10-K 1 d341907d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

 

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

For the fiscal year ended December 31, 2016

OR

 

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

For the transition period from                          to                         

Commission file number: 001-34726

LyondellBasell Industries N.V.

(Exact name of registrant as specified in its charter)

 

The Netherlands   98-0646235

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1221 McKinney St.,
Suite 300

Houston, Texas

USA 77010

 

4th Floor, One Vine Street

London

W1J0AH

The United Kingdom

 

Delftseplein 27E

3013 AA Rotterdam

The Netherlands

(Address of principal executive offices) (Zip Code)

 

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

(Registrant’s telephone numbers, including area codes)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange On Which Registered

Ordinary Shares, €0.04 Par Value   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    ☑  Yes    ☐  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    ☐  Yes    ☑  No

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 website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  

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

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2016, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $74.42, was $25.4 billion. For purposes of this disclosure, in addition to the registrant’s executive officers and members of its Supervisory Board, the registrant has included Access Industries, LLC and its affiliates as “affiliates.”

The registrant had 402,531,335 shares outstanding at February 14, 2017 (excluding 175,904,235 treasury shares).

Documents incorporated by reference:

Portions of the Notice of the 2017 Annual Meeting of Shareholders and 2017 Proxy Statement, in connection with the Company’s 2017 Annual Meeting of Shareholders (in Part III), as indicated herein.

 

 

 


Table of Contents
PART I   

1 and 2. Business and Properties

     3   

Overview

     3   

Segments

     3   

Olefins and Polyolefins Segments Generally

     4   

Olefins and Polyolefins—Americas Segment

     4   

Olefins and Polyolefins—Europe, Asia, International Segment

     6   

Intermediates and Derivatives Segment

     7   

Refining Segment

     9   

Technology Segment

     11   

General

     11   

Intellectual Property

     11   

Environmental

     11   

Employee Relations

     12   

Executive Officers of the Registrant

     13   

Description of Properties

     15   

Website Access to SEC Reports

     16   

1A. Risk Factors

     16   

1B. Unresolved Staff Comments

     26   

3. Legal Proceedings

     26   

4. Mine Safety Disclosures

     27   
PART II   

5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     28   

6. Selected Financial Data

     31   

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

     32   

7A. Quantitative and Qualitative Disclosures About Market Risk

     57   

8. Financial Statements and Supplementary Data

     61   

9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     145   

9A. Controls and Procedures

     145   

9B. Other Information

     145   
PART III   

10. Directors, Executive Officers and Corporate Governance

     146   

11. Executive Compensation

     146   

12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     146   

13. Certain Relationships and Related Transactions, and Director Independence

     146   

14. Principal Accounting Fees and Services

     146   
PART IV   

15. Exhibits, Financial Statement Schedules

     147   

16. Form 10-K Summary

     147   

Signatures

     148   


Table of Contents

CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.

We based forward-looking statements on our current expectations, estimates and projections of our business and the industries in which we operate. We caution you that these statements are not guarantees of future performance. They involve assumptions about future events that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. Our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:

 

   

the cost of raw materials represents a substantial portion of our operating expenses, and energy costs generally follow price trends of crude oil, natural gas liquids and/or natural gas; price volatility can significantly affect our results of operations and we may be unable to pass raw material and energy cost increases on to our customers due to the significant competition that we face, the commodity nature of our products and the time required to implement pricing changes;

 

   

our U.S. operations have benefited from low-cost natural gas and natural gas liquids; decreased availability of these materials (for example, from their export or regulations impacting hydraulic fracturing in the U.S.) could reduce the current benefits we receive;

 

   

if crude oil prices fall materially, or decrease relative to U.S. natural gas prices, we would see less benefit from low-cost natural gas and natural gas liquids and it could have a negative effect on our results of operations;

 

   

industry production capacities and operating rates may lead to periods of oversupply and low profitability; for example, there have been substantial capacity expansions announced in the U.S. olefins industry;

 

   

we may face unplanned operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failures, unscheduled downtime, supplier disruptions, labor shortages, strikes, work stoppages or other labor difficulties, transportation interruptions, spills and releases and other environmental incidents) at any of our facilities, which would negatively impact our operating results; for example, because the Houston refinery is our only refining operation, we would not have the ability to increase production elsewhere to mitigate the impact of any outage at that facility;

 

   

changes in general economic, business, political and regulatory conditions in the countries or regions in which we operate could increase our costs, restrict our operations and reduce our operating results;

 

   

our ability to execute our organic growth plans may be negatively affected by our ability to complete projects on time and on budget;

 

   

uncertainties associated with worldwide economies could create reductions in demand and pricing, as well as increased counterparty risks, which could reduce liquidity or cause financial losses resulting from counterparty default;

 

   

the negative outcome of any legal and environmental proceedings or changes in laws or regulations regarding legal and environmental matters may increase our costs or otherwise limit our ability to achieve savings under current regulations;

 

   

any loss or non-renewal of favorable tax treatment under tax agreements or tax treaties, or changes in tax laws, regulations or treaties, may substantially increase our tax liabilities;

 

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we may be required to reduce production or idle certain facilities because of the cyclical and volatile nature of the supply-demand balance in the chemical and refining industries, which would negatively affect our operating results;

 

   

we rely on continuing technological innovation, and an inability to protect our technology, or others’ technological developments, could negatively impact our competitive position;

 

   

we have significant international operations, and fluctuations in exchange rates, valuations of currencies and our possible inability to access cash from operations in certain jurisdictions on a tax-efficient basis, if at all, could negatively affect our liquidity and our results of operations;

 

   

we are subject to the risks of doing business at a global level, including wars, terrorist activities, political and economic instability and disruptions and changes in governmental policies, which could cause increased expenses, decreased demand or prices for our products and/or disruptions in operations, all of which could reduce our operating results;

 

   

if we are unable to comply with the terms of our credit facilities, indebtedness and other financing arrangements, those obligations could be accelerated, which we may not be able to repay; and

 

   

we may be unable to incur additional indebtedness or obtain financing on terms that we deem acceptable, including for refinancing of our current obligations; higher interest rates and costs of financing would increase our expenses.

Any of these factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. Our management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements. Additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in the “Risk Factors” section of this report on page 16.

 

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PART I

Items 1 and 2. Business and Properties

OVERVIEW

LyondellBasell Industries N.V. is a global, independent chemical company and was incorporated under Dutch law on October 15, 2009. Unless otherwise indicated, the “Company,” “we,” “our,” “us” and “LyondellBasell” are used in this report to refer to the businesses of LyondellBasell Industries N.V. and its consolidated subsidiaries. We are one of the world’s top five independent chemical companies based on revenues.

We participate globally across the petrochemical value chain and are an industry leader in many of our product lines. Our chemicals businesses consist primarily of large processing plants that convert large volumes of liquid and gaseous hydrocarbon feedstocks into plastic resins and other chemicals. Our chemical products tend to be basic building blocks for other chemicals and plastics, while our plastic products are typically used in large volume applications. Our customers use our plastics and chemicals to manufacture a wide range of products that people use in their everyday lives including food packaging, home furnishings, automotive components, paints and coatings. Our refining business consists of our Houston refinery, which processes crude oil into refined products such as gasoline, diesel and jet fuel.

Our financial performance is influenced by the supply and demand for our products, the cost and availability of feedstocks, global and regional competitor capacity, our operational efficiency and our ability to control costs. We have a strong operational focus and, as a producer of large volume commodities, continuously strive to differentiate ourselves through safe, reliable and low-cost operations in all our businesses. We purchase large quantities of natural gas, electricity and steam which we use as energy to fuel our facilities. We also purchase large quantities of natural gas and crude oil derivatives which we use as feedstocks. During recent years the cost of natural gas-derived raw materials in the U.S. versus the global cost of crude oil-derived raw materials has had a significant positive influence on the profitability of our North American operations. While the North American feedstock advantage has declined more recently with lower oil prices and resulting lower olefin prices, improved product supply and demand fundamentals in several businesses, notably global polyolefins products, have partially offset the decline.

SEGMENTS

We manage our operations through five operating segments. Our reportable segments are:

 

   

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 derivatives, oxyfuels and related products and intermediate chemicals, such as styrene monomer, acetyls, ethylene oxide and ethylene glycol.

 

   

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

 

   

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

Financial information about our business segments and geographical areas can be found in Note 22, Segment and Related Information, to the Consolidated Financial Statements. Information about the locations where we produce our primary products can be found under “Description of Properties.”

 

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In 2016, 2015 and 2014, no single customer accounted for 10% or more of our total revenues.

Olefins and Polyolefins Segments Generally

We are one of the leading worldwide producers of olefins and polyethylene (“PE”) and we are the world’s second largest producer of polypropylene (“PP”). We manage our olefin and polyolefin business in two reportable segments, O&P—Americas and O&P—EAI.

Olefins & Co-products—Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for PE and a large number of other chemicals, plastics and synthetics. Ethylene is produced by steam cracking hydro-carbons such as ethane and propane as well as naphtha. This production results in co-products such as aromatics and other olefins, including propylene and butadiene. Ethylene and its co-products are fundamental to many parts of the economy, including the production of consumer products, packaging, housing and automotive components and other durable and nondurable goods.

Polyolefins—The term polyolefins includes PE and PP and they are derived from ethylene and propylene. Polyolefins are the most used thermoplastics in the world and are used in wide-ranging applications and products and enhance everyday quality of life. Our products are used in consumer automotive and industrial applications ranging from food and beverage packaging to housewares and construction materials.

Polyethylene—We produce high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear low density polyethylene (“LLDPE”). PE sales accounted for approximately 24%, 21% and 18% of our total revenues in 2016, 2015 and 2014, respectively.

Polypropylene—We produce PP homopolymers, PP impact copolymers and PP random copolymers. PP compounds are produced from blends of polyolefins and additives and are sold mainly to the automotive and home appliances industries. PP sales accounted for approximately17% of our total revenues in 2016 and 2015, and 16% in 2014.

Olefins and Polyolefins—Americas Segment

Overview

Our O&P—Americas segment produces and markets olefins and co-products, polyethylene and polypropylene.

Sales & Marketing / Customers

The majority of the ethylene we produce is consumed internally as a raw material in the production of PE and other derivatives, with the balance sold to third party customers under multi-year contracts or on a spot basis. In the last two years, we have added 1.11 billion pounds of ethylene capacity at our Gulf Coast facilities.

We use all of the propylene that we produce in the production of PP, propylene oxide and other derivatives. As a result we also purchase propylene from third parties. In addition to purchases of propylene, at times we purchase ethylene for resale, when necessary, to satisfy customer demand above our own production levels. Volumes of any of these products purchased for resale can vary significantly from period to period, and are typically most significant during extended outages of our own production, such as during planned turnarounds. However, purchased volumes have not historically had a significant impact on profits, except to the extent that they replace lower-cost production.

Most of the ethylene and propylene production of our Channelview, Corpus Christi and La Porte, Texas facilities is shipped via a pipeline system, which has connections to numerous U.S. Gulf Coast consumers. This pipeline extends from Corpus Christi to Mont Belvieu, Texas. In addition, exchange agreements with other

 

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ethylene and co-products producers allow access to customers who are not directly connected to this pipeline system. Some ethylene is shipped by rail car from our Clinton, Iowa facility to our Morris, Illinois facility and some is shipped directly to customers. Some propylene is shipped by ocean going vessel, barge, railcar and truck.

Our PP and PE production is typically sold through our sales organization to an extensive base of established customers and distributors servicing both the domestic and export markets either under annual contracts or on a spot basis. We have sales offices in various locations in North America and our polyolefins primarily are transported in North America by railcar or truck. Export sales are primarily to customers in Central and South America, with sales to Asia expected to increase in the coming years as global supply and demand balances shift. We also consume PP in our PP compounds business, which is managed worldwide by our O&P—EAI segment.

Joint Venture Relationships

We participate in a joint venture in Mexico, which provides us with capacity for approximately 640 million pounds of PP production. The capacity is based on our percentage ownership of the joint ventures’ total capacity. We do not hold a majority interest in or have operational control of this joint venture.

Raw Materials

Raw material cost is the largest component of the total cost for the production of ethylene and its co-products. The primary raw materials used in our Americas olefin facilities are heavy liquids and natural gas liquids (“NGLs”). Heavy liquids include crude oil-based naphtha and other refined products, as well as condensate, a very light crude oil resulting from natural gas production. NGLs include ethane, propane and butane. The use of heavy liquid raw materials results in the production of a significant amount of co-products such as propylene, butadiene and benzene, as well as gasoline blending components, while the use of NGLs results in the production of a smaller amount of co-products.

Our ability to pass on raw material price increases to our customers is dependent upon market-driven demand for olefins and polyolefins. Sales prices for products sold in the spot market are determined by market forces. Our contract prices are influenced by product supply and demand conditions, spot prices, indices published in industry publications and, in some instances, cost recovery formulas.

Prior to 2010, olefins facilities using heavy liquids as feedstock generated higher margins than those using NGLs. However, technological advances for extracting shale-based oil and gas have led to an increased supply of NGLs giving them a cost advantage over heavy liquids, particularly in the U.S. With reductions in oil prices since 2014, the cost advantage has declined, but is still significant. A plant’s flexibility to consume a wide range of raw materials generally will provide an advantage over plants that are restricted in their processing capabilities. Our Americas’ facilities can process significant quantities of either heavy liquids or NGLs. We estimate that in the U.S. we can produce up to approximately 90% of our total ethylene output using NGLs. Changes in the raw material feedstock utilized in the production process will result in variances in production capacities among products. We believe our raw material flexibility in the U.S. is a key advantage in our production of ethylene and its co-products.

Industry Dynamics / Competition

With respect to olefins and polyolefins, competition is based on price and, to a lesser extent, on product quality, product delivery, reliability of supply, product performance and customer service. Industry consolidation in North America has led to fewer, although larger, competitors. Profitability is affected not only by supply and demand for olefins and polyolefins, but also by raw material costs and price competition among producers, which may intensify due to, among other things, the addition of new capacity. In general, demand is a function of worldwide economic growth, including the regional dynamics that underlie global growth trends.

 

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We compete in North America with other large marketers and producers, including global chemical companies, chemical divisions of large oil companies and regional marketers and producers.

Based on published data, we believe we were, as of December 31, 2016:

 

   

the second largest producer of ethylene in North America, with ethylene capacity of 11.7 billion pounds per year,

 

   

the third largest producer of PE in North America with 6.4 billion pounds per year of capacity; and

 

   

the largest producer of PP in North America, with 3.9 billion pounds, including our share of our Indelpro joint venture capacity.

Olefins and Polyolefins—Europe, Asia, International Segment

Overview

Our O&P—EAI segment produces and markets olefins and co-products, polyethylene and polypropylene, including PP compounds.

Sales & Marketing / Customers

Our ethylene production is primarily consumed internally as a raw material in the production of polyolefins, and we purchase additional ethylene as needed to meet our production needs. Our propylene production is used as a raw material in the production of PP and propylene oxide, and we regularly purchase propylene from third parties because our internal needs exceed our internal production.

With respect to PP and PE, our production is typically sold through our sales organization to an extensive base of established customers under annual contracts or on a spot basis and is also sold through distributors. Our polyolefins are transported in Europe primarily by railcar or truck.

Our regional sales offices are in various locations, including The Netherlands, Hong Kong, China, India, Australia and the United Arab Emirates. We also operate through a worldwide network of local sales and representative offices in Europe, Asia and Africa. Our joint ventures described below typically manage their domestic sales and marketing efforts independently, and we typically operate as their agent/distributor for all or a portion of their exports.

Joint Venture Relationships

We participate in several manufacturing joint ventures in Saudi Arabia, Thailand, Poland, Australia and South Korea. We do not hold majority interests in any of these joint ventures, nor do we have operational control. These ventures provide us with additional production capacity of approximately 2.9 billion pounds of PP, approximately 1.4 billion pounds of olefins, approximately 0.9 billion pounds of PE and approximately 100 million pounds of PP compounds. These capacities are based on our percentage ownership interest in the joint ventures’ total capacities. We realize profits or losses from these ventures as income (or loss) on the equity basis of accounting.

We generally license our polyolefin process technologies and supply catalysts to our joint ventures through our Technology segment. Some of our joint ventures are able to source cost advantaged raw materials from their local shareholders.

Raw Materials

Raw material cost is the largest component of the total cost for the production of olefins and co-products. The primary raw material used in our European olefin facilities is naphtha; however, in recent years we have

 

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sourced increased amounts of advantaged NGLs when the opportunity arises. For our Saudi joint venture facilities, locally sourced and cost advantaged NGLs, including ethane, propane and butane are used. The principal raw materials used in the production of polyolefins are propylene and ethylene. In Europe, we have the capacity to produce approximately 50% of the propylene requirements for our European PP production and all of the ethylene requirements for our European PE production. Propylene and ethylene requirements that are not produced internally are generally acquired pursuant to long-term contracts with third party suppliers or via spot purchases.

Our PP compounds facilities receive the majority of their PP raw materials from one of our wholly owned or joint venture facilities. Some of our joint ventures receive propylene and ethylene from their local shareholders under long-term contracts.

Our ability to pass through the increased cost of raw materials to customers is dependent on global market demand for olefins and polyolefins. In general, the pricing for purchases and sales of most products is determined by global market forces, including the impacts of foreign exchange on the pricing of the underlying naphtha raw materials, most of which are priced in U.S. dollars. There can be a lag between naphtha raw material price changes and contract product price changes that will cause volatility in our product margins.

Industry Dynamics / Competition

With respect to olefins and polyolefins, competition is based on price, product quality, product delivery, reliability of supply, product performance and customer service. We compete with regional and multinational chemical companies and divisions of large oil companies. The petrochemical market in the European Union (“EU”) has been affected by the price volatility of naphtha, the primary feedstock for olefins in the region, as well as fluctuating demand as a result of changing European and global economic conditions.

Based on published data and including our proportionate share of our joint ventures, we believe we were, as of December 31, 2016:

 

   

the fifth largest producer of ethylene in Europe with an ethylene capacity in Europe of 4.3 billion pounds per year;

 

   

the largest producer of PP in Europe with 5.7 billion pounds per year of capacity, including our share of the Poland joint venture; and

 

   

the largest producer of PE in Europe with 4.8 billion pounds per year of capacity, including our share of the Poland joint venture.

Intermediates and Derivatives Segment

Overview

Our I&D segment produces and markets propylene oxide (“PO”) and its derivatives, oxyfuels and related products, and intermediate chemicals such as styrene monomer (“SM”), acetyls and ethylene oxides and derivatives.

PO and Derivatives—We produce PO through two distinct technologies, one of which yields tertiary butyl alcohol (“TBA”) as the co-product and the other of which yields SM as the co-product. The two technologies are mutually exclusive with dedicated assets for manufacturing either PO/TBA or PO/SM. PO is an intermediate commodity chemical and is a precursor of polyols, propylene glycol, propylene glycol ethers and butanediol. PO and derivatives are used in a variety of durable and consumables items with key applications such as urethane foams used for insulation, automotive/furniture cushioning, coatings, surfactants, synthetic resins and several other household usages.

 

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Oxyfuels and Related Products—We produce two distinct ether-based oxyfuels, methyl tertiary butyl ether (“MTBE”) and ethyl tertiary butyl ether (“ETBE”). These oxyfuels are produced by converting the TBA co-product of PO into isobutylene and reacting with methanol or ethanol to produce either MTBE or ETBE. Both are used as high-octane gasoline components that help gasoline burn cleaner and reduce automobile emissions. Other TBA derivatives which we refer to as “C4 chemicals,” are largely used to make synthetic rubber and other gasoline additives.

Intermediate Chemicals—We produce other commodity chemicals that utilize ethylene as a key component feedstock, including SM, acetyls and ethylene oxide derivatives. SM is utilized in various applications such as plastics, expandable polystyrene for packaging, foam cups and containers, insulation products and durables and engineering resins. Acetyls comprise methanol, glacial acetic acid (“GAA”) and vinyl acetate monomer (“VAM”). Natural gas (methane) is the feedstock for methanol, some of which is converted to GAA, and a portion of the GAA is reacted with ethylene to create VAM. VAM is an intermediate chemical used in fabric or wood treatments, pigments, coatings, films and adhesives. Ethylene oxide is an intermediate chemical that is used to produce ethylene glycol, glycol ethers and other derivatives. Ethylene oxide and its derivatives are used in the production of polyester, antifreeze fluids, solvents and other chemical products.

Sales & Marketing / Customers

We sell our PO and its co-products and derivatives through multi-year sales and processing agreements as well as spot sales. Some of our contract sales agreements have cost plus pricing terms. PO and derivatives are transported by barge, ocean going vessel, pipeline, railcar, and tank truck.

We sell our oxyfuels and related products under market and cost-based sales agreements and in the spot market. Oxyfuels are transported by barge, ocean going vessel and tank truck and are used as octane blending components worldwide outside of the United States due to their blending characteristics and emission benefits. C4 chemicals, such as high-purity isobutylene, are sold to producers of synthetic rubber and other chemical products primarily in the United States and Europe, and are transported by rail, truck, pipeline and marine shipments.

Intermediate chemicals are shipped by barge, marine vessel, pipeline, railcar and tank truck. SM is sold globally into regions such as North America, Europe, Asia, and South America export markets through spot sales and commercial contracts. Within acetyls, methanol is consumed internally to make GAA, used as a feedstock for oxyfuels and related products, and also sold directly into the merchant commercial market. As the final conversion stage, GAA is converted with ethylene to produce VAM which is sold worldwide under multi-year commercial contracts and on a spot basis.

Sales of our PO and derivatives, oxyfuels and related products, and intermediate chemicals are made by our marketing and sales personnel, and also through distributors and independent agents in the Americas, Europe, the Middle East, Africa and the Asia Pacific region.

Joint Venture Relationships

We have two PO joint ventures with Covestro AG, one in the U.S. and one in Europe. We operate four of the U.S. PO production facilities for the U.S. PO joint venture. Covestro’s interest represents ownership of an in-kind portion of the PO production of 1.5 billion pounds per year. We take, in-kind, the remaining PO production and all co-product production. The parties’ rights in the joint venture are based on off-take volumes related to actual production of PO as opposed to ownership percentages. Covestro also has the right to 50% of the PO and SM production of our European PO joint venture. Our proportional production capacity provided through this venture is approximately 340 million pounds of PO and approximately 750 million pounds of SM. We do not share marketing or product sales with Covestro under either of these PO joint ventures.

 

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We also have joint venture manufacturing relationships in China. These ventures provide us with additional production capacity of approximately 115 million pounds of PO. This capacity is based on our operational share of the joint ventures’ total capacities.

Raw Materials

The cost of raw materials is the largest component of total production cost for PO, its co-products and its derivatives. Propylene, isobutane or mixed butane, ethylene, and benzene are the primary raw materials used in the production of PO and its co-products. The market prices of these raw materials historically have been related to the price of crude oil, NGLs and natural gas, as well as supply and demand for the raw materials.

In the U.S., we obtain a large portion of our propylene, benzene and ethylene raw materials needed for the production of PO and its co-products from our O&P—Americas segment and to a lesser extent from third parties. Raw materials for the non-U.S. production of PO and its co-products are obtained from our O&P—EAI segment and from third parties. We consume a significant portion of our internally-produced PO in the production of PO derivatives.

The raw material requirements not sourced internally are purchased at market-based prices from numerous suppliers in the U.S. and Europe with which we have established contractual relationships, as well as in the spot market.

For the production of oxyfuels, we purchase our ethanol feedstock requirements from third parties and our methanol from both internal production and external sources. Carbon monoxide and methanol are the primary raw materials required for the production of GAA. We purchase carbon monoxide pursuant to a long-term contract with pricing primarily based on the cost of production. The methanol required for our downstream production of acetyls is internally sourced from a partnership and from our methanol plant at Channelview, Texas. Natural gas is the primary raw material required for the production of methanol.

In addition to ethylene, acetic acid is a primary raw material for the production of VAM. We obtain our entire requirements for acetic acid and ethylene from our internal production. Historically, we have used a large percentage of our acetic acid production to produce VAM.

Industry Dynamics / Competition

With respect to product competition, the market is influenced and based on a variety of factors, including product quality, price, reliability of supply, technical support, customer service and potential substitute materials. Profitability is affected by the worldwide level of demand along with price competition, which may intensify due to, among other things, new industry capacity and industry outages. Demand growth could be impacted by further development of alternative bio-based methodologies. Our major worldwide competitors include other multinational chemical and refining companies as well as some regional marketers and producers.

Based on published data, excluding our partners’ shares of joint venture capacity, we believe as of December 31, 2016 we were:

 

   

the second largest producer of PO worldwide; and

 

   

the largest producer of oxyfuels worldwide.

Refining Segment

Overview

The primary product of our Refining segment is refined products made from heavy, high-sulfur crude oil and other crude oils of varied types and sources available on the U.S. Gulf Coast. These refined products include gasoline and other distillates.

 

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Sales & Marketing / Customers

The Houston refinery’s products primarily are sold in bulk to other refiners, marketers, distributors and wholesalers at market-related prices. Most of the Houston refinery’s products are sold under contracts with a term of one year or less or are sold in the spot market. The Houston refinery’s products generally are transported to customers via pipelines and terminals owned and operated by other parties.

Raw Materials

Our Houston refinery, which is located on the Houston Ship Channel in Houston, Texas, has a heavy, high-sulfur crude oil processing capacity of approximately 268,000 barrels per day on a calendar day basis (normal operating basis), or approximately 292,000 barrels per day on a stream day basis (maximum achievable over a 24 hour period). The Houston refinery is a full conversion refinery designed to refine heavy, high-sulfur crude oil. This crude oil is more viscous and dense than traditional crude oil and contains higher concentrations of sulfur and heavy metals, making it more difficult to refine into gasoline and other high-value fuel products. However, this crude oil has historically been less costly to purchase than light, low-sulfur crude oil such as Brent.

We purchase the crude oil used as a raw material for the Houston refinery on the open market on a spot basis and under a number of supply agreements with regional producers, generally with terms varying from one to two years.

Industry Dynamics / Competition

Our refining competitors are major integrated oil companies, refineries owned or controlled by foreign governments and independent domestic refiners. Based on published data, as of January 2016, there were 141 operable crude oil refineries in the U.S., and total U.S. refinery capacity was approximately 18.3 million barrels per day. During 2016, the Houston refinery processed an average of approximately 205,000 barrels per day of crude oil.

Our refining operations compete for the purchases of crude oil based on price and quality. Supply disruptions could impact the availability and pricing. We compete in gasoline and distillate markets as a bulk supplier of fungible products satisfying industry and government specifications. Competition is based on price and location.

The markets for fuel products tend to be volatile as well as cyclical as a result of the changing global economy and changing crude oil and refined product prices. Crude oil prices are impacted by worldwide political events, the economics of exploration and production and refined products demand. Prices and demand for fuel products are influenced by seasonal and short-term factors such as weather and driving patterns, as well as by longer term issues such as the economy, energy conservation and alternative fuels. Industry fuel products supply is dependent on short-term industry operating capabilities and on long-term refining capacity.

A crack spread is a benchmark indication of refining margins based on the processing of a specific type of crude oil into an assumed selection of major refined products. The Houston refinery generally tracks the Maya 2-1-1 crack spread, which represents the difference between the current month Gulf Coast price of two barrels of Maya crude oil as set by Petróleos Mexicanos (“Pemex”) and one barrel each of U.S. Gulf Coast Reformulated Gasoline Blendstock for Oxygen Blending (“RBOB”) Gasoline and of U.S. Gulf Coast Ultralow-sulfur Diesel (“ULSD”). While these benchmark refining spreads are generally indicative of the level of profitability at the Houston refinery and similarly configured refineries, there are many other factors specific to each refinery and the industry in general, which influence operating results such as the value of refinery by-products. Refinery by-products are products other than gasoline and distillates that represent about one-third of the total product volume, and include coke, sulfur, and lighter materials such as NGLs and crude olefins streams. The cost of Renewable Identification Numbers (“RINs”), which are EPA mandated renewable fuel credits, can also affect profitability.

 

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Technology Segment

Overview

Our Technology segment develops and licenses chemical and polyolefin process technologies and manufactures and sells polyolefin catalysts. We market our process technologies and our polyolefin catalysts to external customers and also use them in our own manufacturing operations. Approximately 25% of our catalyst sales are intercompany.

Our polyolefin process licenses are structured to provide a standard core technology, with individual customer needs met by adding customized modules that provide the required capabilities to produce the defined production grade slate and plant capacity. In addition to the basic license agreement, a range of services can also be provided, including project assistance, training, assistance in starting up the plant, and ongoing technical support after start-up. We may also offer marketing and sales services. In addition, licensees may continue to purchase polyolefin catalysts that are consumed in the production process, generally under long-term catalyst supply agreements with us.

Research and Development

Our research and development (“R&D”) activities are designed to improve our existing products and processes, and discover and commercialize new materials, catalysts and processes. These activities focus on product and application development, process development, catalyst development and fundamental polyolefin focused research.

In 2016, 2015 and 2014, our R&D expenditures were $99 million, $102 million and $127 million, respectively. A portion of these expenses are related to technical support and customer service and are allocated to the other business segments. In 2016 and 2015, approximately 45% of all R&D costs were allocated to business segments other than Technology, while in 2014, the allocation approximated 35%.

GENERAL

Intellectual Property

We maintain an extensive patent portfolio and continue to file new patent applications in the U.S. and other countries. As of December 31, 2016, we owned approximately 5,300 patents and patent applications worldwide. Our patents and trade secrets cover our processes, products and catalysts and are significant to our competitive position, particularly with regard to PO, intermediate chemicals, petrochemicals, polymers and our process technologies. We own globally registered and unregistered trademarks including marks for “LyondellBasell,” “Lyondell” and “Equistar.” While we believe that our intellectual property provides competitive advantages, we do not regard our businesses as being materially dependent upon any single patent, trade secret or trademark. Some of our heritage production capacity operates under licenses from third parties.

Environmental

Most of our operations are affected by national, state, regional and local environmental laws. Matters pertaining to the environment are discussed in Part I, Item 1A. Risk Factors; Part I, Item 3. Legal Proceedings; Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Notes 2 and 19 to the Consolidated Financial Statements.

We have made, and intend to continue to make, the expenditures necessary for compliance with applicable laws and regulations relating to environmental, health and safety matters. We incurred capital expenditures of $192 million in 2016 for health, safety and environmental compliance purposes and improvement programs, and estimate such expenditures to be approximately $200 million in 2017 and $180 million in 2018.

 

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While capital expenditures or operating costs for environmental compliance, including compliance with potential legislation and potential regulation related to climate change, cannot be predicted with certainty, we do not believe they will have a material effect on our competitive position.

While there can be no assurance that physical risks to our facilities and supply chain due to climate change will not occur in the future, we do not believe these risks are material in the near term.

Employee Relations

As of December 31, 2016, we employed approximately 13,000 full-time and part-time employees around the world. Of this total, 6,300 were located in North America and another 5,800 were located in Europe. The remainder of our employees is in other global locations.

As of December 31, 2016, approximately 830 of our employees in North America were represented by labor unions. The vast majority of our employees in Europe and South America are subject to staff council or works council coverage or collective bargaining agreements.

In addition to our own employees, we use the services of contractors in the routine conduct of our businesses.

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers as of February 1, 2017 were as follows:

 

Name and Age

  

Significant Experience

Bhavesh V. (“Bob”) Patel, 50

  

Chief Executive Officer and Chairman of the Management Board since January 2015.

 

Executive Vice President, Olefins and Polyolefins—EAI and Technology from October 2013 and member of the Management Board from April 2014 to January 2015.

 

Senior Vice President, Olefins and Polyolefins—EAI and Technology from November 2010 to October 2013.

 

Senior Vice President, Olefins and Polyolefins—Americas from March 2010 to June 2011.

 

General Manager, Olefins and NGLs of Chevron Phillips Chemical Company from 2009 to 2010.

Thomas Aebischer, 55

  

Executive Vice President and Chief Financial Officer since January 2016.

 

Chief Financial Officer of LaFargeHolcim from July 2015 to December 2015.

 

Chief Financial Officer of Holcim Ltd. from January 2011 to June 2015.

Kevin W. Brown, 59

  

Executive Vice President, Manufacturing and Refining since January 2015 and member of the Management Board since May 2015.

 

Senior Vice President, Refining from October 2009 to January 2015.

 

Director of Sinclair Oil from January 2006 to September 2009.

 

Executive Vice President, Operations of Sinclair Oil from June 2004 to September 2009.

Dan M. Coombs, 60

  

Executive Vice President, Global Olefins and Polyolefins, and Technology since January 2016.

 

Executive Vice President, Intermediates and Derivatives from May 2015 to January 2016.

 

Senior Vice President of Manufacturing for Chevron Phillips Chemical from December 2013 to May 2015.

 

Senior Vice President for Specialties, Aromatics and Styrenics for Chevron Phillips Chemical from December 2011 to November 2013.

 

Vice President of Corporate Planning and Development for Chevron Phillips Chemical from September 2011 to November 2011.

 

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Name and Age

  

Significant Experience

  

 

Deputy General Manager for Qatar Chemical Company Limited Development and Vice President Qatar for Chevron Phillips Chemical from April 2010 to September 2011.

Massimo Covezzi, 59

   Senior Vice President, Research and Development since January 2008.

James Guilfoyle, 46

  

Senior Vice President, Global Intermediates and Derivatives since June 2015.

 

Vice President of Global Propylene Oxide and Co-Products from March 2015 to May 2015.

 

Director of Polymer Sales Americas from January 2012 to February 2015.

 

Director of High Density Polyethylene from November 2006 to December 2011.

Jeffrey A. Kaplan, 48

  

Executive Vice President and Chief Legal Officer since March 2015 and member of the Management Board since May 2015.

 

Deputy General Counsel from December 2009 to March 2015.

Michael VanDerSnick, 52

  

Senior Vice President, Health, Safety, Security and Environment since June 2015.

 

Senior Vice President, Manufacturing—EAI from July 2012 to June 2015.

 

Site manager of the Company’s Channelview, Matagorda, Chocolate Bayou and Bayport, Texas plants from 2004 to 2012.

Jacquelyn H. Wolf, 55

  

Senior Vice President and Chief Human Resources Officer since September 2012.

 

Senior Vice President and Chief Human Resources Officer for Celanese, Inc. from December 2009 to July 2012.

 

Executive Vice President and Chief Human Resources Officer for Comerica Bank from January 2006 to December 2009.

 

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Description of Properties

Our principal manufacturing facilities as of December 31, 2016 are set forth below, and are identified by the principal segment or segments using the facility. All of the facilities are wholly owned, except as otherwise noted.

 

Location

  

Segment

Americas

  

Bayport (Pasadena), Texas

   I&D

Bayport (Pasadena), Texas(1)

   I&D

Bayport (Pasadena), Texas

   O&P—Americas

Channelview, Texas(2)

   O&P—Americas

Channelview, Texas(1)(2)(3)

   I&D

Chocolate Bayou, Texas

   O&P—Americas

Clinton, Iowa

   O&P—Americas

Corpus Christi, Texas

   O&P—Americas

Edison, New Jersey

   O&P—Americas

Houston, Texas

   Refining

La Porte, Texas(4)

   O&P—Americas

La Porte, Texas(4)(5)

   I&D

Lake Charles, Louisiana

   O&P—Americas

Matagorda, Texas

   O&P—Americas

Morris, Illinois

   O&P—Americas

Tuscola, Illinois

   O&P—Americas

Victoria, Texas†

   O&P—Americas

Europe

  

Berre l’Etang, France

   O&P—EAI

Botlek, Rotterdam, The Netherlands†

   I&D

Brindisi, Italy

   O&P—EAI

Carrington, UK

   O&P—EAI

Ferrara, Italy

   O&P—EAI
   Technology

Fos-sur-Mer, France†

   I&D

Frankfurt, Germany†

   O&P—EAI
   Technology

Knapsack, Germany†

   O&P—EAI

Ludwigshafen, Germany†

   Technology

Maasvlakte, The Netherlands(6)

   I&D

Moerdijk, The Netherlands†

   O&P—EAI

Münchsmünster, Germany†

   O&P—EAI

Tarragona, Spain(7)

   O&P—EAI

Wesseling, Germany

   O&P—EAI

Asia Pacific

  

Geelong, Australia

   O&P—EAI

 

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The facility is located on leased land.
(1) The Bayport PO/TBA plants and the Channelview PO/SM I plant are held by the U.S. PO joint venture between Covestro and Lyondell Chemical Company. These plants are located on land leased by the U.S. PO joint venture.
(2) Equistar Chemicals, LP operates a styrene maleic anhydride unit and a polybutadiene unit, which are owned by an unrelated party and are located within the Channelview facility on property leased from Equistar Chemicals, LP.
(3) Unrelated equity investors hold a minority interest in the PO/SM II plant at the Channelview facility.
(4) The La Porte facilities are on contiguous property.
(5) The La Porte methanol facility is owned by La Porte Methanol Company, a partnership owned 85% by us.
(6) The Maasvlakte plant is owned by the European PO joint venture and is located on land leased by the European PO joint venture.
(7) The Tarragona PP facility is located on leased land; the compounds facility is located on co-owned land.

Other Locations and Properties

We maintain executive offices in London, the United Kingdom; Rotterdam, The Netherlands; and Houston, Texas. We maintain research facilities in Lansing, Michigan; Channelview, Texas; Cincinnati, Ohio; Ferrara, Italy and Frankfurt, Germany. Our Asia Pacific headquarters are in Hong Kong. We also have technical support centers in Bayreuth, Germany; Geelong, Australia and Tarragona, Spain. We have various sales facilities worldwide.

Website Access to SEC Reports

Our Internet website address is http://www.lyb.com. Information contained on our Internet website is not part of this report on Form 10-K.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available on our website, free of charge, as soon as reasonably practicable after such reports are filed with, or furnished to, the U.S. Securities and Exchange Commission. Alternatively, you may access these reports at the SEC’s website at http://www.sec.gov.

Item 1A. Risk Factors.

You should carefully consider the following risk factors in addition to the other information included in this Annual Report on Form 10-K. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.

Our business, including our results of operations and reputation, could be adversely affected by safety or product liability issues.

Failure to appropriately manage safety, human health, product liability and environmental risks associated with our products, product life cycles and production processes could adversely impact employees, communities, stakeholders, our reputation and our results of operations. Public perception of the risks associated with our products and production processes could impact product acceptance and influence the regulatory environment in which we operate. While we have procedures and controls to manage safety risks, issues could be created by events outside of our control, including natural disasters, severe weather events and acts of sabotage.

 

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Our operations are subject to risks inherent in chemical and refining businesses, and we could be subject to liabilities for which we are not fully insured or that are not otherwise mitigated.

We maintain property, business interruption, product, general liability, casualty and other types of insurance that we believe are appropriate for our business and operations as well as in line with customary industry practices. However, we are not fully insured against all potential hazards incident to our business, including losses resulting from natural disasters, wars or terrorist acts. Changes in insurance market conditions have caused, and may in the future cause, premiums and deductibles for certain insurance policies to increase substantially and, in some instances, for certain insurance to become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, we might not be able to finance the amount of the uninsured liability on terms acceptable to us or at all, and might be obligated to divert a significant portion of our cash flow from normal business operations.

Further, because a part of our business involves licensing polyolefin process technology, our licensees are exposed to similar risks involved in the manufacture and marketing of polyolefins. Hazardous incidents involving our licensees, if they do result or are perceived to result from use of our technologies, may harm our reputation, threaten our relationships with other licensees and/or lead to customer attrition and financial losses. Our policy of covering these risks through contractual limitations of liability and indemnities and through insurance may not always be effective. As a result, our financial condition and results of operation would be adversely affected, and other companies with competing technologies may have the opportunity to secure a competitive advantage.

A sustained decrease in the price of crude oil may adversely impact the results of our operations, primarily in North America.

Energy costs generally follow price trends of crude oil and natural gas. These price trends may be highly volatile and cyclical. In the past, raw material and energy costs have experienced significant fluctuations that adversely affected our business segments’ results of operations. For example, we have benefitted from the favorable ratio of U.S. natural gas prices to crude oil prices in recent years. This advantage was reduced as oil prices declined beginning in 2014. If the price of crude oil remains lower relative to U.S. natural gas prices or if the demand for natural gas and NGLs increases, this may have a negative impact on our results of operations.

Costs and limitations on supply of raw materials and energy may result in increased operating expenses.

The costs of raw materials and energy represent a substantial portion of our operating expenses. Due to the significant competition we face and the commodity nature of many of our products we are not always able to pass on raw material and energy cost increases to our customers. When we do have the ability to pass on the cost increases, we are not always able to do so quickly enough to avoid adverse impacts on our results of operations.

Cost increases for raw materials also may increase working capital needs, which could reduce our liquidity and cash flow. Even if we increase our sales prices to reflect rising raw material and energy costs, demand for products may decrease as customers reduce their consumption or use substitute products, which may have an adverse impact on our results of operations. In addition, producers in natural gas cost-advantaged regions, such as the Middle East and North America, benefit from the lower prices of natural gas and NGLs. Competition from producers in these regions may cause us to reduce exports from Europe and elsewhere. Any such reductions may increase competition for product sales within Europe and other markets, which can result in lower margins in those regions.

For some of our raw materials and utilities there are a limited number of suppliers and, in some cases, the supplies are specific to the particular geographic region in which a facility is located. It is also common in the chemical and refining industries for a facility to have a sole, dedicated source for its utilities, such as steam, electricity and gas. Having a sole or limited number of suppliers may limit our negotiating power, particularly in

 

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the case of rising raw material costs. Any new supply agreements we enter into may not have terms as favorable as those contained in our current supply agreements.

Additionally, there is growing concern over the reliability of water sources, including around the Texas Gulf Coast where several of our facilities are located. The decreased availability or less favorable pricing for water as a result of population growth, drought or regulation could negatively impact our operations.

If our raw material or utility supplies were disrupted, our businesses may incur increased costs to procure alternative supplies or incur excessive downtime, which would have a direct negative impact on plant operations. Disruptions of supplies may occur as a result of transportation issues including, but not limited to, as a result of natural disasters and water levels that can affect the operations of vessels, barges, rails, trucks and pipeline traffic. These risks are particularly prevalent in the U.S. Gulf Coast area. Additionally, the export of NGLs from the U.S., greater restrictions on hydraulic fracturing or the lifting by the U.S. government of the ban on U.S. crude oil exports could restrict the availability of our raw materials, thereby increasing our costs.

With increased volatility in raw material costs, our suppliers could impose more onerous terms on us, resulting in shorter payment cycles and increasing our working capital requirements.

Our ability to source raw materials may be adversely affected by political instability, civil disturbances or other governmental actions.

We obtain a portion of our principal raw materials from sources in North Africa, the Middle East, and Central and South America that may be less politically stable than other areas in which we conduct business, such as Europe or the U.S. Political instability, civil disturbances and actions by governments in these areas are likely to substantially increase the price and decrease the supply of raw materials necessary for our operations, which will have a material adverse effect on our results of operations.

Increased incidents of civil unrest, including terrorist attacks and demonstrations that have been marked by violence, have occurred in a number of countries in North Africa and the Middle East. Some political regimes in these countries are threatened or have changed as a result of such unrest. Political instability and civil unrest could continue to spread in the region and involve other areas. Such unrest, if it continues to spread or grow in intensity, could lead to civil wars, regional conflicts, or regime changes resulting in governments that are hostile to countries in which we conduct substantial business, such as in Europe, the U.S., or their respective trading partners.

Economic disruptions and downturns in general, and particularly continued global economic uncertainty or economic turmoil in emerging markets, could have a material adverse effect on our business, prospects, operating results, financial condition and cash flows.

Our results of operations can be materially affected by adverse conditions in the financial markets and depressed economic conditions generally. Economic downturns in the businesses and geographic areas in which we sell our products substantially reduce demand for our products and result in decreased sales volumes and increased credit risk. Recessionary environments adversely affect our business because demand for our products is reduced, particularly from our customers in industrial markets generally and the automotive and housing industries specifically, and may result in higher costs of capital. A significant portion of our revenues and earnings are derived from our business in Europe, including southern Europe. In addition, most of our European transactions and assets, including cash reserves and receivables, are denominated in euros.

If a sustained financial crisis in Europe leads to a further significant devaluation of the euro, the value of our financial assets that are denominated in euros would be significantly reduced when translated to U.S. dollars for financial reporting purposes. We also derive significant revenues from our business in emerging markets, particularly the emerging markets in Asia and South America. Any broad-based downturn in these emerging

 

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markets, or in a key market such as China, could require us to reduce export volumes into these markets and could also require us to divert product sales to less profitable markets. Any of these conditions could ultimately harm our overall business, prospects, operating results, financial condition and cash flows.

The cyclicality and volatility of the industries in which we participate may cause significant fluctuations in our operating results.

Our business operations are subject to the cyclical and volatile nature of the supply-demand balance in the chemical and refining industries. Our future operating results are expected to continue to be affected by this cyclicality and volatility. The chemical and refining industries historically have experienced alternating periods of capacity shortages, causing prices and profit margins to increase, followed by periods of excess capacity, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins.

In addition to changes in the supply and demand for products, changes in energy prices and other worldwide economic conditions can cause volatility. These factors result in significant fluctuations in profits and cash flow from period to period and over business cycles.

New capacity additions in Asia, the Middle East and North America may lead to periods of oversupply and lower profitability. A sizable number of expansions have been announced in North America. The timing and extent of any changes to currently prevailing market conditions are uncertain and supply and demand may be unbalanced at any time. As a consequence, we are unable to accurately predict the extent or duration of future industry cycles or their effect on our business, financial condition or results of operations.

We sell products in highly competitive global markets and face significant price pressures.

We sell our products in highly competitive global markets. Due to the commodity nature of many of our products, competition in these markets is based primarily on price and, to a lesser extent, on product performance, product quality, product deliverability, reliability of supply and customer service. Often, we are not able to protect our market position for these products by product differentiation and may not be able to pass on cost increases to our customers due to the significant competition in our business.

In addition, we face increased competition from companies that may have greater financial resources and different cost structures or strategic goals than us. These include large integrated oil companies (some of which also have chemical businesses), government-owned businesses, and companies that receive subsidies or other government incentives to produce certain products in a specified geographic region. Continuing, increased competition from these companies, especially in our olefin and refining businesses, could limit our ability to increase product sales prices in response to raw material and other cost increases, or could cause us to reduce product sales prices to compete effectively, which could reduce our profitability. Competitors with different cost structures or strategic goals than we have may be able to invest significant capital into their businesses, including expenditures for research and development.

In addition, specialty products we produce may become commoditized over time. Increased competition could result in lower prices or lower sales volumes, which would have a negative impact on our results of operations.

Interruptions of operations at our facilities may result in liabilities or lower operating results.

We own and operate large-scale facilities. Our operating results are dependent on the continued operation of our various production facilities and the ability to complete construction and maintenance projects on schedule. Interruptions at our facilities may materially reduce the productivity and profitability of a particular manufacturing facility, or our business as a whole, during and after the period of such operational difficulties. In the past, we had to shut down plants on the U.S. Gulf Coast, including the temporary shutdown of our Houston refinery, as a result of hurricanes striking the Texas coast.

 

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In addition, because the Houston refinery is our only refining operation, an outage at the refinery could have a particularly negative impact on our operating results. Unlike our chemical and polymer production facilities, which may have sufficient excess capacity to mitigate the negative impact of lost production at other facilities, we do not have the ability to increase refining production elsewhere in the U.S.

Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions, our operations are subject to hazards inherent in chemical manufacturing and refining and the related storage and transportation of raw materials, products and wastes. These potential hazards include:

 

   

pipeline leaks and ruptures;

 

   

explosions;

 

   

fires;

 

   

severe weather and natural disasters;

 

   

mechanical failure;

 

   

unscheduled downtimes;

 

   

supplier disruptions;

 

   

labor shortages or other labor difficulties;

 

   

transportation interruptions;

 

   

remediation complications;

 

   

increased restrictions on, or the unavailability of, water for use at our manufacturing sites or for the transport of our products or raw materials;

 

   

chemical and oil spills;

 

   

discharges or releases of toxic or hazardous substances or gases;

 

   

shipment of incorrect or off-specification product to customers;

 

   

storage tank leaks;

 

   

other environmental risks; and

 

   

terrorist acts.

Some of these hazards may cause severe damage to or destruction of property and equipment or personal injury and loss of life and may result in suspension of operations or the shutdown of affected facilities.

Large capital projects can take many years to complete, and market conditions could deteriorate significantly between the project approval date and the project startup date, negatively impacting project returns. If we are unable to complete capital projects at their expected costs and in a timely manner, or if the market conditions assumed in our project economics deteriorate, our business, financial condition, results of operations and cash flows could be materially and adversely affected.

Delays or cost increases related to capital spending programs involving engineering, procurement and construction of facilities could materially adversely affect our ability to achieve forecasted internal rates of return and operating results. Delays in making required changes or upgrades to our facilities could subject us to fines or penalties as well as affect our ability to supply certain products we produce. Such delays or cost increases may arise as a result of unpredictable factors, many of which are beyond our control, including:

 

   

denial of or delay in receiving requisite regulatory approvals and/or permits;

 

   

unplanned increases in the cost of construction materials or labor;

 

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disruptions in transportation of components or construction materials;

 

   

adverse weather conditions, natural disasters or other events (such as equipment malfunctions, explosions, fires or spills) affecting our facilities, or those of vendors or suppliers;

 

   

shortages of sufficiently skilled labor, or labor disagreements resulting in unplanned work stoppages; and

 

   

nonperformance by, or disputes with, vendors, suppliers, contractors or subcontractors.

Any one or more of these factors could have a significant impact on our ongoing capital projects. If we were unable to make up the delays associated with such factors or to recover the related costs, or if market conditions change, it could materially and adversely affect our business, financial condition, results of operations and cash flows.

Increased IT security threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, facilities and services.

Increased global information security threats and more sophisticated, targeted computer crime pose a risk to the confidentiality, availability and integrity of our data, operations and infrastructure. While we attempt to mitigate these risks by employing a number of measures, including security measures, employee training, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems, our employees, systems, networks, products, facilities and services remain potentially vulnerable to sophisticated espionage or cyber-assault. Depending on their nature and scope, such threats could potentially lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.

We operate internationally and are subject to exchange rate fluctuations, exchange controls, political risks and other risks relating to international operations.

We operate internationally and are subject to the risks of doing business on a global level. These risks include fluctuations in currency exchange rates, economic instability and disruptions, restrictions on the transfer of funds and the imposition of duties and tariffs. Additional risks from our multinational business include transportation delays and interruptions, war, terrorist activities, epidemics, pandemics, political instability, import and export controls, changes in governmental policies, labor unrest and current and changing regulatory environments.

We generate revenues from export sales and operations that may be denominated in currencies other than the relevant functional currency. Exchange rates between these currencies and functional currencies in recent years have fluctuated significantly and may do so in the future. It is possible that fluctuations in exchange rates will result in reduced operating results. Additionally, we operate with the objective of having our worldwide cash available in the locations where it is needed, including the United Kingdom for our parent company’s significant cash obligations as a result of dividend and interest payments. It is possible that we may not always be able to provide cash to other jurisdictions when needed or that such transfers of cash could be subject to additional taxes, including withholding taxes.

Our operating results could be negatively affected by the global laws, rules and regulations, as well as political environments, in the jurisdictions in which we operate. There could be reduced demand for our products, decreases in the prices at which we can sell our products and disruptions of production or other operations. Additionally, there may be substantial capital and other costs to comply with regulations and/or increased security costs or insurance premiums, any of which could reduce our operating results.

 

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We obtain a portion of our principal raw materials from international sources that are subject to these same risks. Our compliance with applicable customs, currency exchange control regulations, transfer pricing regulations or any other laws or regulations to which we may be subject could be challenged. Furthermore, these laws may be modified, the result of which may be to prevent or limit subsidiaries from transferring cash to us.

Furthermore, we are subject to certain existing, and may be subject to possible future, laws that limit or may limit our activities while some of our competitors may not be subject to such laws, which may adversely affect our competitiveness.

Changes in tax laws and regulations could affect our tax rate and our results of operations.

We are a tax resident in the United Kingdom and are subject to the United Kingdom corporate income tax system. LyondellBasell N.V. has little or no taxable income of its own because, as a holding company, it does not conduct any operations. Through our subsidiaries, we have substantial operations world-wide. Taxes are primarily paid on the earnings generated in various jurisdictions, including the United States, The Netherlands, Germany, France, and Italy.

A portion of the Company’s interest income from internal financing is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. In September 2016, the UK enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that will impact our internal financing structure. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may also impact our internal financings.

We monitor income tax legislative developments (including, for example, the U.S. tax reform proposals and the European Union’s state aid investigations) in countries where we conduct business. Recently, there has been an increase in attention, both in the U.K. and globally, to the tax practices of multinational companies, including proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in legislative changes that could adversely affect our tax rate. Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.

Many of our businesses depend on our intellectual property. Our future success will depend in part on our ability to protect our intellectual property rights, and our inability to do so could reduce our ability to maintain our competitiveness and margins.

We have a significant worldwide patent portfolio of issued and pending patents. These patents and patent applications, together with proprietary technical know-how, are significant to our competitive position, particularly with regard to PO, performance chemicals, petrochemicals, and polymers. We rely on the patent, copyright and trade secret laws of the countries in which we operate to protect our investment in research and development, manufacturing and marketing. However, we may be unable to prevent third parties from using our intellectual property without authorization. Proceedings to protect these rights could be costly, and we may not prevail.

The failure of our patents or confidentiality agreements to protect our processes, apparatuses, technology, trade secrets or proprietary know-how could result in significantly lower revenues, reduced profit margins and cash flows and/or loss of market share. We also may be subject to claims that our technology, patents or other intellectual property infringes on a third party’s intellectual property rights. Unfavorable resolution of these claims could result in restrictions on our ability to deliver the related service or in a settlement that could be material to us.

 

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Shared control or lack of control of joint ventures may delay decisions or actions regarding the joint ventures.

A portion of our operations are conducted through joint ventures, where control may be exercised by or shared with unaffiliated third parties. We cannot control the actions of our joint venture partners, including any nonperformance, default or bankruptcy of joint venture partners. The joint ventures that we do not control may also lack financial reporting systems to provide adequate and timely information for our reporting purposes.

Our joint venture partners may have different interests or goals than we do and may take actions contrary to our requests, policies or objectives. Differences in views among the joint venture participants also may result in delayed decisions or in failures to agree on major matters, potentially adversely affecting the business and operations of the joint ventures and in turn our business and operations. We may develop a dispute with any of our partners over decisions affecting the venture that may result in litigation, arbitration or some other form of dispute resolution. If a joint venture participant acts contrary to our interest, it could harm our brand, business, results of operations and financial condition.

We cannot predict with certainty the extent of future costs under environmental, health and safety and other laws and regulations, and cannot guarantee they will not be material.

We may face liability arising out of the normal course of business, including alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at our current or former facilities or chemicals that we manufacture, handle or own. In addition, because our products are components of a variety of other end-use products, we, along with other members of the chemical industry, are subject to potential claims related to those end-use products. Any substantial increase in the success of these types of claims could negatively affect our operating results.

We (together with the industries in which we operate) are subject to extensive national, regional, state and local environmental laws, regulations, directives, rules and ordinances concerning:

 

   

emissions to the air;

 

   

discharges onto land or surface waters or into groundwater; and

 

   

the generation, handling, storage, transportation, treatment, disposal and remediation of hazardous substances and waste materials.

Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, some of these laws and regulations require us to meet specific financial responsibility requirements. Any substantial liability for environmental damage could have a material adverse effect on our financial condition, results of operations and cash flows.

Although we have compliance programs and other processes intended to ensure compliance with all such regulations, we are subject to the risk that our compliance with such regulations could be challenged. Non-compliance with certain of these regulations could result in the incurrence of additional costs, penalties or assessments that could be material.

Our industry is subject to extensive government regulation, and existing, or future regulations may restrict our operations, increase our costs of operations or require us to make additional capital expenditures.

Compliance with regulatory requirements could result in higher operating costs, such as regulatory requirements relating to emissions, the security of our facilities, and the transportation, export or registration of our products. We generally expect that regulatory controls worldwide will become increasingly more demanding, but cannot accurately predict future developments.

 

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Increasingly strict environmental laws and inspection and enforcement policies, could affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Stricter environmental, safety and health laws, regulations and enforcement policies could result in increased operating costs or capital expenditures to comply with such laws and regulations. Additionally, we are required to have permits for our businesses and are subject to licensing regulations. These permits and licenses are subject to renewal, modification and in some circumstances, revocation. Further, the permits and licenses are often difficult, time consuming and costly to obtain and could contain conditions that limit our operations.

We may incur substantial costs to comply with climate change legislation and related regulatory initiatives.

There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (“GHG”) reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws in this field continue to evolve and, while they are likely to be increasingly widespread and stringent, at this stage it is not possible to accurately estimate either a timetable for implementation or our future compliance costs relating to implementation. Within the framework of the EU emissions trading scheme (“ETS”), we were allocated certain allowances of carbon dioxide for the affected plants of our European sites for the period from 2008 to 2012 (“ETS II period”). The ETS II period did not bring additional cost to us as the allowance allocation was sufficient to cover the actual emissions of the affected plants. We were able to build an allowance surplus during the ETS II period which has been banked to the scheme for the period from 2013 to 2020 (“ETS III period”). We expect to incur additional costs for the ETS III period, despite the allowance surplus accrued over the ETS II period, as allowance allocations have been reduced for the ETS III period and more of our plants are affected by the scheme. We maintain an active hedging strategy to cover these additional costs. We expect to incur additional costs in relation to future carbon or GHG emission trading schemes.

In the U.S., the Environmental Protection Agency (the “EPA”) has promulgated federal GHG regulations under the Clean Air Act affecting certain sources. The EPA has issued mandatory GHG reporting requirements, requirements to obtain GHG permits for certain industrial plants and proposals for GHG performance standards for some facilities. The recent EPA action could be a precursor to further federal regulation of carbon dioxide emissions and other greenhouse gases, and may affect the outcome of other climate change lawsuits pending in U.S. courts in a manner unfavorable to our industry. In any event, additional regulation may be forthcoming at the U.S. federal or state level with respect to GHG emissions, and such regulation could result in the creation of additional costs in the form of taxes or required acquisition or trading of emission allowances.

Compliance with these or other changes in laws, regulations and obligations that create a GHG emissions trading scheme or GHG reduction policies generally could significantly increase our costs or reduce demand for products we produce. Additionally, compliance with these regulations may result in increased permitting necessary for the operation of our business or for any of our growth plans. Difficulties in obtaining such permits could have an adverse effect on our future growth. Therefore, any future potential regulations and legislation could result in increased compliance costs, additional operating restrictions or delays in implementing growth projects or other capital investments, and could have a material adverse effect on our business and results of operations.

We may be required to record material charges against our earnings due to any number of events that could cause impairments to our assets.

We may be required to reduce production at or idle facilities for extended periods of time or exit certain businesses as a result of the cyclical nature of our industry. Specifically, oversupplies of or lack of demand for particular products or high raw material prices may cause us to reduce production. We may choose to reduce production at certain facilities because we have off-take arrangements at other facilities, which make any reductions or idling unavailable at those facilities. Any decision to permanently close facilities or exit a business likely would result in impairment and other charges to earnings.

 

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Temporary outages at our facilities can last for several quarters and sometimes longer. These outages could cause us to incur significant costs, including the expenses of maintaining and restarting these facilities. In addition, even though we may reduce production at facilities, we may be required to continue to purchase or pay for utilities or raw materials under take-or-pay supply agreements.

Our business is capital intensive and we rely on cash generated from operations and external financing to fund our growth and ongoing capital needs. Limitations on access to external financing could adversely affect our operating results.

We require significant capital to operate our current business and fund our growth strategy. Moreover, interest payments, dividends and the expansion of our business or other business opportunities may require significant amounts of capital. We believe that our cash from operations currently will be sufficient to meet these needs. However, if we need external financing, our access to credit markets and pricing of our capital is dependent upon maintaining sufficient credit ratings from credit rating agencies and the state of the capital markets generally. There can be no assurances that we would be able to incur indebtedness on terms we deem acceptable, and it is possible that the cost of any financings could increase significantly, thereby increasing our expenses and decreasing our net income. If we are unable to generate sufficient cash flow or raise adequate external financing, including as a result of significant disruptions in the global credit markets, we could be forced to restrict our operations and growth opportunities, which could adversely affect our operating results.

We may use our five-year, $2.5 billion revolving credit facility, which backs our commercial paper program, to meet our cash needs, to the extent available. As of December 31, 2016, we had no borrowings or letters of credit outstanding under the facility and $500 million outstanding under our commercial paper program, leaving an unused and available credit capacity of $1,973 million. We may also meet our cash needs by selling receivables under our $900 million U.S. accounts receivable securitization facility. In the event of a default under our credit facility or any of our senior notes, we could be required to immediately repay all outstanding borrowings and make cash deposits as collateral for all obligations the facility supports, which we may not be able to do. Any default under any of our credit arrangements could cause a default under many of our other credit agreements and debt instruments. Without waivers from lenders party to those agreements, any such default could have a material adverse effect on our ability to continue to operate.

Legislation and regulatory initiatives could lead to a decrease in demand for our products.

New or revised governmental regulations and independent studies relating to the effect of our products on health, safety and the environment may affect demand for our products and the cost of producing our products. Initiatives by governments and private interest groups will potentially require increased toxicological testing and risk assessments of a wide variety of chemicals, including chemicals used or produced by us. For example, in the United States, the National Toxicology Program (“NTP”) is a federal interagency program that seeks to identify and select for study chemicals and other substances to evaluate potential human health hazards. In the European Union, the Regulation on Registration, Evaluation, Authorisation and Restriction of Chemicals (“REACH”) is regulation designed to identify the intrinsic properties of chemical substances, assess hazards and risks of the substances, and identify and implement the risk management measures to protect humans and the environment.

Assessments under NTP, REACH or similar programs or regulations in other jurisdictions may result in heightened concerns about the chemicals we use or produce and may result in additional requirements being placed on the production, handling, labeling or use of those chemicals. Such concerns and additional requirements could also increase the cost incurred by our customers to use our chemical products and otherwise limit the use of these products, which could lead to a decrease in demand for these products. Such a decrease in demand could have an adverse impact on our business and results of operations.

 

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Adverse results of legal proceedings could materially adversely affect us.

We are subject to and may in the future be subject to a variety of legal proceedings and claims that arise out of the ordinary conduct of our business. Results of legal proceedings cannot be predicted with certainty. Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and may cause significant expenditure and diversion of management attention. We may be faced with significant monetary damages or injunctive relief against us that could materially adversely affect a portion of our business operations or materially and adversely affect our financial position and our results of operations should we fail to prevail in certain matters.

Significant changes in pension fund investment performance or assumptions relating to pension costs may adversely affect the valuation of pension obligations, the funded status of pension plans, and our pension cost.

Our pension cost is materially affected by the discount rates used to measure pension obligations, the level of plan assets available to fund those obligations at the measurement date and the expected long-term rates of return on plan assets. Significant changes in investment performance or a change in the portfolio mix of invested assets may result in corresponding increases and decreases in the value of plan assets, particularly equity securities, or in a change of the expected rate of return on plan assets. Any changes in key actuarial assumptions, such as the discount rate or mortality rate, would impact the valuation of pension obligations, affecting the reported funded status of our pension plans as well as the net periodic pension cost in the following fiscal years.

Nearly all of our current pension plans have projected benefit obligations that exceed the fair value of the plan assets. As of December 31, 2016, the aggregate deficit was $942 million. Any declines in the fair values of the pension plans assets could require additional payments by us in order to maintain specified funding levels.

Our pension plans are subject to legislative and regulatory requirements of applicable jurisdictions, which could include, under certain circumstances, local governmental authority to terminate the plan.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 3. Legal Proceedings.

Environmental Matters

From time to time we and our joint ventures receive notices or inquiries from government entities regarding alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions that we reasonably believe could exceed $100,000. The matters below are disclosed solely pursuant to that requirement.

In September 2013, the Louisiana Department of Environmental Quality (the “LDEQ”) issued a Compliance Order and Notice of Potential Penalty to Equistar Chemicals, LP pertaining to self-reported deviations arising from our Lake Charles, Louisiana polyolefins plant and relating to certain Clean Air Act Title V permit conditions, limits and other requirements. The matter involves deviations reported by us to the LDEQ in semi-annual reports covering 2007 through June 2011. We reasonably believe that LDEQ may assert an administrative penalty demand in this matter in excess of $100,000.

In September 2013, U.S. Environmental Protection Agency (the “EPA”) Region V issued a Notice and Finding of Violation alleging violations at our Morris, Illinois facility related to flaring activity. The Notice

 

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generally alleges failures to monitor steam usage and improper flare operations. We reasonably believe that EPA Region V may assert a penalty demand in excess of $100,000.

In June 2014, EPA Region V issued a Notice and Finding of Violation alleging violations at our Tuscola, Illinois facility related to flaring activity. The Notice generally alleges failure to conduct a valid performance test and improper flare operations. We reasonably believe that EPA Region V may assert a penalty demand in excess of $100,000.

In July 2015, the Texas Commission on Environmental Quality (the “TCEQ”) issued a proposed Agreed Order to Houston Refining LP pertaining to an emissions event which occurred in August 2014. TCEQ has asserted an administrative penalty demand for this matter of $100,000, which was approved by the Commissioners in January 2016, and has been fully paid.

In February 2016, the TCEQ issued a Notice of Enforcement to Equistar Chemicals, LP following a TCEQ compliance investigation file review. In April 2016, TCEQ issued a proposed Agreed Order, which assesses an administrative penalty of $105,000 and proposes a one-time offer to defer $21,000 of the penalty if Equistar satisfactorily complies with the terms of the order. TCEQ approved the Agreed Order in November 2016 and the penalty has been fully paid.

In April 2016, the EPA issued a Notice of Violation to Houston Refining LP arising from a 2014 inspection. The EPA alleged the production of fuel with excess sulfur and the failure to retire sufficient sulfur credits. We have reached a final settlement which requires Houston Refining to pay a penalty of $434,500 with no additional requirements. This penalty was paid in January 2017.

Litigation and Other Matters

Information regarding our litigation and other legal proceedings can be found in Note 19, Commitments and Contingencies, to the Consolidated Financial Statements.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market and Dividend Information

Our shares were listed on the New York Stock Exchange (“NYSE”) on October 14, 2010 under the symbol “LYB.” The high and low sales prices for our ordinary shares and the cash dividends per share declared for the two most recent fiscal years are shown in the table below.

 

     High      Low      Cash  Dividends
Declared
 

2016

        

First Quarter

   $ 89.99       $ 69.10       $ 0.78   

Second Quarter

     93.75         69.82         0.85   

Third Quarter

     81.75         71.48         0.85   

Fourth Quarter

     92.68         76.71         0.85   

2015

        

First Quarter

   $ 91.99       $ 71.74       $ 0.70   

Second Quarter

     107.32         87.03         0.78   

Third Quarter

     104.66         72.76         0.78   

Fourth Quarter

     98.25         83.22         0.78   

The payment of dividends or distributions in the future will be subject to the requirements of Dutch law and the discretion of our Management Board and our Supervisory Board. The declaration of any future cash dividends and, if declared, the amount of any such dividends, will depend upon general business conditions, our financial condition, our earnings and cash flow, our capital requirements, financial covenants and other contractual restrictions on the payment of dividends or distributions.

There can be no assurance that any dividends or distributions will be declared or paid in the future.

Holders

As of February 14, 2017, there were approximately 6,000 record holders of our shares, including Cede & Co. as nominee of the Depository Trust Company.

United Kingdom Tax Considerations

In May 2013, we announced the planned migration of the tax domicile of LyondellBasell Industries N.V. from The Netherlands, where LyondellBasell Industries N.V. is incorporated, to the United Kingdom. On August 28, 2013, the Dutch and the United Kingdom competent authorities completed a mutual agreement procedure and issued a ruling that retroactively as of July 1, 2013 LyondellBasell Industries N.V. should be treated solely as a tax resident in the United Kingdom and is subject to the United Kingdom corporate income tax system.

As a result of its United Kingdom tax residency, dividend distributions by LyondellBasell Industries N.V. to its shareholders are not subject to withholding tax, as the United Kingdom currently does not levy a withholding tax on dividend distributions.

 

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Performance Graph

The performance graph and the information contained in this section is not “soliciting material”, is being furnished, not filed, with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.

The graph below shows the relative investment performance of LyondellBasell Industries N.V. shares, the S&P 500 Index and the S&P 500 Chemicals Index since December 31, 2011. The graph assumes that $100 was invested on December 31, 2011 and any dividends paid were reinvested at the date of payment. The graph is presented pursuant to SEC rules and is not meant to be an indication of our future performance.

 

LOGO

 

     12/31/2011    12/31/2012    12/31/2013    12/31/2014    12/31/2015    12/31/2016

LyondellBasell Industries N.V.

   $100    $191.38    $276.98    $282.05    $319.09    $327.88

S&P 500 Index

   $100    $116.00    $153.57    $174.60    $177.01    $198.18

S&P 500 Chemicals Index

   $100    $123.61    $162.92    $180.35    $172.82    $190.37

 

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Issuer Purchases of Equity Securities

 

2016 Period

   Total Number
of Shares
Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares That May Yet
Be Purchased Under  the
Plans or Programs
 

October 1—October 31

     1,818,874       $ 80.83         1,818,874         24,608,892   

November 1—November 30

     1,785,643       $ 82.34         1,785,643         22,823,249   

December 1—December 31

     1,620,896       $ 88.24         1,620,896         21,202,353   
  

 

 

       

 

 

    

Total

     5,225,413       $ 83.64         5,225,413         21,202,353   
  

 

 

       

 

 

    

On May 13, 2016, we announced a share repurchase program of up to 42,518,980 of our ordinary shares through November 13, 2017. The maximum number of shares that may yet be purchased is not necessarily an indication of the number of shares that will ultimately be purchased.

 

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Item 6. Selected Financial Data.

The following selected financial data was derived from our consolidated financial statements, which were prepared from our books and records. This data should be read in conjunction with the Consolidated Financial Statements and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” below. Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of factors that will enhance an understanding of this data.

 

     Year Ended December 31,  

In millions of dollars, except per share data

   2016     2015     2014     2013     2012  

Results of operations data:

          

Sales and other operating revenues

   $ 29,183      $ 32,735      $ 45,608      $ 44,062      $ 45,352   

Operating income(a)

     5,060        6,122        5,736        5,102        4,676   

Interest expense(b)

     (322     (310     (352     (309     (655

Income from equity investments

     367        339        257        203        143   

Income from continuing operations(a)(c)

     3,847        4,479        4,172        3,860        2,858   

Earnings per share from continuing operations:

          

Basic

     9.17        9.63        8.04        6.81        5.01   

Diluted

     9.15        9.60        8.00        6.76        4.96   

Loss from discontinued operations, net of tax

     (10     (5     (4     (7     (24

Loss per share from discontinued operations:

          

Basic

     (0.02     (0.01     (0.01     (0.01     (0.04

Diluted

     (0.02     (0.01     (0.01     (0.01     (0.04

Balance sheet data:

          

Total assets

     23,442        22,757        24,221        27,230        24,167   

Short-term debt

     594        353        346        58        95   

Long-term debt(d)

     8,387        7,675        6,699        5,709        4,252   

Cash and cash equivalents

     875        924        1,031        4,450        2,732   

Short-term investments

     1,147        1,064        1,593        —          —     

Accounts receivable

     2,842        2,517        3,448        4,030        3,904   

Inventories

     3,809        4,051        4,517        5,279        5,075   

Working capital

     4,122        4,386        4,901        5,737        5,694   

Cash flow data:

          

Cash provided by (used in):

          

Operating activities

     5,606        5,842        6,048        4,835        4,787   

Investing activities

     (2,297     (1,051     (3,531     (1,602     (1,013

Expenditures for property, plant and equipment

     (2,243     (1,440     (1,499     (1,561     (1,060

Financing activities

     (3,349     (4,850     (5,907     (1,589     (2,145

Dividends declared per share

     3.33        3.04        2.70        2.00        4.20   

 

(a) Includes pretax, non-cash charges in 2016, 2015 and 2014 of $29 million ($18 million after tax), $548 million ($351 million after tax) and $760 million ($483 million after tax), respectively, related to lower of cost or market (“LCM”) inventory valuation adjustments. Also includes a pre-tax and after-tax gain of $78 million on the sale of our wholly owned Argentine subsidiary and a pre-tax charge of $58 million ($37 million after tax) for a pension settlement in 2016.
(b) Interest expense in 2012 included charges of $294 million for premiums related to the refinancing of notes bearing interest rates of 8% and 11% per annum with lower coupon notes.
(c) Income from continuing operations in 2016 includes $135 million of out of period adjustments related to taxes on our cross currency swaps and deferred liabilities related to some of our consolidated subsidiaries. Income from continuing operations for the year ended December 31, 2013 included a $353 million benefit related to the release of valuation allowances primarily associated with tax losses in our French group. Income from continuing operations for the year ended December 31, 2012 included after-tax charges of $210 million for premiums and charges on the early repayment of debt.
(d) Includes current maturities of long-term debt.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

GENERAL

This discussion should be read in conjunction with the information contained in our Consolidated Financial Statements, and the accompanying notes elsewhere in this report. When we use the terms “we,” “us,” “our” or similar words in this discussion, unless the context otherwise requires, we are referring to LyondellBasell Industries N.V. and its consolidated subsidiaries.

OVERVIEW

Earnings for 2016 were good despite a heavy schedule of planned maintenance and the challenges of several operational upsets at our Houston refinery. Our continued strong earnings and cash flow enabled us to increase the amount of our interim dividends and to continue the repurchase of our ordinary shares. During 2016, the global olefins and polyolefins industry benefitted from continued favorable supply and demand balances, while low crude oil and fuel prices negatively impacted margins for refining and oxyfuels and related products. Strong results for our O&P—EAI and Technology segments demonstrate continued global industry strength.

The completion of the expansion and turnaround of our Corpus Christi ethylene facility in the fourth quarter of 2016 marked the final step in our 2 billion pound North American ethylene expansion program. Our completed ethylene expansion program, the start of site preparation for our 1.1 billion pound polyethylene facility and advancements on the design of our new PO/TBA plant, along with the completion of several major plant turnarounds this year position us favorably for the coming years.

Significant items that affected 2016 results include:

 

   

Olefins and Polyolefins—Americas (“O&P—Americas”) results declined on lower olefins results.

 

   

Lower refining margins and lower crude processing rates due primarily to planned and unplanned maintenance at our Houston refinery;

 

   

Lower Intermediates and Derivatives (“I&D”) segment results driven mainly by lower margins for most I&D products; and

 

   

Improved Olefins and Polyolefins—Europe, Asia, International (“O&P—EAI”) segment results on higher European polyolefins margins.

Other noteworthy items during 2016 include the following:

 

   

We increased our interim dividend from $0.78 to $0.85 in May 2016;

 

   

We repurchased approximately 36.6 million of our ordinary shares during 2016;

 

   

We increased our revolving credit facility and commercial paper program from $2,000 million to $2,500 million in June 2016;

 

   

We issued €750 million of 1.875% guaranteed notes due 2022 in March 2016; and

 

   

We sold our wholly owned Argentine subsidiary for $184 million in February 2016, realizing net proceeds of $137 million and an increase in earnings of $78 million.

 

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Results of operations for the periods discussed in these “Results of Operations” are presented in the table below.

 

      Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Sales and other operating revenues

   $ 29,183       $ 32,735       $ 45,608   

Cost of sales

     23,191         25,683         38,939   

Selling, general and administrative expenses

     833         828         806   

Research and development expenses

     99         102         127   
  

 

 

    

 

 

    

 

 

 

Operating income

     5,060         6,122         5,736   

Interest expense

     (322      (310      (352

Interest income

     17         33         33   

Other income (expense), net

     111         25         38   

Income from equity investments

     367         339         257   

Provision for income taxes

     1,386         1,730         1,540   
  

 

 

    

 

 

    

 

 

 

Income from continuing operations

     3,847         4,479         4,172   

Loss from discontinued operations, net of tax

     (10      (5      (4
  

 

 

    

 

 

    

 

 

 

Net income

   $ 3,837       $ 4,474       $ 4,168   
  

 

 

    

 

 

    

 

 

 

RESULTS OF OPERATIONS

Revenues—We had revenues of $29,183 million in 2016, $32,735 million in 2015 and $45,608 million in 2014.

2016 versus 2015—Revenues decreased by $3,552 million, or 11%, in 2016 compared to 2015.

Lower average sales prices driven by decreases in the prices of crude oil and other feedstocks led to revenue declines of 10% in 2016. Lower sales volumes in our Refining segment due to turnaround activities and unplanned outages, which were substantially offset by higher I&D segment sales volumes, led to a 1% volume-driven decline in revenues. The decline in revenues includes a $290 million impact from the sale of our wholly owned Argentine subsidiary.

2015 versus 2014—Revenues decreased $12,873 million, or 28%, in 2015 compared to 2014.

The decline in prices for crude oil and other feedstocks during 2015 was the primary contributing factor for lower average sales prices, which were responsible for 23% of the revenue decline in 2015 versus 2014. Unfavorable translation impacts resulting from a significant decline in the euro/U.S. dollar exchange rate further reduced revenues by 5% during 2015.

Sales volumes during 2015 were relatively unchanged from 2014. A decrease in sales due to lower crude processing rates in our Refining segment was mostly offset by higher sales volumes for U.S. and European polyolefins, oxyfuels and related products and intermediate chemicals. Revenues for each of our business segments are reviewed further in the “Segment Analysis” section below.

Cost of Sales—Cost of sales were $23,191 million in 2016, $25,683 million in 2015 and $38,939 million in 2014.

Fluctuations in our cost of sales are generally driven by changes in feedstock and energy costs, as all other material components remain relatively flat from year to year. Feedstock and energy related costs generally represent approximately 75% to 80% of cost of sales, other variable costs account for approximately 10% of cost

 

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of sales on an annual basis and fixed operating costs, consisting primarily of expenses associated with employee compensation, depreciation and amortization, and maintenance, range from approximately 10% to 15% in each annual period.

2016 versus 2015—Cost of sales decreased by $2,492 million in 2016 compared to 2015.

The decrease in cost of sales in 2016 was primarily due to lower feedstock and energy costs. Raw material costs for crude oil, heavy liquids and natural gas liquids (“NGLs”) and other feedstocks were lower in 2016 compared to 2015. The sale of our wholly owned Argentine subsidiary in 2016 also contributed approximately $230 million to the decline in 2016 cost of sales.

Cost of sales in 2016 and 2015 also included noncash, pre-tax lower of cost or market (“LCM”) inventory valuation charges totaling $29 million and $548 million, respectively. The 2016 adjustment is related to a drop in polypropylene prices in our O&P—Americas segment and the adjustments in 2015 affected all of our segments except Technology. The 2015 adjustments were driven mainly by declines in the prices for crude oil, ethylene, propylene, benzene and ETBE. During 2015, cost of sales also included $35 million of amortization expense associated with the expiration of emission allowance credits in our Refining and I&D segments.

2015 versus 2014—Cost of sales decreased by $13,256 million in 2015 compared to 2014.

The decrease in cost of sales in 2015 was primarily due to lower feedstock and energy costs. In 2015, the raw material costs for crude oil, heavy liquids and natural gas liquids (“NGLs”) and other feedstocks were significantly lower relative to 2014.

Cost of sales in 2015 included the $548 million pretax LCM inventory valuation charge and $35 million of amortization expense discussed above. Cost of sales in 2014 included a $760 million charge related to an LCM inventory valuation adjustment driven by a decline in feedstock prices in our O&P—Americas segment and a $52 million benefit in our O&P—EAI segment associated with a settlement for certain existing and future environmental claims under a 2005 indemnification agreement.

Operating Income—Our operating income was $5,060 million, $6,122 million and $5,736 million in 2016, 2015 and 2014, respectively.

2016 versus 2015—Operating income decreased by $1,062 million in 2016.

Operating income for 2016 reflects the impacts of the LCM inventory valuation adjustment discussed above and a $58 million pension settlement charge. Operating income for 2015 reflects the LCM inventory valuation adjustment and the emission credit allowance amortization discussed above. Including these impacts, 2016 operating income declined relative to 2015 by $863 million, $243 million and $166 million in our O&P—Americas, Refining and I&D segments, respectively. These lower results were partially offset by a $185 million improvement in operating income for our O&P—EAI segment.

2015 versus 2014—Operating income increased by $386 million in 2015, which includes the impact of the LCM inventory valuation adjustments, environmental settlement and emission credit allowances amortization discussed above.

Including these impacts, operating income in 2015 for our O&P—EAI and Refining segments reflect improvements of $425 million and $250 million, respectively. These improvements were offset in part by a $316 million decline in the results of our O&P—Americas segment.

Operating results for each of our business segments are reviewed further in the “Segment Analysis” section below.

 

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Interest Expense—Interest expense was $322 million in 2016, $310 million in 2015 and $352 million in 2014.

2016 versus 2015—Debt issuances of our 1.875% guaranteed notes due 2022 in March 2016 and our 4.625% senior notes due 2055 in March 2015 and reduced benefits from our fixed-for-floating interest rate swaps resulted in $42 million of higher interest expense in 2016. This increase was partially offset by a $22 million increase in capitalized interest and $7 million of lower bank and other fees.

2015 versus 2014—The decrease in interest expense in 2015 relative to 2014 was primarily due to favorable impacts of $85 million related to our fixed-for-floating interest rate swaps and cross-currency swaps. This decrease was offset in part by $46 million of higher interest charges related to the issuance of our 4.875% guaranteed notes due 2044 in February 2014 and our 4.625% senior notes due 2055 in March 2015.

For additional information related to our fixed-for-floating interest rate swaps and cross-currency swaps, see Notes 12, 14 and 15.

Income from Equity Investments—Our income from equity investments was $367 million in 2016, $339 million in 2015 and $257 million in 2014.

2016 versus 2015—The $28 million increase in income from equity investments in 2016 is largely due to improved results for our joint ventures in Mexico, Saudi Arabia, Poland and Thailand.

2015 versus 2014—Our 2015 income from equity investments increased by $82 million over 2014 largely due to improved results from our joint ventures in Poland, Korea and Mexico, offset in part by lower results from our joint ventures in Saudi Arabia.

Income Taxes—Our effective income tax rates of 26.5% in 2016, 27.9% in 2015 and 27.0% in 2014 resulted in tax provisions of $1,386 million, $1,730 million and $1,540 million, respectively. Our 2016 income tax provision includes $135 million of non-cash out of period adjustments from prior years, for further information on these adjustments, please see Footnote 18, Income Taxes. Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries with varying statutory tax rates, the U.S. domestic production activity deduction, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions. The Company’s exempt income primarily includes interest income and equity earnings of joint ventures. The interest income is earned by certain of our European subsidiaries through intercompany financings and is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. The equity earnings are attributable to our joint ventures and these earnings when paid through dividends to certain European subsidiaries are eligible for participation exemptions, which exempt the dividend payments from all or portions of normal statutory income tax rates. We currently anticipate the favorable treatment for the interest income and dividends to continue in the near term; however, this treatment is based on current law and tax rulings, which could change. The foreign exchange gains/losses have a permanent impact on our effective income tax rate that can cause unpredictable movement in our effective income tax rate. We continue to maintain valuation allowances in various jurisdictions totaling $96 million, which could impact our effective tax rate in the future. We believe our effective income tax rate for 2017 will be approximately 27%.

2016—The 2016 effective income tax rate, which was lower than the U.S. statutory tax rate of 35%, was favorably impacted by exempt income (-6.7%), earnings in various countries (notably in Europe) with lower statutory tax rates (-3.0%), the impact of a change in non-U.S. tax law on our deferred tax liabilities (-1.0%) and the U.S. domestic production activity deduction (-0.8%). These favorable items were partially offset by the effects of non-cash out of period adjustments (2.5%) and U.S. state and local income taxes (0.5%).

 

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2015—The 2015 effective income tax rate, which was lower than the U.S. statutory tax rate of 35%, was favorably impacted by exempt income (-5.1%), earnings in various countries (notably in Europe) with lower statutory tax rates (-2.1%), and the U.S. domestic production activity deduction (-1.4%). These favorable items were partially offset by the effects of U.S. state and local income taxes (1.0%).

2014—The 2014 effective income tax rate, which was lower than the U.S. statutory tax rate of 35%, was favorably impacted by exempt income (-4.8%), the U.S. domestic production activity deduction (-1.9%), foreign exchange losses (-1.5%), and earnings in various countries (notably in Europe) with lower statutory tax rates (-1.1%). These favorable items were partially offset by the effects of U.S. state and local income taxes (1.1%).

For further information related to our income taxes, see Note 18 to the Consolidated Financial Statements.

Comprehensive Income—We had comprehensive income of $3,763 million in 2016, $4,064 million in 2015 and $3,052 million in 2014.

2016 versus 2015—In 2016, comprehensive income decreased on lower net income, the unfavorable impacts of financial derivative adjustments and the increase in actuarial losses related to our defined benefit pension and other postretirement benefit plans recognized in 2016. These decreases were offset in part by the net favorable impact of unrealized net changes in foreign currency translation adjustments.

In 2016, we had a pre-tax gain of $43 million related to the effective portion of the unrealized gains of our financial instruments designated as net investment hedges. The cumulative effect of our derivatives designated as cash flow hedges in 2016 was a loss of $29 million. In 2016, cumulative losses associated with the strengthening of the euro versus the U.S. dollar in the first half of the year resulted in a pre-tax loss of $15 million related to our cross currency swaps. An unrealized loss of $17 million in 2016 related to forward-starting interest rate swaps was driven by decreases in benchmark interest rates during that period.

A pre-tax loss of $63 million related to our cross currency swaps was a reclassification adjustment included in net income in 2016.

In 2016 and 2015, we recognized net actuarial losses of $188 million and $8 million, respectively. The $188 million net loss in 2016 reflects $279 million of losses due to pension and other postretirement benefit discount rate decreases, offset by $79 million of gains related to pension asset experience and $10 million due to favorable postretirement liability experience and other immaterial items. In 2015, the $8 million net loss was primarily attributable to $133 million of actual asset return less than the expected return. This loss was offset by gains due to $73 million of discount rate increases and, $50 million of gains due to favorable liability experience and healthcare assumptions. In 2016, we also recognized a $61 million reclassification adjustment related primarily to a voluntary lump sum program offered to certain former employees in select U.S. pension plans. Total lump sum payments from these plans exceeded annual service and interest cost in 2016 resulting in this loss.

2015 versus 2014—In 2015, Comprehensive income increased on higher net income, the reduction in actuarial losses related to our defined benefit pension and other postretirement benefit plans recognized in 2015, the favorable impact of unrealized net changes in foreign currency translation adjustments and to a lesser extent, the benefit of favorable financial derivative adjustments.

In 2015 and 2014, we recognized net actuarial losses of $8 million and $493 million, respectively. The $493 million net loss in the prior year was caused primarily by pension and other postretirement benefit discount rate decreases and mortality assumption changes. In 2015, the $8 million net loss was primarily attributable to $133 million of actual asset return less than the expected return. This loss was offset by gains due to $73 million of discount rate increases and, $50 million of gains due to favorable liability experience and healthcare assumptions.

 

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The predominant functional currency for our operations outside of the U.S. is the euro. Relative to the U.S. dollar, the value of the euro decreased during 2015 and 2014, resulting in losses as reflected in the Consolidated Statements of Comprehensive Income.

In 2015, the cumulative effect of our derivatives designated as cash flow hedges was a gain of $279 million. Cumulative gains in 2015 associated with the decline in the euro versus the U.S. dollar resulted in a pre-tax gain of $262 million related to our cross currency swaps. A $17 million gain in 2015 related to forward-starting interest rate swaps were driven by increases in benchmark interest rates during that period.

A pre-tax loss of $207 million related to our cross currency swaps was a reclassification adjustment included in net income in 2015.

See “Critical Accounting Policies” below and Note 16 to the Consolidated Financial Statements for additional information on the key assumptions included in calculating the discount rate and expected return on plan assets.

Segment Analysis

We use earnings before interest, income taxes, and depreciation and amortization (“EBITDA”) as our measure of profitability for segment reporting purposes. This measure of segment operating results is used by our chief operating decision maker to assess the performance of and allocate resources to our operating segments. Intersegment eliminations and items that are not directly related or allocated to business operations are included in “Other.” For additional information related to our operating segments, as well as a reconciliation of EBITDA to its nearest generally accepted accounting principles (“GAAP”) measure, Income from continuing operations before income taxes, see Note 22, Segment and Related Information, to our Consolidated Financial Statements.

 

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Our continuing operations are divided into five reportable segments: O&P—Americas; O&P—EAI; I&D; Refining; and Technology. The following tables reflect selected financial information for our reportable segments.

 

     Year Ended December 31,  

Millions of dollars

   2016     2015     2014  

Sales and other operating revenues:

      

O&P—Americas segment

   $ 9,077      $ 9,964      $ 13,948   

O&P—EAI segment

     10,579        11,576        15,203   

I&D segment

     7,226        7,772        10,130   

Refining segment

     5,135        6,557        11,710   

Technology segment

     479        465        497   

Other, including intersegment eliminations

     (3,313     (3,599     (5,880
  

 

 

   

 

 

   

 

 

 

Total

   $ 29,183      $ 32,735      $ 45,608   
  

 

 

   

 

 

   

 

 

 

Operating income:

      

O&P—Americas segment

   $ 2,393      $ 3,256      $ 3,572   

O&P—EAI segment

     1,494        1,309        884   

I&D segment

     1,058        1,224        1,220   

Refining segment

     (99     144        (106

Technology segment

     221        197        171   

Other, including intersegment eliminations

     (7     (8     (5
  

 

 

   

 

 

   

 

 

 

Total

   $ 5,060      $ 6,122      $ 5,736   
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

      

O&P—Americas segment

   $ 362      $ 353      $ 316   

O&P—EAI segment

     229        219        248   

I&D segment

     269        233        225   

Refining segment

     163        196        169   

Technology segment

     41        46        61   
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,064      $ 1,047      $ 1,019   
  

 

 

   

 

 

   

 

 

 

Income (loss) from equity investments:

      

O&P—Americas segment

   $ 59      $ 42      $ 21   

O&P—EAI segment

     302        283        229   

I&D segment

     6        14        7   
  

 

 

   

 

 

   

 

 

 

Total

   $ 367      $ 339      $ 257   
  

 

 

   

 

 

   

 

 

 

Other income (expense), net

      

O&P—Americas segment

   $ 63      $ 10      $ 2   

O&P—EAI segment

     42        14        5   

I&D segment

     —          4        7   

Refining segment

     8        2        2   

Other, including intersegment eliminations

     (2     (5     22   
  

 

 

   

 

 

   

 

 

 

Total

   $ 111      $ 25      $ 38   
  

 

 

   

 

 

   

 

 

 

EBITDA:

      

O&P—Americas segment

   $ 2,877      $ 3,661      $ 3,911   

O&P—EAI segment

     2,067        1,825        1,366   

I&D segment

     1,333        1,475        1,459   

Refining segment

     72        342        65   

Technology segment

     262        243        232   

Other, including intersegment eliminations

     (9     (13     17   
  

 

 

   

 

 

   

 

 

 

Total

   $ 6,602      $ 7,533      $ 7,050   
  

 

 

   

 

 

   

 

 

 

 

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Olefins and Polyolefins—Americas Segment

Overview—In calculating the impact of margin and volume on EBITDA, consistent with industry practice, management offsets revenues and volumes related to ethylene co-products against the cost to produce ethylene. Volume and price impacts of ethylene co-products are reported in margin. Ethylene is a major building block of olefins and polyolefins and as such management assesses the performance of the segment based on ethylene sales volumes and prices and our internal cost of ethylene production.

2016 versus 2015—EBITDA in 2016 reflects lower olefins and polyethylene results, partially offset by improved polypropylene results.

The benefit to 2016 EBITDA from a $57 million gain on the sale of our wholly owned Argentine subsidiary in February 2016 was offset in part by a $29 million non-cash LCM inventory valuation charge recognized in the fourth quarter due primarily to a drop in polypropylene prices. In 2015, volatility in the benchmark prices for heavy liquids and natural gas and certain correlated products, particularly ethylene and propylene, which continued during most of the year, led to net non-cash LCM inventory valuation adjustments totaling $160 million.

2015 versus 2014—Segment results were lower in 2015 primarily due to a decline in olefins results partially offset by improved polyolefin results relative to 2014. Olefins margins in 2015 continued to benefit from low-cost ethylene produced from NGLs in North America, but to a lesser extent than in 2014. The cost advantage for this ethylene, compared to that produced from naphtha and other crude oil-based liquids in the rest of the world, declined due to the lower crude oil prices in 2015.

Prices for heavy liquids, NGLs and olefins declined significantly in the fourth quarter of 2014 to levels that had not been seen in recent years. These declines resulted in the recognition of the non-cash, LCM inventory adjustments totaling $279 million in 2014 discussed below. As discussed above, results for 2015 were also negatively impacted by a $160 million LCM inventory valuation adjustment.

Ethylene Raw Materials—Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of the movement of raw material and energy costs for ethylene and its co-products in the O&P—Americas segment. Ethylene and its co-products are produced from two major raw material groups:

 

   

NGLs, principally ethane and propane, the prices of which are generally affected by natural gas prices; and

 

   

crude oil-based liquids (“liquids” or “heavy liquids”), including naphtha, condensates, and gas oils, the prices of which are generally related to crude oil prices.

Although prices of these raw materials are generally related to crude oil and natural gas prices, during specific periods the relationships among these materials and benchmarks may vary significantly. In the U.S., we have significant capability to change the mix of raw materials used in the production of ethylene and its co-products to take advantage of the relative costs of heavy liquids and NGLs.

Production economics for the industry have favored NGLs in recent years. Although the decline in oil prices significantly reduced the cost of ethylene produced from heavy liquids in 2015, NGL prices also declined and they have continued to be preferred feedstocks. We produced between 87% and 90% of our U.S. ethylene production NGLs during the past three years.

 

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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.

 

     Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Sales and other operating revenues

   $ 9,077       $ 9,964       $ 13,948   

Income from equity investments

     59         42         21   

EBITDA

     2,877         3,661         3,911   

Revenues—Revenues decreased by $887 million, or 9%, in 2016 compared to 2015 and by $3,984 million, or 29%, in 2015 compared to 2014.

2016 versus 2015—Average sales prices for ethylene and polyethylene declined in 2016, consistent with feedstock prices that are correlated to the price of natural gas, which declined relative to 2015. These lower average sales prices led to a revenue decrease of 11% in that period. A 2% revenue increase resulted from the improvement in 2016 product sales volumes as higher olefins sales volume, supported by an increase in the level of purchases for resale during turnaround activities, were only partly offset by lower polyolefins volumes. The sale of our Argentine subsidiary reduced 2016 revenues by $230 million.

2015 versus 2014—Average sales prices declined for most products in 2015 resulting in a 31% revenue decrease compared to 2014. Lower average olefin prices reflect the significant decline in prices for crude oil and correlated products relative to prices in 2014. The decline in average polyethylene and polypropylene sales prices followed the decline in the 2015 prices of their respective feedstocks, ethylene and propylene.

These decreases in revenues were offset in part by an increase in sales volumes, which gave rise to a 2% revenue increase in 2015, compared to 2014. Ethylene sales volumes were higher due to increased production reflecting higher capacity following the completion of the expansion-related turnaround at our La Porte, Texas facility during 2014 and additional production related to less planned and unplanned downtime at our Channelview, Texas facility. Polyethylene sales volumes improved in 2015, due to the completion of an expansion-related turnaround at our Matagorda, Texas facility in the first quarter of 2014 and continued healthy global demand.

EBITDA—EBITDA decreased by $784 million, or 21%, in 2016 compared to 2015 and by $250 million, or 6%, in 2015 compared to 2014.

2016 versus 2015—Lower olefin and polyethylene margins in 2016 were partially offset by higher polypropylene margins. The decline in olefins margins reflected a 2 cents per pound decrease in average ethylene sales prices and an approximate 4 cents per pound increase in the cost of ethylene production driven by lower co-product prices and an increase in the cost of NGL feedstocks. Polyethylene margins declined 4 cents per pound from very high levels in 2015 as average polyethylene sales prices caught up with the overall decline in the cost of ethylene feedstock, after lagging feedstock cost declines in 2015. A 4 cent per pound improvement in 2016 polypropylene margins reflects the benefits of lower propylene feedstock costs and tight market conditions. These olefin and polyethylene margin impacts led to a 17% decrease in EBITDA during 2016. An additional 10% decline in 2016 EBITDA is attributed to the impact of lower volumes related to lower ethylene production during the turnaround and expansion-related activities at our Corpus Christi, Texas ethylene facility and a site-wide outage related to turnaround activities at our Morris, Illinois site.

These negative impacts were partially offset by a 6% increase in 2016 EBITDA primarily due to a $131 million reduction in the unfavorable LCM adjustment recognized in 2016 versus 2015 and to the $57 million gain on the 2016 sale of our Argentine subsidiary.

2015 versus 2014—The 6% decrease in EBITDA reflected a 24% net margin decline as lower olefin margins were partly offset by higher polyethylene and polypropylene margins. This decrease in margins was

 

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offset in part by a 14% increase related to higher volumes and a 3% increase related to the $119 million decline in the non-cash charges related to the LCM inventory valuation adjustments discussed above. Improvements in our income from equity investments accounts for the remaining 1% increase in EBITDA during 2015.

Olefin margins declined in 2015 as a 19 cent per pound drop in the average sales price for ethylene outpaced the decrease in our cost of ethylene production. Lower NGL and heavy liquids feedstock prices in 2015 outpaced the decline in selling prices of our co-products, which resulted in the decrease of our cost of ethylene production compared to the prior year.

Polyethylene margins reflected a 5 cent per pound improvement in 2015 as demand remained strong and decreases in the cost of ethylene feedstock outpaced lower average sales prices relative to 2014. Polypropylene margins, which increased by 7 cents per pound in 2015, benefited from lower propylene feedstock costs, which in part reflected the decline in crude oil prices, and higher average sales prices relative to propylene, driven by industry operating issues and increased demand.

Sales volumes in 2015 increased as compared to the prior year as a result of downtime and expansion-related activities in 2014 and the increased demand discussed above.

Olefins and Polyolefins—Europe, Asia, International Segment

OverviewIn calculating the impact of margin and volume on EBITDA, consistent with industry practice, management offsets revenues and volumes related to ethylene co-products against the cost to produce ethylene. Volume and price impacts of ethylene co-products are reported in margin. Ethylene is a major building block of our olefins and polyolefins and as such management assesses the performance of the segment based on ethylene sales volumes and prices and our internal cost of ethylene production.

2016 versus 2015Higher operating results in 2016 were largely the result of higher polyolefin margins, offset in part by lower olefins results and reductions in polyolefins volumes due to turnaround activity and unplanned downtime.

EBITDA in 2016 reflects the benefit of a $21 million gain from the sale of our wholly owned Argentine subsidiary and $11 million of gains from the sales of our joint venture in Japan and idled assets in Australia. EBITDA in 2015 included a $30 million non-cash LCM inventory valuation adjustment driven by a decline in the prices of naphtha and polyolefins.

2015 versus 2014—Operating results in 2015 reflect improved results for our European polyolefins and, to a lesser extent, higher results for olefins and better results for our joint ventures that are accounted for using the equity method.

At the end of the fourth quarter of 2015, lower feedstock and product prices resulted in market prices that were lower than the carrying value of our related inventories. Accordingly, we recorded a $30 million non-cash, LCM inventory valuation charge related to olefins and polyolefins. This compares to the $44 million non-cash, LCM inventory valuation charge related to olefins that was recognized in the fourth quarter of 2014 as a result of the declining price of naphtha.

Ethylene Raw Materials—In Europe, heavy liquids are the primary raw materials for our ethylene production. In recent years, we have sourced increased amounts of advantaged NGLs when the opportunity has arisen. In 2016, we continued to process advantaged feedstocks as market opportunities allowed.

 

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

 

     Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Sales and other operating revenues

   $ 10,579       $ 11,576       $ 15,203   

Income from equity investments

     302         283         229   

EBITDA

     2,067         1,825         1,366   

Revenues—Revenues in 2016 decreased by $997 million, or 9%, compared to 2015 and by $3,627 million, or 24%, in 2015 compared to 2014.

2016 versus 2015—The decline in 2016 revenues comprises a 7% decrease related to lower average sales prices, and a 2% reduction of sales volumes stemming from turnaround activities and unplanned outages.

In 2016, average sales prices for olefins and polyolefins fell following feedstock prices that declined in conjunction with the price of crude oil.

2015 versus 2014—The decline in 2015 revenues reflects decreases of 14% and 12% related to lower average sales prices and currency translation impacts, respectively. An increase in polyolefins volumes resulting from increased demand and higher operating rates, which was substantially offset by a decline in olefins volumes stemming from turnaround activities at our Münchsmünster, Germany facility and unplanned outages, was responsible for a 2% revenue increase in 2015.

In 2015, lower average sales prices for polypropylene were partially offset by higher average polyethylene prices. Decreases in feedstock costs in 2015 led to the decline in polypropylene sales prices compared to 2014. The increase in polyethylene prices in 2015 reflect strong spread increases over ethylene, primarily in Europe.

EBITDA—EBITDA increased by $242 million, or 13%, in 2016 compared to 2015 and by $459 million, or 34%, in 2015 compared to 2014.

2016 versus 2015—In 2016, higher European polyolefins margins stemming from declining ethylene and propylene feedstock costs outpaced falling product prices and led to an 11% increase in EBITDA. This margin improvement in 2016 was partially offset by a 2% decrease in EBITDA due largely to lower polyolefin volumes.

A 3% increase in 2016 EBITDA is attributed to gains associated with the sales of a joint venture, idled assets and our wholly owned Argentine subsidiary, as well as the absence of the 2015 LCM inventory valuation adjustment discussed above. Income from our equity investments also led to a 1% increase in EBITDA in 2016 due to higher polyolefin margins in our European joint venture and strong operating rates in our Saudi joint ventures.

2015 versus 2014—Improved margins in all major product groups and the increase in polyolefins volumes described above contributed 42% and 4%, respectively, to EBITDA in 2015. Polyolefins margins improved due to supply constraints as a result of several industry outages. Olefins margins improved in 2015 as the lower cost of ethylene production, which was driven by lower feedstock prices, outpaced the decline in olefin product prices.

A 4% increase in EBITDA associated with an improvement in Income from equity investments in 2015, was mainly driven by improved margins relative to 2014 in certain joint ventures as a result of favorable market prices during 2015 and strong operating rates.

These increases were partially offset by a 13% decrease due to the translation of a weaker euro and a 3% decrease related to a net charge of $38 million discussed below. In 2015, EBITDA included a $30 million charge related to the LCM adjustment previously discussed. In 2014, EBITDA included a $52 million benefit associated

 

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with a settlement for certain existing and future environmental claims under a 2005 indemnification agreement from an insurance settlement, which was offset in part by the $44 million LCM inventory valuation charge discussed above.

Intermediates and Derivatives Segment

Overview

2016 versus 2015—Operating results for 2016 were lower than in 2015, as margin compression for most products related to declining energy prices, higher industry production rates and additional industry capacity was only partly offset by the impact of higher volumes.

EBITDA in 2015 was negatively impacted by the recognition of $181 million of LCM inventory valuation adjustments driven by the continued decline in prices for feedstocks, certain oxyfuels and related products, and intermediate chemical products to levels that were lower than the carrying value of our related inventories at reporting dates throughout the year.

2015 versus 2014—Results in 2015 improved as higher margins in intermediate chemicals benefited from the favorable impact of product pricing and declining feedstock costs. This improvement was substantially offset by a decline in 2015 oxyfuels and related products results indicative of a decrease in energy prices compared to unusually high margins in 2014.

Our 2015 results were also unfavorably impacted by the non-cash, LCM inventory valuation adjustment discussed above, which reflects an $88 million increase over the LCM inventory valuation adjustment recognized in the fourth quarter of 2014.

The following table sets forth selected financial information for the I&D segment including Income from equity investments, which is a component of EBITDA.

 

     Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Sales and other operating revenues

   $ 7,226       $ 7,772       $ 10,130   

Income from equity investments

     6         14         7   

EBITDA

     1,333         1,475         1,459   

Revenues—Revenues for 2016 decreased by $546 million, or 7%, compared to 2015 and by $2,358 million, or 23%, in 2015 compared to 2014.

2016 versus 2015—Lower average sales prices in 2016 reflect the impacts of lower crude oil, lower gasoline prices and the decline in various feedstock prices. Additional industry supply also negatively impacted the average sales prices for certain products during 2016. These lower sales prices in 2016 were responsible for an 11% revenue decrease.

This price driven decrease was offset in part by a 4% volume-related revenue increase in 2016 resulting from fewer planned and unplanned production outages relative to 2015.

2015 versus 2014—In 2015, the significant decline in crude oil and key feedstocks prices was the primary driver behind the overall decrease in average sales prices across most products. This decline in prices was offset in part by improved octane blend premiums for oxyfuels and related products and gasoline price spreads over crude oil that were strong in 2015. These lower average sales prices and the impact of currency translation impacts led to revenue decreases of 23% and 6%, respectively.

 

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Higher sales volumes for oxyfuels and related products and intermediate chemicals were largely responsible for a 6% volume driven revenue increase. Sales volumes for oxyfuels and related products increased due to strong octane and gasoline demand. Intermediate chemicals volumes increased due to increased feedstock supply and improved operating rates at our acetyls facilities.

EBITDA—EBITDA decreased by $142 million, or 10%, in 2016 compared to 2015 and increased by $16 million, or 1%, in 2015 compared to 2014.

2016 versus 2015—Lower margins in most I&D products in 2016 resulted in a 30% decrease in EBITDA. Weaker gasoline markets drove oxyfuels and related product values lower relative to butane feedstock costs, and lower product prices in propylene oxide and derivatives and intermediate chemicals were driven largely by increased industry supply. Lower income from our equity investments in 2016 also resulted in a 1% decrease in EBITDA during that period.

An EBITDA increase in 2016 of 9% related to the higher volumes discussed above, partially offset the negative margin impact. EBITDA in 2016 also reflected an increase of 12% related to the absence of the LCM inventory valuation adjustment recognized in the 2015 comparison period.

2015 versus 2014—EBITDA increased by $16 million, or 1%, in 2015 compared to 2014. Higher sales volumes in 2015 as discussed above led to a volume-driven increase of 7% in EBITDA.

Lower oxyfuels and related products margins, substantially offset by an improvement in intermediate chemicals margins resulted in a 1% decrease in 2015 EBITDA. Oxyfuels and related products margins were lower in 2015 due to a significant decline in crude oil prices offset in part by strong gasoline price spreads over crude oil and octane blending value. Margins for intermediate chemicals improved as styrene margins were favorably impacted by tight supply resulting from industry outages and feedstock prices that declined more rapidly than average sales prices.

EBITDA was further reduced by 6% as a result of the $88 million incremental increase in the non-cash LCM inventory valuation adjustment recognized in 2015 over 2014. The remaining change in 2015 EBITDA is attributable to a small improvement in income from our equity investments.

Refining Segment

Overview

2016 versus 2015—Lower margins and reduced production due to planned and unplanned outages in 2016 as described below resulted in significantly lower results for our Refining segment in 2016 as compared to 2015. EBITDA in 2015 included charges totaling $177 million related to non-cash charges associated with LCM inventory valuation adjustments driven by a decline of nearly $20 per barrel in crude oil prices and corresponding reductions in refined product prices.

2015 versus 2014—The results of our Refining segment in 2015 were impacted by non-cash charges totaling $177 million related to LCM inventory valuation adjustments described above which were $167 million less than the LCM inventory valuation adjustment recorded in 2014.

Fourth quarter 2015 results declined significantly compared to the results in the prior three quarters of 2015 as refinery operating rates were significantly lower due to unplanned maintenance outages. The recognition of a $127 million non-cash, LCM inventory valuation adjustment resulted in a loss for the fourth quarter. Operating results were higher in 2015 relative to 2014 as a result of improvements in refining margins and the favorable impact of the lower LCM adjustment recognized in 2015.

 

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The following table sets forth selected financial information and heavy crude processing rates for the Refining segment and the U.S. refining market margins for the applicable periods. “LLS” is a light crude oil, while “Maya” is a heavy crude oil.

 

     Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Sales and other operating revenues

   $ 5,135       $ 6,557       $ 11,710   

EBITDA

     72         342         65   

Heavy crude oil processing rates, thousands of barrels per day

     201         238         259   
  

 

 

    

 

 

    

 

 

 

Market margins, dollars per barrel

                    

Light crude oil—2-1-1

   $ 10.73       $ 14.04       $ 13.32   

Light crude oil—Maya differential

     8.51         8.26         11.11   
  

 

 

    

 

 

    

 

 

 

Total Maya 2-1-1

   $ 19.24       $ 22.30       $ 24.43   
  

 

 

    

 

 

    

 

 

 

Revenues—Revenues decreased by $1,422 million, or 22% in 2016 compared to 2015 and by $5,153 million, or 44%, in 2015 compared to 2014.

2016 versus 2015—Major refined product prices declined due to lower crude oil prices and to weakness relative to crude oil. The average per barrel price of benchmark Maya crude oil declined $7.59 in 2016 compared to 2015. A 16% price-related revenue decline in 2016 versus 2015 reflected per barrel price declines of approximately $10.51 and $10.77 for gasoline and distillates, respectively.

The remaining 6% revenue decrease in 2016 is attributed to reduced processing rates. Processing declines resulted from several unplanned outages, including a coker unit fire, downtime at crude units with reduced processing and several utility interruptions. Planned turnaround activity on a crude unit and a coker unit processing train early in 2016 also contributed to lower throughput during 2016.

2015 versus 2014—Total revenues decreased on significantly lower product prices due to the drop in crude oil prices and a reduction in sales volumes due to production limitations. The average crude oil price in 2015 declined by slightly over $40 per barrel compared to 2014 leading to lower product pricing. This decline in product pricing caused a 38% decrease in revenues compared to 2014. Processing rates in 2015 reflect an 8% decrease from 2014 rates, driven by processing limits which were negatively impacted primarily by unplanned maintenance in the fourth quarter of 2015. This decline contributed to a 6% decrease in 2015 revenues.

EBITDA—EBITDA decreased by $270 million, or 79%, in 2016 compared to 2015 and decreased by $277 million, or 426%, in 2015 compared to 2014.

2016 versus 2015—A decline in refining margins in 2016 led to a 90% decrease in EBITDA. The Maya 2-1-1 benchmark refining spread declined in 2016 by approximately $3.10 per barrel relative to 2015. This decrease was driven by per barrel declines of approximately $3.15 and $3.40 in gasoline and diesel spreads, respectively, and an approximate $1.00 reduction in the price differential between Brent and Maya crude oils. The operating issues that drove lower crude throughput in 2016 also negatively impacted margins due to a less favorably priced crude oil mix and higher variable costs per barrel.

Lower production stemming from a reduction in average heavy crude oil processing rates relative to 2015 led to a decrease in EBITDA in 2016 of 41%. This reduction in rates was attributable to the unplanned outages, crude unit operating limitations and planned turnaround activities discussed above.

 

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The absence of the $177 million LCM inventory valuation adjustment recognized in 2015 resulted in an EBITDA increase of 52% in 2016 as compared to 2015.

2015 versus 2014—LCM inventory valuation adjustments of $177 million and $344 million were recognized in 2015 and 2014, respectively. This change in the 2015 LCM inventory valuation adjustment resulted in a 257% increase in EBITDA. Results improved by an additional 283% in 2015 due to an increase in refining margins. These improvements were offset in part by a 114% decline in EBITDA due to lower processing rates.

The increase in refining margins in 2015 relative to 2014 was generated by improved by-product price spreads to crude oil and a 14% increase in purchases of crude oil at advantaged prices relative to the Maya crude price benchmark. By-product spreads improved due to the decline in 2015 of the average per barrel price of crude oil relative to 2014. These factors more than offset the $2.13 per barrel decline in the Maya 2-1-1 benchmark margin in 2015 versus 2014.

Crude processing rates in 2015 reflect an 8% decline relative to 2014. This decline is mainly due to a number of unplanned outages for maintenance that began in the latter part of the third quarter and extended into early December. The average crude processing rate for the fourth quarter of 2015 was 206 thousands of barrels per day. Processing rates returned to near full capacity by mid-December 2015.

Technology Segment

Overview—The Technology segment recognizes revenues related to the sale of polyolefin catalysts and the licensing of chemical and polyolefin process technologies. These revenues are offset in part by the costs incurred in the production of catalysts, licensing and services activities and research and development (“R&D”) activities. In 2016 and 2015, our Technology segment incurred approximately 55% of all R&D costs while in 2014, it incurred approximately 65% of our R&D costs.

2016 versus 2015—EBITDA in 2016 improved with higher catalyst margins. A small increase in licensing and services revenue was mostly offset by slightly lower catalyst sales volumes.

2015 versus 2014—EBITDA in 2015 was relatively unchanged compared to 2014, reflecting improved catalyst results and lower R&D expenses, offset by lower licensing and services revenues.

The following table sets forth selected financial information for the Technology segment.

 

     Year Ended December 31,  

Millions of dollars

     2016          2015          2014    

Sales and other operating revenues

   $ 479       $ 465       $ 497   

EBITDA

     262         243         232   

Revenues—Revenues increased by $14 million, or 3%, in 2016 compared to 2015 and decreased by $32 million, or 6%, in 2015 compared to 2014.

2016 versus 2015—Higher average catalyst sales prices and higher revenues recognized on process licenses each led to a 2% increase in 2016 revenues. These increases were partly offset by a 1% revenue decrease resulting from lower catalyst sales volumes.

2015 versus 2014—The unfavorable currency translation impacts due to the significantly weaker euro versus the U.S. dollar and a decline in licensing and services revenues contributed 12% and 7% to the decrease in 2015 revenues. These declines were offset in part by revenue increases of 12% and 1%, respectively, related to higher catalyst sales volumes and higher average catalyst sales prices in 2015.

 

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EBITDA—EBITDA in 2016 increased by $19 million, or 8%, compared to 2015 and by $11 million, or 5%, in 2015 compared to 2014.

2016 versus 2015—A 10% improvement in EBITDA during 2016 due to higher catalyst margins and an increase in licensing and services revenue was partly offset by a 2% decrease in EBITDA resulting from lower catalyst volumes.

2015 versus 2014—EBITDA increased by $11 million, or 5%, in 2015 compared to 2014. Improved catalyst volumes and margins, partly offset by unfavorable currency translation impacts, and lower R& D expenses were responsible for increases in EBITDA of 7% and 9%, respectively. These increases were partly offset by an 11% decrease in EBITDA due to lower licensing and services revenues.

FINANCIAL CONDITION

Operating, investing and financing activities of continuing operations, which are discussed below, are presented in the following table:

 

     Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Source (use) of cash:

        

Operating activities

   $ 5,606       $ 5,842       $ 6,048   

Investing activities

     (2,297      (1,051      (3,531

Financing activities

     (3,349      (4,850      (5,907

Operating Activities—Cash of $5,606 million generated in 2016 primarily reflected earnings adjusted for non-cash items and cash generated by the main components of working capital—accounts receivable, inventories and accounts payable. The non-cash items in 2016 included a $78 million gain related to the sale of our wholly owned Argentine subsidiary with adjustments for related working capital and gains totaling $11 million related to sales of our joint venture in Japan and idled assets in Australia.

The main components of working capital generated cash of $123 million in 2016. Higher product sales prices in the fourth quarter of 2016 across all segments combined with the impact of higher fourth quarter 2016 sales volumes in our O&P—Americas, Refining and I&D segments led to an increase in accounts receivable. This increase in accounts receivable was offset by higher accounts payable, which was driven by the higher cost of crude oil and other feedstocks. The level of inventories fell in our O&P—Americas segment following the completion of turnaround activities in the fourth quarter of 2016 and in our Refining segment, which had higher crude oil inventories at the end of 2015 due to operational issues during the fourth quarter.

Cash of $5,842 million generated in 2015 primarily reflected earnings adjusted for non-cash items and cash used by the main components of working capital. The main components of working capital consumed cash of $246 million in 2015. The lower cost of crude oil and other feedstocks in 2015 led to a decline in accounts payable. Preparation for the turnaround in 2016 at our Corpus Christi, Texas facility and the unplanned maintenance outage at our Houston refinery, which resulted in higher levels of U.S. olefins and crude oil inventories at year end, led to the increase in consolidated inventories in 2015. Accounts receivable decreased on lower average product sales prices, reflective of the drop in 2015 crude oil prices.

Cash of $6,048 million generated in 2014 primarily reflected earnings adjusted for non-cash items and refunds totaling $232 million for value added taxes related to prior periods that were received from Italian tax authorities in 2014. These cash inflows were offset in part by cash used by the main components of working capital.

 

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The increase in 2014 inventories primarily reflected higher olefins raw material inventories, offset in part by lower ethylene and propylene inventories due to turnaround activities at our La Porte, Texas facility, and higher levels of inventory for crude oil and work-in-process in our Refining segment. Lower feedstock costs led to the decrease in 2014 accounts payable. The decrease in accounts receivable primarily reflected lower ethylene prices in our O&P—EAI segment, lower prices for oxyfuels and related products in our I&D segment, lower average sales prices and year end volumes in North American polyolefins and lower prices for refining products. Also contributing to the decline was a larger than usual accounts receivable balance at the end of 2013 attributable to customer remittance timing.

Investing Activities—We invested cash of $2,297 million, $1,051 million and $3,531 million in 2016, 2015 and 2014, respectively.

We invest in investment-grade and other high-quality instruments that provide adequate flexibility to redeploy funds as needed to meet our cash flow requirements while maximizing yield. In 2016, 2015 and 2014, we invested $764 million, $2,073 million and $3,439 million, respectively, in securities that are classified as Short-term investments. The majority of these investments are deemed available-for-sale; however, beginning in the third quarter of 2016, we invested in additional securities deemed held-to-maturity. We also invested $674 million, $397 million and $425 million in tri-party repurchase agreements in 2016, 2015 and 2014, respectively. These investments are classified as short-term loans receivable except for a $101 million investment which was classified as a long-term loan receivable in 2015. We received proceeds upon the sale and maturity of certain of our available-for-sale securities and repurchase agreements of $674 million and $685 million, respectively, in 2016; $2,489 million and $350 million, respectively, in 2015; and $1,751 million and $75 million, respectively, in 2014. See Note 14 to the Consolidated Financial Statements for additional information regarding these investments.

The following table summarizes our capital expenditures for continuing operations for the periods from 2014 through 2016:

 

     Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Capital expenditures by segment:

        

O&P—Americas

   $ 1,376       $ 668       $ 912   

O&P—EAI

     261         186         191   

I&D

     333         441         241   

Refining

     224         108         123   

Technology

     36         24         25   

Other

     13         13         7   
  

 

 

    

 

 

    

 

 

 

Consolidated capital expenditures of continuing operations

   $ 2,243       $ 1,440       $ 1,499   
  

 

 

    

 

 

    

 

 

 

In 2017, we expect to spend approximately $2 billion, which includes contributions to our PO joint venture assets. Capital spending is projected to be lower in 2017 relative to 2016, which included the ethylene expansion and related turnaround of our Corpus Christi, Texas facility and turnaround activities at other facilities.

In 2016 and 2015, capital expenditures included debottlenecks of certain assets to enhance production, turnaround activities and expansion projects at several sites, as well as other plant improvement projects and railcar purchases. The increased levels of capital expenditures in 2016 versus 2015 for our O&P—Americas, O&P—EAI and Refining segments were largely due to debottleneck and turnaround activities.

Financing Activities—Financing activities used cash of $3,349 million, $4,850 million and $5,907 million in 2016, 2015 and 2014, respectively.

 

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We made payments totaling $2,938 million, $4,656 million and $5,788 million in 2016, 2015 and 2014, respectively, to acquire a portion of our outstanding ordinary shares. We also made dividend payments totaling $1,395 million, $1,410 million and $1,403 million to our shareholders in 2016, 2015 and 2014, respectively. For additional information related to these share repurchases and dividend payments, see Note 20 to the Consolidated Financial Statements.

We received net proceeds of $177 million, $61 million and $262 million in 2016, 2015 and 2014, respectively, through the issuance and repurchase of commercial paper instruments under our commercial paper program.

In March 2016, we issued €750 million of 1.875% guaranteed notes due 2022 and received net proceeds of $812 million. In March 2015, we issued $1,000 million of 4.625% senior notes due 2055 and received net proceeds of $984 million. In February 2014, we issued $1,000 million of 4.875% guaranteed notes due 2044 and received net proceeds of $988 million.

Additional information related to our commercial paper program and the issuance of debt can be found in the Liquidity and Capital Resources section below and in Note 12 to the Consolidated Financial Statements.

Liquidity and Capital Resources—As of December 31, 2016, we had $2,022 million of unrestricted cash and cash equivalents and marketable securities classified as Short-term investments. We also held $369 million of tri-party repurchase agreements classified as Prepaid expenses and other current assets at December 31, 2016. For additional information related to our purchases of marketable securities, which currently include time deposits, certificates of deposit, commercial paper, bonds and limited partnership investments, and our investments in tri-party repurchase agreements, see “Investing Activities” above and Note 14 to the Consolidated Financial Statements.

At December 31, 2016, we held $556 million of cash in jurisdictions outside the U.S., principally in the United Kingdom. There are currently no material legal or economic restrictions that would impede our transfers of cash.

We also had total unused availability under our credit facilities of $2,710 million at December 31, 2016, which included the following:

 

   

$1,973 million under our $2,500 million revolving credit facility, which backs our $2,500 million commercial paper program. Availability under this facility is net of outstanding borrowings, outstanding letters of credit provided under the facility and notes issued under our commercial paper program. A small portion of our availability under this facility is impacted by changes in the euro/U.S. dollar exchange rate. At December 31, 2016, we had $500 million of outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under the facility; and

 

   

$737 million under our $900 million U.S. accounts receivable securitization facility. Availability under this facility is subject to a borrowing base of eligible receivables, which is reduced by outstanding borrowings and letters of credit, if any. This facility had no outstanding borrowings or letters of credit at December 31, 2016.

See Note 12 to the Consolidated Financial Statements for additional information related to our credit facilities.

In accordance with our current interest rate risk management strategy and subject to management’s evaluation of market conditions and the availability of favorable interest rates among other factors, we may from time to time enter into interest rate swap agreements to economically convert a portion of our fixed rate debt to variable rate debt or convert a portion of variable rate debt to fixed rate debt.

 

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We have $451 million of outstanding letters of credit and bank guarantees issued under uncommitted credit facilities at December 31, 2016. At December 31, 2016, we had total debt, including current maturities, of $8,981 million.

In June 2016, the term of our existing $2,000 million revolving credit facility was extended for one year to June 2021 pursuant to a consent agreement. We also amended the revolving credit facility in June 2016 to increase its size from $2,000 million to $2,500 million. All other material terms of the agreement remained unchanged. The letters of credit sublimit of our senior revolving credit facility was reduced from $700 million to $500 million by agreement in September 2015.

In connection with the increase of our revolving credit facility, in June 2016 we increased the size of our 2014 commercial paper program to permit the issuance of privately placed, unsecured short-term promissory notes (“commercial paper”) in an aggregate amount not to exceed $2,500 million. Proceeds from the issuance of commercial paper may be used for general corporate purposes, including dividend payments and share repurchases. At December 31, 2016, we had $500 million of commercial paper outstanding.

In March 2016, our direct, 100% owned subsidiary, LYB International Finance II B.V., issued €750 million of 1.875% guaranteed notes due 2022 at a discounted price of 99.607%. Proceeds from these notes were used for general corporate purposes, including repurchases of our ordinary shares. These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance II’s existing and future unsecured indebtedness and to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness.

In August 2015, we amended our U.S. accounts receivable securitization facility, which, among other things, decreased the purchase limit from $1,000 million to $900 million, added a $300 million uncommitted accordion feature and extended the term of the facility to August 2018.

In March 2015, we issued $1,000 million of 4.625% Notes due 2055 at a discounted price of 98.353%. Proceeds from these notes were used for general corporate purposes, including repurchases of our ordinary shares. These unsecured notes rank equally in right of payment to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness.

In February 2014, our direct, 100% owned subsidiary, LYB International Finance B.V., issued $1,000 million of 4.875% Notes due 2044 at a discounted price of 98.831%. Proceeds from these notes were used for general corporate purposes, including repurchases of our ordinary shares. These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB International Finance B.V.’s existing and future unsecured indebtedness and to all of LyondellBasell’s existing and future unsubordinated indebtedness.

See Note 12 to the Consolidated Financial Statements, for additional information related to our credit facilities and Notes discussed above, including terms of redemption.

In May 2016, our shareholders approved a proposal to authorize us to repurchase up to an additional 10%, or approximately 42.5 million, of our shares outstanding over the following eighteen months. Our share repurchase program does not have a stated dollar amount, and purchases may be made through open market purchases, private market transactions or other structured transactions. Repurchased shares could be retired or used for general corporate purposes, including for various employee benefit and compensation plans. As of December 31, 2016, we have purchased 21.3 million shares under this program for approximately $1,688 million. As of February 14, 2017, we had approximately 20 million shares remaining under the current authorization. The timing and amount of additional shares repurchased will be determined by our Management Board based on its evaluation of market conditions and other factors. For additional information related to our share repurchase programs, see Note 20 to the Consolidated Financial Statements.

 

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In September 2016, we received proceeds of $72 million from the sale of our joint venture in Japan. We also purchased a net additional 7.41% interest in our joint venture in Korea for $36 million in September 2016. In February 2016, we received net proceeds of $137 million from the sale of our wholly owned Argentine subsidiary.

We engaged an investment bank in 2016 to assist in testing the value of our Houston refinery as part of our regular review of our asset portfolio and as a result of indications of interest in the refinery by third parties. Following a thorough process, we have elected to retain the refinery in our asset portfolio.

We may repay or redeem our debt, including purchases of our outstanding bonds in the open market, using cash on hand, cash from operating activities, proceeds from the issuance of debt, proceeds from asset divestitures, or a combination thereof. In connection with any repayment or redemption of our debt, we may incur cash and non-cash charges, which could be material in the period in which they are incurred. We currently intend to refinance certain outstanding debt, subject to market conditions, in the first quarter of 2017. Our current analyses indicate that the refinancing may result in charges of approximately $125 million based on current market conditions. The actual costs will depend on several factors, including interest rates and market conditions if and when the refinancing occurs.

We plan to fund our ongoing working capital, capital expenditures, debt service and other funding requirements with cash from operations, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. Cash on hand, cash from operating activities, proceeds from the issuance of debt, or a combination thereof, may be used to fund the repurchase of shares under our share repurchase program.

We intend to continue to declare and pay quarterly dividends, with the goal of increasing the dividend over time, after giving consideration to our cash balances and expected results from operations.

We believe that our cash on hand, cash from operating activities and proceeds from our credit facilities provide us with sufficient financial resources to meet our anticipated capital requirements and obligations as they come due.

Contractual and Other Obligations—The following table summarizes, as of December 31, 2016, our minimum payments for long-term debt, including current maturities, short-term debt, and contractual and other obligations for the next five years and thereafter:

 

     Total      Payments Due By Period  

Millions of dollars

      2017      2018      2019      2020      2021      Thereafter  

Total debt

   $ 9,191       $ 596       $ 1       $ 2,001       $ —         $ 1,000       $ 5,593   

Interest on total debt

     5,470         321         321         321         321         321         3,865   

Advances from customers

     69         22         13         15         4         —           15   

Other

     1,688         922         397         105         31         27         206   

Deferred income taxes

     2,331         423         134         147         136         120         1,371   

Other obligations:

                    

Purchase obligations:

                    

Take-or-pay contracts

     15,436         2,647         2,633         2,750         2,871         2,769         1,766   

Other contracts

     8,556         3,343         2,179         1,002         467         204         1,361   

Operating leases

     1,650         341         286         211         173         146         493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,391       $ 8,615       $ 5,964       $ 6,552       $ 4,003       $ 4,587       $ 14,670   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Total Debt—Our debt includes unsecured senior notes, guaranteed notes and various other U.S. and non-U.S. loans. See Note 12 to the Consolidated Financial Statements for a discussion of covenant requirements under the credit facilities and indentures and additional information regarding our debt facilities.

Interest on Total Debt—Our debt and related party debt agreements contain provisions for the payment of monthly, quarterly or semi-annual interest at a stated rate of interest over the term of the debt.

Pension and other Postretirement Benefits—We maintain several defined benefit pension plans, as described in Note 16 to the Consolidated Financial Statements. Many of our U.S. and non-U.S. plans are subject to minimum funding requirements; however, the amounts of required future contributions for all our plans are not fixed and can vary significantly due to changes in economic assumptions, liability experience and investment return on plan assets. As a result, we have excluded pension and other postretirement benefit obligations from the Contractual and Other Obligations table above. Our annual contributions may include amounts in excess of minimum required funding levels. Contributions to our non-U.S. plans in years beyond 2017 are not expected to be materially different than the expected 2017 contributions disclosed in Note 16 to the Consolidated Financial Statements. At December 31, 2016, the projected benefit obligation for our pension plans exceeded the fair value of plan assets by $942 million. Subject to future actuarial gains and losses, as well as future asset earnings, we, together with our consolidated subsidiaries, will be required to fund the discounted obligation of $942 million in future years. We contributed $114 million, $107 million and $94 million to our pension plans in 2016, 2015 and 2014, respectively. We provide other postretirement benefits, primarily medical benefits to eligible participants, as described in Note 16 to the Consolidated Financial Statements. We pay other unfunded postretirement benefits as incurred.

Advances from Customers—We are obligated to deliver products in connection with long-term sales agreements under which advances from customers were received in prior years. These advances are treated as deferred revenue and will be amortized to earnings as product is delivered over the remaining terms of the respective contracts, which range predominantly from 2 to 8 years. The unamortized long-term portion of such advances totaled $47 million as of December 31, 2016.

Other—Other primarily consists of accruals for environmental remediation costs, obligations under deferred compensation arrangements, and anticipated asset retirement obligations. See “Critical Accounting Policies” below for a discussion of obligations for environmental remediation costs.

Deferred Income Taxes—The scheduled settlement of the deferred tax liabilities shown in the table is based on the scheduled reversal of the underlying temporary differences. Actual cash tax payments will vary depending upon future taxable income. See Note 18 to the Consolidated Financial Statements for additional information related to our deferred tax liabilities.

Purchase Obligations—We are party to various obligations to purchase products and services, principally for raw materials, utilities and industrial gases. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. The commitments are segregated into take-or-pay contracts and other contracts. Under the take-or-pay contracts, we are obligated to make minimum payments whether or not we take the product or service. Other contracts include contracts that specify minimum quantities; however, in the event that we do not take the contractual minimum, we are only obligated for any resulting economic loss suffered by the vendor. The payments shown for the other contracts assume that minimum quantities are purchased. For contracts with variable pricing terms, the minimum payments reflect the contract price at December 31, 2016.

Operating Leases—We lease various facilities and equipment under noncancelable lease arrangements for various periods. See Note 13 to the Consolidated Financial Statements for related lease disclosures.

 

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CURRENT BUSINESS OUTLOOK

In the past several months, the industry outlook for 2017 has steadily improved. Healthy U.S. and global economic activity and ethylene project delays have led to an improved forecast for industry supply and demand dynamics. Crude oil prices and NGL supply have stabilized at more favorable levels than during much of 2016. The U.S. regulatory landscape may change in ways that are generally favorable to our industry. While we will continue to watch these developments, we believe our significant investment in our 2016 maintenance programs favorably positions us for 2017.

RELATED PARTY TRANSACTIONS

We have related party transactions with our joint venture partners. We believe that such transactions are effected on terms substantially no more or less favorable than those that would have been agreed upon by unrelated parties on an arm’s length basis. See Note 4 to the Consolidated Financial Statements for additional related party disclosures.

CRITICAL ACCOUNTING POLICIES

Management applies those accounting policies that it believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the U.S. (see Note 2 to the Consolidated Financial Statements). Our more critical accounting policies include those related to the valuation of inventory, long-lived assets, the valuation of goodwill, accruals for long-term employee benefit costs such as pension and other postretirement costs, and accruals for taxes based on income. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its estimates used in the preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment.

Inventory—We account for our inventory using the last-in, first-out (“LIFO”) method of accounting.

The cost of raw materials, which represents a substantial portion of our operating expenses, and energy costs generally follow price trends for crude oil and/or natural gas. Crude oil and natural gas prices are subject to many factors, including changes in economic conditions.

Since our inventory consists of manufactured products derived from crude oil, natural gas, natural gas liquids and correlated materials, as well as the associated feedstocks and intermediate chemicals, our inventory market values are generally influenced by changes in benchmark crude oil and heavy liquid values and prices for manufactured finished goods. The degree of influence of a particular benchmark may vary from period to period, as the composition of the dollar value LIFO pools change. Due to natural inventory composition changes, variation in pricing from period to period does not necessarily result in a linear LCM impact. Additionally, an LCM condition may arise due to a volumetric decline in a particular material that had previously provided a positive impact within a pool. As a result, market valuations and LCM conditions are dependent upon the composition and mix of materials on hand at the balance sheet date. In the measurement of an LCM adjustment, the numeric input value for determining the crude oil market price includes pricing that is weighted by volume of inventories held at a point in time, including WTI, Brent and Maya crude oils.

As indicated above, fluctuation in the prices of crude oil, natural gas and correlated products from period to period may result in the recognition of charges to adjust the value of inventory to the lower of cost or market in periods of falling prices and the reversal of those charges in subsequent interim periods as market prices recover. Accordingly, our cost of sales and results of operations may be affected by such fluctuations.

 

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On May 1, 2010, upon emergence from bankruptcy, we recorded our inventory, which is primarily crude oil and correlated products derived therefrom, at fair value in accordance with the requirements of fresh-start accounting. The per barrel benchmark price of WTI crude oil at that date was $86.15.

During 2014, we recorded LCM inventory valuation adjustments totaling $760 million driven primarily by the decline in the price of crude oil and related declines in the prices of heavy liquids and other correlated products. A $45 million charge was taken in the third quarter of 2014 which marked the beginning of a downward price trend. An additional $715 million of LCM inventory valuation adjustment was recognized in the fourth quarter of 2014 to reflect decreases of approximately 50% in the price indices for crude oil and other correlated products as compared to the third quarter of 2014. At December 31, 2014, representative prices for crude oil and heavy liquids were $47.59 per barrel and $45.20 per barrel, respectively. These price inputs were calculated using a weighted average of the materials held in inventory on that date.

The trend of falling hydrocarbon prices continued in 2015, leading to further LCM inventory valuation adjustments. In 2015, the cumulative charge related to LCM inventory valuation adjustments, which was driven by declines in crude oil, ethylene, propylene, benzene and ETBE, was $548 million. Representative prices used in the calculation of the cumulative LCM inventory adjustments recognized in 2015 were $30.22 per barrel for crude oil, 20 cents per pound for ethylene, 32 cents per pound for propylene, $2.14 per gallon for benzene and $1.66 per gallon for ETBE.

A drop in polypropylene prices led to the recognition of a $29 million LCM adjustment in the fourth quarter of 2016.

Further sustained price declines in our finished goods and raw materials could result in additional LCM inventory valuation charges during 2017. Several of our LIFO inventory pools are “at-risk” for further adjustment as each impacted LIFO pool is at, or close to, the calculated market value at the last balance sheet measurement date. “At-risk” inventory accounts for $2.2 billion of our total inventory carrying value of $3.8 billion as of December 31, 2016. The extent to which further adjustment may occur is dependent on pool specific product prices and composition within each individual dollar value LIFO pool at the balance sheet date.

Long-Lived Assets—With respect to long-lived assets, which primarily include property, plant and equipment and intangible assets, key assumptions included estimates of useful lives and the recoverability of carrying values of fixed assets and other intangible assets, as well as the existence of any obligations associated with the retirement of fixed assets. Such estimates could be significantly modified and/or the carrying values of the assets could be impaired by such factors as new technological developments, new chemical industry entrants with significant raw material or other cost advantages, uncertainties associated with the European, U.S. and other world economies, the cyclical nature of the chemical and refining industries, and uncertainties associated with regulatory governmental actions.

When events or changes in circumstances indicate that the carrying value of an asset may not be recoverable, we evaluate definite lived intangible assets for impairment. Long-lived assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which for us is generally at the plant group level (or, at times individual plants in certain circumstances where we have isolated production units with separately identifiable cash flows). When it is probable that the undiscounted cash flows of a tangible asset or asset group will not be sufficient to recover the carrying amount, the asset is written down to its estimated fair value. In-process research and development projects are impaired when abandoned.

The estimated useful lives of long-lived assets range from 3 to 30 years. Depreciation and amortization of these assets, including amortization of capitalized plant turnaround costs, under the straight-line method over their estimated useful lives totaled $1,064 million in 2016. The useful lives of assets are assessed periodically and if determined to be shorter than originally estimated, depreciation and amortization charges would be accelerated over the revised useful life.

 

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Goodwill—Goodwill of $528 million at December 31, 2016 represents the tax effect of the differences between the tax and book bases of our assets and liabilities resulting from the revaluation of those assets and liabilities to fair value in connection with the Company’s emergence from bankruptcy and adoption of fresh-start accounting. We evaluate the recoverability of the carrying value of goodwill annually or more frequently if events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable.

We have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed for each of the reporting units include, but are not limited to, changes in long-term commodity prices, discount rates, competitive environments, planned capacity, cost factors such as raw material prices, and financial performance of the reporting units. If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a two-step quantitative test is required.

We also have the option to proceed directly to the two-step quantitative impairment test. Under the two-step impairment test, the fair value of each reporting unit is compared to its carrying value, including goodwill. For step one of the impairment test, the fair value of the reporting unit is calculated using a discounted cash-flow model. Such a model inherently utilizes a significant number of estimates and assumptions, including operating margins, tax rates, discount rates, capital expenditures and working capital changes. Step two of the impairment test would be performed should management conclude that the carrying value of a reporting unit, including goodwill, is in excess of its fair value. In step two of the impairment test, the carrying amount of a reporting unit’s goodwill is compared to the implied fair value of its goodwill. Valuation experts may be used in such an assessment. If the carrying value of goodwill exceeds its implied fair value, an impairment charge equal to the excess would be recognized.

For 2016 and 2015, management performed a qualitative impairment assessment of our reporting units which indicated that the fair value of our reporting units was greater than their carrying value. Accordingly, a quantitative two-step goodwill impairment test was not required. Accordingly, no goodwill impairment was recognized in 2016 or 2015.

Long-Term Employee Benefit Costs—Our costs for long-term employee benefits, particularly pension and other postretirement medical and life insurance benefits, are incurred over long periods of time, and involve many uncertainties over those periods. The net periodic benefit cost attributable to current periods is based on several assumptions about such future uncertainties, and is sensitive to changes in those assumptions. It is management’s responsibility, often with the assistance of independent experts, to select assumptions that in its judgment represent its best estimates of the future effects of those uncertainties. It also is management’s responsibility to review those assumptions periodically to reflect changes in economic or other factors that affect those assumptions.

The current benefit service costs, as well as the existing liabilities, for pensions and other postretirement benefits are measured on a discounted present value basis. The discount rate is a current rate, related to the rate at which the liabilities could be settled. Our assumed discount rate is based on yield information for high-quality corporate bonds with durations comparable to the expected cash settlement of our obligations. For the purpose of measuring the benefit obligations at December 31, 2016, we used a weighted average discount rate of 4.20% for the U.S. plans which reflects the different terms of the related benefit obligations. The weighted average discount rate used to measure obligations for non-U.S. plans at December 31, 2016 was 1.52%, reflecting market interest rates. The discount rates in effect at December 31, 2016 will be used to measure net periodic benefit cost during 2017.

The benefit obligation and the periodic cost of other postretirement medical benefits are also measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As of December 31, 2016, the assumed rate of increase for our U.S. plans was 7.0%, decreasing to 4.5% in 2038 and

 

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thereafter. A one percentage point change in the health care cost trend rate assumption as of December 31, 2016 would have resulted in a $21 million increase or $14 million decrease in the accumulated other postretirement benefit liability for our non-U.S. plans and would have resulted in an increase or decrease of less than $1 million for U.S. plans. Due to limits on our maximum contribution level under the medical plan, there would have been no significant effect on either our benefit liability or net periodic cost.

The net periodic cost of pension benefits included in expense also is affected by the expected long-term rate of return on plan assets assumption. Investment returns that are recognized currently in net income represent the expected long-term rate of return on plan assets applied to a market-related value of plan assets which, for us, is defined as the market value of assets. The expected rate of return on plan assets is a longer term rate, and is expected to change less frequently than the current assumed discount rate, reflecting long-term market expectations, rather than current fluctuations in market conditions.

The weighted average expected long-term rate of return on assets in our U.S. plans of 8.00% is based on the average level of earnings that our independent pension investment advisor had advised could be expected to be earned over time and 3.37%, for our non-U.S. plan assets is based on an expectation and asset allocation that varies by region. The asset allocations are summarized in Note 16 to the Consolidated Financial Statements. The actual returns in 2016 were gains of 7.22% and 15.81% for our U.S. and non-U.S. plan assets, respectively.

The actual rate of return on plan assets may differ from the expected rate due to the volatility normally experienced in capital markets. Management’s goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility.

Net periodic pension cost recognized each year includes the expected asset earnings, rather than the actual earnings or loss. Along with other gains and losses, this unrecognized amount, to the extent it cumulatively exceeds 10% of the projected benefit obligation for the respective plan, is recognized as additional net periodic benefit cost over the average remaining service period of the participants in each plan.

The following table reflects the sensitivity of the benefit obligations and the net periodic benefit costs of our pension plans to changes in the actuarial assumptions:

 

     Effects on
Benefit Obligations
in 2016
     Effects on Net
Periodic Pension
Costs

in 2017
 

Millions of dollars

   U.S.      Non-U.S.      U.S.      Non-U.S.  

Projected benefit obligations at December 31, 2016

   $ 1,846       $ 1,491       $ —         $ —     

Projected net periodic pension costs in 2017

           7         56   

Discount rate increases by 100 basis points

     (166      (200      (6      (4

Discount rate decreases by 100 basis points

     199         246         10         15   

 

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The sensitivity of our postretirement benefit plans obligations and net periodic benefit costs to changes in actuarial assumptions are reflected in the following table:

 

     Effects on
Benefit Obligations
in 2016
     Effects on Net
Periodic Benefit
Costs

in 2017
 

Millions of dollars

   U.S.      Non-U.S.      U.S.      Non-U.S.  

Projected benefit obligations at December 31, 2016

   $ 276       $ 67       $ —         $ —     

Projected net periodic benefit costs in 2017

           12         6   

Discount rate increases by 100 basis points

     (23      —           (2      —     

Discount rate decreases by 100 basis points

     27         —           (2      —     

Additional information on the key assumptions underlying these benefit costs appears in Note 16 to the Consolidated Financial Statements.

Accruals for Taxes Based on Income—The determination of our provision for income taxes and the calculation of our tax benefits and liabilities is subject to management’s estimates and judgments due to the complexity of the tax laws and regulations in the tax jurisdictions in which we operate. Uncertainties exist with respect to interpretation of these complex laws and regulations.

Deferred tax assets and liabilities are determined based on temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse.

We recognize future tax benefits to the extent that the realization of these benefits is more likely than not. Our current provision for income taxes is impacted by the recognition and release of valuation allowances related to net deferred assets in certain non-U.S. jurisdictions. Further changes to these valuation allowances may impact our future provision for income taxes, which will include no tax benefit with respect to losses incurred and no tax expense with respect to income generated in these countries until the respective valuation allowance is eliminated.

We recognize the financial statement benefits with respect to an uncertain income tax position that we have taken or may take on an income tax return when we believe it is more likely than not that the position will be sustained with the tax authorities. For a position that is likely to be sustained, the benefit recognized in the financial statements is measured at the largest cumulative amount that is greater than 50 percent likely of being realized.

For further information related to our income taxes, see Note 18 to the Consolidated Financial Statements.

ACCOUNTING AND REPORTING CHANGES

For a discussion of the potential impact of new accounting pronouncements on our Consolidated Financial Statements, see Note  2 to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See Note 14 to the Consolidated Financial Statements for discussion of LyondellBasell Industries N.V.’s management of commodity price risk, foreign currency exposure and interest rate risk through its use of derivative instruments and hedging activities.

 

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Commodity Price Risk

A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with changes in the business cycle. We try to protect against such instability through various business strategies. These include provisions in sales contracts allowing us to pass on higher raw material costs through timely price increases, formula price contracts to transfer or share commodity price risk, and increasing the depth and breadth of our product portfolio.

In addition, we use commodity swap and futures contracts with various terms to manage a small portion of the volatility related to raw materials and product purchases and sales. Such contracts are generally limited to durations of one year or less. Hedge accounting has not been elected for most of our commodity contracts in the periods presented. Market risks created by these derivative instruments and the mark-to-market valuations of open positions are considered by management prior to execution and monitored daily.

The estimated fair value and notional amounts of our open commodity futures contracts and swap contracts are shown in the table below:

 

    December 31, 2016  
          Notional Amounts              

Millions of dollars

  Fair Value     Value     Volumes     Volume Unit     Maturity Dates  

Futures and swaps not designated as hedges:

         

Heating oil

  $ 1      $ 20        12        million gallons        February 2017   

Crude oil

    (1     30        23        million gallons       
 
February 2017
- March 2017
  
  

Naphtha

    1        48        100        million kilograms        January 2017   

Swaps designated as cash-flow hedges:

         

Ethane

    3        58        184        million gallons       
 
January 2017 -
December 2019
  
  
 

 

 

   

 

 

       
  $ 4      $ 156         
 

 

 

   

 

 

       
    December 31, 2015  
          Notional Amounts              

Millions of dollars

  Fair Value     Value     Volumes     Volume Unit     Maturity Dates  

Futures and swaps not designated as hedges:

         

Heating oil

  $ —        $ 10        9        million gallons       
 
February 2016
- April 2016
  
  

Crude oil

    7        72        78        million gallons       
 
February 2016
- May 2016
  
  

Crude/Distillates

    (2     57        252        million gallons        October 2016   

Butane

    1        1        8        million gallons        February 2016   
 

 

 

   

 

 

       
  $ 6      $ 140         
 

 

 

   

 

 

       

We use value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes.

VAR estimates the maximum potential loss in fair market values, given a certain move in prices over a certain period of time, using specified confidence levels.

 

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Using sensitivity analysis and hypothetical changes in market prices ranging from 14% to 17%, which represent a three month volatility range of the underlying products noted in the table above, the effect on our pretax income would be less than $1 million. The quantitative information about market risk is necessarily limited because it does not take into account the effects of the underlying operating transactions.

Foreign Exchange Risk

We manufacture and market our products in a number of countries throughout the world and, as a result, are exposed to changes in foreign currency exchange rates. We enter into transactions in currencies other than the applicable functional currency.

A significant portion of our reporting entities use the euro as their functional currency. Our reporting currency is the U.S. dollar. The translation gains or losses that result from the process of translating the euro denominated financial statements to U.S. dollars are deferred in accumulated other comprehensive income (“AOCI”) until such time as those entities may be liquidated or sold. Changes in the value of the U.S. dollar relative to the euro can therefore have a significant impact on comprehensive income.

We have entered into hedging arrangements designated as net investment hedges to reduce the volatility from foreign currency fluctuation associated with our net investments in foreign operations and investments in foreign subsidiaries.

The table below illustrates the impact on Other comprehensive loss of a 10% fluctuation in the foreign currency rate associated with each net investment hedge and the EURIBOR and LIBOR rates associated with basis swaps at December 31, 2016.

 

Net Investment Hedges

  

Notional Amount

  

10% Variance on

Foreign Currency Rate

  

Impact on Other
Comprehensive Loss

Basis Swaps

  

€400 million

($444 million)

   euro/U.S. dollar rate    $42 million
      EURIBOR and LIBOR rates    Less than $1 million

Forward Exchange Contracts

  

€275 million

($299 million)

   euro/U.S. dollar rate    $30 million

Guaranteed Euro Notes Due 2022

   €750 million    euro/U.S. dollar rate    $79 million

Some of our operations enter into transactions that are not denominated in their functional currency. This results in exposure to foreign currency risk for financial instruments, including, but not limited to third party and intercompany receivables and payables and intercompany loans.

We maintain risk management control practices to monitor the foreign currency risk attributable to our inter-company and third party outstanding foreign currency balances. These practices involve the centralization of our exposure to underlying currencies that are not subject to central bank and/or country specific restrictions. By centralizing most of our foreign currency exposure into one subsidiary, we are able to take advantage of any natural offsets thereby reducing the overall impact of changes in foreign currency rates on our earnings. At December 31, 2016, a 10% fluctuation compared to the U.S. dollar in the underlying currencies that have no central bank or other currency restrictions related to non-hedged monetary net assets would have had a resulting additional impact to earnings of less than $1 million.

Our policy is to maintain an approximately balanced position in foreign currencies to minimize exchange gains and losses arising from changes in exchange rates. To minimize the effects of our net currency exchange exposures, we enter into foreign currency spot and forward contracts and, in some cases, cross-currency swaps.

 

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We also engage in short-term foreign exchange swaps in order to roll certain hedge positions and to make funds available for intercompany financing. Our net position in foreign currencies is monitored daily.

We have entered into $2,300 million of non-cancellable cross-currency swaps, which we designated as foreign currency cash flow hedges, to reduce the variability in the functional currency equivalent cash flows of certain foreign currency denominated intercompany notes. For a summary of the estimated fair value and notional amounts for our cross-currency swaps outstanding at December 31, 2016, see Note 14 to the Consolidated Financial Statements.

For 2016, 2015, and 2014, Other income, net in the Consolidated Statements of Income reflected losses of $4 million and $7 million and a gain of $15 million, respectively, in net exchange rate gains and losses. For forward contracts, including swap transactions, that economically hedge recognized monetary assets and liabilities in foreign currencies, no hedge accounting is applied. Changes in the fair value of foreign currency forward contracts are reported in the Consolidated Statements of Income and offset the currency exchange results recognized on the assets and liabilities.

Interest Rate Risk

We are exposed to interest rate risk with respect to our fixed and variable rate debt. Fluctuations in interest rates impact the fair value of fixed-rate debt as well as pretax earnings stemming from interest expense on variable-rate debt.

Fixed-rate debt—We entered into interest rate swaps as part of our interest rate risk management strategy. At December 31, 2016, the total notional amounts of forward-starting interest rate swaps designated as cash flow hedges and interest rate swaps designated as fair value hedges were $1,000 million and $2,600 million, respectively.

At December 31, 2016, after giving consideration to the $2,600 million of fixed-rate debt that we have effectively converted to floating through these U.S. dollar fixed-for-floating interest rate swaps, approximately 66% of our debt portfolio, on a gross basis, incurred interest at a fixed-rate and the remaining 34% of the portfolio incurred interest at a variable-rate. We estimate that a 10% change in market interest rates as of December 31, 2016 would change the fair value of our interest rate swaps outstanding and would have had a resulting impact on our pretax income of approximately $12 million.

Variable-rate debt—Our variable rate debt consists of our $2,500 million Senior Revolving Credit Facility, our $900 million U.S. Receivables Securitization Facility and $500 million outstanding at December 31, 2016 under our Commercial Paper Program. At December 31, 2016, there were no outstanding borrowings under our Senior Revolving Credit Facility and U.S. Receivables Securitization facility. We estimate that a 10% change in interest rates would have had less than a $1 million impact on earnings.

 

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Item 8. Financial Statements and Supplementary Data.

Index to the Consolidated Financial Statements

 

     Page  

LYONDELLBASELL INDUSTRIES N.V.

  

Management’s Report On Internal Control Over Financial Reporting

     62   

Reports of Independent Registered Public Accounting Firm

     63   

Consolidated Financial Statements:

  

Consolidated Statements of Income

     64   

Consolidated Statements of Comprehensive Income

     65   

Consolidated Balance Sheets

     66   

Consolidated Statements of Cash Flows

     68   

Consolidated Statements of Stockholders’ Equity

     70   

Notes to the Consolidated Financial Statements

     71   

 

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MANAGEMENT’S REPORT ON INTERNAL CONTROL

OVER FINANCIAL REPORTING

Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

We conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016 based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2016.

The effectiveness of our internal control over financial reporting as of December 31, 2016 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Supervisory Board of Directors and Stockholders of LyondellBasell Industries N.V.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of LyondellBasell Industries N.V. and its subsidiaries at December 31, 2016 and December 31, 2015 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

February 17, 2017

 

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LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF INCOME

 

     Year Ended December 31,  

Millions of dollars, except earnings per share

   2016     2015     2014  

Sales and other operating revenues:

      

Trade

   $ 28,454      $ 31,930      $ 44,714   

Related parties

     729        805        894   
  

 

 

   

 

 

   

 

 

 
     29,183        32,735        45,608   

Operating costs and expenses:

      

Cost of sales

     23,191        25,683        38,939   

Selling, general and administrative expenses

     833        828        806   

Research and development expenses

     99        102        127   
  

 

 

   

 

 

   

 

 

 
     24,123        26,613        39,872   

Operating income

     5,060        6,122        5,736   

Interest expense

     (322     (310     (352

Interest income

     17        33        33   

Other income, net

     111        25        38   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before equity investments and income taxes

     4,866        5,870        5,455   

Income from equity investments

     367        339        257   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     5,233        6,209        5,712   

Provision for income taxes

     1,386        1,730        1,540   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     3,847        4,479        4,172   

Loss from discontinued operations, net of tax

     (10     (5     (4
  

 

 

   

 

 

   

 

 

 

Net income

     3,837        4,474        4,168   

Net income (loss) attributable to non-controlling interests

     (1     2        6   
  

 

 

   

 

 

   

 

 

 

Net income attributable to the Company shareholders

   $ 3,836      $ 4,476      $ 4,174   
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Net income (loss) attributable to the Company shareholders —

      

Basic:

      

Continuing operations

   $ 9.17      $ 9.63      $ 8.04   

Discontinued operations

     (0.02     (0.01     (0.01
  

 

 

   

 

 

   

 

 

 
   $ 9.15      $ 9.62      $ 8.03   
  

 

 

   

 

 

   

 

 

 

Diluted:

      

Continuing operations

   $ 9.15      $ 9.60      $ 8.00   

Discontinued operations

     (0.02     (0.01     (0.01
  

 

 

   

 

 

   

 

 

 
   $ 9.13      $ 9.59      $ 7.99   
  

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Year Ended December 31,  

Millions of dollars

   2016     2015     2014  

Net income

   $ 3,837      $ 4,474      $ 4,168   

Other comprehensive income (loss), net of tax—

      

Financial derivatives:

      

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

     (29     279        13   

Reclassification adjustment included in net income

     (63     (207     (89

Income tax expense (benefit)

     (96     71        4   
  

 

 

   

 

 

   

 

 

 

Financial derivatives, net of tax

     4        1        (80
  

 

 

   

 

 

   

 

 

 

Unrealized gains (losses) on available-for-sale securities:

      

Unrealized holding gains (losses) arising during the period

     7        (6     —     

Income tax expense (benefit)

     1        (1     —     
  

 

 

   

 

 

   

 

 

 

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

     6        (5     —     
  

 

 

   

 

 

   

 

 

 

Defined pension and other postretirement benefit plans:

      

Prior service cost arising during the period

     4        —          5   

Reclassification adjustment for amortization of prior service cost included in net income

     1        5        —     

Net actuarial loss arising during the period

     (188     (8     (493

Reclassification adjustment for net actuarial loss included in net income

     31        28        7   

Reclassification adjustment for settlement loss included in net income

     61        —          —     

Income tax expense (benefit)

     (21     4        (172
  

 

 

   

 

 

   

 

 

 

Defined pension and other postretirement benefit plans, net of tax

     (70     21        (309
  

 

 

   

 

 

   

 

 

 

Foreign currency translations adjustments:

      

Unrealized loss arising during the period

     (27     (434     (733

Reclassification adjustment included in net income

     7        —          —     

Income tax benefit

     (7     (5     —     
  

 

 

   

 

 

   

 

 

 

Foreign currency translations, net of tax

     (13     (429     (733
  

 

 

   

 

 

   

 

 

 

Total other comprehensive loss

     (73     (412     (1,122
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     3,764        4,062        3,046   

Comprehensive (income) loss attributable to non-controlling interests

     (1     2        6   
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to the Company shareholders

   $ 3,763      $ 4,064      $ 3,052   
  

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

     December 31,  

Millions of dollars

   2016      2015  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 875       $ 924   

Restricted cash

     3         7   

Short-term investments

     1,147         1,064   

Accounts receivable:

     

Trade, net

     2,716         2,363   

Related parties

     126         154   

Inventories

     3,809         4,051   

Prepaid expenses and other current assets

     923         1,226   
  

 

 

    

 

 

 

Total current assets

     9,599         9,789   

Property, plant and equipment, net

     10,137         8,991   

Investments and long-term receivables:

     

Investment in PO joint ventures

     415         397   

Equity investments

     1,575         1,608   

Other investments and long-term receivables

     20         122   

Goodwill

     528         536   

Intangible assets, net

     550         640   

Other assets

     618         674   
  

 

 

    

 

 

 

Total assets

   $ 23,442       $ 22,757   
  

 

 

    

 

 

 

See Notes to the Consolidated Financial Statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

     December 31,  

Millions of dollars, except shares and par value data

   2016      2015  

LIABILITIES AND EQUITY

     

Current liabilities:

     

Current maturities of long-term debt

   $ 2       $ 4   

Short-term debt

     594         353   

Accounts payable:

     

Trade

     2,028         1,627   

Related parties

     501         555   

Accrued liabilities

     1,415         1,810   
  

 

 

    

 

 

 

Total current liabilities

     4,540         4,349   

Long-term debt

     8,385         7,671   

Other liabilities

     2,113         2,036   

Deferred income taxes

     2,331         2,127   

Commitments and contingencies

     

Stockholders’ equity:

     

Ordinary shares, €0.04 par value, 1,275 million shares authorized, 404,046,331 and 440,150,069 shares outstanding, respectively

     31         31   

Additional paid-in capital

     10,191         10,202   

Retained earnings

     12,282         9,841   

Accumulated other comprehensive loss

     (1,511      (1,438

Treasury stock, at cost, 174,389,139 and 138,285,201 ordinary shares, respectively

     (14,945      (12,086
  

 

 

    

 

 

 

Total Company share of stockholders’ equity

     6,048         6,550   

Non-controlling interests

     25         24   
  

 

 

    

 

 

 

Total equity

     6,073         6,574   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 23,442       $ 22,757   
  

 

 

    

 

 

 

See Notes to the Consolidated Financial Statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  

Millions of dollars

   2016     2015     2014  

Cash flows from operating activities:

      

Net income

   $ 3,837      $ 4,474      $ 4,168   

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

      

Depreciation and amortization

     1,064        1,047        1,019   

Amortization of debt-related costs

     16        16        20   

Inventory valuation adjustment

     29        548        760   

Equity investments—

      

Equity income

     (367     (339     (257

Distribution of earnings, net of tax

     385        285        156   

Deferred income taxes

     357        181        177   

Gain on sales of business and equity method investment

     (84     —          —     

Gain on sale of assets

     (5     —          —     

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

      

Accounts receivable

     (383     780        358   

Inventories

     123        (240     (205

Accounts payable

     383        (786     (378

Prepaid expenses and other current assets

     226        (121     156   

Other, net

     25        (3     74   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     5,606        5,842        6,048   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Expenditures for property, plant and equipment

     (2,243     (1,440     (1,499

Payments for repurchase agreements

     (674     (397     (425

Proceeds from repurchase agreements

     685        350        75   

Purchases of available-for-sale securities

     (688     (2,073     (3,439

Proceeds from sales and maturities of available-for-sale securities

     674        2,489        1,751   

Purchases of held-to-maturity securities

     (76     —          —     

Payment for acquisition of business and equity method investment

     (65     —          —     

Net proceeds from sales of business and equity method investment

     209        —          —     

Proceeds from settlement of net investment hedges

     1,295        —          —     

Payments for settlement of net investment hedges

     (1,356     —          —     

Change in restricted cash

     4        (5     8   

Other, net

     (62     25        (2
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (2,297     (1,051     (3,531
  

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS—Continued

 

     Year Ended December 31,  

Millions of dollars

   2016      2015      2014  

Cash flows from financing activities:

        

Repurchases of Company ordinary shares

     (2,938      (4,656      (5,788

Dividends paid

     (1,395      (1,410      (1,403

Issuance of long-term debt

     812         984         992   

Net proceeds from commercial paper

     177         61         262   

Payments of debt issuance costs

     (5      (16      (18

Other, net

     —           187         48   
  

 

 

    

 

 

    

 

 

 

Net cash used in financing activities

     (3,349      (4,850      (5,907
  

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash

     (9      (48      (29
  

 

 

    

 

 

    

 

 

 

Decrease in cash and cash equivalents

     (49      (107      (3,419

Cash and cash equivalents at beginning of period

     924         1,031         4,450   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 875       $ 924       $ 1,031   
  

 

 

    

 

 

    

 

 

 

Supplemental Cash Flow Information:

        

Interest paid

   $ 346       $ 310       $ 343   
  

 

 

    

 

 

    

 

 

 

Net income taxes paid

   $ 741       $ 1,417       $ 1,167   
  

 

 

    

 

 

    

 

 

 

See Notes to the Consolidated Financial Statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

 

   

 

Ordinary Shares

    Additional
Paid-in

Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive

Income (Loss)
    Company
Share of
Stockholders’

Equity
    Non-
Controlling

Interests
 

Millions of dollars

  Issued     Treasury            

Balance, December 31, 2013

  $ 31      $ (2,035   $ 10,382      $ 4,004      $ 96      $ 12,478      $ 36   

Net income (loss)

    —          —          —          4,174        —          4,174        (6

Other comprehensive loss

    —          —          —          —          (1,122     (1,122     —     

Share-based compensation

    —          55        5        —          —          60        —     

Dividends ($2.70 per share)

    —          —          —          (1,403     —          (1,403     —     

Repurchases of Company ordinary shares

    —          (5,873     —          —          —          (5,873     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

  $ 31      $ (7,853   $ 10,387      $ 6,775      $ (1,026   $ 8,314      $ 30   

Net income (loss)

    —          —          —          4,476        —          4,476        (2

Other comprehensive loss

    —          —          —          —          (412     (412     —     

Share-based compensation

    —          382        (205     —          —          177        —     

Dividends ($3.04 per share)

    —          —          —          (1,410     —          (1,410     —     

Repurchases of Company ordinary shares

    —          (4,615     —          —          —          (4,615     —     

Settlement from partner on exit from partnership

    —          —          20        —          —          20        (4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2015

  $ 31      $ (12,086   $ 10,202      $ 9,841      $ (1,438   $ 6,550      $ 24   

Net income

    —          —          —          3,836        —          3,836        1   

Other comprehensive loss

    —          —          —          —          (73     (73     —     

Share-based compensation

    —          55        (11     —          —          44        —     

Dividends ($3.33 per share)

    —          —          —          (1,395     —          (1,395     —     

Repurchases of Company ordinary shares

    —          (2,914     —          —          —          (2,914     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

         Page  
1.  

Description of Company and Operations

     72   
2.  

Summary of Significant Accounting Policies

     72   
3  

Discontinued Operations and Dispositions

     81   
4.  

Related Party Transactions

     81   
5.  

Accounts Receivable

     82   
6.  

Inventories

     83   
7.  

Property, Plant and Equipment, Goodwill and Intangible Assets

     83   
8.  

Investment in PO Joint Ventures

     85   
9.  

Equity Investments

     86   
10.  

Prepaid Expenses and Other Current Assets and Other Assets

     88   
11.  

Accrued Liabilities

     89   
12.  

Debt

     90   
13.  

Lease Commitments

     94   
14.  

Financial Instruments

     95   
15.  

Fair Value Measurement

     107   
16.  

Pension and Other Postretirement Benefits

     110   
17.  

Incentive and Share-Based Compensation

     124   
18.  

Income Taxes

     128   
19.  

Commitments and Contingencies

     133   
20.  

Stockholders’ Equity

     135   
21.  

Per Share Data

     138   
22.  

Segment and Related Information

     139   
23.  

Unaudited Quarterly Results

     143   

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Company and Operations

LyondellBasell Industries N.V. is a limited liability company (Naamloze Vennootschap) incorporated under Dutch law by deed of incorporation dated October 15, 2009. Unless otherwise indicated, the “Company,” “we,” “us,” “our” or similar words are used to refer to LyondellBasell Industries N.V. together with its consolidated subsidiaries (“LyondellBasell N.V.”).

LyondellBasell N.V. is a worldwide manufacturer of chemicals and polymers, a refiner of crude oil, a significant producer of gasoline blending components and a developer and licensor of technologies for the production of polymers.

2. Summary of Significant Accounting Policies

The following significant accounting policies were applied in the preparation of these Consolidated Financial Statements:

Basis of Preparation and Consolidation

The accompanying Consolidated Financial Statements have been prepared from the books and records of LyondellBasell N.V. under accounting principles generally accepted in the U.S. (“U.S. GAAP”). Subsidiaries are defined as being those companies over which we, either directly or indirectly, have control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases. All intercompany transactions and balances have been eliminated in consolidation.

The Consolidated Financial Statements have been prepared under the historical cost convention, as modified for the accounting of certain financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. Consolidated financial information, including subsidiaries, equity investments, has been prepared using uniform accounting policies for similar transactions and other events in similar circumstances.

Cash and Cash Equivalents

Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts. Cash equivalents include instruments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents exclude restricted cash. Our cash equivalents are placed in certificates of deposit, high-quality commercial paper and money market accounts with major international banks and financial institutions.

Although, we have no current requirements for compensating balances in a specific amount at a specific point in time, we maintain compensating balances at our discretion for some of our banking services and products.

Short-Term Investments

We also have investments in marketable securities classified as available-for-sale and held-to-maturity. These securities, which are included in Short-term investments on the Consolidated Balance Sheets, are carried at estimated fair value with unrealized gains and losses recorded as a component of Accumulated other comprehensive income (“AOCI”). We periodically review our available-for-sale and held-to-maturity securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

circumstances indicate the carrying value of an asset may not be recoverable, the investment is written down to fair value, establishing a new cost basis.

Trade Receivables

Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business.

We calculate provisions for doubtful accounts receivable based on our estimates of amounts that we believe are unlikely to be collected. Collectability of receivables is reviewed and the provision calculated for doubtful accounts is adjusted at least quarterly, based on aging of specific accounts and other available information about the associated customers. Provisions for doubtful accounts are included in Selling, general and administrative expenses.

Inventories

Inventories are carried at the lower of current market value or cost. Cost is determined using the last-in, first-out (“LIFO”) method for raw materials, work in progress (“WIP”) and finished goods, and the moving average cost method for materials and supplies.

Inventory exchange transactions, which involve fungible commodities, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory, with cost determined using the LIFO method.

Property, Plant and Equipment

Property, plant and equipment are recorded at historical cost. Historical cost includes expenditures that are directly attributable to the acquisition of the items. Costs may also include borrowing costs incurred on debt during construction or major projects exceeding one year, costs of major maintenance arising from turnarounds of major units relating to betterments and committed decommission costs. Routine maintenance costs are expensed as incurred. Land is not depreciated. Depreciation is computed using the straight-line method over the estimated useful asset lives to their residual values.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.

We evaluate property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which, for us, is generally at the plant group level (or, at times, individual plants in certain circumstances where we have isolated production units with separately identifiable cash flows). When it is probable that an asset or asset group’s undiscounted future cash flows will not be sufficient to recover the carrying amount, the asset is written down to its estimated fair value.

Upon retirement or sale, we remove the cost of the asset and the related accumulated depreciation from the accounts and reflect any resulting gain or loss in the Consolidated Statements of Income.

 

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Equity Investments

We account for equity investments using the equity method of accounting if we have the ability to exercise significant influence over, but not control of, an investee. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting rights. Under the equity method of accounting, investments are stated initially at cost and are adjusted for subsequent additional investments and our proportionate share of profit or losses and distributions.

We record our share of the profits or losses of the equity method investments, net of income taxes, in the Consolidated Statements of Income. When our share of losses in an equity investment equals or exceeds our interest in the equity investment, including any other unsecured receivables, we do not recognize further losses, unless we have incurred obligations or made payments on behalf of the equity investment.

We evaluate our equity method investments for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of investment to the carrying value of investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline in value to be other-than temporary, the excess of the carrying value over the estimated fair value is recognized in the Consolidated Financial Statements as an impairment.

Goodwill

We recorded goodwill upon our application of fresh-start accounting on May 1, 2010. Goodwill is not amortized, but is tested annually for impairment. We assess the recoverability of the carrying value of goodwill during the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable.

We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed for each of the reporting units include, but are not limited to, changes in long-term commodity prices, discount rates, competitive environments, planned capacity, cost factors such as raw material prices, and financial performance of the reporting units. If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a two-step quantitative test is required.

In 2016 and 2015, management performed qualitative impairment assessments of our reporting units which indicated that the fair value of our reporting units was greater than their carrying value. Accordingly, a quantitative two-step goodwill impairment test was not required and no goodwill impairment was recognized.

Intangible Assets

Intangible Assets—Intangible assets primarily consist of emission allowances, various contracts, in-process research and development and software costs. These assets are amortized using the straight-line method over their estimated useful lives or over the term of the related agreement, if shorter. We evaluate definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.

 

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Research and Development—Research and development (“R&D”) costs are expensed when incurred. Subsidies for research and development are included in Other income (expense), net. Depreciation expense related to R&D assets is included as a cost of R&D.

Income Taxes

The income tax for the period comprises current and deferred tax. Income tax is recognized in the Consolidated Statements of Income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In these cases, the applicable tax amount is recognized in other comprehensive income or directly in equity, respectively.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the net tax effects of net operating loss carryforwards. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

We recognize uncertain income tax positions in our financial statements when we believe it is more likely than not, based on the technical merits, that the position or a portion thereof will be sustained upon examination.

Employee Benefits

Pension PlansWe have both defined benefit (funded and unfunded) and defined contribution plans. For the defined benefit plans, a projected benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Pension costs primarily represent the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of expected return on plan assets.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity and are reflected in Accumulated other comprehensive income in the period in which they arise.

Other Post-Employment ObligationsCertain employees are entitled to postretirement medical benefits upon retirement. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment applying the same accounting methodology used for defined benefit plans.

Termination BenefitsContractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan or statutory law. A liability is recognized for one time termination benefits when we are committed to i) make payments and the number of affected employees and the benefits received are known to both parties, and ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount. Benefits falling due more than 12 months after the balance sheet date are discounted to present value.

Other Provisions

Environmental Remediation Costs—Environmental remediation liabilities include liabilities related to sites we currently own, sites we no longer own, as well as sites where we have operated that belong to other parties. Liabilities for anticipated expenditures related to investigation and remediation of contaminated sites are accrued

 

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when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated. Only ongoing operating and monitoring costs, the timing of which can be determined with reasonable certainty, are discounted to present value. Future legal costs associated with such matters, which generally are not estimable, are not included in these liabilities.

Asset Retirement ObligationsAt some sites, we are contractually obligated to decommission our plants upon site exit. Asset retirement obligations are recorded at the present value of the estimated costs to retire the asset at the time the obligation is incurred. That cost, which is capitalized as part of the related long-lived asset, is depreciated on a straight-line basis over the remaining useful life of the related asset. Accretion expense in connection with the discounted liability is also recognized over the remaining useful life of the related asset. Such depreciation and accretion expenses are included in Cost of sales.

Foreign Currency Translation

Functional and Reporting Currency—Items included in the financial information of each of LyondellBasell N.V.’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”) and then translated to the U.S. dollar reporting currency through Other comprehensive income.

Transactions and Balances—Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Consolidated Statements of Income.

In the Consolidated Financial Statements, the results and financial position of all subsidiaries that have a functional currency different from the presentation currency are translated into the reporting currency as follows:

 

  1. Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;

 

  2. Income and expenses for each income statement are translated at average exchange rates; and

 

  3. All resulting exchange differences are recognized as a separate component within Other comprehensive income (foreign currency translation).

Revenue Recognition

Substantially all of the Company’s revenue is derived from product sales. Revenues are recognized when sales are realized or realizable, and the earnings process is complete. Revenue from product sales is recognized when the price is fixed or determinable, collectability is reasonably assured, and the customer has an obligation to pay at the time of transfer of title and risk of loss to the customer, which usually occurs at the time of shipment. Revenue is recognized at the time of delivery if we retain the risk of loss during shipment.

Share-Based Compensation

The Company grants stock-based compensation awards that vest over a specified period upon employees meeting certain service criteria. The fair value of equity instruments issued to employees is measured on the grant date and is recognized over the vesting period.

 

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Contingent share awards are recognized ratably over the vesting period as a liability and re-measured, at fair value, at the balance sheet date.

Leases

We lease land and other assets for use in our operations. All lease agreements are evaluated and classified as either an operating lease or a capital lease. A lease is classified as a capital lease if any of the following criteria are met: transfer of ownership to the lessee by the end of the lease term; the lease contains a bargain purchase option; the lease term is equal to 75% or greater of the asset’s useful economic life; or the present value of the future minimum lease payments is equal to or greater than 90% of the asset’s fair market value. Capital leases are recorded at the lower of the net present value of the total amount of rent payable under the leasing agreement (excluding finance charges) or fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with our normal depreciation policy for tangible fixed assets, but generally not exceeding the lease term. Operating lease expense is recognized ratably over the entire lease term.

Derivative Financial Instruments and Hedging Activities

We selectively enter into derivative transactions to manage market risk volatility associated with changes in commodity pricing, currency exchange rates and interest rates. We categorize assets and liabilities, measured at fair value, into one of three different levels depending on the observability of the inputs employed in the measurement. Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 inputs are observable inputs other than quoted prices included within Level 1 for the asset or liability, either directly or indirectly through market corroborated inputs. Level 3 inputs are unobservable inputs for the asset or liability reflecting significant modifications to observable related market data or our assumptions about pricing by market participants. For a discussion related to financial instruments and derivatives policies, see Note 14.

Non-Controlling Interests

Non-controlling interests primarily represent the interests of a subsidiary owning an equity investment in Al-Waha Petrochemicals Ltd.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Recently Adopted Guidance

Compensation—In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-12, Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. Under this new guidance, entities are required to treat performance targets that affect vesting and could be achieved after the requisite service period as a performance condition. The amendments in this ASU were effective for annual and interim periods beginning after December 15, 2015. The early adoption of this amendment did not have a material impact on our Consolidated Financial Statements.

 

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Consolidation—In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which amends and changes the consolidation analysis currently required under U.S. GAAP. This ASU modifies the process used to evaluate whether limited partnerships and similar entities are variable interest entities (“VIEs”) or voting interest entities; affects the analysis performed by reporting entities regarding VIEs, particularly those with fee arrangements and related party relationships; and provides a scope exception for certain investment funds. The amendments in this update were effective for annual and interim periods beginning after December 15, 2015. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.

Consolidation: Interests Held through Related Parties That Are under Common Control—In October, 2016, the FASB issued ASU 2016-17, which amends the consolidation requirements that apply to a single decision maker’s evaluation of interests held through related parties that are under common control when it is determining whether it is the primary beneficiary of a variable interest entity (VIE). Entities that already have adopted the amendments in ASU 2015-02 are required to apply amendments in this ASU retrospectively to all relevant periods beginning with the fiscal year in which ASU 2015-02 initially was applied. The application of this amendment did not have a material impact on our Consolidated Financial Statements.

Going Concern—In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under this new guidance, management is required to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued (or available to be issued when applicable). Additionally, the entity must provide certain disclosures if conditions or events raise substantial doubt about its ability to continue as a going concern. The amendments in this update are effective for annual periods ending after December 15, 2016 and interim periods thereafter. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.

Derivatives and Hedging—In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. The ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to apply only the four-step decision sequence as described in the amended guidance. The ASU is effective for public entities for annual and interim periods beginning after December 15, 2016. The early adoption of this amendment did not have a material impact on our Consolidated Financial Statements.

Investments—In March 2016, the FASB issued ASU 2016-07, Investments—Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. This ASU simplifies the recognition and reporting requirements for investments that become qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The amendments in this ASU are effective for all entities for annual and interim periods beginning after December 15, 2016. Prospective application is required. The early adoption of this amendment did not have a material impact on our Consolidated Financial Statements.

Accounting Guidance Issued But Not Adopted as of December 31, 2016

Revenue Recognition—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition requirements in Accounting Standard Codification (“ASC”) 606, Revenue Recognition. Under this guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This ASU also requires enhanced disclosures. In August 2015,

 

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the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the original effective date for one year to annual and interim periods beginning after December 15, 2017. Retrospective and modified retrospective application is allowed.

Amendments to Revenue Recognition—In 2016 the FASB issued several amendments to Topic 606, Revenue from Contracts with Customers. ASU 2016-08, Principal versus Agent Considerations, contains amendments that clarify the implementation guidance on principal versus agent considerations. ASU 2016-10, Identifying Performance Obligations and Licensing clarifies the guidance in the new revenue standard on identifying performance obligations and accounting for licenses of intellectual property. The FASB also issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which further clarifies the new revenue guidance primarily in the areas of collectability, noncash consideration, presentation of sales tax, and transition. The FASB also issued ASU 2016-20 Technical Corrections and Improvements to Topic 606, which provides numerous improvements related to the Topic 606. All amendments are effective with the same date as ASU 2014-09.

Management is currently assessing the effects of applying the new standard and has preliminarily determined that there will not be a material impact on our Consolidated Financial Statements. We expect to use a modified retrospective transition method.

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

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

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

Compensation—In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of

 

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awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2016. Various transition methods are prescribed depending on the aspect of accounting impacted by the amended guidance. Adoption of the amendments in this guidance will result in a reclassification of approximately $8 million and $52 million in 2016 and 2015, respectively, from cash flows from operating activities to cash flows from financing activities on our Consolidated Statement of Cash Flows.

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

Statement of Cash Flows—In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The updated accounting requirement is intended to reduce diversity in practice in the classification of certain transactions in the statement of cash flows. Such transactions include but are not limited to debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination and distributions received from equity method of investments. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.

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

Statement of Cash Flows: Restricted Cash—In November 2016, the FASB issued ASU 2016-18. The ASU requires entities to include in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU will become effective for public entities for annual periods beginning after December 15, 2017. The adoption of this amendment is not expected to have a material impact on our Consolidated Financial Statements.

 

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

Simplifying the Test for Goodwill Impairment: Intangibles—Goodwill and Other—In January, 2017, the FASB issued ASU 2017-04 to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The amendments will be effective for public entities for annual and interim goodwill impairment tests in periods beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. We do not believe the adoption of this new guidance will have a material impact on our Consolidated Financial Statements.

3. Discontinued Operations and Dispositions

Discontinued Operations—We began reporting the Berre refinery as a discontinued operation in the second quarter of 2012. The impact of this discontinued operation is immaterial to our consolidated results.

Future cash outflows will occur for exit or disposal activities and for payments made to severed employees. Exit and disposal costs are expected to be incurred through the end of 2017. Payments to the affected employees are expected to be substantially complete by 2019.

In May 2016, we received a notice pertaining to the final closure of our Berre refinery from the Prefect of Bouches du Rhone. This notice outlines the requirements to dismantle the refinery facilities. At this time, the estimated cost and associated cash flows to fulfill these requirements are not deemed to be material.

Dispositions—Upon the sale of our wholly owned subsidiary, Petroken Petroquimica Ensenada S.A. in February 2016, we received net proceeds of $137 million, which is reflected in Cash flows from investing activities in the Consolidated Statement of Cash Flows. In connection with the sale, we recognized a pretax and after tax gain of $78  million, which is reflected in Other Income, net in the Consolidated Income Statements.

4. Related Party Transactions

We have related party transactions with affiliates of one of our major shareholders, Access Industries (“Access”) and with the Company’s joint venture partners (see Notes 8 and 9).

Access—In December 2010, we entered into a tax cooperation agreement with Access which terminated on December 31, 2014. The tax cooperation agreement allowed either party to provide the other with information and support in connection with tax return preparation and audits on a time and materials basis through 2014. No payments were made to or received from Access under this agreement during 2014.

 

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In December 2010, one of our subsidiaries received demand letters from affiliates of Access demanding (i) indemnity for losses, including attorney’s fees and expenses, arising out of a pending lawsuit and (ii) payment of (a) $100 million in management fees under a 2007 management agreement between an Access affiliate and the predecessor of LyondellBasell AF and (b) other unspecified amounts related to advice purportedly given in connection with financing and other strategic transactions. For additional information related to this matter, see Note 19.

Joint Venture Partners—We have related party transactions with our equity investees. These related party transactions include the sales and purchases of goods in the normal course of business as well as certain financing arrangements. In addition, under contractual arrangements with certain of our equity investees, we receive certain services, utilities and materials at some of our manufacturing sites and we provide certain services to our equity investees.

We have guaranteed $18 million of the indebtedness of one of our joint ventures as of December 31, 2016. In 2015, we received a $19 million payment for a loan made to our joint venture, Al-Waha Petrochemicals Ltd. in 2010.

Related party transactions a