10-K 1 d533271d10k.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, 2017

OR

 

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

For the transition period from                         to                         

Commission file number: 001-34726

LyondellBasell Industries N.V.

(Exact name of registrant as specified in its charter)

 

The Netherlands   98-0646235

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1221 McKinney St.,

Suite 300

Houston, Texas

USA 77010

 

4th Floor, One Vine Street

London

W1J0AH

The United Kingdom

 

Delftseplein 27E

3013 AA Rotterdam

The Netherlands

(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  
     Emerging growth company  

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

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

The aggregate market value of common stock held by non-affiliates of the registrant on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter, based on the closing price on that date of $84.39, was $27.3 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 394,556,328 shares outstanding at February 20, 2018 (excluding 183,883,835 treasury shares).

Documents incorporated by reference:

Portions of the Notice of the 2018 Annual Meeting of Shareholders and 2018 Proxy Statement, in connection with the Company’s 2018 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

     10  

Technology Segment

     11  

General

     11  

Intellectual Property

     11  

Environmental

     12  

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

     27  

3. Legal Proceedings

     27  

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

     33  

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

     141  

9A. Controls and Procedures

     141  

9B. Other Information

     141  
PART III  

10. Directors, Executive Officers and Corporate Governance

     142  

11. Executive Compensation

     142  

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

     142  

13. Certain Relationships and Related Transactions, and Director Independence

     142  

14. Principal Accounting Fees and Services

     142  
PART IV  

15. Exhibits, Financial Statement Schedules

     143  

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 operations in the United States (“U.S.”) 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, substantial capacity expansions are underway 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;

 

1


Table of Contents
   

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.

 

2


Table of Contents

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 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 production 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 liquids and crude oil derivatives which we use as feedstocks. During recent years the relatively low 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 lower oil prices have reduced the North American feedstock advantage, 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 21, 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.”

 

3


Table of Contents

In 2017, 2016 and 2015, 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 many other chemicals and plastics. Ethylene is produced by steam cracking hydrocarbons such as ethane, propane, and 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—Polyolefins such as PE and PP are polymers derived from olefins including ethylene and propylene. Polyolefins are the most widely used thermoplastics in the world and are found in applications and products that enhance the 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 21%, 24% and 21% of our total revenues in 2017, 2016 and 2015, respectively.

Polypropylene—We produce PP homopolymers and 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 approximately 17% of our total revenues in 2017, 2016 and 2015.

Olefins and Polyolefins—Americas Segment

Overview

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

Sales & Marketing / Customers

Most 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, primarily under multi-year contracts. In 2016 and 2017, we added a total of 880 million pounds of ethylene capacity at our facilities in North America.

We use all the propylene we produce in the production of PP, propylene oxide and other derivatives of those products. As a result, we also purchase propylene from third parties. In addition to purchases of propylene, 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 maintenance. 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 from 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

 

4


Table of Contents

ethylene and co-products producers allow access to customers who are not directly connected to this pipeline system. Some ethylene is shipped by railcar from our Clinton, Iowa facility to our Morris, Illinois facility and some is shipped directly to customers. Propylene is generally shipped by marine vessel, barge, railcar or 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 Latin 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 venture’s 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 to produce 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 significant volumes 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 volume of co-products.

Our ability to pass on raw material price increases to our customers is dependent on 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, providing 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 mix 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.

 

5


Table of Contents

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 capacity data, we believe as of December 31, 2017 we were:

 

   

the second largest producer of ethylene in North America, with ethylene capacity of 11.8 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 Mexican 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 derivatives of those products, 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 primarily transported in Europe 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 2.4 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.

 

6


Table of Contents

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 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 relative to 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 capacity data and including our proportionate share of our joint ventures, we believe as of December 31, 2017 we were:

 

   

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

 

7


Table of Contents

and derivatives are used in a variety of durable and consumable items with key applications such as urethane foams used for insulation, automotive/furniture cushioning, coatings, surfactants, synthetic resins and several other household usages.

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. Our acetyls products 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 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, marine 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, marine 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 railcar, tank 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. 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

 

8


Table of Contents

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.

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 obtain 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 all our 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 capacity data, excluding our partners’ shares of joint venture capacity, we believe as of December 31, 2017 we were:

 

   

the second largest producer of PO worldwide; and

 

   

the second largest producer of oxyfuels worldwide.

 

9


Table of Contents

Refining Segment

Overview

The primary products of our Refining segment are 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.

Sales & Marketing / Customers

The Houston refinery’s products are primarily 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. The sales of refined products accounted for approximately 18%, 16% and 19% of our total revenues in 2017, 2016 and 2015, respectively.

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 2017, 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 2017, the Houston refinery processed an average of approximately 236,000 barrels per day of heavy 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

 

10


Table of Contents

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 Ultra Low 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, such as the value of refinery by-products, which influence operating results. 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 renewable fuel credits mandated by the U.S. Environmental Protection Agency (the “EPA”), can also affect profitability.

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 2017, 2016 and 2015, our R&D expenditures were $106 million, $99 million and $102 million, respectively. A portion of these expenses are related to technical support and customer service and are allocated to the other business segments. In 2017, 2016 and 2015, approximately 45% of all R&D costs were allocated to business segments other than Technology.

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, 2017, we owned approximately 5,580 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,” “Basell” 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.

 

11


Table of Contents

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 18 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 $279 million in 2017 for health, safety and environmental compliance purposes and improvement programs, and estimate such expenditures to be approximately $210 million in 2018 and $230 million in 2019.

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, 2017, we employed approximately 13,400 full-time and part-time employees around the world. Of this total, 6,400 were located in North America and another 5,900 were located in Europe. The remainder of our employees are in other global locations.

As of December 31, 2017, approximately 850 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.

 

12


Table of Contents

EXECUTIVE OFFICERS OF THE REGISTRANT

Our executive officers as of February 1, 2018 were as follows:

 

Name and Age

  

Significant Experience

Bhavesh V. (“Bob”) Patel, 51

  

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.

Thomas Aebischer, 56

  

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.

Paul Augustowski, 57

  

Senior Vice President, Olefins and Polyolefins—Americas since January 2016.

 

Vice President, Polymer Sales—Americas from January 2015 to January 2016.

 

Director, Polypropylene and Catalloy—Americas from November 2011 to January 2015.

Darleen Caron, 53

  

Executive Vice President and Chief Human Resources Officer since October 2017.

 

Executive Vice President of Global Human Resources and Member of The Office of The President at SNC Lavalin Group, Inc. from December 2010 to December 2015.

Daniel Coombs, 61

  

Executive Vice President, Global Manufacturing, Projects, Refining and Technology since February 2017.

 

Executive Vice President, Global Olefins and Polyolefins, and Technology from January 2016 to February 2017.

 

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.

 

13


Table of Contents

Name and Age

  

Significant Experience

  

 

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.

Massimo Covezzi, 60

   Senior Vice President, Research and Development since January 2008.

Stephen Doktycz, 56

  

Senior Vice President, Strategic Planning and Transactions since March 2017.

 

Corporate Director and Executive Project Lead at The Dow Chemical Company from 2013 to March 2017.

 

Global Director, Corporate and Strategic Development at The Dow Chemical Company from 2011 to 2013.

Dale Friedrichs, 54

  

Vice President, Health, Safety, Environment and Security since February 2017.

 

Site Manager of various facilities from January 1995 to February 2017.

James Guilfoyle, 47

  

Senior Vice President, Global Intermediates & Derivatives and Global Supply Chain since February 2017

 

Senior Vice President, Global Intermediates and Derivatives from June 2015 to February 2017.

 

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.

Jeffrey Kaplan, 49

  

Executive Vice President and Chief Legal Officer since March 2015.

 

Deputy General Counsel from December 2009 to March 2015.

Richard Roudeix, 55

  

Senior Vice President, Olefins & Polyolefins, Europe, Asia and International since February 2017.

 

Senior Vice President, Olefins & Polyolefins, Europe from March 2015 to February 2017.

 

Director, Olefins Europe from May 2009 to March 2015.

 

14


Table of Contents

Description of Properties

Our principal manufacturing facilities as of December 31, 2017 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)

   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(3)

   O&P—Americas

La Porte, Texas(3)(4)

   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(5)

   I&D

Moerdijk, The Netherlands†

   O&P—EAI

Münchsmünster, Germany

   O&P—EAI

Tarragona, Spain(6)

   O&P—EAI

Wesseling, Germany

   O&P—EAI

Asia Pacific

  

Geelong, Australia

   O&P—EAI

 

15


Table of Contents

 

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) The La Porte facilities are on contiguous property.
(4) The La Porte methanol facility is owned by La Porte Methanol Company, a partnership owned 85% by us.
(5) The Maasvlakte plant is owned by the European PO joint venture and is located on land leased by the European PO joint venture.
(6) 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.

 

16


Table of Contents

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 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. crude oil prices to natural gas 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

 

17


Table of Contents

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 resulting from natural disasters, water levels, and interruptions in marine water routes, among other causes, 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, increasing exports of NGLs and crude oil from the U.S. or greater restrictions on hydraulic fracturing 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 more 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 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

 

18


Table of Contents

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 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 would 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.

 

19


Table of Contents

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;

 

20


Table of Contents
   

unplanned increases in the cost of construction materials or labor;

 

   

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 trade restrictions or 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. Trade protection measures such as quotas, duties, tariffs, safeguard measures or anti-dumping duties imposed in the countries in which we operate could negatively impact our business. Additionally, there may be substantial

 

21


Table of Contents

capital and other costs to comply with regulations and/or increased security costs or insurance premiums, any of which could reduce our operating results.

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

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

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

We are a tax resident in the United Kingdom and are subject to the United Kingdom corporate income tax system. LyondellBasell Industries 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 U.S., The Netherlands, Germany, France and Italy.

A portion of our interest income from internal financing is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. In September 2016, the United Kingdom enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that resulted in changes to our internal financing structure which did not materially impact our Consolidated Financial Statements. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that could impact our internal financings in future years. Pursuant to a recent Executive Order, the Treasury Department reviewed these regulations and determined to delay but retain these regulations, subject to further review after the enactment of U.S. tax reform. In December 2017, the U.S. enacted “H.R.1,” also known as the “Tax Cuts and Jobs Act” (the “Tax Act”), materially impacting our 2017 Consolidated Financial Statements and significantly affecting future periods. We are awaiting Treasury’s review of the existing Section 385 debt-equity regulations which could impact our internal financings in future years as well as any new regulations pursuant to Treasury’s expanded regulatory authority under the Tax Act.

We monitor income tax developments in countries where we conduct business. Recently, there has been an increase in attention, both in the U.S. and globally, to the tax practices of multinational companies, including the European Union’s state aid investigations and proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in additional legislative changes that could adversely affect our tax rate. Other than the recently enacted Tax Act, 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.

 

22


Table of Contents

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

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

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

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

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

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

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

 

   

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.

 

23


Table of Contents

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

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

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

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

There has been a broad range of proposed or promulgated state, national and international laws focusing on greenhouse gas (“GHG”) reduction. These proposed or promulgated laws apply or could apply in countries where we have interests or may have interests in the future. Laws and regulations 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.

 

24


Table of Contents

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

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

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

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

We may use our five-year, $2.5 billion revolving credit facility, which backs our commercial paper program, to meet our cash needs, to the extent available. As of December 31, 2017, we had no borrowings or letters of credit outstanding under the facility and no borrowings under our commercial paper program, leaving an unused and available credit capacity of $2,500 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.

 

25


Table of Contents

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

Adverse results of legal proceedings could materially adversely affect us.

We are subject to and may in the future be subject to a variety of legal proceedings and claims that arise out of the ordinary conduct of our business. Results of legal proceedings cannot be predicted with certainty. Irrespective of its merits, litigation may be both lengthy and disruptive to our operations and may cause significant expenditure and diversion of management attention. We may be faced with significant monetary damages or injunctive relief against us that could have an adverse impact on our business and 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, 2017, the aggregate deficit was $903 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.

Integration of acquisitions could disrupt our business and harm our financial condition and stock price.

We may make acquisitions in order to enhance our business. On February 15, 2018, we entered into a definitive agreement to acquire A. Schulman. Acquisitions involve numerous risks, including problems combining the purchased operations, technologies or products, unanticipated costs and liabilities, diversion of management’s attention from our core businesses, and potential loss of key employees.

There can be no assurance that we will be able to integrate successfully any businesses, products, technologies, or personnel that we might acquire. The integration of businesses that we may acquire is likely to be a complex, time-consuming, and expensive process and we may not realize the anticipated revenues or other benefits associated with our acquisitions if we do not manage and operate the acquired business up to our expectations. If we are unable to efficiently operate as a combined organization utilizing common information and communication systems, operating procedures, financial controls, and human resources practices, our business, financial condition, and results of operations may be adversely affected.

 

26


Table of Contents
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, the EPA Region V issued a Notice and Finding of Violation alleging violations at our Morris, Illinois facility related to flaring activity. The Notice generally alleges failures to monitor steam usage and improper flare operations. Region V indicated at a December 2017 meeting that it intends to issue an administrative enforcement order in 2018. 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. Region V indicated at a December 2017 meeting that it intends to issue an administrative enforcement order in 2018. We reasonably believe that EPA Region V may assert a penalty demand in excess of $100,000.

In August 2015 the Victoria plant experienced a hexane leak into the cooling water system which resulted in estimated emissions of 154,000 pounds of hexane over a 12-day period from the cooling water pond operated by the site host, Invista. In November 2017, the Texas Commission on Environmental Quality (the “TCEQ”) issued a proposed agreed order to both Invista and Equistar assessing a proposed penalty of $300,000. We are currently in discussions with TCEQ.

In March 2017, the TCEQ issued a proposed Agreed Order to Houston Refining LP. The proposed Agreed Order stems from agency record reviews conducted from May to July 2016 and September to October 2016 and an agency investigation conducted in April 2016. In June 2017, TCEQ issued a revised Agreed Order that carries a total administrative penalty of $77,626. The Agreed Order is currently awaiting final TCEQ approval.

Litigation and Other Matters

Information regarding our litigation and other legal proceedings can be found in Note 18, Commitments and Contingencies, to the Consolidated Financial Statements.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

27


Table of Contents

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
 

2017

        

First Quarter

   $ 97.64      $ 85.66      $ 0.85  

Second Quarter

     92.03        78.01        0.90  

Third Quarter

     100.69        82.54        0.90  

Fourth Quarter

     111.62        96.20        0.90  

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  

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 20, 2018, there were approximately 6,100 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.

 

28


Table of Contents

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, 2012. The graph assumes that $100 was invested on December 31, 2012 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

 

     12/31/2012    12/31/2013    12/31/2014    12/31/2015    12/31/2016    12/31/2017

LyondellBasell Industries N.V.

   $100.00    $144.73    $147.38    $166.73    $171.33    $228.66

S&P 500 Index

   $100.00    $132.39    $150.51    $152.59    $170.84    $208.14

S&P 500 Chemicals Index

   $100.00    $131.80    $145.91    $139.81    $154.01    $195.08

 

29


Table of Contents

Issuer Purchases of Equity Securities

 

2017 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

     —        $ —          —          33,570,716  

November 1—November 30

     —        $ —          —          33,570,716  

December 1—December 31

     —        $ —          —          33,570,716  
  

 

 

       

 

 

    

Total

     —        $ —          —          33,570,716  
  

 

 

       

 

 

    

On May 24, 2017, we announced a share repurchase program of up to 40,087,633 of our ordinary shares through November 23, 2018. 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.

 

30


Table of Contents
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, which 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

   2017     2016     2015     2014     2013  

Results of operations data:

          

Sales and other operating revenues

   $ 34,484     $ 29,183     $ 32,735     $ 45,608     $ 44,062  

Operating income(a)

     5,460       5,060       6,122       5,736       5,102  

Interest expense(b)

     (491     (322     (310     (352     (309

Income from equity investments

     321       367       339       257       203  

Income from continuing operations(a)(b)(c)

     4,895       3,847       4,479       4,172       3,860  

Earnings per share from continuing operations:

          

Basic

     12.28       9.17       9.63       8.04       6.81  

Diluted

     12.28       9.15       9.60       8.00       6.76  

Loss from discontinued operations, net of tax

     (18     (10     (5     (4     (7

Loss per share from discontinued operations:

          

Basic

     (0.05     (0.02     (0.01     (0.01     (0.01

Diluted

     (0.05     (0.02     (0.01     (0.01     (0.01

Balance sheet data:

          

Total assets

     26,206       23,442       22,757       24,221       27,230  

Short-term debt

     68       594       353       346       58  

Long-term debt(d)

     8,551       8,387       7,675       6,699       5,709  

Cash and cash equivalents

     1,523       875       924       1,031       4,450  

Short-term investments

     1,307       1,147       1,064       1,593       —    

Accounts receivable

     3,539       2,842       2,517       3,448       4,030  

Inventories

     4,217       3,809       4,051       4,517       5,279  

Working capital

     4,861       4,122       4,386       4,901       5,737  

Cash flow data:

          

Cash provided by (used in):

          

Operating activities

     5,206       5,606       5,842       6,048       4,835  

Investing activities

     (1,756     (2,301     (1,046     (3,539     (1,597

Expenditures for property, plant and equipment

     (1,547     (2,243     (1,440     (1,499     (1,561

Financing activities

     (2,859     (3,349     (4,850     (5,907     (1,589

Dividends declared per share

     3.55       3.33       3.04       2.70       2.00  

 

(a) Operating income and Income from continuing operations in 2017 include a pretax gain of $108 million ($103 million, after tax) on the sale of our 27% interest in Geosel, a joint venture in France; a pretax gain of $31 million ($20 million, after tax) on the sale of our Lake Charles, Louisiana site; and a pretax, non-cash gain related to the elimination of an obligation associated with a lease of $ 21 million ($14 million, after tax). In 2016, they also included a pretax and after-tax gain of $78 million on the sale of our wholly owned Argentine subsidiary and a pretax charge of $58 million ($37 million, after tax) for a pension settlement. Operating income and Income from continuing operations in 2016, 2015 and 2014 included pretax, non-cash charges 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.
(b) Interest expense and Income from continuing operations in 2017 includes pretax charges of $113 million ($106 million, after tax) related to the redemption of $1,000 million aggregate principal amount of our outstanding 5% senior notes due 2019.

 

31


Table of Contents
(c) Income from continuing operations in 2017 includes an $819 million non-cash tax benefit related to the lower federal income tax rate resulting from the newly enacted U.S. Tax Cuts and Jobs Act. In 2016, it included $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 in 2013 included a $353 million benefit related to the release of valuation allowances primarily associated with tax losses in our French group.
(d) Long-term debt includes current maturities of long-term debt.

 

32


Table of Contents
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

We demonstrated the strength of our earnings performance under dynamic market conditions in 2017 with increased volumes, improved EBITDA and higher earnings relative to 2016. The complementary performance of our O&P—Americas and O&P—EAI segments combined with the relative stability of our I&D segment’s portfolio provided a resilient platform for profitability in 2017. Global operating rates remained strong in 2017 due to delays in new capacity, a volume shortfall from Hurricane Harvey and an improving market in China. Our reliable performance during the year positioned us to capture market opportunities as they arose. We also advanced our growth program by commencing construction on our new Hyperzone high-density polyethylene plant in La Porte, Texas and reaching a final investment decision for a world-scale PO/TBA plant.

Significant items that affected 2017 results include:

 

   

Improved Olefins and Polyolefins—Americas (“O&P—Americas”) results driven by the impact of higher olefins volumes relative to 2016 following completion of our Corpus Christi expansion in late 2016;

 

   

Higher Olefins and Polyolefins—Europe, Asia, International (“O&P—EAI”) segment results on higher olefins margins and increased volumes on most products, partly offset by lower polyethylene margins;

 

   

Higher Intermediates and Derivatives (“I&D”) segment results driven mainly by higher intermediate chemicals margins; and

 

   

Better crude processing rates, with a less unfavorable impact from planned and unplanned maintenance at our Houston refinery, and higher industry refining margins relative to 2016.

Other noteworthy items during 2017 include the following:

 

   

Non-cash benefit of $819 million recognized in the fourth quarter of 2017 related to the lower federal income tax rate resulting from the newly enacted U.S. Tax Cuts and Jobs Act;

 

   

Senior unsecured debt rating raised to BBB+ from BBB by Standard and Poor’s Rating Services in September 2017, matching our corporate investment-grade rating;

 

   

Final investment decision announced in July 2017 to build a world-scale PO/TBA plant in Texas with a capacity of 1 billion pounds of PO and 2.2 billion pounds of TBA. Construction is expected to commence in the second half of 2018;

 

   

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

 

   

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

 

   

Repurchased approximately 10 million of our ordinary shares during 2017.

 

33


Table of Contents

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

 

      Year Ended December 31,  

Millions of dollars

   2017      2016      2015  

Sales and other operating revenues

   $ 34,484      $ 29,183      $ 32,735  

Cost of sales

     28,059        23,191        25,683  

Selling, general and administrative expenses

     859        833        828  

Research and development expenses

     106        99        102  
  

 

 

    

 

 

    

 

 

 

Operating income

     5,460        5,060        6,122  

Interest expense

     (491      (322      (310

Interest income

     24        17        33  

Other income, net

     179        111        25  

Income from equity investments

     321        367        339  

Provision for income taxes

     598        1,386        1,730  
  

 

 

    

 

 

    

 

 

 

Income from continuing operations

     4,895        3,847        4,479  

Loss from discontinued operations, net of tax

     (18      (10      (5
  

 

 

    

 

 

    

 

 

 

Net income

   $ 4,877      $ 3,837      $ 4,474  
  

 

 

    

 

 

    

 

 

 

RESULTS OF OPERATIONS

Revenues—We had revenues of $34,484 million in 2017, $29,183 million in 2016 and $32,735 million in 2015.

2017 versus 2016—Revenues increased by $5,301 million, or 18%, in 2017 compared to 2016.

Average sales prices in 2017 were higher across most products as sales prices generally correlate with crude oil and natural gas prices, which on average, increased compared to the corresponding period in 2016. These higher prices led to increases in revenues of 15%. Higher sales volumes in our O&P—Americas, O&P-EAI and Refining segments, which were partly offset by lower I&D segment volumes, led to a revenue increase in 2017 of 2%. Favorable foreign exchange impacts were responsible for a 1% revenue increase in 2017.

2016 versus 2015—Revenues decreased $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. Revenues for each of our business segments are reviewed further in the “Segment Analysis” section below.

Cost of Sales—Cost of sales were $28,059 million in 2017, $23,191 million in 2016 and $25,683 million in 2015.

Fluctuations in our cost of sales are generally driven by changes in feedstock and energy costs, as all other material components remain relatively flat from year to year. Feedstock and energy related costs generally represent approximately 75% to 80% of cost of sales, other variable costs account for approximately 10% of cost of sales on an annual basis and fixed operating costs, consisting primarily of expenses associated with employee compensation, depreciation and amortization, and maintenance, range from approximately 10% to 15% in each annual period.

 

34


Table of Contents

2017 versus 2016—Cost of sales increased by $4,868 million, or 21%, in 2017 compared to 2016. This increase was primarily due to higher feedstock and energy costs. Costs for crude oil, heavy liquids and natural gas liquids (“NGLs”) and other feedstocks were higher in 2017 relative to 2016.

2016 versus 2015—Cost of sales decreased by $2,492 million, or 10%, 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 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 non-cash, pretax 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.

Operating Income—Our operating income was $5,460 million, $5,060 million and $6,122 million in 2017, 2016 and 2015, respectively.

2017 versus 2016—Operating income increased by $400 million in 2017.

This improvement over 2016 was primarily due to increases of $144 million, $140 million, $77 million and $68 million in operating income for our I&D, O&P—EAI, Refining and O&P—Americas segments, 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.

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

Interest Expense—Interest expense was $491 million in 2017, $322 million in 2016 and $310 million in 2015.

2017 versus 2016—We recognized charges totaling $113 million related to the March 2017 redemption of $1,000 million of our outstanding 5% senior notes due 2019. These charges include $65 million of prepayment premiums, $44 million for adjustments associated with fair value hedges and $4 million for the write-off of associated unamortized debt issuance costs.

Compared to 2016 and excluding the effects of fair value hedges and the charges described above, interest expense decreased $39 million in 2017 due to the redemption of our 5% senior notes due 2019 in the first quarter of 2017, and increased $35 million as a result of the related to debt issuances in March 2017 of our 3.5% guaranteed notes due 2027 and in March 2016 of our 1.875% guaranteed notes due 2022. A reduction in the

 

35


Table of Contents

amount of interest capitalized during 2017 and increased charges from our fair value hedges resulted in incremental increases in interest expense of $13 million and $45 million respectively, relative to 2016.

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.

For additional information related to our fair value hedges and fixed-for-floating interest rate swaps, see Notes 12 and 14.

Other Income, Net—Other income, net, was $179 million in 2017, $111 million in 2016 and $25 million in 2015.

2017 versus 2016—The $68 million increase in Other income, net, is primarily due to gains recognized on the 2017 sales of a joint venture interest and other assets, and the elimination of a non-cash obligation in 2017, as compared to the gain on the 2016 sale of our wholly owned subsidiary in Argentina.

In 2017, we recognized gains of $108 million on the sale of our O&P—EAI segment’s 27% interest in its Geosel joint venture and $31 million on the sale of our O&P—Americas segment’s Lake Charles, Louisiana site. We also recognized a $21 million non-cash gain in our O&P—EAI segment related to the elimination of an obligation associated with a lease.

In 2016, we recognized a $78 million gain related to the sale of our wholly owned Argentine subsidiary. We allocated $57 million and $21 million of this gain to our O&P—Americas and O&P—EAI segments, respectively.

2016 versus 2015—The $86 million increase in Other income, net, is largely due to the $78 million gain on the sale of our wholly owned subsidiary mentioned above.

Income from Equity Investments—Our income from equity investments was $321 million in 2017, $367 million in 2016 and $339 million in 2015.

2017 versus 2016—Income from our equity investments decreased in 2017 mainly due to lower results for our joint ventures in Poland, Asia and Mexico.

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.

Income Taxes—Our effective income tax rates of 10.9% in 2017, 26.5% in 2016 and 27.9% in 2015 resulted in tax provisions of $598 million, $1,386 million and $1,730 million, respectively.

On December 22, 2017, the U.S. enacted “H.R.1,” also known as the “Tax Cuts and Jobs Act” (the “Tax Act”), materially impacting our 2017 Consolidated Financial Statements. This change in U.S. tax law included a reduction in the federal corporate tax rate from 35% to 21% for years beginning after 2017, which resulted in the remeasurement of our U.S. net deferred income tax liabilities. Based upon a preliminary assessment of the expected impact of the Tax Act, we recorded a provisional tax benefit of $819 million as a result of the remeasurement of our deferred tax liabilities. In addition, excluding the impact of any discrete items, we expect our effective income tax rate for 2018 to be approximately 21%, which includes an estimated (-5.5%) benefit because of the Tax Act’s enactment. Some components of the Tax Act’s impact on 2018 were taken into consideration provisionally based upon reasonable estimates of future tax positions. We will continue to analyze the Tax Act to determine the full effects of the new law, including any further Treasury regulations as they are

 

36


Table of Contents

issued, but we believe the future impact on the effective income tax rate will be positive. The ultimate impact of the Tax Act on our effective tax rate will largely depend on the percentage of pretax income generated in the U.S. as compared to the rest of the world.

In September 2016, the United Kingdom enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that resulted in changes to our internal financing structure which did not materially impact our consolidated financial statements. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings in future years. Pursuant to a recent Executive Order, the Treasury Department reviewed these regulations and determined to delay but retain these regulations, subject to further review after enactment of U.S tax reform.

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. Our exempt income primarily includes interest income, export incentives, 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 export incentives relate to tax benefits derived from elections and structures available for U.S. exports. 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 income tax rate in the future.

2017—The 2017 effective income tax rate, which was lower than the U.S. statutory tax rate of 35%, was favorably impacted by the remeasurement of U.S. net deferred tax liabilities due to the enactment of the Tax Act (-14.9%), exempt income (-7.0%), earnings in various countries (notably in Europe) with lower statutory tax rates (-3.0%), and the U.S. domestic production activity deduction (-1.0%). These favorable items were partially offset by the effects of U.S. state and local income taxes (0.7%) and changes in uncertain tax positions (0.5%). Although the Tax Act lowered the U.S. statutory federal income tax rate to 21% for tax years beginning after 2017, the reconciliation uses the 35% rate in effect for the year ended December 31, 2017.

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%).

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 Note 17.

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%).

Comprehensive Income—We had comprehensive income of $5,105 million in 2017, $3,763 million in 2016 and $4,064 million in 2015.

 

37


Table of Contents

2017 versus 2016—The $1,342 million increase in Comprehensive income in 2017 relative to 2016 reflects higher net income, the net favorable impacts of unrealized net changes in foreign currency translation adjustments and actuarial losses related to our defined benefit pension and other postretirement benefit plans. These increases were offset by an unfavorable impact of financial derivative instruments recognized in 2017.

The predominant functional currency for our operations outside of the U.S. is the euro. Relative to the U.S. dollar, the value of the euro increased during 2017 resulting in net gains as reflected in the Consolidated Statements of Comprehensive Income. These net gains in 2017 include pretax losses of $288 million, which represent the effective portion of our net investment hedges.

We recognized net actuarial gains of $74 million in 2017 and net actuarial losses of $188 million in 2016. The $74 million net gain in 2017 reflects $74 million of gains due to changes in pension and other postretirement benefit discount rate assumptions and $6 million of gains due to favorable postretirement liability experience and other immaterial items. These gains were partly offset by $7 million of losses due to pension asset experience (actual asset return compared to expected return). In 2016, the $188 million net loss was primarily attributable to $279 million of losses due to pension and other postretirement benefit discount rate decreases, which was 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 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.

The cumulative effects of our derivatives designated as cash flow hedges were losses of $323 million. The euro strengthened against the U.S. dollar in 2017 resulting in pretax losses of $287 million in 2017 related to our cross-currency swaps. Pretax gains of $264 million related to our cross-currency swaps were reclassification adjustments included in 2017 net income. Unrealized pretax losses of $25 million in 2017 related to forward-starting interest rate swaps were driven by increases in benchmark interest rates during those periods.

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 pretax 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 pretax 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 pretax 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.

 

38


Table of Contents

Total lump sum payments from these plans exceeded annual service and interest cost in 2016 resulting in this loss.

See “Critical Accounting Policies” below and Note 15 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 21, Segment and Related Information, to our Consolidated Financial Statements.

 

39


Table of Contents

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

   2017     2016     2015  

Sales and other operating revenues:

      

O&P—Americas segment

   $ 10,400     $ 9,077     $ 9,964  

O&P—EAI segment

     12,263       10,579       11,576  

I&D segment

     8,472       7,226       7,772  

Refining segment

     6,848       5,135       6,557  

Technology segment

     450       479       465  

Other, including intersegment eliminations

     (3,949     (3,313     (3,599
  

 

 

   

 

 

   

 

 

 

Total

   $ 34,484     $ 29,183     $ 32,735  
  

 

 

   

 

 

   

 

 

 

Operating income:

      

O&P—Americas segment

   $ 2,461     $ 2,393     $ 3,256  

O&P—EAI segment

     1,634       1,494       1,309  

I&D segment

     1,202       1,058       1,224  

Refining segment

     (22     (99     144  

Technology segment

     183       221       197  

Other, including intersegment eliminations

     2       (7     (8
  

 

 

   

 

 

   

 

 

 

Total

   $ 5,460     $ 5,060     $ 6,122  
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization:

      

O&P—Americas segment

   $ 439     $ 362     $ 353  

O&P—EAI segment

     239       229       219  

I&D segment

     279       269       233  

Refining segment

     177       163       196  

Technology segment

     40       41       46  
  

 

 

   

 

 

   

 

 

 

Total

   $ 1,174     $ 1,064     $ 1,047  
  

 

 

   

 

 

   

 

 

 

Income from equity investments:

      

O&P—Americas segment

   $ 42     $ 59     $ 42  

O&P—EAI segment

     271       302       283  

I&D segment

     8       6       14  
  

 

 

   

 

 

   

 

 

 

Total

   $ 321     $ 367     $ 339  
  

 

 

   

 

 

   

 

 

 

Other income (expense), net

      

O&P—Americas segment

   $ 40     $ 63     $ 10  

O&P—EAI segment

     138       42       14  

I&D segment

     1       —         4  

Refining segment

     2       8       2  

Other, including intersegment eliminations

     (2     (2     (5
  

 

 

   

 

 

   

 

 

 

Total

   $ 179     $ 111     $ 25  
  

 

 

   

 

 

   

 

 

 

EBITDA:

      

O&P—Americas segment

   $ 2,982     $ 2,877     $ 3,661  

O&P—EAI segment

     2,282       2,067       1,825  

I&D segment

     1,490       1,333       1,475  

Refining segment

     157       72       342  

Technology segment

     223       262       243  

Other, including intersegment eliminations

     —         (9     (13
  

 

 

   

 

 

   

 

 

 

Total

   $ 7,134     $ 6,602     $ 7,533  
  

 

 

   

 

 

   

 

 

 

 

40


Table of Contents

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.

2017 versus 2016—EBITDA improved in 2017 due to higher olefins volumes stemming from the expansion of our Corpus Christi, Texas olefins facility in late 2016. Higher olefins and polyethylene margins in 2017 were offset by lower polypropylene margins. EBITDA for 2017 also included a $31 million gain on the sale of our Lake Charles, Louisiana, site. EBITDA for 2016 included a $57 million gain on the first quarter sale of our wholly owned Argentine subsidiary and a $29 million non-cash LCM inventory valuation charge recognized in the fourth quarter due primarily to a reduction in polypropylene prices.

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

EBITDA in 2016 also reflects the net benefit arising from the gain on sale of our Argentine subsidiary and the non-cash LCM inventory valuation charge discussed above. 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.

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. We have significant flexibility to vary the raw material mix and process conditions in our U.S. olefins plants in order to maximize profitability as market prices for both feedstocks and products change.

As in recent years, strong supplies from the U.S. shale gas/oil boom resulted in ethane being a preferred feedstock in our U.S. plants in 2017. We produced 75% of our ethylene from ethane. Despite generally higher liquid feedstock prices, strong propylene and butadiene coproduct prices at various points in the year also brought liquids into our feedslate.

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

   2017      2016      2015  

Sales and other operating revenues

   $ 10,400      $ 9,077      $ 9,964  

Income from equity investments

     42        59        42  

EBITDA

     2,982        2,877        3,661  

 

41


Table of Contents

Revenues—Revenues increased by $1,323 million, or 15%, in 2017 compared to 2016 and decreased by $887 million, or 9%, in 2016 compared to 2015.

2017 versus 2016—Average sales prices for most products increased in 2017, consistent with feedstock prices that are correlated with crude oil and natural gas prices, which on average increased relative to 2016. These higher sales prices were responsible for a 14% increase in 2017 revenues.

Operating rates and product volumes improved in 2017 due to turnaround activities and the expansion at our Corpus Christi, Texas facility during 2016. These increased volumes were responsible for a revenue increase of 1% in 2017.

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.

EBITDA—EBITDA increased by $105 million, or 4%, in 2017 compared to 2016 and decreased by $784 million, or 21%, in 2016 compared to 2015.

2017 versus 2016—Increased volumes in 2017 due largely to the expansion of our Corpus Christi, Texas olefins facility was responsible for a 5% improvement in EBITDA. Margins were relatively unchanged in 2017 compared to 2016 due to an approximate 5 cents per pound decrease in polypropylene spreads that offset per pound increases in olefins and polyethylene spreads of a half cent and 2 cents, respectively. Polypropylene margins declined from the high levels in 2016 on the higher cost of propylene feedstocks, while the increase in olefins and polyethylene margins was attributable to higher average sales prices that more than offset the increased cost of ethylene. Lower income from our joint venture relative to the prior year led to a 1% decline in EBITDA. The net impact to EBITDA of the gain on sale of our wholly owned Argentine subsidiary in the first quarter of 2016 and the fourth quarter LCM inventory valuation adjustment mentioned above was offset by the first quarter 2017 gain on sale of our Lake Charles, Louisiana site.

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 cents 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 inventory valuation adjustment recognized in 2016 versus 2015 and to the $57 million gain on the 2016 sale of our Argentine subsidiary.

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.

 

42


Table of Contents

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.

2017 versus 2016—EBITDA increased in 2017 compared to 2016. This improvement was driven by higher olefins margins and the impact of higher volumes across most products, partly offset by lower polyethylene margins and lower income from our equity investments.

EBITDA for 2017 also includes a $108 million gain on the third quarter sale of our 27% interest in Geosel and a $21 million beneficial impact related to the elimination of an obligation associated with a lease. In 2016, EBITDA reflected gains totaling $11 million from the sales of our joint venture in Japan and idled assets in Australia and a $21 million gain from the sale of our wholly owned Argentine subsidiary.

2016 versus 2015—Higher EBITDA in 2016 was 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.

Ethylene Raw Materials—In Europe, heavy liquids are the primary raw materials for our ethylene production. In recent years, we have sourced advantaged NGLs when the opportunity has arisen. In 2017, we benefited less from advantaged feedstocks than in recent years as prices for NGLs increased relative to oil-based naphtha feedstock prices.

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

   2017      2016      2015  

Sales and other operating revenues

   $ 12,263      $ 10,579      $ 11,576  

Income from equity investments

     271        302        283  

EBITDA

     2,282        2,067        1,825  

Revenues—Revenues in 2017 increased by $1,684 million, or 16%, compared to 2016 and decreased by $997 million, or 9%, in 2016 compared to 2015.

2017 versus 2016—Average sales prices in 2017 were higher across most products as sales prices generally correlate with crude oil prices, which on average, increased compared to 2016. These higher average sales prices were responsible for a revenue increase of 11% in 2017. Better product availability compared to 2016, which was affected by turnaround activity and inventory requirements, led to higher sales volumes across most products. These increased volumes resulted in a revenue increase of 3% in 2017.

Foreign exchange impacts that, on average, were favorable for 2017 resulted in a revenue increase of 2% compared to the prior year.

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.

 

43


Table of Contents

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

EBITDA—EBITDA increased by $215 million, or 10%, in 2017 compared to 2016 and by $242 million, or 13%, in 2016 compared to 2015.

2017 versus 2016—An increase in olefin margins driven largely by a 6 cents per pound increase in ethylene sales prices was partly offset in 2017 by a 3 cents per pound decrease in European polyethylene spreads due to a more balanced European market compared to the prior year. This net increase resulted in a 1% improvement in 2017 EBITDA compared to 2016. The higher 2017 volumes discussed above added another 5% to EBITDA. Favorable foreign exchange impacts in 2017 also contributed an additional 1% to EBITDA. The net beneficial impact of the transactions in 2016 and 2017 discussed above related to the sales of our wholly owned subsidiary, joint venture interests and idled assets, and the elimination of a lease-related obligation, resulted in an additional 5% increase in EBITDA. These increases were partially offset by a 2% decrease in EBITDA driven by a reduction in income from equity investments in Poland and Asia in 2017 relative to very strong 2016 results.

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.

Intermediates and Derivatives Segment

Overview—Improvements in 2017 EBITDA for intermediate chemicals and PO & derivatives were partly offset by lower results for oxyfuels and related products. EBITDA in 2017 also reflected an approximate $50 million unfavorable impact of charges related to precious metals catalyst financings relative to 2016.

2017 versus 2016—EBITDA was higher for our I&D segment in 2017 relative to 2016 due to stronger margins for intermediate chemicals products supported by reduced market supply stemming from industry outages and increased demand in Asia.

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.

 

44


Table of Contents

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

   2017      2016      2015  

Sales and other operating revenues

   $ 8,472      $ 7,226      $ 7,772  

Income from equity investments

     8        6        14  

EBITDA

     1,490        1,333        1,475  

Revenues—Revenues for 2017 increased by $1,246 million, or 17%, compared to 2016 and decreased by $546 million, or 7%, in 2016 compared to 2015.

2017 versus 2016—Higher average sales prices in 2017 for most products, which reflect the impacts of higher feedstock and energy costs and industry supply constraints, were responsible for revenue increases of 17%. Favorable foreign exchange impacts also led to a 1% revenue increase in 2017. These increases were partially offset by a revenue decrease of 1% in 2017, primarily due to lower sales volumes for intermediate chemicals and oxyfuels and related products. This volume-driven decline was largely due to reduced production associated with two major turnarounds at our Botlek, Netherlands, and Channelview, Texas, facilities.

2016 versus 2015—Lower average sales prices in 2016 reflected 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.

EBITDA—EBITDA increased by $157 million, or 12%, in 2017 compared to 2016 and decreased by $142 million, or 10%, in 2016 compared to 2015.

2017 versus 2016—Higher intermediate chemicals and PO and derivative product margins driven by higher average sales prices resulted in a 19% increase in EBITDA. This increase was offset in part by a 2% decline in margins for oxyfuels and related products primarily due to higher butane pricing. This margin improvement was partly offset by decreases in EBITDA of 4% and 1%, respectively, stemming from the unfavorable impacts associated with charges related to precious metals catalyst financings and the lower volumes discussed above.

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.

 

45


Table of Contents

Refining Segment

Overview

2017 versus 2016—EBITDA for our Refining segment benefited from higher crude processing rates in 2017 as the impacts of planned and unplanned maintenance outages were less than in 2016. Higher industry margins were offset by higher maintenance-related fixed costs in 2017.

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.

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

   2017      2016      2015  

Sales and other operating revenues

   $ 6,848      $ 5,135      $ 6,557  

EBITDA

     157        72        342  

Heavy crude oil processing rates, thousands of barrels per day

     236        201        238  
  

 

 

    

 

 

    

 

 

 

Market margins, dollars per barrel

                    

Light crude oil—2-1-1

   $ 13.54      $ 10.73      $ 14.04  

Light crude oil—Maya differential

     7.02        8.51        8.26  
  

 

 

    

 

 

    

 

 

 

Total Maya 2-1-1

   $ 20.56      $ 19.24      $ 22.30  
  

 

 

    

 

 

    

 

 

 

Revenues—Revenues increased by $1,713 million, or 33% in 2017 compared to 2016 and decreased by $1,422 million, or 22%, in 2016 compared to 2015.

2017 versus 2016—Higher product prices in 2017 largely driven by an increase in average crude oil prices of approximately $10 per barrel led to a revenue increase of 26% relative to 2016. Heavy crude oil processing rates increased by 17% in 2017, leading to a volume driven revenue increase of 7%, as the impacts of planned and unplanned outages and the effects of Hurricane Harvey in 2017 had less of an impact on processing rates than the unplanned outages in 2016 referenced below. In 2017, we completed planned turnarounds on one of our crude units and our fluid catalytic converter.

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.

 

46


Table of Contents

EBITDA—EBITDA increased by $85 million, or 118%, in 2017 compared to 2016 and decreased by $270 million, or 79%, in 2016 compared to 2015.

2017 versus 2016—Increased production accounted for approximately 90% of the improvement in 2017 EBITDA. Crude oil processing rates in 2017 were higher than 2016 as discussed above. Higher refining margins, which were partly offset by higher maintenance-related fixed costs, accounted for the remaining 10% improvement in 2017 EBITDA.

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

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

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

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 2017, 2016 and 2015, our Technology segment incurred approximately 55% of all R&D costs.

2017 versus 2016—A decline in 2017 EBITDA reflects lower licensing revenues, partially offset by higher catalyst sales volumes, compared to 2016.

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.

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

 

     Year Ended December 31,  

Millions of dollars

     2017          2016          2015    

Sales and other operating revenues

   $ 450      $ 479      $ 465  

EBITDA

     223        262        243  

Revenues—Revenues decreased by $29 million, or 6%, in 2017 compared to 2016 and increased by $14 million, or 3%, in 2016 compared to 2015.

2017 versus 2016—Lower licensing revenues were responsible for a revenue decrease of 12% in 2017 relative to 2016. This decrease was partially offset by revenue increases of 3% and 1%, respectively, related to increased catalyst sales volumes and higher average sales prices. Favorable foreign exchange impacts were responsible for an additional 2% increase in EBITDA.

 

47


Table of Contents

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.

EBITDA—EBITDA in 2017 decreased by $39 million, or 15%, compared to 2016 and increased by $19 million, or 8%, in 2016 compared to 2015.

2017 versus 2016—Lower licensing and services revenues in 2017 were largely responsible for a 20% decrease in 2017 EBITDA. This decline was partly offset by a 5% improvement in EBITDA resulting from an increase in catalyst volumes during 2017.

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.

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

   2017     2016     2015  

Source (use) of cash:

      

Operating activities

   $ 5,206     $ 5,606     $ 5,842  

Investing activities

     (1,756     (2,301     (1,046

Financing activities

     (2,859     (3,349     (4,850

Operating Activities—Cash of $5,206 million generated in 2017 primarily reflected earnings adjusted for non-cash items partly offset by $593 million of cash used by the main components of working capital—accounts receivable, inventories and accounts payable. Higher sales prices across all of our segments in the fourth quarter of 2017 and brief delays in the receipt of payments for products in our Refining and I&D segments led to the increase in accounts receivable. Inventories increased for most products in our O&P—EAI and O&P—Americas segments and included an inventory build in our O&P–Americas segment in anticipation of first quarter 2018 turnaround activities These increases were partly offset by an increase in feedstock pricing in the fourth quarter of 2017 in our O&P—Americas, O&P—EAI and Refining segments which led to an increase in accounts payable.

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. 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

 

48


Table of Contents

$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.

Investing Activities—We invested cash of $1,756 million, $2,301 million and $1,046 million in 2017, 2016 and 2015, 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 2017, 2016 and 2015, we invested $653 million, $764 million and $2,073 million, respectively, in securities that are classified as Short-term investments. We also invested $512 million, $674 million and $397 million in tri-party repurchase agreements in 2017, 2016 and 2015, respectively. We received proceeds upon the sale and maturity of certain of our Short-term investments and tri-party purchase agreements of $574 million and $381 million, respectively, in 2017; $674 million and $685 million, respectively, in 2016; and $2,489 million and $350 million, respectively, in 2015. See Note 14 to the Consolidated Financial Statements for additional information regarding these investments.

Joint Venture Activity—In September 2017, we sold our 27% interest in our Geosel joint venture and received proceeds of $155 million.

In April 2017, we increased our interest in the entity that holds our equity interest in Al Waha Petrochemicals Ltd. from 83.79% to 100% by paying $21 million to exercise a call option to purchase the remaining 16.21% interest held by a third party.

In September 2016, we purchased a net additional interest in our joint venture in Korea for $36 million. In February 2016, we received proceeds of $72 million for the sale of our joint venture in Japan.

Financial Instruments Activity—Upon expiration in 2017 and 2016, we settled foreign currency contracts with a notional value of €550 million and €1,200 million, respectively, which were designated as net investment hedges of our investments in foreign subsidiaries. Payments to and proceeds from our counterparties resulted in a net cash outflows of $49 million and $61 million during 2017 and 2016, respectively. See Note 14 to the Consolidated Financial Statements for additional information regarding these foreign currency contracts.

Sale of Wholly Owned Subsidiary—In February 2016, we received net cash proceeds of $137 million for the sale of our wholly owned Argentine subsidiary.

The following table summarizes our capital expenditures for continuing operations for the periods from 2015 through 2017:

 

     Year Ended December 31,  

Millions of dollars

   2017      2016      2015  

Capital expenditures by segment:

        

O&P—Americas

   $ 753      $ 1,376      $ 668  

O&P—EAI

     206        261        186  

I&D

     332        333        441  

Refining

     213        224        108  

Technology

     32        36        24  

Other

     11        13        13  
  

 

 

    

 

 

    

 

 

 

Consolidated capital expenditures of continuing operations

   $ 1,547      $ 2,243      $ 1,440  
  

 

 

    

 

 

    

 

 

 

 

49


Table of Contents

In 2018, we expect to spend approximately $2.4 billion, which includes contributions to our PO joint ventures. The higher level of expected capital expenditures in 2018 versus 2017 is largely driven by construction related to our new Hyperzone polyethylene plant at our La Porte, Texas facility and construction related to our new PO/TBA plant in Texas.

In 2017 and 2016, capital expenditures included construction related to our new Hyperzone polyethylene plant, construction related to our new PO/TBA, debottlenecks of certain assets to enhance production, turnaround activities at several sites as well as other plant improvement projects. The lower level of capital expenditures in 2017 versus 2016 for our O&P—Americas segment is largely due to the completion of the 800 million pound ethylene expansion at our Corpus Christi, Texas facility in the fourth quarter of 2016.

Financing Activities—Financing activities used cash of $2,859 million, $3,349 million and $4,850 million in 2017, 2016 and 2015, respectively.

We made payments totaling $866 million, $2,938 million and $4,656 million in 2017, 2016 and 2015, respectively, to acquire a portion of our outstanding ordinary shares. We also made dividend payments totaling $1,415 million, $1,395 million and $1,410 million to our shareholders in 2017, 2016 and 2015, respectively. For additional information related to these share repurchases and dividend payments, see Note 19 to the Consolidated Financial Statements.

Through the issuance and repurchase of commercial paper instruments under our commercial paper program, we made net repayments of $493 million in 2017 and received net proceeds of $177 million and $61 million in 2016 and 2015, respectively.

In March 2017, we issued $1,000 million of 3.5% guaranteed notes due 2027 and received net proceeds of $990 million. The proceeds from these notes, together with available cash, were used to repay $1,000 million of our outstanding 5% senior notes due 2019. We paid $65 million in premiums in connection with this prepayment.

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.

Additional information related to our commercial paper program and the issuance and repayment 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, 2017, we had $2,830 million of unrestricted cash and cash equivalents and marketable securities classified as Short-term investments. We also held $570 million of tri-party repurchase agreements classified as Prepaid expenses and other current assets at December 31, 2017. 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, 2017, we held $557 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.

 

50


Table of Contents

We also had total unused availability under our credit facilities of $3,400 million at December 31, 2017, which included the following:

 

   

$2,500 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, 2017, we had no outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under the facility; and

 

   

$900 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, 2017.

We have $413 million of outstanding letters of credit, bank guarantees, and surety bonds issued under uncommitted credit facilities at December 31, 2017. At December 31, 2017, we had total debt, including current maturities, of $8,619 million.

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. For information related to our Senior Notes and Guaranteed Notes and credit facilities, including terms of redemption, see Note 12 to the Consolidated Financial Statements.

In May 2017, our shareholders approved a proposal to authorize us to repurchase up to an additional 10%, or approximately 40 million, of our shares outstanding through November 2018 (“May 2017 Share Repurchase Program”). As a result, the authorization of the remaining unpurchased shares under the share repurchase program approved by our shareholders in May 2016 (“May 2016 Share Repurchase Program”) was suspended. 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. In 2017, we have purchased approximately 10 million shares under these programs for approximately $845 million. As of February 20, 2018, we had approximately 34 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 19 to the Consolidated Financial Statements.

We may repay or redeem our debt, including purchases of our outstanding bonds in the open market, using cash and cash equivalents, cash from our short-term investments and tri-party repurchase agreements, 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.

In July 2017, we announced our final investment decision to build a world-scale PO/TBA plant in Texas with a capacity of 1 billion pounds of PO and 2.2 billion pounds of TBA. The project is estimated to cost approximately $2.4 billion, with construction estimated to commence in the second half of 2018. We anticipate the project to be completed in the middle of 2021.

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 and cash

 

51


Table of Contents

equivalents, cash from our short-term investments and tri-party repurchase agreements, cash from operating activities, proceeds from the issuance of debt, or a combination thereof, may be used to fund the purchase 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.

As discussed in Note 23 of the Notes to the Consolidated Financial Statements, subsequent to our 2017 fiscal year end we entered into a definitive agreement to acquire A. Schulman. We plan to use cash-on-hand to fund the acquisition.

We believe that our current liquidity availability and cash from operating activities 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, 2017, 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

      2018      2019      2020      2021      2022      Thereafter  

Total debt

   $ 8,788      $ 70      $ 1,005      $ 5      $ 1,004      $ 903      $ 5,801  

Interest on total debt

     5,566        408        383        358        358        298        3,761  

Advances from customers

     105        61        15        6        3        3        17  

Other

     2,157        1,227        491        35        34        15        355  

Deferred income taxes

     1,655        296        105        104        91        107        952  

Other obligations:

                    

Purchase obligations:

                    

Take-or-pay contracts

     16,958        2,846        2,898        2,981        2,994        2,718        2,521  

Other contracts

     9,803        4,561        2,026        1,047        618        293        1,258  

Operating leases

     1,445        311        232        194        165        26        517  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,477      $ 9,780      $ 7,155      $ 4,730      $ 5,267      $ 4,363      $ 15,182  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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 15 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 2018 are not expected to be materially different than the expected 2018 contributions disclosed in Note 15 to the Consolidated Financial Statements. At December 31, 2017, the projected benefit obligation for our pension plans exceeded the fair value of plan assets by $903 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 $903 million in future years. We contributed $103 million, $114 million and $107 million to our pension plans in 2017, 2016 and

 

52


Table of Contents

2015, respectively. We provide other postretirement benefits, primarily medical benefits to eligible participants, as described in Note 15 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 1 to 15 years. The unamortized long-term portion of such advances totaled $44 million as of December 31, 2017.

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 17 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, 2017.

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

CURRENT BUSINESS OUTLOOK

Over the past several months, strong global demand and delays in capacity additions across the industry have improved the outlook for 2018. We look forward to realizing the benefits of strong operating rates across our broad portfolio of assets. and continuing the improvement in the reliability and profitability of our Houston refinery.

Unusually cold weather on the U.S. Gulf Coast in the third week of January caused industry disruptions. The impact of these disruptions, which also affected our assets, is currently expected to negatively impact our EBITDA by approximately $45 million. About two thirds of this impact is expected to be borne by our O&P—Americas segment with the remaining impact negatively affecting our I&D segment. Planned maintenance scheduled for one cracker at our Channelview Texas facility is also expected to negatively impact our O&P—Americas EBITDA by approximately $50 million in each of the first and second quarters of 2018. Our I&D segment is expected to benefit from continued strength in the market for oxyfuels and related products We expect to continue the improvement in reliability and profitability of our Houston refinery in 2018.

Over the coming years, we will advance our growth by increasing the pace of organic business investments while diligently pursuing value-adding inorganic opportunities.

 

53


Table of Contents

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.

During 2015 and 2016 we incurred LCM inventory adjustments of $548 million and $29 million respectively. In 2015 the LCM adjustments were driven by declines in the prices of crude oil, ethylene, propylene, benzene and ETBE. The 2016 adjustment, which occurred in the fourth quarter was driven by a decline in the price of propylene. As a result of the impairments charges taken in 2014, 2015 and 2016 all of our inventory pools are valued at 2015 or 2016 year-end market prices prior to indexation. While prices for our products and raw materials are inherently volatile and therefore no prediction can be given with certainty, we do not believe any of our inventory is at risk for impairment at this time.

Goodwill—Goodwill of $570 million at December 31, 2017 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

 

54


Table of Contents

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 quantitative test is required.

We also have the option to proceed directly to the quantitative impairment test. Under the quantitative impairment test, the fair value of each reporting unit is compared to its carrying value, including goodwill. For the quantitative 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. If the carrying value of goodwill exceeds its fair value, an impairment charge equal to the excess would be recognized.

For 2017 and 2016, 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 goodwill impairment test was not required. Accordingly, no goodwill impairment was recognized in 2017 or 2016.

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, 2017, we used a weighted average discount rate of 3.73% 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, 2017 was 2.13%, reflecting market interest rates. The discount rates in effect at December 31, 2017 will be used to measure net periodic benefit cost during 2018.

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, 2017, the assumed rate of increase for our U.S. plans was 6.7%, decreasing to 4.5% in 2038 and thereafter. A one hundred basis point change in the health care cost trend rate assumption as of December 31, 2017 would have resulted in a $18 million increase or $12 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.

 

55


Table of Contents

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 2.15%, for our non-U.S. plan assets is based on an expectation and asset allocation that varies by region. In 2018, the average expected long-term rate of return on assets in our U.S. plans is expected to be 7.50%. The asset allocations are summarized in Note 15 to the Consolidated Financial Statements. The actual returns in 2017 were gains of 14.45% and 8.82% 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 2017
     Effects on Net
Periodic Pension

Costs
in 2018
 

Millions of dollars

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

Projected benefit obligations at December 31, 2017

   $ 1,924      $ 1,511      $ —        $ —    

Projected net periodic pension costs in 2018

           11        54  

Discount rate increases by 100 basis points

     (177      (190      (7      (7

Discount rate decreases by 100 basis points

     215        231        12        12  

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 2017
     Effects on Net
Periodic Benefit

Costs
in 2018
 

Millions of dollars

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

Projected benefit obligations at December 31, 2017

   $ 280      $ 62      $ —        $ —    

Projected net periodic benefit costs in 2018

           11        4  

Discount rate increases by 100 basis points

     (24      —          (2      —    

Discount rate decreases by 100 basis points

     29        —          (2      —    

Additional information on the key assumptions underlying these benefit costs appears in Note 15 to the Consolidated Financial Statements.

 

56


Table of Contents

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. At December 31, 2017, the measurement of our deferred tax balances was materially affected by the U.S. enactment of “H.R.1,” also known as the Tax Act, as explained in Note 17 to the Consolidated Financial Statements.

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 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 17 to the Consolidated Financial Statements.

ACCOUNTING AND REPORTING CHANGES

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

 

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

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

Commodity Price Risk

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

In addition, we use commodity swap and futures contracts with various terms to manage a small portion of the volatility related to raw materials and product purchases and sales. Such contracts are generally limited to durations of one year or less. Hedge accounting has been elected for some 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 regularly.

 

57


Table of Contents

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

 

    December 31, 2017  
          Notional Amounts              

Millions of dollars

  Fair Value     Value     Volumes     Volume Unit     Maturity Dates  

Futures and swaps not designated as hedges:

         

Heating oil

  $ (1   $ 8       4       million gallons      
January 2018
- February 2018
 
 

Crude oil

    16       48       35       million gallons      
January 2018
- March 2018
 
 

Gasoline

    (15     9       40       million gallons      
January 2018
- February 2018
 
 

Naphtha

    2       57       100       million kilograms       January 2018  

Swaps designated as cash-flow hedges:

         

Ethane

    (8     102       375       million gallons      
January 2018 -
December 2019
 
 
 

 

 

   

 

 

       
  $ (6   $ 224        
 

 

 

   

 

 

       
    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
 
 

Naptha

    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        
 

 

 

   

 

 

       

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

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

Using sensitivity analysis and hypothetical changes in market prices ranging from 9% to 13%, which represent a three-month volatility range of the underlying products noted in the table above, the effect on our pretax income would be approximately $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 many countries throughout the world and, as a result, are exposed to changes in foreign currency exchange rates.

 

58


Table of Contents

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 in stockholders’ equity resulting from foreign currency fluctuation associated with our net investments in foreign operations. 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 are shown in the table below:

 

December 31, 2017

Net Investment Hedges

  

Notional Amount

  

10% Variance on

Foreign Currency Rate

  

Impact on Other
Comprehensive Loss

Basis Swaps

   €742 million    euro/U.S. dollar rate    $91 million
      EURIBOR and LIBOR rates    Less than $1 million

Guaranteed Euro Notes Due 2022

   €750 million    euro/U.S. dollar rate    $90 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, 2017, 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 approximately $2 million.

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

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

We have entered into $2,300 million of non-cancellable cross-currency swaps, which we designated as foreign currency cash flow hedges, to reduce the variability in the functional currency equivalent cash flows of certain foreign currency denominated intercompany notes. At December 31, 2017, these foreign currency contracts have maturity dates ranging from 2021 to 2027 and their fair value was a net liability of $4 million. A 10% fluctuation compared to the U.S. dollar would have had a resulting additional impact to Other comprehensive income (loss) of approximately $265 million.

Other income, net in the Consolidated Statements of Income reflected losses of $1 million, $4 million and $7 million for 2017, 2016 and 2015, 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

 

59


Table of Contents

assets and liabilities. At December 31, 2017, these foreign currency contracts, which will mature in January 2018, had an aggregated notional amount of $1,014 million and the fair value was a net liability of $11 million. A 10% fluctuation compared to the U.S. dollar would have had a resulting additional impact to earnings of approximately $10 million.

Interest Rate Risk

Interest rate risk management is viewed as a trade-off between cost and risk. The cost of interest is generally lower for short-term debt and higher for long-term debt, and lower for floating rate debt and higher for fixed rate debt. However, the risk associated with interest rates is inversely related to the cost, with short-term debt carrying a higher refinancing risk and floating rate debt having higher interest rate volatility. Our interest rate risk management strategy attempts to optimize this cost/risk/reward tradeoff.

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. To minimize earnings at risk, we target to maintain floating rate debt equal to our cash and cash equivalents, marketable securities and tri-party repurchase agreements, as those assets are invested in floating rate instruments. As part of our interest rate risk management strategy we also enter into interest rate swaps.

Pre-issuance interest rate—A pre-issuance interest rate strategy is utilized to mitigate the risk that benchmark interest rates (i.e. U.S. Treasury, mid-swaps, etc.) will increase between the time a decision has been made to issue debt and when the actual debt offering transpires. In March 2015 we entered into forward-starting interest rate swaps to mitigate the risk of adverse changes in the benchmark interest rates on the anticipated refinancing of our senior notes due 2019. These interest rate swaps will be terminated upon debt issuance. At December 31, 2017, the total notional amount of these interest rate contracts designated as cash flow hedges was $1,000 million and its fair value was a net liability of $41 million. We estimate that a 10% change in market interest rates as of December 31, 2017 would change the fair value of our forward-starting interest rate swap outstanding and would have had a resulting impact on Other comprehensive income (loss) of approximately $47 million.

Fixed-rate debt—We entered into interest rate swaps as part of our interest rate risk management strategy. At December 31, 2017, the total notional amount of interest rate swaps designated as fair value hedges, which have maturity dates ranging from 2019 to 2027, was $3,000 million and their fair value was a net liability of $1 million.

At December 31, 2017, after giving consideration to the $3,000 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, 2017 would change the fair value of our interest rate swaps outstanding and would have had a resulting impact on our pretax income of approximately $29 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 our Commercial Paper Program. At December 31, 2017, there were no outstanding borrowings under our Senior Revolving Credit Facility, U.S. Receivables Securitization facility or our Commercial Paper Program. We estimate that a 10% change in interest rates would have had less than a $1 million impact on earnings based on our average variable-rate debt outstanding per year.

 

60


Table of Contents
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  

Report of Independent Registered Public Accounting Firm

     63  

Consolidated Financial Statements:

  

Consolidated Statements of Income

     65  

Consolidated Statements of Comprehensive Income

     66  

Consolidated Balance Sheets

     67  

Consolidated Statements of Cash Flows

     69  

Consolidated Statements of Stockholders’ Equity

     71  

Notes to the Consolidated Financial Statements

     72  

 

61


Table of Contents

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, 2017 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, 2017.

The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

62


Table of Contents

Report of Independent Registered Public Accounting Firm

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

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of LyondellBasell Industries N.V. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 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, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated 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 the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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.

 

63


Table of Contents

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (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 22, 2018

We have served as the Company’s auditor since 2008.

 

64


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF INCOME

 

     Year Ended December 31,  

Millions of dollars, except earnings per share

   2017     2016     2015  

Sales and other operating revenues:

      

Trade

   $ 33,705     $ 28,454     $ 31,930  

Related parties

     779       729       805  
  

 

 

   

 

 

   

 

 

 
     34,484       29,183       32,735  

Operating costs and expenses:

      

Cost of sales

     28,059       23,191       25,683  

Selling, general and administrative expenses

     859       833       828  

Research and development expenses

     106       99       102  
  

 

 

   

 

 

   

 

 

 
     29,024       24,123       26,613  

Operating income

     5,460       5,060       6,122  

Interest expense

     (491     (322     (310

Interest income

     24       17       33  

Other income, net

     179       111       25  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before equity investments and income taxes

     5,172       4,866       5,870  

Income from equity investments

     321       367       339  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     5,493       5,233       6,209  

Provision for income taxes

     598       1,386       1,730  
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     4,895       3,847       4,479  

Loss from discontinued operations, net of tax

     (18     (10     (5
  

 

 

   

 

 

   

 

 

 

Net income

     4,877       3,837       4,474  

Net (income) loss attributable to non-controlling interests

     2       (1     2  
  

 

 

   

 

 

   

 

 

 

Net income attributable to the Company shareholders

   $ 4,879     $ 3,836     $ 4,476  
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Net income (loss) attributable to the Company shareholders —

      

Basic:

      

Continuing operations

   $ 12.28     $ 9.17     $ 9.63  

Discontinued operations

     (0.05     (0.02     (0.01
  

 

 

   

 

 

   

 

 

 
   $ 12.23     $ 9.15     $ 9.62  
  

 

 

   

 

 

   

 

 

 

Diluted:

      

Continuing operations

   $ 12.28     $ 9.15     $ 9.60  

Discontinued operations

     (0.05     (0.02     (0.01
  

 

 

   

 

 

   

 

 

 
   $ 12.23     $ 9.13     $ 9.59  
  

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

65


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Year Ended December 31,  

Millions of dollars

   2017     2016     2015  

Net income

   $ 4,877     $ 3,837     $ 4,474  

Other comprehensive income (loss), net of tax—

      

Financial derivatives

     (45     4       1  

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

     (3     6       (5

Unrealized gains on available-for-sale securities held by equity investees

     19       —         —    

Defined pension and other postretirement benefit plans

     77       (70     21  

Foreign currency translations

     178       (13     (429
  

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     226       (73     (412
  

 

 

   

 

 

   

 

 

 

Comprehensive income

     5,103       3,764       4,062  

Comprehensive (income) loss attributable to non-controlling interests

     2       (1     2  
  

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to the Company shareholders

   $ 5,105     $ 3,763     $ 4,064  
  

 

 

   

 

 

   

 

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

66


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

     December 31,  

Millions of dollars

   2017      2016  

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 1,523      $ 875  

Restricted cash

     5        3  

Short-term investments

     1,307        1,147  

Accounts receivable:

     

Trade, net

     3,359        2,716  

Related parties

     180        126  

Inventories

     4,217        3,809  

Prepaid expenses and other current assets

     1,147        923  
  

 

 

    

 

 

 

Total current assets

     11,738        9,599  

Property, plant and equipment, net

     10,997        10,137  

Investments and long-term receivables:

     

Investment in PO joint ventures

     420        415  

Equity investments

     1,635        1,575  

Other investments and long-term receivables

     17        20  

Goodwill

     570        528  

Intangible assets, net

     568        550  

Other assets

     261        618  
  

 

 

    

 

 

 

Total assets

   $ 26,206      $ 23,442  
  

 

 

    

 

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

67


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

     December 31,  

Millions of dollars, except shares and par value data

   2017     2016  

LIABILITIES AND EQUITY

 

Current liabilities:

    

Current maturities of long-term debt

   $ 2     $ 2  

Short-term debt

     68       594  

Accounts payable:

    

Trade

     2,258       2,028  

Related parties

     637       501  

Accrued liabilities

     1,812       1,415  
  

 

 

   

 

 

 

Total current liabilities

     4,777       4,540  

Long-term debt

     8,549       8,385  

Other liabilities

     2,275       2,113  

Deferred income taxes

     1,655       2,331  

Commitments and contingencies

    

Stockholders’ equity:

    

Ordinary shares, €0.04 par value, 1,275 million shares authorized, 394,512,054 and 404,046,331 shares outstanding, respectively

     31       31  

Additional paid-in capital

     10,206       10,191  

Retained earnings

     15,746       12,282  

Accumulated other comprehensive loss

     (1,285     (1,511

Treasury stock, at cost, 183,928,109 and 174,389,139 ordinary shares, respectively

     (15,749     (14,945
  

 

 

   

 

 

 

Total Company share of stockholders’ equity

     8,949       6,048  

Non-controlling interests

     1       25  
  

 

 

   

 

 

 

Total equity

     8,950       6,073  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 26,206     $ 23,442  
  

 

 

   

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

68


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  

Millions of dollars

   2017     2016     2015  

Cash flows from operating activities:

 

Net income

   $ 4,877     $ 3,837     $ 4,474  

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

      

Depreciation and amortization

     1,174       1,064       1,047  

Amortization of debt-related costs

     15       16       16  

Charges related to repayment of debt

     49       —         —    

Share-based compensation

     55       38       53  

Inventory valuation adjustment

     —         29       548  

Equity investments—

      

Equity income

     (321     (367     (339

Distribution of earnings, net of tax

     309       385       285  

Deferred income taxes

     (587     357       181  

Gain on sales of business and equity method investments

     (108     (84     —    

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

      

Accounts receivable

     (521     (383     780  

Inventories

     (237     123       (240

Accounts payable

     165       383       (786

Other, net

     336       208       (177
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     5,206       5,606       5,842  
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Expenditures for property, plant and equipment

     (1,547     (2,243     (1,440

Payments for repurchase agreements

     (512     (674     (397

Proceeds from repurchase agreements

     381       685       350  

Purchases of available-for-sale securities

     (653     (688     (2,073

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

     499       674       2,489  

Purchases of held-to-maturity securities

     —         (76     —    

Proceeds from maturities of held-to-maturity securities

     75       —         —    

Purchases of business, equity method investment and non-controlling interest

     (21     (65     —    

Net proceeds from sales of business and equity method investments

     155       209       —    

Proceeds from settlement of net investment hedges

     609       1,295       —    

Payments for settlement of net investment hedges

     (658     (1,356     —    

Other, net

     (84     (62     25  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,756     (2,301     (1,046
  

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

69


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued

 

     Year Ended December 31,  

Millions of dollars

   2017     2016     2015  

Cash flows from financing activities:

      

Repurchases of Company ordinary shares

     (866     (2,938     (4,656

Dividends paid

     (1,415     (1,395     (1,410

Issuance of long-term debt

     990       812       984  

Repayment of long-term debt

     (1,000     —         —    

Debt extinguishment costs

     (65     —         —    

Net (repayments of) proceeds from commercial paper

     (493     177       61  

Payments of debt issuance costs

     (8     (5     (16

Other, net

     (2     —         187  
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (2,859     (3,349     (4,850
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     59       (9     (48
  

 

 

   

 

 

   

 

 

 

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

     650       (53     (102

Cash and cash equivalents and restricted cash at beginning of period

     878       931       1,033  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents and restricted cash at end of period

   $ 1,528     $ 878     $ 931  
  

 

 

   

 

 

   

 

 

 

Supplemental Cash Flow Information:

      

Interest paid, net of capitalized interest

   $ 333     $ 313     $ 299  
  

 

 

   

 

 

   

 

 

 

Net income taxes paid

   $ 1,044     $ 741     $ 1,417  
  

 

 

   

 

 

   

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

70


Table of Contents

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, 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  

Net income (loss)

    —         —         —         4,879       —         4,879       (2

Other comprehensive income

    —         —         —         —         226       226       —    

Share-based compensation

    —         41       14       —         —         55       —    

Dividends ($3.55 per share)

    —         —         —         (1,415     —         (1,415     —    

Repurchases of Company ordinary shares

    —         (845     —         —         —         (845     —    

Purchase of non-controlling interest

    —         —         1       —         —         1       (22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2017

  $ 31     $ (15,749   $ 10,206     $ 15,746     $ (1,285   $ 8,949     $ 1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to the Consolidated Financial Statements.

 

71


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

         Page  
1.  

Description of Company and Operations

     73  
2.  

Summary of Significant Accounting Policies

     73  
3  

Discontinued Operations and Dispositions

     85  
4.  

Related Party Transactions

     86  
5.  

Accounts Receivable

     86  
6.  

Inventories

     87  
7.  

Property, Plant and Equipment, Goodwill and Intangible Assets

     87  
8.  

Investment in PO Joint Ventures

     89  
9.  

Equity Investments

     90  
10.  

Prepaid Expenses, Other Current Assets and Other Assets

     92  
11.  

Accrued Liabilities

     93  
12.  

Debt

     94  
13.  

Lease Commitments

     99  
14.  

Financial Instruments and Fair Value Measurements

     99  
15.  

Pension and Other Postretirement Benefits

     106  
16.  

Incentive and Share-Based Compensation

     119  
17.  

Income Taxes

     123  
18.  

Commitments and Contingencies

     128  
19.  

Stockholders’ Equity

     130  
20.  

Per Share Data

     134  
21.  

Segment and Related Information

     135  
22.  

Unaudited Quarterly Results

     138  
23.  

Subsequent Events

     139  

 

72


Table of Contents

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

 

73


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the investment is written down to fair value, establishing a new cost basis.

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.

Loans Receivable

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

Inventories

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

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 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.

 

74


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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.

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 quantitative test is required.

In 2017 and 2016, 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 goodwill impairment test was not required and no goodwill impairment was recognized.

 

75


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Intangible Assets

Intangible Assets—Intangible assets 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. 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.

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.

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

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

Foreign Currency Translation

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

 

76


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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 recognizes compensation expense in the financial statements for share-based compensation awards based upon the grant date fair value over the vesting period.

Contingent share awards are recognized ratably over the vesting period as a liability and re-measured, at fair value, at the balance sheet date, see Note 16 to the Consolidated Financial Statements.

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.

Financial Instruments and Hedging Activities

Pursuant to our risk management policies, we selectively enter into derivative transactions to manage market risk volatility associated with changes in commodity pricing, currency exchange rates and interest rates. Derivatives used for this purpose are generally designated as net investment hedges, cash flow hedges or fair value hedges. Derivative instruments are recorded at fair value on the balance sheet. Gains and losses related to changes in the

 

77


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

fair value of derivative instruments not designated as hedges are recorded in earnings. For derivatives designated as net investment hedges and cash flow hedges, the effective portion of the gains and losses is recorded in Other comprehensive income (loss) and the ineffective portion is recorded in earnings. For derivatives designated as net investment hedges, gains or losses resulting from its settlement are reflected in foreign currency translations adjustments in Other comprehensive income (loss). For derivatives that have been designated as fair value hedges, the gains and losses of the derivatives and hedged instruments are recorded in earnings.

Net Investment Hedges—We enter into foreign currency contracts and foreign currency denominated debt to reduce the volatility in stockholders’ equity resulting from changes in currency exchange rates of our foreign subsidiaries with respect to the U.S. dollar. Our foreign currency derivatives currently consist of cross-currency basis swap contracts and forward exchange contracts.

For our basis swaps, we use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis at least on a quarterly basis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the forward method to measure ineffectiveness.

For our forward exchange contracts and our euro denominated notes payable, we use the critical terms match to assess both prospective and retrospective hedge effectiveness by comparing the spot rate change in the hedging instrument and the spot rate change in the designated net investment. We use the forward method to measure ineffectiveness.

Cash flows related to our foreign currency contracts designated as net investment hedges are reported in Cash flows from investing activities and related interest payments are reported in Cash flows from operating activities in the Consolidated Statement of Cash Flows. Cash flows related to our foreign currency denominated debt designated as net investment hedges are reported in Cash flows from financing activities and related interest payments are reported in Cash flows from operating activities in the Consolidated Statement of Cash Flows.

Cash Flow Hedges—Our cash flow hedges include cross currency swaps, forward starting interest rate swaps and commodity swaps.

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

We enter into forward-starting interest rate contracts to mitigate the risk of adverse changes in benchmark interest rates on the anticipated refinancing of our senior notes due 2019.

We also have commodity swaps to manage the volatility of the commodity price related to anticipated purchases of raw materials. We enter into over-the-counter commodity swaps with one or more counterparties whereby we pay a predetermined fixed price and receive a price based on the average monthly rate of a specified index for the specified nominated volumes.

We use the long-haul method to assess hedge effectiveness of these cash flow hedges using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis at least on a quarterly basis. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.

 

78


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Fair Value Hedges—We use interest rate swaps as part of our current interest rate risk management strategy to achieve a desired proportion of variable versus fixed rate debt. Under these arrangements, we exchange fixed-rate for floating-rate interest payments to effectively convert our fixed-rate debt to floating-rate debt.

These payments are classified as Other, net, in the Cash flows from operating activities section of the Consolidated Statements of Cash Flows. We use the long-haul method to assess hedge effectiveness using a regression analysis approach. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method to measure ineffectiveness.

We evaluate the effectiveness of the hedging relationship at least on quarterly basis and calculate the changes in the fair value of the derivatives and the underlying hedged items separately.

Fair Value Measurements

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—Quoted prices for identical instruments in active markets.

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.

Level 3—Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.

Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

Changes in fair value levels—Management reviews the disclosures regarding fair value measurements at least quarterly. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified as Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is reclassified as Level 3.

We use the following inputs and valuation techniques to estimate the fair value of our financial instruments disclosed in Note 14:

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

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

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

 

79


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

Commodity and Embedded Derivatives—The fair values of our commodity derivatives classified as Level 1 and embedded derivatives are measured using closing market prices of public exchanges and from third-party broker quotes and pricing providers.

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

Forward Exchange Contracts—The fair value of our forward exchange contracts is based on forward market rates.

Available-for-Sale Securities—The fair value of our available-for-sale securities is calculated using observable market data for similar securities and broker quotes from recognized purveyors of market data or the net asset value for limited partnership investments provided by the fund administrator. Our limited partnership investments include investments in, among other things, equities and equity related securities, debt securities, credit instruments, global interest rate products, currencies, commodities, futures, options, warrants and swaps. These investments, which include both long and short positions, may be redeemed at least monthly with advance notice ranging up to ninety days.

Loans Receivable—The fair value of our tri-party repurchase agreements are based on discounted cash flows, which consider prevailing market rates for the respective instrument maturity in addition to corroborative support from the minimum underlying collateral requirements.

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

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

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

We use the following inputs and valuation techniques to estimate the fair value of our pension assets disclosed in Note 15:

Common and preferred stock—Valued at the closing price reported on the market on which the individual securities are traded.

 

80


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Fixed income securities—Certain securities that are not traded on an exchange are valued at the closing price reported by pricing services. Other securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.

Commingled funds—Valued based upon the unit values of such collective trust funds held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund derived from inputs principally from, or corroborated by, observable market data by correlation or other means.

Real estate—Valued on the basis of a discounted cash flow approach, which includes the future rental receipts, expenses, and residual values as the highest and best use of the real estate from a market participant view as rental property.

Hedge funds—Valued based upon the unit values of such alternative investments held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund.

Private equity—Valued based upon the unit values of such alternative investments held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund. Certain securities held in the fund are valued at the closing price reported on the exchange or other established quotation service for over-the-counter securities. Other assets held in the fund are valued based on the most recent financial statements prepared by the fund manager.

Convertible securities—Valued at the quoted prices for similar assets or liabilities in active markets.

U.S. government securities—Certain securities are valued at the closing price reported on the active market on which the individual securities are traded. Other securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.

Cash and cash equivalents—Valued at the quoted prices for similar assets or liabilities in active markets.

Non-U.S. insurance arrangements—Valued based upon the estimated cash surrender value of the underlying insurance contract, which is derived from an actuarial determination of the discounted benefits cash flows.

Employee Benefits

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

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

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

 

81


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

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

Intangibles-Goodwill and Other—In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles—Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be measured as 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. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The early adoption of this amendment in the first quarter of 2017 did not have a material impact on our Consolidated Financial Statements.

Inventories—In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this new guidance, entities that measure inventory using any method other than last-in, first-out or the retail inventory method will be required to measure inventory at the lower of cost and net realizable value. The amendments in this ASU, which should be applied prospectively, were effective for annual and interim periods beginning after December 15, 2016. The adoption of this amendment in the first quarter of 2017 did not have a material impact on our Consolidated Financial Statements.

Compensation—In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU were effective for public entities for annual and interim periods beginning after December 15, 2016. Adoption of the amendments in this guidance in the first quarter of 2017 did not have a material impact 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 annual and interim periods beginning after December 15, 2017, with early adoption permitted. Early adoption of the

 

82


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

amendments in this guidance in the second quarter of 2017 resulted in a reclassification of cash flows related to debt extinguishment costs incurred in March 2017 of $65 million from operating to financing activity cash flows. Other aspects of the amendment did not have a material impact on our Consolidated Statements of Cash Flows.

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

Compensation—Stock Compensation—In May 2017, the FASB issued ASU 2017-09, Stock Compensation: Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Compensation–Stock Compensation. Early adoption of this amendment in the third quarter of 2017 did not have a material impact on our Consolidated Financial Statements.

Accounting Guidance Issued But Not Adopted as of December 31, 2017

Revenue Recognition—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition requirements in Accounting Standard Codification (“ASC”) 606, Revenue Recognition. Under this guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This ASU also requires enhanced disclosures. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the original effective date for one year to annual and interim periods beginning after December 15, 2017. We will adopt this standard as of January 1, 2018 following the modified retrospective method.

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 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 accounting for 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. We have completed any required changes to our systems and processes, including updating our internal controls. We do not expect