UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
For the quarterly period ended March 31, 2017
or
For the transition period from to
Commission file number: 001-34726
LYONDELLBASELL INDUSTRIES N.V.
(Exact name of registrant as specified in its charter)
(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
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
The registrant had 402,805,018 ordinary shares, €0.04 par value, outstanding at April 25, 2017 (excluding 175,635,060 treasury shares).
TABLE OF CONTENTS
Part I – Financial Information
Item 1. Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statement of Stockholders’ Equity
Notes to the Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II – Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
Signature
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
Millions of dollars, except earnings per share
Sales and other operating revenues:
Trade
Related parties
Operating costs and expenses:
Cost of sales
Selling, general and administrative expenses
Research and development expenses
Operating income
Interest expense
Interest income
Other income, net
Income from continuing operations before equity investments and income taxes
Income from equity investments
Income from continuing operations before income taxes
Provision for income taxes
Income from continuing operations
Loss from discontinued operations, net of tax
Net income
Net income attributable to non-controllinginterests
Net income attributable to the Company shareholders
Earnings per share:
Net income (loss) attributable to the Company shareholders —
Basic:
Continuing operations
Discontinued operations
Diluted:
See Notes to the Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions of dollars
Other comprehensive income (loss), net of tax –
Financial derivatives:
Loss on cash flow hedges arising during the period
Reclassification adjustment included in net income
Income tax expense (benefit)
Financial derivatives, net of tax
Unrealized loss onavailable-for-sale securities:
Unrealized holding loss arising during the period
Income tax benefit
Unrealized loss onavailable-for-sale securities, net of tax
Unrealized gain onavailable-for-sale securities held by equity investees:
Unrealized holding gain arising during the period
Income tax expense
Unrealized gain onavailable-for-sale securities held by equity investees, net of tax
Defined pension and other postretirement benefit plans:
Reclassification adjustment for net actuarial loss included in net income
Defined pension and other postretirement benefit plans, net of tax
Foreign currency translation adjustments:
Unrealized gain arising during the period
Foreign currency translation adjustments, net of tax
Total other comprehensive income
Comprehensive income
Comprehensive income attributable to non-controllinginterests
Comprehensive income attributable to the Company shareholders
2
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts receivable:
Trade, net
Inventories
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment at cost
Less: Accumulated depreciation
Property, plant and equipment, net
Investments and long-term receivables:
Investment in PO joint ventures
Equity investments
Other investments and long-term receivables
Goodwill
Intangible assets, net
Other assets
Total assets
3
Millions of dollars, except shares and par value data
LIABILITIES AND EQUITY
Current liabilities:
Current maturities of long-term debt
Short-term debt
Accounts payable:
Accrued liabilities
Total current liabilities
Long-term debt
Other liabilities
Deferred income taxes
Commitments and contingencies
Stockholders’ equity:
Ordinary shares, €0.04 par value, 1,275 million shares authorized, 402,781,384 and 404,046,331 shares outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock, at cost, 175,658,694 and 174,389,139 ordinary shares, respectively
Total Company share of stockholders’ equity
Non-controlling interests
Total equity
Total liabilities and equity
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of debt-related costs
Charges related to payment of debt
Inventory valuation adjustments
Equity investments –
Equity income
Distributions of earnings, net of tax
Gain on sale of business
Gain on sale of assets
Changes in assets and liabilities that provided (used) cash:
Accounts receivable
Accounts payable
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Expenditures for property, plant and equipment
Proceeds from disposal of assets
Payments for repurchase agreements
Proceeds from repurchase agreements
Purchases ofavailable-for-sale securities
Proceeds from sales and maturities of available-for-sale securities
Proceeds from sales and maturities of held-to-maturity securities
Net proceeds from sale of business
Proceeds from settlement of net investment hedges
Payments for settlement of net investment hedges
Change in restricted cash
Net cash used in investing activities
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Cash flows from financing activities:
Repurchases of Company ordinary shares
Dividends paid
Issuance of long-term debt
Repayment of long-term debt
Net proceeds from commercial paper
Payments of debt issuance costs
Net cash used in financing activities
Effect of exchange rate changes on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
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CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Ordinary Shares
Balance, December 31, 2016
Other comprehensive income
Share-based compensation
Dividends ($0.85 per share)
Balance, March 31, 2017
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1.
Basis of Presentation
2.
Accounting and Reporting Changes
3.
Accounts Receivable
4.
5.
Debt
6.
Financial Instruments
7.
Fair Value Measurement
8.
Pension and Other Postretirement Benefits
9.
Income Taxes
10.
Commitments and Contingencies
11.
Stockholders’ Equity
12.
Per Share Data
13.
Segment and Related Information
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
LyondellBasell Industries N.V., together with its consolidated subsidiaries (collectively “LyondellBasell N.V.”), is a worldwide manufacturer of chemicals and polymers, a refiner of crude oil, a significant producer of gasoline blending components and a developer and licensor of technologies for production of polymers. Unless otherwise indicated, the “Company,” “we,” “us,” “our” or similar words are used to refer to LyondellBasell N.V.
The accompanying Consolidated Financial Statements are unaudited and have been prepared from the books and records of LyondellBasell N.V. in accordance with the instructions to Form 10-Q and Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for the entire year. These Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Recently Adopted Guidance
Intangibles-Goodwill and Other—In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASC”) 2017-04 Simplifying the Test for Goodwill Impairment to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The early adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
Inventories—In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this new guidance, entities that measure inventory using any method other than last-in,first-out or the retail inventory method will be required to measure inventory at the lower of cost and net realizable value. The amendments in this ASU, which should be applied prospectively, are effective for annual and interim periods beginning after December 15, 2016. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.
Compensation—In March 2016, the FASB issued ASU 2016-09, Compensation–Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2016. Various transition methods are prescribed depending on the aspect of accounting impacted by the amended guidance. Adoption of the amendments in this guidance in the first quarter of 2017 did not have a material impact on our Consolidated Statement of Cash Flows.
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Accounting Guidance Issued But Not Adopted as of March 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 ASC 606, Revenue Recognition. Under this guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This ASU also requires enhanced disclosures. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the original effective date for one year to annual and interim periods beginning after December 15, 2017. Retrospective and modified retrospective application is allowed.
Amendments to Revenue Recognition—In 2016 the FASB issued several amendments to Topic 606, Revenue from Contracts with Customers. ASU 2016-08, Principal versus Agent Considerations, contains amendments that clarify the implementation guidance on principal versus agent considerations. ASU 2016-10, Identifying Performance Obligations and Licensing clarifies the guidance in the new revenue standard on identifying performance obligations and accounting for licenses of intellectual property. The FASB also issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which further clarifies the new revenue guidance primarily in the areas of collectability, noncash consideration, presentation of sales tax, and transition. The FASB also issued ASU 2016-20 Technical Corrections and Improvements to Topic 606, which provides numerous improvements related to the Topic 606. All amendments are effective with the same date as ASU 2014-09.
Management is currently assessing the effects of applying the new standard and has preliminarily determined that there will not be a material impact on our Consolidated Financial Statements. We expect to use the modified retrospective method.
Financial Instruments—In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance in this ASU includes a requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Prospective application of this ASU is required for public entities for annual and interim periods beginning on or after December 15, 2017. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes the existing guidance for lease accounting in ASC 840, Leases. Under the new guidance, for leases with a term longer than 12 months a lessee should recognize a liability for lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. Topic 842 retains a classification distinction between finance leases and operating leases, with the classification affecting the pattern of expense recognition in the income statement. This ASU also requires enhanced disclosures. A modified retrospective transition approach is required for annual and interim periods beginning on or after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements via an extensive review of numerous existing lease contracts and other purchase obligations that contain embedded lease features, both classified as operating leases under the existing guidance.
Financial Instruments—In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This amendment requires financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, resulting in the use of a current expected credit loss (“CECL”) model when measuring an impairment of financial instruments. Credit losses related to available-for-sale securities should be recorded in the consolidated income statement through an allowance for credit losses. Estimated credit losses utilizing the CECL model are based on reasonable use of historical experience,
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current conditions and forecasts that affect the collectability of reported financial assets. This ASU also modifies the impairment model for available-for-sale debt securities by eliminating the concept of “other than temporary” as well as providing a simplified accounting model for purchased financial assets with credit deterioration since their origination. The guidance will be effective for public entities for annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact of the amendments in this guidance on our Consolidated Financial Statements.
Statement of Cash Flows—In August 2016, the FASB issued ASU2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The updated accounting requirement is intended to reduce diversity in practice in the classification of certain transactions in the statement of cash flows. Such transactions include, but are not limited to, debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination and distributions received from equity method of investments. The amendments in this ASU are effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Income Taxes—In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory. The ASU is aimed at reducing complexity in accounting standards. Under current GAAP, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The new guidance eliminates the exception for all intra-entity sales of assets other than inventory, and a reporting entity would recognize tax expense from the sale of assets in the seller’s tax jurisdiction when the transfer occurs, even though the pre-tax effects of that transaction are eliminated in consolidation. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new guidance will be effective for public entities for annual periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
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 in their cash and cash-equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. The ASU will become effective for public entities for annual periods beginning after December 15, 2017. The adoption of this amendment is not expected to have a material impact on our Consolidated Financial Statements.
Business Combinations—In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether a transaction should be accounted for as an acquisition (or disposal) of an asset or a business. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets—In February 2017, the FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecogntion Guidance and Accounting for Partial Sales of Nonfinancial Assets. The guidance provides clarification about the term in substance nonfinancial asset; other aspects of the scope of Subtopic 610-20 Other Income which were confusing and complex; and how an entity should account for partial sales of nonfinancial assets once the amendments in Update 2014-09 become effective. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
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Compensation—Retirement Benefits—In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The guidance will require changes in presentation of current service cost and other components of net benefit cost. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2017. We are currently assessing the impact of this new guidance on our Consolidated Financial Statements.
Receivables—Nonrefundable Fees and Other Costs—In March 2017, the FASB issued ASU 2017-08, Premium Amortization on Purchased Callable Debt Securities. This new guidance requires the premium on callable debt securities to be amortized to the earliest call date. Under current U.S. GAAP, premiums on callable debt securities are generally amortized over the contractual life of the security. The amendments will be effective for public entities for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of this new guidance to have a material impact on our Consolidated Financial Statements.
Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $15 million and $16 million at March 31, 2017 and December 31, 2016, respectively.
Inventories consisted of the following components:
Finished goods
Work-in-process
Raw materials and supplies
Total inventories
For information related to lower of cost or market inventory valuation adjustments recognized during the three months ended March 31, 2016, see Note 13.
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Long-term loans, notes and other long-term debt consisted of the following:
Senior Notes due 2019, $2,000 million, 5.0% ($5 million of debt issuance cost)
Senior Notes due 2021, $1,000 million, 6.0% ($8 million of debt issuance cost)
Senior Notes due 2024, $1,000 million, 5.75% ($9 million of debt issuance cost)
Senior Notes due 2055, $1,000 million, 4.625% ($16 million of discount; $12 million of debt issuance cost)
Guaranteed Notes due 2044, $1,000 million, 4.875% ($11 million of discount; $10 million of debt issuance cost)
Guaranteed Notes due 2043, $750 million, 5.25% ($22 million of discount; $7 million of debt issuance cost)
Guaranteed Notes due 2023, $750 million, 4.0% ($7 million of discount; $4 million of debt issuance cost)
Guaranteed Notes due 2027, $300 million, 8.1%
Guaranteed Notes due 2022, €750 million, 1.875% ($3 million of discount; $4 million of debt issuance cost)
Guaranteed Notes due 2027, $1,000 million, 3.5% ($10 million of discount; $8 million of debt issuance cost)
Other
Total
Less current maturities
Our 5% senior notes due 2019 include losses of $36 million and $19 million for the three months ended March 31, 2017 and 2016, respectively, and gains of $42 million for the year ended December 31, 2016 for fair value adjustments related to the fair value hedge accounting treatment of our fixed-for-floating interest rate swap strategy. Since inception in 2014, we have recognized net gains of $48 million related to these adjustments. Our 6% senior notes due 2021 include $5 million of fair value gains since inception in 2016, which includes a $2 million gain for the three months ended March 31, 2017. Our 3.5% guaranteed notes due 2027 also include a $1 million fair value loss for the three months ended March 31, 2017. These fair value adjustments are recognized in Interest expense in the Consolidated Statements of Income.
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Short-term loans, notes, and other short-term debt consisted of the following:
$2,500 million Senior Revolving Credit Facility
$900 million U.S. Receivables Securitization Facility
Commercial paper
Financial payables to equity investees
Precious metal financings
Total short-term debt
Long-Term Debt
Guaranteed Notes due 2027—In February 2017, LYB International Finance II B.V. (“LYB Finance II”), a direct, 100% owned finance subsidiary of LyondellBasell Industries N.V., as defined in Rule 3-10(b) of Regulation S-X, issued $1,000 million of 3.5% guaranteed notes due 2027 at a discounted price of 98.968%.
These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance II’s existing and future unsecured indebtedness and to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness. There are no significant restrictions that would impede LyondellBasell N.V., as guarantor, from obtaining funds by dividend or loan from its subsidiaries.
The indenture governing these notes contains limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by significant property or by capital stock of subsidiaries that own significant property, enter into certain sale and lease-back transactions with respect to any significant property or enter into consolidations, mergers or sales of all or substantially all of our assets.
The notes may be redeemed before the date that is three months prior to the scheduled maturity date at a redemption price equal to the greater of 100% of the principal amount of the notes redeemed and the sum of the present values of the remaining scheduled payments of principal and interest (discounted at the applicable Treasury Yield plus 20 basis points) on the notes to be redeemed. The notes may also be redeemed on or after the date that is three months prior to the scheduled maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest.
Senior Notes due 2019—In March 2017, we redeemed $1,000 million aggregate principal amount of our outstanding 5% senior notes due 2019, and paid $65 million in make-whole premiums. In conjunction with the redemption of these notes, we recognized non-cash charges of $4 million for the write-off of unamortized debt issuance costs and $44 million for the write-off of the cumulative fair value hedge accounting adjustment related to the redeemed notes.
Short-Term Debt
Senior Revolving Credit Facility—Our $2,500 million revolving credit facility, which expires in June 2021, may be used for dollar and euro denominated borrowings, has a $500 million sublimit for dollar and euro denominated letters of credit, a $1,000 million uncommitted accordion feature, and supports our commercial paper program. The aggregate balance of outstanding borrowings, including amounts outstanding under our commercial paper program, and letters of credit under this facility may not exceed $2,500 million at any given time. Borrowings under the facility bear interest at a Base Rate or LIBOR, plus an applicable margin. Additional fees are incurred for the average daily unused commitments.
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The facility contains customary covenants and warranties, including specified restrictions on indebtedness and liens. In addition, we are required to maintain a leverage ratio at the end of every fiscal quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. We are in compliance with these covenants as of March 31, 2017. At March 31, 2017, we had $550 million of outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under this facility.
Commercial Paper Program—We have a commercial paper program under which we may issue up to $2,500 million of privately placed, unsecured, short-term promissory notes (“commercial paper”) under this program, which is backed by our $2,500 million Senior Revolving Credit Facility. Proceeds from the issuance of commercial paper may be used for general corporate purposes, including dividends and share repurchases. Interest rates on the commercial paper outstanding at March 31, 2017 are based on the term of the notes and range from 90 to 130 basis points.
U.S. Receivables Securitization Facility—Our $900 million U.S. accounts receivable securitization facility, which expires in 2018, has a purchase limit of $900 million in addition to a $300 million uncommitted accordion feature. This facility provides liquidity through the sale or contribution of trade receivables by certain of our U.S. subsidiaries to a wholly owned, bankruptcy-remote subsidiary on an ongoing basis and without recourse. The bankruptcy-remote subsidiary may then, at its option and subject to a borrowing base of eligible receivables, sell undivided interests in the pool of trade receivables to financial institutions participating in the facility. In the event of liquidation, the bankruptcy-remote subsidiary’s assets will be used to satisfy the claims of its creditors prior to any assets or value in the bankruptcy-remote subsidiary becoming available to us. We are responsible for servicing the receivables. This facility also provides for the issuance of letters of credit up to $200 million. The term of the securitization facility may be extended in accordance with the terms of the agreement. The facility is also subject to customary covenants and warranties, including limits and reserves and the maintenance of specified financial ratios. We are required to maintain a leverage ratio at the end of every fiscal quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. Performance obligations under the facility are guaranteed by the parent company. Additional fees are incurred for the average daily unused commitments.
At March 31, 2017, there were no borrowings or letters of credit under the facility.
Other—At March 31, 2017 and December 31, 2016, our weighted average interest rate on outstanding short-term debt was 1.1% and 0.9%, respectively.
Debt Discount and Issuance Costs
In the three months ended March 31, 2017 and 2016, amortization of debt discounts and debt issuance costs resulted in amortization expense of $8 million and $4 million, respectively, which is included in Interest expense in the Consolidated Statements of Income.
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Cash Concentration—Our cash equivalents are placed in high-quality commercial paper, money market funds, marketable securities with maturities less than three months and time deposits with major international banks and financial institutions.
Market Risks—We are exposed to market risks, such as changes in commodity pricing, currency exchange rates and interest rates. To manage the volatility related to these exposures, we selectively enter into derivative transactions pursuant to our risk management policies. Derivative instruments are recorded at fair value on the balance sheet. Gains and losses related to changes in the fair value of derivative instruments not designated as hedges are recorded in earnings. For derivatives that have been designated as fair value hedges, the gains and losses of the derivatives and hedged instruments are recorded in earnings. For derivatives designated as cash flow and net investment hedges, the effective portion of the gains and losses is recorded in Other comprehensive income (loss). The ineffective portion of cash flow and net investment hedges is recorded in earnings.
Marketable Securities—We invest cash in investment-grade securities for periods generally not exceeding three years. Investments in securities with original maturities of three months or less are classified as Cash and cash equivalents. At March 31, 2017 and December 31, 2016, we had marketable securities classified as Cash and cash equivalents of $120 million and $351 million, respectively.
We also have investments in marketable securities classified as available-for-sale and held-to-maturity. These securities are included in Short-term investments on the Consolidated Balance Sheets. Investments classified as available-for-sale are carried at estimated fair value with unrealized gains and losses recorded as a component of Accumulated other comprehensive income (“AOCI”). Investments classified as held-to-maturity are carried at amortized cost. We periodically review our available-for-sale and held-to-maturity securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the investment is written down to fair value, establishing a new cost basis.
Repurchase Agreements—We invest in tri-party repurchase agreements. Under these agreements, we make cash purchases of securities according to a pre-agreed profile from our counterparties. The counterparties have an obligation to repurchase, and we have an obligation to sell, the same or substantially the same securities at a pre-defined date for a price equal to the purchase price plus interest. These securities, which pursuant to our internal policies, are held by a third-party custodian and must generally have a minimum collateral value of 102%, secure the counterparty’s obligation to repurchase the securities. Depending upon maturity, these tri-party repurchase agreements are treated as short-term loans receivable and are reflected in Prepaid expenses and other current assets or as long-term loans receivable reflected in Other investments and long-term receivables on our Consolidated Balance Sheets. The balance of our investment at March 31, 2017 and December 31, 2016 was $497 million and $369 million, respectively.
Commodity Prices—We are exposed to commodity price volatility related to purchases of natural gas liquids, crude oil and other raw materials and sales of our products. We selectively use over-the counter commodity swaps, options and exchange traded futures contracts with various terms to manage the volatility related to these risks. In addition, we are exposed to volatility on the prices of precious metals to the extent that we have obligations, classified as embedded derivatives, tied to the price of precious metals associated with secured borrowings.
Foreign Currency Rates—We have significant worldwide operations. The functional currencies of our consolidated subsidiaries through which we operate are primarily the U.S. dollar and the euro. We enter into transactions denominated in currencies other than our designated functional currencies. As a result, we are exposed to foreign currency risk on receivables and payables. We maintain risk management control policies intended to monitor foreign currency risk attributable to our outstanding foreign currency balances. These control policies involve the
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centralization of foreign currency exposure management, the offsetting of exposures and the estimating of expected impacts of changes in foreign currency rates on our earnings. We enter into foreign currency forward contracts to reduce the effects of our net currency exchange exposures. At March 31, 2017, foreign currency forward contracts in the notional amount of $81 million, maturing from April 2017 to August 2017, were outstanding.
For forward contracts that economically hedge recognized monetary assets and liabilities in foreign currencies and that are not designated as net investment hedges, hedge accounting is not applied. Changes in the fair value of foreign currency forward contracts, which are reported in the Consolidated Statements of Income, are offset in part by the currency translation results recognized on the assets and liabilities.
Foreign Currency Gain (Loss)—Other income, net, in the Consolidated Statements of Income reflected losses of $5 million and $3 million for the three months ended March 31, 2017 and 2016, respectively.
Basis Swaps—In March 2017, we entered into €617 million of basis swaps to reduce the volatility in stockholders’ equity resulting from changes in currency exchange rates of our foreign subsidiaries with respect to the U.S. dollar. We use the critical terms match to assess both the prospective and retrospective hedge effectiveness of these basis swaps by comparing the spot rate change in the euro notes and the spot rate change in the designated net investment.
We also have €400 million of basis swaps entered into in 2015 to reduce the volatility in stockholders’ equity resulting from changes in currency exchange rates of our foreign subsidiaries with respect to the U.S. dollar. We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis of these basis swap contracts at least on a quarterly basis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the forward method to measure ineffectiveness.
Under the terms of these contracts, which have been designated as net investment hedges, we will make interest payments in euros at 3 Month EURIBOR plus applicable basis and will receive interest in U.S. dollars at 3 Month LIBOR plus applicable basis. Upon the maturities of these contracts, we will pay the principal amount in euros and receive U.S. dollars from our counterparties. The effective portion of the unrealized gains and losses on these basis swap contracts is reported within Foreign currency translation adjustments in Accumulated other comprehensive loss and reclassified to earnings only when realized upon the sale or upon complete or substantially complete liquidation of the investment in the foreign entity. Cash flows from basis swaps are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows.
There was no ineffectiveness recorded during the three months ended March 31, 2017 and 2016 related to these basis swaps.
The following table summarizes the notional and fair value of our basis swaps outstanding:
Assets–
Basis swaps expiring in 2017
Basis swaps expiring in 2018
Liabilities–
Basis swaps expiring in 2027
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Forward Exchange Contracts—In October 2016, we entered into forward exchange contracts with an aggregate notional value of €275 million ($299 million) to mitigate the risk associated with the fluctuations in the Euro to U.S. Dollar exchange rate related to our investments in foreign subsidiaries. There was no ineffectiveness recorded during the three months ended March 31, 2017 related to these forward exchange contracts.
We use the critical terms match to assess both prospective and retrospective hedge effectiveness by comparing the spot rate change in the Euro notes and the spot rate change in the designated net investment. We use the hypothetical derivative method to measure hedge ineffectiveness.
In December 2015, we entered into forward exchange contracts with an aggregate notional value of €750 million ($795 million) to mitigate the risk associated with the fluctuations in the Euro to U.S. dollar exchange rate related to our investments in foreign subsidiaries.
We elected to designate these forward exchange contracts as net investment hedges. The effective portion of the gains or losses was recorded within foreign currency translation adjustments in Accumulated other comprehensive loss. In periods where the hedging relationship was deemed ineffective, changes in the fair value were recorded directly to Other income, net in the Consolidated Statements of Income. Cash flows from these forward exchange contracts are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows.
On March 31, 2016, the forward exchange contracts entered into in December 2015 expired. Upon settlement of these contracts, we paid €750 million ($850 million at the expiry spot rate) to our counterparties and received $795 million from our counterparties. The $55 million difference, which includes a $30 million loss in the first quarter of 2016, is reflected within foreign currency translations adjustments in Accumulated other comprehensive loss. Cash flows from these forward exchange contracts are reported in Cash flows from investing activities in the Consolidated Statement of Cash Flows.
There was no ineffectiveness recorded for this hedging relationship during the three months ended March 31, 2016.
Guaranteed Euro Notes Due 2022—In March 2016, we issued euro denominated notes payable due 2022 (“Euro notes”) with notional amounts totaling €750 million. To mitigate the risk to our investments in foreign subsidiaries associated with fluctuations in the euro to U.S. dollar exchange rate, we designated these Euro notes as a net investment hedge.
The effective portion of the gain or loss is recorded within foreign currency translation adjustments in Accumulated other comprehensive loss and will be reclassified to earnings only when realized upon the sale of or the complete or substantially complete liquidation of the investment in the foreign entity. In periods where the hedging relationship is deemed ineffective, changes in remeasurement of the Euro notes due to changes in the spot exchange rate will be recorded directly to Other income, net in the Consolidated Statements of Income. Cash flows related to our Euro notes are reported in Cash flows from financing activities and related interest payments are reported in Cash flows from operating activities in the Consolidated Statement of Cash Flows.
There was no ineffectiveness recorded for this hedging relationship in each of the three months ended March 31, 2017 and 2016.
Cross-Currency Swaps—We have cross-currency swap contracts that reduce our exposure to the foreign currency exchange risk associated with certain intercompany loans. Under the terms of these contracts, which have been designated as cash flow hedges, we make interest payments in euros and receive interest in U.S. dollars. Upon the maturities of these contracts, we will pay the principal amount of the loans in euros and receive U.S. dollars from our counterparties.
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We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.
The effective portion of the unrealized gains and losses on these cross-currency swap contracts is reported in Accumulated other comprehensive loss and reclassified to earnings over the period that the hedged intercompany loans affect earnings based on changes in spot rates. The ineffective portion of the unrealized gains and losses is recorded directly to Other income, net in the Consolidated Statements of Income. In addition, the swaps are marked-to-market each reporting period with the euro notional values measured based on the current foreign exchange spot rate.
There was no ineffectiveness recorded during the three months ended March 31, 2017 and 2016.
The following table summarizes our cross-currency swaps outstanding:
Millions of dollars, except expiration date and rates
Pay Euro
Receive U.S. dollars
Forward-Starting Interest Rate Swaps—In March 2015, we entered into forward-starting interest rate swaps to mitigate the risk of adverse changes in the benchmark interest rates on the anticipated refinancing of our senior notes due 2019. These interest rate swaps will be terminated upon debt issuance. The total notional amount of these forward-starting interest rate swaps was $1,000 million at March 31, 2017. The ineffectiveness recorded for this hedging relationship was less than $1 million in each of the three months ended March 31, 2017 and 2016.
We elected to designate these forward-starting interest rate swaps as cash flow hedges. The effective portion of the gain or loss is recorded in Accumulated other comprehensive loss. In periods where the hedging relationship is deemed ineffective, the ineffective portion of the changes in the fair value will be recorded as Interest expense in the Consolidated Statements of Income. The related deferred gains and losses recognized in Accumulated other comprehensive loss will be amortized to interest expense over the original term of the related swaps using the effective interest method.
We use a regression analysis approach under the hypothetical derivative method to assess both prospective and retrospective hedge effectiveness. We use the dollar-offset method under the hypothetical derivative method to measure hedge ineffectiveness.
There was no settlement of our forward-starting swap agreements during each of the three months ended March 31, 2017 and 2016.
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As of March 31, 2017, less than $1 million (on a pretax basis) is scheduled to be reclassified as a decrease to interest expense over the next twelve months.
Commodity swaps designated as cash-flow hedges—We have commodity swaps designated as cash-flow hedges to manage the volatility of the commodity price related to anticipated purchases of raw materials. We enter into over-the-counter commodity swaps with one or more counterparties whereby these commodity swaps require us to pay a predetermined fixed price and receive a price based on the average monthly forward rate of a specified index for the specified nominated volumes.
We use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis monthly. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.
The effective portion of the unrealized gains and losses on these commodity swaps designated as cash-flow hedges is reported in Accumulated other comprehensive loss and reclassified to earnings in the same period or periods that the hedged forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses is recorded directly to Other income, net in the Consolidated Statements of Income. There was no ineffectiveness recorded during the three months ended March 31, 2017.
As of March 31, 2017, less than $1 million (on a pretax basis) is scheduled to be reclassified as an increase to cost of sales over the next twelve months.
Fixed-for-Floating Interest Rate Swaps—In 2017, we entered into U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $1,000 million 3.5% guaranteed notes due 2027 associated with the risk of variability in the 3 Month USD LIBOR rate (the benchmark interest rate).
We also have U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $1,000 million 6% senior notes due 2021 associated with the risk of variability in the 1 Month USD LIBOR rate (the benchmark interest rate).
In 2014, we entered into U.S. dollar fixed-for-floating interest rate swaps with third party financial institutions to mitigate changes in the fair value of our $2,000 million 5% senior notes due 2019 associated with the risk of variability in the 3 Month USD LIBOR rate (the benchmark interest rate). In March 2017, concurrent with the redemption of $1,000 million of our outstanding 5% senior notes due 2019, we dedesignated the related $2,000 million fair value hedge and terminated swaps in the notional amount of $1,000 million. At the same time, we redesignated the remaining $1,000 million notional amount of swaps as a fair value hedge of the remaining $1,000 million of 5% senior notes outstanding. For information related to charges recognized as a result of the dedesignation of the hedging relationship, see Note 5.
Our interest rate swaps are used as part of our current interest rate risk management strategy to achieve a desired proportion of variable versus fixed rate debt.
Under these arrangements, we exchange fixed-rate for floating-rate interest payments to effectively convert our fixed-rate debt to floating rate-debt. The fixed and variable cash payments for the interest rate swaps related to our 5% senior notes due 2019 are net settled semi-annually. The fixed and variable payments for the interest rate swaps related to our 6% senior notes due 2021 are settled semi-annually and monthly, respectively. The fixed and variable payments for the interest rate swaps related to our guaranteed notes due 2027 are settled quarterly. These payments are classified as Other, net, in the Cash flows from operating activities section of the Consolidated Statements of Cash Flows.
We elected to designate these fixed-for-floating interest rate swaps as fair value hedges. We use the long-haul method to assess hedge effectiveness using a regression analysis approach. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method to measure ineffectiveness.
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Changes in the fair value of the derivatives and changes in the value of the hedged items based on changes in the benchmark interest rate are recorded as Interest expense in our Consolidated Statements of Income. We evaluate the effectiveness of the hedging relationship quarterly and calculate the changes in the fair value of the derivatives and the underlying hedged items separately. There was no ineffectiveness for these hedging relationships in the three months ended March 31, 2017; however, we recognized a net gain of $9 million for the three months ended March 31, 2016.
At March 31, 2017, we had outstanding interest rate swap agreements with notional amounts of $1,000 million, maturing on April 15, 2019, $1,000 million, maturing on November 15, 2021, and $1,000 million, maturing on March 2, 2027.
Investments in marketable securities—The following table summarizes our investments in marketable securities:
Short-term investments:
Available-for-salesecurities, at fair value
Held-to-maturitysecurities, at cost
The following table summarizes the amortized cost, gross unrealized gains and losses, and fair value of our available-for-sale and held-to maturity securities that are outstanding as of March 31, 2017 and December 31, 2016. Refer to Note 7 for additional information regarding the fair value of available-for-sale and held-to maturity securities.
Available-for-salesecurities:
Bonds
Certificates of deposit
Time deposits
Limited partnership investments
Totalavailable-for-sale securities
Held-to-maturitysecurities:
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Our limited partnership investments include investments in, among other things, equities and equity related securities, debt securities, credit instruments, global interest rate products, currencies, commodities, futures, options, warrants and swaps. These investments, which include both long and short positions, may be redeemed at least monthly with advance notice ranging up to ninety days. The fair value of these funds is estimated using the net asset value (NAV) per share of the respective pooled fund investment.
No losses related to other-than-temporary impairments of ouravailable-for-sale and held-to-maturity investments have been recorded in Accumulated other comprehensive loss during the three months ended March 31, 2017 and the year ended December 31, 2016.
As of March 31, 2017, our available-for-sale securities had the following maturities: commercial paper securities held by the Company had maturities between three and twelve months; bonds had maturities between two and forty three months; certificates of deposit mature between two and twelve months; and limited partnership investments mature between one and three months. Our time deposits classified as held-to-maturity securities mature within three months.
The proceeds from maturities and sales of our available-for-sale securities during the three months ended March 31, 2017 and 2016 are summarized in the following table:
Proceeds from maturities of securities
Proceeds from sales of securities
No gain or loss was realized in connection with the sales of our available-for-sale securities during the three months ended March 31, 2017 and 2016. The specific identification method was used to identify the cost of the securities sold and the amounts reclassified out of Accumulated other comprehensive loss into earnings.
During the three months ended March 31, 2017, we had maturities of our held-to-maturity securities totaling $44 million. We had no sales of our held-to-maturitysecurities and we had no transfers of investments classified as held-to-maturity toavailable-for-sale.
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The following table summarizes the fair value and unrealized losses related toavailable-for-sale and held-to-maturity securities that were in a continuous unrealized loss position for less than and greater than twelve months as of March 31, 2017 and December 31, 2016.
Financial Instruments—The following table summarizes financial instruments outstanding as of March 31, 2017 and December 31, 2016 that are measured at fair value on a recurring basis. Refer to Note 7 for additional information regarding the fair value of financial instruments.
Balance Sheet
Classification
Derivatives designated as net investment hedges:
Basis swaps
Forward exchange contracts
Derivatives designated as cash flow hedges:
Cross-currency swaps
Commodity swaps
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Forward-starting interest rate swaps
Derivatives designated as fair value hedges:
Fixed-for-floatinginterest rate swaps
Derivatives not designated as hedges:
Commodities
Embedded derivatives
Foreign currency
Non-derivatives:
Available-for-salesecurities
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Performance share awards
25
The following table summarizes the pretax effect of derivative instruments and non-derivative instruments designated as net investment hedges charged directly to income:
Income StatementClassification
Derivatives designated as cash-flow hedges:
Non-derivatives designated as net investment hedges:
Euro notes payable
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Income Statement Classification
The pretax effect of the gains (losses) recognized in income for our fixed-for-floating interest rate swaps includes the net value of interest accrued of $7 million and $6 million during the three months ended March 31, 2017 and 2016, respectively.
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The following table presents the financial instruments outstanding as of March 31, 2017 and December 31, 2016 that are measured at fair value on a recurring basis.
Derivatives:
Available-for-salesecurities measured at net asset value*
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The fair value of the commodities assets classified as Level 2 is associated with our commodity swaps designated as cash-flow hedges. The fair values of the commodities assets and liabilities classified as Level 1 are associated with our commodity derivatives not designated as hedges.
There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2017 and the year ended December 31, 2016.
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The following table presents the carrying value and estimated fair value of our financial instruments that are not measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016. Short-term loans receivable, which represent our repurchase agreements, and short-term and long-term debt, are recorded at amortized cost in the Consolidated Balance Sheets. The carrying and fair values of short-term and long-term debt exclude capital leases.
Assets:
Short-term loans receivable
Liabilities:
The fair value of all non-derivative financial instruments included in Current assets described below, Current liabilities, including Short-term debt excluding precious metal financings, and Accounts payable; approximates the applicable carrying value due to the short maturity of those instruments. Current assets include Cash and cash equivalents, Restricted cash, held-to-maturity time deposits and Accounts receivable.
We use the following inputs and valuation techniques to estimate the fair value of our financial instruments:
Basis Swaps—The fair value of our basis swap contracts is calculated using the present value of future cash flows discounted using observable inputs such as known notional value amounts, yield curves, and spot and forward exchange rates.
Cross-Currency Swaps—The fair value of our cross-currency swaps is calculated using the present value of future cash flows discounted using observable inputs with the foreign currency leg revalued using published spot and future exchange rates on the valuation date.
Forward-Starting Interest Rate Swaps—The fair value of our forward-starting interest rate swaps is calculated using the present value of future cash flows method and based on observable inputs such as benchmark interest rates.
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Fixed-for-FloatingInterest Rate Swaps—The fair value of our fixed-for-floating interest rate swaps is calculated using the present value of future cash flows method and based on observable inputs such as interest rates and market yield curves.
Commodity and Embedded Derivatives—The fair values of our commodity derivatives classified as Level 1 and embedded derivatives are measured using closing market prices at the end of the reporting period obtained from the New York Mercantile Exchange and from third-party broker quotes and pricing providers.
The fair value of our commodity swaps classified as Level 2 is determined using a combination of observable and unobservable inputs. The observable inputs consist of future market values of various crude and heavy fuel oils, which are readily available through public data sources. The unobservable input, which is the estimated discount or premium used in the market pricing, is calculated using an internally-developed, multi-linear regression model based on the observable prices of the known components and their relationships to historical prices. A significant change in this unobservable input would not have a material impact on the fair value measurement of our level 2 commodity swaps.
Foreign Currency Derivatives and Forward Exchange Contracts—The fair value of our foreign currency derivatives is based on forward market rates.
Available-for-Sale Securities—Fair value is calculated using observable market data for similar securities and broker quotes from recognized purveyors of market data or the net asset value for limited partnership investments provided by the fund administrator.
Performance Share Awards—Fair value is determined using the quoted market price of our stock.
Short-Term and Long-Term Loans Receivable—Valuations are based on discounted cash flows, which consider prevailing market rates for the respective instrument maturity in addition to corroborative support from the minimum underlying collateral requirements.
Short-Term Debt—Fair values of short-term borrowings related to precious metal financing arrangements are determined based on the current market price of the associated precious metal.
Long-Term Debt—Fair value is calculated using pricing data obtained from well-established and recognized vendors of market data for debt valuations.
Net periodic pension benefits included the following cost components for the periods presented:
Service cost
Interest cost
Expected return on plan assets
Actuarial and investment loss amortization
Net periodic pension benefit costs
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Net periodic other postretirement benefits included the following cost components for the periods presented:
Actuarial loss amortization
Net periodic benefit costs
The total net periodic cost of our pension and other postretirement benefit plans were as follows:
Pension plans
Other postretirement benefit plans
Our effective income tax rate for the three months ended March 31, 2017 was 28.1% compared with 29.5% for the three months ended March 31, 2016. Our effective income tax rate fluctuates based on, among other factors, changes in pretax income in countries with varying statutory tax rates, the U.S. domestic production activity deduction, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions.
Compared with the three months ended March 31, 2016, the lower effective tax rate for the three months ended March 31, 2017 was primarily attributable to a reduction in foreign exchange gains, changes in pretax income in countries with varying statutory tax rates, adjustments to our deferred tax liabilities, partially offset by fluctuations in valuation allowances and local taxes.
We monitor income tax developments (including, for example, the U.S. tax reform proposals and the European Union’s state aid investigations) in countries where we conduct business. In October 2016, the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings. Recently, there has been an increase in attention, both in the U.K. and globally, to the tax practices of multinational companies, including proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in legislative changes that could affect our tax rate. Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.
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Financial Assurance Instruments—We have obtained letters of credit, performance and surety bonds and have issued financial and performance guarantees to support trade payables, potential liabilities and other obligations. Considering the frequency of claims made against the financial instruments we use to support our obligations, and the magnitude of those financial instruments in light of our current financial position, management does not expect that any claims against or draws on these instruments would have a material adverse effect on our Consolidated Financial Statements. We have not experienced any unmanageable difficulty in obtaining the required financial assurance instruments for our current operations.
Environmental Remediation—Our accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $94 million and $95 million as of March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, the accrued liabilities for individual sites range from less than $1 million to $15 million. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In our opinion, it is reasonably possible that losses in excess of the liabilities recorded may have been incurred. However, we cannot estimate any amount or range of such possible additional losses. New information about sites, new technology or future developments such as involvement in investigations by regulatory agencies, could require us to reassess our potential exposure related to environmental matters.
The following table summarizes the activity in our accrued environmental liability included in “Accrued liabilities” and “Other liabilities”:
Beginning balance
Changes in estimates
Amounts paid
Foreign exchange effects
Ending balance
Access Indemnity Demand—In December 2010, one of our subsidiaries received demand letters from affiliates of Access Industries (collectively, “Access Entities”), a more than five percent shareholder of the Company, demanding indemnity for losses, including attorney’s fees and expenses, arising out of a pending lawsuit styled Edward S. Weisfelner, as Litigation Trustee of the LB Litigation Trust v. Leonard Blavatnik, et al., Adversary Proceeding No. 09-1375 (REG), in the United States Bankruptcy Court, Southern District of New York. In the Weisfelner lawsuit, the plaintiffs seek to recover from Access the return of all amounts earned by the Access Entities related to their purchase of shares of Lyondell Chemical prior to its acquisition by Basell AF S.C.A.; distributions by Basell AF S.C.A. to its shareholders before it acquired Lyondell Chemical; and management and transaction fees and expenses. Trial of the lawsuit was held in October 2016. In April 2017, the court awarded $7.2 million to the plaintiffs and denied all other relief. This ruling remains subject to potential appeal by the parties.
The Access Entities have also demanded $100 million in management fees under a 2007 management agreement between an Access affiliate and the predecessor of LyondellBasell AF, as well as other unspecified amounts relating to advice purportedly given in connection with financing and other strategic transactions. In June 2009, an Access affiliate filed a proof of claim in Bankruptcy Court against LyondellBasell AF seeking “no less than” $723 thousand for amounts allegedly owed under the 2007 management agreement. In April 2011, Lyondell Chemical filed an objection to the claim and brought a declaratory judgment action for a determination that the demands are not valid. The declaratory judgment action is stayed pending the outcome of the Weisfelner lawsuit.
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We do not believe that the 2007 management agreement is in effect or that the Company or any Company-affiliated entity owes any obligations under the management agreement, including for management fees or for indemnification. We intend to vigorously defend our position in any proceedings and against any claims or demands that may be asserted.
Although the court issued a ruling in Weisfelner in April 2017 as noted above, it remains subject to potential appeal by the parties. Accordingly, we cannot at this time estimate the reasonably possible loss or range of loss that may be incurred in the Weisfelner lawsuit; therefore, we cannot estimate the loss that may be sought by way of indemnity.
409A Matter—Certain of the Company’s current and former executives were being audited by the Internal Revenue Service for the 2012 tax year regarding the treatment of their Company stock options under Section 409A of the Internal Revenue Code. In early 2017, the audits were settled and the Company has incurred an aggregate of $1.7 million for all liabilities relating to the 2012 tax year. The Company believes that any additional future liability that may arise related to this issue will not be material.
Indemnification—We are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation and dissolution of joint ventures. Pursuant to these arrangements, we provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of March 31, 2017, we had not accrued any significant amounts for our indemnification obligations, and we are not aware of other circumstances that would likely lead to significant future indemnification obligations. We cannot determine with certainty the potential amount of future payments under the indemnification arrangements until events arise that would trigger a liability under the arrangements.
As part of our technology licensing contracts, we give indemnifications to our licensees for liabilities arising from possible patent infringement claims with respect to certain proprietary licensed technologies. Such indemnifications have a stated maximum amount and generally cover a period of five to ten years.
Dividend Distributions—On March 13, 2017, we paid a cash dividend of $0.85 per share for an aggregate of $343 million to shareholders of record on March 6, 2017.
Share Repurchase Programs—During the second quarter of 2016, we completed the repurchase of shares under a share repurchase program approved by our shareholders in May 2015 (“May 2015 Share Repurchase Program”). We were authorized to purchase up to 10% of our outstanding shares under this program. In May 2016, our shareholders approved a proposal to authorize us to repurchase up to an additional 10% of our outstanding ordinary shares through November 2017 (“May 2016 Share Repurchase Program”). These repurchases, which are determined at the discretion of our Management Board, may be executed from time to time through open market or privately negotiated transactions. The repurchased shares, which are recorded at cost, are recorded as Treasury stock and may be retired or used for general corporate purposes, including for various employee benefit and compensation plans.
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The following table summarizes our share repurchase activity for the periods presented:
Millions of dollars, except shares and per share amounts
May 2016 Share Repurchase Program
May 2015 Share Repurchase Program
Due to the timing of settlements, total cash paid for share repurchases for the three months ended March 31, 2017 and 2016 was $160 million and $986 million, respectively.
Ordinary Shares—The changes in the outstanding amounts of ordinary shares are as follows:
Ordinary shares outstanding:
Warrants exercised
Employee stock purchase plan
Purchase of ordinary shares
Treasury Shares—The changes in the amounts of treasury shares held by the Company are as follows:
Ordinary shares held as treasury shares:
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Accumulated Other Comprehensive Income (Loss)—The components of, and after-tax changes in, Accumulated other comprehensive income (loss) as of and for the three months ended March 31, 2017 and 2016 are presented in the following table:
Balance – January 1, 2017
Other comprehensive income (loss) before reclassifications
Amounts reclassified from accumulated other comprehensive loss
Net other comprehensive income (loss)
Balance – March 31, 2017
Balance – January 1, 2016
Balance – March 31, 2016
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The amounts reclassified out of each component of Accumulated other comprehensive loss are as follows:
Reclassification adjustments for:
Defined pension and other postretirement benefit plan items:
Amortization of:
Actuarial loss
Reclassifications, before tax
Amounts reclassified out of Accumulated other comprehensive loss
Amortization of prior service cost and actuarial loss are included in the computation of net periodic pension and other postretirement benefit costs (see Note 8).
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Basic earnings per share is based upon the weighted average number of shares of common stock outstanding during the periods. Diluted earnings per share includes the effect of certain stock option awards and other equity-based compensation awards. We have unvested restricted stock units that are considered participating securities for earnings per share.
Earnings per share data and dividends declared per share of common stock are as follows:
Net income (loss)
Less: net loss attributable to non-controllinginterests
Net income (loss) attributable to the Company shareholders
Net income attributable to participating securities
Net income (loss) attributable to ordinary shareholders – basic and diluted
Millions of shares, except per share data
Basic weighted average common stock outstanding
Effect of dilutive securities:
MTI, QPA and PSU awards
Potential dilutive shares
Earnings (loss) per share:
Basic
Diluted
Participating securities
Dividends declared per share of common stock
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Our operations are managed through five operating segments, as shown below. We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting. Each of our operating segments is managed by a senior executive reporting directly to our Chief Executive Officer, the chief operating decision maker. Discrete financial information is available for each of the segments, and our Chief Executive Officer uses the operating results of each of the operating segments for performance evaluation and resource allocation. The activities of each of our segments from which they earn revenues and incur expenses are described below:
Our chief operating decision maker uses EBITDA as the primary measure for reviewing our segments’ profitability and therefore, in accordance with ASC 280, Segment Reporting, we have presented EBITDA for all segments. We define EBITDA as earnings before interest, taxes and depreciation and amortization.
Intersegment eliminations and items that are not directly related or allocated to business operations are included in “Other.” Sales between segments are made primarily at prices approximating prevailing market prices.
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Summarized financial information concerning reportable segments is shown in the following table for the periods presented:
Customers
Intersegment
EBITDA
Operating results for our O&P–Americas segment include a $31 million gain on the sale of a Lake Charles, Louisiana site in the first quarter of 2017. Our I&D segment results for the first quarter of 2017 include charges totaling $38 million primarily related to the settlement of precious metal financings.
Operating results for our O&P–EAI segment included a non-cash charge of $40 million in the first quarter of 2016 related to a lower of cost or market (“LCM”) inventory valuation adjustment driven primarily by declines in prices of several of our polyolefins products and naphtha. Operating results for our I&D segment reflected a non-cash charge of $28 million in the first quarter of 2016 related to an LCM inventory valuation adjustment primarily driven by declines in the prices of benzene and styrene. Our O&P–Americas and O&P–EAI segments also benefited from gains of $57 million and $21 million, respectively, related to the first quarter 2016 sale of our wholly owned subsidiary, Petroken Petroquimica Ensenada S.A.
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A reconciliation of EBITDA to Income from continuing operations before income taxes is shown in the following table for each of the periods presented:
EBITDA:
Total segment EBITDA
Other EBITDA
Less:
Depreciation and amortization expense
Add:
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
This discussion and analysis should be read in conjunction with the information contained in our Consolidated Financial Statements and the accompanying notes elsewhere in this report. When we use the terms “we,” “us,” “our” or similar words in this discussion, unless the context otherwise requires, we are referring to LyondellBasell Industries N.V. and its consolidated subsidiaries.
OVERVIEW
We began 2017 with improved results over the fourth quarter of 2016 in our O&P–Americas, O&P–EAI and I&D segments. Olefins and polyolefins demand continued to be solid across all regions. The I&D segment benefited from improved first quarter profitability for styrene and methanol. Our refinery performed planned maintenance on the fluid catalytic cracker unit, completed repairs on one of our two crude distillation units and fully commissioned our investment for the production of Tier 3 low-sulfur gasoline during the first quarter. We expect our Refining segment to benefit from the completion of this work. Significant items that affected our results during the first quarter of 2017 relative to the first quarter of 2016 include:
Other noteworthy items since the beginning of the year include the following:
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Results of operations for the periods discussed are presented in the table below:
Sales and other operating revenues
RESULTS OF OPERATIONS
Revenues—Revenues increased by $1,687 million, or 25%, in the first quarter of 2017 compared to the first quarter of 2016.
Higher average sales prices driven by the increase in feedstock prices correlated with the movement in crude oil prices led to a 24% increase in revenue. A 2% increase in first quarter 2017 revenues associated with higher volumes was largely attributable to higher volumes in our O&P–Americas segment in the first quarter of 2017.
The remaining change in first quarter 2017 revenues is attributable to unfavorable foreign exchange impacts.
Cost of Sales—Cost of sales increased by $1,825 million, or 35%, in the first quarter of 2017 compared to the first quarter of 2016 primarily due to the increase in feedstock and energy costs.
Cost of sales in the first quarter of 2016 included non-cashLCM inventory valuation charges in our O&P–EAI and I&D segments totaling $68 million.
Operating Income—Operating income decreased by $150 million in the first quarter of 2017 compared to the first quarter of 2016.
Operating income for the first quarter of 2016 reflects the impact of the $68 million LCM inventory valuation adjustment discussed above. Including this impact, operating income for the first quarter of 2017 declined relative to the first quarter of 2016 by $148 million, $40 million and $23 million in our O&P–Americas, Refining and Technology segments, respectively. These negative impacts were offset in part by improvements of $43 million and $14 million in our O&P–EAI and I&D segments. Results for each of our business segments are discussed further in the “Segment Analysis” section below.
Interest Expense—Interest expense in the first quarter of 2017 increased by $125 million compared to the first quarter of 2016.
In March 2017, we recognized charges totaling $113 million related to the redemption of $1,000 million of our outstanding 5% senior notes due 2019. These charges included $65 million of prepayment premiums, $44 million for the write-off of the fair value adjustment associated with fair value hedges and $4 million for the write-off of associated unamortized debt issuance costs.
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Increased interest expense 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 was offset in part by a reduction in interest expense associated with our 5% senior notes due 2019 resulting in a net $4 million increase in interest expense in the first quarter of 2017. The reduced benefit from our fixed-for-floating interest rate swaps also resulted in an $8 million increase in interest expense during the first quarter of 2017. For additional information related to the repayment of debt, see Note 5.
Other Income, Net—Other income, net of $30 million in the first quarter of 2017 reflects a decrease of $58 million relative to the same period in 2016. In the first quarter of 2017, we recognized a $31 million gain on the sale of a Lake Charles, Louisiana site, which was allocated to our O&P–Americas segment. We also recognized a $78 million gain related to the sale of our wholly owned Argentine subsidiary in the first quarter of 2016. We allocated $57 million and $21 million of this gain to our O&P–Americas and O&P–EAI segments, respectively.
Income Tax—Our effective income tax rate for the first quarter of 2017 was 28.1% compared with 29.5% for the first quarter of 2016. Our effective tax rate fluctuates based on, among other factors, changes in pretax income in countries with varying statutory tax rates, the U.S. domestic production activity deduction, changes in valuation allowances, changes in foreign exchange gains/losses, the amount of exempt income, and changes in unrecognized tax benefits associated with uncertain tax positions.
The Company’s exempt income primarily includes interest income and equity earnings of joint ventures. The interest income is earned by certain of our European subsidiaries through intercompany financings and is either untaxed or taxed at rates substantially lower than the U.S. statutory rate. The equity earnings are attributable to our joint ventures and these earnings when paid through dividends to certain European subsidiaries are eligible for participation exemptions, which exempt the dividend payments from all or portions of normal statutory income tax rates. We currently anticipate the favorable treatment for the interest income and dividends to continue in the near term; however, this treatment is based on current law and tax rulings, which could change. The foreign exchange gains/losses have a permanent impact on our effective income tax rate that can cause unpredictable movement in our effective income tax rate.
Compared with the first quarter of 2016, the lower effective tax rate for the first quarter of 2017 was primarily attributable to a reduction in foreign exchange gains (-0.7%), changes in pretax income in countries with varying statutory tax rates (-0.4%), adjustments to our deferred tax liabilities (-2.2%), partially offset by fluctuations in valuation allowances (1.1%) and local taxes (0.6%).
We monitor income tax developments (including, for example, the U.S. tax reform proposals and the European Union’s state aid investigations) in countries where we conduct business. In October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings. Recently, there has been an increase in attention, both in the U.K. and globally, to the tax practices of multinational companies, including proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in legislative changes that could affect our tax rate. Management does not believe that recent changes in income tax laws will have a material impact on our Consolidated Financial Statements, although new or proposed changes to tax laws could affect our tax liabilities in the future.
Comprehensive Income—Comprehensive income decreased by $201 million in the first quarter of 2017 compared to the same period in 2016. This decrease reflects lower net income, the favorable impacts of financial derivative adjustments and the net unfavorable impact of unrealized net changes in foreign currency translation adjustments.
In the first quarter of 2017, we had pre-tax losses of $35 million, which represent the effective portion of the unrealized losses of our financial instruments designated as net investment hedges.
In the first quarter of 2017, the cumulative effects of our derivatives designated as cash flow hedges were losses of $2 million. The euro strengthened against the U.S. dollar in the first quarter of 2017 resulting in pre-tax losses of $7 million in the first quarter of 2017 related to our cross currency swaps.
Pre-tax gains of $25 million related to our cross currency swaps were reclassification adjustments included in net income in the first quarter of 2017. Unrealized gains of $7 million in the first quarter of 2017 related to forward-starting interest rate swaps were driven by decreases in benchmark interest rates during those periods.
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Segment Analysis
We use earnings before interest, income taxes, and depreciation and amortization (“EBITDA”) as our measure of profitability for segment reporting purposes. This measure of segment operating results is used by our chief operating decision maker to assess the performance of and allocate resources to our operating segments. Intersegment eliminations and items that are not directly related or allocated to business operations are included in “Other.” For additional information related to our operating segments, as well as a reconciliation of EBITDA to its nearest GAAP measure, Income from continuing operations before income taxes, see Note 13, Segment and Related Information, to our Consolidated Financial Statements.
Our continuing operations are divided into five reportable segments: O&P–Americas; O&P–EAI; I&D; Refining; and Technology. Revenues and the components of EBITDA for the periods presented are reflected in the table below.
O&P–Americas segment
O&P–EAI segment
I&D segment
Refining segment
Technology segment
Other, including intersegment eliminations
Operating income:
Depreciation and amortization:
Income from equity investments:
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Other income (expense):
Olefins and Polyolefins–Americas Segment
Overview—First quarter 2017 segment results primarily reflect lower polyolefins results compared to a very strong first quarter of 2016. EBITDA for the first quarter of 2017 also included a $31 million gain on the sale of a Lake Charles, Louisiana site. EBITDA for the first quarter of 2016 included a $57 million gain on the sale of our wholly owned Argentine subsidiary.
Ethylene Raw Materials—Production economics for the industry have favored natural gas liquids (“NGLs”) in recent years. While ethane continues to be the preferred U.S. olefins feedstock over time, there were periods during the first quarter of 2017 when crude oil based liquids (“heavy liquids”), had comparable or favored economics. These favorable economics resulted from co-product price increases, a more significant component of heavy liquid economics than for ethane, which outpaced feedstock price increases during the quarter. We produced approximately 87% and 90% of our U.S. ethylene production from NGLs during the first quarters of 2017 and 2016, respectively.
The following table sets forth selected financial information for the O&P–Americas segment including Income from equity investments, which is a component of EBITDA.
Revenues—Revenues for our O&P–Americas segment increased by $489 million, or 23%, in the first quarter of 2017 compared to the first quarter of 2016.
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Average sales prices for most products increased in the first quarter of 2017, consistent with feedstock prices that are correlated with the price of crude oil, which increased relative to the first quarter of 2016. These higher sales prices were responsible for a 22% increase in first quarter 2017 revenues.
Higher first quarter 2017 volumes stemming from higher sales of ethylene led to a 1% increase in revenues.
EBITDA—EBITDA decreased by $155 million, or 18%, in the first quarter of 2017 compared to the first quarter of 2016.
Polyethylene and polypropylene margins declined by 3 cents per pound and 14 cents per pound, respectively, in the first quarter of 2017 due largely to increased prices for ethylene and propylene feedstock. These declines were partly offset by a 3 cent per pound increase in olefins margins, which themselves were negatively impacted by turnaround activity in the first quarter of 2017. These margin impacts led to a 17% decrease in EBITDA while lower income from our equity investments relative to the prior year period resulted in a 1% decline in EBITDA. The net impact of the gain on sale of our wholly owned Argentine subsidiary in the first quarter of 2016 and the first quarter 2017 gain on sale of the Lake Charles, Louisiana site resulted in a 3% decrease in EBITDA over the prior year. These collective decreases were slightly offset by a 3% increase in EBITDA attributed to the change in volumes.
Olefins and Polyolefins–Europe, Asia, International Segment
Overview—Higher operating results for the first quarter of 2017 reflect the absence of a $40 millionnon-cash LCM inventory valuation charge and a $21 million gain on sale of our wholly owned Argentine subsidiary recognized in the first quarter of 2016.
The following table sets forth selected financial information for the O&P–EAI segment including Income from equity investments, which is a component of EBITDA.
Revenues—Revenues increased by $446 million, or 17%, in the first quarter of 2017 compared to the first quarter of 2016.
Average sales prices in the first quarter of 2017 were higher across most products as sales prices generally correlate with crude oil prices, which on average, significantly increased compared to the first quarter of 2016. Sales volumes were higher across most businesses due to better product availability compared to the first quarter of 2016, which was affected by turnaround activity and inventory requirements. These higher average sales prices and sales volumes were responsible for revenue increases of 18% and 1%, respectively, in the first quarter of 2017.
These beneficial impacts to revenue were partially offset in the first quarter 2017 by the 2% revenue decrease stemming from the unfavorable translation impacts due to a slightly weaker euro versus the U.S. dollar.
EBITDA—EBITDA increased by $20 million, or 4%, in the first quarter of 2017 compared to the first quarter of 2016.
Higher volumes in the first quarter of 2017 relative to the corresponding prior year period led to a 5% increase in EBITDA. An additional 4% increase in EBITDA resulted from the net $19 million increase related to the absence of the first quarter 2016 non-cash LCM inventory valuation charge and the gain on the sale of our Argentine subsidiary discussed above.
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These beneficial impacts were offset in part by a 2% decrease in EBITDA attributable to a lower polyolefins margins in Europe, which declined mainly due to a 4 cents per pound decrease in polyethylene spreads.
EBITDA during the period also reflected decreases of 2% from the impact of unfavorable foreign exchange impacts and 1% related to lower income from our equity investments.
Intermediates and Derivatives Segment
Overview— Our I&D segment’s operating results for the first quarter of 2017 were higher than the first quarter of 2016, as margins for intermediate chemicals products benefited from industry supply constraints. The settlement of precious metal financings resulted in a $31 million negative impact on first quarter 2017 operating results as compared to the prior year period.
Operating results for the first quarter of 2016 included a $28 millionnon-cash LCM inventory charge.
The following table sets forth selected financial information for the I&D segment including Income from equity investments, which is a component of EBITDA.
Revenues—Revenues increased by $448 million, or 26%, in the first quarter of 2017 compared to the first quarter of 2016.
Higher average sales prices in the first quarter of 2017 for most products, which reflect the impacts of higher feedstock and energy costs and recent industry supply constraints, were responsible for a revenue increase of 29%. This increase was partially offset by a 1% revenue decrease resulting from the impact of unfavorable foreign exchange in the current year period.
A further reduction in revenues resulting from a 2% volume driven decline in the first quarter of 2017 relative to the first quarter 2016 was driven by timing of export shipments of oxyfuels.
EBITDA—EBITDA increased $13 million, or 4%, in the first quarter of 2017 compared to the first quarter of 2016.
Margin improvements for intermediate chemicals products and oxyfuels and related products resulted in a 9% increase in first quarter 2017 EBITDA. Higher sales prices supported by recent industry supply constraints outpaced the increase in feedstock costs for intermediate chemicals, styrene and acetyls. Oxyfuels and related product margins benefited from an approximate $20 per barrel increase in crude oil prices which more than offset the higher cost of feedstocks.
These margin improvements were partly offset by a 4% decrease in EBITDA related to the volume decline discussed above. An additional 1% decrease in first quarter 2017 EBITDA reflected the net impact of the $31 million unfavorable impact associated with the settlement of precious metal financings, and the absence of the $28 million first quarter 2016 LCM inventory valuation adjustment discussed above.
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Refining Segment
Overview—Results for our Refining segment in the first quarter of 2017 compared to the first quarter of 2016 were lower due to the impact of the planned turnaround of our fluid catalytic cracker unit and maintenance on one of our crude units. The impact of these 2017 outages reduced profitability more than the crude and coker unit turnarounds in the first quarter of 2016.
The following table sets forth selected financial information and heavy crude oil processing rates for the Refining segment and the U.S. refining market margins for the applicable periods. Light Louisiana Sweet, is a light, sweet crude oil, while “Maya” is a heavy, sour crude oil. References to industry benchmarks for refining market margins are to industry prices reported by Platts, a division of S&P Global.
Heavy crude processing rates, thousands of barrels per day
Market margins, dollars per barrel
Light crude oil –2-1-1
Light crude – Maya differential
Total Maya2-1-1
Revenues—Revenues increased by $398 million, or 42%, in the first quarter of 2017 compared to the first quarter of 2016.
Total revenues increased on significantly higher product prices due to an increase in average crude oil prices of approximately $20 per barrel compared to the first quarter of 2016. This increase in prices resulted in a 47% increase in revenues compared to the same period in 2016. Although average heavy oil crude processing rates in the first quarter of 2017 increased 9% over the prior year period, the turnaround of our fluid catalytic processing resulted in lower sales volumes and a corresponding 5% decrease in revenues during the period.
EBITDA—EBITDA decreased by $44 million, or 314%, in the first quarter of 2017 compared to the first quarter of 2016.
The decrease was driven by a turnaround on the fluid catalytic cracker unit reducing the yield value of crude oil processed in the quarter. The reduction in yield value was largely responsible for a 343% decline in EBITDA. Increased heavy crude oil processing rates were responsible for a 29% increase in first quarter 2017 EBITDA relative to the first quarter of 2016. The shutdown of a crude unit for maintenance in the first quarter of 2017 had less of an impact on processing rates than the turnaround in the first quarter of 2016.
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Technology Segment
Overview—Operating results for the Technology segment reflect lower licensing revenues in the first quarter of 2017 compared to the prior year period.
The following table sets forth selected financial information for the Technology segment:
Revenues—Revenues decreased by $12 million, or 9%, in the first quarter of 2017 compared to the first quarter of 2016. A decline in licensing and services in the first quarter of 2017 was responsible for a 20% revenue decrease. Unfavorable foreign exchange impacts resulted in an additional 2% decline in revenues. These decreases were offset in part by revenue increases of 12% and 1% due to higher catalyst volumes and prices, respectively.
EBITDA—EBITDA decreased by $23 million, or 28%, in the first quarter of 2017. Lower licensing income relative to the first quarter of 2016 was the primary driver in a 46% decline in EBITDA relative to the corresponding period in 2016. This decline was offset in part by a 18% increase in EBITDA related to higher first quarter 2017 catalyst volumes.
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FINANCIAL CONDITION
Operating, investing and financing activities of continuing operations, which are discussed below, are presented in the following table:
Source (use) of cash:
Operating activities
Investing activities
Financing activities
Operating Activities
2017—Lower earnings and an increase in accounts receivable resulted in a reduction of cash flows from operations compared to the first quarter of 2016. The increase in accounts receivable was mainly driven by higher product sales prices in our O&P–Americas, O&P–EAI and I&D segments in the first quarter of 2017 relative to the fourth quarter of 2016.
2016—Cash of $1,300 million generated in the first quarter of 2016 primarily reflected earnings adjusted fornon-cash items, including the $78 million gain related to the sale of our wholly owned Argentine subsidiary and adjustments for related working capital, and cash used by the main components of working capital.
The main components of working capital consumed cash of $70 million during the first quarter of 2016. Higher first quarter 2016 sales volumes for our O&P–EAI and I&D segments relative to the fourth quarter of 2015 led to the increase in accounts receivable. Accounts payable increased as a result of higher feedstock purchases by our Refining and I&D segments.
Investing Activities—We invest cash in investment-grade and other high quality instruments that provide adequate flexibility to redeploy funds as needed to meet our cash flow requirements while maximizing yield. In the first quarter of 2017 and 2016, we invested $408 million and $483 million, respectively, in securities that are classified as Short-term investments. The majority of these investments are deemed available-for-sale; however, we also invested in some securities deemedheld-to-maturity. In the first quarter of 2017, we also invested $324 million in tri-party repurchase agreements, which are classified as short-term loans receivable. We received proceeds upon the sale and maturity of certain of our available-for-sale securities and repurchase agreements of $338 million and $202 million, respectively, in the first quarter of 2017, and $240 million and $98 million, respectively, in the corresponding period of 2016.
In December 2015, we entered into €750 million ($795 million) of forward exchange contracts, which were designated as net investment hedges of our investments in foreign subsidiaries. Payments to and proceeds from our counterparties upon settlement of these forward exchange contracts following their expiration in March 2016 resulted in a net cash outflow of $55 million.
See Note 6 to the Consolidated Financial Statements for additional information regarding these investments.
In February 2016, we received net cash proceeds of $137 million for the sale of our wholly owned Argentine subsidiary.
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The following table summarizes capital expenditures for the periods presented:
Capital expenditures by segment:
O&P–Americas
O&P–EAI
I&D
Refining
Technology
Consolidated capital expenditures of continuing operations
In the first quarter of 2017 and 2016, our capital expenditures included 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 for our O&P–Americas in the first quarter of 2017 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—In the first quarter of 2017 and 2016, we made payments of $160 million and $986 million, respectively, to acquire approximately 1.5 million and 12 million, respectively, of our outstanding ordinary shares. We also made dividend payments totaling $343 million and $336 million during the first quarter of 2017 and 2016, respectively. For additional information related to these share repurchases and dividend payments, see Note 11 to the Consolidated Financial Statements.
We received net proceeds of $50 million and $177 million in the first quarter of 2017 and 2016, respectively, through the issuance and repurchase of commercial paper instruments under our commercial paper program.
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. The net proceeds from these notes were used for general corporate purposes, including repurchases of LyondellBasell N.V.’s ordinary shares.
Additional information related to these notes can be found in the Liquidity and Capital Resources section below and in Note 5 to the Consolidated Financial Statements.
Liquidity and Capital Resources—As of March 31, 2017, we had $1,661 million of unrestricted cash and cash equivalents and marketable securities classified as Short-term investments. We also held $497 million of tri-party repurchase agreements classified as Prepaid expenses and other current assets at March 31, 2017. For additional information related to our purchases of marketable securities see “Investing Activities” above and Note 6 to the Consolidated Financial Statements.
At March 31, 2017, we held $418 million of cash in jurisdictions outside of the U.S., principally in the United Kingdom. There are currently no material legal or economic restrictions that would impede our transfers of cash.
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We also had total unused availability under our credit facilities of $2,827 million at March 31, 2017, which included the following:
In March 2017, our direct, 100% owned subsidiary, LYB International Finance II B.V., issued $1,000 million of 3.5% guaranteed notes due 2027 at a discounted price of 98.968%. These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB International Finance II B.V.’s existing and future unsecured indebtedness and to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness. The net proceeds from these notes, together with available cash, were used to repay $1,000 million aggregate principal amount of our outstanding 5% Senior Notes due 2019 in March 2017.
At March 31, 2017, we had total debt, including current maturities, of $9,032 million. We also had $497 million of outstanding letters of credit, bank guarantees and surety bonds issued under uncommitted credit facilities at March 31, 2017.
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 additional information related to our credit facilities and Notes discussed above, see Note 5 to the Consolidated Financial Statements.
In May 2016, our shareholders approved a proposal to authorize us to repurchase up to an additional 10%, or approximately 42.5 million of our shares outstanding over the following eighteen months. Our share repurchase program does not have a stated dollar amount, and purchases may be made through open market purchases, private market transactions or other structured transactions. Repurchased shares could be retired or used for general corporate purposes, including for various employee benefit and compensation plans. As of March 31, 2017, we have purchased approximately 22.9 million shares under this program for approximately $1,827 million. As of April 25, 2017, we had approximately 20 million shares remaining under the current authorization. The timing and amount of additional shares repurchased will be determined by our Management Board based on its evaluation of market conditions and other factors. For additional information related to our share repurchase programs, see Note 11 to the Consolidated Financial Statements.
We may repay or redeem our debt, including purchases of our outstanding bonds in the open market, using cash on hand, cash from operating activities, proceeds from the issuance of debt, proceeds from asset divestitures, or a combination thereof. In connection with any repayment or redemption of our debt, we may incur cash andnon-cash charges, which could be material in the period in which they are incurred.
We plan to fund our ongoing working capital, capital expenditures, debt service and other funding requirements with cash from operations, which could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. Cash on hand, cash from operating activities, proceeds from the issuance of debt, or a combination thereof, may be used to fund the repurchase of shares under our share repurchase program.
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We intend to continue to declare and pay quarterly dividends, with the goal of increasing the dividend over time, after giving consideration to our cash balances and expected results from operations.
We believe that our cash on hand, cash from operating activities and proceeds from our credit facilities provide us with sufficient financial resources to meet our anticipated capital requirements and obligations as they come due.
CURRENT BUSINESS OUTLOOK
During April, global olefin and polyolefin industry conditions have continued to remain favorable. While first quarter maintenance was relatively light for the U.S. ethylene industry, industry schedules show higher planned downtime in Europe and Asia during the second quarter of 2017. With the heavy schedule of maintenance that has taken place over the past five quarters largely complete, we expect to benefit from our refining and expanded olefins capacity as we progress through 2017.
ACCOUNTING AND REPORTING CHANGES
For a discussion of the potential impact of new accounting pronouncements on our consolidated financial statements, see Note 2 to the Consolidated Financial Statements.
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CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can identify our forward-looking statements by the words “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “will,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” and similar expressions.
We based the forward-looking statements on our current expectations, estimates and projections about ourselves and the industries in which we operate in general. We caution you that these statements are not guarantees of future performance as they involve assumptions that, while made in good faith, may prove to be incorrect, and involve risks and uncertainties we cannot predict. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecast in the forward-looking statements. Any differences could result from a variety of factors, including the following:
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Any of these factors, or a combination of these factors, could materially affect our future results of operations and the ultimate accuracy of the forward-looking statements. These forward-looking statements are not guarantees of future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Our management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.
All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section and any other cautionary statements that may accompany such forward-looking statements. Except as otherwise required by applicable law, we disclaim any duty to update any forward-looking statements.
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Our exposure to market and regulatory risks is described in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016. Our exposure to such risks has not changed materially in the three months ended March 31, 2017.
As of March 31, 2017 with the participation of our management, our Chief Executive Officer (principal executive officer) and our Chief Financial Officer (principal financial officer) carried out an evaluation, pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the Act), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Act). Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were operating effectively as of March 31, 2017.
There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Act, in the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Information regarding our litigation and other legal proceedings can be found in Note 10, Commitments and Contingencies, to the Consolidated Financial Statements, which is incorporated into this Item 1 by reference.
The following is a description of environmental proceedings to which a governmental authority is a party and potential monetary sanctions are reasonably likely to be $100,000 or more.
In March 2017, the Texas Commission on Environmental Quality (the “TCEQ”) issued a proposed Agreed Order to Houston Refining LP. The proposed Agreed Order stems from agency record reviews conducted May-July 2016 and September-October 2016 and an agency investigation conducted in April 2016.
Additional information about such environmental proceedings can be found in Part I, Item 3 of our 2016 Annual Report on Form10-K, which is incorporated into this Item 1 by reference.
There have been no material changes from the risk factors disclosed in Item 1A of our 2016 Annual Report on Form 10-K.
Period
January 1 – January 31
February 1 – February 28
March 1 – March 31
Not applicable.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
/s/ Mike W. Sumruld
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