filings.toolsItem 8. Financial Statements and Supplementary Data.
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Item 8. Financial Statements and Supplementary Data.
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Index to the Consolidated Financial Statements
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MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
Management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
We conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2017 based on the Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2017.
The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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Report of Independent Registered Public Accounting Firm
To the Supervisory Board of Directors and Stockholders of LyondellBasell Industries N.V.:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of LyondellBasell Industries N.V. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
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Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 22, 2018
We have served as the Company’s auditor since 2008.
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LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF INCOME
| Year Ended December 31, | ||||||||||||
| Millions of dollars, except earnings per share | 2017 | 2016 | 2015 | |||||||||
| Sales and other operating revenues: | ||||||||||||
| Trade | $ | 33,705 | $ | 28,454 | $ | 31,930 | ||||||
| Related parties | 779 | 729 | 805 | |||||||||
| 34,484 | 29,183 | 32,735 | ||||||||||
| Operating costs and expenses: | ||||||||||||
| Cost of sales | 28,059 | 23,191 | 25,683 | |||||||||
| Selling, general and administrative expenses | 859 | 833 | 828 | |||||||||
| Research and development expenses | 106 | 99 | 102 | |||||||||
| 29,024 | 24,123 | 26,613 | ||||||||||
| Operating income | 5,460 | 5,060 | 6,122 | |||||||||
| Interest expense | (491 | ) | (322 | ) | (310 | ) | ||||||
| Interest income | 24 | 17 | 33 | |||||||||
| Other income, net | 179 | 111 | 25 | |||||||||
| Income from continuing operations before equity investments and income taxes | 5,172 | 4,866 | 5,870 | |||||||||
| Income from equity investments | 321 | 367 | 339 | |||||||||
| Income from continuing operations before income taxes | 5,493 | 5,233 | 6,209 | |||||||||
| Provision for income taxes | 598 | 1,386 | 1,730 | |||||||||
| Income from continuing operations | 4,895 | 3,847 | 4,479 | |||||||||
| Loss from discontinued operations, net of tax | (18 | ) | (10 | ) | (5 | ) | ||||||
| Net income | 4,877 | 3,837 | 4,474 | |||||||||
| Net (income) loss attributable to non-controlling interests | 2 | (1 | ) | 2 | ||||||||
| Net income attributable to the Company shareholders | $ | 4,879 | $ | 3,836 | $ | 4,476 | ||||||
| Earnings per share: | ||||||||||||
| Net income (loss) attributable to the Company shareholders — | ||||||||||||
| Basic: | ||||||||||||
| Continuing operations | $ | 12.28 | $ | 9.17 | $ | 9.63 | ||||||
| Discontinued operations | (0.05 | ) | (0.02 | ) | (0.01 | ) | ||||||
| $ | 12.23 | $ | 9.15 | $ | 9.62 | |||||||
| Diluted: | ||||||||||||
| Continuing operations | $ | 12.28 | $ | 9.15 | $ | 9.60 | ||||||
| Discontinued operations | (0.05 | ) | (0.02 | ) | (0.01 | ) | ||||||
| $ | 12.23 | $ | 9.13 | $ | 9.59 | |||||||
See Notes to the Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Net income | $ | 4,877 | $ | 3,837 | $ | 4,474 | ||||||
| Other comprehensive income (loss), net of tax— | ||||||||||||
| Financial derivatives | (45 | ) | 4 | 1 | ||||||||
| Unrealized gains (losses) on available-for-sale securities | (3 | ) | 6 | (5 | ) | |||||||
| Unrealized gains on available-for-sale securities held by equity investees | 19 | — | — | |||||||||
| Defined pension and other postretirement benefit plans | 77 | (70 | ) | 21 | ||||||||
| Foreign currency translations | 178 | (13 | ) | (429 | ) | |||||||
| Total other comprehensive income (loss), net of tax | 226 | (73 | ) | (412 | ) | |||||||
| Comprehensive income | 5,103 | 3,764 | 4,062 | |||||||||
| Comprehensive (income) loss attributable to non-controlling interests | 2 | (1 | ) | 2 | ||||||||
| Comprehensive income attributable to the Company shareholders | $ | 5,105 | $ | 3,763 | $ | 4,064 | ||||||
See Notes to the Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,523 | $ | 875 | ||||
| Restricted cash | 5 | 3 | ||||||
| Short-term investments | 1,307 | 1,147 | ||||||
| Accounts receivable: | ||||||||
| Trade, net | 3,359 | 2,716 | ||||||
| Related parties | 180 | 126 | ||||||
| Inventories | 4,217 | 3,809 | ||||||
| Prepaid expenses and other current assets | 1,147 | 923 | ||||||
| Total current assets | 11,738 | 9,599 | ||||||
| Property, plant and equipment, net | 10,997 | 10,137 | ||||||
| Investments and long-term receivables: | ||||||||
| Investment in PO joint ventures | 420 | 415 | ||||||
| Equity investments | 1,635 | 1,575 | ||||||
| Other investments and long-term receivables | 17 | 20 | ||||||
| Goodwill | 570 | 528 | ||||||
| Intangible assets, net | 568 | 550 | ||||||
| Other assets | 261 | 618 | ||||||
| Total assets | $ | 26,206 | $ | 23,442 | ||||
See Notes to the Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| Millions of dollars, except shares and par value data | 2017 | 2016 | ||||||
| LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 2 | $ | 2 | ||||
| Short-term debt | 68 | 594 | ||||||
| Accounts payable: | ||||||||
| Trade | 2,258 | 2,028 | ||||||
| Related parties | 637 | 501 | ||||||
| Accrued liabilities | 1,812 | 1,415 | ||||||
| Total current liabilities | 4,777 | 4,540 | ||||||
| Long-term debt | 8,549 | 8,385 | ||||||
| Other liabilities | 2,275 | 2,113 | ||||||
| Deferred income taxes | 1,655 | 2,331 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Ordinary shares, €0.04 par value, 1,275 million shares authorized, 394,512,054 and 404,046,331 shares outstanding, respectively | 31 | 31 | ||||||
| Additional paid-in capital | 10,206 | 10,191 | ||||||
| Retained earnings | 15,746 | 12,282 | ||||||
| Accumulated other comprehensive loss | (1,285 | ) | (1,511 | ) | ||||
| Treasury stock, at cost, 183,928,109 and 174,389,139 ordinary shares, respectively | (15,749 | ) | (14,945 | ) | ||||
| Total Company share of stockholders’ equity | 8,949 | 6,048 | ||||||
| Non-controlling interests | 1 | 25 | ||||||
| Total equity | 8,950 | 6,073 | ||||||
| Total liabilities and equity | $ | 26,206 | $ | 23,442 | ||||
See Notes to the Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 4,877 | $ | 3,837 | $ | 4,474 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization | 1,174 | 1,064 | 1,047 | |||||||||
| Amortization of debt-related costs | 15 | 16 | 16 | |||||||||
| Charges related to repayment of debt | 49 | — | — | |||||||||
| Share-based compensation | 55 | 38 | 53 | |||||||||
| Inventory valuation adjustment | — | 29 | 548 | |||||||||
| Equity investments— | ||||||||||||
| Equity income | (321 | ) | (367 | ) | (339 | ) | ||||||
| Distribution of earnings, net of tax | 309 | 385 | 285 | |||||||||
| Deferred income taxes | (587 | ) | 357 | 181 | ||||||||
| Gain on sales of business and equity method investments | (108 | ) | (84 | ) | — | |||||||
| Changes in assets and liabilities that provided (used) cash: | ||||||||||||
| Accounts receivable | (521 | ) | (383 | ) | 780 | |||||||
| Inventories | (237 | ) | 123 | (240 | ) | |||||||
| Accounts payable | 165 | 383 | (786 | ) | ||||||||
| Other, net | 336 | 208 | (177 | ) | ||||||||
| Net cash provided by operating activities | 5,206 | 5,606 | 5,842 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Expenditures for property, plant and equipment | (1,547 | ) | (2,243 | ) | (1,440 | ) | ||||||
| Payments for repurchase agreements | (512 | ) | (674 | ) | (397 | ) | ||||||
| Proceeds from repurchase agreements | 381 | 685 | 350 | |||||||||
| Purchases of available-for-sale securities | (653 | ) | (688 | ) | (2,073 | ) | ||||||
| Proceeds from sales and maturities of available-for-sale securities | 499 | 674 | 2,489 | |||||||||
| Purchases of held-to-maturity securities | — | (76 | ) | — | ||||||||
| Proceeds from maturities of held-to-maturity securities | 75 | — | — | |||||||||
| Purchases of business, equity method investment and non-controlling interest | (21 | ) | (65 | ) | — | |||||||
| Net proceeds from sales of business and equity method investments | 155 | 209 | — | |||||||||
| Proceeds from settlement of net investment hedges | 609 | 1,295 | — | |||||||||
| Payments for settlement of net investment hedges | (658 | ) | (1,356 | ) | — | |||||||
| Other, net | (84 | ) | (62 | ) | 25 | |||||||
| Net cash used in investing activities | (1,756 | ) | (2,301 | ) | (1,046 | ) | ||||||
See Notes to the Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Cash flows from financing activities: | ||||||||||||
| Repurchases of Company ordinary shares | (866 | ) | (2,938 | ) | (4,656 | ) | ||||||
| Dividends paid | (1,415 | ) | (1,395 | ) | (1,410 | ) | ||||||
| Issuance of long-term debt | 990 | 812 | 984 | |||||||||
| Repayment of long-term debt | (1,000 | ) | — | — | ||||||||
| Debt extinguishment costs | (65 | ) | — | — | ||||||||
| Net (repayments of) proceeds from commercial paper | (493 | ) | 177 | 61 | ||||||||
| Payments of debt issuance costs | (8 | ) | (5 | ) | (16 | ) | ||||||
| Other, net | (2 | ) | — | 187 | ||||||||
| Net cash used in financing activities | (2,859 | ) | (3,349 | ) | (4,850 | ) | ||||||
| Effect of exchange rate changes on cash | 59 | (9 | ) | (48 | ) | |||||||
| Increase (decrease) in cash and cash equivalents and restricted cash | 650 | (53 | ) | (102 | ) | |||||||
| Cash and cash equivalents and restricted cash at beginning of period | 878 | 931 | 1,033 | |||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 1,528 | $ | 878 | $ | 931 | ||||||
| Supplemental Cash Flow Information: | ||||||||||||
| Interest paid, net of capitalized interest | $ | 333 | $ | 313 | $ | 299 | ||||||
| Net income taxes paid | $ | 1,044 | $ | 741 | $ | 1,417 | ||||||
See Notes to the Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Ordinary Shares | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Company Share of Stockholders’ Equity | Non- Controlling Interests | |||||||||||||||||||||||
| Millions of dollars | Issued | Treasury | ||||||||||||||||||||||||||
| Balance, December 31, 2014 | $ | 31 | $ | (7,853 | ) | $ | 10,387 | $ | 6,775 | $ | (1,026 | ) | $ | 8,314 | $ | 30 | ||||||||||||
| Net income (loss) | — | — | — | 4,476 | — | 4,476 | (2 | ) | ||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (412 | ) | (412 | ) | — | |||||||||||||||||||
| Share-based compensation | — | 382 | (205 | ) | — | — | 177 | — | ||||||||||||||||||||
| Dividends ($3.04 per share) | — | — | — | (1,410 | ) | — | (1,410 | ) | — | |||||||||||||||||||
| Repurchases of Company ordinary shares | — | (4,615 | ) | — | — | — | (4,615 | ) | — | |||||||||||||||||||
| Settlement from partner on exit from partnership | — | — | 20 | — | — | 20 | (4 | ) | ||||||||||||||||||||
| Balance, December 31, 2015 | $ | 31 | $ | (12,086 | ) | $ | 10,202 | $ | 9,841 | $ | (1,438 | ) | $ | 6,550 | $ | 24 | ||||||||||||
| Net income | — | — | — | 3,836 | — | 3,836 | 1 | |||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | (73 | ) | (73 | ) | — | |||||||||||||||||||
| Share-based compensation | — | 55 | (11 | ) | — | — | 44 | — | ||||||||||||||||||||
| Dividends ($3.33 per share) | — | — | — | (1,395 | ) | — | (1,395 | ) | — | |||||||||||||||||||
| Repurchases of Company ordinary shares | — | (2,914 | ) | — | — | — | (2,914 | ) | — | |||||||||||||||||||
| Balance, December 31, 2016 | $ | 31 | $ | (14,945 | ) | $ | 10,191 | $ | 12,282 | $ | (1,511 | ) | $ | 6,048 | $ | 25 | ||||||||||||
| Net income (loss) | — | — | — | 4,879 | — | 4,879 | (2 | ) | ||||||||||||||||||||
| Other comprehensive income | — | — | — | — | 226 | 226 | — | |||||||||||||||||||||
| Share-based compensation | — | 41 | 14 | — | — | 55 | — | |||||||||||||||||||||
| Dividends ($3.55 per share) | — | — | — | (1,415 | ) | — | (1,415 | ) | — | |||||||||||||||||||
| Repurchases of Company ordinary shares | — | (845 | ) | — | — | — | (845 | ) | — | |||||||||||||||||||
| Purchase of non-controlling interest | — | — | 1 | — | — | 1 | (22 | ) | ||||||||||||||||||||
| Balance, December 31, 2017 | $ | 31 | $ | (15,749 | ) | $ | 10,206 | $ | 15,746 | $ | (1,285 | ) | $ | 8,949 | $ | 1 | ||||||||||||
See Notes to the Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Company and Operations
LyondellBasell Industries N.V. is a limited liability company (Naamloze Vennootschap) incorporated under Dutch law by deed of incorporation dated October 15, 2009. Unless otherwise indicated, the “Company,” “we,” “us,” “our” or similar words are used to refer to LyondellBasell Industries N.V. together with its consolidated subsidiaries (“LyondellBasell N.V.”).
LyondellBasell N.V. is a worldwide manufacturer of chemicals and polymers, a refiner of crude oil, a significant producer of gasoline blending components and a developer and licensor of technologies for the production of polymers.
2. Summary of Significant Accounting Policies
The following significant accounting policies were applied in the preparation of these Consolidated Financial Statements:
Basis of Preparation and Consolidation
The accompanying Consolidated Financial Statements have been prepared from the books and records of LyondellBasell N.V. under accounting principles generally accepted in the U.S. (“U.S. GAAP”). Subsidiaries are defined as being those companies over which we, either directly or indirectly, have control through a majority of the voting rights or the right to exercise control or to obtain the majority of the benefits and be exposed to the majority of the risks. Subsidiaries are consolidated from the date on which control is obtained until the date that such control ceases. All intercompany transactions and balances have been eliminated in consolidation.
The Consolidated Financial Statements have been prepared under the historical cost convention, as modified for the accounting of certain financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. Consolidated financial information, including subsidiaries, equity investments, has been prepared using uniform accounting policies for similar transactions and other events in similar circumstances.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts. Cash equivalents include instruments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates fair value. Cash and cash equivalents exclude restricted cash. Our cash equivalents are placed in certificates of deposit, high-quality commercial paper and money market accounts with major international banks and financial institutions.
Although, we have no current requirements for compensating balances in a specific amount at a specific point in time, we maintain compensating balances at our discretion for some of our banking services and products.
Short-Term Investments
We 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
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the investment is written down to fair value, establishing a new cost basis.
Trade Receivables
Trade receivables are amounts due from customers for merchandise sold or services performed in the ordinary course of business.
We calculate provisions for doubtful accounts receivable based on our estimates of amounts that we believe are unlikely to be collected. Collectability of receivables is reviewed and the provision calculated for doubtful accounts is adjusted at least quarterly, based on aging of specific accounts and other available information about the associated customers. Provisions for doubtful accounts are included in Selling, general and administrative expenses.
Loans Receivable
We invest in tri-party repurchase agreements. Under these agreements, we make cash purchases of securities according to a pre-agreed profile from our counterparties. The counterparties have an obligation to repurchase, and we have an obligation to sell, the same or substantially the same securities at a pre-defined date for a price equal to the purchase price plus interest. These securities, which pursuant to our internal policies are held by a third-party custodian and must generally have a minimum collateral value of 102%, secure the counterparty’s obligation to repurchase the securities. Depending upon maturity, these tri-party repurchase agreements are treated as short-term loans receivable and are reflected in Prepaid expenses and other current assets or as long-term loans receivable reflected in Other investments and long-term receivables on our Consolidated Balance Sheets.
Inventories
Cost of our raw materials, work-in-progress and finished goods inventories is determined using the last-in, first-out (“LIFO”) method and is carried at the lower of current market value or cost. Cost of our materials and supplies inventory is determined using the moving average cost method and is carried at the lower of cost and net realizable value.
Inventory exchange transactions, which involve fungible commodities, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory, with cost determined using the LIFO method.
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost. Historical cost includes expenditures that are directly attributable to the acquisition of the items. Costs may also include borrowing costs incurred on debt during construction or major projects exceeding one year, costs of major maintenance arising from turnarounds of major units and committed decommission costs. Routine maintenance costs are expensed as incurred. Land is not depreciated. Depreciation is computed using the straight-line method over the estimated useful asset lives to their residual values.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
We evaluate property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which, for us, is generally at the plant group level (or, at times, individual plants in certain circumstances where we have isolated production units with separately identifiable cash flows). When it is probable that an asset or asset group’s undiscounted future cash flows will not be sufficient to recover the carrying amount, the asset is written down to its estimated fair value.
Upon retirement or sale, we remove the cost of the asset and the related accumulated depreciation from the accounts and reflect any resulting gain or loss in the Consolidated Statements of Income.
Equity Investments
We account for equity investments using the equity method of accounting if we have the ability to exercise significant influence over, but not control of, an investee. Significant influence generally exists if we have an ownership interest representing between 20% and 50% of the voting rights. Under the equity method of accounting, investments are stated initially at cost and are adjusted for subsequent additional investments and our proportionate share of profit or losses and distributions.
We record our share of the profits or losses of the equity method investments, net of income taxes, in the Consolidated Statements of Income. When our share of losses in an equity investment equals or exceeds our interest in the equity investment, including any other unsecured receivables, we do not recognize further losses, unless we have incurred obligations or made payments on behalf of the equity investment.
We evaluate our equity method investments for impairment when events or changes in circumstances indicate, in management’s judgment, that the carrying value of such investments may have experienced an other-than-temporary decline in value. When evidence of loss in value has occurred, management compares the estimated fair value of investment to the carrying value of investment to determine whether an impairment has occurred. If the estimated fair value is less than the carrying value and management considers the decline in value to be other-than temporary, the excess of the carrying value over the estimated fair value is recognized in the Consolidated Financial Statements as an impairment.
Goodwill
We recorded goodwill upon our application of fresh-start accounting on May 1, 2010. Goodwill is not amortized, but is tested annually for impairment. We assess the recoverability of the carrying value of goodwill during the fourth quarter of each year or whenever events or changes in circumstances indicate that the carrying amount of the goodwill of a reporting unit may not be fully recoverable.
We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. Qualitative factors assessed for each of the reporting units include, but are not limited to, changes in long-term commodity prices, discount rates, competitive environments, planned capacity, cost factors such as raw material prices, and financial performance of the reporting units. If the qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, a quantitative test is required.
In 2017 and 2016, management performed qualitative impairment assessments of our reporting units which indicated that the fair value of our reporting units was greater than their carrying value. Accordingly, a quantitative goodwill impairment test was not required and no goodwill impairment was recognized.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets
Intangible Assets—Intangible assets consist of emission allowances, various contracts, in-process research and development and software costs. These assets are amortized using the straight-line method over their estimated useful lives or over the term of the related agreement. We evaluate definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
Research and Development—Research and development (“R&D”) costs are expensed when incurred. Subsidies for research and development are included in Other income (expense), net. Depreciation expense related to R&D assets is included as a cost of R&D.
Income Taxes
The income tax for the period comprises current and deferred tax. Income tax is recognized in the Consolidated Statements of Income, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In these cases, the applicable tax amount is recognized in other comprehensive income or directly in equity, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as the net tax effects of net operating loss carryforwards. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We recognize uncertain income tax positions in our financial statements when we believe it is more likely than not, based on the technical merits, that the position or a portion thereof will be sustained upon examination.
Other Provisions
Environmental Remediation Costs—Environmental remediation liabilities include liabilities related to sites we currently own, sites we no longer own, as well as sites where we have operated that belong to other parties. Liabilities for anticipated expenditures related to investigation and remediation of contaminated sites are accrued when it is probable a liability has been incurred and the amount of the liability can be reasonably estimated. Only ongoing operating and monitoring costs, the timing of which can be determined with reasonable certainty, are discounted to present value. Future legal costs associated with such matters, which generally are not estimable, are not included in these liabilities.
_Asset Retirement Obligations—_At some sites, we are contractually obligated to decommission our plants upon site exit. Asset retirement obligations are recorded at the present value of the estimated costs to retire the asset at the time the obligation is incurred. That cost, which is capitalized as part of the related long-lived asset, is depreciated on a straight-line basis over the remaining useful life of the related asset. Accretion expense in connection with the discounted liability is also recognized over the remaining useful life of the related asset. Such depreciation and accretion expenses are included in Cost of sales.
Foreign Currency Translation
Functional and Reporting Currency—Items included in the financial information of each of LyondellBasell N.V.’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”) and then translated to the U.S. dollar reporting currency through Other comprehensive income.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Transactions and Balances—Foreign currency transactions are translated into the functional currency using exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the Consolidated Statements of Income.
In the Consolidated Financial Statements, the results and financial position of all subsidiaries that have a functional currency different from the presentation currency are translated into the reporting currency as follows:
| 1. | Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; |
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| 2. | Income and expenses for each income statement are translated at average exchange rates; and |
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| 3. | All resulting exchange differences are recognized as a separate component within Other comprehensive income (foreign currency translation). |
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Revenue Recognition
Substantially all of the Company’s revenue is derived from product sales. Revenues are recognized when sales are realized or realizable, and the earnings process is complete. Revenue from product sales is recognized when the price is fixed or determinable, collectability is reasonably assured, and the customer has an obligation to pay at the time of transfer of title and risk of loss to the customer, which usually occurs at the time of shipment. Revenue is recognized at the time of delivery if we retain the risk of loss during shipment.
Share-Based Compensation
The Company recognizes compensation expense in the financial statements for share-based compensation awards based upon the grant date fair value over the vesting period.
Contingent share awards are recognized ratably over the vesting period as a liability and re-measured, at fair value, at the balance sheet date, see Note 16 to the Consolidated Financial Statements.
Leases
We lease land and other assets for use in our operations. All lease agreements are evaluated and classified as either an operating lease or a capital lease. A lease is classified as a capital lease if any of the following criteria are met: transfer of ownership to the lessee by the end of the lease term; the lease contains a bargain purchase option; the lease term is equal to 75% or greater of the asset’s useful economic life; or the present value of the future minimum lease payments is equal to or greater than 90% of the asset’s fair market value. Capital leases are recorded at the lower of the net present value of the total amount of rent payable under the leasing agreement (excluding finance charges) or fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with our normal depreciation policy for tangible fixed assets, but generally not exceeding the lease term. Operating lease expense is recognized ratably over the entire lease term.
Financial Instruments and Hedging Activities
Pursuant to our risk management policies, we selectively enter into derivative transactions to manage market risk volatility associated with changes in commodity pricing, currency exchange rates and interest rates. Derivatives used for this purpose are generally designated as net investment hedges, cash flow hedges or fair value hedges. Derivative instruments are recorded at fair value on the balance sheet. Gains and losses related to changes in the
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
fair value of derivative instruments not designated as hedges are recorded in earnings. For derivatives designated as net investment hedges and cash flow hedges, the effective portion of the gains and losses is recorded in Other comprehensive income (loss) and the ineffective portion is recorded in earnings. For derivatives designated as net investment hedges, gains or losses resulting from its settlement are reflected in foreign currency translations adjustments in Other comprehensive income (loss). For derivatives that have been designated as fair value hedges, the gains and losses of the derivatives and hedged instruments are recorded in earnings.
_Net Investment Hedges—_We enter into foreign currency contracts and foreign currency denominated debt to reduce the volatility in stockholders’ equity resulting from changes in currency exchange rates of our foreign subsidiaries with respect to the U.S. dollar. Our foreign currency derivatives currently consist of cross-currency basis swap contracts and forward exchange contracts.
For our basis swaps, we use the long-haul method to assess hedge effectiveness using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis at least on a quarterly basis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the forward method to measure ineffectiveness.
For our forward exchange contracts and our euro denominated notes payable, we use the critical terms match to assess both prospective and retrospective hedge effectiveness by comparing the spot rate change in the hedging instrument and the spot rate change in the designated net investment. We use the forward method to measure ineffectiveness.
Cash flows related to our foreign currency contracts designated as net investment hedges are reported in Cash flows from investing activities and related interest payments are reported in Cash flows from operating activities in the Consolidated Statement of Cash Flows. Cash flows related to our foreign currency denominated debt designated as net investment hedges are reported in Cash flows from financing activities and related interest payments are reported in Cash flows from operating activities in the Consolidated Statement of Cash Flows.
_Cash Flow Hedges—_Our cash flow hedges include cross currency swaps, forward starting interest rate swaps and commodity swaps.
We have cross-currency swap contracts designated as cash flow hedges to reduce our exposure to the foreign currency exchange risk associated with certain intercompany loans. Under the terms of these contracts, we make interest payments in euros and receive interest in U.S. dollars. Upon the maturities of these contracts, we will pay the principal amount of the loans in euros and receive U.S. dollars from our counterparties.
We enter into forward-starting interest rate contracts to mitigate the risk of adverse changes in benchmark interest rates on the anticipated refinancing of our senior notes due 2019.
We also have commodity swaps to manage the volatility of the commodity price related to anticipated purchases of raw materials. We enter into over-the-counter commodity swaps with one or more counterparties whereby we pay a predetermined fixed price and receive a price based on the average monthly rate of a specified index for the specified nominated volumes.
We use the long-haul method to assess hedge effectiveness of these cash flow hedges using a regression analysis approach under the hypothetical derivative method. We perform the regression analysis at least on a quarterly basis. We use the dollar offset method under the hypothetical derivative method to measure ineffectiveness.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
_Fair Value Hedges—_We use interest rate swaps as part of our current interest rate risk management strategy to achieve a desired proportion of variable versus fixed rate debt. Under these arrangements, we exchange fixed-rate for floating-rate interest payments to effectively convert our fixed-rate debt to floating-rate debt.
These payments are classified as Other, net, in the Cash flows from operating activities section of the Consolidated Statements of Cash Flows. We use the long-haul method to assess hedge effectiveness using a regression analysis approach. We perform the regression analysis over an observation period of three years, utilizing data that is relevant to the hedge duration. We use the dollar offset method to measure ineffectiveness.
We evaluate the effectiveness of the hedging relationship at least on quarterly basis and calculate the changes in the fair value of the derivatives and the underlying hedged items separately.
Fair Value Measurements
We categorize assets and liabilities, measured at fair value, into one of three different levels depending on the observability of the inputs employed in the measurement:
Level 1—Quoted prices for identical instruments in active markets.
Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs or significant value-drivers are observable.
Level 3—Model-derived valuations in which one or more significant inputs or significant value-drivers are unobservable.
Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable.
Changes in fair value levels—Management reviews the disclosures regarding fair value measurements at least quarterly. If an instrument classified as Level 1 subsequently ceases to be actively traded, it is transferred out of Level 1. In such cases, instruments are reclassified as Level 2, unless the measurement of its fair value requires the use of significant unobservable inputs, in which case it is reclassified as Level 3.
We use the following inputs and valuation techniques to estimate the fair value of our financial instruments disclosed in Note 14:
Basis Swaps—The fair value of our basis swap contracts is calculated using the present value of future cash flows discounted using observable inputs such as known notional value amounts, yield curves, and spot and forward exchange rates.
Cross-Currency Swaps—The fair value of our cross-currency swaps is calculated using the present value of future cash flows discounted using observable inputs with the foreign currency leg revalued using published spot and future exchange rates on the valuation date.
_Forward-Starting Interest Rate Swaps—_The fair value of our forward-starting interest rate swaps is calculated using the present value of future cash flows method and based on observable inputs such as benchmark interest rates.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Fixed-for-Floating Interest Rate Swaps—The fair value of our fixed-for-floating interest rate swaps is calculated using the present value of future cash flows using observable inputs such as interest rates and market yield curves.
Commodity and Embedded Derivatives—The fair values of our commodity derivatives classified as Level 1 and embedded derivatives are measured using closing market prices of public exchanges and from third-party broker quotes and pricing providers.
The fair value of our commodity swaps classified as Level 2 is determined using a combination of observable and unobservable inputs. The observable inputs consist of future market values of various crude and heavy fuel oils, which are readily available through public data sources. The unobservable input, which is the estimated discount or premium used in the market pricing, is calculated using an internally-developed, multi-linear regression model based on the observable prices of the known components and their relationships to historical prices. A significant change in this unobservable input would not have a material impact on the fair value measurement of our Level 2 commodity swaps.
Forward Exchange Contracts—The fair value of our forward exchange contracts is based on forward market rates.
_Available-for-Sale Securities—_The fair value of our available-for-sale securities is calculated using observable market data for similar securities and broker quotes from recognized purveyors of market data or the net asset value for limited partnership investments provided by the fund administrator. Our limited partnership investments include investments in, among other things, equities and equity related securities, debt securities, credit instruments, global interest rate products, currencies, commodities, futures, options, warrants and swaps. These investments, which include both long and short positions, may be redeemed at least monthly with advance notice ranging up to ninety days.
_Loans Receivable—_The fair value of our tri-party repurchase agreements are based on discounted cash flows, which consider prevailing market rates for the respective instrument maturity in addition to corroborative support from the minimum underlying collateral requirements.
Short-Term Debt—Fair values of short-term borrowings related to precious metal financing arrangements are determined based on the current market price of the associated precious metal.
Long-Term Debt—Fair value is calculated using pricing data obtained from well-established and recognized vendors of market data for debt valuations.
Due to the short maturity, the fair value of all non-derivative financial instruments included in Current assets, Current liabilities, approximates the applicable carrying value. Current assets include Cash and cash equivalents, Restricted cash, held-to-maturity time deposits and Accounts receivable. Current liabilities include Accounts payable and Short-term debt excluding precious metal financings.
We use the following inputs and valuation techniques to estimate the fair value of our pension assets disclosed in Note 15:
_Common and preferred stock—_Valued at the closing price reported on the market on which the individual securities are traded.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
_Fixed income securities—_Certain securities that are not traded on an exchange are valued at the closing price reported by pricing services. Other securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
_Commingled funds—_Valued based upon the unit values of such collective trust funds held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund derived from inputs principally from, or corroborated by, observable market data by correlation or other means.
_Real estate—_Valued on the basis of a discounted cash flow approach, which includes the future rental receipts, expenses, and residual values as the highest and best use of the real estate from a market participant view as rental property.
_Hedge funds—_Valued based upon the unit values of such alternative investments held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund.
_Private equity—_Valued based upon the unit values of such alternative investments held at year end by the pension plans. Unit values are based on the fair value of the underlying assets of the fund. Certain securities held in the fund are valued at the closing price reported on the exchange or other established quotation service for over-the-counter securities. Other assets held in the fund are valued based on the most recent financial statements prepared by the fund manager.
_Convertible securities—_Valued at the quoted prices for similar assets or liabilities in active markets.
_U.S. government securities—_Certain securities are valued at the closing price reported on the active market on which the individual securities are traded. Other securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
_Cash and cash equivalents—_Valued at the quoted prices for similar assets or liabilities in active markets.
Non-U.S. insurance arrangements—Valued based upon the estimated cash surrender value of the underlying insurance contract, which is derived from an actuarial determination of the discounted benefits cash flows.
Employee Benefits
_Pension Plans—_We have both defined benefit (funded and unfunded) and defined contribution plans. For the defined benefit plans, a projected benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Pension costs primarily represent the increase in the actuarial present value of the obligation for pension benefits based on employee service during the year and the interest on this obligation in respect of employee service in previous years, net of expected return on plan assets.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity and are reflected in Accumulated other comprehensive income in the period in which they arise.
_Other Post-Employment Obligations—_Certain employees are entitled to postretirement medical benefits upon retirement. The entitlement to these benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment applying the same accounting methodology used for defined benefit plans.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
_Termination Benefits—_Contractual termination benefits are payable when employment is terminated due to an event specified in the provisions of a social/labor plan or statutory law. A liability is recognized for one-time termination benefits when we are committed to i) make payments and the number of affected employees and the benefits received are known to both parties, and ii) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal and can reasonably estimate such amount. Benefits falling due more than 12 months after the balance sheet date are discounted to present value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Recently Adopted Guidance
Intangibles-Goodwill and Other—In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles—Goodwill and other (Topic 350): Simplifying the Test for Goodwill Impairment to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be measured as amount by which a reporting unit’s carrying value exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The early adoption of this amendment in the first quarter of 2017 did not have a material impact on our Consolidated Financial Statements.
Inventories—In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. Under this new guidance, entities that measure inventory using any method other than last-in, first-out or the retail inventory method will be required to measure inventory at the lower of cost and net realizable value. The amendments in this ASU, which should be applied prospectively, were effective for annual and interim periods beginning after December 15, 2016. The adoption of this amendment in the first quarter of 2017 did not have a material impact on our Consolidated Financial Statements.
Compensation—In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU were effective for public entities for annual and interim periods beginning after December 15, 2016. Adoption of the amendments in this guidance in the first quarter of 2017 did not have a material impact on our Consolidated Financial Statements.
Statement of Cash Flows—In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The updated accounting requirement is intended to reduce diversity in practice in the classification of certain transactions in the statement of cash flows. Such transactions include, but are not limited to, debt prepayment or debt extinguishment costs, settlement of zero coupon debt instruments, contingent consideration payments made after a business combination and distributions received from equity method of investments. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. Early adoption of the
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
amendments in this guidance in the second quarter of 2017 resulted in a reclassification of cash flows related to debt extinguishment costs incurred in March 2017 of $65 million from operating to financing activity cash flows. Other aspects of the amendment did not have a material impact on our Consolidated Statements of Cash Flows.
Statement of Cash Flows—In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash. The ASU requires entities to include restricted cash and restricted cash equivalents in their cash and cash-equivalent balances in the statement of cash flows. Early retrospective adoption of this amendment in the second quarter of 2017 did not have a material impact on our Consolidated Statements of Cash Flows.
Compensation—Stock Compensation—In May 2017, the FASB issued ASU 2017-09, Stock Compensation: Scope of Modification Accounting. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Compensation–Stock Compensation. Early adoption of this amendment in the third quarter of 2017 did not have a material impact on our Consolidated Financial Statements.
Accounting Guidance Issued But Not Adopted as of December 31, 2017
Revenue Recognition—In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the current revenue recognition requirements in Accounting Standard Codification (“ASC”) 606, Revenue Recognition. Under this guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. This ASU also requires enhanced disclosures. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the original effective date for one year to annual and interim periods beginning after December 15, 2017. We will adopt this standard as of January 1, 2018 following the modified retrospective method.
Amendments to Revenue Recognition—In 2016 the FASB issued several amendments to Topic 606, Revenue from Contracts with Customers. ASU 2016-08, Principal versus Agent Considerations, contains amendments that clarify the implementation guidance on principal versus agent considerations. ASU 2016-10, Identifying Performance Obligations and Licensing clarifies the guidance on identifying performance obligations and accounting for licenses of intellectual property. The FASB also issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which further clarifies accounting for collectability, noncash consideration, presentation of sales tax, and transition. The FASB also issued ASU 2016-20 Technical Corrections and Improvements to Topic 606, which provides numerous improvements related to the Topic 606. All amendments are effective with the same date as ASU 2014-09. We have completed any required changes to our systems and processes, including updating our internal controls. We do not expect that adoption of this guidance and amendments to have a material impact on our Consolidated Financial Statements.
Financial Instruments—In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The new guidance in this ASU includes a requirement for equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. Prospective application of this ASU is required for public entities for annual and interim periods beginning on or after December 15, 2017. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Leases—In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes the existing guidance for lease accounting in ASC 840, Leases. Under the new guidance, for leases with a term longer than 12 months a lessee should recognize a 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 review of existing lease contracts and other purchase obligations that contain embedded lease features, which are generally classified as operating leases under the existing guidance. In 2018, the FASB also issued ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842. Under this guidance, an optional transition practical expedient is available whereby existing or expired land easements that were not previously accounted for as leases under Topic 840 are not required to be evaluated under Topic 842. We will evaluate the application of this ASU together with the overall assessment of Topic 842.
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 historical experience, current conditions and forecasts that affect the collectability. 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 annual and interim periods beginning after December 15, 2019. Early adoption is permitted. We are currently assessing the impact of the amendment 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. 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 pretax effects of that transaction are eliminated in consolidation. The new guidance will be effective for public entities for annual periods beginning after December 15, 2017. We do not expect the adoption of this new guidance 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 in 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 do not expect the adoption of this guidance to have a material impact 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 Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. The guidance provides clarification about the term in substance nonfinancial asset, other aspects of the scope of Subtopic 610-20 Other Income, 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 annual and interim periods beginning after December 15, 2017. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. This amendment will be effective for public entities for annual and interim periods beginning after December 15, 2017. We do not expect the adoption of this new guidance to have a material impact 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 guidance requires the premium on callable debt securities to be amortized to the earliest call date. Under current requirements, premiums on callable debt securities are generally amortized over the contractual life of the security. The amendments will be effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
_Derivatives and Hedging—_In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities. The guidance will make more financial and nonfinancial hedging strategies eligible for hedge accounting and amends the presentation and disclosure requirements while changing how companies assess hedge effectiveness. The amendments will be effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted and the Company will adopt the guidance effective January 1, 2018. We do not expect the adoption of this guidance to have a material impact on our Consolidated Financial Statements.
_Accumulated Other Comprehensive Income—_In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The guidance will permit entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Tax Act to retained earnings. The amendment will be effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are currently assessing the impact of the amendment on our Consolidated Financial Statements.
3. Discontinued Operations and Dispositions
Discontinued Operations—We began reporting the Berre refinery as a discontinued operation in the second quarter of 2012. The impact of this discontinued operation is immaterial to our consolidated results.
Cash outflows for exit and disposal costs were incurred through the end of 2017. Payments to severed employees are expected to be substantially complete by 2019.
In May 2016, we received a notice pertaining to the final closure of our Berre refinery from the Prefect of Bouches du Rhone. This notice outlines the requirements to dismantle the refinery facilities. At this time, the estimated cost and associated cash flows to fulfill these requirements are not deemed to be material.
Dispositions—Upon the sale of our wholly owned subsidiary, Petroken Petroquimica Ensenada S.A. in February 2016, we received net proceeds of $137 million, which is reflected in Cash flows from investing activities in the Consolidated Statement of Cash Flows. In connection with the sale, we recognized a pretax and after-tax gain of $78 million, which is reflected in Other Income, net in the Consolidated Income Statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Related Party Transactions
We have related party transactions with affiliates of one of our major shareholders, Access Industries (“Access”) and with the Company’s joint venture partners (see Notes 8 and 9).
Access—In December 2010, one of our subsidiaries received demand letters from affiliates of Access demanding (i) indemnity for losses, including attorney’s fees and expenses, arising out of a pending lawsuit and (ii) payment of (a) $100 million in management fees under a 2007 management agreement between an Access affiliate and the predecessor of LyondellBasell AF S.C.A. (“LyondellBasell AF”) and (b) other unspecified amounts related to advice purportedly given in connection with financing and other strategic transactions. For additional information related to this matter, see Note 18.
_Joint Venture Partners—_We have related party transactions with our equity investees. These related party transactions include the sales and purchases of goods in the normal course of business as well as certain financing arrangements. In addition, under contractual arrangements with certain of our equity investees, we receive certain services, utilities and materials at some of our manufacturing sites and we provide certain services to our equity investees.
We have guaranteed $21 million of the indebtedness of one of our joint ventures as of December 31, 2017. In 2015, we received a $19 million payment for a loan made to our joint venture, Al-Waha Petrochemicals Ltd. in 2010.
Related party transactions are summarized as follows:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| The Company billed related parties for: | ||||||||||||
| Sales of products— | ||||||||||||
| Joint venture partners | $ | 779 | $ | 729 | $ | 805 | ||||||
| Shared service agreements— | ||||||||||||
| Joint venture partners | 16 | 18 | 19 | |||||||||
| Related parties billed the Company for: | ||||||||||||
| Sales of products— | ||||||||||||
| Joint venture partners | 2,759 | 2,402 | 2,831 | |||||||||
| Shared service agreements— | ||||||||||||
| Joint venture partners | 75 | 71 | 73 |
5. Accounts Receivable
We sell our products primarily to other industrial concerns in the petrochemicals and refining industries. We perform ongoing credit evaluations of our customers’ financial conditions and, in certain circumstances, require letters of credit or corporate guarantees from them. Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, was $17 million and $16 million at December 31, 2017 and 2016, respectively. We recorded provisions for doubtful accounts receivable, which are reflected in the Consolidated Statements of Income, of less than $1 million in 2017, 2016 and 2015.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Inventories
Inventories consisted of the following components at December 31:
| Millions of dollars | 2017 | 2016 | ||||||
| Finished goods | $ | 2,932 | $ | 2,575 | ||||
| Work-in-process | 142 | 154 | ||||||
| Raw materials and supplies | 1,143 | 1,080 | ||||||
| Total inventories | $ | 4,217 | $ | 3,809 | ||||
At December 31, 2017 and 2016, approximately 86% and 85%, respectively, of our inventories were valued using the last in, first out (“LIFO”) method and the remaining inventories, consisting primarily of materials and supplies, were valued at the moving average cost method. At December 31, 2017 and 2016, our LIFO cost exceeded current replacement cost under the first-in first-out method. The excess of our inventories at estimated net realizable value over LIFO cost after lower of cost or market charges was approximately $1,194 million and $499 million at December 31, 2017 and 2016, respectively.
For information related to lower of cost or market (“LCM”) inventory valuation charges recognized during 2016 and 2015, see Note 21.
7. Property, Plant and Equipment, Goodwill and Intangible Assets
Property, Plant and Equipment—The components of property, plant and equipment, at cost, and the related accumulated depreciation are as follows at December 31:
| Millions of dollars | Estimated Useful Lives (in Years) | 2017 | 2016 | |||||||||
| Land | $ | 313 | $ | 278 | ||||||||
| Major manufacturing equipment | 25 | 10,029 | 9,061 | |||||||||
| Buildings | 30 | 826 | 682 | |||||||||
| Light equipment and instrumentation | 5-20 | 2,141 | 1,932 | |||||||||
| Office furniture | 15 | 16 | 14 | |||||||||
| Major turnarounds | 4-7 | 1,765 | 1,528 | |||||||||
| Information system equipment | 3-5 | 59 | 58 | |||||||||
| Construction in progress | 1,421 | 1,082 | ||||||||||
| Total property, plant and equipment | 16,570 | 14,635 | ||||||||||
| Less accumulated depreciation | (5,573 | ) | (4,498 | ) | ||||||||
| Property, plant and equipment, net | $ | 10,997 | $ | 10,137 | ||||||||
_Capitalized Interest—_We capitalize interest costs incurred on funds used to construct property, plant and equipment. In 2017, 2016 and 2015, we capitalized interest of $20 million, $33 million and $11 million, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Intangible Assets—The components of identifiable intangible assets, at cost, and the related accumulated amortization are as follows at December 31:
| 2017 | 2016 | |||||||||||||||||||||||
| Millions of dollars | Cost | Accumulated Amortization | Net | Cost | Accumulated Amortization | Net | ||||||||||||||||||
| In-process research and development costs | $ | 117 | $ | (70 | ) | $ | 47 | $ | 106 | $ | (54 | ) | $ | 52 | ||||||||||
| Emission allowances | 786 | (468 | ) | 318 | 697 | (421 | ) | 276 | ||||||||||||||||
| Various contracts | 552 | (356 | ) | 196 | 518 | (306 | ) | 212 | ||||||||||||||||
| Software costs | 73 | (66 | ) | 7 | 70 | (60 | ) | 10 | ||||||||||||||||
| Total intangible assets | $ | 1,528 | $ | (960 | ) | $ | 568 | $ | 1,391 | $ | (841 | ) | $ | 550 | ||||||||||
Amortization of these identifiable intangible assets for the next five years is expected to be $103 million in 2018, $102 million in 2019, $86 million in 2020, $35 million in 2021 and $29 million in 2022.
Depreciation and Amortization Expense—Depreciation and amortization expense is summarized as follows:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Property, plant and equipment | $ | 1,023 | $ | 920 | $ | 875 | ||||||
| Investment in PO joint ventures | 41 | 40 | 28 | |||||||||
| Emission allowances | 67 | 62 | 97 | |||||||||
| Various contracts | 27 | 27 | 32 | |||||||||
| In-process research and development costs | 9 | 8 | 8 | |||||||||
| Software costs | 7 | 7 | 7 | |||||||||
| Total depreciation and amortization | $ | 1,174 | $ | 1,064 | $ | 1,047 | ||||||
Asset Retirement Obligations—In certain cases, we are contractually obligated to decommission our plants upon site exit. In such cases, we have accrued the net present value of the estimated costs. The majority of our asset retirement obligations are related to facilities in Europe. The changes in our asset retirement obligations are as follows:
| Year Ended December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| Beginning balance | $ | 77 | $ | 83 | ||||
| Payments | (3 | ) | (4 | ) | ||||
| Changes in estimates | (26 | ) | (1 | ) | ||||
| Accretion expense | 2 | 3 | ||||||
| Effects of exchange rate changes | 8 | (4 | ) | |||||
| Ending balance | $ | 58 | $ | 77 | ||||
Although, we may have asset retirement obligations associated with some of our other facilities, the present value of those obligations is not material in the context of an indefinite expected life of the facilities. We continually review the optimal future alternatives for our facilities. Any decision to retire one or more facilities may result in an increase in the present value of such obligations.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Goodwill—Goodwill was $570 million at December 31, 2017 and $528 million at December 31, 2016. All movements were due to foreign exchange impacts.
8. Investment in PO Joint Ventures
We, together with Covestro PO LLC, a subsidiary of Covestro AG (collectively “Covestro”), share ownership in a U.S. propylene oxide (“PO”) manufacturing joint venture (the “U.S. PO joint venture”). The U.S. PO joint venture owns a PO/styrene monomer (“SM” or “styrene”) and a PO tertiary butyl alcohol (“TBA”) manufacturing facility. Covestro’s ownership interest represents an undivided interest in certain U.S. PO joint venture assets with correlative PO capacity reservation that resulted in ownership of annual in-kind cost-based PO production of approximately 1.5 billion pounds in 2017 and 2016. We take in kind the remaining cost-based PO and co-product production.
In addition, we and Covestro each have a 50% interest in a separate manufacturing joint venture (the “European PO joint venture”), which owns a PO/SM plant at Maasvlakte near Rotterdam, The Netherlands. In substance, each partner’s ownership interest represents an undivided interest in all of the European PO joint venture assets with correlative capacity reservation that resulted in ownership of annual in-kind cost-based PO and SM production.
We and Covestro do not share marketing or product sales under the U.S. PO joint venture. We operate the U.S. PO joint venture’s and the European PO joint venture’s (collectively the “PO joint ventures”) plants and arrange and coordinate the logistics of product delivery. The partners share in the cost of production and logistics is based on their product offtake.
We account for both the U.S. PO joint venture and the European PO joint venture using the equity method. We report the cost of our product offtake as inventory and equity loss as cost of sales in our Consolidated Financial Statements. Related production cash flows are reported in the operating cash flow section of the Consolidated Statements of Cash Flows.
Our equity investment in the PO joint ventures represents our share of the manufacturing plants and is decreased by recognition of our share of equity loss, which is equal to the depreciation and amortization of the assets of the PO joint ventures. Other changes in the investment balance are principally due to our additional capital contributions to the PO joint ventures to fund capital expenditures. Such contributions are reported in the investing cash flow section of the Consolidated Statements of Cash Flows.
Our product offtake was 6,189 million, 6,024 million and 6,270 million pounds of PO and its co-products for the years ended December 31, 2017, 2016 and 2015, respectively.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Changes in our investments in the U.S. and European PO joint ventures for 2017 and 2016 are summarized below:
| Millions of dollars | U.S. PO Joint Venture | European PO Joint Venture | Total PO Joint Ventures | |||||||||
| Investments in PO joint ventures—January 1, 2017 | $ | 316 | $ | 99 | $ | 415 | ||||||
| Cash contributions | 26 | 6 | 32 | |||||||||
| Depreciation and amortization | (32 | ) | (9 | ) | (41 | ) | ||||||
| Effect of exchange rate changes | — | 14 | 14 | |||||||||
| Investments in PO joint ventures—December 31, 2017 | $ | 310 | $ | 110 | $ | 420 | ||||||
| Investments in PO joint ventures—January 1, 2016 | $ | 296 | $ | 101 | $ | 397 | ||||||
| Cash contributions | 52 | 9 | 61 | |||||||||
| Depreciation and amortization | (32 | ) | (8 | ) | (40 | ) | ||||||
| Effect of exchange rate changes | — | (3 | ) | (3 | ) | |||||||
| Investments in PO joint ventures—December 31, 2016 | $ | 316 | $ | 99 | $ | 415 | ||||||
9. Equity Investments
Our PO joint ventures, which are also accounted for using the equity method of accounting, are discussed in Note 8 to the accompanying Consolidated Financial Statements and are, therefore, not included in the following discussion.
Our remaining principal direct and indirect equity investments are as follows at December 31:
| Percent of Ownership | 2017 | 2016 | ||||||
| Basell Orlen Polyolefins Sp. Z.o.o. | 50.00 | % | 50.00 | % | ||||
| PolyPacific Pty. Ltd. | 50.00 | % | 50.00 | % | ||||
| Saudi Polyolefins Company | 25.00 | % | 25.00 | % | ||||
| Saudi Ethylene & Polyethylene Company Ltd. | 25.00 | % | 25.00 | % | ||||
| Al-Waha Petrochemicals Ltd. | 25.00 | % | 20.95 | % | ||||
| Polymirae Co. Ltd. | 50.00 | % | 50.00 | % | ||||
| HMC Polymers Company Ltd. | 28.56 | % | 28.56 | % | ||||
| Indelpro S.A. de C.V. | 49.00 | % | 49.00 | % | ||||
| Ningbo ZRCC Lyondell Chemical Co. Ltd. | 26.65 | % | 26.65 | % | ||||
| Ningbo ZRCC Lyondell Chemical Marketing Co. | 50.00 | % | 50.00 | % | ||||
| NOC Asia Ltd. | 40.00 | % | 40.00 | % | ||||
| Geosel | — | % | 27.00 | % |
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The changes in our equity investments are as follows:
| Year Ended December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| Beginning balance | $ | 1,575 | $ | 1,608 | ||||
| Income from equity investments | 321 | 367 | ||||||
| Distribution of earnings, net of tax | (309 | ) | (385 | ) | ||||
| Purchase of equity method investment | — | 38 | ||||||
| Sale of equity method investment | (35 | ) | (58 | ) | ||||
| Unrealized gain on available-for-sale securities | 19 | — | ||||||
| Currency exchange effects | 68 | 8 | ||||||
| Other | (4 | ) | (3 | ) | ||||
| Ending balance | $ | 1,635 | $ | 1,575 | ||||
In September 2017, we sold our 27% interest in our Geosel joint venture and received proceeds of $155 million. In September 2016, we received proceeds of $72 million from the sale of our ownership interest in SunAllomer Ltd., our joint venture in Japan. Also in September 2016, we purchased a net additional 7.41% interest in Polymirae Co. Ltd., our joint venture in Korea, for $36 million.
Summarized balance sheet information of the Company’s investments accounted for under the equity method are as follows at December 31:
| Year Ended December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| Current assets | $ | 2,844 | $ | 2,436 | ||||
| Noncurrent assets | 4,541 | 4,687 | ||||||
| Total assets | 7,385 | 7,123 | ||||||
| Current liabilities | 1,607 | 2,008 | ||||||
| Noncurrent liabilities | 1,418 | 1,668 | ||||||
| Net assets | $ | 4,360 | $ | 3,447 | ||||
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Summarized income statement information of the Company’s investments accounted for under the equity method are set forth below:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Revenues | $ | 6,632 | $ | 6,608 | $ | 8,017 | ||||||
| Cost of sales | (5,119 | ) | (4,933 | ) | (6,370 | ) | ||||||
| Gross profit | 1,513 | 1,675 | 1,647 | |||||||||
| Net operating expenses | (223 | ) | (229 | ) | (196 | ) | ||||||
| Operating income | 1,290 | 1,446 | 1,451 | |||||||||
| Interest income | 7 | 8 | 7 | |||||||||
| Interest expense | (74 | ) | (79 | ) | (66 | ) | ||||||
| Foreign currency translation | 11 | (13 | ) | (29 | ) | |||||||
| Other income, net | 11 | 23 | 44 | |||||||||
| Income before income taxes | 1,245 | 1,385 | 1,407 | |||||||||
| Provision for income taxes | (153 | ) | (303 | ) | (299 | ) | ||||||
| Net income | $ | 1,092 | $ | 1,082 | $ | 1,108 | ||||||
The difference between our carrying value and the underlying equity in the net assets of our equity investments are assigned to the investment’s assets and liabilities based on an analysis of the factors giving rise to the basis difference. The amortization of the basis difference is included in Income from equity investments in the Consolidated Statements of Income.
10. Prepaid Expenses, Other Current Assets and Other Assets
The components of Prepaid expenses and Other current assets were as follows at December 31:
| Millions of dollars | 2017 | 2016 | ||||||
| Loans receivable | $ | 570 | $ | 369 | ||||
| Renewable identification numbers | 117 | 123 | ||||||
| Advances to suppliers | 35 | 37 | ||||||
| Income taxes | 29 | 82 | ||||||
| VAT receivables | 184 | 95 | ||||||
| Prepaid insurance | 25 | 28 | ||||||
| Financial derivatives | 66 | 61 | ||||||
| Other taxes | 14 | 9 | ||||||
| Other | 107 | 119 | ||||||
| Total prepaid expenses and other current assets | $ | 1,147 | $ | 923 | ||||
The renewable identification numbers reflected above represent a U.S. government established credit used to show compliance in meeting the Environmental Protection Agency’s Renewable Fuel Standard.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of Other assets were as follows at December 31:
| Millions of dollars | 2017 | 2016 | ||||||
| Deferred tax assets | $ | 90 | $ | 192 | ||||
| Debt issuance costs | 15 | 19 | ||||||
| Company-owned life insurance | 56 | 55 | ||||||
| Financial derivatives | 26 | 296 | ||||||
| Pension assets | 33 | 13 | ||||||
| Other | 41 | 43 | ||||||
| Total other assets | $ | 261 | $ | 618 | ||||
11. Accrued Liabilities
Accrued liabilities consisted of the following components at December 31:
| Millions of dollars | 2017 | 2016 | ||||||
| Payroll and benefits | $ | 442 | $ | 334 | ||||
| Renewable identification numbers | 130 | 136 | ||||||
| Product sales rebates | 166 | 147 | ||||||
| Taxes other than income taxes | 199 | 177 | ||||||
| Income taxes | 386 | 311 | ||||||
| Interest | 151 | 142 | ||||||
| Share repurchases | — | 21 | ||||||
| Deferred revenues | 61 | 22 | ||||||
| Restructuring | 14 | 12 | ||||||
| Other | 263 | 113 | ||||||
| Total accrued liabilities | $ | 1,812 | $ | 1,415 | ||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12. Debt
Long-term loans, notes and other long-term debt net of unamortized discount and debt issuance cost consisted of the following as of December 31:
| Millions of dollars | 2017 | 2016 | ||||||
| Senior Notes due 2019, $2,000 million, 5.0% ($3 million of debt issuance cost) | $ | 961 | $ | 1,906 | ||||
| Senior Notes due 2021, $1,000 million, 6.0% ($7 million of debt issuance cost) | 981 | 988 | ||||||
| Senior Notes due 2024, $1,000 million, 5.75% ($8 million of debt issuance cost) | 992 | 991 | ||||||
| Senior Notes due 2055, $1,000 million, 4.625% ($16 million of discount; $11 million of debt issuance cost) | 973 | 972 | ||||||
| Guaranteed Notes due 2044, $1,000 million, 4.875% ($11 million of discount; $10 million of debt issuance cost) | 979 | 979 | ||||||
| Guaranteed Notes due 2043, $750 million, 5.25% ($21 million of discount; $7 million of debt issuance cost) | 722 | 721 | ||||||
| Guaranteed Notes due 2023, $750 million, 4.0% ($6 million of discount; $4 million of debt issuance cost) | 740 | 739 | ||||||
| Guaranteed Notes due 2027, $300 million, 8.1% | 300 | 300 | ||||||
| Guaranteed Notes due 2022, €750 million, 1.875% ($2 million of discount; $3 million of debt issuance cost) | 894 | 785 | ||||||
| Guaranteed Notes due 2027, $1,000 million, 3.5% ($9 million of discount; $8 million of debt issuance cost) | 984 | — | ||||||
| Other | 25 | 6 | ||||||
| Total | 8,551 | 8,387 | ||||||
| Less current maturities | (2 | ) | (2 | ) | ||||
| Long-term debt | $ | 8,549 | $ | 8,385 | ||||
Gains (losses) related to fair value adjustments associated with the fair value hedge accounting of our fixed-for-floating interest rate swaps for the applicable periods are as follows:
| Millions of dollars | Inception Year | Year Ended December 31, | Cumulative Amount Since Inception | |||||||||||||
| 2017 | 2016 | |||||||||||||||
| Senior Notes due 2019, 5.0% | 2014 | $ | (48 | ) | $ | 42 | $ | 36 | ||||||||
| Senior Notes due 2021, 6.0% | 2016 | 9 | 3 | 12 | ||||||||||||
| Guaranteed Notes due 2027, 3.5% | 2017 | (1 | ) | — | (1 | ) |
These fair value adjustments are recognized in Interest expense in the Consolidated Statements of Income.
Short-term loans, notes and other short-term debt consisted of the following as of December 31:
| Millions of dollars | 2017 | 2016 | ||||||
| $2,500 million Senior Revolving Credit Facility | $ | — | $ | — | ||||
| $900 million U.S. Receivables Securitization Facility | — | — | ||||||
| Commercial paper | — | 500 | ||||||
| Precious metal financings | 64 | 90 | ||||||
| Other | 4 | 4 | ||||||
| Total short-term debt | $ | 68 | $ | 594 | ||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Aggregate maturities of debt during the next five years are $70 million in 2018, $1,005 million in 2019, $5 million in 2020, $1,004 million in 2021, $903 million in 2022 and $5,801 million thereafter.
Long-Term Debt
_Guaranteed Notes due 2027—_In March 2017, LYB International Finance II B.V. (“LYB Finance II”), a direct, 100% owned finance subsidiary of LyondellBasell Industries N.V., as defined in Rule 3-10(b) of Regulation S-X, issued $1,000 million of 3.5% guaranteed notes due 2027 at a discounted price of 98.968%. In March 2017, the net proceeds from these notes, together with available cash, were used to redeem $1,000 million aggregate principal amount of our outstanding 5% senior notes due 2019.
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, 2021 and 2024—In March 2017, we redeemed $1,000 million aggregate principal amount of the $2,000 million aggregate principal amount outstanding of our 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.
We have outstanding $1,000 million aggregate principal amount of 5.75% senior notes due 2024, and $1,000 million of 6% senior notes due 2021.
The indentures governing the 5%, 5.75% and 6% Senior Notes contain limited covenants, including those restricting our ability and the ability of our subsidiaries to incur indebtedness secured by any property or assets, enter into certain sale and lease-back transactions with respect to any assets or enter into consolidations, mergers or sales of all or substantially all of our assets.
These notes may be redeemed and repaid, in whole or in part, at any time and from time to time prior to the date that is 90 days 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 a premium for each note redeemed equal to the greater of 1.00% of the then outstanding principal amount of the note and the excess of: (a) the present value at such redemption date of (i) the principal amount of the note at maturity plus (ii) all required interest payments due on the note through maturity (excluding accrued but unpaid interest), computed using a discount rate equal to the Treasury Rate as of
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
such redemption date plus 50 basis points; over (b) the outstanding principal amount of the note. These notes may also be redeemed, in whole or in part, at any time on or after the date which is 90 days prior to the final maturity date of the notes, at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest.
_Guaranteed Notes due 2022—_In March 2016, LYB Finance II issued €750 million of 1.875% guaranteed notes due 2022 at a discounted price of 99.607%.
These unsecured notes, which are fully and unconditionally guaranteed by LyondellBasell Industries N.V., rank equally in right of payment to all of LYB Finance 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 Comparable Government Bond Rate plus 35 basis points) on the notes to be redeemed. The notes may also be redeemed on or after the date that is three months prior to the scheduled maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest. The notes are also redeemable upon certain tax events.
Senior Notes due 2055—In March 2015, we issued $1,000 million of 4.625% Notes due 2055 at a discounted price of 98.353%. These unsecured notes rank equally in right of payment to all of LyondellBasell N.V.’s existing and future unsubordinated indebtedness.
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 six 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 35 basis points) on the notes to be redeemed. The notes may also be redeemed on or after the date that is six months prior to the final maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest.
Guaranteed Notes due 2044—In February 2014, LYB International Finance B.V. (“LYB Finance”), 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 4.875% guaranteed notes due 2044 at a discounted price of 98.831%.
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’s existing and future unsecured indebtedness and to all of
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
LyondellBasell’s existing and future unsubordinated indebtedness. There are no significant restrictions that would impede the Guarantor from obtaining funds by dividend or loan from its subsidiaries. Subsidiaries are generally prohibited from entering into arrangements that would limit their ability to make dividends to or enter into loans with the Guarantor.
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 six 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 six months prior to the final maturity date of the notes at a redemption price equal to 100% of the principal amount of the notes redeemed plus accrued and unpaid interest.
Guaranteed Notes due 2023 and 2043—In July 2013, LYB Finance issued $750 million of 4% guaranteed notes due 2023 and $750 million of 5.25% Notes due 2043 at discounted prices of 98.678% and 97.004%, respectively.
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’s existing and future unsecured indebtedness and to all of LyondellBasell’s existing and future unsubordinated indebtedness. There are no significant restrictions that would impede the Guarantor from obtaining funds by dividend or loan from its subsidiaries. Subsidiaries are generally prohibited from entering into arrangements that would limit their ability to make dividends to or enter into loans with the Guarantor.
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 and repaid, in whole or in part, at any time and from time to time prior to maturity 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 on the notes to be redeemed. Such interest will be discounted to the date of redemption on a semi-annual basis at the applicable Treasury Yield plus 25 basis points in the case of the 4% Notes due 2023 and plus 30 basis points in the case of the 5.25% Notes due 2043.
Guaranteed Notes due 2027—We have outstanding $300 million aggregate principal amount of 8.1% Guaranteed Notes due 2027. These notes, which are guaranteed by LyondellBasell Industries Holdings B.V., a subsidiary of LyondellBasell N.V., contain certain restrictions with respect to the level of maximum debt that can be incurred and security that can be granted by certain operating companies that are direct or indirect wholly owned subsidiaries of LyondellBasell Industries Holdings B.V.
The 2027 Notes contain customary provisions for default, including, among others, the non-payment of principal and interest, certain failures to perform or observe obligations under the Agreement on the notes, the occurrence of certain defaults under other indebtedness, failure to pay certain indebtedness and the insolvency or bankruptcy of certain LyondellBasell N.V. subsidiaries.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Short-Term Debt
_Senior Revolving Credit Facility—_In June 2017, the term of our $2,500 million revolving credit facility was extended for one year to June 2022 pursuant to a consent agreement. All other material terms of the revolving credit facility remained unchanged.
The revolving credit facility may be used for dollar and euro denominated borrowings, has a $500 million sublimit for dollar and euro denominated letters of credit, a $1,000 million uncommitted accordion feature, and supports our commercial paper program. The aggregate balance of outstanding borrowings and letters of credit under the facility may not exceed $2,500 million at any given time. Borrowings under the facility bear interest at a Base Rate or LIBOR, plus an applicable margin. Additional fees are incurred for the average daily unused commitments.
The facility contains customary covenants and warranties, including specified restrictions on indebtedness and liens. In addition, we are required to maintain a leverage ratio at the end of every quarter of 3.50 to 1.00 or less for the period covering the most recent four quarters. We are in compliance with these covenants as of December 31, 2017.
At December 31, 2017, we had no outstanding commercial paper, no outstanding letters of credit and no outstanding borrowings under the 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”). The program 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.
_U.S. Receivables Securitization Facility—_Our $900 million U.S. accounts receivable securitization facility, which expires in August 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 provisions of the agreement. The facility is also subject to customary warranties and covenants, 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 our parent company. Additional fees are incurred for the average daily unused commitments.
At December 31, 2017, there were no borrowings or letters of credit outstanding under the facility.
Precious Metal Financings—We enter into lease agreements for precious metals which are used in our production processes. All precious metal borrowings are classified as Short-term debt.
Weighted Average Interest Rate—At December 31, 2017 and 2016, our weighted average interest rates on outstanding short-term debt were 1.8% and 0.9%, respectively.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
_Debt Discount and Issuance Costs—_Amortization of debt discount and debt issuance costs resulted in amortization expense of $15 million for the year ended December 31, 2017, and $16 million for each year ended December 31, 2016 and 2015, which is included in Interest expense in the Consolidated Statements of Income.
13. Lease Commitments
We lease office facilities, railcars, vehicles, and other equipment under operating leases. Some leases contain renewal provisions, purchase options and escalation clauses.
The aggregate future estimated payments under these commitments are:
| Millions of dollars | ||||
| 2018 | $ | 311 | ||
| 2019 | 232 | |||
| 2020 | 194 | |||
| 2021 | 165 | |||
| 2022 | 26 | |||
| Thereafter | 517 | |||
| Total minimum lease payments | $ | 1,445 | ||
Rental expense for the years ended December 31, 2017, 2016 and 2015 was $440 million, $426 million and $422 million, respectively.
14. Financial Instruments and Fair Value Measurements
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.
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 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.
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
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 foreign currency losses of $1 million in 2017, $4 million in 2016, and $7 million in 2015.
Financial Instruments Measured at Fair Value on a Recurring Basis—The following table summarizes financial instruments outstanding as of December 31, 2017 and 2016 that are measured at fair value on a recurring basis:
| December 31, 2017 | December 31, 2016 | |||||||||||||||||
| Notional Amount | Fair Value | Notional Amount | Fair Value | Balance Sheet Classification | ||||||||||||||
| Millions of dollars | ||||||||||||||||||
| Assets— | ||||||||||||||||||
| Derivatives designated as hedges: | ||||||||||||||||||
| Commodities | $ | — | $ | — | $ | 4 | $ | — | Prepaid expenses and other current assets | |||||||||
| Commodities | — | — | 54 | 3 | Other assets | |||||||||||||
| Foreign currency | — | 26 | 604 | 49 | Prepaid expenses and other current assets | |||||||||||||
| Foreign currency | 2,000 | 25 | 2,439 | 282 | Other assets | |||||||||||||
| Interest rates | — | 20 | — | 6 | Prepaid expenses and other current assets | |||||||||||||
| Interest rates | 650 | 1 | 2,200 | 11 | Other assets | |||||||||||||
| Derivatives not designated as hedges: | ||||||||||||||||||
| Commodities | 77 | 20 | 85 | 3 | Prepaid expenses and other current assets | |||||||||||||
| Foreign currency | 19 | — | 11 | — | Prepaid expenses and other current assets | |||||||||||||
| Non-derivatives: | ||||||||||||||||||
| Available-for-sale securities | 1,310 | 1,307 | 1,069 | 1,073 | Short-term investments | |||||||||||||
| Total | $ | 4,056 | $ | 1,399 | $ | 6,466 | $ | 1,427 | ||||||||||
| Liabilities— | ||||||||||||||||||
| Derivatives designated as hedges: | ||||||||||||||||||
| Commodities | $ | 97 | $ | 8 | $ | — | $ | — | Accrued liabilities | |||||||||
| Commodities | 5 | — | — | — | Other liabilities | |||||||||||||
| Foreign currency | 139 | 29 | — | 15 | Accrued liabilities | |||||||||||||
| Foreign currency | 950 | 140 | — | — | Other liabilities | |||||||||||||
| Interest rates | — | 5 | — | 1 | Accrued liabilities | |||||||||||||
| Interest rates | 3,350 | 58 | 1,400 | 20 | Other liabilities | |||||||||||||
| Derivatives not designated as hedges: | ||||||||||||||||||
| Commodities | 108 | 29 | 103 | 11 | Accrued liabilities | |||||||||||||
| Foreign currency | 995 | 11 | 28 | 1 | Accrued liabilities | |||||||||||||
| Non-derivatives: | ||||||||||||||||||
| Performance share awards | 23 | 23 | 19 | 19 | Accrued liabilities | |||||||||||||
| Performance share awards | 27 | 27 | 22 | 22 | Other liabilities | |||||||||||||
| Total | $ | 5,694 | $ | 330 | $ | 1,572 | $ | 89 | ||||||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
All derivatives and available-for-sale securities in the tables above are classified as Level 2, except our limited partnership investments included in our available-for-sale securities discussed below, that are measured at fair value using the net asset value per share (or its equivalent) practical expedient and have not been classified in the fair value hierarchy.
At December 31, 2017, our outstanding foreign currency and commodity contracts not designated as hedges mature in January 2018 and from January 2018 to June 2018, respectively.
Financial Instruments Not Measured at Fair Value on a Recurring Basis—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 December 31, 2017 and 2016. Short-term and long-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 and commercial paper.
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||
| Millions of dollars | ||||||||||||||||
| Non-derivatives: | ||||||||||||||||
| Assets: | ||||||||||||||||
| Short-term loans receivable | $ | 570 | $ | 570 | $ | 369 | $ | 369 | ||||||||
| Liabilities: | ||||||||||||||||
| Short-term debt | $ | 64 | $ | 75 | $ | 90 | $ | 98 | ||||||||
| Long-term debt | 8,526 | 9,442 | 8,382 | 9,147 | ||||||||||||
| Total | $ | 8,590 | $ | 9,517 | $ | 8,472 | $ | 9,245 | ||||||||
All financial instruments in the table above are classified as Level 2. There were no transfers between Level 1 and Level 2 for any of our financial instruments during the years ended December 31, 2017 and 2016.
_Net Investment Hedges—_In 2017 and 2016, we entered into €617 million and €275 million, respectively, of foreign currency contracts that were designated as net investment hedges. In 2017 and 2016, foreign currency contracts with an aggregate notional value of €550 million and €1,200 million, respectively, expired. Upon settlement of these foreign currency contracts in 2017, we paid €550 million ($658 million at the expiry spot rate) to our counterparties and received $609 million from our counterparties. In 2016, we paid €1,200 million ($1,356 million at the expiry spot rate) to our counterparties and received $1,295 million from our counterparties.
In 2016, we also issued euro denominated notes payable due 2022 with notional amounts totaling €750 million that were designated as a net investment hedge.
At December 31, 2017 and December 31, 2016, we had outstanding foreign currency contracts with an aggregate notional value of €742 million ($789 million) and €675 million ($743 million), respectively, designated as net investment hedges. In addition, at December 31, 2017 and December 31, 2016, we had outstanding foreign-currency denominated debt, with notional amounts totaling €750 million ($899 million) and €750 million ($791 million), respectively, designated as a net investment hedge.
There was no ineffectiveness recorded for any of these net investment hedging relationships during the years ended December 31, 2017, 2016 and 2015.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
_Cash Flow Hedges—_The following table summarizes our cash flow hedges outstanding at December 31, 2017 and December 31, 2016:
| December 31, 2017 | December 31, 2016 | |||||||||||
| Millions of dollars | Notional Value | Notional Value | Expiration Date | |||||||||
| Foreign currency | $ | 2,300 | $ | 2,300 | 2021 to 2027 | |||||||
| Interest rates | 1,000 | 1,000 | 2019 | |||||||||
| Commodities | 102 | 58 | 2018 to 2019 |
In 2015 we recognized a gain of $15 million in Accumulated other comprehensive loss related to the settlement of our forward-starting interest rate swap agreements. In 2017 and 2016, there was no settlement of our forward-starting swap agreements.
The ineffectiveness recorded for these hedging relationships were less than $1 million during each of the years ended December 31, 2017, 2016 and 2015.
As of December 31, 2017, less than $1 million (on a pretax basis) and $8 million (on a pretax basis) is scheduled to be reclassified as a decrease to interest expense and cost of sales respectively over the next twelve months.
_Fair Value Hedges—_In February 2017, we entered into U.S. dollar fixed-for-floating interest rate swaps to mitigate changes in 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 fixed-rate and variable-rate are settled semi-annually and quarterly, respectively.
In the third quarter of 2014, we entered into U.S. dollar fixed-for-floating interest rate swaps to mitigate changes in the fair value of our $2,000 million 5% senior notes due 2019. 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.
In 2016 and 2017, we entered into U.S. dollar fixed-for-floating interest rate swaps with aggregate notional value of $600 million and $400 million, respectively, 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 fixed and variable payments for the interest rate swaps related to our 6% senior notes due 2021 are settled semi-annually and monthly, respectively.
At December 31, 2017 and December 31, 2016, we had outstanding interest rate contracts with aggregate notional amounts of $3,000 million and $2,600 million, respectively, designated as fair value hedges. Our interest rate contracts outstanding at December 31, 2017 mature from 2019 to 2027.
We recognized a net loss of $16 million during the year ended December 31, 2017 and net gains of $32 million and $44 million during the years ended December 31, 2016 and 2015, respectively, related to the ineffectiveness of our hedging relationships.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
_Impact on Earnings and Other Comprehensive Income—_The following tables summarize the pretax effect of derivative instruments and non-derivative instruments on Other comprehensive income and earnings for the years ended December 31, 2017, 2016 and 2015:
| Effect of Financial Instruments | ||||||||||||||
| Year Ended December 31, 2017 | ||||||||||||||
| Millions of dollars | Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI to Income | Additional Gain (Loss) Recognized in Income | Income Statement Classification | ||||||||||
| Derivatives designated as hedges: | ||||||||||||||
| Commodities | $ | (11 | ) | $ | — | $ | — | Cost of sales | ||||||
| Foreign currency | (466 | ) | 265 | 42 | Other income, net; Interest expense | |||||||||
| Interest rates | (25 | ) | (1 | ) | 2 | Interest expense | ||||||||
| Derivatives not designated as hedges: | ||||||||||||||
| Commodities | — | — | (18 | ) | Sales and other operating revenues | |||||||||
| Commodities | — | — | (23 | ) | Cost of sales | |||||||||
| Foreign currency | — | — | (23 | ) | Other income, net | |||||||||
| Non-derivatives designated as hedges: | ||||||||||||||
| Long-term debt | (109 | ) | — | — | Other income, net | |||||||||
| $ | (611 | ) | $ | 264 | $ | (20 | ) | |||||||
| Effect of Financial Instruments | ||||||||||||||
| Year Ended December 31, 2016 | ||||||||||||||
| Millions of dollars | Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI to Income | Additional Gain (Loss) Recognized in Income | Income Statement Classification | ||||||||||
| Derivatives designated as hedges: | ||||||||||||||
| Commodities | $ | 3 | $ | — | $ | — | Cost of sales | |||||||
| Foreign currency | (30 | ) | (63 | ) | 46 | Other income, net; Interest expense | ||||||||
| Interest rates | (17 | ) | — | 8 | Interest expense | |||||||||
| Derivatives not designated as hedges: | ||||||||||||||
| Commodities | — | — | 12 | Sales and other operating revenues | ||||||||||
| Commodities | — | — | 6 | Cost of sales | ||||||||||
| Foreign currency | — | — | 16 | Other income, net | ||||||||||
| Non-derivatives designated as hedges: | ||||||||||||||
| Long-term debt | 58 | — | — | Other income, net | ||||||||||
| Total | $ | 14 | $ | (63 | ) | $ | 88 | |||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Effect of Financial Instruments | ||||||||||||||
| Year Ended December 31, 2015 | ||||||||||||||
| Millions of dollars | Gain (Loss) Recognized in AOCI | Gain (Loss) Reclassified from AOCI to Income | Additional Gain (Loss) Recognized in Income | Income Statement Classification | ||||||||||
| Derivatives designated as hedges: | ||||||||||||||
| Foreign currency | $ | 257 | $ | (207 | ) | $ | 45 | Other income, net; Interest expense | ||||||
| Interest rates | 17 | — | 38 | Interest expense | ||||||||||
| Derivatives not designated as hedges: | ||||||||||||||
| Commodities | — | — | (14 | ) | Sales and other operating revenues | |||||||||
| Commodities | — | — | 50 | Cost of sales | ||||||||||
| Foreign currency | — | — | (24 | ) | Other income, net | |||||||||
| Total | $ | 274 | $ | (207 | ) | $ | 95 | |||||||
For the years ended December 31, 2017, 2016 and 2015, the pretax effect of the periodic receipt of fixed interest and payment of variable interest associated with our fixed-for-floating interest rate swaps resulted in an additional gain (loss) recognized in Interest expense of $23 million, $21 million and $29 million, respectively.
_Investments in Marketable Securities—_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 December 31, 2017 and 2016:
| December 31, 2017 | ||||||||||||||||
| Millions of dollars | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Commercial paper | $ | 180 | $ | — | $ | — | $ | 180 | ||||||||
| Bonds | 630 | — | — | 630 | ||||||||||||
| Certificates of deposit | 150 | — | — | 150 | ||||||||||||
| Limited partnership investments | 350 | 2 | (5 | ) | 347 | |||||||||||
| Total available-for-sale securities | $ | 1,310 | $ | 2 | $ | (5 | ) | $ | 1,307 | |||||||
| December 31, 2016 | ||||||||||||||||
| Millions of dollars | Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Commercial paper | $ | 232 | $ | — | $ | — | $ | 232 | ||||||||
| Bonds | 141 | — | — | 141 | ||||||||||||
| Certificates of deposit | 347 | 1 | — | 348 | ||||||||||||
| Limited partnership investments | 350 | 2 | — | 352 | ||||||||||||
| Total available-for-sale securities | $ | 1,070 | $ | 3 | $ | — | $ | 1,073 | ||||||||
| Held-to-maturity securities: | ||||||||||||||||
| Time deposits | $ | 74 | $ | — | $ | — | $ | 74 | ||||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
At December 31, 2017 and 2016, we had marketable securities classified as Cash and cash equivalents of $1,035 million and $351 million, respectively.
Our limited partnership investments include investments in, among other things, equities and equity related securities, debt securities, credit instruments, global interest rate products, currencies, commodities, futures, options, warrants and swaps. These investments, which include both long and short positions, may be redeemed at least monthly with advance notice ranging up to ninety days. The fair value of these funds is estimated using the net asset value (“NAV”) per share of the respective pooled fund investment.
No losses related to other-than-temporary impairments of our available-for-sale and held-to-maturity investments have been recorded in Accumulated other comprehensive loss during the years ended December 31, 2017, 2016 and 2015.
As of December 31, 2017, our available-for-sale securities had the following maturities: commercial paper securities held by the Company had maturities between two and three months; bonds had maturities between four and thirty-four months; certificates of deposit mature in three months; and limited partnership investments mature between one and three months.
The proceeds from maturities and sales of our available-for-sale securities during the years ended December 31, 2017, 2016 and 2015 are summarized in the following table:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Proceeds from maturities of securities | $ | 499 | $ | 674 | $ | 2,288 | ||||||
| Proceeds from sales of securities | — | — | 201 |
We recognized realized gains of less than $1 million in connection with the sale of securities during the year ended December 31, 2015. No gain or loss was realized in connection with the sales of our available-for-sale securities during the years ended December 31, 2017 and 2016, respectively.
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 year ended December 31, 2017, we had maturities of our held-to-maturity securities of $75 million and had no transfers of investments classified as held-to-maturity to available-for-sale.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the fair value and unrealized losses related to available-for-sale and held-to-maturity securities that were in a continuous unrealized loss position for less than and greater than twelve months as of December 31, 2017, 2016 and 2015:
| December 31, 2017 | ||||||||||||||||
| Less than 12 months | Greater than 12 months | |||||||||||||||
| Millions of dollars | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Limited partnership investments | $ | 117 | $ | (5 | ) | $ | — | $ | — | |||||||
| December 31, 2016 | ||||||||||||||||
| Less than 12 months | Greater than 12 months | |||||||||||||||
| Millions of dollars | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Limited partnership investments | $ | — | $ | — | $ | 105 | $ | (3 | ) | |||||||
| December 31, 2015 | ||||||||||||||||
| Less than 12 months | Greater than 12 months | |||||||||||||||
| Millions of dollars | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
| Available-for-sale securities: | ||||||||||||||||
| Limited partnership investments | $ | 345 | $ | (5 | ) | $ | — | $ | — |
15. Pension and Other Postretirement Benefits
We have defined benefit pension plans which cover employees in the U.S. and various non-U.S. countries. We also sponsor postretirement benefit plans other than pensions that provide medical benefits to certain of our U.S., Canadian, and French employees. In addition, we provide other postemployment benefits such as early retirement and deferred compensation severance benefits to employees of certain non-U.S. countries. We use a measurement date of December 31 for all of our benefit plans.
For 2017, the actual returns on the assets of our U.S. and non-U.S. defined benefit pension plans were a gain of 14.45% and 8.82%, respectively.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides a reconciliation of projected benefit obligations, plan assets and the funded status of our U.S. and non-U.S. defined benefit pension plans:
| Year Ended December 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Benefit obligation, beginning of period | $ | 1,846 | $ | 1,491 | $ | 2,066 | $ | 1,317 | ||||||||
| Service cost | 47 | 39 | 44 | 32 | ||||||||||||
| Interest cost | 60 | 23 | 88 | 32 | ||||||||||||
| Actuarial loss (gain) | 104 | (174 | ) | 15 | 254 | |||||||||||
| Plan amendments | — | 12 | — | (4 | ) | |||||||||||
| Benefits paid | (133 | ) | (31 | ) | (79 | ) | (33 | ) | ||||||||
| Participant contributions | — | 1 | — | 1 | ||||||||||||
| Settlement | — | (30 | ) | (288 | ) | (25 | ) | |||||||||
| Business divestiture | — | — | — | (11 | ) | |||||||||||
| Foreign exchange effects | — | 180 | — | (72 | ) | |||||||||||
| Benefit obligation, end of period | 1,924 | 1,511 | 1,846 | 1,491 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets, beginning of period | 1,571 | 824 | 1,789 | 723 | ||||||||||||
| Actual return on plan assets | 195 | (60 | ) | 100 | 146 | |||||||||||
| Company contributions | 47 | 56 | 49 | 65 | ||||||||||||
| Benefits paid | (133 | ) | (31 | ) | (79 | ) | (33 | ) | ||||||||
| Participant contributions | — | 1 | — | 1 | ||||||||||||
| Settlement | — | (30 | ) | (288 | ) | (25 | ) | |||||||||
| Foreign exchange effects | — | 92 | — | (53 | ) | |||||||||||
| Fair value of plan assets, end of period | 1,680 | 852 | 1,571 | 824 | ||||||||||||
| Funded status of continuing operations,end of period | $ | (244 | ) | $ | (659 | ) | $ | (275 | ) | $ | (667 | ) | ||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Amounts recognized in the Consolidated Balance Sheets consist of: | ||||||||||||||||
| Prepaid benefit cost, long-term | $ | 8 | $ | 25 | $ | 3 | $ | 10 | ||||||||
| Accrued benefit liability, current | — | (24 | ) | — | (18 | ) | ||||||||||
| Accrued benefit liability, long-term | (252 | ) | (660 | ) | (278 | ) | (659 | ) | ||||||||
| Funded status, end of period | $ | (244 | ) | $ | (659 | ) | $ | (275 | ) | $ | (667 | ) | ||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Amounts recognized in Accumulated other comprehensive loss: | ||||||||||||||||
| Actuarial and investment loss | $ | 385 | $ | 234 | $ | 376 | $ | 346 | ||||||||
| Prior service cost (credit) | 2 | 8 | 2 | (1 | ) | |||||||||||
| Balance, end of period | $ | 387 | $ | 242 | $ | 378 | $ | 345 | ||||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following additional information is presented for our U.S. and non-U.S. pension plans as of December 31:
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Accumulated benefit obligation for defined benefit plans | $ | 1,887 | $ | 1,406 | $ | 1,816 | $ | 1,382 |
Pension plans with projected benefit obligations in excess of the fair value of assets are summarized as follows at December 31:
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Projected benefit obligations | $ | 1,776 | $ | 1,285 | $ | 1,703 | $ | 943 | ||||||||
| Fair value of assets | 1,524 | 601 | 1,425 | 265 |
Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Accumulated benefit obligations | $ | 1,742 | $ | 1,190 | $ | 1,676 | $ | 725 | ||||||||
| Fair value of assets | 1,524 | 601 | 1,425 | 135 |
The following table provides the components of net periodic pension costs:
| U.S. Plans | ||||||||||||
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Net Periodic Pension Cost: | ||||||||||||
| Service cost | $ | 47 | $ | 44 | $ | 45 | ||||||
| Interest cost | 60 | 88 | 85 | |||||||||
| Actual return on plan assets | (195 | ) | (100 | ) | 27 | |||||||
| Less—return in excess of (less than) expected return | 74 | (39 | ) | (175 | ) | |||||||
| Expected return on plan assets | (121 | ) | (139 | ) | (148 | ) | ||||||
| Settlement loss | — | 58 | 2 | |||||||||
| Prior service cost amortization | 1 | 1 | — | |||||||||
| Actuarial and investment loss amortization | 20 | 20 | 13 | |||||||||
| Net periodic benefit cost (credit) | $ | 7 | $ | 72 | $ | (3 | ) | |||||
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Non-U.S. Plans | ||||||||||||
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Net Periodic Pension Cost: | ||||||||||||
| Service cost | $ | 39 | $ | 32 | $ | 32 | ||||||
| Interest cost | 23 | 32 | 37 | |||||||||
| Actual return on plan assets | 60 | (146 | ) | (63 | ) | |||||||
| Less—return in excess of (less than) expected return | (79 | ) | 122 | 39 | ||||||||
| Expected return on plan assets | (19 | ) | (24 | ) | (24 | ) | ||||||
| Settlement loss | 2 | 3 | — | |||||||||
| Prior service cost amortization | 2 | — | 2 | |||||||||
| Actuarial and investment loss amortization | 16 | 8 | 8 | |||||||||
| Net periodic benefit cost | $ | 63 | $ | 51 | $ | 55 | ||||||
Lump sum benefit payments of $288 million were made from existing plan assets in 2016. These payments in total exceeded annual service and interest cost, resulting in pension settlement expense of $58 million. A significant portion of the lump sum payments were due to a voluntary lump sum program to certain former employees in select U.S. pension plans.
Our goal is to manage pension investments over the longer term to achieve optimal returns with an acceptable level of risk and volatility. The assets are externally managed by professional investment firms and performance is evaluated continuously against specific benchmarks.
The actual and target asset allocations for our plans are as follows:
| 2017 | 2016 | |||||||||||||||
| Millions of dollars | Actual | Target | Actual | Target | ||||||||||||
| Canada | ||||||||||||||||
| Equity securities | 50 | % | 50 | % | 49 | % | 50 | % | ||||||||
| Fixed income | 50 | % | 50 | % | 51 | % | 50 | % | ||||||||
| United Kingdom—Lyondell Chemical Plans | ||||||||||||||||
| Equity securities | 49 | % | 50 | % | 50 | % | 50 | % | ||||||||
| Fixed income | 51 | % | 50 | % | 50 | % | 50 | % | ||||||||
| United Kingdom—Basell Plans | ||||||||||||||||
| Equity securities | 49 | % | 50 | % | 58 | % | 60 | % | ||||||||
| Fixed income | 51 | % | 50 | % | 42 | % | 40 | % | ||||||||
| United States | ||||||||||||||||
| Equity securities | 36 | % | 32 | % | 33 | % | 32 | % | ||||||||
| Fixed income | 37 | % | 38 | % | 47 | % | 38 | % | ||||||||
| Alternatives | 27 | % | 30 | % | 20 | % | 30 | % | ||||||||
| Netherlands—Lyondell Chemical Plans | ||||||||||||||||
| Fixed income | N/A | N/A | 100 | % | 100 | % | ||||||||||
| Netherlands—Basell Plans | ||||||||||||||||
| Equity securities | N/A | N/A | 7 | % | 10 | % | ||||||||||
| Fixed income | N/A | N/A | 93 | % | 90 | % |
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
During 2017, Netherlands Defined Benefits pension plans modified their insurance arrangements. As a result, the plan assets were transferred to the insurer for investment in its pooled asset portfolio, and treated as a nonparticipating insurance contract. The associated plan assets of $527 million underlying the insurance arrangement are measured at the cash surrender value, which is derived primarily from an actuarial determination of the discounted benefits cash flows. The transfer of plan assets resulted in a change in classification in the fair value hierarchy from Level 2 in 2016 for fixed income securities to Level 3 in 2017. Furthermore, changes in the underlying discount rate assumption (1.93%), resulted in an $83 million reduction reported in actual return on plan assets and a loss in Other Comprehensive Income. This other comprehensive loss was effectively offset by a corresponding gain due to the change in the discount rate used to measure the related plan benefit obligation.
We estimate the following contributions to our pension plans in 2018:
| Millions of dollars | U.S. | Non-U.S. | ||||||
| Defined benefit plans | $ | 44 | $ | 63 | ||||
| Multi-employer plans | — | 7 | ||||||
| Total | $ | 44 | $ | 70 | ||||
As of December 31, 2017, future expected benefit payments by our pension plans which reflect expected future service, as appropriate, are as follows:
| Millions of dollars | U.S. | Non-U.S. | ||||||
| 2018 | $ | 153 | $ | 59 | ||||
| 2019 | 151 | 55 | ||||||
| 2020 | 146 | 53 | ||||||
| 2021 | 142 | 52 | ||||||
| 2022 | 137 | 54 | ||||||
| 2023 through 2027 | 641 | 292 |
The following tables set forth the principal assumptions on discount rates, projected rates of compensation increase and expected rates of return on plan assets, where applicable. These assumptions vary for the different plans, as they are determined in consideration of local conditions.
The assumptions used in determining the net benefit liabilities for our pension plans were as follows at December 31:
| 2017 | 2016 | |||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||
| Weighted average assumptions: | ||||||||||||||||
| Discount rate | 3.73 | % | 2.13 | % | 4.20 | % | 1.52 | % | ||||||||
| Rate of compensation increase | 4.00 | % | 2.94 | % | 4.00 | % | 2.93 | % |
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The assumptions used in determining net benefit costs for our pension plans were as follows:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Weighted average assumptions for the year: | ||||||||||||||||||||||||
| Discount rate | 4.20 | % | 1.52 | % | 4.38 | % | 2.70 | % | 4.04 | % | 2.84 | % | ||||||||||||
| Expected return on plan assets | 8.00 | % | 2.15 | % | 8.00 | % | 3.37 | % | 8.00 | % | 3.63 | % | ||||||||||||
| Rate of compensation increase | 4.00 | % | 2.93 | % | 4.00 | % | 3.15 | % | 4.00 | % | 3.19 | % |
The discount rate assumptions reflect the rates at which the benefit obligations could be effectively settled, based on the yields of high quality long-term bonds where the term closely matches the term of the benefit obligations. At the beginning of 2017, we changed the approach used to measure service and interest costs for pension and other postretirement benefits under significant U.S. plans. For 2016, we measured service and interest costs utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. For 2017, we measured service and interest costs by applying the specific spot rates along that same yield curve to the plans’ projected cash flows. We believe the new approach provides a more precise measurement of service and interest costs. This change did not affect the measurement of our plan obligations. We will account for this change as a change in accounting estimate and, accordingly, will account for it on a prospective basis. The weighted average expected long-term rate of return on assets in our U.S. plans of 8.00% is based on the average level of earnings that our independent pension investment advisor had advised could be expected to be earned over a fifteen to twenty year time period consistent with the plans’ target asset allocation, historical capital market performance, historical plan performance (since the 1997 inception of the U.S. Master Trust) and a forecast of expected future asset returns. The weighted average expected long-term rate of return on assets in our non-U.S. plans of 2.15% is based on expectations and asset allocations that vary by region. We review these long-term assumptions on a periodic basis.
In the U.S. plans, the expected rate of return was derived based on the target asset allocation of 32% equity securities (8.3% expected return), 38% fixed income securities (5.6% expected return), and 30% alternative investments (9.5% expected return). In the non-U.S. plans, the investments consist primarily of fixed income securities whose expected rates of return range from 2.45% to 5.75%.
The following table reflects the actual annualized total returns for the periods ended December 31, 2017:
| Annualized | ||||||||||||||||||||
| December 31, 2017 | One Year | Three Years | Five Years | Ten Years | ||||||||||||||||
| U.S. plan assets | 14.45 | % | 14.45 | % | 6.78 | % | 8.01 | % | 5.30 | % | ||||||||||
| Non-U.S. plan assets | 8.82 | % | 8.82 | % | 9.40 | % | 10.68 | % | 7.82 | % |
Actual rates of return may differ from the expected rate due to the volatility normally experienced in capital markets. The goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility in order to meet the benefit obligations of the plans as they come due.
Our pension plans have not directly invested in securities of LyondellBasell N.V., and there have been no significant transactions between any of the pension plans and the Company or related parties thereof.
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The pension investments that are measured at fair value as of December 31, 2017 and 2016 are summarized below:
| December 31, 2017 | ||||||||||||||||
| Millions of dollars | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| U.S. | ||||||||||||||||
| Common and preferred stock | $ | 410 | $ | 410 | $ | — | $ | — | ||||||||
| Commingled funds measured at net asset value | 410 | — | — | — | ||||||||||||
| Fixed income securities | 225 | — | 225 | — | ||||||||||||
| Real estate measured at net asset value | 102 | |||||||||||||||
| Hedge funds measured at net asset value | 253 | |||||||||||||||
| Private equity measured at net asset value | 94 | |||||||||||||||
| U.S. government securities | 148 | 148 | — | — | ||||||||||||
| Cash and cash equivalents | 34 | 34 | — | — | ||||||||||||
| Total U.S. Pension Assets | $ | 1,676 | $ | 592 | $ | 225 | $ | — | ||||||||
| December 31, 2017 | ||||||||||||||||
| Millions of dollars | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Non-U.S. | ||||||||||||||||
| Common stock | $ | — | $ | — | $ | — | $ | — | ||||||||
| Commingled funds measured at net asset value | 297 | |||||||||||||||
| Fixed income securities | — | — | — | — | ||||||||||||
| Insurance arrangements | 549 | — | — | 549 | ||||||||||||
| Cash and cash equivalents | 5 | 5 | — | — | ||||||||||||
| Total Non-U.S. Pension Assets | $ | 851 | $ | 5 | $ | — | $ | 549 | ||||||||
| December 31, 2016 | ||||||||||||||||
| Millions of dollars | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| U.S. | ||||||||||||||||
| Common and preferred stock | $ | 394 | $ | 394 | $ | — | $ | — | ||||||||
| Commingled funds measured at net asset value | 215 | |||||||||||||||
| Fixed income securities | 215 | — | 215 | — | ||||||||||||
| Real estate measured at net asset value | 100 | |||||||||||||||
| Hedge funds measured at net asset value | 126 | |||||||||||||||
| Private equity measured at net asset value | 77 | |||||||||||||||
| U.S. government securities | 138 | 136 | 2 | — | ||||||||||||
| Cash and cash equivalents | 294 | 294 | — | — | ||||||||||||
| Total U.S. Pension Assets | $ | 1,559 | $ | 824 | $ | 217 | $ | — | ||||||||
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| December 31, 2016 | ||||||||||||||||
| Millions of dollars | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
| Non-U.S. | ||||||||||||||||
| Common stock | $ | 2 | $ | 2 | $ | — | $ | — | ||||||||
| Commingled funds measured at net asset value | 337 | |||||||||||||||
| Fixed income securities | 463 | — | 463 | — | ||||||||||||
| Cash and cash equivalents | 21 | 21 | — | — | ||||||||||||
| Total Non-U.S. Pension Assets | $ | 823 | $ | 23 | $ | 463 | $ | — | ||||||||
The fair value measurements of the investments in certain entities that calculate net asset value per share as of December 31, 2017 are as follows:
| Millions of dollars | Fair Value | Unfunded Commitments | Remaining Life | Redemption Frequency (if currently eligible) | Trade to Settlement Terms | Redemption Notice Period | ||||||||||||||||
| U.S. | ||||||||||||||||||||||
| Commingled fund investing in Domestic Equity | $ | 106 | $ | — | N/A | daily | 1 to 3 days | 3 to 4 days | ||||||||||||||
| Commingled fund investing in International Equity | 61 | — | N/A | daily | 1 to 3 days | 3 days | ||||||||||||||||
| Commingled fund investing in Fixed Income | 243 | — | N/A | daily | 1 to 3 days | 3 to 7 days | ||||||||||||||||
| Real Estate | 102 | 12 | 10 years | quarterly | 15 to 25 days | 45 to 90 days | ||||||||||||||||
| Hedge Funds | 253 | — | N/A | quarterly | 10 to 30 days | 20 to 90 days | ||||||||||||||||
| Private Equity | 94 | 92 | 10 years | Not eligible | N/A | N/A | ||||||||||||||||
| Total U.S. | $ | 859 | $ | 104 | ||||||||||||||||||
| Millions of dollars | Fair Value | Unfunded Commitments | Remaining Life | Redemption Frequency (if currently eligible) | Trade to Settlement Terms | Redemption Notice Period | ||||||||||||||||
| Non-U.S. | ||||||||||||||||||||||
| Commingled fund investing in Domestic Equity | $ | 29 | $ | — | N/A | 1 to 7 days | 1 to 3 days | 1 to 3 days | ||||||||||||||
| Commingled fund investing in International Equity | 119 | — | N/A | 1 to 7 days | 1 to 3 days | 1 to 3 days | ||||||||||||||||
| Commingled fund investing in Fixed Income | 149 | — | N/A | daily | 1 to 3 days | 3 days | ||||||||||||||||
| Total Non-U.S. | $ | 297 | $ | — | ||||||||||||||||||
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair value measurements of the investments in certain entities that calculate net asset value per share as of December 31, 2016 are as follows:
| Millions of dollars | Fair Value | Unfunded Commitments | Remaining Life | Redemption Frequency (if currently eligible) | Trade to Settlement Terms | Redemption Notice Period | ||||||||||||||||
| U.S. | ||||||||||||||||||||||
| Commingled fund investing in Domestic Equity | $ | 78 | $ | — | N/A | daily | 1 to 3 days | 3 to 4 days | ||||||||||||||
| Commingled fund investing in International Equity | 47 | — | N/A | daily | 1 to 3 days | 3 days | ||||||||||||||||
| Commingled fund investing in Fixed Income | 90 | — | N/A | daily | 1 to 3 days | 3 to 7 days | ||||||||||||||||
| Real Estate | 100 | 9 | 10 years | quarterly | 15 to 25 days | 45 to 90 days | ||||||||||||||||
| Hedge Funds | 126 | — | N/A | quarterly | 10 to 30 days | 20 to 90 days | ||||||||||||||||
| Private Equity | 77 | 96 | 10 years | Not eligible | N/A | N/A | ||||||||||||||||
| Total U.S. | $ | 518 | $ | 105 | ||||||||||||||||||
| Millions of dollars | Fair Value | Unfunded Commitments | Remaining Life | Redemption Frequency (if currently eligible) | Trade to Settlement Terms | Redemption Notice Period | ||||||||||||
| Non-U.S. | ||||||||||||||||||
| Commingled fund investing in Domestic Equity | $ | 27 | $ | — | N/A | 1 to 7 days | 1 to 3 days | 1 to 3 days | ||||||||||
| Commingled fund investing in International Equity | 125 | — | N/A | 1 to 7 days | 1 to 3 days | 1 to 3 days | ||||||||||||
| Commingled fund investing in Fixed Income | 185 | — | N/A | daily | 1 to 3 days | 3 days | ||||||||||||
| Total Non-U.S. | $ | 337 | $ | — | ||||||||||||||
The preceding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. The redemption frequency may be subject to market conditions and/or contractual obligations. Furthermore, although the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Multi-employer Plan—The Company participates in a multi-employer arrangement with Pensionskasse der BASF WaG V.VaG (“Pensionskasse”) which provides for benefits to the majority of our employees in Germany. Up to a certain salary level, the benefit obligations are covered by contributions of the Company and the employees to the plan. Contributions made to the multi-employer plan are expensed as incurred.
The following table provides disclosure related to the Company’s multi-employer plan:
| Company Contributions | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Pensionskasse(a) | $ | 27 | $ | 7 | $ | 7 |
| (a) | The Company-specific plan information for the Pensionskasse is not publicly available and the plan is not subject to a collective-bargaining agreement. The plan provides fixed, monthly retirement payments on the |
|---|
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| basis of the credits earned by the participating employees. To the extent that the Pensionskasse is underfunded, the future contributions to the plan may increase and may be used to fund retirement benefits for employees related to other employers. The Pensionskasse financial statements for the years ended December 31, 2016 and 2015 indicated total assets of $7,897 million and $7,560 million, respectively; total actuarial present value of accumulated plan benefits of $7,559 million and $7,232 million, respectively; and total contributions for all participating employers of $246 million and $244 million, respectively. Our plan contributions did not exceed 5 percent of the total contributions in 2017, 2016 or 2015. |
|---|
Other Postretirement Benefits—We sponsor unfunded health care and life insurance plans covering certain eligible retired employees and their eligible dependents. Generally, the medical plans pay a stated percentage of medical expenses reduced by deductibles and other coverage. Life insurance benefits are generally provided by insurance contracts. We retain the right, subject to existing agreements, to modify or eliminate these benefits.
The following table provides a reconciliation of benefit obligations of our unfunded other postretirement benefit plans:
| Year Ended December 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Benefit obligation, beginning of period | $ | 276 | $ | 67 | $ | 285 | $ | 56 | ||||||||
| Service cost | 3 | 2 | 3 | 2 | ||||||||||||
| Interest cost | 9 | 1 | 11 | 2 | ||||||||||||
| Actuarial loss (gain) | 6 | (15 | ) | (7 | ) | 9 | ||||||||||
| Benefits paid | (21 | ) | (1 | ) | (23 | ) | (1 | ) | ||||||||
| Participant contributions | 7 | — | 7 | — | ||||||||||||
| Foreign exchange effects | — | 8 | — | (1 | ) | |||||||||||
| Benefit obligation, end of period | 280 | 62 | 276 | 67 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets, beginning of period | — | — | — | — | ||||||||||||
| Employer contributions | 14 | 1 | 16 | 1 | ||||||||||||
| Participant contributions | 7 | — | 7 | — | ||||||||||||
| Benefits paid | (21 | ) | (1 | ) | (23 | ) | (1 | ) | ||||||||
| Fair value of plan assets, end of period | — | — | — | — | ||||||||||||
| Funded status, end of period | $ | (280 | ) | $ | (62 | ) | $ | (276 | ) | $ | (67 | ) | ||||
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Amounts recognized in the Consolidated | ||||||||||||||||
| Balance Sheets consist of: | ||||||||||||||||
| Accrued benefit liability, current | $ | (18 | ) | $ | (1 | ) | $ | (18 | ) | $ | (1 | ) | ||||
| Accrued benefit liability, long-term | (262 | ) | (61 | ) | (258 | ) | (66 | ) | ||||||||
| Funded status, end of period | $ | (280 | ) | $ | (62 | ) | $ | (276 | ) | $ | (67 | ) | ||||
Table of Contents
LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| December 31, 2017 | December 31, 2016 | |||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||
| Amounts recognized in Accumulated other comprehensive loss: | ||||||||||||||||
| Actuarial and investment income (loss) | $ | 19 | $ | (19 | ) | $ | 25 | $ | (37 | ) | ||||||
| Balance, end of period | $ | 19 | $ | (19 | ) | $ | 25 | $ | (37 | ) | ||||||
The following table provides the components of net periodic other postretirement benefit costs:
| U.S. Plans | ||||||||||||
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Net Periodic Other Postretirement Cost: | ||||||||||||
| Service cost | $ | 3 | $ | 3 | $ | 4 | ||||||
| Interest cost | 9 | 11 | 13 | |||||||||
| Actuarial loss amortization | — | — | 2 | |||||||||
| Net periodic benefit cost | $ | 12 | $ | 14 | $ | 19 | ||||||
| Non-U.S. Plans | ||||||||||||
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Net Periodic Other Postretirement Cost: | ||||||||||||
| Service cost | $ | 2 | $ | 2 | $ | 1 | ||||||
| Interest cost | 1 | 2 | 2 | |||||||||
| Actuarial loss amortization | 3 | 2 | 3 | |||||||||
| Net periodic benefit cost | $ | 6 | $ | 6 | $ | 6 | ||||||
The following table sets forth the assumed health care cost trend rates:
| U.S. Plans | ||||||||||||||||
| December 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| Assumed health care trend rate: | ||||||||||||||||
| Immediate trend rate | 6.7% | 7.0% | ||||||||||||||
| Ultimate trend rate (the rate to which the cost trend rate is assumed to decline) | 4.5% | 4.5% | ||||||||||||||
| Year that the rate reaches the ultimate trend rate | 2038 | 2038 | ||||||||||||||
| Non-U.S. Plans | ||||||||||||||||
| Canada | France | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Assumed health care trend rate: | ||||||||||||||||
| Immediate trend rate | 6.0 | % | 6.0 | % | 4.7 | % | 4.6 | % | ||||||||
| Ultimate trend rate (the rate to which the cost trend rate is assumed to decline) | 4.5 | % | 4.5 | % | 4.7 | % | 4.6 | % | ||||||||
| Year that the rate reaches the ultimate trend rate | 2021 | 2021 | — | — |
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The health care cost trend rate assumption does not typically have a significant effect on the amounts reported due to limits on maximum contribution levels to the medical plans. However, changing the assumed health care cost trend rates by one percentage point in each year would increase or decrease the accumulated other postretirement benefit liability as of December 31, 2017 by $18 million and $12 million, respectively, for non-U.S. plans and by less than $1 million for U.S. plans and would not have a material effect on the aggregate service and interest cost components of the net periodic other postretirement benefit cost for the year then ended.
The assumptions used in determining the net benefit liabilities for our other postretirement benefit plans were as follows:
| December 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||
| Weighted average assumptions: | ||||||||||||||||
| Discount rate | 3.66 | % | 2.48 | % | 4.07 | % | 1.69 | % | ||||||||
| Rate of compensation increase | 4.00 | % | — | 4.00 | % | — |
The assumptions used in determining the net benefit costs for our other postretirement benefit plans were as follows:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | |||||||||||||||||||
| Weighted average assumptions for the year: | ||||||||||||||||||||||||
| Discount rate | 4.07 | % | 1.69 | % | 4.23 | % | 2.69 | % | 3.85 | % | 2.92 | % | ||||||||||||
| Rate of compensation increase | 4.00 | % | — | 4.00 | % | — | 4.00 | % | — |
As of December 31, 2017, future expected benefit payments by our other postretirement benefit plans, which reflect expected future service, as appropriate, were as follows:
| Millions of dollars | U.S. | Non-U.S. | ||||||
| 2018 | $ | 19 | $ | 1 | ||||
| 2019 | 20 | 1 | ||||||
| 2020 | 20 | 1 | ||||||
| 2021 | 21 | 1 | ||||||
| 2022 | 21 | 1 | ||||||
| 2023 through 2027 | 98 | 8 |
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Accumulated Other Comprehensive Loss—The following pretax amounts were recognized in Accumulated other comprehensive loss as of and for the years ended December 31, 2017 and 2016:
| Pension Benefits | Other Benefits | |||||||||||||||
| Millions of dollars | Actuarial (Gain) Loss | Prior Service Cost (Credit) | Actuarial (Gain) Loss | Prior Service Cost (Credit) | ||||||||||||
| December 31, 2015 | $ | 625 | $ | 6 | $ | 12 | $ | — | ||||||||
| Arising during the period | 186 | (4 | ) | 2 | — | |||||||||||
| Amortization | (28 | ) | (1 | ) | (2 | ) | — | |||||||||
| Settlement loss | (61 | ) | — | — | — | |||||||||||
| December 31, 2016 | 722 | 1 | 12 | — | ||||||||||||
| Arising during the period | (65 | ) | 12 | (9 | ) | — | ||||||||||
| Amortization | (36 | ) | (3 | ) | (3 | ) | — | |||||||||
| Settlement loss | (2 | ) | — | — | — | |||||||||||
| December 31, 2017 | $ | 619 | $ | 10 | $ | — | $ | — | ||||||||
In 2017, $65 million of pension benefits actuarial gain primarily reflects $72 million of gains due to changes in discount rate assumption offset by $7 million of losses due to asset experience. There were $9 million of other postretirement benefits actuarial gains primarily due to $2 million of discount rate assumption changes and $6 million of changes due to favorable liability experience, and other immaterial items. In 2016, $186 million of pension benefits actuarial loss primarily reflects $265 million of losses due to changes in discount rate assumption offset by $79 million of gains due to asset experience (actual asset return compared to expected return). There were $2 million of other postretirement benefits actuarial losses due to $14 million of discount rate assumption changes, offset by a gain of $10 million of changes due to favorable liability experience, and other immaterial items.
Deferred income taxes related to amounts in Accumulated other comprehensive income (loss) include provisions of $208 million and $237 million as of December 31, 2017 and 2016, respectively.
At December 31, 2017, Accumulated other comprehensive income (loss) of $10 million represents net actuarial and investment losses related to non-U.S. pension plans that are expected to be recognized as a component of net periodic benefit cost in 2018. There are $21 million of net actuarial and investment losses and $1 million of prior service cost in AOCI at December 31, 2017 for U.S. pension plans expected to be recognized in net periodic benefit cost in 2018. At December 31, 2017, AOCI included $1 million of net actuarial loss related to non-U.S. other postretirement benefits that is expected to be recognized in net periodic benefit cost in 2018.
Defined Contribution Plans—Most employees in the U.S. and certain non-U.S. countries are eligible to participate in defined contribution plans by contributing a portion of their compensation. We also make employer contributions, such as matching contributions, to certain of these plans. The Company has a nonqualified deferred compensation plan that covers senior management in the U.S. The plan was amended in April 2013 to provide for company contributions on behalf of certain eligible employees who earn base pay above the IRS annual compensation limit.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides the company contributions to the Employee Savings Plans:
| Company Contributions | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Millions of dollars | U.S. | Non-U.S. | U.S. | Non-U.S. | U.S. | Non-U.S. | ||||||||||||||||||
| Employee Savings Plans | $ | 36 | $ | 5 | $ | 35 | $ | 7 | $ | 32 | $ | 4 |
16. Incentive and Share-Based Compensation
We are authorized to grant restricted stock units, stock options, performance share units, and other cash and stock awards under our Long-Term Incentive Plan (“LTIP”). The Compensation Committee determines the recipients of the equity awards, the type of awards, the required performance measures, and the timing and duration of each grant. The maximum number of shares of our common stock reserved for issuance under the LTIP is 22,000,000. As of December 31, 2017, there were 5,806,969 shares remaining available for issuance assuming maximum payout for PSUs. Upon share exercise or payment, shares are issued from our treasury shares.
Total share-based compensation expense and the associated tax benefits are as follows for the years ended December 31:
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Compensation Expense: | ||||||||||||
| Restricted stock units | $ | 13 | $ | 10 | $ | 11 | ||||||
| Stock options | 7 | 7 | 6 | |||||||||
| Qualified performance awards | — | (3 | ) | 25 | ||||||||
| Performance share units | 35 | 24 | 11 | |||||||||
| Total | $ | 55 | $ | 38 | $ | 53 | ||||||
| Tax Benefit: | ||||||||||||
| Restricted stock units | $ | 5 | $ | 4 | $ | 4 | ||||||
| Stock options | 2 | 2 | 2 | |||||||||
| Qualified performance awards | — | (1 | ) | 9 | ||||||||
| Performance share units | 12 | 8 | 4 | |||||||||
| Total | $ | 19 | $ | 13 | $ | 19 | ||||||
Beginning in 2017, we elected to recognize forfeitures as they occur for stock-based compensation.
Restricted Stock Unit Awards (“RSUs”)—RSUs generally entitle the recipient to be paid out an equal number of ordinary shares on the third anniversary of the grant date. RSUs, which are subject to customary accelerated vesting or forfeiture in the event of certain termination events, are accounted for as an equity award with compensation cost recognized in the income statement ratably over the vesting period.
In 2015, 190,399 RSUs were granted to the Chief Executive Officer (“CEO”) and three other executive officers. These RSUs vest in annual tranches with 10% vested after one year and an additional 15% vested after two years and the remaining vesting in equal tranches after each of the third, fourth, and fifth years. Compensation cost for these awards is recognized using the graded vesting method.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The holders of all RSUs are entitled to dividend equivalents to be settled no later than March 15, following the year in which dividends are paid, as long as the participant is in full employment at the time of the dividend payment. See the “Dividend Distribution” section of Note 19 for the per share amount of dividend equivalent payments made to the holders of RSUs during 2017, 2016 and 2015. Total dividend equivalent payments were $1 million in each of 2017 and 2016, and $2 million in 2015.
RSUs are valued at the market price of the underlying stock on the date of grant. The weighted average grant date fair value for RSUs granted during the years ended December 31, 2017, 2016 and 2015 was $91.14, $79.77 and $83.31, respectively. The total fair value of RSUs vested during 2017, 2016 and 2015 was $8 million, $16 million and $120 million, respectively.
The following table summarizes RSU activity for the year ended December 31, 2017:
| Number of Units | Weighted Average Grant Date Fair Value (per share) | |||||||
| Thousands of units, except per share amounts | ||||||||
| Outstanding at January 1, 2017 | 295 | $ | 79.03 | |||||
| Granted | 205 | 91.14 | ||||||
| Vested | (95 | ) | 78.97 | |||||
| Forfeited | (28 | ) | 85.20 | |||||
| Outstanding at December 31, 2017 | 377 | $ | 85.17 | |||||
As of December 31, 2017, the unrecognized compensation cost related to RSUs was $15 million, which is expected to be recognized over a weighted average period of 2 years.
Stock Options—Stock options are granted with an exercise price equal to the market price of our ordinary shares at the date of grant. The awards generally have a three-year vesting period that vests in equal increments on the first, second, and third anniversary of the grant date. The awards have a contractual term of ten years, subject to customary accelerated vesting or forfeiture in the event of certain termination events. The stock options are accounted for as equity awards with compensation cost recognized using the graded vesting method.
In 2015, 457,555 stock options were granted to the CEO and three other executive officers. These stock options vest in annual tranches with 10% vested after one year and an additional 15% vested after two years and the remaining vesting in equal tranches after each of the third, fourth, and fifth years.
The fair value of each stock option award is estimated, based on several assumptions, on the date of grant using the Black-Scholes option valuation model. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on our historical stock price volatility over the expected term); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of a United States Treasury zero coupon bond with a maturity equal to the expected life of the option).
The expected term of all options granted is estimated based on a simplified approach. In 2010, when the majority of our options were granted, we determined that the simplified method was appropriate because of the life of
LyondellBasell N.V. and its relative stage of development. Similarly, we did not possess exercise patterns similar to our situation. The option grants that have been made since 2010 have been limited in number and have occurred during periods of substantial share price volatility.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Weighted average fair values of stock options granted in each respective year and the assumptions used in estimating those fair values are as follows:
| 2017 | 2016 | 2015 | ||||||||||
| Weighted average fair value | $ | 21.55 | $ | 20.39 | $ | 22.71 | ||||||
| Fair value assumptions: | ||||||||||||
| Dividend yield | 4.0 | % | 3.0-4.0 | % | 3.0 | % | ||||||
| Expected volatility | 34.9%-35.1 | % | 35.3-36.0 | % | 35.9-37.0 | % | ||||||
| Risk-free interest rate | 2.10%-2.29 | % | 1.14-1.93 | % | 1.48-1.93 | % | ||||||
| Weighted average expected term, in years | 6.0 | 6.0 | 6.0-6.7 |
The following table summarizes stock option activity for the year ended December 31, 2017 for the non-qualified stock options:
| Number of Shares (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Term | Aggregate Intrinsic Value (millions of dollars) | |||||||||||||
| Outstanding at January 1, 2017 | 927 | $ | 74.19 | |||||||||||||
| Granted | 313 | 92.73 | ||||||||||||||
| Exercised | (134 | ) | 44.76 | |||||||||||||
| Forfeited | (45 | ) | 83.34 | |||||||||||||
| Expired | (42 | ) | 84.57 | |||||||||||||
| Outstanding at December 31, 2017 | 1,019 | $ | 82.93 | 7.6 years | $ | 28 | ||||||||||
| Exercisable at December 31, 2017 | 324 | $ | 78.47 | 6.3 years | $ | 10 | ||||||||||
The range of exercise prices for stock options outstanding as of December 31, 2017, 2016 and 2015 was $13.11 to $113.03, $12.61 to $113.03 and $12.61 to $113.03, respectively.
The aggregate intrinsic value of stock options exercised during the years ended December 31, 2017, 2016 and 2015 was $6 million, $1 million and $280 million, respectively.
As of December 31, 2017, the unrecognized compensation cost related to non-qualified stock options was $5 million, which is expected to be recognized over a one-year period. During 2017, cash received from the exercise of stock options was $6 million. There was $2 million tax benefit associated with these exercises.
Performance Share Units (“PSUs”), Qualified Performance Awards (“QPAs”), Medium-Term Incentive Program (“MTI”)—Shares issued in satisfaction of PSU and QPA awards are granted under our LTIP. The target number of share awards is established at the beginning of a three-calendar year performance period. Each unit is equivalent to one share of our common stock. Beginning in 2017, the final number of shares payable is determined based on LyondellBasell N.V.’s Total Shareholder Return (TSR) relative to a group of peer companies, and are classified as equity awards. Compensation expense during the three-calendar year performance period is accrued on a straight- line basis. PSUs are valued using a Monte-Carlo simulation payout value on grant date. These share awards are subject to customary accelerated vesting and forfeiture in the event of certain termination events.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
PSU awards granted prior to 2017 and QPA awards are similar. The final number of shares payable related to pre-2017 PSUs and QPAs are determined at the end of the three-calendar year performance period by our Compensation Committee. Since the service-inception date precedes the grant date, these share awards are treated as a liability award until the grant date and compensation expense during the three-calendar year performance period is accrued on a straight-line basis subject to fair value adjustments. Pre-2017 PSU awards are valued based on the market price of the underlying stock on the date of payment.
Beginning January 1, 2016, the holders of PSUs are entitled to accrue dividend equivalent units. These dividend equivalent units will be converted to shares upon payment at the end of the three-year performance cycle and are classified in Accrued and Other liabilities on the Consolidated Balance Sheets. PSU dividend equivalent units on liability awards are recorded in compensation expense while PSU dividend equivalent units on equity awards are recorded in retained earnings.
The following table summarizes PSU activity for the year ended December 31, 2017:
| Number of Units | Weighted Average Grant Date Fair Value (per share) | |||||||
| Thousands of units, except per share amounts | ||||||||
| Outstanding at January 1, 2017 | — | $ | — | |||||
| Granted | 237 | 93.28 | ||||||
| Vested | — | — | ||||||
| Forfeited | (13 | ) | 93.28 | |||||
| Outstanding at December 31, 2017 | 224 | $ | 93.28 | |||||
The number of PSUs are based on the target number of share awards. The assumptions used in the Monte Carlo simulation to estimate the fair value of PSUs granted in 2017 are as follows:
| 2017 | ||||
| Expected volatility of LyondellBasell N.V. common stock | 30.98 | % | ||
| Expected volatility of peer companies | 16.98-39.89 | % | ||
| Average correlation coefficient of peer companies | 0.51 | |||
| Risk-free interest rate | 1.46 | % |
As of December 31, 2017, the unrecognized compensation cost related to PSUs and dividend equivalents assuming target payout was $27 million, which is expected to be recognized over a weighted average period of 2 years.
For grants made in 2013, eligible employees other than executive officers could elect to receive share-based awards (QPAs) or cash-based awards (MTI) while executive officers were only eligible for the share-based awards (QPAs). Awards under the MTI are accounted for as a liability and classified in Other liabilities on the Consolidated Balance Sheets. We recorded compensation expense for cash MTI awards of $1 million and $10 million for the years ended December 31, 2016 and 2015, respectively, based on the expected achievement of performance results.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The weighted average grant date fair value for QPAs granted during the years ended December 31, 2016 and 2015 was $77.93 and $89.94, respectively. The total fair value of QPAs vested during 2016 and 2015 was $20 million and $33 million, respectively.
Employee Stock Purchase Plan
We have an Employee Share Purchase Plan (“ESPP”) which includes a 10% discount and a look-back provision. These provisions allow participants to purchase our stock at a discount on the lower of the fair market value at the beginning or end of the purchase period. As a result of the 10% discount and the look-back provision, the ESPP is considered a compensatory plan under generally accepted accounting principles.
1 7. Income Taxes
LyondellBasell Industries N.V. is tax resident in the United Kingdom pursuant to a mutual agreement procedure determination ruling between the Dutch and United Kingdom competent authorities and therefore subject solely to the United Kingdom corporate income tax system.
Through our subsidiaries, we have substantial operations world-wide and earn significant income in the United States. Taxes are primarily paid on the earnings generated in various jurisdictions, including the United States, The Netherlands, Germany, France, Italy and other countries. LyondellBasell Industries N.V. has little or no taxable income of its own because, as a holding company, it does not conduct any operations. Instead, the subsidiaries through which we operate incur tax obligations in the jurisdictions in which they operate.
We monitor income tax developments in countries where we conduct business. On December 22, 2017, the U.S. enacted “H.R.1”, also known as the “Tax Cuts and Jobs Act” (the “Tax Act”) with some provisions effective as early as 2017 while others are delayed until 2018. This change in U.S. tax law included a reduction in the federal corporate tax rate from 35% to 21% for years beginning after 2017, which resulted in the remeasurement of our U.S. net deferred income tax liabilities. Our 2017 income tax provision includes an $819 million income tax benefit related to the remeasurement of our U.S. net deferred income tax liabilities. Although the $819 million income tax benefit represents a reasonable estimate of the impact of the Tax Act on our Consolidated Financial Statements as of December 31, 2017, it should be considered provisional. The impact of the Tax Act may differ from this reasonable estimate due to additional guidance that may be issued, changes in assumptions made, and the finalization of certain U.S. income tax positions with the filing of our 2017 U.S. income tax return which will allow for the ability to conclude whether any further adjustments are necessary to our deferred tax assets and liabilities. Any adjustments to these provisional amounts will be reported as a component of income tax expense in the reporting period in which any such adjustments are identified which will be no later than the fourth quarter of 2018. We will continue to analyze the Tax Act to determine the full effects of the new law.
In September 2016, the United Kingdom enacted provisions (the so called “anti-hybrid provisions”), effective for years beginning January 1, 2017, that resulted in changes to our internal financing structure which did not materially impact our Consolidated Financial Statements. In addition, in October 2016 the U.S. Treasury issued final Section 385 debt-equity regulations that may impact our internal financings in future years. Pursuant to a recent Executive Order, the Treasury Department reviewed these regulations and determined to delay but retain these regulations, subject to further review after enactment of U.S. tax reform. There has been an increase in attention, both in the U.S. and globally, to the tax practices of multinational companies, including the European Union’s state aid investigations and proposals by the Organization for Economic Cooperation and Development with respect to base erosion and profit shifting. Such attention may result in additional legislative changes that could adversely affect our tax rate. Other than the recently enacted Tax Act, Management does not believe that
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
The significant components of the provision for income taxes are as follows:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Current: | ||||||||||||
| U.S. federal | $ | 543 | $ | 421 | $ | 1,009 | ||||||
| Non-U.S. | 595 | 557 | 468 | |||||||||
| State | 47 | 51 | 72 | |||||||||
| Total current | 1,185 | 1,029 | 1,549 | |||||||||
| Deferred: | ||||||||||||
| U.S. federal | (637 | ) | 339 | 66 | ||||||||
| Non-U.S. | 22 | 20 | 104 | |||||||||
| State | 28 | (2 | ) | 11 | ||||||||
| Total deferred | (587 | ) | 357 | 181 | ||||||||
| Provision for income taxes before tax effects of other comprehensive income | 598 | 1,386 | 1,730 | |||||||||
| Tax effects of elements of other comprehensive income: | ||||||||||||
| Pension and postretirement liabilities | 29 | (21 | ) | 4 | ||||||||
| Financial derivatives | (14 | ) | (96 | ) | 71 | |||||||
| Foreign currency translation | (33 | ) | (7 | ) | (5 | ) | ||||||
| Unrealized gains (losses) from available-for-sale securities | (3 | ) | 1 | (1 | ) | |||||||
| Total income tax expense in comprehensive income | $ | 577 | $ | 1,263 | $ | 1,799 | ||||||
Since the proportion of U.S. revenues, assets, operating income and associated tax provisions is significantly greater than any other single taxing jurisdiction within the worldwide group, the reconciliation of the differences between the provision for income taxes and the statutory rate is presented on the basis of the U.S. statutory federal income tax rate of 35% as opposed to the United Kingdom statutory rate of 20% to provide a more meaningful insight into those differences. Since the Tax Act lowered the U.S. statutory federal income tax rate to 21% for tax years beginning after 2017, the reconciliation uses the 35% rate in effect for the year ended December 31, 2017. Our effective tax rate for the year ended December 31, 2017 is 10.9%. This summary is shown below:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Income before income taxes: | ||||||||||||
| U.S. | $ | 2,438 | $ | 2,511 | $ | 3,691 | ||||||
| Non-U.S. | 3,055 | 2,722 | 2,518 | |||||||||
| Total | $ | 5,493 | $ | 5,233 | $ | 6,209 | ||||||
| Income tax at U.S. statutory rate | $ | 1,923 | $ | 1,832 | $ | 2,173 | ||||||
| Increase (reduction) resulting from: | ||||||||||||
| Non-U.S. income taxed at lower statutory rates | (164 | ) | (159 | ) | (130 | ) | ||||||
| Remeasurement of U.S. net deferred tax liability | (819 | ) | — | — | ||||||||
| State income taxes, net of federal benefit | 40 | 24 | 59 | |||||||||
| Exempt income | (385 | ) | (349 | ) | (319 | ) | ||||||
| U.S. manufacturing deduction | (57 | ) | (42 | ) | (88 | ) | ||||||
| Other, net | 60 | 80 | 35 | |||||||||
| Income tax provision | $ | 598 | $ | 1,386 | $ | 1,730 | ||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Our 2016 income tax provision included a charge of $135 million for non-cash out of period adjustments from prior years which is reflected in Other, net in the table above. $74 million of the charge relates to a correction for the tax effects on our cross-currency swaps with the remainder relating primarily to adjustments for deferred tax liabilities associated with some of our consolidated subsidiaries. Management concluded that these adjustments were immaterial to all periods presented.
The deferred tax effects of tax loss and credit carryforwards (“tax attributes”) and the tax effects of temporary differences between the tax basis of assets and liabilities and their reported amounts in the Consolidated Financial Statements, reduced by a valuation allowance where appropriate, are presented below. The 2017 impact of re-measurement of the U.S. net deferred tax liability resulting from the U.S. enactment of the Tax Act is included in the various components of deferred income taxes.
| December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| Deferred tax liabilities: | ||||||||
| Accelerated tax depreciation | $ | 1,523 | $ | 1,910 | ||||
| Investment in joint venture partnerships | 214 | 304 | ||||||
| Intangible assets | 48 | 140 | ||||||
| Inventory | 266 | 379 | ||||||
| Other liabilities | 26 | 41 | ||||||
| Total deferred tax liabilities | 2,077 | 2,774 | ||||||
| Deferred tax assets: | ||||||||
| Tax attributes | 196 | 255 | ||||||
| Employee benefit plans | 315 | 404 | ||||||
| Other assets | 97 | 72 | ||||||
| Total deferred tax assets | 608 | 731 | ||||||
| Deferred tax asset valuation allowances | (96 | ) | (96 | ) | ||||
| Net deferred tax assets | 512 | 635 | ||||||
| Net deferred tax liabilities | $ | 1,565 | $ | 2,139 | ||||
| December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| Balance sheet classifications: | ||||||||
| Deferred tax assets—long-term | $ | 90 | $ | 192 | ||||
| Deferred tax liability—long-term | 1,655 | 2,331 | ||||||
| Net deferred tax liabilities | $ | 1,565 | $ | 2,139 | ||||
At December 31, 2017 and 2016, we had total tax attributes available in the amount of $784 million and $968 million, respectively, for which a deferred tax asset was recognized at December 31, 2017 and 2016 of $196 million and $255 million, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The scheduled expiration of the tax attributes and the related deferred tax assets, before valuation allowance, as of December 31, 2017 are as follows:
| Millions of dollars | Tax Attributes | Deferred Tax on Tax Attributes | ||||||
| 2018 | $ | 26 | $ | 6 | ||||
| 2019 | 35 | 9 | ||||||
| 2020 | — | — | ||||||
| 2021 | 29 | 2 | ||||||
| 2022 | 15 | 1 | ||||||
| Thereafter | 147 | 33 | ||||||
| Indefinite | 532 | 145 | ||||||
| $ | 784 | $ | 196 | |||||
The tax attributes are primarily related to operations in France, Canada, the United Kingdom, Spain, The Netherlands and the United States. The related deferred tax assets by primary jurisdictions are shown below:
| December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| France | $ | 92 | $ | 140 | $ | 197 | ||||||
| Canada | 31 | 29 | 31 | |||||||||
| United Kingdom | 17 | 16 | 17 | |||||||||
| Spain | 32 | 33 | 38 | |||||||||
| The Netherlands | 13 | 19 | 23 | |||||||||
| United States | 10 | 16 | 15 | |||||||||
| Other | 1 | 2 | 1 | |||||||||
| $ | 196 | $ | 255 | $ | 322 | |||||||
To fully realize these net deferred tax assets, we will need to generate sufficient future taxable income in the countries where these tax attributes exist during the periods in which the attributes can be utilized. Based upon projections of future taxable income over the periods in which the attributes can be utilized and/or temporary differences can be reversed, management believes it is more likely than not that only $101 million of these deferred tax assets at December 31, 2017 will be realized.
Prior to the close of each reporting period, management considers the weight of all evidence, both positive and negative, to determine if a valuation allowance is necessary for each jurisdictions’ net deferred tax assets. We place greater weight on historical evidence over future predictions of our ability to utilize net deferred tax assets. We consider future reversals of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences, and taxable income in prior carryback year(s) if carryback is permitted under applicable law, as well as available prudent and feasible tax planning strategies that would, if necessary, be implemented to ensure realization of the net deferred tax asset.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A summary of the valuation allowances by primary jurisdiction is shown below, reflecting the valuation allowances for all the net deferred tax assets, including deferred tax assets for tax attributes and other temporary differences.
| December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| France | $ | 25 | $ | 22 | $ | 27 | ||||||
| Canada | 32 | 30 | 33 | |||||||||
| United Kingdom | 17 | 16 | 11 | |||||||||
| Spain | — | — | 19 | |||||||||
| The Netherlands | 12 | 12 | 20 | |||||||||
| United States | 10 | 16 | 14 | |||||||||
| Other | — | — | 1 | |||||||||
| $ | 96 | $ | 96 | $ | 125 | |||||||
During 2017, the valuation allowance decreased in the U.S. due to the remeasurement of our U.S. net deferred income tax liability. This reduction was offset by increases in the valuation allowances of other jurisdictions due primarily to currency translation adjustments.
During 2016, we released $19 million of our valuation allowance related to Spanish net deferred tax assets associated with operating losses, as Spanish operations were no longer in a three-year cumulative loss position and our projections indicated and management expected the operating losses to be fully utilized within the next nine years.
During 2015, the reduction in our valuation allowances were primarily attributable to currency translation adjustments.
French tax law provides for an indefinite carryforward of tax losses; however, losses allowed in any particular year may not exceed fifty percent of taxable income. With respect to our French operations, we have a total net deferred tax asset of $62 million, against which we retain a valuation allowance of $25 million for losses that we do not expect to realize a future benefit due to limitations imposed by French tax law. The remaining portion of the net deferred tax asset of $37 million, primarily related to French tax losses, is expected to be fully realized.
We continue to maintain a full valuation allowance against the net deferred tax asset in Canada. Given our operational structure in Canada and the relevant Canadian loss utilization rules, we do not expect to realize a future benefit related to the net deferred tax asset.
Deferred taxes on the unremitted earnings of certain equity joint ventures and subsidiaries of $51 million and $47 million at December 31, 2017 and 2016, respectively, have been provided.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Tax benefits totaling $544 million, $546 million and $521 million relating to uncertain tax positions, which are reflected in Other liabilities, were unrecognized as of December 31, 2017, 2016 and 2015, respectively. The following table presents a reconciliation of the beginning and ending amounts of unrecognized tax benefits:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Balance, beginning of period | $ | 546 | $ | 521 | $ | 534 | ||||||
| Additions for tax positions of current year | 15 | 16 | 9 | |||||||||
| Additions for tax positions of prior years | 3 | 11 | 5 | |||||||||
| Reductions for tax positions of prior years | (20 | ) | (2 | ) | (24 | ) | ||||||
| Settlements (payments/refunds) | — | — | (3 | ) | ||||||||
| Balance, end of period | $ | 544 | $ | 546 | $ | 521 | ||||||
The majority of the 2017, 2016 and 2015 balances, if recognized, will affect the effective tax rate. We operate in multiple jurisdictions throughout the world, and our tax returns are periodically audited or subjected to review by tax authorities. We are currently under examination in a number of tax jurisdictions. As a result, there is an uncertainty in income taxes recognized in our financial statements. We may settle or appeal positions challenged by the tax authorities. It is reasonably possible that, within the next twelve months, due to the settlement of uncertain tax positions with various tax authorities and the expiration of statutes of limitations, unrecognized tax benefits could decrease by up to approximately $110 million. We are no longer subject to any significant income tax examinations by tax authorities for the years prior to 2016 in the Netherlands, prior to 2013 in Italy, prior to 2010 in Germany, prior to 2009 in France, prior to 2016 in the United Kingdom, and prior to 2011 in the U.S., our principal tax jurisdictions.
We recognize interest accrued related to unrecognized tax benefits in income tax expense. Income tax expense included interest and penalties totaling $16 million in each of the years ended December 31, 2017 and 2016 and $5 million in the year ended December 31, 2015. We had accrued approximately $63 million, $47 million and $31 million for interest and penalties as of December 31, 2017, 2016 and 2015, respectively.
18. Commitments and Contingencies
Commitments—We have various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for our businesses and at prevailing market prices. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. At December 31, 2017, we had commitments of approximately $820 million primarily related to building our new Hyperzone high-density polyethylene plant in La Porte, Texas and a world-scale PO/TBA plant on the Texas Gulf Coast. Our other capital expenditure commitments at December 31, 2017 were in the normal course of business.
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.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Environmental Remediation—Our accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $102 million and $95 million as of December 31, 2017 and 2016, respectively. At December 31, 2017, the accrued liabilities for individual sites range from less than $1 million to $19 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:”
| Year Ended December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| Beginning balance | $ | 95 | $ | 106 | ||||
| Additional provisions | — | 5 | ||||||
| Changes in estimates | 11 | 15 | ||||||
| Amounts paid | (13 | ) | (29 | ) | ||||
| Foreign exchange effects | 9 | (2 | ) | |||||
| Ending balance | $ | 102 | $ | 95 | ||||
_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 Company (“Lyondell Chemical”) prior to its acquisition by Basell AF S.C.A.; distributions by Basell AF S.C.A. to its shareholders before it acquired Lyondell Chemical; and management and transaction fees and expenses. Trial of the lawsuit was held in October 2016. In April 2017, the court awarded $7.2 million to the plaintiffs and denied all other relief, and in May 2017 the court issued its Final Judgment reflecting this ruling. With prejudgment interest included, the total Final Judgment is $12.6 million. The plaintiffs filed an appeal to the Federal District Court for the Southern District of New York, which largely affirmed the Final Judgement on January 24, 2018.
The Access Entities have also demanded $100 million in management fees under a 2007 management agreement between an Access affiliate and the predecessor of LyondellBasell AF, as well as other unspecified amounts relating to advice purportedly given in connection with financing and other strategic transactions. In June 2009, an Access affiliate filed a proof of claim in Bankruptcy Court against LyondellBasell AF seeking “no less than” $723 thousand for amounts allegedly owed under the 2007 management agreement. In April 2011, Lyondell Chemical filed an objection to the claim and brought a declaratory judgment action for a determination that the demands are not valid. The declaratory judgment action is stayed pending the outcome of the Weisfelner lawsuit.
We do not believe that the 2007 management agreement is in effect or that the Company or any Company-affiliated entity owes any obligations under the management agreement, including for management fees or for indemnification. We intend to vigorously defend our position in any proceedings and against any claims or demands that may be asserted.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Although the court issued its Final Judgment in Weisfelner in May 2017 as noted above, it remains subject to further potential appeal by the parties. Accordingly, we cannot at this time estimate whether there is a reasonably possible loss or range of loss that may be incurred.
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 December 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.
19. Stockholders’ Equity
Dividend Distributions—The following table summarizes the dividends paid in the periods presented:
| Millions of dollars, except per share amounts | Dividend Per Ordinary Share | Aggregate Dividends Paid | Date of Record | |||||||||
| For the year 2017: | ||||||||||||
| March | $ | 0.85 | $ | 343 | March 6, 2017 | |||||||
| June | 0.90 | 361 | June 5, 2017 | |||||||||
| September | 0.90 | 356 | September 6, 2017 | |||||||||
| December | 0.90 | 355 | December 5, 2017 | |||||||||
| $ | 3.55 | $ | 1,415 | |||||||||
| For the year 2016: | ||||||||||||
| March | $ | 0.78 | $ | 336 | February 29, 2016 | |||||||
| June | 0.85 | 362 | May 24, 2016 | |||||||||
| September | 0.85 | 351 | August 16, 2016 | |||||||||
| December | 0.85 | 346 | November 29, 2016 | |||||||||
| $ | 3.33 | $ | 1,395 | |||||||||
Share Repurchase Program—In May 2017, our shareholders approved a proposal to authorize us to repurchase up to an additional 10% of our outstanding ordinary shares through November 2018 (“May 2017 Share Repurchase Program”). As a result, the authorization of the remaining unpurchased shares under the share repurchase program approved by our shareholders in May 2016 (“May 2016 Share Repurchase Program”) was superseded. We completed the repurchase of shares under our share repurchase programs authorized by our shareholders in May 2015 (“May 2015 Share Repurchase Program”) and April 2014 (“April 2014 Share Repurchase Program”) in 2016 and 2015, respectively.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 classified as Treasury stock and may be retired or used for general corporate purposes, including for various employee benefit and compensation plans.
The following table summarizes our share repurchase activity for the periods presented:
| Millions of dollars, except shares and per share amounts | Shares Repurchased | Average Purchase Price | Total Purchase Price, Including Commissions | |||||||||
| For the year 2017: | ||||||||||||
| May 2016 Share Repurchase Program | 3,501,084 | $ | 85.71 | $ | 300 | |||||||
| May 2017 Share Repurchase Program | 6,516,917 | 83.54 | 545 | |||||||||
| 10,018,001 | $ | 84.30 | $ | 845 | ||||||||
| For the year 2016: | ||||||||||||
| May 2015 Share Repurchase Program | 15,302,707 | $ | 80.15 | $ | 1,226 | |||||||
| May 2016 Share Repurchase Program | 21,316,627 | 79.18 | 1,688 | |||||||||
| 36,619,334 | $ | 79.58 | $ | 2,914 | ||||||||
| For the year 2015: | ||||||||||||
| April 2014 Share Repurchase Program | 19,892,101 | $ | 86.40 | $ | 1,719 | |||||||
| May 2015 Share Repurchase Program | 31,947,812 | 90.66 | 2,896 | |||||||||
| 51,839,913 | $ | 89.03 | $ | 4,615 | ||||||||
Due to the timing of settlements, total cash paid for share repurchases for the years ended December 31, 2017, 2016 and 2015 was $866 million, $2,938 million and $4,656 million, respectively.
Ordinary Shares—The changes in the outstanding amounts of ordinary shares are as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Ordinary shares outstanding: | ||||||||||||
| Beginning balance | 404,046,331 | 440,150,069 | 486,969,402 | |||||||||
| Share-based compensation | 371,980 | 418,892 | 4,972,908 | |||||||||
| Warrants exercised | 4,184 | 200 | 1,989 | |||||||||
| Employee stock purchase plan | 107,560 | 96,504 | 45,683 | |||||||||
| Purchase of ordinary shares | (10,018,001 | ) | (36,619,334 | ) | (51,839,913 | ) | ||||||
| Ending balance | 394,512,054 | 404,046,331 | 440,150,069 | |||||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Treasury Shares—The changes in the amounts of treasury shares held by the Company are as follows:
| Year Ended December 31, | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||
| Ordinary shares held as treasury shares: | ||||||||||||
| Beginning balance | 174,389,139 | 138,285,201 | 91,463,729 | |||||||||
| Share-based compensation | (371,980 | ) | (418,892 | ) | (4,972,908 | ) | ||||||
| Warrants exercised | 509 | — | 150 | |||||||||
| Employee stock purchase plan | (107,560 | ) | (96,504 | ) | (45,683 | ) | ||||||
| Purchase of ordinary shares | 10,018,001 | 36,619,334 | 51,839,913 | |||||||||
| Ending balance | 183,928,109 | 174,389,139 | 138,285,201 | |||||||||
Accumulated Other Comprehensive Income (Loss)—The components of, and after-tax changes in, Accumulated other comprehensive loss as of and for the years ended December 31, 2017, 2016 and 2015 are presented in the following table:
| Millions of dollars | Financial Derivatives | Net Unrealized Holding Gains (Losses) on Investments | Net Unrealized Holding Gains (Losses) on Equity Investees | Defined Benefit Pension and Other Postretirement Benefit Plans | Foreign Currency Translation Adjustments | Total | ||||||||||||||||||
| Balance—January 1, 2017 | $ | (75 | ) | $ | 1 | $ | — | $ | (498 | ) | $ | (939 | ) | $ | (1,511 | ) | ||||||||
| Other comprehensive income (loss) before reclassifications | (323 | ) | (6 | ) | 19 | 62 | 145 | (103 | ) | |||||||||||||||
| Tax (expense) benefit before reclassifications | 86 | 3 | — | (15 | ) | 33 | 107 | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | 264 | — | — | 44 | — | 308 | ||||||||||||||||||
| Tax (expense) benefit | (72 | ) | — | — | (14 | ) | — | (86 | ) | |||||||||||||||
| Net other comprehensive income (loss) | (45 | ) | (3 | ) | 19 | 77 | 178 | 226 | ||||||||||||||||
| Balance—December 31, 2017 | $ | (120 | ) | $ | (2 | ) | $ | 19 | $ | (421 | ) | $ | (761 | ) | $ | (1,285 | ) | |||||||
| Balance—January 1, 2016 | $ | (79 | ) | $ | (5 | ) | $ | — | $ | (428 | ) | $ | (926 | ) | $ | (1,438 | ) | |||||||
| Other comprehensive income (loss) before reclassifications | (29 | ) | 7 | — | (184 | ) | (27 | ) | (233 | ) | ||||||||||||||
| Tax (expense) benefit before reclassifications | 7 | (1 | ) | — | 37 | 7 | 50 | |||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | (63 | ) | — | — | 93 | 7 | 37 | |||||||||||||||||
| Tax (expense) benefit | 89 | — | — | (16 | ) | — | 73 | |||||||||||||||||
| Net other comprehensive income (loss) | 4 | 6 | — | (70 | ) | (13 | ) | (73 | ) | |||||||||||||||
| Balance—December 31, 2016 | $ | (75 | ) | $ | 1 | $ | — | $ | (498 | ) | $ | (939 | ) | $ | (1,511 | ) | ||||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Millions of dollars | Financial Derivatives | Net Unrealized Holding Gains (Losses) on Investments | Net Unrealized Holding Gains (Losses) on Equity Investees | Defined Benefit Pension and Other Postretirement Benefit Plans | Foreign Currency Translation Adjustments | Total | ||||||||||||||||||
| Balance—January 1, 2015 | $ | (80 | ) | $ | — | $ | — | $ | (449 | ) | $ | (497 | ) | $ | (1,026 | ) | ||||||||
| Other comprehensive income (loss) before reclassifications | 279 | (6 | ) | — | (8 | ) | (434 | ) | (169 | ) | ||||||||||||||
| Tax (expense) benefit before reclassifications | (71 | ) | 1 | — | 2 | 5 | (63 | ) | ||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) | (207 | ) | — | — | 33 | — | (174 | ) | ||||||||||||||||
| Tax (expense) benefit | — | — | — | (6 | ) | — | (6 | ) | ||||||||||||||||
| Net other comprehensive income (loss) | 1 | (5 | ) | — | 21 | (429 | ) | (412 | ) | |||||||||||||||
| Balance—December 31, 2015 | $ | (79 | ) | $ | (5 | ) | $ | — | $ | (428 | ) | $ | (926 | ) | $ | (1,438 | ) | |||||||
The amounts reclassified out of each component of Accumulated other comprehensive loss are as follows:
| Millions of dollars | Year Ended December 31, | Affected Line Items on the Consolidated Statements of Income | ||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||
| Reclassification adjustments for: | ||||||||||||||
| Financial derivatives | $ | 264 | $ | (63 | ) | $ | (207 | ) | Other income, net | |||||
| Income tax expense (benefit) | 72 | (89 | ) | — | Provision for income taxes | |||||||||
| Financial derivatives, net of tax | 192 | 26 | (207 | ) | ||||||||||
| Amortization of defined pension items: | ||||||||||||||
| Prior service cost | 3 | 1 | 5 | |||||||||||
| Actuarial loss | 39 | 31 | 28 | |||||||||||
| Settlement loss | 2 | 61 | — | |||||||||||
| Income tax expense | 14 | 16 | 6 | |||||||||||
| Defined pension items, net of tax | 30 | 77 | 27 | |||||||||||
| Foreign currency translations adjustments | — | 7 | — | Other income, net | ||||||||||
| Income tax expense (benefit) | — | — | — | Provision for income taxes | ||||||||||
| Foreign currency translations adjustments, net of tax | — | 7 | — | |||||||||||
| Total reclassifications, before tax | 308 | 37 | (174 | ) | ||||||||||
| Income tax expense (benefit) | 86 | (73 | ) | 6 | Provision for income taxes | |||||||||
| Total reclassifications, after tax | $ | 222 | $ | 110 | $ | (180 | ) | Amount included in net income | ||||||
Amortization of prior service cost and actuarial loss are included in the computation of net periodic pension and other postretirement benefit costs (see Note 15).
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Non-Controlling Interests—In April 2017, we increased our interest in the entity that holds our equity interest in Al Waha Petrochemicals Ltd. from 83.79% to 100% by paying $21 million to exercise a call option to purchase the remaining 16.21% interest held by a third party.
20. Per Share Data
Basic earnings per share are 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 options 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:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||
| Continuing | Discontinued | Continuing | Discontinued | Continuing | Discontinued | |||||||||||||||||||
| Millions of dollars | Operations | Operations | Operations | Operations | Operations | Operations | ||||||||||||||||||
| Net income (loss) | $ | 4,895 | $ | (18 | ) | $ | 3,847 | $ | (10 | ) | $ | 4,479 | $ | (5 | ) | |||||||||
| Less: net (income) loss attributable to non-controlling interests | 2 | — | (1 | ) | — | 2 | — | |||||||||||||||||
| Net income (loss) attributable to the Company shareholders | 4,897 | (18 | ) | 3,846 | (10 | ) | 4,481 | (5 | ) | |||||||||||||||
| Net income attributable to participating securities | (5 | ) | — | (4 | ) | — | (8 | ) | — | |||||||||||||||
| Net income (loss) attributable to ordinary shareholders—basic and diluted | $ | 4,892 | $ | (18 | ) | $ | 3,842 | $ | (10 | ) | $ | 4,473 | $ | (5 | ) | |||||||||
| Millions of shares, except per share amounts | ||||||||||||||||||||||||
| Basic weighted average common stock outstanding | 398 | 398 | 419 | 419 | 465 | 465 | ||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||
| Stock options | 1 | 1 | — | — | — | — | ||||||||||||||||||
| QPA and PSU awards | — | — | 1 | 1 | 1 | 1 | ||||||||||||||||||
| Potential dilutive shares | 399 | 399 | 420 | 420 | 466 | 466 | ||||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||||||
| Basic | $ | 12.28 | $ | (0.05 | ) | $ | 9.17 | $ | (0.02 | ) | $ | 9.63 | $ | (0.01 | ) | |||||||||
| Diluted | $ | 12.28 | $ | (0.05 | ) | $ | 9.15 | $ | (0.02 | ) | $ | 9.60 | $ | (0.01 | ) | |||||||||
| Participating securities | 0.4 | 0.4 | 0.3 | 0.3 | 0.4 | 0.4 | ||||||||||||||||||
| Dividends declared per share of common stock | $ | 3.55 | $ | — | $ | 3.33 | $ | — | $ | 3.04 | $ | — | ||||||||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
21. Segment and Related Information
Our operations are managed through five operating segments, as shown below. We disclose the results of each of our operating segments in accordance with ASC 280, Segment Reporting. Each of the operating segments is managed by a senior executive reporting directly to our Chief Executive Officer, the chief operating decision maker. Discrete financial information is available for each of the segments, and our Chief Executive Officer uses the operating results of each of the operating segments for performance evaluation and resource allocation. The activities of each of our segments from which they earn revenues and incur expenses are described below:
| • | Olefins and Polyolefins—Americas (“O&P—Americas”). Our O&P—Americas segment produces and markets olefins and co-products, polyethylene and polypropylene. |
|---|
| • | Olefins and Polyolefins—Europe, Asia, International (“O&P—EAI”). Our O&P—EAI segment produces and markets olefins and co-products, polyethylene, and polypropylene, including polypropylene compounds. |
|---|
| • | Intermediates and Derivatives (“I&D”). Our I&D segment produces and markets propylene oxide and its derivatives; oxyfuels and related products; and intermediate chemicals such as styrene monomer, acetyls, ethylene oxide and ethylene glycol. |
|---|
| • | Refining. Our Refining segment refines heavy, high-sulfur crude oil and other crude oils of varied types and sources available on the U.S. Gulf Coast into refined products, including gasoline and distillates. |
|---|
| • | Technology. Our Technology segment develops and licenses chemical and polyolefin process technologies and manufactures and sells polyolefin catalysts. |
|---|
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.
Summarized financial information concerning reportable segments is shown in the following table for the periods presented:
| Year Ended December 31, 2017 | ||||||||||||||||||||||||||||
| O&P – Americas | O&P – EAI | I&D | Refining | Technology | Other | Total | ||||||||||||||||||||||
| Millions of dollars | ||||||||||||||||||||||||||||
| Sales and other operating revenues: | ||||||||||||||||||||||||||||
| Customers | $ | 7,592 | $ | 12,040 | $ | 8,346 | $ | 6,165 | $ | 341 | $ | — | $ | 34,484 | ||||||||||||||
| Intersegment | 2,808 | 223 | 126 | 683 | 109 | (3,949 | ) | — | ||||||||||||||||||||
| 10,400 | 12,263 | 8,472 | 6,848 | 450 | (3,949 | ) | 34,484 | |||||||||||||||||||||
| Depreciation and amortization expense | 439 | 239 | 279 | 177 | 40 | — | 1,174 | |||||||||||||||||||||
| Other income (expense), net | 40 | 138 | 1 | 2 | — | (2 | ) | 179 | ||||||||||||||||||||
| Income from equity investments | 42 | 271 | 8 | — | — | — | 321 | |||||||||||||||||||||
| Capital expenditures | 753 | 206 | 332 | 213 | 32 | 11 | 1,547 | |||||||||||||||||||||
| EBITDA | 2,982 | 2,282 | 1,490 | 157 | 223 | — | 7,134 |
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Year Ended December 31, 2016 | ||||||||||||||||||||||||||||
| Millions of dollars | O&P – Americas | O&P – EAI | I&D | Refining | Technology | Other | Total | |||||||||||||||||||||
| Sales and other operating revenues: | ||||||||||||||||||||||||||||
| Customers | $ | 6,757 | $ | 10,404 | $ | 7,085 | $ | 4,559 | $ | 378 | $ | — | $ | 29,183 | ||||||||||||||
| Intersegment | 2,320 | 175 | 141 | 576 | 101 | (3,313 | ) | — | ||||||||||||||||||||
| 9,077 | 10,579 | 7,226 | 5,135 | 479 | (3,313 | ) | 29,183 | |||||||||||||||||||||
| Depreciation and amortization expense | 362 | 229 | 269 | 163 | 41 | — | 1,064 | |||||||||||||||||||||
| Other income (expense), net | 63 | 42 | — | 8 | — | (2 | ) | 111 | ||||||||||||||||||||
| Income from equity investments | 59 | 302 | 6 | — | — | — | 367 | |||||||||||||||||||||
| Capital expenditures | 1,376 | 261 | 333 | 224 | 36 | 13 | 2,243 | |||||||||||||||||||||
| EBITDA | 2,877 | 2,067 | 1,333 | 72 | 262 | (9 | ) | 6,602 |
| Year Ended December 31, 2015 | ||||||||||||||||||||||||||||
| Millions of dollars | O&P – Americas | O&P – EAI | I&D | Refining | Technology | Other | Total | |||||||||||||||||||||
| Sales and other operating revenues: | ||||||||||||||||||||||||||||
| Customers | $ | 7,344 | $ | 11,371 | $ | 7,596 | $ | 6,059 | $ | 365 | $ | — | $ | 32,735 | ||||||||||||||
| Intersegment | 2,620 | 205 | 176 | 498 | 100 | (3,599 | ) | — | ||||||||||||||||||||
| 9,964 | 11,576 | 7,772 | 6,557 | 465 | (3,599 | ) | 32,735 | |||||||||||||||||||||
| Depreciation and amortization expense | 353 | 219 | 233 | 196 | 46 | — | 1,047 | |||||||||||||||||||||
| Other income (expense), net | 10 | 14 | 4 | 2 | — | (5 | ) | 25 | ||||||||||||||||||||
| Income from equity investments | 42 | 283 | 14 | — | — | — | 339 | |||||||||||||||||||||
| Capital expenditures | 668 | 186 | 441 | 108 | 24 | 13 | 1,440 | |||||||||||||||||||||
| EBITDA | 3,661 | 1,825 | 1,475 | 342 | 243 | (13 | ) | 7,533 |
In 2017, our O&P—Americas results include a $31 million gain on the first quarter sale of our Lake Charles, Louisiana site. EBITDA for our O&P—EAI segment includes a $108 million gain on the sale of our 27% interest in Geosel and also includes a $21 million non-cash gain stemming from the elimination of an obligation associated with a lease.
In 2016, operating results for our O&P—Americas segment includes a non-cash, LCM inventory valuation charge of $29 million due mainly to the drop in polypropylene prices. Our O&P—Americas and O&P—EAI segments’ results benefited from gains of $57 million and $21 million, respectively, related to the 2016 sale of our wholly owned subsidiary, Petroken Petroquimica Ensenada S.A.
In 2015, operating results for the O&P—Americas, O&P—EAI, I&D and Refining segments included non-cash charges of $160 million, $30 million, $181 million and $177 million, respectively, related to LCM inventory valuation adjustments. Declines in the prices of ethylene, propylene and other products correlated with crude oil were the primary drivers of the LCM inventory valuation adjustment for the O&P—Americas segment while the LCM inventory valuation adjustment recognized by our O&P—EAI segment is mainly related to polyolefins. Declines in the prices of various chemicals, notably benzene and ETBE, within our I&D segment’s inventory pools led to the LCM inventory valuation adjustment recognized by the I&D segment in 2015. The LCM inventory valuation adjustment recognized by the Refining segment in 2015 was driven primarily by declines in the price of crude oil.
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
A reconciliation of EBITDA to Income from continuing operations before income taxes is shown in the following table for each of the periods presented:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| EBITDA: | ||||||||||||
| Total segment EBITDA | $ | 7,134 | $ | 6,611 | $ | 7,546 | ||||||
| Other EBITDA | — | (9 | ) | (13 | ) | |||||||
| Less: | ||||||||||||
| Depreciation and amortization expense | (1,174 | ) | (1,064 | ) | (1,047 | ) | ||||||
| Interest expense | (491 | ) | (322 | ) | (310 | ) | ||||||
| Add: | ||||||||||||
| Interest income | 24 | 17 | 33 | |||||||||
| Income from continuing operations before income taxes | $ | 5,493 | $ | 5,233 | $ | 6,209 | ||||||
The following assets are summarized and reconciled to consolidated totals in the following table:
| Millions of dollars | O&P – Americas | O&P – EAI | I&D | Refining | Technology | Other | Total | |||||||||||||||||||||
| December 31, 2017 | ||||||||||||||||||||||||||||
| Property, plant and equipment, net | $ | 5,092 | $ | 2,077 | $ | 2,457 | $ | 1,130 | $ | 241 | $ | — | $ | 10,997 | ||||||||||||||
| Investment in PO joint ventures | — | — | 420 | — | — | — | 420 | |||||||||||||||||||||
| Equity investments | 187 | 1,366 | 82 | — | — | — | 1,635 | |||||||||||||||||||||
| Goodwill | 162 | 162 | 237 | — | 9 | — | 570 | |||||||||||||||||||||
| December 31, 2016 | ||||||||||||||||||||||||||||
| Property, plant and equipment, net | $ | 4,688 | $ | 1,881 | $ | 2,288 | $ | 1,067 | $ | 213 | $ | — | $ | 10,137 | ||||||||||||||
| Investment in PO joint ventures | — | — | 415 | — | — | — | 415 | |||||||||||||||||||||
| Equity investments | 164 | 1,332 | 79 | — | — | — | 1,575 | |||||||||||||||||||||
| Goodwill | 162 | 139 | 219 | — | 8 | — | 528 |
The following geographic data for revenues are based upon the location of the customer and for long-lived assets, the location of the assets:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Sales and other operating revenues: | ||||||||||||
| United States | $ | 16,618 | $ | 13,962 | $ | 16,101 | ||||||
| Germany | 2,746 | 2,474 | 2,697 | |||||||||
| Italy | 1,352 | 1,203 | 1,349 | |||||||||
| France | 1,306 | 1,055 | 1,201 | |||||||||
| Mexico | 1,504 | 1,026 | 951 | |||||||||
| The Netherlands | 1,069 | 727 | 856 | |||||||||
| Other | 9,889 | 8,736 | 9,580 | |||||||||
| Total | $ | 34,484 | $ | 29,183 | $ | 32,735 | ||||||
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Year Ended December 31, | ||||||||
| Millions of dollars | 2017 | 2016 | ||||||
| Long-lived assets: | ||||||||
| United States | $ | 8,761 | $ | 8,230 | ||||
| Germany | 1,417 | 1,276 | ||||||
| The Netherlands | 779 | 657 | ||||||
| France | 551 | 530 | ||||||
| Italy | 329 | 309 | ||||||
| Mexico | 198 | 175 | ||||||
| Other | 1,585 | 1,500 | ||||||
| Total | $ | 13,620 | $ | 12,677 | ||||
Long-lived assets include Property, plant and equipment, net, Intangible assets, net, Equity investments, and Investments in PO joint ventures (see Notes 7, 8 and 9).
Revenues by key product are summarized in the following table:
| Year Ended December 31, | ||||||||||||
| Millions of dollars | 2017 | 2016 | 2015 | |||||||||
| Sales and other operating revenues: | ||||||||||||
| Olefins & co-products | $ | 4,304 | $ | 3,215 | $ | 3,446 | ||||||
| Polyethylene | 7,368 | 6,903 | 7,536 | |||||||||
| Polypropylene | 7,824 | 6,917 | 7,616 | |||||||||
| PO & derivatives | 2,204 | 1,852 | 2,149 | |||||||||
| Oxyfuels and related products | 3,022 | 2,676 | 2,906 | |||||||||
| Intermediate chemicals | 3,051 | 2,483 | 2,541 | |||||||||
| Refined products | 6,165 | 4,559 | 6,059 | |||||||||
| Other | 546 | 578 | 482 | |||||||||
| Total | $ | 34,484 | $ | 29,183 | $ | 32,735 | ||||||
22. Unaudited Quarterly Results
The following table presents selected financial data for the quarterly periods in 2017 and 2016:
| For the Quarter Ended | ||||||||||||||||
| Millions of dollars, except per share amounts | March 31 | June 30 | September 30 | December 31 | ||||||||||||
| 2017 | ||||||||||||||||
| Sales and other operating revenues | $ | 8,430 | $ | 8,403 | $ | 8,516 | $ | 9,135 | ||||||||
| Gross profit(a) | 1,439 | 1,802 | 1,577 | 1,607 | ||||||||||||
| Operating income(b) | 1,210 | 1,577 | 1,332 | 1,341 | ||||||||||||
| Income from equity investments | 81 | 78 | 81 | 81 | ||||||||||||
| Income from continuing operations(b) (c) | 805 | 1,134 | 1,058 | 1,898 | ||||||||||||
| Loss from discontinued operations, net of tax | (8 | ) | (4 | ) | (2 | ) | (4 | ) | ||||||||
| Net income(b) (c) | 797 | 1,130 | 1,056 | 1,894 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | 1.98 | 2.82 | 2.67 | 4.80 | ||||||||||||
| Diluted | 1.98 | 2.81 | 2.67 | 4.79 |
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| For the Quarter Ended | ||||||||||||||||
| Millions of dollars, except per share amounts | March 31 | June 30 | September 30 | December 31 | ||||||||||||
| 2016 | ||||||||||||||||
| Sales and other operating revenues | $ | 6,743 | $ | 7,328 | $ | 7,365 | $ | 7,747 | ||||||||
| Gross profit(a) | 1,577 | 1,626 | 1,462 | 1,327 | ||||||||||||
| Operating income(b) | 1,360 | 1,403 | 1,249 | 1,048 | ||||||||||||
| Income from equity investments | 91 | 117 | 81 | 78 | ||||||||||||
| Income from continuing operations(b) | 1,030 | 1,092 | 955 | 770 | ||||||||||||
| Loss from discontinued operations, net of tax | — | (1 | ) | (2 | ) | (7 | ) | |||||||||
| Net income(b) | 1,030 | 1,091 | 953 | 763 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | 2.38 | 2.57 | 2.30 | 1.87 | ||||||||||||
| Diluted | 2.37 | 2.56 | 2.30 | 1.87 |
| (a) | Represents Sales and other operating revenues less Cost of sales. |
|---|
| (b) | The three months ended March 31, 2017 includes a gain of $31 million ($20 million after tax) on the sale of our Lake Charles, Louisiana site currently used as a logistic terminal. The three months ended June 30, 2017 includes a $21 million non-cash gain ($14 million after tax) stemming from the elimination of an obligation associated with a lease. The three months ended September 30, 2017 includes a $108 million gain ($103 million after tax) on the sale of our 27% interest in Geosel. |
|---|
The three months ended March 31, 2016 included charges of $40 million related to out-of-period adjustments for deferred tax liabilities associated with some of our subsidiaries. We also recognized a pretax LCM inventory valuation charge of $68 million ($47 million after tax) in the three months ended March 31, 2016, which was reversed in the three months ended June 30, 2016. The three months ended March 31, 2016 also included a pretax and after-tax gain of $78 million on the sale of our wholly owned Argentine subsidiary.
The three months ended June 30, 2016 included charges of $21 million related to out-of-period adjustments for deferred tax liabilities associated with some of our subsidiaries.
The three months ended December 31, 2016 included a charge of $61 million for out-of-period tax corrections related to tax effects on our cross-currency swaps, a pretax LCM inventory valuation charge of $29 million ($18 million after tax) and a pension settlement charge of $58 million ($37 million after tax). For additional information related to these adjustments, see Note 21.
| (c) | The three months ended March 31, 2017 includes total charges to interest expense of $113 million ($106 million after tax) related to the redemption of $1,000 million aggregate principal amount of our outstanding 5% senior notes due 2019. The three months ended December 31, 2017 includes an $819 million non-cash tax benefit related to the lower federal income tax rate resulting from the newly enacted U.S. Tax Act. |
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23. Subsequent Events
On February 15, 2018, we reached a definitive agreement to acquire A. Schulman, a global supplier of high-performance plastic compounds, composites and powders. The acquisition builds upon our already existing platform in this space to create a premier Advanced Polymer Solutions business with broad geographic reach, leading technologies and a diverse product portfolio. Under the terms of the agreement, we will acquire A. Schulman for total consideration of $2.25 billion. We will purchase 100 percent of A. Schulman common stock for $42 per share and one contingent value right per share, and assume outstanding debt and certain other obligations. The contingent value rights generally will provide a holder with an opportunity to receive certain net
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LYONDELLBASELL INDUSTRIES N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
proceeds, if any are recovered, from certain ongoing litigation and government investigations relating to A. Schulman’s Citadel and Lucent acquisitions.
The proposed acquisition, which has been unanimously approved by the respective boards of LyondellBasell N.V. and A. Schulman, is subject to customary closing conditions, including regulatory approvals and approval by A. Schulman shareholders. The acquisition is expected to close in the second half of 2018. We are using cash-on-hand to finance the acquisition.
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