XFRA:DLY LyondellBasell Industries NV Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

or

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

For the transition period from              to             

Commission file number: 001-34726

LYONDELLBASELL INDUSTRIES N.V.

(Exact name of registrant as specified in its charter)

 

  The Netherlands    98-0646235
  (State or other jurisdiction of incorporation or organization)    (I.R.S. Employer Identification No.)

Stationsplein 45

3013 AK Rotterdam

The Netherlands

(Address of principal executive offices)

31 10 275 5500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [  ]

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

Large accelerated filer [ x ]            Accelerated filer [  ]          Non-accelerated filer [  ]           Smaller reporting company [  ]

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ x] No [  ]

The registrant had 574,954,832 ordinary shares, €0.04 par value, outstanding at July 24, 2012 (excluding 3,375,353 treasury shares).

 

 


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

TABLE OF CONTENTS

 

     Page  

Part I – Financial Information

     1   

Item 1.  Financial Statements

     1   

Consolidated Statements of Income

     1   

Consolidated Statements of Comprehensive Income

     2   

Consolidated Balance Sheets

     3   

Consolidated Statements of Cash Flows

     5   

Consolidated Statement of Stockholders’ Equity

     6   

Notes to the Consolidated Financial Statements

     7   

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

     34   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     52   

Item 4.  Controls and Procedures

     52   

Part II – Other Information

     53   

Item 1.  Legal Proceedings

     53   

Item 1A.  Risk Factors

     53   

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

     53   

Item 6.  Exhibits

     54   

Signature

     55   


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF INCOME

 

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

Millions of dollars, except earnings per share

           2012                      2011                      2012                      2011          

Sales and other operating revenues:

           

Trade

   $ 11,005       $ 12,997       $ 22,452       $ 24,085   

Related parties

     243         309         530         601   
  

 

 

    

 

 

    

 

 

    

 

 

 
     11,248         13,306         22,982         24,686   

Operating costs and expenses:

           

Cost of sales

     9,561         11,704         20,093         21,741   

Selling, general and administrative expenses

     201         236         424         451   

Research and development expenses

     37         56         76         89   
  

 

 

    

 

 

    

 

 

    

 

 

 
     9,799         11,996         20,593         22,281   

Operating income

     1,449         1,310         2,389         2,405   

Interest expense

     (411)         (176)         (510)         (339)   

Interest income

            13                20   

Other income (expense), net

            47                (3)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before equity investments, reorganization items and income taxes

     1,048         1,194         1,892         2,083   

Income from equity investments

     27         73         73         131   

Reorganization items

     (1)         (28)                (30)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     1,074         1,239         1,969         2,184   

Provision for income taxes

     306         388         607         651   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations

     768         851         1,362         1,533   

Income (loss) from discontinued operations, net of tax

     - -          (48)                (70)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     768         803         1,367         1,463   

Net loss attributable to non-controlling interests

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to the Company

   $ 770       $ 804       $ 1,370       $ 1,467   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share:

           

Net income (loss) —

           

Basic:

           

Continuing operations

   $ 1.34       $ 1.49       $ 2.37       $ 2.70   

Discontinued operations

     - -          (0.08)         0.01         (0.12)   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1.34       $ 1.41       $ 2.38       $ 2.58   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Continuing operations

   $ 1.33       $ 1.46       $ 2.36       $ 2.68   

Discontinued operations

     - -          (0.08)         0.01         (0.12)   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1.33       $ 1.38       $ 2.37       $ 2.56   
  

 

 

    

 

 

    

 

 

    

 

 

 

See Notes to the Consolidated Financial Statements.

 

1


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three months ended
June  30,
     Six Months Ended
June  30,
 

Millions of dollars

           2012                      2011                      2012                      2011          

Net income

   $ 768       $ 803       $ 1,367       $ 1,463   

Other comprehensive income, net of tax –

           

Defined benefit pension plan:

           

Prior service cost arising during the period

                           

Amortization of prior service cost included in net income

            - -          12         - -    

Income taxes on defined benefit plans

     (2)         - -          (4)         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Defined benefit pension plan, net

                   10          
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency translations adjustment:

           

Unrealized net change arising during the period

     (376)         126         (173)         502   

Income taxes on foreign currency translation adjustments

     - -          (1)                - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Foreign currency translations, net of tax

     (376)         125         (172)         502   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income (loss)

     (371)         126         (162)         505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     397         929         1,205         1,968   

Comprehensive loss attributable to non-controlling interest

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to the Company

   $ 399       $ 930       $ 1,208       $ 1,972   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

2


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

Millions, except shares and par value data

           June 30,        
2012
         December 31,    
2011
 

ASSETS

     

Current Assets:

     

Cash and cash equivalents

   $ 1,950       $ 1,065   

Restricted cash

     14         53   

Accounts receivable:

     

Trade, net

     3,667         3,582   

Related parties

     221         196   

Inventories

     5,759         5,499   

Prepaid expenses and other current assets

     755         1,040   
  

 

 

    

 

 

 

Total current assets

     12,366         11,435   

Property, plant and equipment, net

     7,237         7,333   

Investments and long-term receivables:

     

Investment in PO joint ventures

     411         412   

Equity investments

     1,521         1,559   

Other investments and long-term receivables

     70         72   

Goodwill

     576         585   

Intangible assets, net

     1,103         1,177   

Other assets

     261         266   
  

 

 

    

 

 

 

Total assets

   $ 23,545       $ 22,839   
  

 

 

    

 

 

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

3


Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED BALANCE SHEETS

 

Millions, except shares and par value data

           June 30,        
2012
         December 31,    
2011
 

LIABILITIES AND EQUITY

     

Current liabilities:

     

Current maturities of long-term debt

   $ - -        $  

Short-term debt

     48         48   

Accounts payable:

     

Trade

     2,169         2,562   

Related parties

     835         852   

Accrued liabilities

     915         1,242   

Deferred income taxes

     277         310   
  

 

 

    

 

 

 

Total current liabilities

     4,244         5,018   

Long-term debt

     4,305         3,980   

Other liabilities

     2,208         2,277   

Deferred income taxes

     1,245         917   

Commitments and contingencies

     

Stockholders’ equity:

     

Ordinary shares, €0.04 par value, 1,275 million shares authorized, 574,795,762 and 573,390,514 shares outstanding, respectively

     31         31   

Additional paid-in capital

     10,323         10,272   

Retained earnings

     1,838         841   

Accumulated other comprehensive loss

     (589)         (427)   

Treasury stock, at cost, 3,534,424 and 4,051,013 ordinary shares, respectively

     (111)         (124)   
  

 

 

    

 

 

 

Total Company share of stockholders’ equity

     11,492         10,593   

Non-controlling interests

     51         54   
  

 

 

    

 

 

 

Total equity

     11,543         10,647   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 23,545       $ 22,839   
  

 

 

    

 

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six Months Ended
June 30,
 

Millions of dollars

             2012                         2011             

Cash flows from operating activities:

     

Net income

   $ 1,367       $ 1,463   

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

     

Depreciation and amortization

     481         439   

Asset impairments

     22         18   

Amortization of debt-related costs

     46         20   

Inventory valuation adjustment

     71         - -    

Equity investments -

     

Equity income

     (73)         (131)   

Distribution of earnings, net of tax

     87         107   

Deferred income taxes

     351         316   

Gain on sale of assets

     (10)         (48)   

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

     

Accounts receivable

     (156)         (1,002)   

Inventories

     (379)         (619)   

Accounts payable

     (345)         1,140   

Contributions to pension plans

     (37)         (178)   

Income tax refunds

     288         - -    

Prepaid expenses and other current assets

     (77)         (96)   

Other, net

     (206)         (182)   
  

 

 

    

 

 

 

Net cash provided by operating activities

     1,430         1,247   
  

 

 

    

 

 

 

Cash flows from investing activities:

     

Expenditures for property, plant and equipment

     (461)         (482)   

Proceeds from disposal of assets

     10         70   

Restricted cash

     39         (239)   

Other

     (18)         - -    
  

 

 

    

 

 

 

Net cash used in investing activities

     (430)         (651)   
  

 

 

    

 

 

 

Cash flows from financing activities:

     

Shares issued upon exercise of warrants

            37   

Dividends paid

     (373)         (57)   

Issuance of long-term debt

     3,000         - -    

Repayments of long-term debt

     (2,679)         (260)   

Payments of debt issuance costs

     (50)         (15)   

Other, net

            (4)   
  

 

 

    

 

 

 

Net cash used in financing activities

     (98)         (299)   
  

 

 

    

 

 

 

Effect of exchange rate changes on cash

     (17)         168   
  

 

 

    

 

 

 

Increase in cash and cash equivalents

     885         465   

Cash and cash equivalents at beginning of period

     1,065         4,222   
  

 

 

    

 

 

 

Cash and cash equivalents at end of period

   $ 1,950       $ 4,687   
  

 

 

    

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

 

                                 Accumulated                
                   Additional             Other      Total      Non-  
     Ordinary Shares      Paid-in      Retained      Comprehensive        Stockholders’        Controlling  

Millions of dollars

     Issued        Treasury      Capital       Earnings       Loss      Equity      Interests  

Balance, January 1, 2012

   $ 31       $ (124)       $ 10,272       $ 841       $ (427)       $ 10,593       $ 54   

Net income (loss)

     - -          - -          - -          1,370         - -          1,370         (3)   

Other comprehensive loss

     - -          - -          - -          - -          (162)         (162)         - -    

Warrants exercised

     - -          - -          38         - -          - -          38         - -    

Shares purchased

     - -          (12)         - -          - -          - -          (12)         - -    

Share-based compensation

     - -          25         13         - -          - -          38         - -    

Cash dividends ($0.65 per share)

     - -          - -          - -          (373)         - -          (373)         - -    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance, June 30, 2012

   $ 31       $     (111)       $     10,323       $     1,838       $ (589)       $ 11,492       $ 51   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

 

 

See Notes to the Consolidated Financial Statements.

 

6


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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

 

     Page  

1.   Basis of Presentation

     8   

2.   Accounting and Reporting Changes

     8   

3.   Discontinued Operations

     9   

4.   Accounts Receivable

     10   

5.   Inventories

     11   

6.   Property, Plant and Equipment, Goodwill, Intangibles and Other Assets

     11   

7.   Investment in PO Joint Ventures

     12   

8.   Equity Investments

     12   

9.   Debt

     14   

10. Derivative Financial Instruments

     15   

11. Fair Value Measurement

     21   

12. Pension and Other Post-retirement Benefits

     23   

13. Income Taxes

     24   

14. Commitments and Contingencies

     24   

15. Stockholders’ Equity and Non-Controlling Interests

     27   

16. Per Share Data

     27   

17. Segment and Related Information

     30   

18. Subsequent Events

     33   

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

1. Basis of Presentation

LyondellBasell Industries N.V., together with its consolidated subsidiaries (collectively “LyondellBasell N.V.”), is a worldwide manufacturer of chemicals and polymers, a refiner of crude oil, a significant producer of gasoline blending components and a developer and licensor of technologies for production of polymers and other chemicals. When we use the terms “Company,” “we,” “us,” “our” or similar words, unless the context otherwise requires, we are referring to LyondellBasell N.V.

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of LyondellBasell N.V. in accordance with the instructions to Form 10-Q and Rule 10-1 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States (“U.S. GAAP”) for complete financial statements. In our opinion, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included. The results for interim periods are not necessarily indicative of results for the entire year. These consolidated financial statements should be read in conjunction with the LyondellBasell N.V. consolidated financial statements and notes thereto included in the LyondellBasell Industries N.V. Annual Report on Form 10-K for the year ended December 31, 2011.

 

2. Accounting and Reporting Changes

Recently Adopted Guidance

Comprehensive Income—In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, related to ASC Topic 220, Comprehensive Income: Presentation of Comprehensive Income and in December 2011 the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. These standards eliminate the current option to report other comprehensive income and its components in the statement of changes in equity. We elected to present Statements of Comprehensive Income in two separate but consecutive statements beginning January 1, 2012, and the amendments have been applied retrospectively for all prior periods presented.

Fair Value Measurement—In May 2011, the FASB issued new guidance related to ASC Topic 820, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”) and changes some fair value measurement principles and disclosure requirements. This guidance aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities. As a result, entities are required to measure the fair value of their own equity instruments from the perspective of a market participant that holds the equity instruments as assets. This guidance also enhances disclosure requirements for recurring Level 3 fair value measurements to include quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements. New disclosures on the use of a nonfinancial asset measured or disclosed at fair value are required if its use differs from its highest and best use. In addition, entities must report the level in the fair value hierarchy of assets and liabilities not recorded at fair value but where fair value is disclosed. The ASU was effective for interim and annual periods beginning on or after December 15, 2011. The adoption of this amendment in 2012 did not have a material effect on the presentation of our consolidated financial statements.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Accounting Guidance Issued But Not Adopted as of June 30, 2012

Disclosures about Offsetting Assets and Liabilities—In December 2011, the FASB issued ASU No. 2011-11, Disclosures about Offsetting Assets and Liabilities. The standard requires disclosures to provide information to help reconcile differences in the offsetting requirements under U.S. GAAP and IFRS. The differences in the offsetting requirements account for a difference in the amounts presented in statements of financial position prepared in accordance with U.S. GAAP and IFRS. The new disclosure requirements mandate that entities disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position (balance sheet), as well as instruments similar to a master netting arrangement. In addition, the standard requires disclosure of collateral received and posted in connection with master netting agreements or similar arrangements. The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this amendment is not expected to have a material impact on the presentation of our Consolidated Balance Sheet.

 

3. Discontinued Operations

In September 2011, we announced our intention to initiate consultations with relevant employee Works Councils regarding a contemplated closure of our Berre refinery after receiving no offers to purchase the refinery. In connection with the intended closure, we recorded pre-tax charges totaling $136 million in the fourth quarter of 2011, primarily related to the estimated cost of the social plan for the affected employees. We reduced the estimated cost of the social plan by $14 million in the second quarter of 2012.

On January 4, 2012, operations at the Berre refinery were suspended.

During the three-month period ending June 30, 2012, the operations of the Berre refinery were deemed to have met the criteria for discontinued operations classification. As a result, the operations have been classified as discontinued operations, net of income taxes, in the Consolidated Statements of Income for all periods presented. The amounts included in Income (loss) from discontinued operations are summarized as follows:

 

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

Millions of dollars

           2012                      2011                      2012                      2011          

Sales and other operating revenues

   $ 42       $ 736       $ 187       $ 1,608   
  

 

 

    

 

 

    

 

 

    

 

 

 

Loss from discontinued operations before income taxes

   $ (15)       $ (48)       $ (9)       $ (70)   

Benefit from income taxes

     (15)         - -          (14)         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from discontinued operations, net of tax

   $ - -        $ (48)       $      $ (70)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from discontinued operations includes benefits related to the liquidation of LIFO valued inventory of $7 million and $49 million for the three and six months ended June 30, 2012, respectively.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the assets and liabilities of the Berre refinery that are included in the Consolidated Balance Sheets. These amounts were derived from historical financial information and adjusted to exclude intercompany receivables and payables between the Berre refinery and other subsidiaries of the Company.

 

Millions of dollars

           June 30,        
2012
       December 31,  
2011
 

Current assets related to discontinued operations:

     

Accounts receivable trade, net

   $ 36       $ 234   

Inventories

     75         222   
  

 

 

    

 

 

 

Total current assets related to discontinued operations

   $ 111       $ 456   
  

 

 

    

 

 

 

Current liabilities related to discontinued operations:

     

Accounts payable trade

   $ 22       $ 158   

Accrued liabilities

     39         30   
  

 

 

    

 

 

 

Total current liabilities related to discontinued operations

   $ 61       $ 188   
  

 

 

    

 

 

 

Long-term liabilities related to discontinued operations:

     

Other liabilities

   $ 71       $ 121   
  

 

 

    

 

 

 

Total long-term liabilities related to discontinued operations

   $ 71       $ 121   
  

 

 

    

 

 

 

Future cash inflows will arise from the liquidation of on hand raw materials, intermediate and refined product inventories.

Future cash out flows will occur for activities associated with exit or disposal activities and for payments made to severed employees. Exit and disposal related costs are expected to be incurred for the next two years. Payments to the affected employees are expected to be substantially complete by 2019.

 

4. Accounts Receivable

Our allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $17 million and $16 million at June 30, 2012 and December 31, 2011, respectively.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

5. Inventories

Inventories consisted of the following components:

 

Millions of dollars

          June 30,       
2012
       December 31,  
2011
 

Finished goods

   $ 3,552       $ 3,544   

Work-in-process

     283         267   

Raw materials and supplies

     1,924         1,688   
  

 

 

    

 

 

 

Total inventories

   $ 5,759       $ 5,499   
  

 

 

    

 

 

 

 

6. Property, Plant and Equipment, Goodwill and Intangible Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:

 

Millions of dollars

         June 30,       
2012
       December 31,  
2011
 

Land

   $ 296       $ 301   

Manufacturing facilities and equipment

     7,686         7,358   

Construction in progress

     744         785   
  

 

 

    

 

 

 

Total property, plant and equipment

     8,726         8,444   

Less accumulated depreciation

     (1,489)         (1,111)   
  

 

 

    

 

 

 

Property, plant and equipment, net

   $ 7,237       $ 7,333   
  

 

 

    

 

 

 

During the first six months of 2012, we recognized impairment charges of $22 million, primarily related to damage to our LDPE plant in Wesseling, Germany resulting from an explosion in a reactor bay.

Depreciation and amortization expense is summarized as follows:

 

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

Millions of dollars

            2012                         2011                         2012                           2011             

Property, plant and equipment

   $ 200       $ 184       $ 393       $ 351   

Investment in PO joint ventures

                   15         15   

Emission allowances

     17         18         34         36   

Various contracts

            13         15         35   

Technology, patent and license costs

            - -          13         - -    

Software costs

                   11          
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

   $ 244       $ 224       $ 481       $ 439   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset Retirement Obligations—The liabilities recognized for all asset retirement obligations were $105 million and $123 million at June 30, 2012 and December 31, 2011, respectively.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Goodwill—Goodwill decreased from $585 million at December 31, 2011 to $576 million at June 30, 2012 as a result of foreign exchange translation.

 

7. Investment in PO Joint Ventures

Changes in our investment in the U.S. and European PO joint ventures for 2012 and 2011 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, 2012

   $ 274       $ 138       $ 412   

Cash contributions

            13         18   

Depreciation and amortization

     (11)         (4)         (15)   

Effect of exchange rate changes

     - -          (4)         (4)   
  

 

 

    

 

 

    

 

 

 

Investments in PO joint ventures - June 30, 2012

   $ 268       $ 143       $ 411   
  

 

 

    

 

 

    

 

 

 

Investments in PO joint ventures - January 1, 2011

   $ 291      $ 146       $ 437   

Cash contributions

     - -                  

Depreciation and amortization

     (11)         (4)         (15)   

Effect of exchange rate changes

     - -          12         12   
  

 

 

    

 

 

    

 

 

 

Investments in PO joint ventures - June 30, 2011

   $ 280       $ 156       $ 436   
  

 

 

    

 

 

    

 

 

 

 

8. Equity Investments

The changes in equity investments were as follows:

 

     Six Months Ended
June  30,
 

Millions of dollars

             2012                           2011             

Beginning balance

   $ 1,559       $ 1,587   

Income from equity investments

     73         131   

Dividends received, gross

     (87)         (114)   

Currency exchange effects

     (20)         50   

Other

     (4)         - -    
  

 

 

    

 

 

 

Ending balance

   $ 1,521       $ 1,654   
  

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Summarized income statement information and our share for the periods for which the respective Equity investments were accounted for under the equity method is set forth below:

 

     Three months ended June 30,  
     2012      2011  

Millions of dollars

           100%                    Company      
Share
             100%                    Company      
Share
 

Revenues

   $ 3,175       $ 980       $ 3,113       $ 894   

Cost of sales

     (2,906)         (900)         (2,659)         (767)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     269         80         454         127   

Net operating expenses

     (65)         (31)         (59)         (17)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     204         49         395         110   

Interest income

                           

Interest expense

     (70)         (16)         (63)         (18)   

Foreign currency translation

     16                17          

Loss from equity investments

     (3)         (1)         (41)         (8)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     150         35         314         91   

Provision for income taxes

     18                69         18   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 132       $ 27       $ 245       $ 73   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Six Months Ended June 30,  
     2012      2011  

Millions of dollars

   100%      Company
Share
     100%      Company
Share
 

Revenues

   $ 5,632       $ 1,888       $ 6,700       $ 2,133   

Cost of sales

     (5,095)         (1,721)         (5,829)         (1,876)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     537         167         871         257   

Net operating expense

     (139)         (52)         (157)         (49)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     398         115         714         208   

Interest income

                           

Interest expense

     (127)         (32)         (121)         (34)   

Foreign currency translation

     21                (22)         (5)   

Income (loss) from equity investments

                   (31)         (5)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     299         91         546         166   

Provision for income taxes

     52         18         122         35   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 247       $ 73       $ 424       $ 131   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

9. Debt

Long-term loans, notes and other long-term debt due to unrelated parties consisted of the following:

 

Millions of dollars

           June 30,        
2012
       December 31,  
2011
 

Senior Notes due 2017, $2,250 million, 8.0%

   $ - -        $ 619   

Senior Notes due 2017, € 375 million, 8.0%

     - -          134   

Senior Notes due 2018, $3,240 million, 11.0%

     - -          1,922   

Senior Notes due 2019, $2,000 million, 5.0%

     2,000         - -    

Senior Notes due 2021, $1,000 million, 6.0%

     1,000         1,000   

Senior Notes due 2024, $1,000 million, 5.75%

     1,000         - -    

Guaranteed Notes, due 2027, $300 million, 8.1%

     300         300   

Other

             
  

 

 

    

 

 

 

Total

     4,305         3,984   

Less current maturities

     - -          (4)   
  

 

 

    

 

 

 

Long-term debt

   $ 4,305       $ 3,980   
  

 

 

    

 

 

 

Short-term loans, notes and other short-term debt due to unrelated parties consisted of the following:

 

Millions of dollars

           June 30,        
2012
       December 31,  
2011
 

$2,000 million Senior Revolving Credit Facility

   $ - -        $ - -    

$2,000 million Senior Secured Asset-Based Revolving Credit Facility

     - -          - -    

€450 million European Receivables Securitization Facility

     - -          - -    

Financial payables to equity investees

            10   

Other

     40         38   
  

 

 

    

 

 

 

Total short-term debt

   $ 48       $ 48   
  

 

 

    

 

 

 

Long-Term Debt

5% and 5.75% Senior Notes—In April 2012, LyondellBasell N.V. issued $2,000 million aggregate principal amount of 5% senior notes due 2019 and $1,000 million aggregate principal amount of 5.75% senior notes due 2024, each at an issue price of 100%. When issued, the 5% and 5.75% senior notes were guaranteed on a senior basis by generally all of our U.S. subsidiaries. The subsidiary guarantees were released on June 15, 2012 as a result of the repayment of our 8% and 11% senior notes described below.

8% and 11% Senior Notes—In April 2012, we repaid a total of $2,606 million of our 8% and 11% senior notes, comprising $742 million of our 8% senior notes and $1,864 million of our 11% senior notes. In June 2012, we repaid the remaining outstanding amount of $70 million, comprising $13 million of our 8% senior notes and $57 million of our 11% senior notes. In connection with these repayments, we also paid premiums totaling $294 million. Capitalized debt issuance costs of $18 million related to the 8% and 11% senior notes were charged to interest expense in the second quarter of 2012. As a result of these repayments, the subsidiary guarantees of all of our senior debt, including the 5% and 5.75% senior notes discussed above and our 6% senior notes due 2021 were automatically released.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Other—Amortization of debt issuance costs in the six months ended June 30, 2012 and 2011 resulted in amortization expense of $46 million and $20 million, respectively, which is included in interest expense in the Consolidated Statements of Income. These costs include the write off of unamortized debt issuance costs associated with the repayment of the 8% and 11% senior notes and the termination of the U.S. ABL Facility described below.

Short-Term Debt

Senior Revolving Credit Facility—In May 2012, we entered into a five-year revolving credit facility (the “Senior Revolving Credit Facility”). The Senior Revolving Credit Facility may be used for dollar and euro denominated borrowings and to support up to $700 million of dollar and euro denominated letters of credit. The balance of outstanding borrowings and letters of credit under the facility may not exceed $2,000 million at any given time. We may, from time to time, request the total commitments available under the facility be increased to an aggregate amount not to exceed $2,500 million. We paid fees of $10 million related to the completion of this financing.

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.

At June 30, 2012, availability under this facility was $1,930 million. There were no borrowings outstanding under the facility and outstanding letters of credit totaled $57 million.

Obligations under the facility were guaranteed by our U.S. subsidiaries until those guarantees were released in June 2012 as a result of the repayment of our 8% and 11% senior notes, described above.

The facility contains customary covenants and warranties, including specified restrictions on indebtedness, liens, sale and leaseback transactions and a specified interest coverage ratio and consolidated leverage ratio.

U.S. ABL Facility—In connection with the execution of the new revolving credit facility, we terminated our U.S. asset-based revolving credit facility (“U.S. ABL Facility”). All amounts owed by the borrowers under the U.S. ABL Facility have been repaid and the commitments under the U.S. ABL Facility have been terminated. In connection with the termination of this facility, $17 million of unamortized debt issuance costs were charged to interest expense in the second quarter of 2012.

At December 31, 2011, there were no borrowings outstanding under the U.S. ABL Facility, and outstanding letters of credit totaled $262 million.

Other—At June 30, 2012 and 2011, our weighted average interest rates on outstanding short-term debt were 3.4% and 3.8%, respectively.

 

10. Derivative Financial Instruments

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

Market Risks—We are exposed to market risks, such as changes in commodity pricing, currency exchange rates and interest rates. To manage the volatility related to these exposures, we selectively enter into derivative transactions pursuant to our policies. Designation of the derivatives as fair-value or cash-flow hedges is performed on a specific exposure basis. Hedge accounting may or may not be elected with respect to certain short-term exposures. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Commodity Prices—We are exposed to commodity price volatility related to anticipated purchases of natural gas, crude oil and other raw materials and sales of our products. We selectively use commodity swap, option, and futures contracts with various terms to manage the volatility related to these risks. Such contracts are generally limited to durations of one year or less. Cash-flow hedge accounting may be elected for these derivative transactions. When the duration of a derivative is short, hedge accounting generally would not be elected. When hedge accounting is not elected, the changes in fair value of these instruments are recorded in earnings. When hedge accounting is elected, gains and losses on these instruments are deferred in accumulated other comprehensive income (“AOCI”), to the extent that the hedge remains effective, until the underlying transaction is recognized in earnings.

The following table summarizes the pretax effect of settled commodity futures contracts charged directly to income:

 

     Settled Commodity Contracts
     Six Months Ended June 30, 2012

Millions of dollars

        Gain (Loss)     
Recognized

in Income
           Volumes      
Settled
    

  Volume Unit  

Futures:

        

Gasoline

   $ 10         187      

million gallons

Heating oil

     (1)         293      

million gallons

Butane

     (1)         12      

million gallons

Crude oil

     (8)         233      

million gallons

  

 

 

       
   $ - -          
  

 

 

       
     Six Months Ended June 30, 2011
     Gain (Loss)
Recognized

in Income
     Volumes
Settled
    

Volume Unit

Futures:

        

Gasoline

   $        280      

million gallons

Heating oil

            293      

million gallons

Crude oil

     (1)         - -       

million gallons

  

 

 

       
   $        
  

 

 

       

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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

 

     Open Commodity Contracts
     June 30, 2012
            Notional Amounts            

Millions of dollars

     Fair Value             Value               Volumes         

  Volume Unit  

  

          Maturity Dates           

Futures:

              

Gasoline

   $ 27       $ 376         131      

million gallons

   August 2012

Heating oil

            57         21      

million gallons

   August 2012

Butane

     (39)         240         126      

million gallons

  

October 2012 -

February 2013

Crude oil

     (5)         121         60      

million gallons

   August 2012 - September 2012
  

 

 

    

 

 

          
   $ (15)       $ 794            
  

 

 

    

 

 

          
     December 31, 2011
            Notional Amounts            
     Fair Value      Value      Volumes     

Volume Unit

  

Maturity Dates

Futures:

              

Gasoline

   $ 12       $ 34         12      

million gallons

  

January 2012 -

February 2012

Heating oil

            54         19      

million gallons

   January 2012

Butane

     (1)         22         12      

million gallons

  

January 2012 -

February 2012

  

 

 

    

 

 

          
   $ 12       $ 110            
  

 

 

    

 

 

          

Foreign Currency Rates—We have significant operations in several countries. The functional currencies of our wholly owned subsidiaries through which our operations are conducted are primarily the U.S. dollar and the Euro. We enter into transactions denominated in other than the functional currencies of the Company. 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 both the outstanding foreign currency balances and future commitments. 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 spot, forward and swap contracts to reduce the effects of our net currency exchange exposures. At June 30, 2012, foreign currency spot, forward and swap contracts in the notional amount of $723 million, maturing in July and August 2012, were outstanding. The fair values, based on quoted market exchange rates, resulted in net payables of $3 million and $12 million at June 30, 2012 and December 31, 2011, respectively.

For forward contracts that economically hedge recognized monetary assets and liabilities in foreign currencies, no hedge accounting is applied. Changes in the fair value of foreign currency forward contracts are reported in the Consolidated Statements of Income and offset the currency exchange results recognized on the assets and liabilities.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Foreign Currency Gain (Loss)—Other income, net, in the Consolidated Statements of Income reflected losses of $11 million and $9 million for the three and six months ended June 30, 2012, and a loss of $4 million and a gain of $6 million for the three and six months ended June 30, 2011, respectively.

Warrants—We had warrants outstanding to purchase 111,565 ordinary shares as of June 30, 2012 and 1,000,223 ordinary shares as of December 31, 2011 at exercise prices of $13.77 per share. The fair values of the warrants were determined to be $3 million and $19 million at June 30, 2012 and December 31, 2011, respectively.

Derivatives—The following table summarizes financial instruments outstanding as of June 30, 2012 and December 31, 2011 that are measured at fair value on a recurring basis. Refer to Note 11, Fair Value Measurements, for additional information regarding the fair value of derivative financial instruments.

 

                      June 30, 2012                               December 31, 2011               

Millions of dollars

  

      Balance Sheet      
Classification

           Notional        
Amount
     Fair
           Value          
             Notional        
Amount
     Fair
           Value          
 

Assets at fair value –

              

Derivatives:

              

Commodities

   Prepaid expenses and other current assets    $ 433       $ 29       $ 88       $ 13   
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 433       $ 29       $ 88       $ 13   
     

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities at fair value –

              

Derivatives:

              

Commodities

   Accrued liabilities    $ 361       $ 44       $ 22       $  

Warrants

   Accrued liabilities                    14         19   

Foreign currency

   Accrued liabilities      723                726         12   
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 1,086       $ 50       $ 762       $ 32   
     

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the pretax effect of derivative instruments charged directly to income:

 

      Effect of Financial Instruments
      Three Months Ended June 30, 2012

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 not designated as hedges:

           

Commodities

   $ - -        $ - -        $ (25)       Cost of sales
            Other income

Foreign currency

     - -          - -               (expense), net
  

 

 

    

 

 

    

 

 

    
   $ - -        $ - -        $ (23)      
  

 

 

    

 

 

    

 

 

    
      Three Months Ended June 30, 2011

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 not designated as hedges:

            Other income

Warrants

   $ - -        $ - -        $      (expense), net

Commodities

     - -          - -               Cost of sales
            Other income

Foreign currency

     - -          - -               (expense), net
  

 

 

    

 

 

    

 

 

    
   $ - -        $ - -        $ 10      
  

 

 

    

 

 

    

 

 

    

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

      Effect of Financial Instruments
      Six Months Ended June 30, 2012

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 not designated as hedges:

           
            Other income

Warrants

   $ - -        $ - -        $ (10)       (expense), net

Commodities

     - -          - -          (16)       Cost of sales
            Other income

Foreign currency

     - -          - -          25       (expense), net
  

 

 

    

 

 

    

 

 

    
   $ - -        $ - -        $ (1)      
  

 

 

    

 

 

    

 

 

    
      Six Months Ended June 30, 2011

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 not designated as hedges:

           
            Other income

Warrants

   $ - -        $ - -        $ (53)       (expense), net

Commodities

     - -          - -               Cost of sales
            Other income

Foreign currency

     - -          - -          (1)       (expense), net
  

 

 

    

 

 

    

 

 

    
   $ - -        $ - -        $ (45)      
  

 

 

    

 

 

    

 

 

    

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

11. Fair Value Measurement

The following table presents the derivative financial instruments outstanding as of June 30, 2012 and December 31, 2011 that are measured at fair value on a recurring basis.

 

Millions of dollars

   Fair
      value      
           Level 1                  Level 2                  Level 3        

June 30, 2012:

           

Assets at fair value –

           

Derivatives:

           

Commodities

   $ 29       $             - -        $             29       $             - -    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 29       $ - -        $ 29       $ - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities at fair value –

           

Derivatives:

           

Commodities

   $ 44       $ - -        $ 44       $ - -    

Warrants

            - -                 - -    

Foreign currency

            - -                 - -    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 50       $ - -        $ 50       $ - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Assets at fair value –

           

Derivatives:

           

Commodities

   $ 13       $ - -        $ 13       $ - -    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13       $ - -        $ 13       $ - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities at fair value –

           

Derivatives:

           

Commodities

   $      $ - -        $      $ - -    

Warrants

     19         - -          19         - -    

Foreign currency

     12         - -          12         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $             32       $ - -        $ 32       $ - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

The fair value of all non-derivative financial instruments included in current assets, including cash and cash equivalents, restricted cash and accounts receivable, short-term debt and accounts payable, approximated the applicable carrying value due to the short maturity of those instruments.

There were no financial instruments measured on a recurring basis using Level 3 inputs during the six months ended June 30, 2012 and 2011.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The carrying value and the estimated fair value of our non-derivative financial instruments are shown in the table below:

 

             June 30, 2012                       December 31, 2011           

Millions of dollars

       Carrying    
Value
     Fair
      Value      
           Carrying      
Value
     Fair
      Value      
 

Short and long-term debt, including current maturities

   $         4,348       $         4,660       $         4,026       $         4,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents short and long-term debt at fair value which are recorded at historical cost or amortized cost in the Consolidated Balance Sheet. The carrying and fair value of long-term debt excludes capital leases.

 

     June 30, 2012  

Millions of dollars

       Carrying    
value
         Fair    
value
         Level 1              Level 2              Level 3      

Short-term debt

   $ 48       $ 48       $ - -        $      $ 39   

Long-term debt

     4,300         4,612         - -          4,612         - -    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short term and long-term debt, including current maturities

   $         4,348       $         4,660       $         - -        $         4,621       $         39   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  

Millions of dollars

   Carrying
value
     Fair
value
     Level 1      Level 2      Level 3  

Short-term debt

   $ 48       $ 48       $ - -        $ 10       $ 38   

Long-term debt

     3,978         4,246         - -          4,243          
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Short term and long-term debt, including current maturities

   $ 4,026       $ 4,294       $ - -        $ 4,253       $ 41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

12. Pension and Other Post-retirement Benefits

Net periodic pension benefits included the following cost components:

 

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

Millions of dollars

            2012                         2011                         2012                         2011            

Service cost

   $         11       $      $ 23       $ 20   

Interest cost

     19         22         39         45   

Expected return on plan assets

     (29)         (26)         (59)         (52)   

Amortization

            - -          10         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $      $         5       $         13       $      13   
  

 

 

    

 

 

    

 

 

    

 

 

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

Millions of dollars

   2012      2011      2012      2011  

Service cost

   $      $ 12       $ 17       $ 21   

Interest cost

     13         17         25         29   

Expected return on plan assets

     (7)         (16)         (13)         (23)   

Settlement and curtailment loss

     - -                 - -           

Amortization

     - -                         
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $ 12       $ 19       $ 30       $ 35   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic other post-retirement benefits included the following cost components:

 

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

Millions of dollars

            2012                         2011                         2012                         2011            

Service cost

   $      $      $      $  

Interest cost

                           

Amortization

     - -          - -                 - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $         5       $         5       $         10       $         13   
  

 

 

    

 

 

    

 

 

    

 

 

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

Millions of dollars

   2012      2011      2012      2011  

Service cost

   $ (1)       $      $ - -        $  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $ (1)       $      $ - -        $  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The Company contributed $37 million to its pension plans during the six months ended June 30, 2012, which consisted of $34 million and $3 million to its U.S. and non-U.S. pension plans, respectively.

 

13. Income Taxes

The effective tax rate for the second quarter of 2012 was 28.5% compared with 31.3% for the second quarter of 2011. For the first six months of 2012, the effective tax rate was 30.8% compared with 29.8% for the first six months of 2011. Our effective tax rate fluctuates based on, among other factors, pretax income in countries with lower statutory tax rates, nontaxable income related to joint venture equity earnings, notional royalties, the U.S. domestic production activity deduction, changes in valuation allowance and unrecognized tax benefits. Compared with the second quarter of 2011, the effective tax rate for the second quarter of 2012 was lower due to deductible foreign currency offset with increases in unrecognized tax benefits. The second quarter effective tax rate was also favorably affected by lower earnings in jurisdictions with higher tax rates. When comparing differences within the effective tax rates for the first six months of 2012 and 2011, increases to the effective tax rate related to unrecognized tax benefits offset by deductible foreign currency losses and a reduction in nondeductible charges.

 

14. Commitments and Contingencies

Financial Assurance Instruments—We have obtained letters of credit, performance and surety bonds and have issued financial and performance guarantees to support trade payables, potential liabilities and other obligations. Management does not expect that any claims against or draws on these instruments would have a material adverse effect on our consolidated financial statements.

Environmental Remediation—Our accrued liability for future environmental remediation costs at current and former plant sites and other remediation sites totaled $124 million and $120 million as of June 30, 2012 and December 31, 2011, respectively. At June 30, 2012, the accrued liabilities for individual sites range from less than $1 million to $22 million. The remediation expenditures are expected to occur over a number of years, and not to be concentrated in any single year. In our opinion, it is reasonably possible that losses in excess of the liabilities recorded may have been incurred. However, we cannot estimate any amount or range of such possible additional losses. New information about sites, new technology or future developments such as involvement in investigations by regulatory agencies, could require us to reassess our potential exposure related to environmental matters.

The following table summarizes the activity in our accrued environmental liability included in “Accrued liabilities” and “Other liabilities:”

 

     Six Months Ended
June  30,
 

Millions of dollars

           2012                      2011          

Balance at beginning of period

   $         120       $ 107   

Additional provisions

     12         20   

Amounts paid

     (5)         (4)   

Foreign exchange effects

     (3)          
  

 

 

    

 

 

 

Balance at end of period

   $ 124       $         129   
  

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Litigation and Other Matters

Access Indemnity Demand—On December 20, 2010, one of our subsidiaries received demand letters from affiliates of Access Industries, (collectively, “Access”) a more than five percent shareholder of the Company. We conducted an initial investigation of the facts underlying the demand letters and engaged in discussions with Access. We requested that Access withdraw its demands with prejudice and on January 17, 2011, Access declined to withdraw the demands, with or without prejudice.

Specifically, Access affiliates Nell Limited (“Nell”) and BI S.á.r.l. (“BI”) have demanded that LyondellBasell Industries Holdings B.V. (“LBIH”), a wholly owned subsidiary of the Company, indemnify them and their shareholders, members, affiliates, officers, directors, employees and other related parties for all 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 damages from numerous parties, including Nell, Access and their affiliates. The damages sought from Nell, Access and their affiliates include, among other things, the return of all amounts earned by them related to their acquisition of shares of Lyondell Chemical prior to its acquisition by Basell AF S.C.A. in December 2007, distributions by Basell AF S.C.A. to its shareholders before it acquired Lyondell Chemical, and management and transaction fees and expenses. The trial that was scheduled for October 2011 has been postponed.

Nell and BI have also demanded that LBIH pay $50 million in management fees for each of 2009 and 2010 and that LBIH pay other unspecified amounts relating to advice purportedly given, prior to the Predecessor company’s chapter 11 filing, in connection with financing and other strategic transactions.

Nell and BI assert that LBIH’s responsibility for indemnity and the claimed fees and expenses arise out of a management agreement entered into on December 11, 2007, between Nell and Basell AF S.C.A. They assert that LBIH, as a former subsidiary of Basell AF S.C.A., is jointly and severally liable for Basell AF S.C.A.’s obligations under the agreement, notwithstanding that LBIH was not a signatory to the agreement and the liabilities of Basell AF S.C.A., which was a signatory, were discharged in the LyondellBasell bankruptcy proceedings.

On June 26, 2009, Nell filed a proof of claim in Bankruptcy Court against LyondellBasell AF (successor to Basell AF S.C.A.) seeking “no less than” $723,000 for amounts allegedly owed under the 2007 management agreement. On April 27, 2011, Lyondell Chemical filed an objection to Nell’s claim and, together with LyondellBasell N.V. (successor to LyondellBasell AF) and LBIH, brought a declaratory judgment action in the Bankruptcy Court for a determination that Nell and BI’s demands are not valid. By a Joint Stipulated Order dated June 13, 2011, the declaratory judgment action is stayed pending the outcome of the Weisfelner lawsuit.

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

We cannot at this time estimate the reasonably possible loss or range of loss that Nell, Access, or their affiliates may incur as a result of the lawsuit; therefore, we cannot at this time estimate the reasonably possible loss or range of loss that Nell, Access, or their affiliates may seek from LBIH by way of indemnity.

Indemnification—We are parties to various indemnification arrangements, including arrangements entered into in connection with acquisitions, divestitures and the formation of joint ventures. Pursuant to these arrangements, we provide indemnification to and/or receive indemnification from other parties in connection with liabilities that may

 

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Table of Contents

LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

arise in connection with the transactions and in connection with activities prior to completion of the transactions. These indemnification arrangements typically include provisions pertaining to third party claims relating to environmental and tax matters and various types of litigation. As of June 30, 2012, 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.

In addition, at the time of Basell’s formation in 2005, the Company entered into agreements with Shell and BASF whereby they agreed to indemnify Basell and its successors for a significant portion of the potential obligations that could arise with respect to costs relating to contamination at various sites. These indemnity obligations are currently in dispute. Also, the agreements involving the purchase of the Berre cracker and Berre refinery include similar indemnities from Shell to Basell and its successors. These indemnity obligations are also currently in dispute.

As part of certain of our technology licensing contracts, we give indemnifications to various licensees for liabilities arising from possible patent infringement claims with respect to certain proprietary licensedtechnologies. Such indemnifications have a stated maximum amount and generally cover a period of five to ten years.

Other—We previously identified an agreement related to a former project in Kazakhstan under which a payment was made that raises compliance concerns under the U.S. Foreign Corrupt Practices Act (the “FCPA”). We have engaged outside counsel to investigate these activities, under the oversight of the Audit Committee of the Supervisory Board, and to evaluate internal controls and compliance policies and procedures. In this respect, we may not have conducted business in compliance with the FCPA and may not have had policies and procedures in place adequate to ensure compliance. We made a voluntary disclosure of these matters to the U.S. Department of Justice and are cooperating fully with that agency. We cannot predict the ultimate outcome of these matters at this time since our investigations are ongoing. Therefore, we cannot reasonably estimate a range of liability for any potential penalty resulting from these matters. Violations of these laws could result in criminal and civil liabilities and other forms of relief that could be material to us.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

15. Stockholders’ Equity and Non-Controlling Interests

Dividend distribution—In June 2012, we paid a dividend to all shareholders of record as of May 11, 2012 of $0.40 per share, for an aggregate of $230 million.

Ordinary shares—The changes in the outstanding amounts of ordinary shares issued were as follows:

 

     Six Months Ended
June 30,
 
     2012      2011  

Ordinary shares outstanding:

     

Balance at beginning of period

     573,390,514         565,676,222   

Share-based compensation

     788,474         209,557   

Warrants exercised

     616,774         2,928,918   
  

 

 

    

 

 

 

Balance at end of period

     574,795,762         568,814,697   
  

 

 

    

 

 

 

Ordinary shares held as treasury shares:

     

Balance at beginning of period

     4,051,013         1,122,651   

Warrants exercised

     271,885         410,039   

Share-based compensation

     (788,474)         (209,013)   
  

 

 

    

 

 

 

Balance at end of period

     3,534,424         1,323,677   
  

 

 

    

 

 

 

Ordinary shares issued at end of period

     578,330,186         570,138,374   
  

 

 

    

 

 

 

Non-controlling Interests—Losses attributable to non-controlling interests consisted of the following components:

 

     Six Months Ended
June  30,
 

Millions of dollars

           2012                      2011          

Non-controlling interests’ comprehensive income (loss):

     

Net income (loss) attributable to non-controlling interests

   $ (3)       $  

Fixed operating fees paid to Lyondell Chemical by the PO/SM II partners

     - -          (11)   
  

 

 

    

 

 

 

Comprehensive loss attributable to non-controlling interests

   $         (3)       $         (4)   
  

 

 

    

 

 

 

 

16. 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 option awards. We have unvested restricted stock and restricted stock units that are considered participating securities for earnings per share.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Earnings per share data and dividends declared per share of common stock were as follows:

 

     Three Months Ended  
     June 30, 2012      June 30, 2011  

Millions of dollars

   Continuing
    Operations    
         Discontinued    
Operations
         Continuing    
Operations
         Discontinued    
Operations
 

Basic:

           

Net income (loss)

   $ 768       $ - -        $ 851       $ (48)   

Net loss attributable to non-controlling interests

            - -                 - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to the Company

     770         - -          852         (48)   

Net income attributable to participating securities

     (3)         - -          (5)         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to ordinary shareholders

   $ 767       $ - -        $ 847       $ (48)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income (loss)

   $ 768       $ - -        $ 851       $ (48)   

Net loss attributable to non-controlling interests

            - -                 - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to the Company

     770         - -          852         (48)   

Net income attributable to participating securities

     (3)         - -          (5)         - -    

Effect of dilutive securities – warrants

     - -          - -          (6)         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to ordinary shareholders

   $ 767       $ - -        $ 841       $ (48)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Millions of shares

                           

Basic weighted average common stock outstanding

     573         - -          566         566   

Effect of dilutive securities:

           

Warrants

     - -          - -                  

Stock options

            - -                  

MTI

            - -          - -          - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Potential dilutive shares

     577         - -          575         575   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share:

           

Basic

   $ 1.34       $ - -        $ 1.49       $ (0.08)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 1.33       $ - -        $ 1.46       $         (0.08)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Millions of shares

                           

Anti-dilutive stock options

     0.1         - -          - -          - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Participating securities

     3.7         - -          3.6         3.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per share of common stock

   $         0.40       $         - -        $         0.10       $ - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

     Six Months Ended  
     June 30, 2012      June 30, 2011  

Millions of dollars

   Continuing
    Operations    
         Discontinued    
Operations
         Continuing    
Operations
         Discontinued    
Operations
 

Basic:

           

Net income (loss)

   $ 1,362       $      $         1,533       $ (70)   

Net loss attributable to non-controlling interests

            - -                 - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to the Company

     1,365                1,537         (70)   

Net income attributable to participating securities

     (6)         - -          (9)         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to ordinary shareholders

   $         1,359       $      $ 1,528       $ (70)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted:

           

Net income (loss)

   $ 1,362       $      $ 1,533       $ (70)   

Net loss attributable to non-controlling interests

            - -                 - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to the Company

     1,365                1,537         (70)   

Net income attributable to participating securities

     (6)         - -          (9)         - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to ordinary shareholders

   $ 1,359       $      $ 1,528       $ (70)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Millions of shares

           

Basic weighted average common stock outstanding

     572         572         566         566   

Effect of dilutive securities:

           

MTI

                   - -          - -    

Stock options

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Potential dilutive shares

     576         576         569         569   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per share:

           

Basic

   $ 2.37       $         0.01       $ 2.70       $ (0.12)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 2.36       $ 0.01       $ 2.68       $         (0.12)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Millions of shares

           

Anti-dilutive warrants

     0.2         0.2         8.2         8.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Participating securities

     3.7         3.7         3.6         3.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Dividends declared per share of common stock

   $ 0.65       $ - -        $ 0.10       $ - -    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

17. Segment and Related Information

We operate in five business segments. The marketing of oxyfuels was aligned with the sale of products from the refining business, particularly related to the Berre refinery. However, with the closure of the Berre refinery, responsibility for business decisions relating to oxyfuels has been moved to our I&D business management function as the profits generated by oxyfuels products are related to sourcing decisions regarding certain co-products of propylene oxide production. As a result, the oxyfuels business is now reflected in our I&D segment. All comparable periods presented have been revised to reflect this change. Our five segments consist of the following:

 

   

Olefins and Polyolefins—Americas (“O&P-Americas”), primarily manufacturing and marketing of olefins, including ethylene and its co-products, primarily propylene, butadiene, and aromatics, which include benzene and toluene; polyolefins, including polyethylene, comprising high density polyethylene (“HDPE”), low density polyethylene (“LDPE”) and linear low density polyethylene, and polypropylene; and Catalloy process resins;

 

   

Olefins and Polyolefins—Europe, Asia, International (“O&P–EAI”), primarily manufacturing and marketing of olefins, including ethylene and its co-products, primarily propylene and butadiene; polyolefins, including polyethylene, comprising HDPE, LDPE, and polypropylene; polypropylene-based compounds, materials and alloys (“PP compounds”), Catalloy process resins and polybutene-1 polymers;

 

   

Intermediates and Derivatives (“I&D”), primarily manufacturing and marketing of propylene oxide (“PO”); PO co-products, including styrene and the TBA intermediates tertiary butyl alcohol (“TBA”), isobutylene and tertiary butyl hydroperoxide; PO derivatives, including propylene glycol, propylene glycol ethers and butanediol; ethylene derivatives, including ethylene glycol, ethylene oxide (“EO”), other EO derivatives; acetyls, including vinyl acetate monomer, acetic acid and methanol; and oxygenated fuels, or oxyfuels, such as methyl tertiary butyl ether (“MTBE”) and ethyl tertiary butyl ether (“ETBE”);

 

   

Refining, primarily manufacturing and marketing of refined petroleum products, including gasoline, ultra-low sulfur diesel, jet fuel, lubricants, and alkylate; and

 

   

Technology, primarily licensing of polyolefin process technologies and supply of polyolefin catalysts and advanced catalysts.

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Summarized financial information concerning reportable segments is shown in the following table for the periods presented:

 

Millions of dollars

  Olefins
and
 Polyolefins 
– Americas
    Olefins
and
Polyolefins
– Europe,
Asia &
 International 
    Intermediates
 & Derivatives 
     Refining        Technology           Other             Total      

Three Months Ended June 30, 2012

             

Sales and other operating revenues:

             

Customers

  $ 2,184      $ 3,514      $ 2,186      $ 3,274      $ 86      $     $ 11,248   

Intersegment

    1,099        61        99        222        29        (1,510)        - -   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    3,283        3,575        2,285        3,496        115        (1,506)        11,248   

Operating income

    700        203        390        124        30              1,449   

Income (loss) from equity investments

          29        (6)        - -        - -        - -        27   

Millions of dollars

  Olefins
and
 Polyolefins 
– Americas
    Olefins
and
Polyolefins
– Europe,
Asia &
 International 
    Intermediates
 & Derivatives 
     Refining        Technology           Other             Total      

Three Months Ended June 30, 2011

             

Sales and other operating revenues:

             

Customers

  $ 2,825      $ 4,150      $ 2,516      $ 3,706      $ 103      $     $ 13,306   

Intersegment

    1,185        142        20        290        23        (1,660)        - -   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    4,010        4,292        2,536        3,996        126        (1,654)        13,306   

Operating income

    508        203        327        258        23        (9)        1,310   

Income from equity investments

          61              - -        - -        - -        73   

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Millions of dollars

  Olefins
and
 Polyolefins 
– Americas
    Olefins
and
Polyolefins
– Europe,
Asia &
 International 
    Intermediates
 & Derivatives 
     Refining        Technology           Other             Total      

Six Months Ended June 30, 2012

             

Sales and other operating revenues:

             

Customers

  $ 4,587      $ 7,300      $ 4,587      $ 6,322      $ 175      $ 11      $ 22,982   

Intersegment

    2,045        173        183        377        59        (2,837)        - -    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    6,632        7,473        4,770        6,699        234        (2,826)        22,982   

Operating income

    1,219        206        760        134        68              2,389   

Income (loss) from equity investments

    10        69        (6)        - -         - -         - -         73   

Millions of dollars

  Olefins
and
 Polyolefins 
– Americas
    Olefins
and
Polyolefins
– Europe,
Asia &
 International 
    Intermediates
 & Derivatives 
     Refining        Technology           Other             Total      

Six Months Ended June 30, 2011

             

Sales and other operating revenues:

             

Customers

  $ 5,260      $ 8,053      $ 4,789      $ 6,354      $ 212      $ 18      $ 24,686   

Intersegment

    2,322        227        78        509        53        (3,189)        - -   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    7,582        8,280        4,867        6,863        265        (3,171)        24,686   

Operating income

    929        378        603        416        89        (10)        2,405   

Income from equity investments

    11        112              - -        - -        - -        131   

Sales and other operating revenues and operating income in the “Other” column above include elimination of intersegment transactions.

In the second quarter and first six months of 2012, operating results of the O&P–Americas segment include charges of $40 million and $81 million, respectively, related to the interim liquidation of LIFO inventory, which is expected to be sustained through the end of the year. Inventory levels, which were increased in the fourth quarter 2011 in preparation for a turnaround at our Channelview, Texas facility, decreased during the first six months of 2012 following the commencement of the turnaround. Operating results for O&P-Americas also include a lower of cost or market inventory valuation adjustment of $71 million in the second quarter 2012. Also in the first six months of

 

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LYONDELLBASELL INDUSTRIES N.V.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

2012, operating results for the O&P-EAI segment included a charge of $22 million for impairment of assets at our Wesseling, Germany site. Operating results for second quarter and first six months of 2012 include benefits of $29 million, $18 million, and $53 million associated with insurance settlements related to Hurricane Ike for the O&P–Americas, I&D, and Refining segments, respectively.

 

18. Subsequent Events

LyondellBasell N.V. has evaluated subsequent events through the date the financial statements were issued. Subsequent events have been disclosed throughout the document.

 

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Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

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

In addition to comparisons of current operating results with the same period in the prior year, we have included trailing quarter comparisons of our second quarter 2012 operating results to our results in the first quarter 2012. Because many of our businesses are highly cyclical and also subject to some less significant seasonal effects, trailing quarter comparisons may offer important insight into current business direction.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by CMAI. However, references to industry benchmarks for refining and oxyfuels market margins are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies, and crude oil and natural gas benchmark price references are to Bloomberg.

OVERVIEW

Our results of operation for the second quarter and first six months of 2012 reflect strong performance despite the continued uncertainties caused by the Eurozone crisis and the reduced growth outlook for China. We continue to focus on safe, reliable operations, cost reductions, particularly in Europe, and disciplined growth. We believe this strategy allows us to generate solid results even while facing challenges due to external factors. Significant items that affected our second quarter 2012 results include:

 

   

The continued benefit in the U.S. from an abundance of low cost, natural gas liquids (“NGLs”) supply

 

   

Falling raw materials costs in Europe, which declined faster than our sales prices, helping to at least temporarily improve olefins margins in that region

 

   

Depressed by-product spreads relative to the price of crude oil, which negatively affected our refining results, although the impact was mitigated somewhat by strong operational performance, with the Houston refinery operating at near capacity

Other noteworthy items during the first six months of 2012, include the following:

 

   

We ceased the under-performing operations at the Berre refinery in early January 2012.

 

   

We completed the refinancing of nearly $3 billion of our debt with new debt issuances of unsecured senior notes, significantly improving our debt structure and replaced our $2 billion U.S. ABL Facility with an unsecured revolving credit facility.

 

   

We increased our interim dividend during the second quarter by 60%.

We expect that through the rest of 2012, we may continue to face challenges related to uncertainties in Europe and the negative effects on global economic conditions. Our performance is driven by global economic conditions generally and their impact on demand for our products. Additionally, raw material and energy prices significantly impact our operating results. Finally, industry-specific issues, such as our own production capacity and capacity within the chemicals and refining industries, can have material effects on our results of operations.

 

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

 

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

Millions of dollars

           2012                     2011                     2012                     2011          

Sales and other operating revenues

   $ 11,248      $ 13,306      $ 22,982      $ 24,686   

Cost of sales

     9,561        11,704        20,093        21,741   

Selling, general and administrative expenses

     201        236        424        451   

Research and development expenses

     37        56        76        89   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,449        1,310        2,389        2,405   

Interest expense

     (411)        (176)        (510)        (339)   

Interest income

           13              20   

Other income (expense), net

           47              (3)   

Income from equity investments

     27        73        73        131   

Reorganization items

     (1)        (28)              (30)   

Provision for income taxes

     306        388        607        651   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     768        851        1,362        1,533   

Income (loss) from discontinued operations, net of tax

     - -         (48)              (70)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 768      $ 803      $ 1,367      $ 1,463   
  

 

 

   

 

 

   

 

 

   

 

 

 

RESULTS OF OPERATIONS

Revenues—Revenues decreased by $2,058 million, or 15%, in the second quarter 2012 compared to the second quarter 2011 and by $1,704 million, or 7%, in the first six months of 2012 compared to the first six months of 2011. Lower average product prices were responsible for revenue decreases of 9% in the second quarter 2012 and 3% in the first six months of 2012 while lower average sales volumes contributed 6% and 4% to the revenue deceases in the second quarter and first six months of 2012, respectively. Sales volumes averaged lower in the second quarter and first six months of 2012 for most products except those in the refining segment, which remained relatively unchanged.

Cost of Sales—The decrease in cost of sales of $2,143 million in the second quarter 2012 and $1,648 million in the first six months of 2012 primarily reflects lower raw material costs, compared to the second quarter and first six months of 2011. The lower prices of NGL-based liquid raw materials, particularly ethane, and to a lesser extent, heavy liquids-based raw materials, used in North American olefins contributed to the decreases in cost of sales in the second quarter and first six months of 2012. At the Houston refinery, the lower prices of crude oil in the second quarter 2012 substantially offset the effect of the higher crude oil prices seen in the first quarter 2012. The benefit of falling raw material costs, including ethylene and propylene, benefited cost of sales in the I&D segment, while the falling cost of naphtha benefited the O&P EAI segment’s cost of sales.

Cost of sales in the second quarter and first six months of 2012 included a $100 million benefit associated with an insurance settlement related to Hurricane Ike, which affected the U.S. Gulf Coast in 2008. The benefit was partially offset by a $71 million lower of cost or market inventory valuation adjustment in our O&P-Americas segment. Cost of sales for the first six months of 2012 also included a $22 million charge for impairment of assets, primarily related to damage to our LDPE plant in Wesseling, Germany resulting from an explosion in a reactor bay in January 2012.

SG&A Expenses—Selling, general and administrative expenses in the second quarter and first six months of 2012 were lower by $35 million and $27 million, respectively, compared to the same periods in 2011, primarily as a result of charges in the 2011 periods related to employee compensation associated with the rationalization of certain functional organizations.

 

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Table of Contents

R&D Expenses—Research and development expenses in the second quarter and first six months of 2012 decreased $19 million and $13 million, respectively, compared to the second quarter and first six months of 2011. The higher R&D expenses in the 2011 periods were a result of charges totaling $16 million in the second quarter and first six months of 2011 related to employee severance and asset retirement obligations associated with the relocation of an R&D facility

Operating Income—Second quarter 2012 operating income reflects the effect of higher operating results in all of our segments except for the Refining segment, which had lower results compared to the second quarter 2011. The slight decrease in operating income for the first six months of 2012 reflects lower operating results for our O&P-EAI, Refining and Technology segments, partially offset by higher operating results for our O&P-Americas and I&D segments, compared to the first six months of 2011. Results for each of our business segments are reviewed further in the “Segment Analysis” section below.

Interest Expense—The $235 million and $171 million increases in interest expense in the second quarter and first six months of 2012, compared to the same periods in 2011, were primarily due to the payment of premiums and the write-off of unamortized debt issuance costs associated with the repayment of the 8% senior notes due 2017 and 11% senior notes due 2018 in the second quarter 2012. In connection with the redemption of these notes, we paid premiums totaling $294 million and wrote off $18 million in capitalized debt issuance costs. In addition, another $17 million of capitalized debt issuance costs were written off as a result of the termination of the ABL credit facility in May 2012. These increases were partially offset by the lower interest expense that resulted from refinancing notes bearing interest of 8% and 11% per annum with our 5% senior notes due 2019 and 5.75% senior notes due 2024, both issued in April 2012, and our 6% senior notes due 2021 issued in November 2011.

Income from Equity Investments—Income from equity investments decreased $46 million and $58 million in the second quarter and first six months of 2012, compared to the second quarter and first six months of 2011. These decreases are primarily due to lower operating results of our joint ventures in the Middle East and Asia, which were primarily driven by lower average sales prices and in the six months of 2012, by higher raw material costs and unplanned outages.

Income Tax—The effective tax rate for the second quarter of 2012 was 28.5% compared with 31.3% for the second quarter of 2011. For the first six months of 2012, the effective tax rate was 30.8% compared with 29.8% for the first six months of 2011. Our effective tax rate fluctuates based on, among other factors, pretax income in countries with lower statutory tax rates, nontaxable income related to joint venture equity earnings, notional royalties, the U.S. domestic production activity deduction, changes in valuation allowance and unrecognized tax benefits. Compared with the second quarter of 2011, the effective tax rate for the second quarter of 2012 was lower due to deductible foreign currency losses offset with increases in unrecognized tax benefits. When comparing differences within the effective tax rates for the first six months of 2012 and 2011, increases to the effective tax rate related to unrecognized tax benefits were offset by deductible foreign currency losses and a reduction in non-deductible charges.

 

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Table of Contents

Income from Continuing Operations—The following table summarizes the major components contributing to income from continuing operations:

 

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

Millions of dollars

           2012                     2011                     2012                     2011          

Operating income

   $ 1,449      $ 1,310      $ 2,389      $ 2,405   

Interest expense, net

     (409)        (163)        (504)        (319)   

Other income (expense), net

           47              (3)   

Income from equity investments

     27        73        73        131   

Reorganization items

     (1)        (28)              (30)   

Provision for income taxes

     306        388        607        651   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 768      $ 851      $ 1,362      $ 1,533   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) from Discontinued Operations, Net of Tax—The improvement in the results of our discontinued operations in the second quarter and first six months of 2012, compared to the corresponding periods in 2011, primarily reflects the liquidation of product inventory following the suspension of operations at the Berre refinery in early January 2012. Results for the second quarter and first six months of 2012 reflect pretax benefits of $7 million and $49 million, respectively, related to the liquidation of the Berre refinery’s product inventory following the suspension of operations.

Comprehensive Income—Comprehensive income for the second quarter and first six months of 2012 decreased by $531 million and $764 million, respectively, compared to the second quarter and first six months of 2011, primarily as a result of currency translation adjustments arising from the financial statements of our non-U.S. subsidiaries with functional currencies other than the U.S. dollar. The predominant local currency of our operations outside of the United States is the Euro. The value of the U.S. dollar relative to the Euro increased in the second quarter and first six months of 2012 but decreased in the corresponding periods of 2011 resulting in losses in 2012 and gains in 2011 as reflected in the Statements of Comprehensive Income.

Second Quarter 2012 versus First Quarter 2012—We had income from continuing operations of $768 million in the second quarter 2012 compared to $594 million in the first quarter 2012. Income from continuing operations in the second quarter included a $100 million pretax benefit related to an insurance settlement associated with Hurricane Ike and a $71 million pretax charge related to the lower of cost or market valuation adjustment for our O&P-Americas segment. First quarter income from continuing operations included pretax charges totaling $32 million related to the impairment of assets and the fair value adjustment of our outstanding warrants.

Apart from these items, income in the second quarter primarily reflected higher operating results in our business segments. The improvement in our second quarter operating results primarily reflected higher olefins margins in our O&P-Americas and O&P-EAI segments, higher margins for propylene oxide co-products in our I&D segment and higher refining margins. The improvements were partially offset by higher interest expense in the second quarter, primarily reflecting $294 million of pretax charges related to premiums and other fees related to the $2,676 million prepayment of debt in the second quarter. Interest expense in the second quarter also included a pretax charge of $35 million related to the write off of unamortized debt issuance costs.

 

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Table of Contents

Segment Analysis

Our continuing operations are divided into five reportable segments: O&P—Americas; O&P—EAI; I&D; Refining; and Technology. Beginning in the second quarter 2012, the operations of our Berre refinery in France are being reported as discontinued operations for all periods presented. In addition, beginning in the second quarter 2012, our oxyfuels business, which was previously managed in conjunction with our refining operations and included in our Refining segment, is included in our I&D segment. Accordingly, all comparable periods presented have been revised to reflect the results of our oxyfuels business in our I&D segment. For additional information related to the Berre refinery and the realignment of the oxyfuels business, see Footnotes 3 and 17 to the Consolidated Financial Statements.

 

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

Millions of dollars

           2012                     2011                     2012                     2011          

Sales and other operating revenues:

        

O&P – Americas segment

   $ 3,283      $ 4,010      $ 6,632      $ 7,582   

O&P – EAI segment

     3,575        4,292        7,473        8,280   

I&D segment

     2,285        2,536        4,770        4,867   

Refining segment

     3,496        3,996        6,699        6,863   

Technology segment

     115        126        234        265   

Other, including intersegment eliminations

     (1,506)        (1,654)        (2,826)        (3,171)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 11,248      $ 13,306      $ 22,982      $ 24,686   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

        

O&P – Americas segment

   $ 700      $ 508      $ 1,219      $ 929   

O&P – EAI segment

     203        203        206        378   

I&D segment

     390        327        760        603   

Refining segment

     124        258        134        416   

Technology segment

     30        23        68        89   

Other, including intersegment eliminations

           (9)              (10)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,449      $ 1,310      $ 2,389      $ 2,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from equity investments:

        

O&P – Americas segment

   $     $     $ 10      $ 11   

O&P – EAI segment

     29        61        69        112   

I&D segment

     (6)              (6)         
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 27      $ 73      $ 73      $ 131   
  

 

 

   

 

 

   

 

 

   

 

 

 

Olefins and Polyolefins—Americas Segment

Overview—The U.S. ethylene industry continues to benefit from processing NGLs. Ethylene produced from NGLs in North America is currently lower in cost compared to that produced from crude oil-based liquids, which is the predominant feedstock used in the rest of the world.

Ethylene margins were stronger in the second quarter and first six months of 2012 compared to the second quarter and first six months of 2011 primarily due to lower prices for ethane raw materials. While polypropylene (“PP”) results in the second quarter 2012 were stronger due to higher margins, results in the first six months of 2012 were relatively unchanged compared to the same period in 2011. Polyethylene results were higher in the second quarter 2012 primarily due to higher product margins compared to the second quarter 2011, while results in the first six months of 2012 were lower than the prior year period primarily due to lower margins driven by lower average sales prices.

 

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

 

   

crude oil-bas