LyondellBasell Industries N.V. — FY 2012 Form 10-K
Period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Unless indicated otherwise, financial amounts are in U.S. dollars.
Business context
LyondellBasell is a global chemicals, polymers, refining and technology company, operating through five segments: Olefins and Polyolefins—Americas; Olefins and Polyolefins—Europe, Asia and International (O&P—EAI); Intermediates and Derivatives (I&D); Refining; and Technology. Its results are sensitive to commodity supply and demand, feedstock and energy prices, operating reliability and economic conditions. The U.S. business benefited from low-cost natural gas and natural gas liquids (NGLs).
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $45.352 billion | $48.183 billion |
| Operating income | $4.676 billion | $4.337 billion |
| Income from continuing operations | $2.858 billion | $2.472 billion |
| Net income | $2.834 billion | $2.140 billion |
| Diluted EPS from continuing operations | $4.96 | $4.32 |
| Cash from operating activities | $4.787 billion | $2.860 billion |
| Capital expenditures | $1.060 billion | $1.021 billion |
| Interest expense | $655 million | $1.044 billion |
Revenue fell 6%, reflecting lower average prices (about 4%) and volumes (about 2%). Operating income rose 8%; operating margin was approximately 10.3% versus 9.0% in 2011. Cost of sales declined to $39.595 billion from $42.732 billion, largely due to lower North American NGL feedstock costs. Net income includes discontinued operations losses of $24 million in 2012 and $332 million in 2011.
At year-end, cash and cash equivalents were $2.732 billion, total debt including current maturities was $4.400 billion, and working capital was $5.694 billion. The company reported $3.348 billion of unused availability across credit facilities; there were no borrowings under its $2.0 billion revolving credit facility or the U.S. and European receivables facilities. Total debt was higher than 2011’s $4.032 billion, while cash increased from $1.065 billion. The filing reports operating cash flow and capital spending separately; their difference was approximately $3.727 billion.
Material changes and segment performance
- O&P—Americas: Operating income increased to $2.650 billion from $1.855 billion, principally on strong ethylene margins and lower-cost NGL feedstocks. NGLs supplied about 85% of U.S. ethylene production, up from 75% in 2011.
- O&P—EAI: Operating income fell to $127 million from $435 million amid weak European demand, compressed margins and lower production, including the Wesseling cracker turnaround and delayed restart.
- I&D: Operating income increased to $1.430 billion from $1.156 billion, mainly from stronger oxyfuels margins and volumes. Oxyfuels reporting moved from Refining to I&D in 2012; comparable periods were revised.
- Refining: Operating income declined to $334 million from $809 million. The Houston refinery had lower processing rates and less benefit from favorable crude purchasing opportunities. It is the company’s only refining operation.
- Technology: Operating income was $122 million versus $107 million; underlying operations were described as relatively unchanged after restructuring effects.
The Berre refinery in France ceased operations in January 2012 and was classified as discontinued operations. In April 2012, the company issued $3.0 billion of 5% notes due 2019 and 5.75% notes due 2024, using proceeds and cash to repay its 8% and 11% notes. The refinancing reduced interest expense but included $294 million of repayment premiums. The company paid $2.415 billion in dividends during 2012, including a $2.75-per-share special dividend.
Fourth-quarter revenue was $11.097 billion, operating income $959 million, income from continuing operations $645 million and net income $623 million. Compared with the third quarter, continuing income declined from $851 million, mainly because of weaker O&P—EAI and I&D results; fourth-quarter operating income nevertheless exceeded the prior-year quarter’s $439 million.
Outlook, risks and unusual items
- Management emphasized safe, reliable operations, cost reductions—particularly in Europe—and disciplined growth. It cited continuing uncertainty in Europe and slower expected growth in China. The filing provides no specific earnings or revenue guidance.
- Planned 2013 capital expenditures were $1.481 billion, about 40% above 2012, including expansion, debottlenecking and railcars. Estimated regulatory-related capital spending was $157 million in 2013 and $194 million in 2014.
- Management said cash, operating cash flow and credit availability should be sufficient for anticipated needs and stated an intention to continue quarterly dividends, with a goal of increasing them over time. Future dividends remain discretionary and subject to financial and legal constraints.
- Key risks include volatile feedstock and energy prices, inability to pass cost increases through, industry overcapacity and cyclicality, European weakness, facility outages, environmental and regulatory costs, currency and geopolitical exposures, and dependence on joint ventures. An outage at the Houston refinery could be particularly consequential because it is the sole refinery.
- The company disclosed an ongoing investigation and voluntary disclosure to the U.S. Department of Justice concerning a former Kazakhstan project payment that raised FCPA compliance concerns; potential penalties could not be estimated. It also described Access-affiliate indemnity and management-fee claims related to litigation, for which the potential loss could not be estimated.
- Environmental remediation liabilities were $126 million; management said additional losses were reasonably possible but could not be estimated. The company reported a $1.121 billion pension-plan deficit. The Berre closure had a $59 million remaining employee social-plan accrual at year-end, with payments expected to be substantially complete by 2019.
- 2012 operating results included $100 million of Hurricane Ike insurance benefits, a $28 million reversal of an unfavorable contract reserve and a $24 million legal recovery, partly offset by $53 million of European restructuring charges and a $22 million Wesseling impairment. These items affect comparisons of underlying performance.
Important facts for investors to verify
- Review the full segment disclosures and assess whether North American feedstock-cost advantages can persist as NGL availability, pricing and industry capacity change.
- Examine the sustainability of 2012 cash generation and dividends, including the effect of the $2.415 billion dividend outflow and planned increase in capital spending.
- Check debt maturities, refinancing terms and compliance with facility covenants; the filing lists $4.300 billion of debt due after 2017.
- Monitor European demand, the Wesseling plant’s operating recovery, and the remaining costs and liabilities associated with the Berre closure.
- Track the FCPA investigation, Access-related claims, environmental exposures and pension funding needs, none of which had a clearly estimable maximum exposure in the filing.