LYB

Business Context and Reporting Period

Company: LyondellBasell Industries N.V.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2011
Context: The company operates as the "Successor" entity following its emergence from Chapter 11 bankruptcy on April 30, 2010. Financial results for periods prior to May 1, 2010, are presented as "Predecessor" data and are not directly comparable due to the adoption of fresh-start accounting. The company is a global manufacturer of chemicals, polymers, and refined petroleum products.

Key Financial Metrics (Six Months Ended June 30, 2011)

Material Changes vs. Prior Comparable Period

• Revenue Growth: Revenues increased by $6,055 million (30%) compared to the first six months of 2010. This was driven by a 17% increase in average product prices and a 13% increase in sales volumes.
• Profitability: Operating income rose significantly to $2,330 million from $422 million in the Successor period of 2010. This improvement is attributed to higher product margins across most segments and lower depreciation/amortization expenses resulting from fresh-start accounting asset revaluations.
• Cost of Sales: Increased by $4,805 million primarily due to higher raw material costs (crude oil and hydrocarbons). However, depreciation and amortization expenses were $247 million lower than the combined 2010 periods.
• Interest Expense: Decreased by $505 million compared to the same period in 2010, largely due to the discharge of high-cost debt during the bankruptcy reorganization.
• Segment Performance:
  • Olefins & Polyolefins (Americas): Operating income increased $461 million due to advantaged natural gas liquid feedstock costs.
  • Refining & Oxyfuels: Operating income improved by $545 million, driven by higher refining margins at the Houston refinery.

Guidance, Outlook, Risks, and Unusual Items

• Dividends: A dividend of $0.10 per share was paid in May 2011. The Management Board recommended a subsequent dividend of $0.20 per share, expected to be paid in September 2011.
• Asset Divestiture: In May 2011, the company announced its intention to seek a buyer for its Berre refinery in France.
• Debt Penalties: The company is subject to interest rate penalties (up to 1.00% per annum) on its Senior Secured Notes because required registration statements for an exchange offer were not effective by the May 3, 2011 deadline. Management does not expect these penalties to be material.
• Legal and Regulatory Risks:
  • FCPA Investigation: The company is cooperating with the U.S. Department of Justice regarding a voluntary disclosure of potential Foreign Corrupt Practices Act violations related to a former project in Kazakhstan. The outcome and potential liability range cannot be estimated.
  • Sanctions: The company has ceased business with Iran, Syria, and Sudan and is cooperating with the U.S. Treasury Department regarding past business activities in sanctioned countries.
  • Litigation: A lawsuit with BASF regarding a propylene oxide contract was remanded for a new trial; the estimated loss range is $0 to $135 million.
• Internal Controls: Management concluded that disclosure controls and procedures were not effective as of June 30, 2011, due to a material weakness in tax provision reporting. Remediation efforts are ongoing.

Investor Verification Checklist

• Fresh-Start Accounting Impact: Verify the extent to which lower depreciation and amortization expenses (due to asset write-downs in 2010) are inflating current operating margins compared to historical norms.
• FCPA and Sanctions Exposure: Monitor the status of the ongoing DOJ and Treasury investigations regarding Kazakhstan and sanctioned countries, as penalties could be material.
• Debt Covenant Compliance: Review the status of the registration rights agreements for Senior Secured Notes to assess the duration and cost of interest rate penalties.
• Internal Control Remediation: Track the timeline for remediation of the material weakness in tax provision reporting to ensure future financial statement reliability.
• Refining Margin Volatility: Assess the sustainability of the high refining margins at the Houston refinery, which were a primary driver of Q2 2011 profits.