alpek, s.a.b. de c.v
TRANSCRIPT
OFFERING MEMORANDUM
US$650,000,000
Alpek, S.A.B. de C.V. (Incorporated under the laws of Mexico)
4.500% Senior Notes due 2022
We are offering US$650,000,000 aggregate principal amount of our 4.500% Senior Notes due 2022 (the “notes”). We will pay interest on the notes semi-annually on May 20 and November 20 of each year beginning on May 20, 2013. The notes will mature on November 20, 2022. We may redeem the notes, in whole or in part, at any time at a redemption price based on a “make-whole” premium plus accrued and unpaid interest, if any, to the date of redemption. In addition, in the event of certain changes in the Mexican withholding tax treatment relating to payments of interest on the notes, we may redeem the notes in whole, but not in part, at 100% of their principal amount, plus accrued and unpaid interest, if any, to the date of redemption. There is no sinking fund for the notes.
The notes will be unconditionally guaranteed by certain of our subsidiaries. The notes and the subsidiary guarantees will be our and our subsidiary guarantors’ senior unsecured general obligations (subject to certain statutory preferences under Mexican law, including tax and labor obligations) and will rank equally with each other and with all of our and our subsidiary guarantors’ respective existing and future senior unsecured indebtedness. The notes and the subsidiary guarantees will rank effectively junior to any of our and the subsidiary guarantors’ respective existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally junior to debt obligations of our non-guarantor subsidiaries.
No public market currently exists for the notes. Application has been made for the listing particulars to be approved by the Irish Stock Exchange and to admit the notes to the Official List of the Irish Stock Exchange and to trading on the Global Exchange Market of the Irish Stock Exchange. This Offering Memorandum constitutes a Listing Particulars for the purposes of listing on the Official List of the Global Exchange Market.
Investing in the notes involves risks. See “Risk Factors” beginning on page 18 for certain information that you should consider before investing in the notes.
Offering Price: 99.713% plus accrued interest, if any, from November 20, 2012.
THE NOTES HAVE NOT BEEN AND WILL NOT BE REGISTERED WITH THE NATIONAL SECURITIES REGISTRY ( REGISTRO NACIONAL DE VALORES) MAINTAINED BY THE MEXICAN NATIONAL BANKING AND SE CURITIES COMMISSION ( COMISION NACIONAL BANCARIA Y DE VALORES, OR “CNBV”), AND MAY NOT BE OFFERED OR SOLD PUBLICLY , EXCEPT PURSUANT TO THE PRIVATE PLACEMENT EXEMPTIO N SET FORTH IN ARTICLE 8 OF THE LEY DEL MERCADO DE VALORES, OR THE MEXICAN SECURITIES MARKET LAW. WE WILL NOT IFY THE CNBV OF THE TERMS AND CONDITIONS OF THIS OFFERING AS REQUIRED UNDER A PPLICABLE LAW AND FOR INFORMATIONAL PURPOSES ONLY. DELIVERY OR RECEIPT OF SUCH NOTICE DOES NOT CONSTITUTE OR IMPLY A CERTIFICATION AS TO THE INVESTMENT QUALITY OF TH E NOTES, OUR SOLVENCY, LIQUIDITY OR CREDIT QUALITY OR THE ACCURA CY OR COMPLETENESS OF THE INFORMATION SET FORTH IN THIS OFFERING MEMORANDUM. THIS OFFERING MEMORANDUM IS SOLELY OUR RESPONSIBILITY AND HAS NOT BEEN REVIEWED OR AUTHORI ZED BY THE CNBV.
The notes have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended, (the “Securities Act”), any state securities laws, or the securities laws of any other jurisdiction and may not be offered or sold in the United States or to U.S. persons (as defined in Regulation S under the Securities Act (“Regulation S”)), except in transactions exempt from, or not subject to, the registration requirements of the Securities Act. Accordingly, the notes are being offered and sold in the United States only to qualified institutional buyers in compliance with Rule 144A under the Securities Act (“Rule 144A”) and to persons other than U.S. persons outside the United States in compliance with Regulation S. Prospective purchasers that are qualified institutional buyers are hereby notified that the seller of the notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of eligible offerees and certain restrictions on transfer of the notes, see “Transfer Restrictions.”
The notes are being offered pursuant to an exemption from the requirement to publish a prospectus under Directive 2003/71/EC (as amended and supplemented from time to time, the “Prospectus Directive”), of the European Union, and this offering memorandum has not been approved by a competent authority within the meaning of the Prospectus Directive.
The notes will be ready for delivery in book-entry form only through the facilities of The Depository Trust Company (“DTC”) for the accounts of its direct and indirect participants, including Euroclear Bank S.A./N.V., as operator of the Euroclear System (“Euroclear”), and Clearstream Banking, société anonyme, Luxembourg (“Clearstream”) on November 20, 2012.
Joint Book-Runners
Citigroup Goldman, Sachs & Co. HSBC J.P. Morgan The date of this offering memorandum is July 9, 2013.
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TABLE OF CONTENTS
Page
Notice to Investors ....................................................................................................................................................... ii Available Information ................................................................................................................................................. iv Forward-Looking Statements ...................................................................................................................................... v Certain Definitions .................................................................................................................................................... vii Presentation of Financial and Certain Other Information ............................................................................................ x
Summary...................................................................................................................................................................... 1 The Offering .............................................................................................................................................................. 11 Summary of Financial Data and Other Information .................................................................................................. 15
Risk Factors ............................................................................................................................................................... 18 Exchange Rate Information ....................................................................................................................................... 37 Use of Proceeds ......................................................................................................................................................... 39 Capitalization ............................................................................................................................................................. 40 Selected Historical Financial Data and Other Information ........................................................................................ 41
Management’s Discussion and Analysis of Financial Condition and Results of Operations .................................... 45 Industry ...................................................................................................................................................................... 69 Business ..................................................................................................................................................................... 87 Management ............................................................................................................................................................ 112 Principal Shareholders ............................................................................................................................................. 116 Related Party Transactions ...................................................................................................................................... 117 Description of the Notes .......................................................................................................................................... 119 Book-Entry, Delivery and Form .............................................................................................................................. 142 Transfer Restrictions ................................................................................................................................................ 146 Taxation ................................................................................................................................................................... 148 Plan of Distribution ................................................................................................................................................. 154 Enforcement of Civil Liabilities .............................................................................................................................. 159 Listing and General Information.............................................................................................................................. 160 Legal Matters ........................................................................................................................................................... 161 Independent Accountant .......................................................................................................................................... 162 Index to Financial Statements ................................................................................................................................... F-1
You should rely only on the information contained in this offering memorandum. We have not, and the initial purchasers have not, authorized anyone to provide you with information that is different or additional from that contained in this offering memorandum, and we take no responsibility for any other information that others may give you. If anyone provides you with different or additional information, you should not rely on it. You should assume that the information in this offering memorandum is accurate only as of the date on the front cover of this offering memorandum, regardless of time of delivery of this offering memorandum or any sale of the notes. Our business, financial condition, results of operations and prospects may change after the date on the front cover of this offering memorandum. This document may only be used where it is legal to sell the notes. Neither we nor any of the initial purchasers is making an offer to sell the notes in any jurisdiction where such an offer is not permitted.
Unless otherwise indicated or the context otherwise requires, all references in this offering memorandum to “Alpek,” “our company,” “we,” “ours” “us” or simila r terms refer to Alpek, together with its consolidated subsidiaries.
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NOTICE TO INVESTORS
We are relying on an exemption from registration under the Securities Act for offers and sales of securities that do not involve a public offering. The notes are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act and the applicable state securities laws pursuant to registration or exemption therefrom. By purchasing the notes, you will be deemed to have made the acknowledgements, representations, warranties and agreements described under the heading “Transfer Restrictions” in this offering memorandum. You should understand that you will be required to bear the financial risks of your investment for an indefinite period of time.
Neither the CNBV nor the U.S. Securities and Exchange Commission (the “SEC”), nor any state
securities commission has approved or disapproved of the notes or determined if this offering memorandum is truthful or complete. Any representation to the contrary is a criminal offense.
We have submitted this offering memorandum solely to a limited number of qualified institutional buyers in the United States and to investors outside the United States so they can consider a purchase of the notes. We have not authorized its use for any other purpose. This offering memorandum may not be copied or reproduced in whole or in part. It may be distributed and its contents disclosed only to the prospective investors to whom it is provided. By accepting delivery of this offering memorandum, you agree to these restrictions. See “Transfer Restrictions.”
This offering memorandum is based on information provided by us and by other sources that we believe are reliable. We cannot assure you that this information is accurate or complete. This offering memorandum summarizes certain documents and other information and we refer you to such documents and other information for a more complete understanding of what we discuss in this offering memorandum. In making an investment decision, you must rely on your own examination of our company and the terms of this offering and the notes, including the merits and risks involved.
The initial purchasers make no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this offering memorandum. Nothing contained in this offering memorandum is, or shall be relied upon as, a promise or representation by the initial purchasers as to the past or future.
We are not making any representation to any purchaser of the notes regarding the legality of an investment in the notes by such purchaser under any legal investment or similar laws or regulations. You should not consider any information in this offering memorandum to be legal, business or tax advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding any investment in the notes.
We accept responsibility for the information contained in this offering memorandum. To the best of our knowledge and belief (and we have taken all reasonable care to ensure that), the information contained in this offering memorandum is in accordance with the facts and does not omit any material information. You should assume that the information contained in this offering memorandum is accurate only as of the date on the front cover of this offering memorandum.
We reserve the right to withdraw this offering of the notes at any time, and we and the initial purchasers reserve the right to reject any commitment to subscribe for the notes in whole or in part and to allot to any prospective investor less than the full amount of notes sought by that investor. The initial purchasers and certain related entities may acquire for their own account a portion of the notes.
You must comply with all applicable laws and regulations in force in your jurisdiction and you must obtain any consent, approval or permission required by you for the purchase, offer or sale of the notes under the laws and regulations in force in your jurisdiction to which you are subject or in which you make such purchase, offer or sale, and neither we nor any of the initial purchasers will have any responsibility therefor.
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NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR A N APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FA CT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN T HE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER CHAPTER 421-B IS TRUE , COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THA T AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACT ION MEANS THAT THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE HA S PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT A NY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
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AVAILABLE INFORMATION
We are not subject to the information requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). To permit compliance with Rule 144A under the Securities Act in connection with resales of notes, we will be required under the indenture under which the notes are issued (the “Indenture”), upon the request of a holder of Rule 144A notes or Regulation S notes (during the restricted period, as defined in the legend included under “Transfer Restrictions”), to furnish to such holder and any prospective purchaser designated by such holder the information required to be delivered under Rule 144A(d)(4) under the Securities Act, unless we either furnish information to the SEC in accordance with Rule 12g3-2(b) under the Exchange Act or furnish information to the SEC pursuant to Section 13 or 15(d) of the Exchange Act. Any such request may be made to us in writing at our main office located at Ave. Gómez Morín 1111 Sur, Col. Carrizalejo, San Pedro Garza García, C.P. 66254, Nuevo León, México.
The Indenture will further require that we furnish to the Trustee (as defined herein) all notices of meetings of the holders of notes and other reports and communications that are generally made available to holders of the notes. At our request, the Trustee will be required under the Indenture to mail these notices, reports and communications received by it from us to all record holders of the notes promptly upon receipt. See “Description of the Notes.”
We will make available to the holders of the notes, at the corporate trust office of the Trustee at our cost, copies of the Indenture as well as this offering memorandum, including a review of our operations, and copies in English of our annual audited consolidated financial statements and our quarterly unaudited consolidated financial statements. Information will also be available at the office of the paying agent in Ireland.
Application has been made to admit the notes to the Official List of the Irish Stock Exchange and to trading on the Global Exchange Market, a market of the Irish Stock Exchange, in accordance with its rules. This offering memorandum forms, in all material respects, the listing memorandum for admission to the Irish Stock Exchange. We will be required to comply with any undertakings given by us from time to time to the Irish Stock Exchange in connection with the notes, and to furnish to them all such information as the rules of the Irish Stock Exchange may require in connection with the listing of the notes.
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FORWARD-LOOKING STATEMENTS
This offering memorandum includes forward-looking statements. These statements relate to our future prospects, developments and business strategies and are identified by our use of terms and phrases such as “anticipate,” “believe,” “could,” “would,” “will,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “goals,” “target,” “strategy” and similar terms and phrases, and may include references to assumptions. These statements are contained in the sections entitled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry,” “Business” and other sections of this offering memorandum.
Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global economic, business, market and regulatory conditions, without limitation, and the following:
� availability and price volatility in the cost of raw materials and energy;
� our ability to maintain high capacity utilization rates;
� the impact of competition from other petrochemical manufacturers, including imports of polyester-related raw materials, polypropylene and products from other regions and the use of substitute products;
� our ability to implement our strategy;
� loss of business from significant customers;
� disruption of our supply chain;
� potential changes in industry pricing practices, including changes in the margins in the “cost plus” pricing formula for purified terephthalic acid (“PTA”) in North America;
� our ability to maintain margins for products sold under fixed price arrangements;
� cyclicality in the demand for our products;
� losses from derivative transactions, particularly with respect to our energy and raw material requirements;
� the impact of hurricanes and other natural disasters;
� unanticipated downtime of our production plants;
� changes to environmental and other regulations, or their interpretation;
� loss of key personnel;
� increases in our operating costs or our inability to meet efficiency or cost reduction objectives;
� changes to regulations or interpretations thereof, in respect of importation and exportation of goods;
� risks inherent in international operations, such as trade barriers, currency fluctuations, changes in duties and royalties;
� the implementation of exchange controls in any of the jurisdictions where we operate;
� our ability to refinance short-term debt and other obligations on favorable terms;
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� risks associated with acquisitions and our ability to integrate and benefit from our recent or future acquisitions and strategic alliances; and
� other factors described under “Risk Factors” and elsewhere in this offering memorandum.
Should one or more of these factors or situations materialize, or should the underlying assumptions prove to be incorrect, the actual results may differ considerably from those that are described, foreseen, considered, estimated, expected, predicted or intended in this offering memorandum.
These forward-looking statements speak only as of the date of this offering memorandum and we undertake no obligation to update our forward-looking statements or risk factors to reflect new information, future events or otherwise. Additional factors affecting our business emerge from time to time and it is not possible for us to predict all of these factors, nor can we assess the impact of all such factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Although we believe that the plans, intentions and expectations reflected in or suggested by such forward looking statements are reasonable, we cannot assure you that those plans, intentions or expectations will be achieved. In addition, you should not interpret statements regarding past trends or activities as assurances that those trends or activities will continue in the future. All written, oral and electronic forward-looking statements attributable to us or to the persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.
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CERTAIN DEFINITIONS
In this offering memorandum, except where otherwise indicated or the context otherwise requires, references to:
� Accounting terms have the definitions set forth under International Financial Reporting Standards;
� “2014 International Notes” means Petrotemex’s outstanding US$121 million 9.50% Senior Notes due 2014. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Liquidity and Capital Resources––International Bonds––2014 International Notes;”
� “2022 International Notes” means Alpek’s outstanding US$650 million 4.500% Senior Notes due 2022. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Liquidity and Capital Resources––International Bonds––2022 International Notes;”
� “Akra” means Akra Polyester, S.A de C.V., a subsidiary of Petrotemex;
� “Alfa” means Alfa, S.A.B. de C.V., the principal shareholder of Alpek;
� “Banco de México” means Mexico’s Central Bank;
� “BASF” means BASF SE;
� “BP” means BP Amoco Chemical Company;
� “CAGR” means compound annual growth rate;
� “Capacity share” refers to the installed capacity at our facilities divided by the total industry capacity reported by an independent consultant;
� “Capacity utilization rate” means the percentage utilization of production capacity (as defined below);
� “CHDM” means Cyclohexanedimethanol;
� “Clear Path” or “Clear Path Recycling” means Clear Path Recycling, LLC, a strategic alliance between Shaw Industries Group, Inc. and DAK Americas LLC;
� “Columbia Assets” means the three integrated petrochemicals plants located in Columbia, South Carolina, U.S.A. acquired in 2011 from Eastman, one producing PTA and the other two producing PET;
� “CPI” means the Consumer Price Index of the indicated country;
� “CPL” means caprolactam;
� “DAK Americas” means DAK Americas LLC;
� “DAK Mississippi” means DAK Americas Mississippi Inc.;
� “DAK Pearl River” means DAK Americas Pearl River Inc. (formerly known as Wellman Holdings, Inc.);
� “EPS” means expandable polystyrene;
� “Eastman” means Eastman Chemical Company;
� “Euro” or “€” means the lawful currency of the European Union;
� “GAAP” means generally accepted accounting principles in the indicated country;
� “GDP” means gross domestic product;
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� “IASB” means the International Accounting Standards Board;
� “IFRS” means International Financial Reporting Standards, as issued from time to time by the IASB;
� “Indelpro” means Indelpro, S.A. de C.V.;
� “Installed capacity” means the annual production capacity calculated based on operations for 24 hours each day of a 365-day year;
� “Ktons” means kilotons, or 1,000 Tons (as defined below);
� “MEG” means monoethylene glycol;
� “MFRS” means Mexican Financial Reporting Standards, as issued from time to time by the Mexican Financial Reporting Standards Board (Consejo Mexicano de Normas de Información Financiera);
� “NAFTA” means the North American Free Trade Agreement established on January 1, 1994;
� “NCPI” means the National Consumer Price Index (Índice Nacional de Precios al Consumidor), published from time to time by the Banco de México in the Official Gazette of Mexico (Diario Oficial de la Federación) or any index that may replace it;
� “Official Exchange Rate” means the exchange rate of Mexican Pesos for U.S. Dollars determined by the Banco de México for the payment of obligations denominated in foreign currency payable in Mexico, as published in the Federal Official Gazette (Diario Oficial de la Federación) on a determined date;
� “Pesos,” “Mexican Pesos,” “Pesos” or “Ps.” means the lawful currency of Mexico;
� “PET” means polyethylene terephthalate, in the form of resin;
� “Petrocel” means Petrocel, S.A., a former subsidiary of Petrotemex and a current subsidiary of Alfa;
� “Petrotemex” or “GPT” means Grupo Petrotemex, S.A. de C.V.;
� “Polioles” means Polioles, S.A. de C.V.;
� “PP” means polypropylene;
� “production capacity” means the annual production capacity which, in the case of Alpek, is calculated based on operations for 24 hours each day of a 365-day year and deducting 20 days per year of scheduled downtime for regular maintenance;
� “PTA” means purified terephthalic acid;
� “pX” means paraxylene;
� “R-PET” means polyester product manufactured using as a raw material recycled PET recovered from post consumer sources;
� “Shaw Industries” means Shaw Industries Group, Inc.;
� “Temex” means Tereftalatos Mexicanos, S.A. de C.V., a subsidiary of Petrotemex with minority equity ownership of 8.55% by BP;
� “Tons” means metric tons (one metric ton is equal to 1,000 kilograms or 2,204.6 pounds);
� “Unimor” means Unimor, S.A. de C.V.;
� “Univex” means Univex, S.A., a subsidiary of Unimor;
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� “U.S. Dollars” “Dollars” or “US$” means the lawful currency of the United States of America; and
� “Wellman” means Wellman Holdings, Inc. (currently known as DAK Pearl River Inc.), the PET resin producer with assets in Bay St. Louis, Mississippi, U.S.A. that was acquired by DAK Americas LLC on August 31, 2011.
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PRESENTATION OF FINANCIAL AND CERTAIN OTHER INFORM ATION
Corporate Reorganization
The financial statements and other financial information presented herein were prepared on a combined basis until June 15, 2011 and on a consolidated basis starting on June 16, 2011. Prior to June 16, 2011, Alfa operated in the petrochemical industry through several entities grouped into a business unit informally known as “Alpek” that did not constitute a legal group or entity. However, on April 18, 2011, the Company was incorporated as Alpek, S.A. de C.V. and on June 16, 2011, Alfa transferred to Alpek, through direct or indirect transfers, its shares (together, such transfers of shares and incorporation of Alpek are referred to in this offering memorandum as the “Corporate Reorganization”) in the following companies:
Percentage of direct
Ownership by Alfa prior to the Corporate Reorganization
Percentage of direct and indirect Ownership by Alpek
post Corporate Reorganization
Grupo Petrotemex, S.A. de C.V. and its subsidiaries (“Petrotemex”)(1) ................................................................
100% 100%
Akra Polyester, S.A. de C.V. and its subsidiary (“Akra”) (2) ................................................................................................
51% 93.35%
Indelpro, S.A. de C.V. and its subsidiary (“Indelpro”)(3) ................................51% 51% Polioles, S.A. de C.V. and its subsidiary (“Polioles”)(4) ................................50% plus 1 share 50% plus 1 share Unimor, S.A. de C.V. and its subsidiaries (“Unimor”)(5) ................................100% 100% Copeq Trading Co. (“Copeq”) ................................................................100% 100%
_______________ (1) Alfa Corporativo, S.A. de C.V. (a wholly owned subsidiary of Alfa) owns 2,015 shares, which represents an approximately
0.0000666% share participation out of a total of 3,027,257,764 shares. (2) Petrotemex owned the 49% remaining shares prior to the Corporate Reorganization. Petrotemex currently owns
approximately 93.35% of the shares and BP Amoco Chemical Company owns approximately 6.65% of shares. (3) LyondellBasell Industries Holdings, B.V. (“LyondellBasell”) owns the 49% remaining shares. (4) BASF de México, S.A. de C.V. owns 50% of the shares, minus one share. (5) Alfa Subsidiarias, S.A. de C.V. (a wholly owned subsidiary of Alfa) owns 50,000 shares, which represents an approximately
0.0006997% share participation out of a total of 7,146,015,147 shares
The transfers of the shares from Alfa to Alpek were completed as follows:
� Alfa increased Alpek’s capital stock in the amount of Ps. 4,968 million through a contribution of its share ownership in Petrotemex and Indelpro. Upon such contribution, Alpek owned 100% and 51%, of the shares of these companies, respectively.
� Alfa sold its share ownership in Polioles, Unimor and Copeq to Alpek for Ps. 2,220 million. As a result, Alpek owned 50% plus 1 share, 100% and 100% of the shares of these companies, respectively.
� Alpek assumed a liability of Petrotemex due to Alfa in the amount of Ps. 638 million, derived from the sale that Alfa made to Petrotemex of its ownership interest of 51% in Akra. As a result, Petrotemex owned 100% of Akra’s shares. In addition, Alpek increased the capital stock portion of Petrotemex’s stockholders’ equity through the capitalization of the Petrotemex account payable assumed by Alpek.
See “Business—Corporate Structure” for a chart summarizing our corporate structure as a result of the Corporate Reorganization.
Prior to the completion of the Corporate Reorganization on June 16, 2011, Petrotemex, Akra, Indelpro, Polioles, Unimor and Copeq (together, the “Combined Affiliates”) were under common direct ownership and control of Alfa throughout the reporting periods. Therefore, our audited financial statements prior to 2011 are presented on a combined basis, combining the accounts of the Combined Affiliates, as described in Note 1 to our annual audited consolidated and combined financial statements as of December 31, 2011 and 2012 and January 1, 2011 and for the years ended December 31, 2011 and 2012, together with the notes thereto (the “Annual Audited Financial Statements”). The Corporate Reorganization was completed on June 16, 2011; as of such date, Alpek assumed
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ownership and control of the Combined Affiliates and therefore, as of June 16, 2011, our financial information is prepared on a consolidated basis (including the subsidiary and non-subsidiary guarantors) instead of combined basis.
For additional information regarding the Corporate Reorganization, see Note 1 to our Annual Audited Financial Statements.
Financial Information
The Annual Audited Financial Statements, as well as the other financial information of Alpek included in this offering memorandum related to these financial statements, have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Boards (“IASB”).
The condensed consolidated interim unaudited financial statements as of March 31, 2013 and for the three months ended March 31, 2012 and 2013, together with the notes thereto (the “Interim Unaudited Financial Statements”), as well as the other financial information of Alpek included in this offering memorandum related to these financial statements have been prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting” (“IAS 34”), as issued by the IASB, applicable to the preparation of interim financial statements.
Prior to 2011, we issued our consolidated financial statements in conformity with MFRS. In accordance with IFRS 1 “First-time adoption of IFRS” we considered January 1, 2011 as our IFRS transition date and January 1, 2012 as our IFRS adoption date. The amounts included in the Annual Audited Financial Statements for 2011 have been reconciled in order to be presented under the same standard and criteria applied in 2012. An explanation of how the transition from MFRS to IFRS has affected our financial position and result of operations is provided in Note 3 to the Annual Audited Financial Statements.
The combined financial information set forth below as of and for the years ended December 31, 2009 and 2010 has been derived from our annual financial statements prepared in accordance with MFRS that have not been included in this offering memorandum. Because of the differences between the accounting principles used in the preparation of such financial statements and the accounting principles used in the preparation of the Annual Audited Financial Statements included elsewhere in this offering memorandum, such information is not comparable, and you should use caution when comparing financial information prepared in accordance with MFRS to financial information prepared in accordance with IFRS.
Due to the consolidation of the Columbia Assets into our financial statements as of January 31, 2011, and the consolidation of Wellman into our financial statements as of September 1, 2011, our financial information for the year ended December 31, 2011 included in this offering memorandum is not comparable to our consolidated financial information for other periods and may not be indicative of our future financial performance. For more information regarding these acquisitions, see “Business—Columbia Assets Acquisition” and “Business—Wellman Acquisition.” For the year ended December 31, 2011, our net sales were Ps. 90,667 million (US$7,296 million); of this amount, the consolidation of the Columbia Assets contributed Ps. 12,995 million (US$1,046 million) to our net sales and the consolidation of Wellman contributed Ps. 1,858 million (US$149 million) to our net sales.
Because of our majority ownership and control of our strategic alliances identified herein, our strategic alliances are treated as subsidiaries for accounting purposes.
In making an investment decision, you must rely upon your own examination of the company, the terms of the offering and the financial information included herein. We urge you to consult your own advisors regarding the differences between MFRS, IFRS and U.S. GAAP and how these differences might affect the financial information included in this offering memorandum.
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Exchange Rate Information
Unless stated otherwise, references herein to “Pesos” or “Ps.” are to Mexican Pesos, the legal currency of Mexico; references to “U.S. Dollars,” “Dollars,” “US$” or “$” are to United States Dollars, the legal currency of the United States.
This offering memorandum contains translations of certain peso amounts into U.S. Dollars at specified rates solely for the convenience of the reader. These convenience translations should not be construed as representations that the peso amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the specified rate or at all. Furthermore, the exchange rate for purposes of the convenience translation is not necessarily the same rate we used in preparing our financial statements, which means that U.S. Dollar-denominated items, including U.S. Dollar-denominated expenses and liabilities, may have been translated into Mexican Pesos using one exchange rate (or an average exchange rate) and have been retranslated into U.S. Dollars for convenience of the reader using the convenience translation exchange rate.
Unless otherwise indicated, the exchange rate used for purposes of convenience translations is:
• with respect to balance sheet data included in this offering memorandum, the Official Exchange Rate at the end of the period presented; and
• with respect to financial information other than balance sheet data included in this offering memorandum, the average exchange rate for the period presented, which consists of the daily average of the exchange rates on each day during the period presented. See “Exchange Rates.”
Rounding Adjustments
Certain figures included in this offering memorandum have been rounded for ease of presentation. Percentage figures included in this offering memorandum have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, certain percentage amounts in this offering memorandum may vary from those obtained by performing the same calculations using the figures in our financial statements included elsewhere in this offering memorandum. Certain other amounts that appear in this offering memorandum may not sum due to rounding.
Non-GAAP Financial Measures
A body of generally accepted accounting principles is commonly referred to as “GAAP.” A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. We present “Adjusted EBITDA” in this offering memorandum, which is a non-GAAP financial measure. We define “Adjusted EBITDA” to mean our profit (loss) before tax after adding back or subtracting, as the case may be, (i) depreciation and amortization, (ii) impairment of non-current assets, (iii) comprehensive financing expenses, net (which includes financial expense, finance income, foreign exchange gains (losses), and net gain (loss) from certain derivative financial instruments), (iv) income tax and (v) share of gain (loss) of associates.
In managing our business we rely on Adjusted EBITDA as a means of assessing our operating performance. We believe that Adjusted EBITDA enhances the understanding of our financial performance and our ability to satisfy principal and interest obligations with respect to our indebtedness as well as to fund capital expenditures and working capital requirements. We also believe Adjusted EBITDA is a useful basis of comparing our results with those of other companies because it presents results of operations on a basis unaffected by capital structure and taxes. Adjusted EBITDA, however, is not a measure of financial performance under IFRS and should not be considered as an alternative to net income or operating income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Adjusted EBITDA has material limitations that impair its value as a measure of our overall profitability since it does not address certain ongoing costs of our business that could significantly affect profitability such as financial expenses, income taxes, depreciation, amortization and the impact of certain derivative instruments (except when designated as hedge accounting in accordance with IFRS). Our calculation of Adjusted EBITDA may not be comparable to other companies’ calculation of similarly titled
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measures. For a reconciliation of Adjusted EBITDA to consolidated net income (loss) for the years ended December 31, 2011 and 2012 and for the three months ended March 31, 2012 and 2013, see “Summary—Summary Financial Data and Other Information.”
Industry and Market Data
Market data and other statistical information used throughout this offering memorandum are generally based on independent industry publications, government publications, reports by market research firms or other published independent sources, including independent consultants such as the PCI Consulting Group (“PCI”). Some data are also based on our estimates, which are derived from our review of internal surveys, as well as independent sources. Although we believe these sources are reliable, we have not independently verified the information and cannot guarantee its accuracy or completeness. Third party information included in this offering memorandum has been accurately reproduced and to the best of our knowledge, no facts have been omitted which would render the reproduced information inaccurate or misleading.
In addition, in many cases, we have based certain statements contained in this offering memorandum regarding our industry and our position in the industry on certain assumptions concerning our customers and competitors. These assumptions are based on our experience in the industry and our own investigation of market conditions. We cannot assure you as to the accuracy of any such assumptions, and such assumptions may not be indicative of our position in our industry.
Intellectual Property
This offering memorandum includes some of our trademarks and trade names, including our logos. Each trademark and trade name of any other company appearing in this offering memorandum belongs to its respective owner.
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SUMMARY
This summary highlights certain information contained in this offering memorandum and may not include all the information relevant to you. For a more complete understanding of our business, you should read the following summary together with the more detailed information appearing elsewhere in this offering memorandum, including that set forth under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto included elsewhere in this offering memorandum.
Overview
We are involved in the production, marketing and sale of a diversified portfolio of petrochemical products. We are the largest petrochemical company in Mexico and the second-largest in Latin America (based on 2012 net sales). We have leadership positions across our product portfolio. For example, we were the largest producer of polyester and its precursor chemicals in the Americas based on installed capacity as of December 31, 2012 according to PCI. After the acquisition of Wellman in August 2011, we became the largest polyethylene terephthalate (“PET”) producer in the Americas and the second largest worldwide according to PCI, our internal estimates and market data. For the year ended December 31, 2012 and the three months ended March 31, 2013, in each period we derived approximately 78% of our net sales from our polyester group of products, including the production of purified terephthalic acid (“PTA”), PET resin and polyester fibers. We also operate the only polypropylene (“PP”) plant in Mexico which is one of the largest PP production facilities in North America as well as the largest expandable polystyrene (“EPS”) plant in the Americas in terms of installed capacity, based on our internal estimates and our review of publicly available market data. We are the sole Mexican producer of caprolactam (“CPL”), the majority of which we export to China.
We focus on products and end markets that we believe offer the highest growth potential and ability to expand margins and that are more likely to provide stable financial performance through economic cycles. For the year ended December 31, 2012, 91% of our products (on the basis of sales volume) were used in what we believe are recession-resistant end markets such as the food and beverage packaging and consumer goods end markets. For the year ended December 31, 2012, we generated approximately 50% of our total net sales in high-growth emerging markets including Mexico.
Our businesses benefit from access to competitively sourced raw materials, large-scale integrated production sites, proprietary state-of-the-art manufacturing technologies, strategic alliances and sustainable energy initiatives, which, together with our operational efficiency and expertise, allow us to maintain low-cost operations. We believe our participation in the recent consolidation trends in the North American PET market and our ability to maintain long-standing relationships with our key suppliers and customers have further enhanced our relevant market positions.
We operate through two major business segments: polyester chain products (“Polyester Chain Business”) and plastics and chemicals products (“Plastics & Chemicals Business”). Our Polyester Chain Business segment, comprising the production of PTA, PET and polyester fibers, serves the food and beverage packaging, textile and industrial filament end markets. Our Plastics & Chemicals Business segment, comprising the production of PP, EPS, polyurethanes, CPL, fertilizers and other chemicals, serves a wide range of markets, including the food and beverage packaging, consumer goods, automotive, construction, agriculture, oil industry and pharmaceutical end markets.
We operate 10 plants in Mexico, nine plants in the United States and one plant in Argentina. Our total assets as of March 31, 2013 were Ps. 59,656 million (US$4,829 million). The following table presents our total net sales and Adjusted EDITDA for the periods indicated.
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Year Ended December 31,
Three Months Ended March 31,
2011 2012 2012 2012 2013 2013 (Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (Unaudited) (in millions) Total net sales ..........................90,667 96,163 7,303 24,829 23,284 1,840 Adjusted EBITDA(1) ................9,545 9,611 730 2,550 2,035 161 ______________
(1) For a definition of Adjusted EBITDA, see “Presentation of Financial and Certain Other Information––Non-GAAP Financial Measures.”
Our subsidiaries are involved in the production, marketing and sale of our products in the following industries:
Industry Alpek
Industry Segment Main Products Representative End Markets
Typical End Users(1)
Percent of 2012 Net Sales
Main Geographic End Markets
Polyester Chain Products
PTA, PET � Food and beverage
packaging � Personal care
� Coca Cola � Pepsi � Kraft Foods
Approximately 78%
� Mexico � United States � Argentina � Brazil � Spain � Lithuania � Colombia � Italy
Polyester fibers � Carpets � Non-woven � Apparel
� Hanes � Shaw � Fruit of the Loom
Plastics & Chemicals Products
Polypropylene
� Food and beverage packaging
� Consumer goods � Automotive � Medical
� Coca Cola � Pepsi � Alcoa � Becton Dickinson � Tupperware � Kimberly Clark
Approximately 22%
� Mexico � United States � China � Central America
and Caribbean (2) � Europe(3) � Brazil � Canada � Colombia
Expandable polystyrene and polyurethanes
� Construction � Packaging for
appliances � Furniture and
bedding
� Whirlpool � Samsung � LG � Bosch � Sealy � Simmons
Industrial and specialty chemicals
� Crude oil industry � Automotive � Polyester � Hygiene � Pharmaceutical
� Pemex � Bardahl � Procter & Gamble � Johnson & Johnson
Caprolactam � Textile/apparel � Tire cords � Engineering plastics
� Nike � Quadrant � Rhodia
Fertilizers (ammonium sulfate)
� Agriculture
Many agricultural customers in central Mexico, mainly growers of sorghum and corn
_________ (1) Mix of current customers and non-customers of Alpek. (2) Central America and Caribbean includes Barbados, Belize, Costa Rica, Dominican Republic, Guatemala, Honduras, Jamaica,
Nicaragua, Panama, El Salvador, Trinidad and Tobago and British Virgin Islands. (3) Europe includes Germany, Spain, France, United Kingdom, Italy, Netherlands, Poland and Lithuania.
We estimate that for the year ended December 31, 2012, approximately 91% of our products (on the basis of sales volume) were used in the food and beverage packaging and consumer goods end markets, as shown by the following chart.
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Breakdown of Sales Volume by End Market for the Year Ended December 31, 2012
Food and Beverage
64%
Consumer goods27%
Textiles7%
Construction2%
Corporate Information
Alpek is a sociedad anónima bursátil de capital variable (a publicly traded variable capital corporation) that is a holding company based in Monterrey and controlled by Alfa, a Mexican public company that is one of Mexico’s largest conglomerates, based on net sales. Alpek’s common shares are listed on the Mexican Stock Exchange (Bolsa Mexicana de Valores, S.A.B. de C.V.). Our subsidiaries have operated for over 35 years. We have a successful history of managing strategic alliances, including our majority-owned strategic alliance with BASF (since 1981) and LyondellBasell (since 1992), and with global chemical groups that provide us access to what we believe are best-in-class manufacturing and applications technologies and technical expertise as well as advantageous sourcing of specialty products.
On April 26, 2012, we conducted an initial public offering in Mexico and a private offering of shares in the international markets. We issued a total of 379,298,220 shares (including the exercise of an overallotment option) at the offering price of Ps. 27.50 per share, for a total of Ps. 10,431 million.
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The following chart summarizes our corporate structure as of the date of this offering memorandum, including our principal subsidiaries, our percentage ownership in them and their principal products.
Alpek, S.A.B. de C.V. (1)
Unimor, S.A. de C.V. and
subsidiaries (5) 100%
(CPL and Fertilizers)
Indelpro, S.A. de C.V. and
subsidiary (3) 51% (PP)
Polioles, S.A. de C.V. and
subsidiary (4)
50% + 1 share (EPS, PURs & other
chemicals)
Grupo Petrotemex, S.A. de C.V. (2)
100% (PTA, PET and PSF)
Subsidiary Guarantors of the Notes
Tereftalatos Mexicanos,
S.A. de C.V. (8)
91.45% (PTA)
DAK Resinas Americas Mexico,
S.A. de C.V. 100%
(PET)
DAK Americas LLC (6)
100% (PTA, PET, PSF)
Akra Polyester, S.A. de C.V. (7)
93.35% (PTA, Fibers)
DAK Americas Mississippi, Inc. (9)
100% (PET)
(1) Other non-material subsidiaries are Copeq Trading Co. and Grupo Alpek, S.A. de C.V. (2) Other subsidiaries are DAK Americas Argentina, S.A. and Cogeneración de Energía Limpia de Cosoleacaque, S.A. de C.V.,
among other non-material subsidiaries. (3) LyondellBasell Industries Holdings B.V. owns 49.0% of the shares. Industrias Indelpro, S.A. de C.V. (personnel services
company) is a subsidiary of this company. (4) BASF de Mexico, S.A. de C.V. owns 50.0% minus one share. Industrias Polioles, S.A. de C.V. (personnel services company)
is a subsidiary of this company. (5) Subsidiaries include Univex, S.A. and Nyltek, S.A. de C.V., among other non-material subsidiaries. (6) DAK Americas Exterior, S.L. (a wholly owned subsidiary of Grupo Petrotemex, S.A. de C.V.) directly owns approximately
18.0% of the shares. DAK Americas Pearl River, Inc. is a subsidiary of this company. (7) BP Amoco Chemical Company owns approximately 6.65% of the shares. Industrias Fiqusa, S.A. de C.V. (personnel service
company) is a subsidiary of this company. (8) BP Amoco Chemical Company owns approximately 8.55% of the shares. (9) DAK Americas Pearl River, Inc. (a wholly owned subsidiary of DAK Americas LLC) directly owns 100% of the shares.
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The following map shows the location of our headquarters and each of our production facilities and their installed capacity in Ktons per year.
Cedar Creek, NCPET, 156R-PET, 73 Cape Fear, NC
PTA, 540PET, 209Fibers, 146
Cooper River, SCPET, 156Fibers, 136
Columbia, SCPET, 670PTA, 590
Monterrey, NLCorporate HQsFibers, 160
Altamira, TampsPTA, 1,000PP, 640EPS, 165
Cosoleacaque, VerPTA, 610PET, 156
Salamanca, GtoCPL, 85Fertilizers, 360
Ocotlán, JalNy lon 6, 10
Lerma, EdomexPURs andother chemicals, 129
Zárate, ArgPET, 193
Pearl River, MSPET, 430
Acquisition of Columbia Assets
On January 31, 2011, we completed the acquisition of the U.S. PTA and PET facilities of Eastman for US$622 million. As a result, we acquired a modern, integrated petrochemical facility consisting of three plants located in Columbia, South Carolina, with a total combined annual capacity of 1.26 million tons, which produce PTA and PET. In connection with the acquisition, we acquired working capital of US$190 million, as well as a series of patents and related intellectual property rights to the IntegRex® PTA and PET production technologies, which we believe are leading production technologies that are less capital intensive than other technologies and provide the lowest production cost per ton of PTA and PET of any technology that is currently available. We also incorporated a complementary, diversified portfolio of PET products, which we believe will allow us to reach a wider customer base and offer a more diversified product portfolio. See “Business—Columbia Assets Acquisition.”
Wellman Acquisition
On August 31, 2011, we completed the acquisition of the PET business of Wellman for US$123 million. The Wellman business consists of a 430,000 ton capacity PET plant located in Bay St. Louis, Mississippi, employing 165 people, as well as technology for PET manufacturing. Our acquisition of this plant from Wellman is one of the most recent investments carried out in the PET industry in North America. This plant is strategically located on the coast of the Gulf of Mexico, close to the main sources of raw materials for the production of PET. Additionally, as a result of the acquisition, we acquired a new group of products and brands that we believe have strong market recognition because of their high quality and performance. See “Business—Wellman Acquisition.”
Our Strengths
Throughout our history, we have developed a series of competitive strengths upon which we have built a successful business model. We believe that our key competitive strengths are:
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� Market and Industry Leadership;
� Proven Track Record of Growth;
� Low-Cost Producer Across our Product Portfolio;
� Leading Technology Platform;
� Resilient Financial Performance; and
� Experienced Management Team Supported by Strong Shareholder.
Market and Industry Leadership
We are the largest petrochemical company in Mexico and the second-largest in Latin America (based on 2012 net sales) with leading positions across our product offering. According to PCI, we are one of the largest integrated players in the global polyester industry and the leading integrated polyester producer in North America.
The following table highlights our leading market positions as of December 31, 2012 based on installed capacity in our targeted geographies and end markets:
Products Market Position(1) Share(1) PTA #1 in the Americas 46%(2) PET #1 in the Americas 38%(2) #2 worldwide 8%(2) Polyester Staple Fiber #1 in North America 44%(2) EPS #1 in North America; #1 in Mexico 28%; 91%(3) PP #1 in Mexico 100%(4) CPL #1 in Mexico 100%(4) _______________ (1) Based on installed capacity. (2) Source: PCI, Alpek’s internal estimates and market data. (3) Source: Alpek’s review of publicly available market data. (4) Source: Alpek’s internal estimates.
Our leading market positions are reinforced by significant competitive advantages:
� Our ability to continuously innovate allows us to develop and improve manufacturing technologies and production processes, enhance value-added attributes of our products and reduce our cost structure.
� We are suppliers to important consumer goods brands. We maintain long-term relationships with customers across our portfolio through high-quality customer service and superior technical responsiveness. Our commercial, marketing, research and development organizations allow us to meet specific customer performance requirements and provide our customers with attractive and competitive value initiatives.
� Our long-standing relationships with our strategic alliance partners allow us to access key manufacturing technologies, technical expertise and products.
� We have been an active participant in the recent consolidation trends in the North American PET market. This consolidation has significantly improved the industry structure and allowed us to further enhance our ability to establish valuable and attractive product offerings and broaden our customer base in that market. See “Business.”
� Based on our experience and industry knowledge, we believe that our best-in-class infrastructure would require large capital investments and significant lead time to replicate.
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Proven Track Record of Growth
Throughout our history, we have executed a focused strategy of organic growth and value-creating acquisitions. In addition, we have built a product portfolio and trade leadership that have strategically positioned us to benefit from high-growth emerging markets and the U.S. economic recovery. As a result, for the last 25 years, we have grown our sales volume at a CAGR of 10.4%.
� We have grown our production capacity through high-return, capital-efficient debottleneckings and expansions. For example, in 1998 we debottlenecked our first PP line, increasing its capacity from 100 Ktons to 240 Ktons and further increased the site’s capacity to 640 Ktons in 2008 by adding a second production line. Furthermore, we have converted our PP facility into what we believe is one of the most competitive in North America.
� We have a proven track record of acquiring assets and successfully integrating and improving these assets. For example, in 2001 we acquired certain idle PTA, PET and polyester staple fiber assets in the United States. We have transformed these assets into one of the leading producers within the market of PET and polyester chain products in the Americas. We improved the profitability of these assets by reducing fixed costs, increasing asset utilization, consolidating our product offerings, focusing our product mix on products and markets with higher margins and focusing on the elimination of waste and non-value-added activities. We believe these measures, when coupled with sustainability initiatives aimed at reducing energy needs and increasing environmental awareness, have helped transform these assets and businesses into trade leaders. We further enhanced this leading position through our January and August 2011 acquisitions of the Columbia Assets and Wellman, respectively. We have already improved operating performance of the Columbia Assets and are extracting synergies.
� We intend to continue to use our strengths and competency to grow our business both organically and through acquisitions.
Low-Cost Producer Across our Product Portfolio
We believe we are one of the lowest-cost producers in North America based on our:
� large-scale production facilities. According to PCI, we operate some of the largest manufacturing plants in the Americas for our products, including our world-scale polyester production facilities in Altamira and Cosoleacaque in Mexico, and Columbia, South Carolina, and Cape Fear, North Carolina, in the U.S., and our PP and EPS facilities in Altamira, Mexico;
� high operating rates and energy efficiency. We believe that we operate our plants at industry leading utilization rates, which helps minimize our per-unit production costs. According to internal calculations, our PTA capacity utilization rate in 2012 was 95% compared to a peer average of 84%;
� strategically located assets in close proximity to raw material supplies (principally on the U.S. Gulf Coast), product transportation infrastructure and end markets, which helps reduce logistics costs. In addition, our long-term relationships with suppliers, supported by our large-scale consumption and long-term contracts, give us strategic access to raw materials;
� state-of-the-art production technology. We use industry leading production technologies across our product portfolio that help reduce our production costs by being more efficient than older technologies; and
� low labor cost in Mexico, low overhead costs and lean, flexible organizational structure throughout our facilities.
We intend to maintain and grow our cost advantage through continued investment in cost reduction and efficiency-enhancing projects.
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Leading Technology Platform
We have developed and acquired cutting edge production technologies that we believe have improved our cost position and enhanced the quality and performance of our products. We believe the acquisition of the IntegRex® technology provides us with state-of-the-art PTA and PET production technology. We intend to leverage the IntegRex® technology in potential opportunities for expansion into new markets, partnerships and licensing agreements. We have already signed two agreements for the licensing of IntegRex® technology for an increase of capacity for a PTA plant in The Netherlands and for the construction of a PTA plant in Corpus Christi, USA. The principal benefits of this technology are:
� low conversion cost, which we estimate to be approximately 20% lower than competing technologies and lower capital investments, through the reduction of steps and machinery necessary for the production of PTA and PET;
� low investment per ton of installed capacity;
� potential for large-scale application; and
� lower environmental impact, due to a reduction in wastewater by-product and savings in energy consumption.
Our PP production process also uses state-of-the-art technologies: Spheripol, the most widely used PP technology in the world, and Spherizone, the latest technology being licensed by LyondellBasell. These technologies permit us to produce PP with a wider range of properties. Additionally, our EPS and polyurethanes businesses benefit from close technological collaboration with our strategic alliance partner BASF.
This robust technological base underpins our low-cost advantage, our operational excellence and our ability to develop new products.
Resilient Financial Performance
We have demonstrated strong financial performance throughout the business cycle. During the last economic downturn from 2008 to 2009, our volumes and net sales increased by 12.2% and 4.6%, respectively. Our robust financial performance has been driven by the following key elements:
� for the year ended December 31, 2012, we estimate that approximately 91% of our products (on the basis of sales volume) were ultimately used to produce plastic products and containers for the beverage, food and consumer goods end markets, which tend to be less susceptible to economic downturns;
� for the year ended December 31, 2012, approximately 50% of our sales were in emerging markets, with high demand growth rates;
� for the year ended December 31, 2012 and the three months ended March 31, 2013, more than one-third of our sales to third parties were under long-term supply contracts, which further reduces our exposure to industry cycles;
� our PTA contracts in North America (which represented 23% of our net sales for each of the year ended December 31, 2012 and the three months ended March 31, 2013) are priced on a “cost plus” basis, and a portion of our PET contracts are subject to fixed prices that are negotiated with our customers annually;
� access to competitively sourced raw materials;
� our ability to pass a substantial portion of raw material price increases to our customers; and
� our low-cost position.
Additionally, we believe that regional dynamics in our industries will help reduce volatility in pricing and margins. The North American PTA/PET/polyester market has experienced significant industry consolidation in
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recent years, which we believe will reduce volatility in the Polyester Chain Business. From 2005 to 2012, market consolidation has reduced the number of PET producers in North America from eight to five. PCI expects the North American PET demand outlook to improve, providing a healthy environment for domestic producers.
Experienced Management Team Supported by Strong Principal Shareholder
We have a senior management team with an average of more than 20 years of industry experience and a seasoned and knowledgeable group of operating and technical managers in each of our businesses. Our team has been responsible for the expansion of Alpek through organic growth and acquisitions, and has a proven track record of integrating and optimizing acquired assets and implementing new projects and start-up operations. For example, since our acquisition of the Columbia Assets in January 2011, we have improved our operating rate, and we have also achieved important synergies in areas such as procurement and operations. Additionally, our principal shareholder, Alfa, is a leading Latin American conglomerate with an established culture of operational excellence, prudent corporate governance and reliability as a partner. These values form the core of our businesses on which our management team intends to build.
Our Strategies
We are focused on building on the aforementioned competitive strengths to achieve profitable top-line growth, improve margins, and to generate a strong and sustainable cash flow.
Capitalize on Market Growth Opportunities
We intend to continue expanding our capacity, product portfolio and geographic reach by executing the following strategies while maintaining a prudent approach to financial management:
� investing in capital efficient high-return organic growth opportunities throughout our product portfolio, ranging from large-scale expansions to debottlenecking projects;
� evaluating and pursuing value-accretive acquisitions in the markets where we participate or in new regions with high-growth potential, in order to enhance our position as a global petrochemical player; consistent with this strategy, we recently acquired the Columbia Assets and Wellman;
� leveraging our industry leading technology portfolio and business knowledge, seeking licensing and strategic alliance opportunities or pursuing new integrated projects worldwide through the use of IntegRex® technologies in our PTA/PET businesses; we have already signed two agreements for the licensing of IntegRex® technology for an increase of capacity for a PTA plant in The Netherlands and for the construction of a PTA plant in Corpus Christi, USA.;
� expanding our reach in high-growth markets such as Latin America, Asia and the Middle East;
� diversifying our product portfolio, with an emphasis on higher margin products; and
� continuing to broaden our customer base.
Continue to Pursue Operational Excellence
We believe our low-cost operations have contributed to our successful growth strategy in the markets we serve. We intend to:
� maintain a low-cost structure through continued operating and safety excellence resulting in high-capacity utilization rates at our large-scale production facilities;
� continue to implement additional cost and efficiency improvements, including the replacement of our older and less efficient operations with new large-scale plants using our latest proprietary low-cost technologies;
� reduce energy costs and improve manufacturing efficiency through the use of diversified fuel sources and energy integration; and
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� continue developing long-term competitive sourcing for our key raw materials, taking advantage of our capacity, the convenient geographic location of our operations and our strong logistics infrastructure.
Continue to Develop High Value Offerings for Our Customers
We intend to maintain our position as a supplier of choice and trade leader, supported by close collaboration and long-standing relationships with our key customers in the markets we serve. We plan to continue being our customers’ supplier of choice by maintaining an emphasis on:
� unparalleled responsiveness to customer needs;
� superior technical support;
� continuous innovation in products and services by working closely with customers to better meet their needs; and
� sustainable products and solutions.
Invest in and Grow Our Technology Leadership Position
We intend to continue developing proprietary technologies to maintain our leadership in the PTA/PET industry. We also intend to continue investing in our research and development program to further develop and continually improve our proprietary technologies. We believe that investing in and growing our technology leadership position will help us sustain and enhance our profitability, improve the efficiency of our operations and enhance the return on our investment and sustainability.
Continue to Pursue Sustainability Initiatives
We will continue pursuing initiatives that reduce our environmental footprint. We have several paths to address environmental challenges and encourage sustainable practices, such as:
� continuing to implement energy efficiency projects, reducing our fossil fuel consumption;
� continuing our recycling activities; for example, we intend to implement bottle-to-bottle initiatives through the Clear Path Recycling operation in North Carolina;
� looking into several initiatives related to renewable raw material, which includes working with our customers to support their sustainability efforts; and
� committing to continuous improvement in our health, safety and environmental performance, as well as complying with existing legal obligations in the jurisdictions where we operate.
Attract, Develop and Retain the Best Human Capital
Our human capital has shaped us since our earliest stages. We do not believe we could have fostered and achieved the success we have had without the support of a top-performing, goal-oriented and highly skilled human capital base. Attracting, developing and retaining the best human capital will remain one of our key strategies.
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THE OFFERING
The following is a brief summary of certain terms of this offering and it is not intended to be complete. For a more complete description of the terms of the notes, see “Description of the Notes.”
Issuer .......................................................... Alpek, S.A.B. de C.V.
Notes offered .............................................. US$650,000,000 aggregate principal amount of 4.500% Senior Notes due 2022.
Offering Price ............................................. 99.713%, plus accrued interest, if any, from November 20, 2012.
Maturity Date .............................................. November 20, 2022.
Issue Date ................................................... November 20, 2012.
Interest Rate ................................................ Interest will accrue at a rate of 4.500% per year.
Interest Payment Dates ............................... May 20 and November 20 of each year, beginning on May 20, 2013.
Subsidiary Guarantors ................................ Certain of our subsidiaries identified in “Description of the Notes — General.” As of and for the three months ended March 31, 2013, the Subsidiary Guarantors (in addition to Alpek, on a stand-alone basis) accounted for 68% of our total assets and 72% of our Adjusted EBITDA on a consolidated basis.
Guarantees .................................................. The notes will be fully and unconditionally guaranteed on a senior unsecured basis by our Subsidiary Guarantors.
Ranking....................................................... The notes and subsidiary guarantees will be our and our Subsidiary Guarantors’ respective senior unsecured obligations and they will rank:
• equally with all of our and the Subsidiary Guarantors’ respective existing and future senior unsecured indebtedness (subject to certain obligations that are preferred by statute); and
• senior to all of our and our Subsidiary Guarantors’ respective existing and future subordinated indebtedness.
The notes and the subsidiary guarantees will effectively rank junior to all of our and the Subsidiary Guarantors’ respective existing and future secured indebtedness, to the extent of the value of the assets securing such indebtedness. The notes and the subsidiary guarantees will be structurally subordinated to all indebtedness, and trade payables, of our non-guarantor subsidiaries.
As of March 31, 2013, we and our subsidiaries had total consolidated indebtedness of Ps. 13,827 million (US$1,119 million), Ps. 3,521 million (US$285 million) of which was unsecured indebtedness of the Subsidiary Guarantors and Ps. 2,370 million (US$192 million) of
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which was unsecured indebtedness of our non-guarantor subsidiaries. As of March 31, 2013, on a stand-alone basis the Company had Ps. 7,936 million (US$642 million) of outstanding indebtedness, and none of the Company, any Subsidiary Guarantor or any non-guarantor subsidiary had any secured indebtedness.
As of December 31, 2012, Alpek had net assets of PS. 311 million (accounting for 7% of our consolidated net assets) and for the year ended December 31, 2012, Alpek had an EBITDA of Ps. 0 (accounting for 0% of our consolidated EBITDA). As of December 31, 2012, the Subsidiary Guarantors had net assets of PS. 2,940 million (accounting for 62% of our consolidated net assets) and for the year ended December 31, 2012, the Subsidiary Guarantors had an EBITDA of Ps. 511 million (accounting for 70% of our consolidated EBITDA). As of December 31, 2012, our non-guarantor subsidiaries had net assets of PS. 1,491million (accounting for 31% of our consolidated net assets) and for the year ended December 31, 2012, our non-guarantor subsidiaries had an EBITDA of Ps. 217 million (accounting for 30% of our consolidated EBITDA). As of December 31, 2012, DAK Americas LLC had net assets of PS. 1,110 million (accounting for 23% of our consolidated net assets) and for the year ended December 31, 2012, DAK Americas LLC had an EBITDA of Ps. 212 (accounting for 29% of our consolidated EBITDA). For more information on DAK Americas LLC, see “Business––DAK Americas LLC”
Optional Redemption .................................. We may redeem the notes, in whole or in part, at the greater of 100% of their principal amount outstanding and a make-whole amount described in this offering memorandum, in each case, plus Additional Amounts, if any, and any accrued and unpaid interest, if any, up to the redemption date. See “Description of the Notes —Redemption — Optional make-whole redemption.”
Tax Redemption ......................................... We may redeem the notes, in whole but not in part, at 100% of their principal amount plus accrued interest and Additional Amounts, if any, to the redemption date, upon the occurrence of specified events relating to Mexican tax law, that result in higher withholding taxes with respect to interest payments under the notes. See “Description of the Notes— Redemption —Optional redemption upon tax event.”
Change of Control ...................................... Upon the occurrence of a Change of Control Triggering Event (as defined in “Description of the Notes”), we will be required to make an offer to purchase the notes at a purchase price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest and Additional Amounts, if any, through the purchase date. See “Description of the Notes — Change of control triggering event.”
Additional Amounts ................................... Payments of interest on the notes to investors that are non-residents of Mexico for tax purposes will generally be subject to Mexican withholding taxes at a rate of 4.9%. Subject to certain specified exceptions, we and the Subsidiary Guarantors will, jointly and severally, pay such additional amounts as may be required so that the net amount received by the holders of the notes in respect of principal, interest or other payments on the notes, after any such withholding or deduction, will not be less than the amount each holder of notes would have received if such withholding or deduction
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had not applied. See “Description of the Notes — Additional amounts.”
Certain Covenants....................................... The indenture governing the notes contains covenants that will, among other things, limit the creation of liens by us and our subsidiaries, and will permit us and our subsidiaries to consolidate or merge with, or transfer all or substantially all of our assets to, another person only if any such transaction complies with certain requirements. However, these covenants are subject to a number of important exceptions and qualifications. See “Description of the Notes — Covenants.”
Events of Default ........................................ The indenture sets forth the events of default applicable to the notes. See “Description of the Notes — Event of Default.”
Further Issuances ........................................ We may from time to time without notice to or consent of the holders of the notes create and issue an unlimited principal amount of additional notes of the same series as the notes initially issued in this offering.
Use of Proceeds .......................................... We intend to use the net proceeds from the notes to reduce the outstanding balance under the 2010 Syndicated Credit Facility entered into by Petrotemex, and certain of its subsidiaries, and for general corporate purposes. See “Use of Proceeds.”
Taxation ...................................................... For a summary of Mexican federal income tax consequences and U.S. federal income tax consequences of an investment in the notes, see “Taxation.”
Book-Entry; Form and Denominations....... Each series of notes will be issued in the form of global notes in fully registered form without interest coupons. The global notes will be exchangeable or transferable, as the case may be, for definitive certificated notes in fully registered form without interest coupons only in limited circumstances. Each series of notes will be issued in registered form in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof. See “Book-Entry, Delivery and Form.”
Settlement ................................................... Each series of notes will be delivered in book-entry form through the facilities of The Depository Trust Company, or DTC, for the accounts of its participants, including Euroclear Bank S.A./N.V., as operator of the Euroclear System, or Euroclear, and Clearstream Banking, S.A. Luxembourg, or Clearstream Luxembourg.
Transfer Restrictions ................................... We have not registered the notes under the Securities Act or the securities laws of any other jurisdiction. The notes are subject to restrictions on transfer and may only be offered in transactions exempt from or not subject to the registration requirements of the Securities Act. See “Transfer Restrictions.”
As required under the Mexican Securities Market Law, we will notify the CNBV of the offering of the notes outside of Mexico.
The notes will not be registered with the National Securities Registry and may not be offered or sold publicly or otherwise be subject to
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brokerage activities in Mexico, except to Mexican institutional and qualified investors pursuant to the private placement exemption set forth in Article 8 of the Mexican Securities Market Law.
Listing of the Notes .................................... Application has been made to list the notes on the Official List of the Irish Stock Exchange and to trade them on the Global Exchange Market. We cannot assure you that this application will be accepted.
Governing Law ........................................... The indenture, the notes and the subsidiary guarantees will be governed by, and construed in accordance with, the laws of the State of New York.
Trustee, Registrar, Transfer Agent and Paying Agent ...........................................
The Bank of New York Mellon.
Irish Paying Agent and Listing Agent ........ The Bank of New York Mellon SA/NV, Dublin Branch.
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SUMMARY OF FINANCIAL DATA AND OTHER INFORMATION
You should read the following summary financial data and other information in conjunction with our Annual Audited Financial Statements and our Interim Unaudited Financial Statements, including the notes thereto, and the information set forth in the sections “Presentation of Financial and Certain Other Information,” “Selected Financial Data and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this offering memorandum.
The financial information as of and for the years ended December 31, 2011 and 2012 has been derived from our audited combined and consolidated financial statements prepared in accordance with IFRS. The financial information as of March 31, 2013 and for the three months ended March 31, 2012 and 2013 has been derived from our interim unaudited consolidated financial statements prepared in accordance with IAS 34.
Due to the consolidation of the Columbia Assets into our financial statements as of January 31, 2011, and the consolidation of Wellman into our financial statements as of September 1, 2011, our consolidated financial information for the year ended December 31, 2011, included in this offering memorandum is not comparable to our financial information for other periods and may not be indicative of our future financial performance. For the year ended December 31, 2011, our net sales were Ps. 90,667 million (US$7,296 million); of this amount, the consolidation of the Columbia Assets contributed Ps. 12,995 million (US$1,046 million) to our net sales and the consolidation of Wellman contributed Ps. 1,858 million (US$149 million) to our net sales.
For the Year Ended December 31, For the Three Months Ended March 31,
2011 2012 2012(1) 2012 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (Unaudited) (in millions)
Income Statement Data: Net sales ................................................................90,667 96,163 7,303 24,829 23,284 1,840 Cost of sales................................................................(80,653) (86,767) (6,589) (22,236) (21,332) (1,685) Gross profit ................................................................10,013 9,397 714 2,593 1,952 154 Selling and administrative expenses ................................................................
(2,099) (2,231) (169) (569) (509) (40)
Other income (expenses), net(3) ................................(325) 311 24 13 80 6 Operating profit ................................ 7,589 7,476 568 2,037 1,523 120
Financial income ................................ 225 566 43 435 130 10 Financial expenses ................................(1,415) (1,897) (144) (399) (247) (20)
“Comprehensive financing expense, net” ................................................................
(1,190) (1,331) (101) 37 (117) (9)
Share of losses of associates ................................(23) (39) (3) (8) (11) (1) Profit before income tax ................................6,375 6,106 464 2,065 1,395 110 Income tax ................................................................(1,948) (1,723) (131) (813) (415) (33)
Profit for the period ................................ 4,428 4,383 333 1,252 980 77
As of December 31, As of March 31,
2011 2012 2012(1) 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (US$) (Unaudited)
(in millions)
Balance Sheet Data Current assets:
Cash and cash equivalents(4) ................................ 3,586 6,658 512 4,835 391 Trade and other receivables, net(5) ................................13,281 13,369 1,028 14,203 1,150 Inventories ................................................................12,320 11,582 890 11,567 936 Derivative financial instruments ................................ 49 107 8 202 16
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As of December 31, As of March 31,
2011 2012 2012(1) 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (US$) Other current assets ................................................................231 244 19 196 16
Total current assets ................................................................29,468 31,960 2,457 31,004 2,509 Non-current Assets:
Derivative financial instruments ................................ 27 - - - - Property, plant and equipment, net ................................28,879 26,695 2,052 25,449 2,060 Goodwill and intangible assets, net ................................2,549 2,243 172 2,528 205 Deferred income tax ................................................................940 505 39 410 33 Other non-current assets ..........................................................290 293 23 265 21
Total non-current assets ...............................................................32,685 29,736 2,286 28,653 2,319
Total assets ................................................................ 62,153 61,696 4,742 59,656 4,829
Current liabilities:
Current debt ................................................................2,142 501 38 611 49 Trade and other payables .........................................................13,218 9,696 745 10,171 823 Derivative financial instruments ................................ 439 288 22 68 6 Income tax payable ................................................................301 102 8 179 15 Dividends payable................................................................- - - 576 47 Other current liabilities ............................................................2,579 1,462 112 1,331 108
Total current liabilities ................................................................18,679 12,048 926 12,937 1,047 Non-current liabilities:
Non-current debt ................................................................17,545 13,940 1,071 13,215 1,070 Derivative financial instruments ................................ 743 208 16 173 14 Deferred income tax ................................................................5,126 4,718 363 4,497 364 Employees benefits ................................................................1,261 1,130 87 1,107 90
Total non-current liabilities..........................................................24,675 19,997 1,537 18,993 1,537
Total liabilities ................................................................43,354 32,045 2,463 31,929 2,584 Equity attributable to owner of the company ...............................15,255 26,180 2,012 24,566 1,988 Non-controlling portion ...............................................................3,545 3,471 267 3,162 256
Total Equity ................................................................18,799 29,651 2,279 27,727 2,244
For the Year Ended December 31,
For the Three Months Ended March 31,
2011 2012 2012(1) 2012 2013 2013(2) (Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (Unaudited) (in millions) Cash Flow Data: Net cash generated from operating activities...............................4,662 5,483 416 1,137 639 51 Net cash used in investing activities ................................(9,440) (1,805) (137) (148) (982) (78) Net cash flows (used in) provided from financing activities ................................................................4,862 (280) (21) (1,440) (1,273) (101)
Other Financial Data: Adjusted EBITDA(6) ................................................................9,545 9,611 730 2,550 2,035 161
___________________ (1) Translated into U.S. Dollars, solely for the convenience of the reader, using an exchange rate of (i) Ps. 13.0101 per
U.S. Dollar, the Official Exchange Rate in effect on December 31, 2012, with respect to balance sheet data and (ii) Ps. 13.1685 per U.S. Dollar, the daily average of the Official Exchange Rates on each day during the year ended December 31,
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2012, with respect to financial information other than balance sheet data. These convenience translations should not be construed as representations that the Mexican Peso amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the specified rate or at all. See “Exchange Rate Information.”
(2) Translated into U.S. Dollars, solely for the convenience of the reader, using an exchange rate of (i) Ps. 12.3546 per U.S. Dollar, the Official Exchange Rate in effect on March 31, 2013, with respect to balance sheet data and (ii) Ps. 12.6575 per U.S. Dollar, the daily average of the Official Exchange Rates on each day during the three months ended March 31, 2013, with respect to financial information other than balance sheet data. These convenience translations should not be construed as representations that the Mexican Peso amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the specified rate or at all. See “Exchange Rate Information.”
(3) Other income and expenses for the three months ended March 31, 2012 and 2013 and the years ended December 31, 2011 and 2012 consisted primarily of the following: (i) in 2011, reorganization expenses (Ps. 314 million), business acquisition-related non-capitalized costs (Ps.162 million) and gain from sale of shares of permanent investments (Ps. 88 million), (ii) in 2012, valuation of our commodities-related derivatives financial instruments (Ps. 152 million), (iii) in the three months ended March 31, 2012, costs on sale of property (Ps 1 million) and (iv) in the three months ended March 31, 2013, valuation of our commodities-related derivatives financial instruments (Ps. 76 million). See Note 24 to the Annual Audited Financial Statements.
(4) Restricted cash as of March 31, 2013 and as of December 31, 2011 and 2012 consisted of Ps. 3 million and Ps. 2 million and Ps. 3 million, respectively. See Note 7 to the Annual Audited Financial Statements and Note 7 to the Interim Unaudited Financial Statements.
(5) Provision for impairment of trade receivables as of March 31, 2013 and as of December 31, 2011 and 2012 consisted of Ps. 242 million and Ps. 248 million and Ps. 242 million, respectively.
(6) We define Adjusted EBITDA to mean consolidated profit (loss) for the period after adding back or subtracting, as the case may be, (i) depreciation and amortization, (ii) impairment of non-current assets, (iii) comprehensive financing expense, net (which includes financial expense, finance income, foreign exchange gains (losses), and net gain (loss) from certain derivative financial instruments), (iv) income tax and (v) share of gain (loss) of associates. Our calculation of Adjusted EBITDA may not be comparable to other companies’ calculation of similarly titled measures. See “Presentation of Financial Information and Certain Other Information”. Our Adjusted EBITDA includes EBITDA attributable to our strategic alliances. The following table sets forth a reconciliation of Adjusted EBITDA to consolidated profit (loss) for each of the periods presented:
Year Ended December 31, Three Months Ended March 31, 2011 2012 2012(1) 2012 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$)
(Unaudited) (in millions)
Consolidated profit for the period ................................................................4,428 4,383 333 1,252 980 77 Depreciation and amortization ..........................1,819 2,129 162 513 512 40 Impairment of non-current assets ......................138 5 0 - - - Comprehensive financing
expense, net ................................ 1,190 1,331 101 (37) 117 9 Income tax .........................................................1,948 1,723 131 813 415 33 Share of loss of associates ................................23 39 3 8 11 1 Adjusted EBITDA................................ 9,545 9,611 730 2,550 2,035 161
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RISK FACTORS
You should carefully consider the following discussion of risks, as well as all the other information presented in this offering memorandum before investing in the notes. These risks are not the only risks that affect our business. Additional risks that are presently unknown to us or that we currently deem immaterial may also impair our business. Any of the following risks, if they actually occur, could materially and adversely affect our business, results of operations, financial condition and prospects.
Risks Relating to Our Business
Global economic conditions may adversely affect our business and financial performance.
Economic conditions in Mexico and the United States, as well as globally, may negatively affect our business, results of operations or financial condition. When economic conditions deteriorate, the end markets for our products may experience declines and we may suffer reductions in our prices, sales and profitability. In addition, the financial stability of our customers and suppliers may be affected, which could result in decreased, delayed or canceled purchases of our products, increases in uncollectable accounts receivable or non-performance by suppliers. We may also find it more costly or difficult to obtain financing to fund operations or investment or acquisition opportunities, or to refinance our debt in the future. If we are not able to access debt markets at competitive rates or at all, our ability to implement our business plan and strategy or to refinance debt may be negatively affected.
The global economy has recently experienced a period of slowdown and unprecedented volatility and has been adversely affected by a significant lack of liquidity, loss of confidence in the financial sector, disruptions in the credit markets, reduced business activity, rising unemployment, decline in interest rates and erosion of consumer confidence. The global economic slowdown in general and the U.S. economic slowdown in particular have had, and may continue to have, a negative impact on the Mexican economy as well as on our business, financial condition, results of operations and prospects. For example, the recent economic crisis and continuing effects of the crisis have negatively affected local credit markets and resulted in an increased cost of capital, which may negatively impact the ability of companies, including our customers, to meet their financial requirements. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the markets in which we operate.
The petrochemical business is cyclical and may be adversely affected by events and conditions beyond our control.
The petrochemical business is cyclical. The earnings generated by our products vary from period to period based, in part, on the balance of supply relative to demand within the industry. The balance of supply relative to demand may be significantly affected by the addition of new capacity. In our industry, capacity is generally added in substantial increments as large-scale facilities are built. New capacity may disrupt industry balances and result in downward pressure on prices or margins due to the increase in supply, which could negatively impact our results of operations. Since 2002, new PET capacity has been steadily growing across North America. A number of PET producers have implemented expansions, which caused overall margin reductions in the period from 2002 to 2009. New PET capacity of approximately 498,400 tons was installed between 2009 and 2012. In addition, PTA capacity is expanding in Asia. The expansion of PTA capacity may affect the supply of, and consequently the prices for, PTA in our markets.
Our business may also be affected by other events or conditions that are beyond our control, including changes or developments in domestic or foreign economic markets, changes in industry pricing practices, increases in natural gas or other energy prices or the cost or availability of raw materials, competition from other petrochemical manufacturers, changes in the availability or supply of petrochemical products generally and unanticipated downtime of production plants. These external factors may cause fluctuations in the supply and demand levels for our products and fluctuations in our prices and our margins, which may adversely affect our financial performance.
Our operations are dependent on the availability and cost of our raw materials and energy sources.
Our operations are substantially dependent on the availability and cost of our primary raw materials and energy sources, including, but not limited to, pX, MEG, propylene, styrene, acetic acid, isophthalic acid, natural gas, fuel
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oil, electricity and coal. Any prolonged interruption, discontinuation or other disruption in the supply of raw materials or energy, or substantial increases in their costs, could have a material adverse effect on our financial condition and results of operations. For example, there is currently a significant natural gas shortage in Mexico due to an increase demand for this commodity, lack of development of the distribution infrastructure and a decrease in the production of natural gas in Mexico. This shortage may last a couple of years and, in certain regions of Mexico, the shortage could interrupt our operations for short periods of time.
The availability and prices of raw materials and energy may be negatively affected by a variety of factors, including interruptions in production by suppliers; accidents or other similar events at suppliers’ premises or along the supply chain; allocations of raw materials by suppliers to other purchasers; wars, natural disasters (such as hurricanes in the Gulf of Mexico) or other similar events; the bargaining power of suppliers and our competitors; worldwide price fluctuations; the ability to negotiate terms and conditions that are satisfactory to us; and the availability and cost of transportation. There were four key suppliers that each accounted for more than 8% of our total raw materials for the year ended December 31, 2012. Petróleos Mexicanos (“Pemex”), one of our key suppliers in the Plastics & Chemicals Business, accounted for 9% of our total raw materials supply for the year ended December 31, 2012. There can be no assurance that Pemex or any other significant supplier of raw materials will continue to meet its obligations or will continue to provide raw materials on terms and conditions satisfactory to us. The loss of any supplier, a disruption in its business or a failure to meet our product needs on a timely basis could lead to interruptions in our production and require us to find a suitable alternative source. In such an event, we may not be able to secure an alternative source of supply at a competitive cost or at all.
The prices of our primary raw materials and energy resources, which are typically purchased pursuant to long-term contracts, have fluctuated in the past and are expected to fluctuate in the future. For example, the price of pX, a key petroleum-derived raw material for our business, and the price of energy are sensitive to fluctuations in the global crude oil supply and changes in oil prices. Our prices and margins have been impacted by raw material and energy price increases in the past and could be similarly impacted in the future if we are unable to hedge effectively against any such price increases or pass them through to our customers. For example, our fourth quarter results in 2008 were materially affected by shortages of pX in North America precipitated by hurricanes on the U.S. Gulf Coast, which forced us to make purchases on the spot market and increased our raw material costs.
Prices and volumes of imports of polyester chain products and plastics and chemicals products could adversely impact our margins.
Producers of polyester chain products and plastics and chemicals products in North America could be adversely affected by low-cost imports of polyester chain products and plastics and chemicals products, principally from Asian countries. In addition, the potential for such imports to compete on a cost-effective basis if prices rise above certain levels has the effect of limiting the ability of producers in North America to increase prices or margins in periods of increased demand. The price and volume of imports of polyester chain products and plastics and chemicals products as well as the potential for such imports may negatively impact our margins.
Producers of polyester staple fiber in Mexico and the United States also benefit from anti-dumping duties on certain polyester staple fiber products imported into their respective countries from South Korea and, in the case of U.S. producers, from China and Taiwan, as well. Changes in the existing tariffs or anti-dumping duties could lead to reduced demand for our products or cause us to lower our prices, which would result in lower net sales and could negatively affect our overall financial performance.
Our business is exposed to the risk of product substitution, and any substitution of our products by other materials in the future could have a material adverse effect on our business, financial condition, results of operations and prospects.
The substantial majority of our PET production and, indirectly, our production of PTA, is used for plastic bottles and other containers in the beverage, food and personal care industries, and the increased demand for PET has largely occurred as a result of the substitution of PET for other materials, such as glass and aluminum. If in the future another type of plastic or other material, based on its physical properties or for other economic, environmental or other reasons, becomes a substitute for PET in containers, then demand for PET may decrease, which would have a material adverse effect on our business, financial condition, results of operations and prospects. For example, a plant-based biodegradable plastic material, polylactic acid (“PLA”), is increasingly attracting attention as a
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substitute for petroleum-based plastic materials. Such substitution could become more prevalent if the technology and feedstock limitations, as well as the higher production costs, for such products improve in the future.
Our polyester fiber products compete with other fibers, principally cotton. Any significant substitution by our customers of polyester-based products with other fibers may adversely affect our profitability. In addition, our customers may use recycled polyester staple fiber in their end use products which would decrease the demand for virgin polyester staple fiber which we produce. Fashion and price trends may lead to a substitution of our polyester short fiber products for such competing fibers. If substitution levels increase, the demand for our polyester fiber products may fall and sales thereof decrease, possibly leading to downward pressure on the profitability of our polyester fiber business, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our PP products compete with other plastics in some applications. Any significant substitution by our customers of PP-based products with other plastics in such applications, may adversely affect our profitability. If significant substitution were to occur, the demand for our PP products in some applications may be reduced and sales thereof decrease, possibly leading to downward pressure on the profitability of our PP business, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
In the case of our EPS products, there is significant competition for use in insulation products against alternative materials. If significant substitution occurs, the demand for our EPS products for insulation may be reduced and sales thereof decrease, possibly leading to downward pressure on the profitability of our EPS business, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
Our industry is highly competitive, and increased competition could adversely affect our profit margins and market share.
The petrochemical industry is highly competitive. Our existing and potential competitors include some of the world’s largest petrochemical companies and the chemical divisions of major international oil companies that have their own raw material resources, including companies sponsored by governments in regions such as Asia. Some of these companies may be able to produce products more economically than we can. In addition, some of our competitors are larger than us and may have greater financial and technical resources, which may enable them to invest significant capital into their businesses, including expenditures for research and development. If any of our current or future competitors develops proprietary technology that enables them to produce products at a significantly lower cost, our technology could be rendered uneconomical or obsolete, and we may not have access to any such technology at a reasonable price or at all. In addition, our customers that are significant producers of PET or polyester staple fiber may develop their own sources of PTA supply in lieu of seeking supplies from us. Further, petroleum-rich countries have become more significant participants in the petrochemical industry and may considerably expand this role in the future. Increased competition could compel us to reduce the prices of our products, which could result in reduced profit margins and loss of market share and have a material adverse effect on our business, financial condition, results of operations and prospects.
Our customer base is concentrated, and the loss of all or a portion of the business of a significant customer would have an adverse effect on us.
The ten largest customers in our Polyester Chain Business and our Plastics & Chemicals Business combined accounted for 41% of our total net sales for the year ended December 31, 2012. Our single largest customer accounted for 12% of our total net sales for the year ended December 31, 2012. Given that our profitability depends on our maintenance of a high capacity utilization rate, the loss of all or a substantial portion of the sales volume to a significant customer or end user would have an adverse effect on us. If any significant customer has financial difficulties, this could affect our results of operations by decreasing our sales and/or resulting in uncollectable accounts receivable. In addition, the consolidation of our customers could reduce our net sales and profitability, particularly if one of our significant customers is acquired by a company that has a relationship with one of our competitors. For more information, see “Business––Principal Customers.”
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We have experienced losses in the past, including losses in connection with derivative financial instruments and may do so in the future.
We use derivative financial instruments to manage the risk profile associated with interest rates and to hedge some of our commodity and financial market risks. In 2010 and 2009, we had losses relating to the fair market value of our derivative financial instruments of Ps. 395 million and Ps. 721 million, respectively, which related primarily to the mark-to-market losses associated with commodities-related derivative financial instruments, particularly natural gas and other commodities-related derivatives that we entered into in order to protect against anticipated increases in raw material and energy costs. A substantial decrease in prices of these commodities led to such mark-to-market losses and a significant potential liability in connection with these instruments.
Our internal policy is not to enter into derivative financial instruments for speculative purposes; however, we may continue to enter into derivative financial instruments as an economic hedge against certain business risks, even if these instruments do not qualify for hedge accounting under IFRS. In addition, we may be required to record fair value losses in the future that could be material. The mark-to-market accounting for derivative financial instruments is reflected in our statement of income and has resulted in volatility in our earnings. In addition, we may incur losses in the future in connection with our derivative financial instruments transactions, which could have a material adverse effect on our financial condition and results of operations.
Most of our derivative financial instruments are subject to margin calls in the event that the threshold set by the parties is exceeded. In certain stressed scenarios, the cash required to cover margin calls may reduce the funds available to us for our operations or other capital needs. As of March 31, 2013, we did not have any collateral posted in response to margin calls. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk—Derivative Financial Instruments.”
In addition, we face the risk in the current global economic environment that the creditworthiness of our counterparties may deteriorate substantially. This could prevent our counterparties from honoring their obligations to us, which would expose us to market risks and could have a material adverse effect on us.
We intend to continue using derivative financial instruments in the future for non-speculative hedging purposes, in accordance with our risk policies. Nevertheless, we cannot assure you that we will not incur additional net losses from, or may be required to make cash payments or post cash as collateral in connection with, our derivative financial instruments in the future.
We face risks related to the “cost plus” pricing formula for the sale of PTA.
The historical industry practice in North America has been to price PTA on a “cost plus” basis, using as a reference a pricing formula published by BP, a major producer of PTA in North America. This formula takes into account cost variances in the main factors involved in the PTA production process (pX, energy and labor costs and the U.S. Producer Price Index for other fixed costs), which allows us to transfer to the customer certain variations in the costs of key raw materials and energy and to achieve a more predictable margin. We cannot assure you that this industry pricing practice will continue in the future, which could subject us to increased risk that increases in our raw material and energy costs would not be offset by increases in our prices if we cannot transfer such cost variations to the customer and that, as a result, we would experience decreased or negative margins. In addition, the margins implied by the existing formula may be adjusted downward from time to time. For example, on January 1, 2007, BP made a downward adjustment to the margin implied by its PTA pricing formula, which was adopted by other PTA producers in North America, including us, in order to counteract a widening difference between North American and Asian polyester prices. This pricing disparity was driven largely by cost variances in raw materials due, in part, to the effects of hurricanes Katrina and Rita in the United States. The PTA price differential exposed North American PET producers and the U.S. polyester industry generally (on which North American PTA producers depend) to increased competitive pressure from Asian polyester producers. For example, the PET net trade deficit as a percentage of North American demand increased from approximately 2.1% to 3.5% of sales from 2005 to 2006. However, in 2007, North America had a trade surplus of 0.2% of demand as a result of the reduction in the PTA margin. The most recent adjustment made to the PTA pricing formula for North America was applied on January 1, 2012, in order to reduce polyester price differences among regions. Additional adjustments may be made in the future.
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We face risks related to fixed price arrangements for the sale of PET.
To date, a portion of the volume of our expected 2013 PET production has been committed to customers pursuant to annual sales contracts with fixed prices arrangements. When we enter into fixed price arrangements we are subject to the risk that our own raw material costs and other expenses will be greater than what we were expecting and that variations in these costs could reduce our margins or cause us to incur losses. We seek to manage this risk mainly by entering into financial derivatives. However, these measures carry risk (including non-performance by counterparties) and do not in any event entirely eliminate the risk of decreased margins or incurring losses as a result of the fixed price arrangements.
The conduct of our business may be adversely affected by risks inherent in international operations.
We currently maintain production facilities and operations in Mexico, the United States and Argentina. Our ability to conduct and expand our business and our financial performance are subject to the risks inherent in international operations. Our operations may be adversely affected by trade barriers, currency fluctuations and exchange controls, high levels of inflation and increases in duties, taxes and governmental royalties, as well as changes in local laws and policies (or the interpretation thereof) of the countries in which we conduct business. The governments of countries in which we operate, or may operate in the future, could take actions that materially adversely affect us. For risks relating to our operations in Mexico, see “Risks Relating to Mexico.”
In addition, we face particular risks relating to our business in Argentina. Although general economic conditions in Argentina have shown improvement and political protests and social disturbances have diminished since the economic crisis of 2001and 2002, the rapid and radical changes in the Argentine social, political, economic and legal environment over the past several years and the absence of a clear political consensus in favor of any particular set of economic policies have given rise to uncertainties about the country’s economic and political future. Despite recent economic growth, Argentina may return to a deep recession, high inflation and unemployment and greater social unrest. If instability persists, companies in Argentina may also face the risk of further civil and social unrest, labor strikes, expropriation, nationalization, forced renegotiation or modification of existing contracts and changes in taxation policies, including tax increases and retroactive tax claims, all of which could have an adverse effect on our business.
Hurricanes and other natural disasters could disrupt our business and affect our results of operations.
Hurricanes and other natural disasters, such as earthquakes, floods or tornadoes, have disrupted our business and the businesses of our suppliers and customers in the past and could do so in the future. In 2005, in the third quarter of 2008 and again in August 2012, major hurricanes caused significant disruption in the operations of our suppliers on the U.S. Gulf Coast, which had an adverse impact on sales volumes and costs for some of our products. If similar weather-related events occur in the future, we may suffer business interruption or shutdown or damage to our production facilities, which could adversely and materially affect our results of operations.
Our production facilities process some volatile and hazardous materials that subject us to operating risks that could adversely affect our business, financial condition and results of operations.
We are dependent on the continued safe operation of our production facilities. Our operations are subject to the usual hazards associated with the manufacture of petrochemicals and the handling, storage and transportation of petrochemical materials, including:
� pipeline leaks and ruptures;
� explosions;
� fires;
� floods;
� severe weather and natural disasters;
� mechanical failure;
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� transportation interruptions;
� chemical spills;
� discharges or releases of toxic or hazardous substances or gases;
� storage tank leaks;
� other environmental risks; and
� terrorist attacks.
These hazards can cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage. A major accident at one of our facilities could force us to suspend our operations temporarily, cause production delays and result in significant remediation costs and lost net sales as well as liability for workplace injuries and fatalities. We cannot assure you that our insurance will be sufficient to cover fully all potential hazards incident to our business, including losses resulting from war risks or terrorist acts. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our business, financial condition, results of operations. Because we have a small number of production facilities and because those facilities are currently operating near capacity, the occurrence of any of the foregoing events may significantly reduce the productivity and profitability of a particular production facility and harm our overall results of operations.
Terrorist activities, violence and geopolitical events and their consequences could adversely affect our business, financial condition, results of operations and prospects.
Violence or the continued threat of violence or organized crime within Mexico, or terrorist activities in the United States, and elsewhere, and the potential for military action and heightened security measures in response to such threats, may cause significant disruption to commerce throughout the world, including restrictions on cross-border transport and trade. In addition, related political events may cause a lengthy period of uncertainty that may adversely affect our business. Political and economic instability in other regions of the world, including the United States, Argentina and Canada, could negatively impact our operations. The consequences of violence or terrorism and the responses are unpredictable and could have an adverse effect on our business, financial condition, results of operations and prospects.
Due to the integrated nature of our production facilities, problems in one part of our facilities may cause disruption to other parts of the production facilities, which could adversely affect our business.
Many of our production processes are integrated such that some of the products we produce are used as raw materials to make other products at our plants. Any problems that may develop in the production of one product may adversely affect the production of other petrochemicals in the same production chain. Production problems of this type may cause disruptions at upstream or downstream facilities and result in temporary shutdowns and reduced production. Some of our production processes also rely on common utilities and infrastructure shared amongst different plants at the same site, meaning that any problem with these shared utilities or infrastructure may adversely affect our production at more than one plant.
Compliance with environmental and other governmental laws and regulations could result in added expenditures or liabilities.
Our business is subject to extensive Mexican, U.S. and Argentine federal, state and local laws and regulations concerning, among other things, the generation, storage, handling, use, remediation, disposal and transportation of hazardous materials and the emission and discharge of hazardous and non-hazardous materials into the ground, air or water. The operation of any manufacturing plant and the distribution of chemical products entail risks under environmental laws, many of which provide for substantial fines and criminal sanctions or even lead to the closure of our facilities for certain violations. We are also subject to extensive governmental regulation from Mexican, U.S.
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and Argentine governmental entities concerning our competitive and marketplace conduct, which could affect our ability to make acquisitions within our industry, as well as the health, safety and working conditions of our employees. We currently believe all of our plants operate in accordance with all material applicable laws and regulations. However, subsequent changes in or additions to existing laws or regulations, or stricter enforcement or application or different interpretations of such laws or regulations, could force us to make significant additional expenditures, which could affect our profitability or financial condition in the future. Moreover, from time to time, new legislative initiatives may be introduced that may affect our operations and the conduct of our business, and we cannot provide assurances that the cost of complying with these initiatives or that the effects of these initiatives will not have a material adverse effect on our financial performance in the future.
Failure to comply with past, present or future environmental laws could result in the imposition of fines, third party claims, and investigation by environmental regulators. For example, the perceived effects of climate change may result in additional legal and regulatory requirements to reduce or mitigate the effects of our industrial facilities’ emissions. If such requirements are enacted, or if the applicable laws are more strictly interpreted, our capital expenditures and expenses for environmental compliance in the future may increase, which may have a material and adverse effect on our business, financial condition, results of operations and prospects.
In addition, we may be exposed to liabilities relating to our facilities that arise from non-compliance with environmental laws by prior owners, for which we, as successor owner, may be responsible. For example, DuPont, the previous owner of our Cape Fear and Cedar Creek, North Carolina and Cooper River, South Carolina sites, in coordination with state and federal authorities, is currently conducting groundwater investigations at these sites. While DuPont has agreed to indemnify us for contamination and remediation costs associated with any pre-existing groundwater conditions, such indemnification may not be sufficient or available to cover our liabilities. The inability or refusal of DuPont or any other indemnitor to satisfy its environmental compliance and indemnification obligations could require us to incur costs or become the basis of new or increased liabilities that could have a material adverse effect on our business, financial condition, results of operations and prospects.
Failure to obtain, renew or maintain the permits and approvals required to operate our businesses may have an adverse effect on our business, financial condition, results of operations and prospects.
We require permits and approvals to operate our businesses and/or construct and operate our facilities. In the future, we may be required to renew such permits and approvals or to obtain new permits and approvals. While we believe that we will be able to obtain such permits and approvals and we have not experienced any difficulty in renewing and maintaining these permits and approvals in the past, as and when required, there can be no assurance that the relevant authorities will issue any such permits or approvals in the time frame anticipated by us, or at all. Any failure to renew, maintain or obtain the required permits and approvals and technology licenses, or the revocation or termination of existing permits and approvals, may interrupt our operations or delay or prevent the implementation of any capacity expansion programs, and may have an adverse effect on our business, financial condition, results of operations and prospects.
An increasing focus on environmental and social issues may lead to a decrease in demand for our products.
The “green” movement and its focus on environmental and social issues may lead to a decrease in demand for our products. For example, there is growing social and industry pressure to increase the recycled content of PET used in packaging, in substitution of new PET production, as well as to decrease the weight and amount of plastic used in plastic containers, which has decreased and may further decrease the amount of new PET (and, as a result, PTA) production required. In addition, one of the principal end uses of PET is for the packaging of bottled water. If as a result of the green movement, there is an appreciable decrease in the consumption of bottled water in the markets we serve, then demand for our products may also decrease.
We face risks related to fluctuations in interest rates which could adversely affect our results of operations and our ability to service our debt and other obligations.
We are exposed to fluctuations in interest rates. As of March 31, 2013, Ps.1,539 million (US$125 million), or 11%,of our borrowings accrued interest at a variable rate. Changes in interest rates would affect the cost of these borrowings. If interest rates increase, our debt service obligations on variable rate indebtedness would increase even though the amount borrowed would remain the same, and our net income and cash available for servicing our
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indebtedness would decrease. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources.” As a result, our financial condition, results of operations and liquidity could be materially adversely affected. Furthermore, our attempts to mitigate interest rate risk by financing long-term liabilities with fixed interest rates and using derivative financial instruments, such as floating-to-fixed interest rate swaps, in respect of our indebtedness could result in our failure to realize savings if interest rates fall and could adversely affect our results of operations and our ability to service our debt and other obligations.
Our level of indebtedness may affect our flexibility in operating and developing our business and our ability to satisfy our obligations.
As of March 31, 2013, after giving pro forma effect to the issuance of the notes and the use of the proceeds thereof, we would have had Ps. million (US$ million) of outstanding debt, none of which would have been secured. Our level of indebtedness may have important consequences to investors, including:
� limiting our ability to generate sufficient cash flow to satisfy our obligations with respect to our indebtedness, particularly in the event of a default under one of our other debt instruments;
� limiting cash flow available to fund our working capital, capital expenditures or other general corporate requirements;
� increasing our vulnerability to adverse economic and industry conditions, including increases in interest rates, foreign currency exchange rate fluctuations and market volatility;
� limiting our ability to obtain additional financing to refinance debt or to fund future working capital, capital expenditures, other general corporate requirements and acquisitions on favorable terms or at all; and
� limiting our flexibility in planning for, or reacting to, changes in our business and the industry.
To the extent that we incur additional indebtedness, the risks outlined above could increase. In addition, our actual cash requirements in the future may be greater than expected. Our cash flow from operations may not be sufficient to repay all of the outstanding debt as it becomes due, and we may not be able to borrow money, sell assets or otherwise raise funds on acceptable terms, or at all, to refinance our debt.
We might not be able to obtain funding if a deterioration in the credit and capital markets or reductions in our credit ratings were to occur. This could hinder or prevent us from meeting our future capital needs and from refinancing our existing indebtedness when it comes due.
While global financial markets and economic conditions have improved, they continue to be volatile. A deterioration of capital and credit markets could hinder our ability to access these markets. In addition, adverse changes in our credit ratings, which are based on various factors, including the level and volatility of our earnings, the quality of our management, the liquidity of our balance sheet and our ability to access a broad array of funding sources, may increase our cost of funding. If this were to occur, we cannot be certain that additional funding for our capital needs from credit and capital markets would be available if needed and, to the extent required, on acceptable terms. In addition, we might be unable to refinance our existing indebtedness when it comes due on terms that are acceptable to us or at all. If we were unable to meet our capital needs or refinance our existing indebtedness, it could have a material adverse effect on our financial position and results of operations.
Our operations could be adversely affected if a change in the terms of our suppliers’ financing were to occur.
Our business operations depend to some extent on the relationships we sustain with our suppliers. A number of events, such as deterioration in the financial condition of our suppliers derived from a mechanical problem in one of their facilities, a natural disaster or any event of a similar nature, could restrict the suppliers’ ability to fulfill their obligations to us, which could have a material adverse effect in our operations and financial condition. We currently manage payment terms which are considered standard in the markets in which we participate; however, a change, reduction or elimination of the financing terms with our strategic suppliers could have a material adverse effect on the performance and planning of our operations and on our liquidity and financial results. The current financing terms with our suppliers could change in the future, which could have an adverse effect on our financial results.
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Cross-defaults under, and/or acceleration by lenders of, our debt obligations could result in significant liquidity problems and have a material adverse effect on our business, financial condition, results of operations and prospects.
We and our subsidiaries have entered into loan agreements and indentures and will, from time to time, enter into further agreements relating to debt obligations. Some of these agreements contain various financial and other covenants, including relating to the maintenance of certain ratios, including interest coverage ratios and leverage ratios. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.” A breach of such covenants could give rise to a default, which could entitle our lenders to accelerate the loans provided under these agreements and/or refuse to provide us with any additional funds under the facilities. We cannot assure you that we will be in compliance with our financial or other covenants in the future or that lenders will grant waivers to us. We also cannot assure you that one or more of our lenders under these loan agreements would not seek to enforce any remedies following any breach of financial or other covenants or an event of default thereunder. In addition, most of our loan agreements and our indentures contain cross-default provisions, which would entitle the lenders or holders of notes to accelerate repayments under their respective loan facility or indenture upon the occurrence of a default in our other borrowings. Any acceleration of our indebtedness may have a significant effect on our liquidity and may materially and adversely affect our business, financial condition, results of operations and prospects.
Our frozen U.S. pension plans are currently underfunded, and we may have to make significant cash payments to these plans, which would reduce the cash available for our business.
We have unfunded obligations under our frozen pension plans that cover current and former employees at DAK Americas and DAK Pearl River. The funded status of our pension plans is dependent upon many factors, including returns on invested assets, the level of certain market interest rates and the discount rate used to determine pension obligations. Unfavorable returns on the plan assets or unfavorable changes in applicable laws or regulations could materially change the timing and amount of required plan funding, which would reduce the cash available for our business. Specifically, given the underfunded status of the pension plans, we may be required to contribute certain amounts in order to satisfy the minimum funding standards under the U.S. Internal Revenue Code of 1986. In addition, an increase or a decrease in the discount rate used to determine pension obligations could result in an increase or a decrease in the valuation of pension obligations, which could affect the reported funding status of our pension plan and future contributions, as well as the periodic pension cost in subsequent fiscal years.
Under the U.S. Employee Retirement Income Security Act of 1974, as amended, the Pension Benefit Guaranty Corporation (“PBGC”) has the authority to terminate an underfunded tax-qualified pension plan under limited circumstances. In the event our tax-qualified pension plan is terminated by the PBGC, we could be liable to the PBGC for some portion of the underfunded amount.
Our growth through mergers, acquisitions or strategic alliances may be impacted by antitrust laws, access to capital resources, and the costs and difficulties of integrating future acquired businesses and technologies, which could impede our future growth and adversely affect our competitiveness.
We have made acquisitions in the past in order to grow our business, such as the completion of our acquisition of the Columbia Assets and Wellman in 2011, and we may continue to make them in the future. As part of our strategy, we may seek further growth through acquisitions of other companies in order to maintain a competitive position within the industries in which we operate and to enhance our position in our core areas of operation. This strategy entails risks that could have a material adverse effect on our business, financial condition, results of operations and prospects, including:
� unidentified or unanticipated regulatory and other liabilities or risks in the operations of the companies which we may acquire;
� the need to incur debt, which may reduce our cash available for operations and other uses due to increased debt service obligations;
� potential failure to achieve the expected results, economies of scale, synergies or other benefits sought;
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� greater than expected costs and management time and effort involved in completing and integrating the acquisitions;
� greater capital expenditures required in connection with the purchased facilities;
� potential disruption to our ongoing businesses and difficulty in maintaining our internal control environment, information systems technologies and procedures;
� inability to successfully integrate the services, products and personnel of the acquisitions into our operations or to realize any expected cost savings or other synergy benefits from the acquisitions;
� inability to retain employees, customers and supplier relationships;
� restrictions or conditions imposed by antitrust and other regulatory authorities (including restrictions on reducing workforces);
� customer overlap or loss of customers supplied prior to the acquisitions by us or by any acquired entity; and
� lack of return on our investment.
If we are unable to successfully integrate or manage our acquired businesses, among other consequences, we may not realize anticipated cost savings and revenue growth, which may result in reduced profitability or losses. If new expansion opportunities arise, we may not have sufficient resources to take advantage of these opportunities and additional financing may not be available to us on favorable terms, or at all, causing us to forfeit such opportunities. The impact on us of any of our future acquisitions or investments cannot be fully predicted and any of the risks outlined above, should they materialize, could have a material adverse effect on our business, financial condition, results of operations and prospects.
Regulation of merger and acquisition activity by the United States, Mexico or other jurisdictions may also limit our ability to engage in future acquisitions or mergers. For example, the operations under which Alpek acquired the Columbia Assets and Wellman were reviewed by the U.S. Federal Trade Commission to assess whether the acquisition compromised competition in that market. Alpek cannot guarantee that the authorities in charge of enforcing competition laws in any of the countries in which we operate or in which we may pursue a future acquisition will approve the transaction in question or do so without imposing material conditions.
In addition, our growth to date, in particular driven by acquisitions, has placed, and the anticipated further expansion of our operations will continue to place, a significant strain on our management, systems and resources. In addition to training, managing and integrating our workforce, we will need to continue to develop and improve our financial and management controls. We cannot assure you that we will be able to efficiently or effectively manage the growth and integration of our operations, and any failure to do so may materially and adversely affect our business, financial condition, results of operations and prospects.
The success of our strategic alliances depends on the satisfactory performance by our strategic alliance partners of their strategic alliance obligations. The failure of our strategic alliance partners to perform their strategic alliance obligations could impose on us additional financial and performance obligations that could result in reduced profits or, in some cases, losses for us with respect to our strategic alliances.
A portion of our operations are conducted through strategic alliances, including our strategic alliances with LyondellBasell, BASF and Shaw Industries, where certain decisions must be made in a shared manner with unaffiliated third parties. Differences in views among our strategic alliance partners, particularly LyondellBasell and BASF, may result in delayed decisions, in failure to agree on major matters or in failure to timely react to actions by competitors or to customer opportunities, potentially negatively affecting the business and operations of the strategic alliances and in turn our business and operations.
In addition, we cannot control the actions of our strategic alliance partners, including any nonperformance, default or bankruptcy of strategic alliance partners. The success of our strategic alliances depends, in part, on the satisfactory performance by our strategic alliance partners of their strategic alliance obligations. If our strategic alliance partners fail to satisfactorily perform their strategic alliance obligations as a result of financial or other
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difficulties, the strategic alliance may be unable to adequately perform or deliver its contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and delivery of the contracted services. These additional obligations could result in reduced profits or, in some cases, losses for us with respect to the strategic alliance. We cannot assure you that our business partnerships or strategic alliances will be successful in the future.
Significant capital investments including future development of new facilities have been, and may in the future continue to be, necessary to achieve our growth plans, which carry project and other risks.
Our business requires significant capital expenditures for maintenance and expansion. Our growth plans have required, and may continue to require, significant capital investments to expand, renovate, convert or upgrade existing facilities, develop new facilities or technologies or make major acquisitions or investments. For example, Alpek invested US$622 million in the acquisition of the Columbia Assets, including the intellectual property relating to the IntegRex® technology. Projects that require significant capital expenditure carry risks including:
� failure to complete a project within the prescribed project timetable and/or within budget; and
� failure of the project to perform according to prescribed operating specifications following its completion.
There can be no assurance that technology we have acquired, including the technology acquired as part of the Columbia Assets acquisition, or may acquire in the future will perform as expected or that we will be able to successfully integrate the acquired technology into our production facilities. Furthermore, if new technologies and more cost-efficient processes are developed in the petrochemical industry, our competitors may be able to access new technology which we do not possess.
In addition, any significant increases in raw material costs unforeseen in the project plan and any inability to sell the products produced at volumes and/or price levels envisaged in the project plan could adversely affect the success of our projects. Due to the significant amount of capital required and the long lead time between planning and completion of such projects, project failure could have a material adverse effect on our business, financial condition, results of operations and prospects.
Alpek is continuously evaluating future business opportunities, and it is possible that expected returns on these investments may not be fully achieved as a result of adverse market conditions and other factors. Moreover, it is possible that these projects may not be concluded in a timely manner, for reasons outside of our control.
Changes in laws and regulations relating to beverage containers and packaging could reduce demand for such end use products.
Legal requirements have been enacted in various jurisdictions in the United States and elsewhere requiring that deposits or certain ecotaxes or fees be charged for the sale, marketing and use of certain nonrefillable beverage containers. Other proposals relating to additional beverage container deposits, recycling, ecotax and/or product stewardship have been or may be introduced in various jurisdictions in the United States and elsewhere. Consumers’ increased concerns and changing attitudes about solid waste streams and environmental responsibility and related publicity could result in the adoption of such legislation or regulations. This has encouraged some of our PET customers to reduce the amount of PET resin they use in their bottle production process. This process, known as “light weighting,” has reduced the amount of PET resin used in each bottle and has impacted the demand for pX, PTA and PET resin.
If the legislation or regulations described above were to be adopted and implemented on a large scale, or increased light weighting of bottles or substitution of PET resin as the primary packaging material were to occur, in each case in any of the major markets in which we and/or our key PET customers operate, our PET customers’ costs could increase and they may require changes to the packaging materials they use for their end use products. Such changes would reduce the demand for PET resin, which could have a material adverse effect on our business, financial condition, results of operations and prospects.
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Any loss of key personnel may adversely affect our business.
Our success depends, in large measure, on the skills, experience and efforts of our senior management team and other key personnel. The loss of the services of one or more members of our senior management or other employees with critical skills could have a negative effect on our business, financial condition, results of operations and prospects. If we are not able to attract or retain highly skilled, talented and committed senior managers or other key personnel, our ability to achieve our business objectives may be adversely affected.
Any deterioration of labor relations with our employees or increase in labor costs could adversely affect our business, financial condition, results of operations and prospects.
Our operations are labor intensive. As of March 31, 2013 we employed 4,731 employees. Any significant increase in labor costs, deterioration of employee relations, slowdowns or work stoppages at any of our locations, whether due to union activities, employee turnover or otherwise, could have a material adverse effect on our business, financial condition, results of operations and prospects. A strike, work slowdown or other labor unrest could, in some cases, impair our ability to supply our products to customers, which could result in reduced net sales. Approximately 47.2% of our workforce was unionized as of March 31, 2013. We generally negotiate collective bargaining agreements with these trade unions every two years, though salary increases are applied annually.
Our operations in Mexico are subject to the Federal Labor Law (Ley Federal del Trabajo) (“LFT”) and other labor laws and regulations. On November 30, 2012, amendments to the LFT were published in the Federal Official Gazette of Mexico (Diario Oficial de la Federación). The amendments to the LFT included changes in the regulation of hourly wages, labor agreements, grounds for termination and outsourcing services, among other changes. Our business, results of operations and financial condition may be materially and adversely affected as a result of any increases in labor costs or modified labor conditions as a result of the interpretation by the Mexican courts of these recent amendments. In particular, as a result of these amendments, we could be considered an employer of the employees of our services companies, and as such could be required to pay additional labor benefits, including profits with employees (such profit sharing, “PTU”), which could have a material adverse effect on our financial position.
We may be subject to interruptions or failures in our information technology systems.
We rely on sophisticated information technology systems and infrastructure to support our business, including process control technology. Any of these systems may be susceptible to outages due to fire, floods, power loss, telecommunications failures and similar events. Information technology system failures, network disruptions and breaches of data security could disrupt our operations by causing delays or cancellation of customer orders, impeding the manufacture or shipment of products, processing transactions and reporting financial results, resulting in the unintentional disclosure of customer or our information, or damage to our reputation. Such failures would adversely affect our net sales and profitability, and we cannot assure you that our business continuity plans will be completely effective during an information technology failure or interruption.
Our intellectual property rights may be used without our authorization by third parties.
Our intellectual property rights and proprietary technology are valuable assets in our business. Our ability to compete effectively in part depends on our ability to obtain, maintain, and protect our intellectual property rights and proprietary technology. However, we do not believe that any single patent, trademark, trade secret, or other intellectual property right of ours, or combination of our intellectual property rights, is likely to prevent others from competing with us using a similar business model. Despite our efforts, intellectual property laws of some of the jurisdictions in which we operate and the enforcement of such laws by the authorities in such jurisdictions may impair our ability to protect our intellectual property rights from competition or unauthorized use, lapse or expiration, or from being challenged, narrowed, invalidated, misappropriated or circumvented by third parties, or being deemed unenforceable or abandoned, which, as a result, could harm our business. In addition, we rely on in-licensed intellectual property rights, and such rights may be available to competitors, and thus affect the company’s ability to assert rights against competitors, or hinder settlement disputes with third parties having similar licenses.
From time to time, we seek to protect and enforce our intellectual property and proprietary rights against third parties and may commence litigation with respect to the violation or the inappropriate use of our intellectual
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property rights. The violation of our intellectual property rights or unsuccessful litigation may adversely affect our operations. Moreover, we cannot guarantee that our intellectual property rights will not be used without our authorization. Policing unauthorized use of intellectual property can be difficult and expensive and may not result in in action being taken by the appropriate authorities.
We are part of a corporate group, and we enter into transactions with related parties and affiliates, which could result in conflicts of interest.
We have entered into and will continue to enter into transactions with Alfa, our parent company, and several entities directly or indirectly owned or controlled by our parent company. Specifically, we have entered into certain service contracts with our affiliates in exchange for certain fees. Mexican law applicable to public companies and our by-laws provide for several procedures designed to ensure that the transactions entered into with or among our subsidiaries and our parent company do not deviate materially from prevailing market conditions for those types of transactions, including requiring the approval of our Board of Directors for some of these transactions. We are likely to continue to engage in transactions with our parent and any of its subsidiaries and affiliates, and our subsidiaries and affiliates are likely to continue to engage in transactions among themselves, and no assurance can be given that the terms that we or our subsidiaries consider to be “substantially on market conditions” will be considered as such by third parties. In addition, future conflicts of interest between us and our parent company or any of its subsidiaries or affiliates, and among our subsidiaries and affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor. See “Related Party Transactions.”
We are controlled by Alfa, whose interests may not be aligned with yours.
We are a subsidiary of Alfa, which beneficially owns 82.9% of our outstanding common shares. As such, Alfa has and will continue to have the power to control our affairs and operations. Alfa also controls the election of our Board of Directors, the appointment of our senior management, and our entering into mergers, acquisitions and other extraordinary transactions. All of our directors are designated by Alfa. So long as Alfa controls us, it will continue to be able to strongly influence and effectively control decisions by our board and senior management team. Alfa, as our controlling shareholder, may exercise its control in a manner that differs from your interests as a noteholder.
We have entered into and expect to continue entering into transactions with Alfa and its affiliates, including contracts for administrative and corporate services. Many of these transactions occur in the ordinary course of business. Transactions with affiliates may create the potential for conflicts of interest. See “Principal Shareholders” and “Related Party Transactions.”
We are subject to different corporate disclosure and accounting standards than U.S. companies.
As a non-U.S. issuer, investors may not be able to obtain as much publicly-available information about us as they would about U.S. issuers of publicly traded securities. In addition, up to December 31, 2011 we prepared our consolidated financial statements in accordance with MFRS, which differs from U.S. GAAP and IFRS in certain significant respects. Therefore, potential investors may not be able to easily ascertain the risks facing us as they would if we were a public U.S. company.
We recently began preparing our financial statements in accordance with IFRS and, as a result, some of our financial data are not easily comparable from period to period.
On January 1, 2012, we began preparing our financial statements, traditionally prepared in accordance with MFRS, in accordance with IFRS. Prior to the year ended December 31, 2011, we prepared our financial statements only in accordance with MFRS. As a result, our financial data as of and for the years ended December 31, 2009 and 2010 presented in this offering memorandum has been derived from our audited financial statements for the years ended December 31, 2009 and 2010 prepared in accordance with MFRS. Our financial data as of and for years ended December 31, 2011 and 2012 presented in this offering memorandum are derived from our Annual Audited Financial Statements prepared in accordance with IFRS and our financial data as of March 31, 2013 and for the three months ended March 31, 2012 and 2013 presented in this offering memorandum are derived from our Interim Unaudited Financial Statements prepared in accordance with IAS 34. Because IFRS differs in certain significant respects from MFRS, our MFRS historical financial information is not directly comparable to our IFRS financial
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information presented in this offering memorandum. The lack of comparability of our financial data may make it difficult to gain a full and accurate understanding of our operations and financial condition. Risks Relating to Mexico
Mexican federal governmental policies or regulations, as well as economic, political and social developments in Mexico, could adversely affect our business, financial condition, results of operations and prospects.
We are a Mexican corporation and a significant portion of our assets are located in Mexico, including many of our production facilities. As a result, our business, financial condition, results of operations and prospects are subject to political, economic, legal and regulatory risks specific to Mexico. The Mexican federal government has exercised, and continues to exercise, significant influence over the Mexican economy. Accordingly, Mexican federal governmental actions, fiscal and monetary policy and regulation of state-owned enterprises, such as Pemex, and of private industry could have an impact on Mexican private sector entities, including our company, and on market conditions, prices and returns on Mexican securities, including our securities. We cannot predict the impact that political conditions will have on the Mexican economy. Furthermore, our business, financial condition, results of operations and prospects may be affected by currency fluctuations, price instability, inflation, interest rates, regulation, taxation, social instability and other political, social and economic developments in or affecting Mexico, over which we have no control. We cannot assure potential investors that changes in Mexican federal governmental policies will not adversely affect our business, financial condition, results of operations and prospects. We do not have and do not intend to obtain political risk insurance.
Following Enrique Peña Nieto’s election as President of Mexico in 2012, the Congreso General de los Estados Unidos Mexicanos (“Mexican Congress”) became politically divided, as his political party, the Partido Revolucionario Institucional, does not have majority in the Mexican Congress. The lack of alignment between the Mexican Congress and the President could result in deadlock and prevent the timely implementation of political and economic reforms, which in turn could have a material adverse effect on Mexican economic policy.
We cannot provide any assurances that political developments in Mexico, over which we have no control, will not have an adverse effect on our business, financial condition, results of operations and prospects. Mexico has recently experienced periods of violence and crime due to the activities of drug cartels. In response, the Mexican government has implemented various security measures and has strengthened its police and military forces. Despite these efforts, drug-related crime continues to exist in Mexico. These activities, their possible escalation and the violence associated with them may have a negative impact on the Mexican economy or on our operations in the future. The social and political situation in Mexico could adversely affect the Mexican economy, which in turn could have a material adverse effect on our business, financial condition, results of operations and prospects.
Changes in the relative value of the Mexican Peso to the U.S. Dollar may have an adverse effect on us.
The peso-dollar exchange rate is an important factor for us because of its effect on our business, financial condition, results of operations and prospects.
In general, as described below, a depreciation of the Mexican Peso will likely result in an increase in our operating margins and an appreciation of the Mexican Peso will likely result in a decrease in our operating margins, in each case, when measured in Mexican Pesos. This is because the aggregate amount of our net sales denominated in or linked to U.S. Dollars exceeds the aggregate amount of our cost of sales and other selling, general and administrative expenses denominated in or linked to U.S. Dollars.
Substantially all of our net sales are either denominated in or linked to the value of the U.S. Dollar. As a result, when the Mexican Peso depreciates against the U.S. Dollar, the same level of U.S. Dollar sales as in a prior period will result in higher revenues as stated in Mexican Pesos in the more recent period. Conversely, when the Mexican Peso appreciates against the U.S. Dollar, the same level of U.S. Dollar sales as in a prior period will result in lower revenues as stated in Mexican Pesos in the more recent period. Moreover, because a portion of our cost of goods sold, including labor costs, and other selling, general and administrative expenses are invoiced in Mexican Pesos and are not directly affected by the relative value of the Mexican Peso to the U.S. Dollar, the real appreciation or depreciation of the Mexican Peso relative to the U.S. Dollar can have an effect on our operating margins. For this
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reason, in the past, when the Mexican Peso has appreciated compared to the U.S. Dollar, our profit margins have decreased. By contrast, when the Mexican Peso has lost value, our profit margins have increased.
Currently, the peso-dollar exchange rate is determined on the basis of the free market float in accordance with the policy set by Banco de México. There is no guarantee that Banco de México will maintain the current exchange rate regime or that Banco de México will not adopt a different monetary policy that may affect the exchange rate itself. Any change in the monetary policy, the exchange rate regime or in the exchange rate itself, as a result of market conditions over which we have no control, could have a considerable impact, either positive or negative, on our business, financial condition and results of operations.
The Mexican Peso has been subject to significant devaluations against the U.S. dollar and may be subject to significant fluctuations in the future. In 2008, as a result of the negative economic conditions in the United States and in other parts of the world, local and international markets experienced high volatility, which contributed to the devaluation of the peso. The Mexican government has implemented a series of measures to limit the devaluation of the peso and stabilize the local economy. However, we cannot assure you that such measures will be effective or ongoing or predict how they will impact the Mexican economy.
Mexico may experience high levels of inflation in the future, which could adversely affect our business, financial condition, results of operations and prospects.
Mexico has a history of high levels of inflation and may experience high inflation in the future. Historically, inflation in Mexico has led to higher interest rates, depreciation of the Mexican Peso and the imposition of substantial government controls over exchange rates and prices, which at times has adversely affected our operating revenues and margins. The annual rate of inflation for the last three years, as measured by changes in the NCPI, as provided by Banco de México, was 4.4% in 2010, 3.8% in 2011, 3.6% in 2012 and 1.6% for the three months ended March 31, 2013. Although inflation is less of an issue today than in past years, we cannot assure you that Mexico will not experience high inflation in the future, including in the event of a substantial increase in inflation in the United States. A substantial increase in the Mexican inflation rate could adversely affect consumer purchasing power, thereby negatively impacting demand for our products, and would increase some of our costs, which could adversely affect our business, financial condition, results of operations and prospects.
Developments in other countries could adversely affect the Mexican economy, our business, financial condition and results of operations.
The Mexican economy may be, to varying degrees, affected by economic and market conditions in other countries. Although economic conditions in other countries may differ significantly from economic conditions in Mexico, investors’ reactions to adverse developments in other countries may have an adverse effect on the market value of securities of Mexican issuers. In recent years, for example, the prices of both Mexican debt and equity securities decreased substantially as a result of the prolonged decrease in the United States securities markets. Most recently, credit issues in the United States related principally to the sale of sub-prime mortgages have resulted in significant fluctuations in the financial markets.
In addition, in recent years economic conditions in Mexico have become increasingly correlated with economic conditions in the United States as a result of NAFTA and increased economic activity between the two countries. Therefore, adverse economic conditions in the United States, the termination or re-negotiation of NAFTA or other related events could have a significant adverse effect on the Mexican economy. We cannot assure you that events in other emerging market countries, in the United States or elsewhere will not adversely affect our business, financial condition or results of operations.
The recent increase in violence in Mexico, including violence associated with Mexican drug cartels, has had a negative impact on and could continue to adversely affect the Mexican economy and our business, financial condition, results of operations and prospects.
In recent years, Mexico has experienced prolonged periods of criminal violence, primarily due to the activities of drug cartels. This violence has been particularly pronounced in the northern states of the country that share a border with the United States. Although the Mexican government has increased its security measures by strengthening military and police forces, drug-related violence and crime continue to pose a significant threat to the
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Mexican economy and are a source of economic and political instability and uncertainty. Systemic criminal activity and isolated criminal acts may disrupt our operations, impact our ability to earn revenue and add to our cost of operations. Continued violence could result in the Mexican government taking additional measures, which may include restrictions on cross-border transport and trade. If the levels of violence in Mexico, over which we have no control, remain the same or increase, they could have an adverse effect on the Mexican economy and our business, financial condition, results of operations and prospects.
Risks Relating to the Notes
Payments on the notes and the subsidiary guarantees will be effectively junior to any of our secured indebtedness and structurally junior to debt obligations of our non-guarantor subsidiaries.
The notes will constitute our senior unsecured obligations and will rank equal in right of payment with all of our and our subsidiary guarantors’ other existing and future senior unsecured indebtedness, other than obligations preferred by statute (such as tax and labor claims). Although the holders of the notes will have a direct, but unsecured claim on our assets and property, payment on the notes will be subordinated in right of payment to any of our existing or future secured debt, to the extent of the assets securing such debt. Although the indenture governing the notes will contain restrictions on the incurrence of additional liens, these restrictions are subject to important qualifications and exceptions, and the liens that we may incur in compliance with these restrictions or liens that arise from governmental or creditor action, could be substantial. Payment by us in respect of the notes will also be structurally subordinated to the payment of secured and unsecured debt and other creditors of our non-guarantor subsidiaries.
As of March 31, 2013, we had total consolidated debt of Ps. 13,827 million (US$1,119 million), Ps. 11,457 million (US$927 million) of which was unsecured debt of Alpek and our subsidiary guarantors and Ps. 2,370 million (US$192 million) of which was unsecured debt of our non-guarantor subsidiaries.
If we become insolvent or are liquidated, or we become subject to bankruptcy proceedings, or if payment under any secured debt is accelerated, the relevant lenders would be entitled to exercise the remedies available to a secured lender. Accordingly, any proceeds upon a realization of the collateral would be applied first to amounts due under the secured debt obligations before any proceeds would be available to make payments on the notes. After such application of the proceeds from collateral, it is possible that there would be no assets remaining from which claims of the holders of the notes could be satisfied.
In addition, under Mexican law, our obligations under the notes are subordinated to certain statutory preferences, including claims for salaries, wages, secured obligations (to the extent of the security provided), social security, employee housing fund contributions, taxes and court fees and expenses. Similar statutory preferences may be applicable in other jurisdictions where the subsidiary guarantors are incorporated. In the event of our liquidation, such statutory preferences will have preference over any other claims, including claims by any holder of the notes.
Further, if any assets remain after payment of these lenders, the remaining assets would be available to creditors preferred by statute, such as holders of tax and labor claims, and might be insufficient to satisfy the claims of the holders of the notes and holders of other unsecured debt including trade creditors that rank equal to holders of the notes.
We are a holding company and depend on the results of operations of our subsidiaries.
We are a holding company with no independent operations or substantial assets other than the capital stock of our operating companies. Accordingly, we depend on the results of operations of our subsidiary companies and their ability to pay dividends to us. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit their ability to pay dividends. For a description of certain of these restrictions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Any adverse change in the financial condition or results of operations of our subsidiaries could affect our financial condition. Our non-guarantor subsidiaries will not be obligated to make funds available to us to make payments on the notes.
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The subsidiary guarantees may not be enforceable under applicable laws.
The notes will be fully and unconditionally guaranteed by certain of our Mexican and U.S. subsidiaries. The subsidiary guarantees provide a basis for a direct claim against the subsidiary guarantors; however, it is possible that the guarantees of these subsidiaries may not be enforceable under applicable laws. While Mexican law does not prohibit the giving of subsidiary guarantees and, as a result, does not prevent the subsidiary guarantees of the notes from being valid, binding and enforceable against our Mexican subsidiary guarantors, in the event that a Mexican subsidiary guarantor becomes subject to a judicial reorganization proceeding (concurso mercantíl) or to bankruptcy (quiebra), its guarantee may be deemed to have been a fraudulent transfer and declared void based upon the Mexican subsidiary guarantor being deemed not to have received fair consideration in exchange for such guarantee.
Under various fraudulent conveyance or fraudulent laws (including under the laws of the United States), a court could subordinate or void the obligations of our subsidiaries under the guarantees. Generally, to the extent that a court were to find that at the time one of our subsidiaries entered into a guarantee either (a) the subsidiary guarantor incurred the guarantee with the intent to hinder, delay or defraud any present or future creditor or contemplated insolvency with a design to favor one or more creditors to the exclusion of others or (b) the subsidiary guarantor did not receive fair consideration or reasonably equivalent value for issuing the guarantee and, at the time it issued that guarantee, the subsidiary guarantor (i) was insolvent or became insolvent as a result of issuing the guarantee, (ii) was engaged or about to engage in a business or transaction for which the remaining assets of the subsidiary guarantor constituted unreasonably small capital, (iii) intended to incur, or believed that it would incur, debts beyond its ability to pay those debts as they matured or (iv) was a defendant in an action for money damages, or had a judgment for money damages declared against such subsidiary guarantor if, after final judgment, the judgment is unsatisfied, then the court could void or subordinate the subsidiary’s obligations under the guarantee in favor of the issuer’s or the subsidiary guarantor’s other obligations. In addition, any payment by any subsidiary guarantor could be voided and required to be returned to such subsidiary guarantor, or to a fund for the benefit of its creditors.
Among other things, a legal challenge of a subsidiary’s obligations under a guarantee on fraudulent conveyance grounds could focus on the benefits, if any, realized by the subsidiary guarantors as a result of the issuance of the notes. To the extent a subsidiary guarantee is voided as a fraudulent conveyance or held unenforceable for any other reason, the holders of the notes would not have any claim against that subsidiary guarantor and would solely be our creditors and creditors of the subsidiary guarantors, if any, whose obligations under the guarantees were not held unenforceable. If any such event were to occur, the creditworthiness of the notes, and the market value of the notes in the secondary market, may be materially adversely affected.
We may be unable to purchase the notes upon a specified change of control event, which would result in defaults under the indenture governing the notes.
The terms of the notes will require us to make an offer to repurchase the notes upon the occurrence of a specified change of control event at a purchase price equal to 101% of the principal amount of the notes, plus accrued interest to the date of the purchase. Any financing arrangements we may enter may require repayment of amounts outstanding upon the occurrence of a change of control event and limit our ability to fund the repurchase of your notes in certain circumstances. It is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of notes or that restrictions in our other financing arrangements will not allow the repurchases. If we fail to repurchase the notes in such circumstance, we would default under the indenture which may, in turn, trigger cross-default provisions in our other debt instruments. See “Description of the Notes—Certain Covenants— Repurchase of Notes upon a Change of Control.”
The notes are subject to transfer restrictions.
The notes have not been registered under the Securities Act or any state securities laws, and we are not required to and currently do not plan on making any such registration in the immediate future. As a result, the notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Prospective investors should be aware that investors may be required to bear the financial risks of this investment for an indefinite period of time. See “Transfer Restrictions” for a full explanation of such restrictions.
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An active trading market for the notes may not develop.
Currently there is no market for the notes. Application has been made to have the notes listed on the Official List of the Irish Stock Exchange and for trading on the Global Exchange Market. Even if the notes become listed on this exchange, we may delist the notes. A trading market for the notes may not develop, or if a market for the notes were to develop, the notes may trade at a discount from their initial offering price, depending upon many factors, including prevailing interest rates, the market for similar securities, general economic conditions and our financial condition. The initial purchasers are not under any obligation to make a market with respect to the notes, and we cannot assure you that trading markets will develop or be maintained. Accordingly, we cannot assure you as to the development or liquidity of any trading market for the notes. If an active market for the notes does not develop or is interrupted, the market price and liquidity of the notes may be adversely affected.
Payments claimed in Mexico on the notes, pursuant to a judgment or otherwise, would be in Mexican Pesos.
In the event that proceedings are brought against us in Mexico, either to enforce a judgment or as a result of an original action brought in Mexico, or if payment is otherwise claimed from us in Mexico, we would not be required to discharge those obligations in a currency other than Mexican currency. Under the Monetary Law of the United Mexican States (Ley Monetaria de los Estados Unidos Mexicanos) an obligation, whether resulting from a judgment or by agreement, denominated in a currency other than Mexican currency, which is payable in Mexico, may be satisfied in Mexican currency at the rate of exchange in effect on the date on which payments are made. Such rate is currently determined by Banco de México and published every banking day in the Official Gazette. As a result, you may suffer a U.S. Dollar shortfall if you obtain a judgment or a distribution in Mexico. You should be aware that no separate action exists or is enforceable in Mexico for compensation for any shortfall.
Our obligations under the notes would be converted in the event of bankruptcy.
Under Mexico’s Law on Mercantile Reorganization (Ley de Concursos Mercantiles), if we are declared bankrupt or in concurso mercantíl, our obligations under the notes, (i) would be converted into Mexican Pesos and then from Mexican Pesos into inflation-adjusted units (unidades de inversion, known as UDIs), (ii) would be satisfied at the time claims of all our creditors are satisfied, (iii) would be subject to the outcome of, and priorities recognized in, the relevant proceedings, which differ from those in other jurisdictions such as the United States, including with respect to the treatment of intercompany debt, (iv) would cease to accrue interest from the date the concurso mercantíl is declared, (v) would not be adjusted to take into account any depreciation of the Mexican Peso against the U.S. Dollar occurring after such declaration and (vi) would be subject to certain statutory preferences, including tax, social security and labor claims, and claims of secured creditors (up to the value of the collateral provided to such creditors).
We may not be able to make payments in U.S. Dollars.
In the past, the Mexican economy has experienced balance of payments deficits and shortages in foreign exchange reserves. While the Mexican government does not currently restrict the ability of Mexican or foreign per-sons or entities to convert Mexican Pesos to foreign currencies, including U.S. Dollars, it has done so in the past and could do so again in the future. We cannot assure you that the Mexican government will not implement a restrictive exchange control policy in the future. Any such restrictive exchange control policy could prevent or restrict our access to U.S. Dollars to meet our U.S. Dollar obligations and could also have a material adverse effect on our business, financial condition and results of operations. We cannot predict the impact of any such measures on the Mexican economy.
It may be difficult to enforce civil liabilities against us or our directors, executive officers and controlling persons.
Most of our directors, executive officers, controlling persons and our subsidiary guarantors are non-residents of the United States and substantially all of the assets of such non-resident persons and a significant portion of all of our assets and of our subsidiary guarantors are located in Mexico or elsewhere outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or us or our subsidiary guarantors or to enforce against them or us in courts of any jurisdiction outside Mexico, judgments predicated upon the laws of any such jurisdiction, including any judgment predicated substantially upon the civil
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liability provisions of United States federal and state securities laws. We have been advised that there is doubt as to the enforceability in Mexican courts, in original actions or in actions for enforcement of judgments obtained in courts of jurisdictions outside Mexico, of civil liabilities arising under the laws of any jurisdiction outside Mexico, including any judgment predicated solely upon United States federal or state securities laws. No treaty is currently in effect between the United States and Mexico that covers the reciprocal enforcement of foreign judgments. In the past, Mexican courts have enforced judgments rendered in the United States by virtue of principles of reciprocity and comity as well as the provisions of Mexican law relating to the enforcement of foreign judgments in Mexico, consisting of the review by Mexican courts of the United States judgment in order to ascertain whether Mexican legal principles of due process and public policy (orden público), among other requirements, have been duly complied with, without reviewing the merits of the subject matter of the case, provided that U.S. courts would grant reciprocal treatment to Mexican judgments.
We cannot assure you that the credit ratings for the notes will not be lowered, suspended or withdrawn by the rating agencies.
The credit ratings of the notes may change after issuance. Such ratings are limited in scope, and do not address all material risks relating to an investment in the notes, but rather reflect only the views of the rating agencies at the time the ratings are issued. An explanation of the significance of such ratings may be obtained from the rating agencies. We cannot assure you that such credit ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in the judgment of such rating agencies, circumstances so warrant. Any lowering, suspension or withdrawal of such ratings may have an adverse effect on the market price and marketability of the notes.
The consolidated financial information included in this offering memorandum may be of limited use in assessing the financial position of the Subsidiary Guarantors.
The consolidated financial information included in this offering memorandum includes the financial information for our non-guarantor subsidiaries. As of December 31, 2012, our non-guarantor subsidiaries had net assets of PS. 1,491million (accounting for 31% of our consolidated net assets) and for the year ended December 31, 2012, our non-guarantor subsidiaries had an EBITDA of Ps. 217 million (accounting for 30% of our consolidated EBITDA). As a result, our non-guarantor subsidiaries account for over 25% of our consolidated net assets and EBITDA and may be of limited use in assessing the financial position of the Subsidiary Guarantors.
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EXCHANGE RATE INFORMATION
On December 21, 1994, Banco de México implemented a floating foreign exchange rate regime under which the Mexican Peso is allowed to float freely against the U.S. Dollar and other foreign currencies. Banco de México typically intervenes directly in the foreign exchange market only to reduce what it deems to be excessive short-term volatility. Since mid-2003, Banco de México has been conducting auctions of U.S. Dollars in an attempt to reduce the levels of its foreign reserves. Banco de México conducts open market operations on a regular basis to adjust the size of Mexico’s monetary base. Changes in Mexico’s monetary base have an impact on the exchange rate. Banco de México may increase or decrease the reserve of funds that financial institutions are required to maintain. If the reserve requirement is increased, financial institutions are required to allocate more funds to their reserves, which will in turn reduce the amount of funds available for operations. This causes the amount of available funds in the market to decrease and the cost, or interest rate, to obtain funds increases. The opposite happens if reserve requirements are lowered. This mechanism, known as “corto” or “ largo,” as the case may be, or more formally “the daily settlement balance target,” represents a mechanism used by Banco de México to adjust the level of interest and net foreign exchange rates.
We cannot assure you that Banco de México will maintain its current policies with respect to the Mexican Peso or that the Mexican Peso will not depreciate significantly in the future. Additionally, in the event of shortages of foreign currency, we cannot assure you that foreign currency would continue to be available to private-sector companies or that foreign currency needed by us to service foreign currency obligations, if any, would continue to be available without substantial additional cost.
This offering memorandum contains translations of certain Mexican Peso amounts into U.S. Dollars at specified rates solely for the convenience of the reader. These convenience translations should not be construed as representations that the Mexican Peso amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the specified rate or at all. Unless otherwise indicated, the exchange rate used for purposes of convenience translations is:
• with respect to balance sheet data included in this offering memorandum, the Official Exchange Rate at the end of the period presented; and
• with respect to financial information other than balance sheet data included in this offering memorandum, the average exchange rate for the period presented, which consists of the daily average of the exchange rates on each day during the period presented, as specified in the table below.
The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the Official Exchange Rate, all expressed in nominal Mexican Pesos per U.S. Dollar.
High Low Average(1) Period-End Year 2008 13.92 9.92 11.14 13.54 2009 15.37 12.60 13.51 13.06 2010 13.18 12.16 12.64 12.36 2011 14.24 11.50 12.43 13.98 2012 14.39 12.63 13.17 13.01 Month November 2012 13.25 12.98 13.10 13.04 December 2012 13.01 12.72 12.87 13.01 January 2013 12.99 12.59 12.70 12.71 February 2013 12.87 12.63 12.72 12.87 March 2013 12.83 12.35 12.55 12.35 April 2013 12.36 12.07 12.22 12.16 May 2013 12.63 11.98 12.24 12.63
__________________ (1) The average exchange rate means the daily average of the exchange rates on each day during the relevant period.
Source: Banco de México Official Exchange Rate.
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On May 31, 2013, the Official Exchange Rate in effect was Ps. 12.63 per US$1.00.
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USE OF PROCEEDS
We estimate that the net proceeds from the issuance of the notes will be approximately US$ 644.0 million (after deducting the initial purchasers’ discounts and commissions and the payment of estimated offering expenses). We intend to use the net proceeds from the notes to reduce the outstanding balance under the 2010 Syndicated Credit Facility entered into by Petrotemex, and certain of its subsidiaries, and for general corporate purposes. Affiliates of certain of the initial purchasers are parties to the 2010 Syndicated Credit Facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Liquidity and Capital Resources––Indebtedness ––Syndicated Bank Loans.”
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CAPITALIZATION
The following table sets forth our cash and cash equivalents and consolidated capitalization in accordance with IFRS as of September 30, 2012 (i) on a historical basis and (ii) as adjusted to give effect to the issuance of the notes and the use of the proceeds therefrom as if it had occurred on September 30, 2012. This table should be read together with our Interim Unaudited Financial Statements included in this offering memorandum.
As of September 30, 2012
(Unaudited) Actual As Adjusted (Ps.) (US$)(1) (Ps.) (US$)(1) (in thousands) Cash and cash equivalents 5,945,454 462,606 7,386,407 574,724
Debt:
Current debt 1,273,376 99,079 775,357 60,329 Non-current debt:
GPT’s 2010 Syndicated Credit Facility 6,331,525 492,645 — — GPT’s 2014 International Notes 1,539,581 119,792 1,539,581 119,792 4.500% Senior Notes due 2022, offered hereby — — 8,353,865 650,000 Other non-current debt 4,507,274 350,703 4,507,275 350,703
Total non-current debt 12,378,380 963,141 14,400,720 1,120,496 Total Debt 13,651,756 1,062,220 15,176,078 1,180,825 Equity:
Capital contributions 15,123,017 1,176,696 15,123,0171,176,696 Earned capital 10,580,486 823,250 10,580,486 823,250
Equity attributable to owner of the company 25,703,503 1,999,946 25,703,503 1,999,946 Non-controlling interest 3,353,753 260,950 3,353,753 260,950
Total Equity 29,057,256 2,260,896 29,057,256 2,260,896
Total capitalization(2) 42,709,012 3,323,115 44,233,334 3,441,720 _________________ (1) Amounts in U.S. Dollars have been translated for convenience only from Mexican Pesos at the rate of Ps. 12.8521 per
US$1.00, the Official Exchange Rate in effect on September 28, 2012. See “Exchange Rate Information.” (2) Consists of the sum of stockholders’ equity plus total debt.
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SELECTED HISTORICAL FINANCIAL DATA AND OTHER INFORM ATION
You should read the following selected historical financial data and other information in conjunction with our Annual Audited Financial Statements and our Interim Unaudited Financial Statements, including the notes thereto, and the information set forth in the sections “Presentation of Financial and Certain Other Information,” “Summary of Financial Data and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this offering memorandum.
The financial information as of and for the years ended December 31, 2011 and 2012 has been derived from our audited combined and consolidated financial statements prepared in accordance with IFRS. The financial information as of March 31, 2013 and for the three months ended March 31, 2012 and 2013 has been derived from our interim unaudited consolidated financial statements prepared in accordance with IAS 34.
Due to the consolidation of the Columbia Assets into our financial statements as of January 31, 2011, and the consolidation of Wellman into our financial statements as of September 1, 2011, our consolidated financial information for the year ended December 31, 2011, included in this offering memorandum is not comparable to our financial information for other periods and may not be indicative of our future financial performance. For the year ended December 31, 2011, our net sales were Ps. 90,667 million (US$7,296 million); of this amount, the consolidation of the Columbia Assets contributed Ps. 12,995 million (US$1,046 million) to our net sales and the consolidation of Wellman contributed Ps. 1,858 million (US$149 million) to our net sales.
For the Year Ended December 31, For the Three Months Ended March 31,
2011 2012 2012(1) 2012 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (Unaudited) (in millions)
Income Statement Data: Net sales ................................................................90,667 96,163 7,303 24,829 23,284 1,840 Cost of sales................................................................(80,653) (86,767) (6,589) (22,236) (21,332) (1,685) Gross profit ................................................................10,013 9,397 714 2,593 1,952 154 Selling and administrative expenses ................................................................
(2,099) (2,231) (169) (569) (509) (40)
Other income (expenses), net(3) ................................(325) 311 24 13 80 6 Operating profit ................................ 7,589 7,476 568 2,037 1,523 120
Financial income ................................ 225 566 43 435 130 10 Financial expenses ................................(1,415) (1,897) (144) (399) (247) (20)
“Comprehensive financing expense, net” ................................................................
(1,190) (1,331) (101) 37 (117) (9)
Share of losses of associates ................................(23) (39) (3) (8) (11) (1) Profit before income tax ................................6,375 6,106 464 2,065 1,395 110 Income tax ................................................................(1,948) (1,723) (131) (813) (415) (33)
Profit for the period ................................ 4,428 4,383 333 1,252 980 77
As of December 31, As of March 31,
2011 2012 2012(1) 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (US$) (Unaudited)
(in millions)
Balance Sheet Data Current assets:
Cash and cash equivalents(4) ................................ 3,586 6,658 512 4,835 391 Trade and other receivables, net(5) ................................13,281 13,369 1,028 14,203 1,150 Inventories ................................................................12,320 11,582 890 11,567 936 Derivative financial instruments ................................ 49 107 8 202 16
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As of December 31, As of March 31,
2011 2012 2012(1) 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (US$) Other current assets ................................................................231 244 19 196 16
Total current assets ................................................................29,468 31,960 2,457 31,004 2,509 Non-current Assets:
Derivative financial instruments ................................ 27 - - - - Property, plant and equipment, net ................................28,879 26,695 2,052 25,449 2,060 Goodwill and intangible assets, net ................................2,549 2,243 172 2,528 205 Deferred income tax ................................................................940 505 39 410 33 Other non-current assets ..........................................................290 293 23 265 21
Total non-current assets ...............................................................32,685 29,736 2,286 28,653 2,319
Total assets ................................................................ 62,153 61,696 4,742 59,656 4,829
Current liabilities:
Current debt ................................................................2,142 501 38 611 49 Trade and other payables .........................................................13,218 9,696 745 10,171 823 Derivative financial instruments ................................ 439 288 22 68 6 Income tax payable ................................................................301 102 8 179 15 Dividends payable................................................................- - - 576 47 Other current liabilities ............................................................2,579 1,462 112 1,331 108
Total current liabilities ................................................................18,679 12,048 926 12,937 1,047 Non-current liabilities:
Non-current debt ................................................................17,545 13,940 1,071 13,215 1,070 Derivative financial instruments ................................ 743 208 16 173 14 Deferred income tax ................................................................5,126 4,718 363 4,497 364 Employees benefits ................................................................1,261 1,130 87 1,107 90
Total non-current liabilities..........................................................24,675 19,997 1,537 18,993 1,537
Total liabilities ................................................................43,354 32,045 2,463 31,929 2,584 Equity attributable to owner of the company ...............................15,255 26,180 2,012 24,566 1,988 Non-controlling portion ...............................................................3,545 3,471 267 3,162 256
Total Equity ................................................................18,799 29,651 2,279 27,727 2,244
For the Year Ended December 31,
For the Three Months Ended March 31,
2011 2012 2012(1) 2012 2013 2013(2) (Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (Unaudited) (in millions) Cash Flow Data: Net cash generated from operating activities...............................4,662 5,483 416 1,137 639 51 Net cash used in investing activities ................................(9,440) (1,805) (137) (148) (982) (78) Net cash flows (used in) provided from financing activities ................................................................4,862 (280) (21) (1,440) (1,273) (101)
Other Financial Data: Adjusted EBITDA(6) ................................................................9,545 9,611 730 2,550 2,035 161
___________________ (1) Translated into U.S. Dollars, solely for the convenience of the reader, using an exchange rate of (i) Ps. 13.0101 per
U.S. Dollar, the Official Exchange Rate in effect on December 31, 2012, with respect to balance sheet data and (ii) Ps. 13.1685 per U.S. Dollar, the daily average of the Official Exchange Rates on each day during the year ended December 31, 2012, with respect to financial information other than balance sheet data. These convenience translations should not be construed as representations that the Mexican Peso amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the specified rate or at all. See “Exchange Rate Information.”
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(2) Translated into U.S. Dollars, solely for the convenience of the reader, using an exchange rate of (i) Ps. 12.3546 per U.S. Dollar, the Official Exchange Rate in effect on March 31, 2013, with respect to balance sheet data and (ii) Ps. 12.6575 per U.S. Dollar, the daily average of the Official Exchange Rates on each day during the three months ended March 31, 2013, with respect to financial information other than balance sheet data. These convenience translations should not be construed as representations that the Mexican Peso amounts actually represent such U.S. Dollar amounts or could be converted into U.S. Dollars at the specified rate or at all. See “Exchange Rate Information.”
(3) Other income and expenses for the three months ended March 31, 2012 and 2013 and the years ended December 31, 2011 and 2012 consisted primarily of the following: (i) in 2011, reorganization expenses (Ps. 314 million), business acquisition-related non-capitalized costs (Ps.162 million) and gain from sale of shares of permanent investments (Ps. 88 million), (ii) in 2012, valuation of our commodities-related derivatives financial instruments (Ps. 152 million), (iii) in the three months ended March 31, 2012, costs on sale of property (Ps 1 million) and (iv) in the three months ended March 31, 2013, valuation of our commodities-related derivatives financial instruments (Ps. 76 million). See Note 24 to the Annual Audited Financial Statements.
(4) Restricted cash as of March 31, 2013 and as of December 31, 2011 and 2012 consisted of Ps. 3 million and Ps. 2 million and Ps. 3 million, respectively. See Note 7 to the Annual Audited Financial Statements and Note 7 to the Interim Unaudited Financial Statements.
(5) Provision for impairment of trade receivables as of March 31, 2013 and as of December 31, 2011 and 2012 consisted of Ps. 242 million and Ps. 248 million and Ps. 242 million, respectively.
(6) We define Adjusted EBITDA to mean consolidated profit (loss) for the period after adding back or subtracting, as the case may be, (i) depreciation and amortization, (ii) impairment of non-current assets, (iii) comprehensive financing expense, net (which includes financial expense, finance income, foreign exchange gains (losses), and net gain (loss) from certain derivative financial instruments), (iv) income tax and (v) share of gain (loss) of associates. Our calculation of Adjusted EBITDA may not be comparable to other companies’ calculation of similarly titled measures. See “Presentation of Financial Information and Certain Other Information”. Our Adjusted EBITDA includes EBITDA attributable to our strategic alliances. The following table sets forth a reconciliation of Adjusted EBITDA to consolidated profit (loss) for each of the periods presented:
Year Ended December 31, Three Months Ended March 31, 2011 2012 2012(1) 2012 2013 2013(2)
(Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$)
(Unaudited) (in millions)
Consolidated profit for the period ................................................................4,428 4,383 333 1,252 980 77 Depreciation and amortization ..........................1,819 2,129 162 513 512 40 Impairment of non-current assets ......................138 5 0 - - - Comprehensive financing
expense, net ................................ 1,190 1,331 101 (37) 117 9 Income tax .........................................................1,948 1,723 131 813 415 33 Share of loss of associates ................................23 39 3 8 11 1 Adjusted EBITDA................................ 9,545 9,611 730 2,550 2,035 161
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Selected MFRS Financial Data and Other Information for the Years Ended December 31, 2009 and 2010
The combined financial information set forth below as of and for the years ended December 31, 2009 and 2010 have been derived from our annual financial statements prepared in accordance with MFRS that have not been included in this offering memorandum. Because of the differences between the accounting principles used in the preparation of such financial statements and the accounting principles used in the preparation of the Annual Audited Financial Statements included elsewhere in this offering memorandum, such information is not comparable, and you should use caution when comparing financial information prepared in accordance with MFRS to financial information prepared in accordance with IFRS.
As of the Year Ended December 31, (MFRS) 2009 2010 (Ps.) (Ps.)
(in millions) Net sales ....................................................................... 53,573 61,148 Adjusted EBITDA(1) .................................................... 5,685 6,084 Net debt ....................................................................... 6,960 5,765 Net interest expense ..................................................... 847 741 Capital expenditures .................................................... 464 595 Sales volume (in thousands of tons) .................... 3,139 3,304 _______________ (1) We define “Adjusted EBITDA” under MFRS to mean combined net income (loss) before tax after adding back or
subtracting, as the case may be, (i) depreciation and amortization, (ii) comprehensive financing (expense) income (which includes financing expenses, financing income, exchange loss, net, loss from derivative financial instruments, net and gain on monetary position), (iii) other expenses, net (which typically consists of non-recurring items under MFRS such as impairments of non-current assets), (iv) equity in income (loss) of associated companies and (v) income tax benefits. Our calculation of Adjusted EBITDA may not be comparable to other companies’ calculation of similarly titled measures. The following table sets forth a reconciliation of Adjusted EBITDA to combined net income (loss) under MFRS for each of the periods presented.
For the Year Ended December 31, (MFRS) 2009 2010 (Ps.) (Ps.) (in millions)
Combined net income (loss) for the period ................................ 1,537 2,561 Depreciation and amortization ................................................... 1,428 1,316 Comprehensive financing (expense) income, net....................... 1,723 1,072 Other (expenses) income, net ..................................................... 111 44 Income tax ................................................................................. 885 1,161 Share of loss of associated companies ....................................... 1 19
Adjusted EBITDA ..................................................................... 5,685 6,084
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL C ONDITION AND RESULTS OF OPERATIONS
You should read this discussion in conjunction with our Annual Audited Financial Statements, our Interim Unaudited Financial Statements and the other financial information included elsewhere in this offering memorandum.
Our Annual Audited Financial Statements, as well as the other financial information in the offering memorandum related to these financial statements, have been prepared in accordance with IFRS. Our Interim Unaudited Financial Statements, as well as the other financial information in the offering memorandum related to these financial statements, have been prepared in accordance with IAS 34.
Prior to the completion of the Corporate Reorganization on June 16, 2011, the Combined Affiliates were under common ownership and control of Alfa throughout the reporting periods. Therefore, our audited financial statements prior to 2011 are presented on a combined basis, combining the accounts of the Combined Affiliates, as described in Note 1 to our Annual Audited Financial Statements. The Corporate Reorganization was completed on June 16, 2011; as of such date, Alpek assumed ownership and control of the Combined Affiliates and therefore, as of June 16, 2011, our financial information is prepared on a consolidated instead of combined basis. The Corporate Reorganization did not otherwise have any effect on our operating results. See “Presentation of Financial Information.”
Due to the consolidation of the Columbia Assets into our financial statements as of January 31, 2011, and the consolidation of Wellman into our financial statements as of September 1, 2011, our consolidated financial information for the year ended December 31, 2011 included in this offering memorandum is not comparable to our combined financial information for other periods and may not be indicative of our future financial performance. For the year ended December 31, 2011, our net sales were Ps. 90,667 million (US$7,296 million); of this amount, the consolidation of the Columbia Assets contributed Ps. 12,995 million (US$1,046 million) to our net sales and the consolidation of Wellman contributed Ps. 1,858 million (US$149 million) to our net sales. See Note 2 to the Annual Audited Financial Statements included in this offering memorandum.
Overview
We are involved in the production, marketing and sale of a diversified portfolio of petrochemical products. We are the largest petrochemical company in Mexico and the second-largest in Latin America (based on 2012 net sales). We have leadership positions across our product portfolio. For example, we were the largest producer of polyester and its precursor chemicals in the Americas based on installed capacity as of December 31, 2012 according to PCI. After the acquisition of Wellman in August 2011, we became the largest PET producer in the Americas and the second largest worldwide according to PCI, our internal estimates and market data. For the year ended December 31, 2012 and the three months ended March 31, 2013, in each period we derived approximately 78% of our net sales from our polyester group of products, including the production of PTA, PET resin and polyester fibers. We also operate the only PP plant in Mexico which is one of the largest PP production facilities in North America as well as the largest EPS plant in the Americas in terms of installed capacity, based on our internal estimates and our review of publicly available market data. We are the sole Mexican producer of CPL, the majority of which we export to China.
We focus on products and end markets that we believe offer the highest growth potential and ability to expand margins and that are more likely to provide stable financial performance through economic cycles. For the year ended December 31, 2012, 91% of our products (on the basis of sales volume) were used in what we believe are recession-resistant end markets such as the food and beverage packaging and consumer goods end markets. For the year ended December 31, 2012, we generated approximately 50% of our total net sales in high-growth emerging markets including Mexico.
Our businesses benefit from access to competitively sourced raw materials, large-scale integrated production sites, proprietary state-of-the-art manufacturing technologies, strategic alliances and sustainable energy initiatives, which, together with our operational efficiency and expertise, allow us to maintain low-cost operations. We believe our participation in the recent consolidation trends in the North American PET market and our ability to maintain
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long-standing relationships with our key suppliers and customers have further enhanced our relevant market positions.
We operate through two major business segments: Polyester Chain Business and Plastics & Chemicals Business. Our Polyester Chain Business segment, comprising the production of PTA, PET and polyester fibers, serves the food and beverage packaging, textile and industrial filament end markets. Our Plastics & Chemicals Business segment, comprising the production of PP, EPS, polyurethanes, CPL, fertilizers and other chemicals, serves a wide range of markets, including the food and beverage packaging, consumer goods, automotive, construction, agriculture, oil industry and pharmaceutical end markets.
We operate 10 plants in Mexico, nine plants in the United States and one plant in Argentina. Our total assets as of March 31, 2013 were Ps. 59,656 million (US$4,829 million). The following table presents our total net sales and Adjusted EDITDA for the periods indicated.
Year Ended December 31,
Three Months Ended March 31,
2011 2012 2012 2012 2013 2013 (Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (Unaudited) (in millions) Total net sales ..........................90,667 96,163 7,303 24,829 23,284 1,840 Adjusted EBITDA(1) ................9,545 9,611 730 2,550 2,035 161 ______________
(1) For a definition of Adjusted EBITDA, see “Presentation of Financial and Certain Other Information––Non-GAAP Financial Measures.”
Mexican Economic Environment
Our business is closely tied to general economic conditions in Mexico. As a result, our economic performance and our ability to implement our business strategies may be affected by changes in national economic conditions. Since the 1995 currency and banking crisis, Mexico’s GDP has grown at an average real rate of 2.5% per year. In 2006, GDP grew at a rate of 5.2%, supported by exports of manufactured goods and strong foreign direct investment. Economic conditions began deteriorating in 2007, due mainly to the lower growth in domestic consumer demand, influenced by weaker wages and lower remittances from the United States, which negatively affected domestic consumption and caused Mexico’s GDP growth rate to slow to 3.3%.
In 2008, the Mexican economy experienced a significant deterioration as a result of the global financial crisis. Foreign consumer demand deteriorated significantly, particularly in the manufacturing sector, which also affected domestic consumer demand, with lower investment and consumption. Mexico’s GDP growth rate fell to 1.2% and several supply side shocks affected price levels. The Mexican Peso was also adversely impacted by the economic downturn, and from September 2008 through the first quarter of 2009, the Mexican Peso devaluated significantly.
During 2009, the financial crisis that started in 2008 continued affecting the world economy, which experienced the sharpest decline in decades. Mexico suffered the sharpest decline in GDP since 1932, declining by 6.1% during 2009, mainly as a result of Mexico’s close commercial ties with the United States. As a result of sharp decline in foreign consumer demand, Mexican exports fell drastically in key industries such as the automotive and electrical equipment industries. The Mexican financial sector was strongly affected by volatility. Inflation in 2009 was 3.57%.
However, in 2010, the Mexican economy recovered considerably, with external demand and exports of manufactured goods driving an annual GDP growth of 5.4%, the highest in the past ten years. Mexican GDP grew at a rate of 3.9% in each of 2011 and 2012.
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Factors Affecting Our Results of Operations
Net Sales
Our net sales consist principally of revenue generated from sales of our products and are a function of sales volumes, price and product mix. The principal drivers of sales volumes of our products include:
� available production capacity, including through the acquisition of new production facilities or the expansion of existing plant capacity (see “—Effect of Acquisitions, Dispositions and Capacity Expansion” below);
� our operating rate, the existence or absence of operational disruptions and demand in North America and globally for most of our products by end users, particularly demand for plastic bottles, containers for the food and beverage industries, and construction and packaging material, which indirectly drives demand for our products;
� demand in Mexico for our products, as well as economic growth or contraction in Mexico;
� demand in the Americas and globally for our Polyester Chain Business and other polyester products by end users, particularly demand for plastic bottles and other containers for the food and beverage industries. We believe that PET growth in the U.S. and Canada, although moderating as a result of maturing applications in key markets, the drive toward lighter-weight containers and increased content of recycled material, still offers a large consumption base that relies principally on domestic producers; and
� regional market conditions and the regional supply and demand balance for our Polyester Chain Business products and Plastics & Chemicals Business products, and global trends regarding supply and demand.
The principal factors affecting the price of our products include:
� changes in raw material prices and other price escalators (energy, inflation and labor), which in accordance with industry pricing practices for polyester chain products in North America are reflected in our PTA prices pursuant to the “cost plus” pricing formula for PTA sales described in “Industry—Global Market for polyester value chain products—PTA—Pricing;” these costs are also directly and indirectly reflected in our pricing for PET and polyester staple fiber as we seek to manage the margin between our prices and costs; and
� regional market conditions, the regional supply and demand balance for our products and global trends regarding supply and demand of our products.
Cost of Sales
Our cost of sales consists primarily of raw materials (particularly pX, MEG, propylene, propylene oxide, ethylene oxide, styrene monomer and cyclohexane (together, “main raw materials”)), energy (natural gas, fuel oil, electricity and coal), other catalysts and minor raw materials used in the production processes, labor costs related to production facilities, transportation costs and depreciation and amortization of our plant and equipment. The principal factors that affect our cost of sales include:
� raw material and energy prices, which in the case of our main raw materials are closely related to the price of oil and natural gas;
� high start-up costs associated with new production facilities; and
� our ability to streamline or create efficiencies in production processes.
Realized gains or losses on derivative financial instruments related to commodities designated as hedge accounting are also included in cost of sales.
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Gross Margin
Gross margin is defined as net sales less cost of sales. As described below under “—Key Drivers of Profitability,” the profit margin per ton of our products produced and sold is a key driver of our profitability. Gross margin as a percentage of net sales is a less meaningful measure to us. For example, an increase in cost of sales will normally lead under our pricing practices to increased prices and net sales, and even if the absolute margin on a per ton basis remains constant, the gross margin expressed as a percentage of net sales will decrease in such event.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include a corporate service fee paid to Alfa in respect of administrative and other services provided by Alfa. See “Related Party Transactions.”
Comprehensive Financing (Expense) Income
The components of comprehensive financing (expense) income include:
� interest expense, which is primarily a function of the principal amount of debt outstanding and the interest rates in effect, including the effects of the derivative financial instruments related to interest rates designated as hedge accounting;
� interest income, which includes interest income earned on cash and cash equivalents;
� exchange gain (loss), net, which includes net gains or losses relating to foreign currency exchange rate movements, as further described below under “—Effects of Foreign Currency Exchange Rate Fluctuations”; and
� loss from derivative financial instruments, which reflects changes in the fair market value of derivative financial instruments that from an economic point of view we entered into for hedging purposes but that are designated as held for trading because they do not satisfy the accounting requirements for hedge accounting.
Changes in the fair value of our derivative financial instruments are recognized in comprehensive financing (expense) income, except when designated as a hedge. Their designation as a hedge is documented at the inception of the transaction, specifying the related objective, initial position, risk to be hedged, type of relationship, characteristics, accounting recognition and how their effectiveness will be assessed. Our policy is not to enter into derivative financial instruments for speculative purposes; however, we may enter into derivative financial instruments as an economic hedge against certain business risks, even if these instruments do not qualify for hedge accounting under IFRS.
In connection with our consumption of natural gas, we have entered, and expect to continue to enter, into derivative contracts with various counterparties to protect our financial results against increases in natural gas prices that could negatively affect our costs. Additionally, we use commodities-related derivative financial instruments in order to fix a significant portion of our PET production costs, which, in turn, allows us to offer a fixed price to some of our PET customers.
Effect of Acquisitions, Dispositions and Capacity Expansion
Our results of operations for the periods under review were materially affected by acquisitions, dispositions and capacity expansion.
On August 31, 2011, we completed the acquisition of the PET business of Wellman for US$123 million. The Wellman business consists of a 430,000 ton capacity PET plant located in Bay St. Louis, Mississippi, employing 165 people, as well as technology for PET manufacturing. Our acquisition of this plant from Wellman is one of the most recent investments carried out in the PET industry in North America. This plant is strategically located on the coast of the Gulf of Mexico, close to the main sources of raw materials for the production of PET. Additionally, as a result of the acquisition, we acquired a new group of products and brands that we believe have strong market recognition because of their high quality and performance. See “Business—Wellman Acquisition.”
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On January 31, 2011, we completed the acquisition of the U.S. PTA and PET facilities of Eastman for US$622 million. As a result, we acquired a modern, integrated petrochemical facility consisting of three plants located in Columbia, South Carolina, with a total combined annual capacity of 1.26 million tons, which produce PTA and PET. In connection with the acquisition, we acquired working capital of US$190 million, as well as a series of patents and related intellectual property rights to the IntegRex® PTA and PET production technologies, which we believe are leading production technologies that are less capital intensive than other technologies and provide the lowest production cost per ton of PTA and PET of any technology that is currently available. We also incorporated a complementary, diversified portfolio of PET products, which we believe will allow us to reach a wider customer base and offer a more diversified product portfolio. See “Business—Columbia Assets Acquisition.”
Effect of the Asian CPL Market and Ammonium Sulfate
CPL produced in our Plastics & Chemicals Business is mainly sold in the Asian market. We ship approximately 75% of our CPL production to China, a market with one of the highest growth rates of CPL consumption in the world (13.2% compound annual rate from 2009 to 2012 according to PCI) and which consumes more than one quarter of global CPL production. Chinese CPL demand primarily derives from the textile industry and from demand for industrial uses, with a growing demand for nylon as a textile for the manufacture of women’s underwear and other garments and in the production of tire cords for the growing Asian automotive market. Alpek’s exposure to a downturn in Chinese demand may hamper our results, as was the case in 2008 and 2009 during the recent economic crisis. Nonetheless, it is expected that the growth of demand for CPL in China will outpace the growth in new production capacity.
In the case of ammonium sulfate, we produce approximately 4.5 tons of the fertilizer for each ton of CPL produced. In a typical month, Alpek produces approximately 30 Ktons of ammonium sulfate. We are dependent on regional agricultural cycles and if demand for fertilizers decreases, our margins would be affected and our inventories would increase.
Effect of Consumption in the EPS Market
Alpek, through its strategic alliance with BASF, has the largest EPS production site in the Americas and consequently, as in our other operations, has a low production cost. Alpek sells its broad, high-quality EPS product line in the U.S. and Canadian markets and in some Central and South American and Caribbean markets. During 2008 and 2009, the economic recession resulted in a contraction of the construction and manufacturing industries, affecting the demand for EPS throughout the Americas. However, Alpek experienced a rebound in its EPS volumes since 2010, recovering its operating rates and margins. Alpek currently does not produce cup grade EPS and has instead focused its EPS business in the construction and packaging segments. Therefore, our EPS business is tightly linked to the dynamics of the construction and manufacturing industries in the Americas.
Effects of Foreign Currency Exchange Rate Fluctuations on Results of Operations
Changes in the relative value of the Mexican Peso to the U.S. Dollar have an effect on our results of operations reported in Mexican Pesos. Most of our net sales are either denominated in or linked to the value of the U.S. Dollar. Similarly, a substantial majority of our costs of sales and other selling, general and administrative expenses are either denominated in or linked to the value of the U.S. Dollar, including our purchases of several raw materials and the costs of our operations in the United States. As a result, when the Mexican Peso depreciates against the U.S. Dollar, the same level of U.S. Dollar net sales or expenses in a prior period will result in higher reported net sales or expenses in Mexican Peso terms in the most recent period. Conversely, when the Mexican Peso appreciates against the U.S. Dollar, the same level of U.S. Dollar net sales or expenses in a prior period will result in lower reported net sales or expenses in Mexican Peso terms in the most recent period. In general, a depreciation of the Mexican Peso will likely result in an increase in our operating margins and a real appreciation of the Mexican Peso will likely result in a decrease in our operating margins, in each case, when measured in Mexican Pesos. This is because we have certain expenses in Mexican Pesos such as labor costs in connection with our Mexican operations, and our net sales denominated in or linked to U.S. Dollars exceed our cost of sales and other selling, general and administrative expenses denominated in or linked to U.S. Dollars. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations––Quantitative and Qualitative Disclosures about Market Risk––Derivative Financial Instruments.”
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Effects of Derivative Financial Instruments on Results of Operations
Our results of operations can be significantly impacted by, mark-to-market gains or losses in connection with derivative financial instruments, including natural gas and other commodities-related derivatives. During 2008, we recorded a significant loss relating to the valuation of natural gas and other commodities-related derivatives that we entered into in 2008 in order to protect against then anticipated increases in raw material and energy costs. A substantial decrease in prices of these commodities led to the creation of mark-to-market losses and a significant potential liability in connection with these instruments. While we would expect over time to experience a related decrease in our cost of goods sold due to these decreases in raw material and energy prices (if they were to remain constant), the full savings are not immediately recognized in our financial statements, but the fair value of the liability is required to be recognized immediately. In addition, if we exceed certain thresholds of potential liability, we are required by counterparties to post collateral, which is reflected as restricted cash on the balance sheet and entails additional expense to fund the cash position. As of March 31, 2013 and December 31, 2012 and 2011, we did not have any collateral or restricted cash related to derivative financial instruments. See “—Quantitative and Qualitative Disclosures about Market Risk—Derivative Financial Instruments.”
Limited Seasonality
Our results of operations are not materially affected by seasonality. Although end markets such as water, carbonated soft drinks, food packaging, construction, appliance packaging, certain apparel and fertilizers experience some seasonality, the historical impact on the demand for our products has not been material. Furthermore, our diversified portfolio of products and geographical presence throughout the Americas serve to reduce the effects of any steep cyclical or seasonal behavior in the demand for any of our products.
Key Drivers of Profitability
Key drivers of our profitability include:
� Profit margin per ton produced. The profit margin per ton of our products produced and sold is a key driver of our profitability. With respect to the Polyester Chain Business, the historical industry practice in North America of pricing PTA on a “cost plus” basis has allowed us to define through negotiation with our customers the margin on the PTA production we sell with regard to our most significant (but not all) costs. In the case of PET, a significant portion of the volume of our expected 2013 PET production has been committed to customers pursuant to annual sales contracts with fixed price arrangements; we will seek to follow the same practice in 2013. For these fixed price arrangements, we seek to ensure a desired margin between the price and our own raw material and other costs by entering into arrangements with our suppliers of raw materials or by entering into financial derivatives related to commodities. For the Plastics & Chemicals Business, we follow market pricing dynamics, which are affected by the supply and demand balance and the price fluctuations of raw materials. We aim to maintain the margin of our products by passing through to our customers any effects on our cost bases. In the case of PP, we have contracts with several converters in the larger segments of the market that are linked to market propylene prices in the U.S. Gulf Coast.
� Production and capacity operating rate. Because of the significant fixed cost that is required to operate our production facilities, a certain level of production is required for a production facility to break even. Thus, we seek to operate at a high operating rate, which allows us to increase profitability by leveraging our fixed-cost base (i.e., obtain an incremental profit per ton produced and sold without an incremental increase in fixed costs).
� Large-scale and low-cost production. In general, Alpek has traditionally focused on achieving large-scale, low-cost competitiveness. We believe many of our operations are positioned among the lowest cost producers of the industries in which we participate.
Critical Accounting Policies
We have identified certain key accounting estimates on which our financial condition and results of operations are dependent. These key accounting estimates most often involve complex matters or are based on subjective
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judgments or decisions that require management to make estimates and assumptions which affected the amounts reported in the financial statements. We base our estimates on historical information, where applicable and other assumptions that we believe are reasonable under the circumstances.
Actual results may differ from our estimates under different assumptions or conditions. In addition, estimates routinely require adjustments based on changing circumstances and the receipt of new or more accurate information. In the opinion of our management, our most critical accounting estimates under IFRS are those that require management to make estimates and assumptions that affect the reported amounts related to the accounting for fair value of derivatives and other financial instruments, valuation of non-current assets, goodwill, other intangible assets, income taxes and employee benefit obligations. For a full description of all of our accounting policies, see our Annual Audited Financial Statements and Interim Unaudited Financial Statements included in this offering memorandum.
There are certain critical estimates that we believe required significant judgment in the preparation of our financial statements. We consider an accounting estimate to be critical if:
� it requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and
� changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.
Non-current Assets
We review the estimates for useful lives of fixed assets in order to determine depreciation and amortization expense to be recorded during any reporting period. The useful life of an asset is estimated at the time the asset is acquired and is based on historical experience with similar assets, taking into account anticipated technological or other changes. If technological changes were to occur more rapidly than anticipated, or in a different form than anticipated, the useful lives assigned to these assets may need to be shortened. This would result in the recognition of increased depreciation and amortization expense in future periods. Alternatively, these types of technological changes could result in the recognition of an impairment charge to reflect the write-down in the asset’s value. We review assets for impairment annually, or when events or circumstances indicate that the carrying amount may not be recoverable over the remaining lives of the assets.
In assessing impairments we use cash flows, which take into account our management’s estimates of future operations, including estimates of revenues, costs, operating expenses, capital expenditures and debt service. In accordance with IFRS, if an evaluation is required, the estimated future discounted cash flows associated with an asset would be compared to the asset’s carrying value to determine if an asset is impaired, in which case the asset is written down to its fair value. No impairment existed at January 1, 2011, December 31, 2011 and 2012 and March 31, 2013.
Basis for Consolidation and Combination
The financial statements include the assets, liabilities and results of all entities in which we have a controlling interest after the Corporate Reorganization. The significant outstanding balances and transactions between companies have been eliminated in the combination and consolidation. Please see Note 1 to the Annual Audited Financial Statements included in this offering memorandum. To determine control as of December 31, 2012, we analyzed whether or not we have the power to govern the strategic financial and operating policies of the respective entity, and not only power over the portion of the equity we own. As a result of this analysis, we have exercised critical judgment in determining whether to combine or consolidate the financial statements of Polioles, as applicable, where the determination of control is not straightforward.
IFRS 10 “Consolidated financial statements” was issued in May 2011 and replaces all the guidance on control and consolidation in IAS 27 “Consolidated and separate financial statements” and SIC-12 “Consolidation – special purpose entities”. This standard became effective as of January 1, 2013 and was applied to the Interim Unaudited Financial Statements. Under IFRS 10, subsidiaries are considered to be all entities (including structured entities) over which we have control. We control an entity when we have power over an entity, we are exposed to, or have
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rights to, variable returns from our involvement with such entity and we have the ability to affect these returns through our power over such entity. Subsidiaries are fully consolidated from the date on which control of such entity is transferred to us and they are deconsolidated from the date on which we cease to have control over such entity.
Our management reached the conclusion for both the Annual Audited Financial Statements and the Interim Unaudited Financial Statements that there are factors and circumstances described in the by-laws of Polioles and applicable law that allow Alpek to carry out the daily operations of Polioles and therefore to demonstrate control. We will continue assessing these circumstances at each balance sheet date to determine whether or not this critical judgment will continue to be appropriate. If we determine that we no longer control Polioles, Polioles would need to be deconsolidated and accounted for under the equity method according to the accounting rules in effect at such date. The significant outstanding balances and transactions between companies have been eliminated in the consolidation and combination.
Deferred Income Taxes
As part of the process of preparing our financial statements, we are required to estimate our income taxes. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from differing item treatment, such as allowance for doubtful accounts, deferred assets, inventories, property, machinery and equipment, accrued expenses and tax loss carryforwards, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered.
Significant management judgment is required in determining our provision for income taxes, our deferred income tax assets and deferred income tax liabilities.
Financial Instruments Measured at Fair Value
The fair value of financial instruments is determined based upon liquid market prices evidenced by exchange traded prices, broker-dealer quotations or prices of other transactions with similarly rated counterparties. If available, quoted market prices provide the best indication of value. If quoted market prices are not available for fixed maturity securities and derivatives, we discount expected cash flows using market interest rates commensurate with the credit quality and maturity of the investment.
Derivative financial instruments used for hedging are designated either as cash-flow hedges or fair value hedges. The changes in the fair value of cash flow hedges are reported in other comprehensive income, while the changes in the fair value of fair value hedges (along with the change in the fair value of the hedged item) are recorded in earnings. Fair value amounts are based on either quoted market prices or estimated values derived utilizing dealer quotes or internally generated modeling techniques.
As market conditions change, adjustments to the fair value of these derivatives are made to reflect those conditions. In addition, hedging effectiveness needs to be evaluated on a periodic basis and to the extent the hedge is not deemed effective, hedge accounting ceases to be applied. Actual settlements of these derivatives will reflect the market conditions at the time and may differ significantly from the estimated fair market value reflected on the balance sheet.
The degree of management’s judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices. When observable market prices and parameters do not exist, management’s judgment is necessary to estimate fair value, in terms of estimating the future cash flows, based on variable terms of the instruments and the credit risk and in defining the applicable interest rate to discount those cash flows.
Pensions
The present value of obligations related to our pensions relies on factors determined on the basis of actuarial valuations that use a series of assumptions. The assumptions used in determining the net cost for the period and obligations arising from our pension obligations include the use of discount rates, future salary increases, personnel
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turnover rates and mortality rates, among others. Any changes in these assumptions will impact the book value of the related obligations.
We determine the proper discount rate (the interest rate to be used in determining the present value of future disbursements, estimated to be required to settle pension obligations) at the end of each year. To determine the proper discount rate, we consider the interest rate in accordance with IAS 19 (Revised) denominated in the same currency as that of the benefits to be paid and which have maturity terms closely resembling those of our pension obligations.
Results of Operations
The following financial information has been derived from our Interim Unaudited Financial Statements, prepared in accordance with IAS 34.
Three Months Ended March 31,
Percent Change
2012 Percent of Net Sales 2013
Percent of Net Sales
2013vs. 2012
(in thousands of Pesos, except percentages) Net sales .......................................................... 24,828,722 100.0 23,283,622 100.0 (6.2)Cost of sales ..................................................... (22,235,726) (89.6) (21,331,791) (91.6) (4.1)Gross profit ...................................................... 2,592,995 10.4 1,951,831 8.4 (24.7)Selling and administrative expenses ................. (569,088) (2.3) (508,823) (2.2) (10.6)Other income (expenses), net ........................... 12,711 0.1 79,873 0.3 528.4 Operating profit ................................................ 2,036,618 8.2 1,522,880 6.5 (25.2)
Financial income ........................................ 435,355 1.8 130,396 0.6 (70.0)Financial expenses ..................................... (398,821) (1.6) (247,135) (1.1) (38.0)
Comprehensive financing expense, net ............ 36,534 0.1 (116,739) (0.5) (419.5)Share of losses of associates ............................. (7,949) (0.0) (11,281) (0.0) 41.9 Profit before income tax ................................... 2,065,204 8.3 1,394,860 6.0 (32.5)Income tax ........................................................ (812,999) (3.3) (415,242) (1.8) (48.9)Profit for the period .......................................... 1,252,205 5.0 979,618 4.2 (21.8)Adjusted EBITDA(1) ......................................... 2,549,695 10.3 2,034,844 8.7 (20.2)
___________________ (1) For a definition of Adjusted EBITDA, see “Presentation of Financial and Certain Other Information––Non-GAAP Financial
Measures.”
The following table shows the net sales breakdown by business segment for the three months ended March 31, 2012 and 2013:
Three Months Ended March 31,
Percent Change
2012
Percent of Net Sales 2013
Percent of Net Sales
2013 vs. 2012
(in thousands of Pesos, except percentages)
Net sales of Polyester Chain Business .............. 19,604,494 79.0 18,155,105 78.0 (7.4)
Net sales of Plastics & Chemicals Business ..... 5,242,815 21.1 5,171,158 22.2 (1.4)
Intercompany eliminations(1) ............................ (18,588) (0.1) (42,641) (0.2) 129.4
Total net sales .................................................. 24,828,722 100.0 23,283,622 100.0 (6.2)
_____________________ (1) Substantially all intercompany eliminations between the business segments relate to net sales of MEG.
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The following table shows the net sales breakdown by country of origin for the three months ended March 31, 2012 and 2013, including intercompany sales:
Three Months Ended March 31, Percent Change
2012 Percent of Net Sales 2013
Percent of Net Sales
2013 vs. 2012
(in thousands of Pesos, except percentages)
Mexico ............................................................ 14,158,216 57.0 12,748,040 54.8 (10.0)
United States ................................................... 9,548,462 38.5 9,360,195 40.2 (2.0)
Argentina ......................................................... 1,122,043 4.5 1,175,387 5.0 4.8
Net sales .......................................................... 24,828,722 100.0 23,283,622 100.0 (6.2)
The following table shows the sales volume breakdown by business segment, including the sales volume
breakdown by product for each business segment, for the three months ended March 31, 2012 and 2013, including intercompany sales volume:
Three Months Ended March 31, Percent Change
2012 Percent of
Total Volume 2013 Percent of
Total Volume 2013 vs
2012 (in thousands of tons, except percentages)
PTA............................................................. 341 33.4 317 33.1 (6.9) PET ............................................................. 393 38.5 376 39.3 (4.4) Polyester fibers ........................................... 83 8.1 73 7.6 (12.2)
Total sales volume of Polyester Chain Business ...........................................................
817 80.0 766 80.0 (6.2)
PP ............................................................... 92 9.0 91 9.5 (0.6) CPL ............................................................ 21 2.0 21 2.2 2.2 Other .......................................................... 93 9.1 80 8.3 (14.0)
Total sales volume of Plastics & Chemicals Business ..........................................
205 20.0 192 20.0 (6.4)
Total sales volume ............................................ 1,021 100.0 957 100.0 (6.3)
The following financial information has been derived from our Annual Audited Financial Statements, prepared in accordance with IFRS:
Year Ended December 31,
Percent Change
2011 Percent of Net Sales 2012
Percent of Net Sales
2012vs. 2011
(in thousands of Pesos, except percentages) Net sales .......................................................... 90,666,561 100.0 96,163,456 100.0 6.1 Cost of sales ..................................................... (80,653,169) (89.0) (86,766,709) (90.2) 7.6 Gross profit ...................................................... 10,013,392 11.0 9,396,747 9.8 (6.2)Selling and administrative expenses ................. (2,099,344) (2.3) (2,231,170) (2.3) 6.3 Other income (expenses), net ........................... (325,483) (0.4) 310,836 0.3 (195.5)Operating profit ................................................ 7,588,566 8.4 7,476,413 7.8 (1.5)
Financial income ........................................ 224,508 0.2 565,717 0.6 152.0Financial expenses ..................................... (1,414,730) (1.6) (1,896,979) (2.0) 34.1
Comprehensive financing expense, net ............ (1,190,223) (1.3) (1,331,263) (1.4) 11.8 Share of losses of associates ............................. (22,965) (0.0) (39,055) (0.0) 70.1 Profit before income tax ................................... 6,375,379 7.0 6,106,095 6.3 (4.2)Income tax ........................................................ (1,947,625) (2.1) (1,723,293) (1.8) (11.5)Profit for the period .......................................... 4,427,753 4.9 4,382,802 4.6 (1.0)Adjusted EBITDA(1) ......................................... 9,545,239 10.5 9,610,585 10.0 0.7
___________________ (1) For a definition of Adjusted EBITDA, see “Presentation of Financial and Certain Other Information––Non-GAAP Financial
Measures.”
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The following table shows the net sales breakdown by business segment for the years ended December 31, 2011
and 2012:
Year Ended December 31,
Percent Change
2011
Percent of Net Sales 2012
Percent of Net Sales
2012 vs. 2011
(in thousands of Pesos, except percentages)
Net sales of Polyester Chain Business .............. 70,050,476 77.3 75,249,207 78.3 7.4
Net sales of Plastics & Chemicals Business ..... 20,780,932 22.9 21,068,326 21.9 1.4
Intercompany eliminations(1) ............................ (164,847) (0.2) (154,077) (0.2) (6.5)
Total net sales .................................................. 90,666,561 100.0 96,163,456 100.0 6.1
_____________________ (1) Substantially all intercompany eliminations between the business segments relate to net sales of MEG.
The following table shows the net sales breakdown by country of origin for 2011 and 2012, including intercompany sales:
Year Ended December 31, Percent Change
2011 Percent of Net Sales 2012
Percent of Net Sales
2012 vs. 2011
(in thousands of Pesos, except percentages)
Mexico ............................................................ 53,141,774 58.6 53,456,432 55.6 0.6
United States ................................................... 33,362,928 36.8 38,608,848 40.1 15.7
Argentina ......................................................... 4,161,858 4.6 4,098,176 4.3 (1.5)
Net sales .......................................................... 90,666,561 100.0 96,163,456 100.0 6.1
The following table shows the sales volume breakdown by business segment, including the sales volume breakdown by product for each business segment, for 2011 and 2012, including intercompany sales volume:
Year Ended December 31, Percent Change
2011 Percent of
Total Volume 2012 Percent of
Total Volume 2012 vs
2011 (in thousands of tons, except percentages)
PTA............................................................. 1,329 34.3 1,369 33.5 3.0 PET ............................................................. 1,418 36.6 1,572 38.5 10.9 Polyester fibers ........................................... 337 8.7 322 7.9 (4.7)
Total sales volume of Polyester Chain Business ...........................................................
3,084 79.6 3,263 79.9 5.8
PP ............................................................... 334 8.6 398 9.7 19.0 CPL ............................................................ 92 2.4 86 2.1 (6.9) Other .......................................................... 363 9.4 339 8.3 (6.6)
Total sales volume of Plastics & Chemicals Business ..........................................
790 20.4 823 20.1 4.2
Total sales volume ............................................ 3,874 100.0 4,086 100.0 5.5
Three Months Ended March 31, 2013 Compared to the Three Months Ended March 31, 2012
Net Sales by Business Segment
Net sales of the Polyester Chain Business for the three months ended March 31, 2013, including intercompany sales, were Ps.18,155 million, a decrease of 7.4% from the Ps. 19,604 million reported for the same period in 2012. This decrease was due to a 6.2% decrease in sales volume due in part to the temporary interruption in production
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during January and February 2013 as a result of a debottleneck project in our Columbia facility conducted to increase our PET capacity. Net sales in Mexican pesos were negatively impacted by an appreciation of the Mexican peso against the U.S. Dollar.
Net sales of the Plastics & Chemicals Business for the three months ended March 31, 2013, including intercompany sales, were Ps. 5,171 million, a decrease of 1.4% from the Ps. 5,243 million reported for the same period in 2012. This decrease was primarily due to a 6.4% decrease in sales volume as a result of lower EPS, caprolactam and PP demand. This decrease was partially offset by an increase in prices on a consolidated basis. Net sales in Mexican pesos were negatively impacted by an appreciation of the Mexican peso against the U.S. Dollar.
Net Sales by Country of Origin
Net sales from Mexico for the three months ended March 31, 2013 were Ps. 12,748 million, a decrease of 10.0% from the Ps. 14,158 million reported for the same period in 2012. This decrease was primarily due to lower sales of Polyester Chain Business products as well as lower EPS demand in Mexico and lower caprolactam exports. Net sales in Mexican pesos were negatively impacted by an appreciation of the Mexican peso against the U.S. Dollar.
Net sales from the United States for the three months ended March 31, 2013 were Ps. 9,360 million, a decrease of 2.0% from the Ps. 9,548 million reported for the same period in 2012. This decrease was due in part to a decrease in sales volume due to the temporary interruption of our Columbia facility’s IntegRex® PET line during January and February 2013 as part of a debottleneck project conducted to increase our PET capacity. Net sales in Mexican pesos were negatively impacted by an appreciation of the Mexican peso against the U.S. Dollar.
Net sales from Argentina for the three months ended March 31, 2013 were Ps. 1,175 million, an increase of 4.8% from the Ps. 1,122 million reported for the same period in 2012. This increase was primarily due to an increase in product prices as sales volume remained relatively stable.
General
Net sales for the three months ended March 31, 2013 were Ps. 23,284 million, a decrease of 6.2% from the Ps. 24,829 million reported for the same period in 2012. This decrease was due to a 6.3% decrease in sales volume partially related to the temporary interruption of our Columbia facility’s IntegRex® PET line during January and February 2013 as part of a debottleneck project conducted to increase our PET capacity. The decline in sales volume also reflects lower EPS, caprolactam and Polypropylene demand. Net sales in Mexican pesos were negatively impacted by an appreciation of the Mexican peso against the U.S. Dollar.
Cost of sales for the three months ended March 31, 2013 was Ps. 21,332 million, a decrease of 4.1% from the Ps. 22,236 million reported for the same period in 2012. This decrease was primarily due to a decrease in sales volume, partially offset by a 5% increase in the average published price of pX.
Gross profit, defined as the difference between net sales and cost of sales, for the three months ended March 31, 2013 was Ps. 1,952 million, a decrease of 24.7% from the Ps. 2,593 million reported for the same period in 2012. This decrease was primarily due to the factors described above.
Selling and administrative expenses for the three months ended March 31, 2013 were Ps. 509 million, a decrease of 10.6% from the Ps. 569 million reported for the same period in 2012. This decrease was primarily due to an appreciation of the Mexican peso and to the elimination of certain administrative expenses on a consolidated basis.
Other income, net for the three months ended March 31, 2013 was Ps. 80 million, an increase of 528% from the Ps. 13 million reported for the same period in 2012. This increase was primarily due to a favorable valuation of our commodities-related derivative financial instruments. There was a reclassification for the valuation of the commodities-related derivative financial instruments from comprehensive financing expense, net into other income (expense), net starting on September 2012.
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Operating profit for the three months ended March 31, 2013 was Ps. 1,523 million, a decrease of 25.2% from the Ps. 2,037 million reported for the same period in 2012. This decrease was primarily due to a decrease in gross profit.
Comprehensive financing expense, net for the three months ended March 31, 2013 reflected an expense of Ps. 117 million, compared to an income of Ps. 37 million reported for the same period in 2012. This change was primarily due to a less favorable valuation of our derivative financial instruments and the reclassification for the valuation of commodities-related derivative financial instruments, partially offset by a decrease in financial expenses related to servicing our debt.
Income tax for the three months ended March 31, 2013 was Ps. 415 million, a decrease of 48.9% from the Ps. 813 million reported for the same period in 2012. This decrease was primarily due to a decrease in income before taxes, resulting in an effective tax rate of 30% for the three months ended March 31, 2013.
Profit for the period for the three months ended March 31, 2013 was Ps. 980 million, a decrease of 21.8% from the Ps. 1,252 million reported for the same period in 2012. This decrease was primarily due to the reduction in operating profit and a comprehensive financing expense, net, offset by a reduction in income tax.
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Net Sales by Business Segment
Net sales of the Polyester Chain Business for the year ended December 31, 2012, including intercompany sales, were Ps. 75,249 million, an increase of 7.4% from the Ps. 70,050 million reported for the same period in 2011. This increase was primarily due to a 5.8% increase in sales volume, mainly as a result of the integration of the acquisitions we made in 2011 and stable demand for our products in the North American region. The increase in sales volume was partially offset by the effects of Hurricane Isaac in August 2012 and the interruption of an important customer’s production during the third quarter of 2012.
Net sales of the Plastics & Chemicals Business for the year ended December 31, 2012, including intercompany sales, were Ps. 21,068 million, an increase of 1.4% from the Ps. 20,781 million reported for the same period in 2011. This increase was primarily due to a 4.2% sales volume growth, mainly driven by an increase in PP sales volume resulting from an improved propylene feedstock supply. Sales volume growth was partially offset by a generalized decline in prices. Net sales in Mexican pesos were positively impacted by a depreciation of the Mexican peso.
Net Sales by Country of Origin
Net sales from Mexico for the year ended December 31, 2012 were Ps. 53,456 million, an increase of 0.6% from the Ps. 53,142 million reported for the same period in 2011. Sales growth was negatively impacted by an adjustment in the PTA price formula in North America as well as a month-long outage of a major Polyester customer in Mexico during the third quarter 2012. Net sales in Mexican pesos were positively impacted by a depreciation of the Mexican peso.
Net sales from the United States for the year ended December 31, 2012 were Ps. 38,609 million, an increase of 15.7% from the Ps. 33,363 million reported for the same period in 2011. This increase was primarily due to the inclusion of the operations from the Wellman acquisition and the operations from the Columbia Assets, resulting in an increase in sales volume. This increase was partially offset by the effects of weather related events, including Hurricane Isaac, during 2012.
Net sales from Argentina for the year ended December 31, 2012 were Ps. 4,098 million, a decrease of 1.5% from the Ps. 4,162 million reported for the same period in 2011. This decrease was primarily due to a decrease in sales volume and product prices.
General
Net sales for the year ended December 31, 2012 were Ps. 96,163 million, an increase of 6.1% from the Ps. 90,667 million reported for the same period in 2011. This increase was primarily due to a 5.5% increase in sales volume, mainly due to the integration of acquisitions made in 2011 and an increase in PP sales volume. The growth
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in sales volume was partially offset by a decline in the prices of petrochemical products and an adjustment in the PTA price formula in North America during 2012.
Cost of sales for the year ended December 31, 2012 was Ps. 86,767 million, an increase of 7.6% from the Ps. 80,653 million reported for the same period in 2011. This increase was primarily due to an increase in sales volume resulting primarily from the integration of our acquisitions in 2011, partially offset by a decrease in raw material prices on a consolidated basis. Cost of sales in Mexican pesos was negatively impacted by a depreciation of the Mexican peso.
Gross profit, defined as the difference between net sales and cost of sales, for the year ended December 31, 2012 was Ps. 9,397 million, a decrease of 6.2% from the Ps. 10,013 million reported for the same period in 2011. This decrease was primarily due to the contraction in margins of caprolactam and other export products, as well as an adjustment in the PTA price formula in North America during 2012.
Selling and administrative expenses for the year ended December 31, 2012 were Ps. 2,231 million, an increase of 6.3% from the Ps. 2,099 million reported for the same period in 2011. This increase was primarily due to higher expenses in the United States associated with the transition and post-merger integration process related to the Columbia Assets and the Wellman acquisitions. Expenses in Mexican pesos were negatively impacted by a depreciation of the Mexican peso.
Other income (expense), net for the year ended December 31, 2012 was an income of Ps. 311 million, compared to an expense of Ps. 325 million reported for the same period in 2011. This change was primarily due to a favorable valuation of our commodities-related derivative financial instruments of Ps. 152 million. Since September 30, 2012, the valuation of the commodities-related derivative financial instruments was reclassified from comprehensive financing expense, net into other income (expense), net.
Operating profit for the year ended December 31, 2012 was Ps. 7,476 million, a decrease of 1.5% from the Ps. 7,589 million reported for the same period in 2011. This decrease was primarily due to the contraction in margins of caprolactam and other export products, an adjustment in the PTA price formula in North America during 2012 and certain non-recurring events, such as Hurricane Isaac. This decrease was partially offset by an increase in margins of expandable polystyrene and polyurethane.
Comprehensive financing expense, net for the year ended December 31, 2012 reflected an expense of Ps. 1,331 million, compared to an expense of Ps. 1,190 million reported for the same period in 2011. This change was primarily due to an increase in financial expenses related to debt prepayments including the partial prepayment of the 2014 International Notes, partially offset by an increase in financial income, a positive foreign currency impact and a favorable valuation of our derivative financial instruments.
Income tax for the year ended December 31, 2012 was Ps. 1,723 million, a decrease of 11.5% from the Ps. 1,948 million reported for the same period in 2011. This decrease was primarily due to the decrease in income before taxes and the recognition of certain tax losses that reduced our tax amount, resulting in an effective tax rate of 28% for the year ended December 31, 2012.
Profit for the period for the year ended December 31, 2012 was Ps. 4,383 million, a decrease of 1.0% from the Ps. 4,428 million reported for the same period in 2011. This decrease was primarily due to the reduction in operating profit and an increase in comprehensive financing expense, net, partially offset by the reduction in income tax.
New Accounting Policies and Standards
As of January 1, 2012 we adopted IFRS for the preparation of our consolidated and combined financial statements. New pronouncements and amendments issued but not yet effective for periods starting January 1, 2013 and that had not been adopted by us as of December 31, 2012 include:
IFRS 7, “Financial Instruments: Disclosures”. In October 2012 the IASB amended IFRS 7, “Financial instruments: Disclosures”. The standard amends the required disclosures to enable users of the financial statements
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to evaluate risk exposure related to transfers of financial assets and the effect of these risks on the financial position of the entity. This amendment became effective for us on January 1, 2013.
IAS 1, “Presentation of Financial Statements”. In June 2011 the IASB amended IAS 1, “Presentation of financial statements”. The main change resulting from this modification is the requirement to group items presented in other comprehensive income, on the basis of whether they are potentially reclassified to the income statement in later years. The amendments do not consider which items are presented in other comprehensive income. This amendment became effective for us on January 1, 2013.
IFRS 9, “Financial Instruments”. IFRS 9, “Financial Instruments” was issued in November 2009 and contained requirements for classification and measurement of financial assets. Requirements for financial liabilities were included as part of IFRS 9 in October 2010. Most of the requirements for financial liabilities were taken from IAS 39 without making any changes. However, some amendments were made to the fair value option for financial liabilities to include own credit risk. In December 2011, the IASB made amendments to IFRS 9 to require its application for annual periods beginning on or after January 1, 2015.
IFRS 10, “Consolidated Financial Statements”. In May 2011 the IASB issued IFRS 10, “Consolidated Financial Statements”. This standard outlines the principles for the presentation of consolidated financial statements when an entity controls one or more entities. IFRS 10 defines the principle of control and establishes control as the basis for determining the entities to be consolidated in the financial statements. The standard also includes the accounting requirements for the preparation of the consolidated financial statements, as well as the requirements for application of the principle of control. IFRS 10 replaces IAS 27, “Consolidated and separate financial statements” and SIC 12 “Consolidation – Special purpose entities” and became effective for us on January 1, 2013.
IFRS 11, “Joint Arrangements”. In May 2011 the IASB issued IFRS 11 “Joint Arrangements”. IFRS 11 classifies joint arrangements into two types: joint operations and joint ventures. The entity determines the type of joint arrangement in which it participates considering their rights and obligations. Joint operations arise where a joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement and hence equity accounts for its interest. In a joint venture, an investment is recognized and recorded using the equity method. This amendment became effective for us on January 1, 2013.
IFRS 12, “Disclosure of Interest in Other Entities”. The IASB issued IFRS 12, "Disclosure of Interests in Other Entities" in May 2011. IFRS 12 requires an entity to disclose information to evaluate the nature and risks associated with its interests in other entities, including joint arrangements, associates and special purpose entities. IFRS 12 became effective for us on January 1, 2013.
IFRS 13, “Fair Value Measurement”. In May 2011 the IASB issued IFRS 13, "Fair Value Measurements". The objective of IFRS 13 is to provide a precise definition of fair value and be a single source for the measurement and disclosure requirements for fair value when it is required or permitted by other IFRSs. This amendment became effective for us on January 1, 2013.
IAS 19, “Employee Benefits”. In June 2011 the IASB amended IAS 19, "Employee Benefits". The amendments eliminate the corridor method and show the calculation of interest expense on a net basis. This amendment became effective for us on January 1, 2013.
IAS 27, “Separate Financial Statements”. In May 2011 the IASB amended IAS 27 under a new title "Separate Financial Statements". This standard includes guidelines for separate financial statements that remained in place after the control provisions were included in IFRS 10. This standard became effective for us on January 1, 2013.
IAS 28, “Investments in Associates and Joint Ventures”. In May 2011 the IASB amended IAS 28 under a new heading "Investments in Associates and Joint Ventures". The new standard includes requirements for joint ventures and associates for recognition in accordance with the equity method. IAS 28 became effective for us on January 1, 2013.
IAS 32 (amended) “Financial instruments: Presentation, offsetting of assets and liabilities”. These amendments are the application guidance of IAS 32 and clarify some of the requirements for offsetting financial assets and
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financial liabilities in the statement of financial position. These amendments to IAS 32 become effective for annual periods beginning on or after January 1, 2014.
Our management believes that the adoption of the new standards and amendments discussed above will have no significant impact on our financial statements.
Liquidity and Capital Resources
Overview
Historically, we have generated and expect to continue to generate positive cash flow from operations. Cash flow from operations primarily represents inflows from net earnings (adjusted for depreciation and other non-cash items) and outflows from increases in working capital needed to grow our business. Cash flow used in investing activities represents our investment in property and capital equipment required for our growth, as well as our acquisition activity. Cash flow from financing activities is primarily related to changes in indebtedness borrowed to grow the business or indebtedness repaid with cash from operations or refinancing transactions as well as dividends paid.
Our principal capital needs are for working capital, capital expenditures related to maintenance, expansion and acquisitions and debt service. Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations, overall capacity and terms of financing arrangements and our access to the capital markets. We believe that our future cash from operations together with our access to funds available under such financing arrangements and the capital markets will provide adequate resources to fund our foreseeable operating requirements, capital expenditures, acquisitions and new business development activities.
Liquidity
We are a holding company and, as such, have no operations of our own. Our ability to meet our obligations is primarily dependent on the earnings and cash flows of our subsidiaries and the ability of those subsidiaries to pay us interest or principal payments on intercompany loans, dividends or other amounts.
The following table shows the generation and use of cash in 2011 and 2012 and in the three months ended March 31, 2012 and 2013.
Year Ended December 31, Three Months Ended March
31,
2011 2012 2012 2013
(in thousands of Pesos) Net resources provided by operating activities ................................ 4,662,153 5,483,404 1,136,770 639,208
Net resources (used in) investing activities ..................................... (9,440,156) (1,805,227) (148,150) (981,879)
Net resources provided by (used in) financing activities ................. 4,862,178 (280,122) (1,440,246) (1,273,195)
Cash and cash equivalents at period end (1) ...................................... 3,586,212 6,657,552 2,941,245 4,835,342
_____________________ (1) Includes restricted cash.
On April 26, 2013, pursuant to a license agreement, Indelpro exercised its option to pay Basell Poliolefine Italia S. r. L., (“Basell Poliolefine”) a subsidiary of LyondellBasell (which owns 49% of Indelpro), a lump sum royalty amount of US$21 million in connection to the use of the Spherizone® technology at its second polypropylene production line, which began operations in 2008.
Operating Activities
In the three months ended March 31, 2013, net resources provided by operating activities were Ps. 639 million, primarily attributable to the profit for the period, partially offset by investments in working capital and the payment of taxes.
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In 2012, net resources provided by operating activities were Ps. 5,483 million, primarily attributable to higher sales volume, mainly due to the integration of the Columbia Assets and Wellman acquisition, partially offset by investments in working capital and the payment of taxes.
In 2011, net resources provided by operating activities were Ps. 4,662 million, primarily attributable to higher sales volume and margins, partially offset by higher investments in working capital and the payment of taxes, in each case due to the integration of the Columbia Assets and Wellman.
Investing Activities
In the three months ended March 31, 2013, net resources used in investing activities were Ps. 982 million, primarily attributable to a payment of US$35 million to Gruppo Mossi & Ghisolfi (“M&G”) as part of the contractual rights to receive 400 thousand tons of PET under M&G’s new integrated PTA-PET plant to be constructed in Corpus Christi, Texas (the “M&G Facility”), the construction of a cogeneration plant in Cosoleacaque, Veracruz and the completion PET debottleneck project at the Columbia site.
In 2012, net resources used in investing activities were Ps. 1,805 million, primarily attributable to the construction of a cogeneration plant in Cosoleacaque, Veracruz and a PET debottleneck project at the Columbia site.
In 2011, net resources used in investing activities were Ps. 9,440 million and primarily comprised the resources used for the acquisition of the Columbia Assets and Wellman.
Financing Activities
In the three months ended March 31, 2013, net resources used in financing activities were Ps. 1,273 million, primarily attributable to the payment of dividends.
In 2012, net resources used in financing activities of Ps. 280 million, primarily attributable to a reduction of our debt by Ps. 5,246 million compared to 2011, the payment of dividends and debt service. In April 2012, we received approximately Ps. 10,155 million from an initial public offering of common shares.
In 2011, net resources provided by financing activities of Ps. 4,862 million were used mainly for the financing of the Columbia Assets and Wellman acquisitions.
In 2012 and 2011 we paid dividends of Ps. 2,298 million and Ps. 1,679 million, respectively. In February 2013, we approved dividends of US$114 million. In the three months ended March 31, 2013, we paid dividends of Ps. 1,210 million and as of March 31, 2013, we had dividends payable of Ps. 576 million.
Indebtedness
The following table shows the indebtedness as of December 31, 2011 and 2012 and as March 31, 2012 and 2013:
December 31, March 31,
2011 2012 2012 2013
(Unaudited)
(in thousands of Pesos) Current debt ......................................... 1,650,723 360,457 1,637,071 431,543 Current portion of long-term debt ........ 491,251 140,184 801,680 179,759 Non-current debt .................................. 17,544,786 13,939,767 15,688,530 13,215,468 Total Debt ............................................ 19,686,759 14,440,408 18,127,281 13,826,770
At March 31, 2013, we had total indebtedness of Ps. 13,827 million (US$1,119 million), of which 98.7% was
denominated in U.S. Dollars. Of this amount, Ps. 611 million (US$49 million) constituted short-term debt and Ps. 1,539 million (US$125 million) constituted floating rate debt. Of our total indebtedness, Ps. 7,936 million (US$642 million) was incurred by Alpek, Ps. 3,730 million (US$302 million) was incurred by Petrotemex, Ps. 774 million (US$63 million) was incurred by Indelpro, Ps. 840 million (US$68 million) was incurred by Polioles and Ps. 546
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million (US$44 million) was incurred by Unimor. The primary use of our debt has been to fund acquisitions and capital expenditures. As of March 31, 2013, we had available committed credit lines under which we may borrow up to US$310 million to finance our working capital and other requirements; as of March 31, 2013, we had borrowed approximately US$8 million under these credit lines.
We are currently in compliance with our obligations under our and our subsidiaries’ credit agreements and indentures; such obligations, among other conditions and subject to certain exceptions, either require or limit our and our subsidiaries’ ability to:
• disclose certain financial information;
• maintain accounting books and registries;
• maintain assets in good condition;
• comply with applicable laws and regulations;
• enter into transactions with affiliates;
• effect a consolidation, merger or purchase of all or substantially all of the assets;
• create liens on assets;
• dispose of assets;
• pay dividends;
• incur additional debt;
• carry out sale and lease-back operations; and
• maintain certain financial ratios
The following description summarizes material terms of certain of our and our subsidiaries credit arrangements, including a description of certain covenants contained in such credit arrangements. We are currently in compliance with these covenants. The following description is only a summary and does not purport to describe all of the terms of the credit arrangements that may be important.
International Bonds
2022 International Notes In November 2012, Alpek issued notes in the international capital markets in an aggregate principal amount of
US$650 million. The 2022 International Notes bear interest at a rate of 4.50% per annum, which is payable on May 20 and November 20 of each year. The 2022 International Notes mature on November 20, 2022. The outstanding amount of the 2022 International Notes as of March 31, 2013 was US$650 million.
The indenture governing the 2022 International Notes contains customary events of default. Alpek’s obligations under the 2022 International Notes are guaranteed by the following subsidiaries: (i) Grupo Petrotemex, S.A. de C.V., (ii) DAK Americas LLC, (iii) DAK Resinas Americas Mexico, S.A. de C.V., (iv) Tereftalatos Mexicanos, S.A. de C.V., (v) Akra Polyester, S.A. de C.V. and (vi) DAK Americas Mississippi, Inc.
Alpek has the right, at its option, to redeem any of the 2022 International Notes, in whole or in part, at any time or prior to their maturity at a redemption price equal to the greater of (1) 100% of the then outstanding principal amount of the 2022 International Notes and (2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the
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applicable treasury rate plus 45 basis points, plus accrued interest thereon to the date of redemption and any additional amounts payable with respect to the 2022 International Notes.
2014 International Notes In August 2009, Petrotemex issued notes in the international capital markets in an aggregate principal amount
of US$200 million, and in December 2009, Petrotemex issued US$75 million of additional notes pursuant to a reopening under the same indenture, collectively, the 2014 International Notes. The 2014 International Notes bear interest at a rate of 9.50% per annum, which is payable on February 19 and August 19 of each year. The 2014 International Notes mature on August 19, 2014.
In August 2012, Petrotemex purchased, through a tender offer, approximately US$154 million in aggregate principal amount of the 2014 International Notes; additionally, Petrotemex obtained the majority of consents from holders required to amend certain conditions under the indenture governing the notes. The outstanding amount of the 2014 International Notes as of March 31, 2013 was approximately US$121 million.
The indenture governing the 2014 International Notes contains customary events of default. Petrotemex’s obligations under the 2014 International Notes are guaranteed by the following Petrotemex subsidiaries: Tereftalatos Mexicanos, S.A. de C.V.; DAK Resinas Americas Mexico, S.A. de C.V.; DAK Americas LLC.; Akra Polyester, S.A. de C.V.; and DAK Americas Mississippi, Inc.
Petrotemex has the right, at its option, to redeem any of the 2014 International Notes, in whole or in part, at any time or from time to time prior to their maturity at a redemption price equal to the greater of (1) 100% of the principal amount of the 2014 International Notes and (2) the sum of the present value of each remaining scheduled payment of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus 50 basis points, plus in each case any accrued and unpaid interest on the principal amount of the 2014 International Notes to the date of redemption.
Syndicated Bank Loans
2010 Syndicated Credit Facility
On December 16, 2010, Petrotemex and certain of its subsidiaries entered into a credit agreement with HSBC Bank USA, National Association, as administrative agent, which provided for a US$600 million credit facility. The last US$545 million outstanding under this credit facility was prepaid on November 26, 2012.
Bilateral Bank Debt
Petrotemex-Rabobank Credit Agreement
On August 16, 2010, Petrotemex and certain of its subsidiaries entered into a credit agreement with Rabobank Nederland, New York branch, as lender, (the “Petrotemex-Rabobank Credit Agreement”), in an aggregate principal amount of US$160 million. This facility matures in August 2017. As of March 31, 2013, Petrotemex had US$160 million outstanding under this facility.
Petrotemex’s obligations under the Petrotemex-Rabobank Credit Agreement are guaranteed by Tereftalatos Mexicanos, S.A. de C.V.; DAK Resinas Americas Mexico, S.A. de C.V.; DAK Americas LLC; and Akra Polyester, S.A. de C.V.
There are also maintenance covenants that require Petrotemex to maintain certain financial ratios. The failure to comply with such covenants, if not cured within a certain specified time period, can lead to the loan then outstanding becoming immediately due and payable. These maintenance covenants include: (i) leverage ratio, which requires that the ratio at any date of (a) consolidated net debt to (b) consolidated EBITDA (as defined therein) for the four consecutive fiscal quarters most recently ended on or prior to such date, shall at no time be greater than 3.5 to 1.0; and (ii) interest coverage ratio which requires that the ratio at any date of (a) consolidated EBITDA for the four consecutive fiscal quarters most recently ended on or prior to such date to (b) consolidated net interest
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charges for such period, shall not be less than 3.0 to 1.0, as of the last day of each fiscal quarter. The Petrotemex-Rabobank Credit Agreement also contains certain customary events of default.
Indelpro-Rabobank Credit Agreement
On March 29, 2011, Indelpro entered into a credit agreement with Rabobank Nederland, New York Branch, as lender, (the “Indelpro-Rabobank Credit Agreement”), in an aggregate principal amount of US$60 million. This facility matures in April 2016, with three equal principal amortizations on each anniversary of the borrowing, starting on the third anniversary. As of March 31, 2013, Indelpro had US$60 million outstanding under this facility.
There are also maintenance covenants that require Indelpro to maintain certain financial ratios. The failure to comply with such covenants, if not cured within a certain specified time period, can lead to the loan then outstanding becoming immediately due and payable. These maintenance covenants include: (i) leverage ratio, which requires that the ratio at any date of (a) consolidated net debt to (b) consolidated EBITDA (as defined therein) for the four consecutive fiscal quarters most recently ended on or prior to such date, shall at no time be greater than 3.5 to 1.0; and (ii) interest coverage ratio which requires that the ratio at any date of (a) consolidated EBITDA for the four consecutive fiscal quarters most recently ended on or prior to such date to (b) consolidated net interest charges for such period, shall not be less than 3.0 to 1.0, as of the last day of each fiscal quarter. The Indelpro-Rabobank Credit Agreement also contains certain customary events of default.
Polioles-Comerica Credit Agreement
On August 16, 2011, Polioles entered into a credit agreement with Comerica Bank, as lender, (the “Polioles-Comerica Credit Agreement”), in an aggregate principal amount of US$50 million. This facility matures in August 2016, with four equal amortizations on February 2015, August 2015, February 2016 and August 2016. As of March 31, 2013, Polioles had US$50 million outstanding under this facility.
Polioles’ obligations under the Polioles-Comerica Credit Agreement are guaranteed by Industrias Polioles, S.A. de C.V.
There are also maintenance covenants that require Polioles to maintain certain financial ratios. The failure to comply with such covenants, if not cured within a certain specified time period, can lead to the loan then outstanding becoming immediately due and payable. These maintenance covenants include: (i) leverage ratio, which requires that the ratio at any date of (a) consolidated net debt to (b) consolidated EBITDA (as defined therein) for the four consecutive fiscal quarters most recently ended on or prior to such date, shall at no time be greater than 3.5 to 1.0; and (ii) interest coverage ratio which requires that the ratio at any date of (a) consolidated EBITDA for the four consecutive fiscal quarters most recently ended on or prior to such date to (b) consolidated net interest charges for such period, shall not be less than 3.0 to 1.0, as of the last day of each fiscal quarter. The Polioles-Comerica Credit Agreement also contains certain customary events of default.
Unimor-Comerica Credit Agreement
On September 20, 2010, Unimor entered into a credit agreement with Comerica Bank, as lender, (the “Unimor-Comerica Credit Agreement”), in an aggregate principal amount of US$40 million. This facility matures in September 2015, with thirteen equal quarterly amortizations of US$2.7 million starting on June 2012, and a final payment on the maturity date of US$4.9 million. As of March 31, 2013, Unimor had US$29 million outstanding under this facility.
Unimor’s obligations under the Unimor-Comerica Credit Agreement are guaranteed by Univex, S.A. and Nyltek, S.A. de C.V.
Maintenance covenants in the Unimor-Comerica Credit Agreement require Unimor to maintain certain financial ratios. The failure to comply with such covenants, if not cured within a certain specified time period, can lead to the loan then outstanding becoming immediately due and payable. These maintenance covenants include: (i) consolidated net worth, which requires Unimor not to permit its consolidated net worth to be less than approximately 80% of the consolidated net worth as of December 31, 2009; (ii) leverage ratio, which requires that the ratio at any date of (a) consolidated debt to (b) consolidated EBITDA (as defined therein) for the four
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consecutive fiscal quarters most recently ended on or prior to such date, shall at no time be greater than 3.35 to 1.0; and (iii) interest coverage ratio which requires that the ratio at any date of (a) consolidated EBITDA for the four consecutive fiscal quarters most recently ended on or prior to such date to (b) consolidated net interest charges for such period, shall not be less than 3.25 to 1.0, as of the last day of each fiscal quarter. The Unimor-Comerica Credit Agreement also contains certain customary events of default.
Capital Expenditures
In 2011 and 2012 and in the three months ended March 31, 2012 and 2013, excluding expenditures made in relation to acquisitions, we made capital expenditures of Ps. 588 million (US$47 million), Ps. 1,522 million (US$116 million), Ps. 157 million (US$12 million) and Ps. 391 million (US$31 million), respectively. These capital expenditures mainly include expenditures related to maintenance projects, the construction of the cogeneration plant at the PTA-PET complex in Cosoleacaque, Veracruz and the elimination of bottlenecks at the PET plant in Columbia.
We estimate that our capital expenditures for 2013 and 2014, excluding expenditures made in connection with any acquisitions, will be approximately US$162 million and US$290 million, respectively, primarily for investments in co-generation projects, PET and EPS capacity expansions, as well as payments to M&G during construction of the PTA/PET complex in Corpus Christi, Texas, USA.
Research and Development
In 2011 and 2012 and in the three months ended March 31, 2012 and 2013, we spent US$10 million, US$6 million, US$1.3 million and US$1.1 million, respectively on research and development.
Tabular Disclosure of Contractual Obligations
The following is a summary of our contractual obligations as of March 31, 2013:
Payments Due By Period
Total Less than 1 year 1-3 years 3-5 years More than 5 years
(in thousands of Pesos) Non-current debt .................................... 13,395,227 179,759 2,854,382 2,424,590 7,936,495 Capital (finance) lease obligations .......... 1,873 1,873 - - -Operating lease obligations .................... 756,854 247,650 346,375 162,829 -Short-term debt obligations .................... 429,671 429,671 - - -Total ....................................................... 14,583,624 858,952 3,200,757 2,587,420 7,936,495
In the ordinary course of business, we also enter into long-term supply arrangements for raw materials and energy, which are not reflected in the above table. In addition, our obligations under derivative financial instruments are described further below.
Off Balance Sheet Arrangements
As of March 31, 2013, we did not have any off balance sheet arrangements.
Internal Controls
We have adopted internal control policies and procedures designed to provide reasonable assurance that our operations are subject to and in compliance with guidelines set forth by our management and that our financial reporting complies with IFRS. Some of these policies and procedures include policies and procedures relating to our ongoing business operations, the implementation and promotion of business initiatives, the control and supervision of acquisitions, the promotion, distribution and sale of subsidiary projects and the development of internal controls for our human resources, accounting, legal, tax and information technology departments. We believe that our advanced information technology platform and our organizational structure provide us with the necessary tools to accurately and effectively apply our internal control policies and procedures. In addition, our various operational processes are subject to periodic internal audits.
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Quantitative and Qualitative Disclosures about Market Risk
Derivative Financial Instruments
Because we operate in various countries and enter into credit agreements in U.S. Dollars and, to a lesser extent, other currencies, we have entered into interest rate and exchange rate derivatives for purposes of reducing the overall cost of such financing and the volatility associated with exchange and interest rates. Additionally, due to the nature of the industries in which we operate and our consumption of energy and raw materials, we have entered into hedge contracts covering natural gas, gasoline, ethylene and other raw material prices.
All of our derivative financial transactions are subject to guidelines set forth by Alpek’s Board of Directors in collaboration with Alpek’s Planning, Finance and Audit Committees, and must be authorized by Alpek’s Risk Management Committee.
We maintain a system of internal control over derivative financial instruments. The negotiation, authorization, contracting, operating, monitoring and recording of derivative financial instruments are subject to IAS 39 “Financial Instruments: Recognition and measurement by International Accounting Standards Board (IASB)” and to internal control procedures variously overseen by our treasury, legal, accounting and auditing departments.
In accordance with our policy, the derivatives that we enter into are for non-speculative purposes in the ordinary course of business. From an economic point of view, these derivatives are entered into for hedging purposes; however, for accounting purposes, some of our derivative financial instruments may not be designated as hedges if they do not meet all the accounting requirements established by IFRS and, therefore, may be classified as trading instruments. Derivative financial instruments employed by us are contracted in the over-the-counter market with international financial institutions. The main characteristics of the transactions refer to the obligation to buy or sell a certain underlying asset given certain criteria such as cap rate, spread and strike price, among others.
During the fourth quarter of 2008, we implemented various strategies that substantially modified our derivative position in relation to natural gas prices. We cancelled open natural gas derivative contracts and entered into offsetting positions with new counterparties with respect to a significant amount of our derivative financial instruments, thereby reducing our exposure to these risks. However, many of our derivative transactions have not been closed out and remain in effect, and we may incur additional losses in the future in connection with those transactions.
For the three months ended March 31, 2013 and the years ended December 31, 2012 and 2011, the valuation of derivative financial instruments represented a gain of Ps. 6 million, a gain of Ps. 69 million and a gain of Ps. 4 million, respectively. As of March 31, 2013, we had no breaches in any derivative financial instrument. Since September 2012, we have recorded the valuation of our commodities-related derivative financial instruments in other income and expenses.
The obligations under our derivative financial instruments are generally contracted in U.S. Dollars. The notional amounts and fair values presented in the tables below have been translated from U.S. Dollars to Mexican Pesos using a rate of 12.3546. The fair values presented below are mathematical estimates of the corresponding market values of such instruments. We estimate fair value by reference to independent third-party models, which may include models provided by the swap counterparties under these instruments that use assumptions based on past, present and future expectations of market conditions as of the relevant accounting closing date.
As of March 31, 2013, we did not have any foreign currency exchange rate derivatives.
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Interest Rate Risk
As of March 31, 2013, the position of our interest rate swaps was as follows, in millions of Mexican Pesos:
Type of derivative value or contract
Economic purpose
Accounting treatment
Notional amount
Underlying asset
Fair Value
Maturity
Collateral Unit Reference 2013 2014 2015+
LIBOR-based Hedge Hedge 2,718
% per year 0.42 (173) (27) (52) (94) —
Hedge Non-hedge 957 (17) (17) — — —
(190) (44) (52) (94) —
Natural Gas and Other Commodities Price Risk
We enter into different derivative agreements with several counterparties to protect ourselves against increases in the prices of natural gas and other raw materials. In the case of natural gas derivatives, hedging strategies for commodities were designed to mitigate the impact of potential price increases. The objective is to hedge prices against volatility by having positions that provide stable expectations of cash flows, thus avoiding price uncertainty.
As of March 31, 2013, we had hedges on the price of natural gas for a portion of our expected consumption needs in Mexico and the United States. In addition, in order to fix the sales prices of certain of our products, we have entered into swaps for certain commodities concurrently with the execution of sales contracts with certain customers, as the prices of such commodities have a direct or indirect impact on the sales prices of such products.
As of March 31, 2013, the position of our derivative financial instruments for natural gas and commodities was as follows, in millions of Mexican Pesos:
Type of derivative value or contract
Economic purpose
Accounting treatment
Notional amount
Underlying asset
Fair Value
Maturity
Collateral Unit Reference 2013 2014 2015+
Natural gas Hedge Hedge 502 Dollar /
MMBTU 3.91
84 84 — — —
Hedge Non-hedge 17 (44) (44) — — —
Gasoline Hedge Non-hedge 812 Dollar / Gallon
3.12 77 78 (1) — —
Ethylene Hedge Hedge 317 Cent. dollar /
Pound 63.7 41 44 (3) — —
Ethane Hedge Hedge 36 Cent. dollar /
Gallon 27.9 (7) (7) (0) — —
151 155 (4) — —
Hedge Effectiveness
The effectiveness of derivative financial instruments classified as hedge instruments is assessed on a periodic basis. As of March 31, 2013, we assessed the effectiveness of hedges and estimated that they are highly effective for hedge accounting purposes. The notional amounts related to derivative financial instruments reflect the reference volume contracted.
As of March 31, 2013, the net fair value position of the aforementioned derivative financial instruments amounted to Ps. 39 million, which is included in our balance sheet as follows:
Amount (in thousands of Pesos) Assets: Current assets ................................................................................................................................................................ 202,047 Non-current assets ......................................................................................................................................................... — Liabilities: Current liabilities ........................................................................................................................................................... (68,083) Non-current liabilities ................................................................................................................................................... (172,919)
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Amount (in thousands of Pesos) Net position ................................................................................................................................................................... (38,956)
Credit Lines, Margins and Collateral Policies
In order to manage the obligation to post collateral in connection with margin calls under derivative financial instruments, we have agreed to a credit limit with each counterparty that has a derivative transaction. In cases where the agreed threshold under a particular transaction is less than the absolute mark-to-market value of such transaction, we have the obligation, from time to time, to post the corresponding collateral to the counterparty. We typically satisfy this obligation by drawing on our cash reserves, cash flow generation or available credit lines. Additionally, if we fail to post such collateral, the counterparty has the right, but not the obligation, to declare such obligation as prematurely expired and to demand the corresponding reasonable value in accordance with the agreed terms. At March 31, 2013, we had no cash or other collateral posted for margin calls related to derivative financial instruments.
Risk Management Committee
Alpek has a Risk Management Committee, which supervises among other things hedging and derivative transactions proposed to be entered into with a risk exposure in excess of US$1 million. This committee reports directly to Alpek’s Chairman and Chief Executive Officer (“CEO”). All new hedging and derivative transactions which we propose to enter into, as well as the renewal or cancellation of existing hedging and derivative arrangements, are required to be approved by Alpek’s senior management, including Alpek’s Chairman and CEO. Proposed transactions must satisfy certain criteria, including that they be entered into for non-speculative purposes in the ordinary course of business, that they be based on fundamental analysis and that a sensitivity analysis and other risk analyses have been performed before the transaction is entered into.
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INDUSTRY
This section includes market share and industry and economic data and forecasts that we have obtained from industry sources, including independent consultants such as the PCI, surveys and our internal estimates. There can be no assurance as to the accuracy or completeness of information based on our estimates or industry publications.
Overview
Polyester Chain Business Overview
Polyester is a petroleum-based synthetic material typically manufactured in three forms: resin (commonly known as PET), fiber and film. Polyester has a wide range of end-use applications, including plastic bottles and other food or beverage containers, apparel and carpets. Polyester is made by combining PTA and MEG. Paraxylene (commonly referred to as pX), a chemical produced in a crude oil refinery, is the main raw material used for manufacturing PTA. According to PCI’s estimates, worldwide production of polyester in 2012 was approximately 58 million tons, with a CAGR of 5.1% from 2007 to 2012.
The following chart depicts the polyester production chain, starting from crude oil, which is converted into pX, which is then converted into PTA, which together with MEG, are raw materials used for final production of polyester products.
PTA
PTA is the main raw material used to manufacture PET (used in plastic bottles, containers and other packaging) and polyester fibers (used for carpets, garments, home furnishings and consumer and industrial applications), in addition to other products. Almost all PTA produced is used in the production of polyester resin, fiber and film. In 2012, PET, polyester fiber and film (video, audio and photography) represented approximately 30%, 62% and 4%, respectively, of the market for PTA worldwide, according to PCI’s estimates.
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PET
PET is a polymer derived typically from the reaction between PTA and MEG. PET offers transparency, strength, durability and high barrier properties, has no known health risks, is lightweight, cost-efficient and recyclable and has a high degree of design flexibility and customization, all of which enable custom PET containers to be used for a variety of reusable and temperature-sensitive packaging applications. These characteristics have led to its widespread use in bottles and other containers for liquids, food and personal care products, including carbonated soft drinks, sparkling water, still water, fortified water, isotonic beverages, health drinks, juices, teas, dairy products, prepackaged food, health and beauty aids, pharmaceuticals and other household products. Sheet and film products made from PET are used for cups, lids, trays, bowls and blister packaging. PET has increasingly displaced glass, aluminum, tin and can containers and other plastics such as PVC or polyethylene, and has shown one of the highest growth rates of any plastic container product worldwide during the last decade. Based on our review of publicly available market data, we believe that, from 2002 to 2012, demand for PET grew at a 5.5% CAGR in the U.S. beverage containers market, compared to a CAGR of approximately 0.2% for glass and a CAGR of approximately -2.1% for metal during the same period. This growth is driven by the higher acceptance of PET packaging, which is resilient, lightweight, low-cost and recyclable. Further technology innovation, such as enhanced barrier protection, is expected to enable new applications.
Polyester Fiber and Filament
Polyester fiber includes staple fiber, which may be sold on its own or blended with either cotton or wool; and textured and flat textile filaments and technical yarns that have multiple apparel, home furnishing and non-woven consumer and industrial applications. According to PCI, polyester fiber accounted for an estimated 52% of the world’s total fiber consumption in 2012, compared to 38% in 2002, representing a 7.2% CAGR, compared to a 1.4% CAGR for cotton over the same period. This increase has been driven by greater consumer acceptance of this product due to its durability, flexibility in applications, color stability, quality and production processability that has led to competitive pricing in many end products. This growth has been concentrated primarily in China, India and South Asia, with the market in North America declining in recent years as textile production has migrated to Asia.
Plastics & Chemicals Business Overview
Polypropylene (PP)
PP is a thermoplastic polymer that results from the chemical reaction among propylene monomer and a set of catalysts and chemicals. The properties of PP include low specific gravity, high stiffness, relatively high temperature resistance and good resistance to chemicals and fatigue. PP is used in a wide variety of applications, including packaging, textiles (e.g., ropes, thermal underwear and carpets), stationery, plastic parts and reusable containers of various types, automotive parts, and polymer banknotes.
The following table sets out the various polypropylene market segments and common applications under each segment.
Segments Application
Injection Transportation products, appliances, consumer products, rigid packaging and medical applications.
Fiber Carpet face yarns, carpet backing, diapers, liners, upholstery, medical gowns, geotextiles and rope/cording.
Film/BOPP Labels for soft drink bottles, liners for cereal boxes, wraps for bread, snack foods, cheese and cigarettes.
Raffia Bags and sacks for sugar, flour and industrial products.
Blow molding Bottles and jars.
Compounding & automotive
Resins mixed with additives and other chemicals such as pigments: used in cockpits, appliances, plastic fan blades, washing machines.
Others Distributors and resellers.
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Expandable polystyrene (EPS)
EPS is a lightweight, rigid cellular plastic made from the polymerization of the styrene monomer, which is commonly produced in petroleum refineries. To produce EPS, our customers heat the polystyrene beads (small spheres) with steam. This causes a pre-foaming agent found within the beads (pentane) to evaporate rapidly. When this happens, the beads expand to some 40 to 50 times their original volume. After expansion, the beads undergo a maturing period in order to reach an equilibrium temperature and pressure. The beads are then placed within a mold and reheated with steam. The pre-foamed beads expand further, completely filling the mold cavity and fuse together. The beads are molded to form boards, blocks or customized products. Because of this manufacturing process, EPS is comprised of 90% air.
EPS is a material characterized by its versatility, given its shock-absorbing and custom molding properties. These properties, combined with its processing ease and low cost, make it a popular packaging material for pieces sensitive to impact and for the preservation of perishable products. In Mexico, EPS has been included as part of the construction system in large-scale housing projects due to its ease of installation and light weight in roofing; which reduces construction costs and time and provides thermal and acoustic insulation.
Polyurethane (PURs)
PURs are resilient, flexible, and durable materials that can replace paint, cotton, rubber, metal and wood in various applications across all fields. PURs can be hard like fiberglass, spongy like upholstery foam, protective like varnish, bouncy like rubber tires or sticky like glue. PURs are unique materials that offer the elasticity of rubber combined with the toughness and durability of metal. Polyurethanes result from the reaction of two components: polyol and isocyanate. The polyether polyol, a propylene oxide derivative, is the main raw material that we provide to the polyurethane industry. The following table sets out several polyurethane market segments and common applications under each segment.
PURs Product End Markets
Flexible slab Mattresses, furniture (seating), automotive and intimate apparel.
Flexible molded Automotive.
Rigid Insulation (construction, refrigerators), packaging.
Elastomeric Shoe soles, rollers, automotive (steering wheels, instrument panels, door panels and other small components).
Coatings Painting and adhesives.
Caprolactam (CPL)
CPL is manufactured from a chemical reaction between cyclohexane, ammonia and sulfur. CPL is the main raw material used in the production of nylon 6 (used in textile and industrial yarns, carpets and engineering resins). There are no substitutes for CPL in the production on nylon 6. Nylon 6 is a synthetic fiber and for its strength, resilience and smoothness, among other things, is used in a variety of end-use applications. In 2012, the nylon industry was estimated to be a US$15,400 million global industry, based on Alpek’s estimates and according to PCI. PCI also estimates that in 2012, 4.6 million tons of nylon 6 were produced in the world.
Fertilizers (Ammonium sulfate)
Ammonium sulfate is a by-product of the CPL production process and is a nitrogen-rich fertilizer that is well suited and marketed primarily for use in the farming regions located in central Mexico, near our production facilities.
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Global Market for Polyester Chain Business
The PTA industry is comprised mainly by global players, which, in addition to Alpek, include BP plc (headquartered in the United Kingdom), Zhejiang Yuandong Petro-Chemical Co., Ltd. (China), Mitsui Chemicals, Inc. (Japan), Formosa Chemicals & Fiber Corporation (Taiwan) (“FCFC”), Mitsubishi Chemical Corporation (Japan), Reliance Industries Limited (India) and Lotte Group (South Korea). Based on data prepared by PCI, as of December 31, 2012, Alpek has approximately 46% of North America PTA installed capacity.
The PET industry comprises several major players as well as many smaller companies. PET markets are generally regional because of high transportation costs relative to production costs. Major PET producers in North America, in addition to Alpek, include Gruppo Mossi & Ghisolfi (“M&G”) (Italy), Indorama (Thailand), and Nan Ya Plastics Corporation (Taiwan). According to PCI, as of December 31, 2012, Alpek has approximately 40% of North America PET installed capacity. Customers of this industry primarily include companies that convert PET into plastic bottles and other containers, known in the industry as “converters,” and in turn sell them to major consumer goods companies.
Polyester staple fiber is also a largely regional industry and in North America is comprised mainly by three main players: Alpek, which is the leader in terms of market share and capacity utilization, Nan Ya and Indorama. As of December 31, 2012, Alpek has an estimated 44% of North America polyester staple fiber capacity, according to PCI. The demand for polyester staple fiber in North America has been declining since 1999 due to the shift to Asia of manufacturing capacity for apparel and other end-uses for polyester staple fiber, which has enabled Asian competitors to gain market share. Customers of this industry are manufacturers of carpets, certain knit apparel items and non-woven consumer and industrial products.
The polyester filament industry in North America has also experienced downward pressure on margins due to an increase in raw material and energy costs. Furthermore, end product producers in the polyester fiber production chain have experienced pressure from foreign imports, mainly from China and the rest of Asia. However, following the financial crisis of 2008 and 2009, the polyester filament industry in North America has improved significantly due to economic recovery and the growth of filament demand worldwide, lower energy costs (primarily lower prices for natural gas), and both a lack of supply and higher prices for other fibers, such as cotton, while Asian exporters have seen cost increases in China.
Competitive Environment
As PTA, PET and fibers are commodity products, competition is predominantly based on price and, to a lesser extent, on other factors, including product quality, continuity of supply and customer service.
In an environment characterized by a high level of price competition, the leading producers are likely to have the following competitive advantages:
� economies of scale;
� integration into raw materials;
� low cost manufacturing;
� efficient logistics; and
� ability to manage raw material procurement
Benefits of Integration in the Polyester Chain
The price of PET resin and polyester fiber is predominantly determined by market dynamics and, to a lesser extent, by the PET resin and polyester fiber producer. Therefore, in order to be profitable, producers must effectively manage their production costs. The integration of raw material production provides significant opportunity for cost reduction. The benefits from integration include:
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� Logistics cost savings. The close proximity of the pX, MEG, PTA and PET resin and polyester fiber plants significantly reduces (or, in the case of co-located plants, eliminates) the cost of packaging, loading, shipping and unloading PTA from its production site to the PET resin and polyester fiber production site.
� Fixed costs savings. Integration saves fixed administrative costs associated with managing raw materials purchases and transportation.
� Consistent supply of raw materials. A key benefit of the co-location of the PTA and PET resin or polyester fiber facilities is the security of raw materials sourcing. This reduces the risk of shipping delays or volatility in market prices for the raw materials and facilitates higher capacity utilization.
Accordingly, integration can result in enhanced margins through increased purchasing power and coordinated operational planning across integrated operations. According to PCI, we are one of the largest integrated players in the global polyester industry and the leading integrated polyester producer in North America.
PTA
Industry Development
The rapid growth in worldwide demand for PTA in recent years has been driven mainly by the demand for PET and polyester fiber. According to PCI, from 2002 to 2008, global PTA markets had been growing strongly at rates of approximately 6%-9% per year. After a downturn in the PET and polyester fiber markets in 2008, largely due to the global economic recession, these markets recovered and reached a CAGR of approximately 6.1% for the period between 2007 and 2012.
According to PCI, worldwide trade volume of PTA is concentrated mainly in Asia, which is expected to continue to be a net exporter and is unlikely to become a net importer as in the past. As depicted in the chart below, North America is a major net exporter of PTA, whereas South America, Africa and Central and Eastern Europe are major net import regions.
According to PCI, South America will be a net importer through 2015, with imports peaking in 2012 and then falling in 2013 due to a new PTA facility in Brazil. However, due to subsequent growing PET demand, the region’s PTA net imports are expected to reach over 500 Ktons by 2016.
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Source: PCI
Based on the global consumption trend of PTA in recent years, the proportion of worldwide consumption volume in Asia has increased steadily, the proportion in Western Europe has dropped slightly and the proportion in North America has shown a declining trend.
In Asia, the growth in PTA consumption has been driven by strong polyester fiber demand, which now accounts for nearly two-thirds of global polyester demand, according to PCI’s estimates. In North America and Europe, polyester fiber production has been declining as the textile industry has migrated to Asia. Growth in these regions has been in the PET market, which PCI estimates now accounts for approximately 30% of global polyester demand.
Market Position
While the PTA industry in the Americas is concentrated among a few players, the worldwide market is somewhat more diversified, with 44 producers and more than 80 production facilities, approximately 73% of which are located in Asia. According to PCI’s estimates, we are among the top five global PTA producers based on production capacity as of December 31, 2012. The following tables show the worldwide and North American PTA installed capacity, as reported by PCI, as of December 31, 2012.
Worldwide PTA Installed Capacity Company Installed Capacity
(in thousands of tons per year) BP (UK) 7,348 Hengli (China) 4,400 FCFC (Taiwan) 3,050 Mitsubishi (Japan) 3,018 Alpek (Mexico) 2,790* Sinopec (China) 2,750 Yisheng (China) 2,320 Indorama (Thailand) 2,180 Reliance (India) 2,175 Zhenjiang Yuandong (China) 2,000 Samsung (Korea) 1,930 Others 25,171 World total 59,132 * Our actual installed capacity is 2,740 Ktons, which differs from the amount calculated by PCI. Source: PCI
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North America PTA Installed Capacity Company Installed Capacity
(in thousands of tons per year) Alpek (Mexico) 2,790* BP (UK) 2,450 Interquisa (Spain) 580 Eastman (U.S.) 250 North America total 6,070 * Our actual installed capacity is 2,740 Ktons, which differs from the amount calculated by PCI. Source: PCI
PTA is a commodity product and industry competitiveness is predominantly based on price. Therefore, having
low cost production facilities is a significant competitive advantage. According to PCI, North American PTA assets are generally in the first and second quartile globally based on site capacity, age, technology and integration.
Regional Supply and Demand Growth Dynamics
World: According to PCI, during 2012, worldwide production of PTA was approximately 49.4 million tons, with a CAGR of 5.4% from 2007 to 2012. Worldwide production of PTA is expected to increase at a CAGR of 7.2% from 2012 to 2017 while PTA demand is expected to grow at a CAGR of 6.9% over the same period, according to PCI.
North America: During 2012, North America represented about 11%, or 5.2 million tons, of global PTA production, with a CAGR of 0.6% from 2007 to 2012. Substantially all of North America’s PTA needs are satisfied through regional PTA production, without reliance on imports. According to PCI, PTA demand from North America is expected to grow at a CAGR of 3.1% through 2017, while production capacity is expected to increase at a CAGR of 3.7% for the same period.
Source: PCI
Mexico: According to PCI, Mexico is the second largest market for PTA in North America and the eighth largest PTA market in the world, driven by the high per capita carbonated soft drink consumption, an increase in PET production for bottled water consumption as well as the ongoing substitution of plastic containers for aluminum and glass containers. According to PCI, PTA demand in Mexico is expected to grow at a CAGR of 1.2% through 2017, while production capacity remains flat with no new capacity increases expected in the region.
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Source: PCI
South America: PTA demand in South America decreased at -0.2% CAGR from 2007 to 2012. According to PCI’s estimates, Brazil is the largest market in the region with an estimated total consumption of approximately 455,000 tons in 2012, followed by Argentina with an estimated total consumption of 178,000 tons in 2012. From 2012 to 2017, PCI expects South American PTA demand to grow at a CAGR of 12.5%, while production will increase from zero tons in 2012 to approximately 600,000 tons by 2017, due to the completion of the Suape PTA complex in Brazil.
Pricing
World: PTA prices have traditionally been correlated to pX prices.
North America: PTA prices are generally set on a monthly basis (the “U.S. Contract Delivered Price”) using as a reference a “cost plus” pricing formula published by BP. The formula takes into account cost variances in the main factors involved in the PTA production process (pX, energy and labor costs, and the U.S. Producer Price Index for other fixed costs). The U.S. Contract Delivered Price is based on the published pX price, which as a petrochemical is sensitive to oil and gasoline prices. This pricing formula is typically used for sales in North America and provides predictable and published reference prices. The actual costs of production vary by producer. From time to time, the PTA pricing formula may be adjusted.
Asia: Prices are set monthly and reflect the forces of supply and demand, including freight costs to the customer’s port of destination. This pricing mechanism applies to both PTA imports into the region and sales between countries within the region. In this region, the prices are negotiated mainly between producers in Japan, Taiwan and South Korea and customers from these three countries and from China. Asian producers face significant margin volatility on a month-to-month basis.
Europe: In the European market, domestic PTA pricing is influenced by polyester markets in Asia. Usually prices in Europe follow the Asian PTA price plus the freight costs from Asia to Europe. However, there are some customers that prefer setting a formula based on the European pX price plus a negotiated fee.
South America: In the South American market, a mechanism similar to the European pricing methodology is typically used.
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Source: PCI PET
Industry Development
In the United States, the use of PET became widespread during the 1980s and PET demand has now reached a mature stage. In contrast, PET consumption in Mexico and the rest of the world became prevalent starting in the 1990’s and increased rapidly but per capita consumption remains below U.S. levels.
Source: PCI; Population Reference Bureau
Until 1997, global demand had always exceeded supply, resulting in high profit margins for producers. However, that year a large number of PET plants began operations around the world, reducing margins in 1998 and 1999. As demand continued to grow, equilibrium was reached by 2000 and 2001, and margins improved during those years, reaching a peak in 2005 due to raw material shortages precipitated, in part, by the effects of hurricanes in the United States.
Since 2002, significant new capacity has been installed across North America. A number of PET producers, including Wellman, Invista, M&G, Eastman, StarPet and Alpek, implemented expansions, causing overall margin reductions. In recent years, some of our competitors have shut down certain of their less efficient production facilities in North America, which has effectively removed a total of approximately 914,000 tons of capacity from the market. According to PCI, the PET industry capacity operating rate was 79.2% in 2012 and is expected to be 71.1% in 2013.
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In recent years, the PET industry has experienced a trend through which bottle producers have reduced the amount of PET used to produce bottles. This is known as “light weighting.” Although mechanical properties of the bottles pose a limit to light weighting initiatives, certain bottle sizes, like the 0.5 liter water bottle, have been modified to reduce the use of PET by as much as 50%, or from approximately 15 or more grams to between 9.5 and 10 grams. We believe that in the market in which we participate most of the light weighting effect has been implemented.
PET, like many other plastics, is subject to recycling efforts. Some PET consumers such as large brands of carbonated drinks are increasingly fostering recycling and other green initiatives. The production of R-PET (recycled PET) relies on the supply of curbside bottles that are gathered by regional sanitation services. Logistics costs are very important in the process of deciding where to locate a recycling facility, since moving bottle bales can be very costly. It is therefore important to achieve a proper balance between proximity to the supply of bales and to the demand source of R-PET. The price of bottle bales varies according to supply and demand balances, and to a certain extent, after adding processing costs, it may render R-PET more expensive than virgin PET.
Notwithstanding recycling and light weighting activities, demand for PET has started to grow again since 2010 (after a pause in 2008 and 2009 due to light weighting and weak economic environment). Both recycling and light weighting have allowed PET to foster a more positive perception among consumers as a “friendly plastic.” PET continues to be a very versatile and cost competitive form of packaging and conversions to PET continue to take place in the marketplace.
In the 2010-2011 period, the North American PET industry went through a period of consolidation. Alpek acquired Eastman’s polyester assets in Columbia, South Carolina, along with the IP relating to the IntegRex® Technology and Wellman in Bay St. Louis, Mississippi, while Indorama acquired Invista’s polyester assets in Queretaro, Mexico and Spartanburg, South Carolina. As a result of this consolidation, the top three North American PET producers operate 87% of the installed PET capacity in the region, according to PCI.
Market Position
The following table shows the PET production capacity in North America as of December 31, 2012 estimated with data from PCI.
North America PET Installed Capacity Company Installed Capacity
(in thousands of tons per year) Alpek 1,775* Indorama 1,292 M&G 830 Nan Ya 445 Selenis 146 North America total 4,488 * Our actual installed capacity is 1,777 Ktons, which differs from the amount calculated by PCI. Source: PCI
Regional Supply and Demand Growth Dynamics
World: According to PCI, during 2012, worldwide production of PET was approximately 17.6 million tons, with a CAGR of 5.1% from 2007 to 2012. Worldwide production of PET is expected to increase at a CAGR of 7.4% from 2012 to 2017, while demand is expected to grow at a rate of 6.9% over the same period.
North America: In North America, production of PET was nearly 3.9 million tons in 2012, with a CAGR of 0.8% from 2007 to 2012, according to PCI.
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According to PCI’s estimates, PET has become the main market for PTA in North America, representing approximately 75% of sales in 2012, compared to 58% in 2002. This percentage has increased in recent years due to the closure of certain fiber assets in the region and the higher consumption growth of PET compared to fibers.
PET growth in North America is moderating as a result of maturing applications in such key markets as water, carbonated soft drinks and personal care products and the drive toward lighter-weight containers and increased content of recycled material. According to PCI, forecast demand for PET in North America is expected to increase at a CAGR of 2.8% from 2012 to 2017.
Source: PCI
Mexico: According to PCI, production of PET in Mexico grew at a 1.1% CAGR from 2007 to 2012. PET demand in Mexico is anticipated to grow at an annual rate of 3.3% until 2017, due to expected GDP growth and continued overall social and economic development as well as the increased bottled water and carbonated soft drink consumption and the ongoing substitution of bottling materials described above.
South America: According to PCI, production for PET in South America decreased at -3.0% CAGR from 2007 to 2012. PET is anticipated to grow in South America at a CAGR of 14.7% from 2012 to 2017 for largely the same reasons as in Mexico.
Pricing
Historically, prices of PET in North America have generally been negotiated between PET producers and their customers on a monthly basis as a function of supply and demand. Prices can be subject to rapid change in periods when factors influencing demand are affected, when prices of raw materials fluctuate or when there are shortages of key inputs in the production process.
Source: PCI
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Polyester Fibers
Industry development
Polyester fiber represents the largest and largest-growing market in the man-made fibers (“MMF”) industry. This fiber has replaced cotton in many applications. As a result, cotton production lost 7.4% of its market share to polyester fiber from 2002 to 2012, according to PCI, while polyester fiber gained 14.7%. Polyester has also substituted other MMFs, such as olefin and acrylic fibers, due to reduced costs of production and comparable or enhanced performance. The following chart shows the worldwide fiber consumption change from 1980 to 2012, according to PCI.
Source: PCI
In North America, growth is expected to come from markets less susceptible to imports from Asia, which
according to industry research is expected to continue serving apparel applications. Synthetic fibers for specialized applications with superior performance characteristics, such as tensile strength, dye affinity and resiliency are expected to be the region’s growth drivers.
China’s entry into the WTO decreased Mexican textile producers’ market share of total U.S. textile imports. As a result, Mexican producers were forced to improve their production processes and increase productivity in order to remain competitive. There are market segments in which Mexican producers have advantages compared with China. Some of these advantages consist of a faster response time to customer supply requests and better margins derived from its geographical vicinity to the U.S., according the U.S. Office of Textiles and Apparel (Otexa). Mexico’s privileged situation as a competitive producer within North America, has allowed it to overcome competition, and retain a significant share of the U.S. textile imports.
Market Position
Despite the decline in the polyester staple fiber (“PSF”) market in recent years, since 2008, we have had the largest capacity share in North America, with 44%. Nan Ya has the second largest capacity share with 39%. The following table shows North American polyester staple fiber production capacity, as calculated by PCI.
North America PSF Installed Capacity (2012) Company Installed Capacity (in thousands of tons per year) Alpek 245 * Nan Ya 218 Indorama 95 North America total 558 * Our actual installed capacity is 282 Ktons, which differs from the amount calculated by PCI, which is just an estimate.
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Source: PCI
Polyester filament is used for textile and industrial applications. In North America, the textile filament chain is usually divided into two categories, with certain companies producing partially-oriented yarn (“POY”) and others producing finished textile fibers. The separation between POY (unfinished yarn) and finished yarn production processes implies additional packaging and logistics costs, which creates inefficiencies due to producers’ lack of integration.
According to PCI and our internal estimates, the largest textile filament producers of POY in the North American market are: Nan Ya with 39% of total capacity, followed by Unifi with 28% and Alpek with 24% of total capacity. Total installed capacity is 253 Ktons. In the industrial polyester yarn North American market, the largest producer is Performance Fibers with 88.4% of the total installed capacity of 173 Ktons. Alpek has 8.1% of the installed capacity in the region, while the rest of the market holds the remaining 3.5% and includes a larger number of players because of the degree of specialization of certain products.
Regional Supply and Demand Growth Dynamics
World: According to PCI’s estimates, during 2012, worldwide production of staple fiber was approximately 14.9 million tons, with a CAGR of 4.0% from 2007 to 2012. Worldwide production of polyester staple fiber is expected to increase at a rate of 6.0% from 2012 to 2017. World polyester filament production capacity is forecast to grow at 6.9% CAGR from 2012 through 2017. China’s production capacity is expected to grow 7.9% during the same 2012 to 2017 period. The worldwide demand for polyester filaments is forecast to grow at a 3.9% CAGR between 2012 and 2017.
North America: In North America, the demand for polyester staple fiber has been declining since 1999 and from 2007 to 2012 experienced a negative growth rate of 4.2%. One of the principal drivers of this decline has been the shift to Asia of manufacturing capacity for apparel and other end-uses for polyester staple fiber, which has enabled Asian competitors to gain market share. We estimate that in the near future there will be further attrition in this market. North America’s filament production capacity is expected to grow at a 0.6% CAGR from 2012 to 2017. In North America, demand is expected to grow at a 1.6% CAGR during the same period, according to PCI.
Mexico: The Mexican market demand is forecast to grow 2.0% CAGR from 2012 to 2017, according to PCI. Alpek is the only domestic textile filament producer in the country and has a 48% capacity share in the industrial filaments market.
Pricing
Polyester fiber prices respond to import dynamics. Another factor that has now come into play in the world is the availability of recycled material. Prices can be subject to rapid change in periods when factors influencing demand are affected, when prices of raw materials fluctuate or when there are shortages of key inputs in the production process.
Due to market improvement and lower energy costs, North American polyester filament producers have been improving their business profitability since 2009.
Global Market for Plastics & Chemicals Business
Polypropylene (PP)
Industry Development
Polypropylene typically competes against other traditional non-polymer materials. Examples are aluminum, steel, wood, paper, glass etc. Worldwide, PP growth is showing a significant increase, on pace with other thermoplastics, such as polyethylene. PP has also typically substituted polyethylene in some applications. Historically, propylene prices had been lower than ethylene prices, causing polypropylene to absorb some of the polyethylene demand. The pricing trend, however, has now changed in North America, due in part to the rising prices of propylene, compared to those of ethylene. In spite of this pricing trend, based on our review of publicly available market data, we believe PP demand is expected to grow faster than demand for most polyethylene resins.
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Market Position
We are the only PP producers in Mexico, being the leader of the market with a market share of 30% in 2012, according to our internal estimates. The other 70% of the market is served mainly by imports from U.S. producers and traders.
Regional Supply and Demand Growth Dynamics
World: Based on our review of publicly available market data, we believe approximately 54,000 Ktons were produced during 2012. We believe production showed a CAGR of approximately 3.5% to 4.0% for the period from 2007 to 2012 and we expect it to increase to approximately 5% from 2012 to 2017. We believe demand showed a CAGR of approximately 4% from 2007 to 2012, which we expect to increase to approximately 5% from 2012 to 2017.
North America: Based on our review of publicly available market data, we believe North America showed a production of approximately 7,300 Ktons in 2012, with a CAGR of approximately -3.7% from 2007 to 2012, however we expect it to show moderate growth of 1.5% to 2.0% CAGR from 2012 to 2017. Demand for PP was approximately 7,000 Ktons in 2012 and is expected to grow at a CAGR of 1.4% from 2012 to 2017.
Mexico: The Mexican PP market has been steadily growing, even during periods of economic uncertainty. The Mexican PP market has shown a compounded annual growth rate of approximately 5% from 2007 to 2012. In 2012, the size of the market was estimated at 1,200 Ktons.
Pricing
PP prices respond to market dynamics in the region, as well as to raw material pricing. Through a successful segmentation strategy with our customers, as well as superior service and continuous innovation, we believe we have been able to maintain a pricing edge above prices from imports and the U.S. market.
Expandable Polystyrene (EPS)
Industry Development
The EPS business is divided into three main segments: construction, packaging and disposable containers, such as thermal cups. The cup grade product is, nevertheless, different, and is considered as an independent segment and we do not participate in this segment. Unless otherwise stated, the numbers in this offering memorandum referring to markets and industries do not consider cup grade supply or consumption. Based on our review of publicly available market data, we believe the construction segment represents approximately 62% of the world EPS demand, followed by approximately 33% for the packaging segment. In North America, however, we believe cup grade represents up to 27% of total EPS demand, while we believe the construction segment accounts for approximately 49% of total consumption, with packaging accounting for the remaining 24%.
The EPS business had exhibited relatively good growth until the recent economic crisis, and it has been one of the fastest-growing styrene derivatives for some time. The financial crisis of 2008 and 2009 significantly affected demand in EPS end markets. Based on our review of publicly available data, we believe that in the U.S. and Canada, the decline in construction resulted in a decline in EPS demand of 29% from 2007 to 2009. The effects of the crisis continued in 2010, and the market fell 9% further. From 2010 to 2012, the market showed a recovery of 26% and a moderate growth rate of 2.1% is expected in 2013, due to ongoing recovery in the construction segments to pre-crisis levels.
In Mexico, the financial crisis also had a negative effect. However, in 2010 the market showed a recovery of 3.5%, followed by a growth rate of 4.5% in 2011 and 3.3% in 2012. In 2013, a growth rate of 6.3% is expected, in a continuation of the recovery trend towards pre-crisis levels.
Market Position
In 2012, approximately 48% of our EPS was used in the packaging industry while the remaining 52% went to the construction business. We own and operate the largest EPS manufacturing facility in the Americas and are
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leaders in the Mexican market, having maintained a minimum of 70% share of the Mexican construction and packaging market. As of December 31, 2012, based on our review of publicly available data, we have 91% capacity share in Mexico. In the U.S. and Canada, we estimate our 2012 market share was around 14%. Based on our review of publicly available market data and internal estimates, we believe our EPS installed capacity of 165,000 tons was the largest in North America and the Caribbean in 2012.
Regional Supply and Demand Growth Dynamics
World: Based on our review of publicly available market data, we believe worldwide EPS capacity was approximately 10.3 million tons during 2012. The largest capacity share is in China, which we believe has a little over half of the installed capacity.
North America: Based on our review of publicly available market data, we believe domestic demand for EPS in North America accounted for approximately 520,000 tons in 2012. We believe almost 30% of the North American EPS consumption comes from the cup segment, a market in which we have no participation. We estimate the average annual growth rate for demand has been negative since 2006 due largely to the effects of the recession, but has started to recover since 2010. Based on our review of publicly available market data, we estimate an annual growth rate of 3.2% in EPS demand for the packaging and construction sectors in 2013.
Pricing
The EPS industry bases its prices on a “delta margin,” defined as the price difference between the EPS price and the styrene monomer price free on board (“FOB”) for the U.S. Gulf Coast as reported by third party industry analysts. The fluctuation in delta-margins is a function of the product demand. The styrene monomer price is a function of its availability, and the benzene and ethylene prices in the market.
Polyurethanes (PURs)
Industry Development
Polyurethanes result from the reaction of two components: polyol and isocyanate. The polyether polyol, a propylene oxide derivative, is the main raw material that we provide to the polyurethane industry. Polyurethanes were first developed as a replacement for the insulation of refrigerators and airplanes. With the development of a low-cost polyether polyol, flexible foams opened the door to the bedding, furniture and automotive applications we know today. Formulations, additives and processing techniques have been developed, such as reinforced and structural moldings for exterior automotive parts and one-component systems. In North America, the highest growth can be found in Mexico, where the manufacturing industry is being relocated. A recovery of the manufacturing industry is expected to boost polyurethanes demand for the period between 2012 and 2017.
Market Position
We are the leading Mexican supplier of custom-blended polyurethane products as two-component chemical “systems” for a wide variety of end-use markets. Our strategic alliance partner, BASF, manufactures and provides us with the isocyanate component (“MDI” or “TDI”) to manufacture the polyol component. We can supply some of our PURs customers with a “system,” that is an integral product solution, with both components. Our polyurethanes customers mix both components, at the appropriate ratio, to obtain the polyurethane product. We also provide some of our customers with only one of the basic components, the polyol.
We manufacture and distribute a wide variety of polyols and systems for flexible and rigid foams and for advanced and specialty applications. In addition, we are BASF’s exclusive distributor of isocyanates, certain additives, catalysts and blowing agents required by the polyurethane industry. With this, we can provide its polyurethane customers with an integral solution.
The main end uses for PURs are mattresses, furniture (seating), home appliances (insulation for refrigerators) plus a wide variety of uses in the automotive industry. According to our estimates, we have an important market share in the PURs segment in Mexico of approximately 29% and we believe we are the trade leaders in the Systems market with a share of 36% in 2012.
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Regional Supply and Demand Growth Dynamics
Mexico: We estimate that PURs (excluding Systems) market demand in Mexico represented 115,000 tons in 2012 and the CAGR from 2007 to 2012 was approximately 1.5%. The PURs market is expected to experience a moderate growth of 3.5% in 2013, reaching 119,000 tons.
The CAGR for Systems from 2007 to 2012 was 5.1% according to our estimates. In 2012, the Systems segment market demand in Mexico was 146,000 tons, with an estimated annual growth of 1.4% for 2013, supported by the Mexican manufacturing recovery and the production transfers, mainly in the appliances industry, from the U.S. and other countries.
Pricing
PURs prices are set based on international prices, more specifically those applicable in the U.S. The change in prices is influenced by fluctuations in raw materials prices and by the supply-demand balance. Our products are manufactured from crude oil derivatives, and therefore its raw material prices are influenced by those of crude oil.
Caprolactam (CPL)
Industry Development
Worldwide consumption and trade volume of CPL is concentrated mainly in Northeast Asia (China and Taiwan). The EU, North America and Japan are major net export regions for CPL. Based on the global consumption trend of CPL in recent years, while the proportion of the worldwide consumption volume in China has increased strongly, the proportion in the EU and North America has shown a declining trend. New CPL capacities are required to support future industry growth. Recently, the industry experienced a shortage of product, prompting plans for some expansions or debottlenecking, which are in process or subject to approvals. According to PCI, worldwide CPL capacity will grow by 730 Ktons by 2017 compared to 2012 levels, with an estimated 73% of the growth expected to occur in China. Industry operating rates are expected to remain at healthy levels above 80%.
Market Position
We are the sole CPL producer in Mexico and there are minimal CPL imports into the Mexican market. We currently sell CPL primarily in the Mexican and Northeast Asian markets. According to PCI, in 2012 our exports to China and Taiwan represented 8% and 2%, respectively, of the CPL imports to those countries.
Regional Supply and Demand Growth Dynamics
World: CPL is mainly used for the production of nylon 6 polymer. Therefore, market demand for CPL is a function of the demand for nylon 6 polymer, which is used by a diverse group of manufacturers serving a wide variety of end use markets. Global demand for CPL will continue to grow at an annual average of 2-3%, according to PCI.
In 2012, CPL was a US$12,100 million global industry with global capacity of approximately 5.4 million tons and global production of approximately 4.9 million tons according to PCI.
China: Growth in CPL consumption has been driven by strong textile and industrial filament demand, which now accounts for more than 70% of Chinese CPL demand. In the rest of the world, textile filament production has been declining as the textile industry has migrated to Asia. Growth in these regions has been in the resins market, which accounts for 40% of global CPL demand.
The demand growth CAGR in the CPL industry from 2007 to 2012 was 2.9%. This moderate growth is attributable to the 2008 and 2009 global crisis which impacted commodity markets; however in 2011 and 2012 this industry experienced 4% growth, attributable to an increase in the use of resins in the automotive market. The growth rate in the resin market was 4.9% per year between 2007 and 2012, and a growth rate of 5.1% is expected for 2013.
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According to PCI, the Northeast Asian market, comprised mainly of China and Taiwan, consumed the largest volume of CPL in the world, equal to approximately 42% of world consumption, or 2.0 million tons of CPL, in 2012. China is the largest consumer of CPL of the Northeast Asian market (66% of consumption from this region), accounting for approximately 1,300 Ktons or 28% of world consumption in 2012. According to PCI, Chinese CPL demand is expected to grow at a CAGR of 5.4% from 2012 to 2017. PCI also estimates that Asia will need to import approximately 1,100 Ktons of CPL to meet its demand in 2013.
Pricing
Because CPL generally consists of uniform properties and characteristics, it is a commodity and is traded and exported around the world in the CPL spot market. The spot price is published monthly in a variety of publications. The change in prices is influenced by fluctuations in raw materials prices and majorly by the supply-demand balance.
Fertilizers (Ammonium sulfate)
Industry Development
The fertilizer industry in Mexico is approximately 4.3 million tons per year. Ammonium sulfate competes with another nitrogen-based fertilizer in Mexico called urea, as well as compound fertilizers, which are tailor made. Ammonium sulfate has the value added of its sulfur content, which is suitable to improve the characteristics of the alkaline soil in Mexico.
Mexico’s total demand of ammonium sulfate is approximately 1.9 million tons per year. Additionally, Mexico imports approximately 1.4 million tons per year of urea. Ammonium sulfate sales in Mexico are tied to the agricultural cycle; approximately 75% is sold during spring and summer.
Market Position
There are four producers of ammonium sulfate in Mexico, each of which is located in a different geographical region of the country. One of these producers, Agrogen, with approximately 32% capacity share, produces ammonium sulfate directly from ammonia. Fefesur with 14% capacity share, produces ammonium sulfate as a by-product from mining. Fertirey, with approximately 23% capacity share, produces ammonium sulfate as a by-product from its mining operations. The remaining 32% was produced by us.
Regional Supply and Demand Growth Dynamics
World: The continued growth in worldwide consumption of agricultural products such as grains for human and animal feed, and most recently for fuel production (bio-fuels), requires an extensive use of fertilizers in order to improve yields.
Depending on the production process used to produce CPL, between two and four parts of ammonium sulfate may be produced for each part of CPL produced. In the case of Alpek, approximately 4.3 parts of ammonium sulfate are produced for each part of CPL produced.
Mexico: Because of the low nitrogen content in its agricultural soil, Mexico is a significant market for the use of ammonium sulfate as a fertilizer. Competitiveness is strongly based on the fertilizer’s price; therefore, it is important to be close to a fertilizer demand source so freight costs do not reduce profitability. In Mexico, there is widespread use of fertilizers near our CPL plant.
Pricing
Ammonium sulfate prices vary seasonally with demand. Many of our products, also, are value-added fertilizers based on ammonium sulfate that have higher margins, and are sold to higher-value crops, such as avocado, strawberries and others.
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Other Chemicals
Industry Development
Improved economic growth in Mexico, in particular in the oil, automotive and consumer product industries that use our products, is expected to lead to the growth of our other chemicals and specialty products. The improved competitive position of the region in the production cost of ethylene will also support the development of our group of products that use ethylene oxide as their main raw material.
Market Position
We have an important number of specialty chemicals products with diverse end-uses, among which the most important are: pharmaceuticals, cosmetics, detergents, applications in the oil industry and water treatment.
Oil field chemicals (“OFCs”) are products used in the market for crude oil production process. We take part in the demulsifiers market mainly as a supplier of dehydration and desalting of crude oil products (promoting the separation of water from crude oil) and have reached a 35% domestic market share in demulsifiers within the OFCs market.
Our industrial chemicals products are divided in ethylene and propylene glycols, glycol ethers and brake fluids (GBFs). We believe we are trade leaders in most of those markets.
The markets we participate in our specialty and industrial chemicals are very diverse. The market is highly fragmented among many different products and producers.
Regional Supply and Demand Growth Dynamics
Mexico: In the specialty chemicals products, we estimate that the non-ionic surfactants industry in Mexico is about 85,000 tons per year. Specialty chemicals products have shown a growth rate of 3.7% in 2012 and are expected to grow 3.5% in 2013.
Pricing
Specialty and Industrial Chemical’s prices are set based on international prices, more specifically those applicable in the U.S. The change in prices is influenced by fluctuations in raw materials prices and by the supply-demand balance. Our products are manufactured from crude oil derivatives, and therefore its raw material prices are influenced by those of crude oil.
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BUSINESS
Overview
We are involved in the production, marketing and sale of a diversified portfolio of petrochemical products. We are the largest petrochemical company in Mexico and the second-largest in Latin America (based on 2012 net sales). We have leadership positions across our product portfolio. For example, we were the largest producer of polyester and its precursor chemicals in the Americas based on installed capacity as of December 31, 2012 according to PCI. After the acquisition of Wellman in August 2011, we became the largest PET producer in the Americas and the second largest worldwide according to PCI, our internal estimates and market data. For the year ended December 31, 2012 and the three months ended March 31, 2013, in each period we derived approximately 78% of our net sales from our polyester group of products, including the production of PTA, PET resin and polyester fibers. We also operate the only PP plant in Mexico which is one of the largest PP production facilities in North America as well as the largest EPS plant in the Americas in terms of installed capacity, based on our internal estimates and our review of publicly available market data. We are the sole Mexican producer of CPL, the majority of which we export to China.
We focus on products and end markets that we believe offer the highest growth potential and ability to expand margins and that are more likely to provide stable financial performance through economic cycles. For the year ended December 31, 2012, 91% of our products (on the basis of sales volume) were used in what we believe are recession-resistant end markets such as the food and beverage packaging and consumer goods end markets. For the year ended December 31, 2012, we generated approximately 50% of our total net sales in high-growth emerging markets including Mexico.
Our businesses benefit from access to competitively sourced raw materials, large-scale integrated production sites, proprietary state-of-the-art manufacturing technologies, strategic alliances and sustainable energy initiatives, which, together with our operational efficiency and expertise, allow us to maintain low-cost operations. We believe our participation in the recent consolidation trends in the North American PET market and our ability to maintain long-standing relationships with our key suppliers and customers have further enhanced our relevant market positions.
We operate through two major business segments: Polyester Chain Business and Plastics & Chemicals Business. Our Polyester Chain Business segment, comprising the production of PTA, PET and polyester fibers, serves the food and beverage packaging, textile and industrial filament end markets. Our Plastics & Chemicals Business segment, comprising the production of PP, EPS, polyurethanes, CPL, fertilizers and other chemicals, serves a wide range of markets, including the food and beverage packaging, consumer goods, automotive, construction, agriculture, oil industry and pharmaceutical end markets.
We operate 10 plants in Mexico, nine plants in the United States and one plant in Argentina. Our total assets as of March 31, 2013 were Ps. 59,656 million (US$4,829 million). The following table presents our total net sales and Adjusted EBITDA for the periods indicated.
Year Ended December 31, Three Months Ended
March 31, 2011 2012 2012 2012 2013 2013 (Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (Unaudited) (in millions) Total net sales ..........................90,667 96,163 7,303 24,829 23,284 1,840 Adjusted EBITDA(1) ................9,545 9,611 730 2,550 2,035 161 ______________
(1) For a definition of Adjusted EBITDA, see “Presentation of Financial and Certain Other Information––Non-GAAP Financial Measures.”
Our subsidiaries are involved in the production, marketing and sale of our products in the following industries:
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Industry Alpek
Industry Segment Main Products Representative End Markets
Typical End Users(1)
Percent of 2012 Net Sales
Main Geographic End Markets
Polyester Chain Products
PTA, PET � Food and beverage
packaging � Personal care
� Coca Cola � Pepsi � Kraft Foods
Approximately 78%
� Mexico � United States � Argentina � Brazil � Spain � Lithuania � Colombia � Italy
Polyester fibers � Carpets � Non-woven � Apparel
� Hanes � Shaw � Fruit of the Loom
Plastics & Chemicals Products
Polypropylene
� Food and beverage packaging
� Consumer goods � Automotive � Medical
� Coca Cola � Pepsi � Alcoa � Becton Dickinson � Tupperware � Kimberly Clark
Approximately 22%
� Mexico � United States � China � Central America
and Caribbean (2) � Europe(3) � Brazil � Canada � Colombia
Expandable polystyrene and polyurethanes
� Construction � Packaging for
appliances � Furniture and
bedding
� Whirlpool � Samsung � LG � Bosch � Sealy � Simmons
Industrial and specialty chemicals
� Crude oil industry � Automotive � Polyester � Hygiene � Pharmaceutical
� Pemex � Bardahl � Procter & Gamble � Johnson & Johnson
Caprolactam � Textile/apparel � Tire cords � Engineering plastics
� Nike � Quadrant � Rhodia
Fertilizers (ammonium sulfate)
� Agriculture
Many agricultural customers in central Mexico, mainly growers of sorghum and corn
_________ (1) Mix of current customers and non-customers of Alpek. (2) Central America and Caribbean includes Barbados, Belize, Costa Rica, Dominican Republic, Guatemala, Honduras, Jamaica,
Nicaragua, Panama, El Salvador, Trinidad and Tobago and British Virgin Islands. (3) Europe includes Germany, Spain, France, United Kingdom, Italy, Netherlands, Poland and Lithuania.
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We estimate that for the year ended December 31, 2012, approximately 91% of our products (on the basis of sales volume) were used in the food and beverage packaging and consumer goods end markets, as shown by the following chart.
Breakdown of Sales Volume by End Market for the Year Ended December 31, 2012
Food and Beverage
64%
Consumer goods27%
Textiles7%
Construction2%
History and Evolution
The following timeline sets forth significant milestones leading to the development of our company and our current operations:
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Columbia Assets Acquisition
On January 31, 2011, we completed the acquisition of the U.S. PTA and PET facilities of Eastman for US$622 million. As a result, we acquired a modern, integrated petrochemical facility consisting of three plants located in Columbia, South Carolina, with a total combined annual capacity of 1.26 million tons, which produce PTA and PET. In connection with the acquisition, we acquired working capital of US$190 million, as well as a series of patents and related intellectual property rights to the IntegRex® PTA and PET production technologies, which we believe are leading production technologies that are less capital intensive than other technologies and provide the lowest production cost per ton of PTA and PET of any technology that is currently available. We also incorporated a complementary, diversified portfolio of PET products, which we believe will allow us to reach a wider customer base and offer a more diversified product portfolio.
According to PCI, based on its PTA installed capacity, before the Columbia Assets were purchased by Alpek, Eastman was the third-largest player with a 12% market share in North America, although its production did not have an impact on the PTA merchant market, as 100% of its output was used for its own PET production.
The site encompasses over 1,400 acres in Columbia, South Carolina. The Columbia Assets facility features: (i) the IntegRex® technology PTA facility with a reported annual production capacity of 590,000 tons; (ii) the IntegRex® technology PET manufacturing operations with a reported annual production capacity of 525,000 tons; and (iii) the low CHDM-modified solid-stated PET manufacturing line with a reported annual production capacity of nearly 150,000 tons.
We believe the acquisition of the IntegRex® technology provides us with state-of-the-art PTA and PET production technology. We intend to leverage the IntegRex® technology in potential opportunities for expansion into new markets, partnerships and licensing agreements. We have already signed two agreements for the licensing of IntegRex® technology for an increase of capacity for a PTA plant in The Netherlands and for the construction of a PTA plant in Corpus Christi, USA. The principal benefits of this technology are:
� low conversion cost, which we estimate to be approximately 20% lower than competing technologies and lower capital investments, through the reduction of steps and machinery necessary for the production of PTA and PET;
� low investment per ton of installed capacity;
� potential for large-scale application; and
� lower environmental impact, due to a reduction in wastewater by-product and savings in energy consumption.
We believe the acquisition of the Columbia Assets will provide us with a unique opportunity to develop operational and technological synergies with our Polyester Chain Business while also providing us with an enhanced position in the PTA and PET markets. Furthermore, we believe we can leverage the IntegRex® technology package to explore strategic opportunities to expand our global footprint in the polyester chain. We are unable, however, to utilize the IntegRex® at our other existing PTA and PET plants.
Wellman Acquisition
On August 31, 2011, we completed the acquisition of the PET business of Wellman for US$123 million. The Wellman business consists of a 430,000 ton capacity PET plant located in Bay St. Louis, Mississippi, employing 165 people, as well as technology for PET manufacturing. Our acquisition of this plant from Wellman is one of the most recent investments carried out in the PET industry in North America. This plant is strategically located on the coast of the Gulf of Mexico, close to the main sources of raw materials for the production of PET. Additionally, as a result of the acquisition, we acquired a new group of products and brands that we believe have strong market recognition because of their high quality and performance.
As a result of the Columbia Assets and Wellman acquisitions, we believe we are the largest PTA and PET producer in North America based on installed capacity. According to PCI and based on our internal estimates, with
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the acquisition of the Columbia Assets our North American market share based on installed capacity increased to 45% for PTA and 30% for PET, while the Wellman acquisition further increased our PET share in North America to 40%.
The following tables set forth the largest PTA and PET producers in North America based on installed capacity as of December 31, 2012:
North America PTA Installed Capacity Company Installed Capacity
(in thousands of tons per year) Alpek (Mexico) 2,790* BP (UK) 2,450 Interquisa (Spain) 580 Eastman (U.S.) 250 North America total 6,070 * Our actual installed capacity is 2,740 ktons, which differs from the amount calculated by PCI. Source: PCI
North America PET Installed Capacity
Company Installed Capacity (in thousands of tons per year)
Alpek 1,775* Indorama 1,292 M&G 830 Nan Ya 445 Selenis 126 North America total 4,488 * Our actual installed capacity is 1,777 ktons, which differs from the amount calculated by PCI. Source: PCI
Cogeneration Project
Beginning in 2012 and over the next two years, we plan to invest approximately US$130 million in a cogeneration project, which will produce electricity and steam, through our subsidiary Petrotemex. This cogeneration plant, which will supply our PTA and PET plants located in Cosoleacaque, Veracruz, Mexico, will have a nameplate capacity to generate approximately 95 megawatts of electricity. All of the steam produced by the plant will be used to cover the requirements of the project. The cogeneration plant will also supply energy to other Alfa entities outside of Cosoleacaque.
In order to implement this project, on January 31, 2012, Petrotemex and its subsidiary DAK Resinas Americas Mexico, S.A. de C.V. (both subsidiaries of Alpek) formed a corporation named Cogeneración de Energía Limpia de Cosoleacaque, S.A. de C.V. We believe the project will increase the plants’ efficiency by ensuring a supply of low cost energy with low emissions.
M&G Agreement In the first quarter of 2013, we entered into a master agreement with M&G under which M&G will license our IntegRex® PTA technology for the construction of its M&G Facility. In addition, we will pay US$350 million to M&G in installments during the M&G Facility’s construction, which we intend to pay over the course of the construction from our cash flows from operations, and we will receive contractual rights to 400 thousand tons of PET (made with 336 thousand tons of PTA) per year from the M&G Facility. During the three months ended March 31, 2013 we paid US$35 million to M&G under the agreement. We will supply the raw materials for our portion of PTA-PET under the agreement. The M&G Facility is currently expected to begin operations in 2016.
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Our Strengths
Throughout our history, we have developed a series of competitive strengths upon which we have built a successful business model. We believe that our key competitive strengths are:
� Market and Industry Leadership;
� Proven Track Record of Growth;
� Low-Cost Producer Across our Product Portfolio;
� Leading Technology Platform;
� Resilient Financial Performance; and
� Experienced Management Team Supported by Strong Shareholder.
Market and Industry Leadership
We are the largest petrochemical company in Mexico and the second-largest in Latin America (based on 2012 net sales) with leading positions across our product offering. According to PCI, we are one of the largest integrated players in the global polyester industry and the leading integrated polyester producer in North America.
The following table highlights our leading market positions as of December 31, 2012 based on installed capacity in our targeted geographies and end markets:
Products Market Position(1) Share(1) PTA #1 in the Americas 46%(2) PET #1 in the Americas 38%(2) #2 worldwide 8%(2) Polyester Staple Fiber #1 in North America 44%(2) EPS #1 in North America; #1 in Mexico 28%; 91%(3) PP #1 in Mexico 100%(4) CPL #1 in Mexico 100%(4) _______________ (1) Based on installed capacity. (2) Source: PCI, Alpek’s internal estimates and market data. (3) Source: Alpek’s review of publicly available market data. (4) Source: Alpek’s internal estimates.
Our leading market positions are reinforced by significant competitive advantages:
� Our ability to continuously innovate allows us to develop and improve manufacturing technologies and production processes, enhance value-added attributes of our products and reduce our cost structure.
� We are suppliers to important consumer goods brands. We maintain long-term relationships with customers across our portfolio through high-quality customer service and superior technical responsiveness. Our commercial, marketing, research and development organizations allow us to meet specific customer performance requirements and provide our customers with attractive and competitive value initiatives.
� Our long-standing relationships with our strategic alliance partners allow us to access key manufacturing technologies, technical expertise and products.
� We have been an active participant in the recent consolidation trends in the North American PET market. This consolidation has significantly improved the industry structure and allowed us to further enhance our ability to establish valuable and attractive product offerings and broaden our customer base in that market. See “Business.”
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� Based on our experience and industry knowledge, we believe that our best-in-class infrastructure would require large capital investments and significant lead time to replicate.
Proven Track Record of Growth
Throughout our history, we have executed a focused strategy of organic growth and value-creating acquisitions. In addition, we have built a product portfolio and trade leadership that have strategically positioned us to benefit from high-growth emerging markets and the U.S. economic recovery. As a result, for the last 25 years, we have grown our sales volume at a CAGR of 10.4%.
� We have grown our production capacity through high-return, capital-efficient debottleneckings and expansions. For example, in 1998 we debottlenecked our first PP line, increasing its capacity from 100 Ktons to 240 Ktons and further increased the site’s capacity to 640 Ktons in 2008 by adding a second production line. Furthermore, we have converted our PP facility into what we believe is one of the most competitive in North America.
� We have a proven track record of acquiring assets and successfully integrating and improving these assets. For example, in 2001 we acquired certain idle PTA, PET and polyester staple fiber assets in the United States. We have transformed these assets into one of the leading producers within the market of PET and polyester chain products in the Americas. We improved the profitability of these assets by reducing fixed costs, increasing asset utilization, consolidating our product offerings, focusing our product mix on products and markets with higher margins and focusing on the elimination of waste and non-value-added activities. We believe these measures, when coupled with sustainability initiatives aimed at reducing energy needs and increasing environmental awareness, have helped transform these assets and businesses into trade leaders. We further enhanced this leading position through our January and August 2011 acquisitions of the Columbia Assets and Wellman, respectively. We have already improved operating performance of the Columbia Assets and are extracting synergies.
� We intend to continue to use our strengths and competency to grow our business both organically and through acquisitions.
Low-Cost Producer Across our Product Portfolio
We believe we are one of the lowest-cost producers in North America based on our:
� large-scale production facilities. According to PCI, we operate some of the largest manufacturing plants in the Americas for our products, including our world-scale polyester production facilities in Altamira and Cosoleacaque in Mexico, and Columbia, South Carolina, and Cape Fear, North Carolina, in the U.S., and our PP and EPS facilities in Altamira, Mexico;
� high operating rates and energy efficiency. We believe that we operate our plants at industry leading utilization rates, which helps minimize our per-unit production costs. According to internal calculations, our PTA capacity utilization rate in 2012 was 95% compared to a peer average of 84%;
� strategically located assets in close proximity to raw material supplies (principally on the U.S. Gulf Coast), product transportation infrastructure and end markets, which helps reduce logistics costs. In addition, our long-term relationships with suppliers, supported by our large-scale consumption and long-term contracts, give us strategic access to raw materials;
� state-of-the-art production technology. We use industry leading production technologies across our product portfolio that help reduce our production costs by being more efficient than older technologies; and
� low labor cost in Mexico, low overhead costs and lean, flexible organizational structure throughout our facilities.
We intend to maintain and grow our cost advantage through continued investment in cost reduction and efficiency-enhancing projects.
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Leading Technology Platform
We have developed and acquired cutting edge production technologies that we believe have improved our cost position and enhanced the quality and performance of our products. We believe the acquisition of the IntegRex® technology provides us with state-of-the-art PTA and PET production technology. We intend to leverage the IntegRex® technology in potential opportunities for expansion into new markets, partnerships and licensing agreements. We have already signed two agreements for the licensing of IntegRex® technology for an increase of capacity for a PTA plant in The Netherlands and for the construction of a PTA plant in Corpus Christi, USA. The principal benefits of this technology are:
� low conversion cost, which we estimate to be approximately 20% lower than competing technologies and lower capital investments, through the reduction of steps and machinery necessary for the production of PTA and PET;
� low investment per ton of installed capacity;
� potential for large-scale application; and
� lower environmental impact, due to a reduction in wastewater by-product and savings in energy consumption.
Our PP production process also uses state-of-the-art technologies: Spheripol, the most widely used PP technology in the world, and Spherizone, the latest technology being licensed by LyondellBasell. These technologies permit us to produce PP with a wider range of properties. Additionally, our EPS and polyurethanes businesses benefit from close technological collaboration with our strategic alliance partner BASF.
This robust technological base underpins our low-cost advantage, our operational excellence and our ability to develop new products.
Resilient Financial Performance
We have demonstrated strong financial performance throughout the business cycle. During the last economic downturn from 2008 to 2009, our volumes and net sales increased by 12.2% and 4.6%, respectively. Our robust financial performance has been driven by the following key elements:
� for the year ended December 31, 2012, we estimate that approximately 91% of our products (on the basis of sales volume) were ultimately used to produce plastic products and containers for the beverage, food and consumer goods end markets, which tend to be less susceptible to economic downturns;
� for the year ended December 31, 2012, approximately 50% of our sales were in emerging markets, with high demand growth rates;
� for the year ended December 31, 2012 and the three months ended March 31, 2013, more than one-third of our sales to third parties were under long-term supply contracts, which further reduces our exposure to industry cycles;
� our PTA contracts in North America (which represented 23% of our net sales for each of the year ended December 31, 2012 and the three months ended March 31, 2013) are priced on a “cost plus” basis, and a portion of our PET contracts are subject to fixed prices that are negotiated with our customers annually;
� access to competitively sourced raw materials;
� our ability to pass a substantial portion of raw material price increases to our customers; and
� our low-cost position.
Additionally, we believe that regional dynamics in our industries will help reduce volatility in pricing and margins. The North American PTA/PET/polyester market has experienced significant industry consolidation in
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recent years, which we believe will reduce volatility in the Polyester Chain Business. From 2005 to 2012, market consolidation has reduced the number of PET producers in North America from eight to five. PCI expects the North American PET demand outlook to improve, providing a healthy environment for domestic producers.
Experienced Management Team Supported by Strong Principal Shareholder
We have a senior management team with an average of more than 20 years of industry experience and a seasoned and knowledgeable group of operating and technical managers in each of our businesses. Our team has been responsible for the expansion of Alpek through organic growth and acquisitions, and has a proven track record of integrating and optimizing acquired assets and implementing new projects and start-up operations. For example, since our acquisition of the Columbia Assets in January 2011, we have improved our operating rate, and we have also achieved important synergies in areas such as procurement and operations. Additionally, our principal shareholder, Alfa, is a leading Latin American conglomerate with an established culture of operational excellence, prudent corporate governance and reliability as a partner. These values form the core of our businesses on which our management team intends to build.
Our Strategies
We are focused on building on the aforementioned competitive strengths to achieve profitable top-line growth, improve margins, and to generate a strong and sustainable cash flow.
Capitalize on Market Growth Opportunities
We intend to continue expanding our capacity, product portfolio and geographic reach by executing the following strategies while maintaining a prudent approach to financial management:
� investing in capital efficient high-return organic growth opportunities throughout our product portfolio, ranging from large-scale expansions to debottlenecking projects;
� evaluating and pursuing value-accretive acquisitions in the markets where we participate or in new regions with high-growth potential, in order to enhance our position as a global petrochemical player; consistent with this strategy, we recently acquired the Columbia Assets and Wellman;
� leveraging our industry leading technology portfolio and business knowledge, seeking licensing and strategic alliance opportunities or pursuing new integrated projects worldwide through the use of IntegRex® technologies in our PTA/PET businesses; we have already signed two agreements for the licensing of IntegRex® technology for an increase of capacity for a PTA plant in The Netherlands and for the construction of a PTA plant in Corpus Christi, USA.;
� expanding our reach in high-growth markets such as Latin America, Asia and the Middle East;
� diversifying our product portfolio, with an emphasis on higher margin products; and
� continuing to broaden our customer base.
Continue to Pursue Operational Excellence
We believe our low-cost operations have contributed to our successful growth strategy in the markets we serve. We intend to:
� maintain a low-cost structure through continued operating and safety excellence resulting in high-capacity utilization rates at our large-scale production facilities;
� continue to implement additional cost and efficiency improvements, including the replacement of our older and less efficient operations with new large-scale plants using our latest proprietary low-cost technologies;
� reduce energy costs and improve manufacturing efficiency through the use of diversified fuel sources and energy integration; and
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� continue developing long-term competitive sourcing for our key raw materials, taking advantage of our capacity, the convenient geographic location of our operations and our strong logistics infrastructure.
Continue to Develop High Value Offerings for Our Customers
We intend to maintain our position as a supplier of choice and trade leader, supported by close collaboration and long-standing relationships with our key customers in the markets we serve. We plan to continue being our customers’ supplier of choice by maintaining an emphasis on:
� unparalleled responsiveness to customer needs;
� superior technical support;
� continuous innovation in products and services by working closely with customers to better meet their needs; and
� sustainable products and solutions.
Invest in and Grow Our Technology Leadership Position
We intend to continue developing proprietary technologies to maintain our leadership in the PTA/PET industry. We also intend to continue investing in our research and development program to further develop and continually improve our proprietary technologies. We believe that investing in and growing our technology leadership position will help us sustain and enhance our profitability, improve the efficiency of our operations and enhance the return on our investment and sustainability.
Continue to Pursue Sustainability Initiatives
We will continue pursuing initiatives that reduce our environmental footprint. We have several paths to address environmental challenges and encourage sustainable practices, such as:
� continuing to implement energy efficiency projects, reducing our fossil fuel consumption;
� continuing our recycling activities; for example, we intend to implement bottle-to-bottle initiatives through the Clear Path Recycling operation in North Carolina;
� looking into several initiatives related to renewable raw material, which includes working with our customers to support their sustainability efforts; and
� committing to continuous improvement in our health, safety and environmental performance, as well as complying with existing legal obligations in the jurisdictions where we operate.
Attract, Develop and Retain the Best Human Capital
Our human capital has shaped us since our earliest stages. We do not believe we could have fostered and achieved the success we have had without the support of a top-performing, goal-oriented and highly skilled human capital base. Attracting, developing and retaining the best human capital will remain one of our key strategies.
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Corporate Structure
We are a holding company that conducts its business and operations through its subsidiaries. The following chart summarizes our corporate structure as of the date of this offering memorandum, including our principal subsidiaries, our percentage ownership in them and their principal products.
Alpek, S.A.B. de C.V. (1)
Unimor, S.A. de C.V. and
subsidiaries (5) 100%
(CPL and Fertilizers)
Indelpro, S.A. de C.V. and
subsidiary (3) 51% (PP)
Polioles, S.A. de C.V. and
subsidiary (4)
50% + 1 share (EPS, PURs & other
chemicals)
Grupo Petrotemex, S.A. de C.V. (2)
100% (PTA, PET and PSF)
Subsidiary Guarantors of the Notes
Tereftalatos Mexicanos,
S.A. de C.V. (8)
91.45% (PTA)
DAK Resinas Americas Mexico,
S.A. de C.V. 100%
(PET)
DAK Americas LLC (6)
100% (PTA, PET, PSF)
Akra Polyester, S.A. de C.V. (7)
93.35% (PTA, Fibers)
DAK Americas Mississippi, Inc. (9)
100% (PET)
(1) Other non-material subsidiaries are Copeq Trading Co. and Grupo Alpek, S.A. de C.V. (2) Other subsidiaries are DAK Americas Argentina, S.A. and Cogeneración de Energía Limpia de Cosoleacaque, S.A. de C.V.,
among other non-material subsidiaries. (3) LyondellBasell Industries Holdings B.V. owns 49.0% of the shares. Industrias Indelpro, S.A. de C.V. (personnel services
company) is a subsidiary of this company. (4) BASF de Mexico, S.A. de C.V. owns 50.0% minus one share. Industrias Polioles, S.A. de C.V. (personnel services company)
is a subsidiary of this company. (5) Subsidiaries include Univex, S.A. and Nyltek, S.A. de C.V., among other non-material subsidiaries. (6) DAK Americas Exterior, S.L. (a wholly owned subsidiary of Grupo Petrotemex, S.A. de C.V.) directly owns approximately
18.0% of the shares. DAK Americas Pearl River, Inc. is a subsidiary of this company. (7) BP Amoco Chemical Company owns approximately 6.65% of the shares. Industrias Fiqusa, S.A. de C.V. (personnel service
company) is a subsidiary of this company. (8) BP Amoco Chemical Company owns approximately 8.55% of the shares. (9) DAK Americas Pearl River, Inc. (a wholly owned subsidiary of DAK Americas LLC) directly owns 100% of the shares.
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Facilities and Operations
Our corporate headquarters are located in Monterrey, Nuevo León, Mexico. Alpek currently operates 20 manufacturing plants in the U.S., Mexico and Argentina, which are set forth in the table below:
Product Produced Facility (Location) Installed Capacity
(Ktons/year)
PTA
Wilmington, NC, USA 540(1) Columbia, SC, USA 590(2) Altamira, Tamaulipas, Mexico 1,000 Cosoleacaque, Veracruz, Mexico 610
PET
Wilmington, NC, USA 209 Fayetteville, NC, USA 156(1) Charleston, SC, USA 156(3) Columbia, SC, USA 670(2) Bay St. Louis, MS, USA 430(4) Cosoleacaque, Veracruz, Mexico 156 Zárate, Argentina 193(5)
Fibers Charleston, SC, USA 136(6) Wilmington, NC, USA 146(6)
Filament Monterrey, Nuevo León, Mexico 160 PP Altamira, Tamaulipas, Mexico 640
EPS Altamira, Tamaulipas, Mexico 165 CPL Salamanca, Guanajuato, Mexico 85(7)
Fertilizers Salamanca, Guanajuato, Mexico 360 Nylon 6 Ocotlán, Jalisco, Mexico 10(8) Various Lerma, State of Mexico, Mexico 129(9)(10)
_____________________ (1) This plant was acquired by Petrotemex from DuPont in July 2001. (2) This plant was acquired by Petrotemex from Eastman on January 31, 2011. (3) This plant began operations in June 2003. (4) This plant was acquired by Petrotemex from Wellman in August 2011. (5) This plant was acquired by Petrotemex from Eastman in December 2007. (6) This plant was acquired by Petrotemex from DuPont in August 2004. (7) This plant was acquired by Alfa from Celanese in 1995. (8) This plant was acquired by Alfa from Celanese in 1995. (9) This plant’s capacity varies depending on the production mix. (10) PURs production was relocated to the Lerma plant in 2001.
Outside Mexico, our operations are currently undertaken by Grupo Petrotemex’s wholly-owned subsidiary DAK Americas. We operate a PET facility in Zárate, Argentina, with an installed capacity of 193,000 tons per year. In the United States, our operations are concentrated in North and South Carolina. In North Carolina, two operating facilities (Cedar Creek and Cape Fear) total 365,000 tons per year of PET capacity, plus 540,000 and 146,000 tons per year of PTA and staple fiber, respectively. Additionally, we operate Clear Path, a strategic alliance with Shaw Industries at the Cedar Creek site. Clear Path uses post-consumer bottles to produce R-PET flakes, later used in the manufacturing of carpets. In Cooper River, South Carolina, our facilities include a 156,000 ton per year PET facility and 136,000 ton per year staple fiber facility.
On January 31, 2011, we completed the acquisition of Eastman’s PET assets, which include a manufacturing site in Columbia, South Carolina, with an installed capacity of 670,000 tons per year of PET. Of Columbia’s PET capacity, 525,000 tons per year correspond to the IntegRex® line, a technology that has integrated PTA manufacturing capacity (see “—Columbia Assets Acquisition”).
On August 31, 2011, we completed the acquisition of the PET business of Wellman for US$123 million. The Wellman business consists of a 430,000 ton capacity PET plant located in Bay St. Louis, Mississippi, employing 165 people, as well as technology for PET manufacturing. Our acquisition of this plant from Wellman is one of the most recent investments carried out in the PET industry in North America. This plant is strategically located on the
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coast of the Gulf of Mexico, close to the main sources of raw materials for the production of PET. Additionally, as a result of the acquisition, we acquired a new group of products and brands that we believe have strong market recognition because of their high quality and performance. See “—Wellman Acquisition.”
Within Mexico, our operations are controlled by a number of subsidiaries and strategic alliances, as described in the following table:
Subsidiary Product Installed Capacity
(in thousands of tons per year)
Akra Polyester fiber
PTA 160
1,000 DAK Resinas Americas Mexico PET 156 Indelpro Polypropylene 640 Temex PTA 610
Polioles EPS
Others 165 129
Unimor Caprolactam Fertilizers
Nylon
85 360 10
DAK Americas LLC
DAK Americas is a limited liability company formed on March 26, 2001. The registered address of DAK Americas is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware, 19801. As of December 31, 2012, DAK Americas had net assets of PS. 1,110 million (accounting for 23% of our consolidated net assets) and for the year ended December 31, 2012, DAK Americas had an EBITDA of Ps. 212 (accounting for 29% of our consolidated EBITDA). Outside Mexico, our operations are currently undertaken by Grupo Petrotemex’s wholly-owned subsidiary DAK Americas.
Key Products
Polyester Chain Business
Our Polyester Chain Business primarily involves the production, marketing and sale of PTA, PET and polyester fibers. We are the largest producer of PTA in North America and among the top five producers globally based on installed capacity, according to PCI, as of December 31, 2012. According to PCI, we are also the largest producer of PET in the Americas and the largest producer of polyester fibers in North America, based on our production capacity in 2012. As of December 31, 2012, our Polyester Chain Business represented Ps. 75,249 million (US$5,714 million), or 78%, of our total net sales in 2012.
PTA is primarily used to manufacture PET (used in plastic bottles, containers and other packaging) and polyester fibers (used for carpets, garments, home furnishings and consumer and industrial applications).
PET is a material that has gained widespread use in bottles and other containers for liquids, food and personal care products, including carbonated soft drinks, sparkling water, still water, fortified water, isotonic beverages, health drinks, juices, teas, dairy products, prepackaged food, health and beauty aids, pharmaceuticals and other household products. Sheet and film made from PET are used for cups, lids, trays, bowls and blister packaging. PET offers transparency, strength, durability and high barriers of protection, has no known health risks, is light weight, cost-efficient and recyclable and has a high degree of design flexibility and customization, all of which enable custom PET containers to be used for a variety of reusable and temperature-sensitive packaging applications. PET has increasingly displaced glass, aluminum and tin cans and other plastics such as PVC or polyethylene, and has shown one of the highest growth rates of any plastic container product worldwide during the last decade.
There is a growing trend to include recycled content in PET and polyester staple fiber products and we have developed a post-consumer PET bottle recycling operation to produce PET with recycled content. This new facility is located at our Cedar Creek site in Fayetteville, North Carolina and is operated through a strategic alliance with Shaw Industries. Operations started in the last quarter of 2010. Currently, it has the capacity to recycle 160 million
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pounds of, or over three billion, PET bottles per year. We believe this program will enable us to enhance the value and sustainability of our products and to deliver on the growing demand for recycled content.
Polyester staple fiber has multiple uses in carpets, garments, home furnishings (such as bedding, upholstery, drapery and towels) and non-woven consumer and industrial applications (such as wipes, medical and hygiene products, packaging, pharmaceutical products, automotive fabrics and linings). Polyester staple fiber is used in these products due to the durability, flexibility in applications, color stability, quality and production processability of final products. We have increasingly focused our operations to produce products that are specifically optimized for specific applications, such as carpets, certain knit apparel items (such as t-shirts, sweatshirts, socks and underwear) and non-woven consumer products (such as diapers, baby wipes, household wipes, filters and floor polishers).
Polyester filament has diverse applications such as textile fabrication, including automotive interiors and industrial yarns, manufacturing of seatbelts, canvases, conveyor belts, hoses and other products. According to PCI, the global demand for this product is growing rapidly due to its ability to substitute cotton and other fibers in many applications at lower cost, while providing similar properties.
Plastics & Chemicals Business
Our Plastics & Chemicals Business comprises the production, marketing and sale of polypropylene, expandable polystyrene, PURs, glycols, glycol ethers, oil-field chemicals, specialty chemicals, caprolactam, fertilizers and nylon 6 polymer. Our Plastics & Chemicals Business accounted for Ps. 21,068 million (US$1,600 million), or 22%, of our total net sales in 2012.
Polypropylene (PP) is a thermoplastic polymer that results from the chemical reaction among propylene monomer and a set of catalysts and chemicals. The properties of PP include low specific gravity, high stiffness, relatively high temperature resistance and good resistance to chemicals and fatigue. Polypropylene is used in a wide variety of applications including packaging, textiles (e.g., ropes, thermal underwear and carpets), stationery, plastic parts and reusable containers of various types, automotive components, and polymer banknotes. Rapid improvements in processing properties, coupled with superior cost and environmental properties, contributed to a substitution trend that allowed the PP industry to develop.
We produce a variety of polypropylene products including homopolymers, random and impact copolymers. The Company sells its products to polypropylene processing plants. Indelpro has two presentations for its polypropylene products; the Valtec™ presentation and the Pro-fax™ presentation:
� Valtec™ presentation is sold as white opaque spheres and typically has a natural advantage in commodity-type applications due to the fact that it is not extruded in the production process. This yields a polymer with higher conversion efficiency rate resulting in higher productivity in the customers’ manufacturing processes; and
� Pro-fax™ is presented as small translucent pellets obtained from the extrusion of polypropylene flake and is normally better suited for high-value added applications, such as bottle caps, microwavable food containers, carpeting, diapers and upholstery.
Expandable polystyrene (EPS) is a lightweight, rigid cellular plastic made from the polymerization of the styrene monomer. EPS is a material characterized by its versatility, given its shock-absorbing, insulating and molding properties. These properties, together with its processing ease and low cost, make it a popular packaging material for pieces sensitive to impact and for the preservation of perishable products. In Mexico, EPS has been included as part of the construction system in large-scale housing projects due to its ease of installation and light weight in roofing, therefore reducing construction costs and time. It also provides thermal and acoustic insulation.
Polyurethanes (PURs) are resilient, flexible, and durable materials that can replace paint, cotton, rubber, metal and wood in many applications across all fields. PURs can be hard like fiberglass, spongy like upholstery foam, protective like varnish, bouncy like rubber tires or sticky like glue. PURs are unique materials that offer the elasticity of rubber combined with the toughness and durability of metal.
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Caprolactam (CPL) is the main raw material used in the production of nylon 6 (used in textile and industrial yarns, carpets and engineering resins). Currently, most of the world’s installed capacity for the production of nylon 6 is located in China. In 2012, we shipped approximately 75% of our CPL production to China. We also use a portion of our CPL to produce nylon 6 polymer, which is sold to customers, mostly in Mexico, for further transformation mainly into nylon 6 engineering resins. Examples of the end uses of nylon 6 are apparel (e.g., blouses, dresses, hosiery, intimate apparel, swimwear, sportswear and leg wear), industrial yarns (e.g., tire cord, automotive headliners, conveyor belts and seatbelts), engineering resins (e.g., machine parts) and carpets.
Fertilizers produced based on ammonium sulfate is a by-product of the CPL production process we use. Ammonium sulfate is a nitrogen-rich fertilizer that is well suited for use in the farming regions located in central Mexico, near our production facilities. The close proximity to these regions enable us to sell ammonium sulfate to over 450 fertilizer wholesalers and retailers. In addition, we have a dedicated team committed to the research and development of higher aggregate value fertilizers tailored to the specific needs of our customers.
Other chemicals include specialty chemicals and industrial chemicals. Our specialty chemicals are used to manufacture a wide variety of products in a diverse spectrum of markets, including pharmaceuticals, cosmetics, detergents and industrial cleaning. Industrial chemicals are used in: the polyester, automotive, pharmaceutical, cosmetic and personal care industries; paints, lacquers and dyes; and in various other applications. Our main raw materials in the production of other chemicals are ethylene and propylene oxides.
The following chart presents a breakdown of the various products that make up this business segment:
Product Applications
Oil field chemicals (OFCs) Production of crude oil, dehydration and desalting, corrosion inhibitors and scale inhibitors, among others
Polyethylene glycol (PEG) Pharmaceuticals, medicine tablets, skin creams, ointments, toothpastes and cosmetics
Non-ionic tensoactives Detergents, emulsifiers, demulsifiers, humectants and dispersants (water treatment)
BASF’s performance chemicals in Mexico (re-sale)
Water treatment, detergents, galvanoplasty, wax and cleaning for farms
Laureth (tolling agreement) Shampoos and home surface cleaners
Industrial polyols Antifoam agent (antibiotics, pharmaceuticals), plastic coatings, foaming agent (mining) and functional fluid
Ethylene glycols
PET (bottles for water and soft drinks), polyester fibers
Engine coolant and antifreeze
Solvents, unsaturated polyester resins, polyurethane foams, oil industry (dehumidifying agent for air and natural gas), film developer, paints and flocculants
Propylene glycols
Pharmaceuticals, cosmetics & personal care, food, solvent of flavors and fragrances, chemical intermediate, functional fluid, paints and coatings, printing inks (solvents), liquid cleaners, textile (soap and lubricants) and cutting oils
Glycol ethers and brake fluids Solvent for dyes in textile, adhesives, thinner, metal cleaning, agrochemicals, lacquers, paints and varnish, industrial cleaning and automotive
Principal Customers
Specialty Chemicals
Industrial Chemicals
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In our Polyester Chain Business, our customer base comprises mainly major producers of PET that purchase our PTA, as well as companies that convert PET into plastic bottles and other containers, known in the industry as “converters,” and in turn sell them to major consumer goods companies. Many of the world’s most popular consumer brands use our products in their containers, including Coca Cola, Pepsi, Heinz, Kraft Foods, among others.
In the Plastics & Chemicals Business, most of our customers are converters that purchase PP and EPS in the form of beads for the following uses: (i) extrusion, molding, injection, blowing or thermoforming applications; (ii) production of construction elements, such as EPS blocks for housing; (iii) for manufacturing elements, such as automotive parts, piping and others; (iv) for packaging elements, such as bags, food containers and others; and (v) for disposables, such as diapers, disposable cups, plates and cutlery. Due to its many uses, PURs are sold to customers in a wide variety of end-use markets. CPL is exported mainly to customers in Greater China to produce nylon. Ammonium sulfate is sold to large numbers of agricultural customers near our production facilities for use as fertilizer. We sell specialty and industrial chemicals to hundreds of small and medium businesses in a wide range of industries.
Our ten largest customers in the Polyester Chain Business accounted for 53% of our total net sales for this business segment and 41% of our total net sales for the year ended December 31, 2012. Our largest customer in this segment, composed of various subsidiary companies of M&G, accounted for 12% of our total net sales for the year ended December 31, 2012.
Our ten largest customers in the Plastics & Chemicals Business accounted for 22% of our total net sales for this business segment and 5% of our total net sales for the year ended December 31, 2012. Our largest customer in this business segment accounted for 1% of our total net sales for the year ended December 31, 2012.
In both business segments, we have both short-term and long-term customer contracts, which generally can be renewed for successive one-year periods. Typically, contracts can be terminated by either party upon delivery of prior written notice. In our contracts, we generally agree to supply the requirements of our customers and, in some cases, the customers agree to purchase exclusively from us such supply requirements, which are dictated by their estimates or by a cap set forth in the contract. Pursuant to these contracts, if we are unable to supply the buyer with its requirements, the buyer has the right to purchase its minimum requirements from a third party.
The following chart summarizes the geographic location of our customers for the three months ended March 31, 2013 based on the percentage of our total net sales in the respective geographic region, for all our business segments. Approximately more than 80% of our total sales for the year ended December 31, 2012 were sold within North America.
Breakdown of Net Sales by Geography for the Year Ended December 31, 2012
Mexico36%
Other NAFTA47%
Other Americas
12%
Europe3%
Other Asia2%
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Raw Materials and Energy
Our operations utilize various raw materials, including, but not limited to, the following:
pX
Paraxylene (pX) is a benzene-based hydrocarbon used for the manufacture of PTA for polyester. pX is derived from petroleum through a refining process at oil and petrochemical refineries. It is also used in the production of gasoline.
MEG
Monoethylene glycol (MEG) is an important raw material for industrial applications. A primary use of MEG is in the manufacture of PET, fiber and film. In addition, MEG is important in the production of antifreeze, coolants, aircraft anti-icers and de-icers and solvents.
Styrene Monomer
The main raw material used in the production of EPS is styrene monomer, which is an unsaturated hydrocarbon used to make polystyrene plastics, polymers, rubber, protective coatings and resins. Styrene is also used as a solvent and as an intermediate chemical. Styrene monomer, under normal conditions, is a clear, colorless, flammable liquid.
Propylene
Propylene is a three-carbon, unsaturated hydrocarbon, a co-product of the cracking process, or a by-product obtained in refineries. It is used in the petrochemical industry for the production of polypropylene, propylene oxide, cumene, isopropanol and acrylic acid. When alkylated with butanes or pentanes, it is also used as a gasoline component.
Cylcohexane
Cyclohexane is a benzene derivative used in the production of caprolactam. It is produced via the hydrogenation of benzene.
Ethylene oxide
The chemical compound ethylene oxide is an important industrial chemical used as an intermediate in the production of ethylene glycol and other chemicals, and as a sterilant for foodstuffs and medical supplies. It is a colorless flammable gas at room temperature and a colorless liquid below 10.7 C with a sweet ether-like odor.
Propylene oxide
Propylene oxide is a colorless, low-boiling and highly volatile liquid with a sweet, ether-like odor. Propylene oxide is a chemical intermediate used worldwide to produce commercial and industrial products including polyether polyols, propylene glycols and propylene glycol ethers.
Energy
We use natural gas, fuel oil, coal and electricity to meet our energy needs.
Suppliers
Some of our main suppliers include British Petroleum (BP), Chevron, Exxon Mobil, Flint Hills and Pemex, with whom we maintain close relationships. We are one of the largest pX buyers in the world (in terms of volume) and have entered into supply contracts with our pX suppliers to ensure consistent pricing and reliable supply in the long term. Other raw materials we use, such as MEG, propylene, styrene monomer, acetic acid and isophthalic acid, are also supplied under long-term contracts entered into with suppliers having a global presence or with which we have an established relationship. The majority of our raw material volume, with the exception of MEG, is sourced within
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North America. A significant portion of our MEG is supplied by sources within Saudi Arabia. The prices of our primary raw materials and energy resources, which are typically purchased pursuant to long-term contracts, have fluctuated in the past and are expected to fluctuate in the future. See “Risk Factors—Risks Relating to our Business—Our operations are dependent on the availability and cost of our raw materials and energy sources.”
Competition
In our Polyester Chain Business, we compete on the basis of price, quality, proximity to customers, proximity and strategic access to raw material suppliers and favorable logistics. In the PET industry, we compete on the basis of price, quality and consistency, customer service, product variety and innovation. Geographically, our main competitors in the PTA industry are BP and CEPSA; likewise, our main competitors in the PET industry are M&G and Indorama. In the polyester staple fiber industry, we compete on the basis of quality, customer service and contract terms, including price. Our main competitors in the polyester fibers industry are importers from Asia.
In our Plastics & Chemicals Business, our main strengths as competitors are low-cost production and strong customer relationships. Most of our Plastics & Chemicals Business customers are located in Mexico, where we believe we have a very strong presence and reputation. Also, as the largest producers of EPS and the only producers of PP in the country, our main competitors are importers, although we also have domestic competitors in the EPS industry. This gives us an important advantage in logistics and in customer relations that we believe constitutes a part of our core strengths. We compete on the basis of high-quality production in the specialty and industrial chemicals market and of product specificity in the specialty chemicals market. Other important factors for our competitiveness are price, quality, customer service and innovation, as we offer customizable products that are highly attractive to our customers. In the case of Polioles’ specialty chemicals division, we believe we are able to provide excellent technical support to our customers due to the knowledge base of our technological partner, BASF.
For more information regarding our market position in each business segment, see “Industry.”
Sales and Distribution
Mexico
PTA is distributed from our Cosoleacaque plant to customers in Central Mexico by rail or in trucks. Our PET plant in Mexico is located in the same complex and next to the PTA plant and receives the product by pipeline directly to its silos. For the export market, our PTA production is distributed to a seaport by rail or highway. We have container loading facilities or truck platforms. PTA for customers in Asia is shipped from the Mexican ports of either Salina Cruz or Manzanillo on the Pacific Ocean. For European customers, shipments are made from the port of Veracruz on the Gulf of Mexico.
PTA produced at our Altamira plant is distributed by rail to customers in Mexico as well as to M&G, which is located in the same industrial complex as the Altamira plant. For customers in the United States, South America or Europe, shipments are made in containers from the port of Altamira, located eight kilometers away from the Altamira plant, on the Gulf of Mexico. Proximity to the port makes this location highly competitive for export shipments of PTA.
We sell PET in bulk railcars, bulk trucks and in one-ton bags shipped in package trucks mainly throughout Mexico and to a lesser extent in export markets in Central and South America and the Caribbean. Exports are packaged in one-ton bags and shipped in containers.
Polypropylene is distributed by independent transportation companies. We contract and arrange most of our product shipments. 88% and 93% of our polypropylene sales volume (PP) was sold in Mexico during the year ended December 31, 2012 and the three months ended March 31, 2013, respectively. The rest is typically sold in Central and South America without any or little need in advertisement. Polypropylene is mostly sold directly to producers of flexible film for packaging (where the main market is snacks), caps and closures for all kinds of bottles (soft drinks, food containers and health care), nonwovens for hygiene products (diapers, sanitary napkins, medical clothing), raffia bags for sugar, fertilizers and grains, among others. PP sales are delivered in bulk in hoppercars and bulk trucks, as well as in 25-kg sacks (on pallets) and one-ton super sacks, both delivered in trucks. The particular distribution depends on the location of our customer, the options available to reach a particular customer, the
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presentation the customer requires and the amount of product supplied. PURs are regularly shipped from our facility in Lerma, State of Mexico, in tank trucks for our larger customers and in 55-gallon drums or tote containers for smaller customers. We outsource all our freight needs to third parties.
With regard to specialty chemicals, given that this is a very fragmented market and there are some customers that consume less than one ton of specialty chemicals per year, we are creating a strategy to develop third party independent distributors. Most of our specialty chemicals are sent to customers in 55-gallon drums and sometimes in tank trucks.
Alpek sells CPL to manufacturers of nylon 6 polymer through its own sales team consisting of sales personnel located in Monterrey, Mexico and a Chinese sales agent located in Hong Kong. Alpek delivers CPL to customers in either solid flakes or in molten (semi-liquid) state, which is achieved by maintaining the required heat level during the transportation process. Shipments of molten CPL are limited to customers in close proximity to our production site due to the increased costs of shipping. Generally, all CPL deliveries in Mexico are in a molten state and all deliveries to the Northeast Asian market are in the form of solid flakes. Alpek employs an unrelated third party transportation service provider to deliver CPL to its customers.
Alpek sells ammonium sulfate through its own sales personnel. Fertilizers, which consist of mostly solids, are delivered in two presentations: in bulk direct to the costumer by truck or bagged in 25-kg bags. Alpek has ten distribution and warehouse centers (seven of which it leases and three of which it owns) in the states of Jalisco and Guanajuato. This allows us to store the product in an appropriate manner and close to the place of consumption, which we believe enables us to provide high-quality customer service.
United States
The majority of our PTA production in the United States is consumed internally by our polyester staple fiber and PET facilities in the United States. PTA is delivered by a pipeline within our integrated Cape Fear and Columbia sites, or in rail cars to our Cedar Creek Cooper River and Pearl River sites. PET is mainly shipped in rail cars, using bulk hopper cars to deliver to customer silos, as well as shipping in bulk trucks. Polyester staple fiber is packaged in bales and delivered by trucks and trailers to customers located mainly in North Carolina and South Carolina. Exports of polyester staple fiber to Mexico and Latin America are shipped in containers out of the Wilmington, North Carolina and Charleston, South Carolina seaports.
All of our sales of EPS to the United States are made through BASF’s distribution network and using the Altamira seaport. EPS is a solid product and is shipped in 800-kg superbags. For exports outside the United States, smaller 40-kg bags are used.
Argentina
We sell PET in bulk trucks and in one-ton bags shipped in trucks throughout Argentina. In addition, a significant level of exports takes place to surrounding countries such as Uruguay, Paraguay, Bolivia and Chile. Exports are packaged in one-ton bags and shipped in containers.
Intellectual Property
PTA
Since January 31, 2011, we own the intellectual property rights to the IntegRex® technology developed by Eastman. See “Columbia Assets Acquisition.”
We have had ownership rights with respect to BP’s (formerly Amoco) PTA technology since 1982. Technologies derived from the original BP technology are used in our PTA industrial process in Mexico. We have more than 30 years of experience employing and improving these technologies. As a result of our proprietary technology, we have increased capacity at Cosoleacaque from approximately 135,000 to 600,000 tons per year and at the Altamira plant from approximately 500,000 to 1,000,000 tons per year. In addition, we have undertaken an energy-efficiency project at Cosoleacaque, which has resulted in a significant reduction in production costs.
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We have a royalty-free perpetual license to use DuPont’s original technology for the production of polymer-grade PTA at our plant in Wilmington, North Carolina. We have been going through a process of efficiency improvements by leveraging the know-how acquired in the Mexican plants in order to increase our competitiveness.
PET
In connection with our acquisition of the DAK Americas operations from DuPont, we obtained a royalty-free perpetual technology license for the production of PET. Currently, such technology is utilized at our PET plants located in North Carolina and South Carolina. This technology is the result of ICI’s technological development, sold to DuPont in 1997, and makes these plants highly competitive compared to other plants operating in today’s market. We also have multiple Laser+® registered trademarks that we use to market a diverse variety of PET specialty products. We were also granted a non-exclusive, perpetual, royalty-free license for PET from DuPont and a non-exclusive, royalty-free license for PET from Eastman.
The new Melt-Tek® PET process employed at our Cape Fear, North Carolina site, which was developed in 2007, represents a state-of-the-art innovation in resin manufacturing, providing PET users and converters such benefits as improved product processability, lower temperature properties, shorter cycle times and increased resin uniformity and consistency.
In early 2009, we acquired DuPont’s Crystar® specialty polymers technology, which has enabled us to expand our product offerings to include higher-margin differentiated products to serve more specialized markets.
On January 31, 2011, we announced the completion of the acquisition of the U.S. PTA and PET facilities of Eastman for US$622 million, subject to post-closing adjustment for working capital. As a result, we acquired one modern, integrated petrochemical site consisting of three plants located in Columbia, South Carolina, with a total combined annual capacity of 1.26 million tons, which produce PTA and PET. In connection with the acquisition, we acquired working capital of US$190 million, as well as a series of patents and related intellectual property rights to the IntegRex® PTA and PET production technologies, which we believe are leading production technologies that are less capital intensive than other technologies and provide the lowest production cost per ton of PTA and PET of any technology that is currently available. We also incorporated a complementary, diversified portfolio of PET products, which we believe will allow us to reach a wider customer base and offer a more diversified product portfolio. For example, we have entered the film/sheet and pharmaceutical/medical markets through brands like ParaStar™ and PET 9921 respectively.
On August 31, 2011, we completed the acquisition of the PET business of Wellman for US$123 million. The Wellman business consists of a 430,000 ton capacity PET plant located in Bay St. Louis, Mississippi, employing 165 people, as well as technology for PET manufacturing. Our acquisition of this plant from Wellman is one of the most recent investments carried out in the PET industry in North America. This plant is strategically located on the coast of the Gulf of Mexico, close to the main sources of raw materials for the production of PET. Additionally, as a result of the acquisition, we acquired a new group of products and brands that we believe have strong market recognition because of their high quality and performance.
Polyester Staple Fiber
We have a royalty-free perpetual technology license to use DuPont’s original technology for the production of polyester staple fiber. Currently, such technology is utilized at our plants located in North Carolina and South Carolina. In addition, we have a royalty-free perpetual license limited to North America to market polyester staple fiber under the Dacron® trademark, granted to us by DuPont. We also have the following registered trademarks, each licensed from a third party, that we use to market a diverse variety of fiber specialty products:
� Dacron® polyester staple fiber, a trusted and valued fiber for various markets of the textile industry;
� DelcronTM Hydrotec fiber, which uses molecular engineering to impart permanent moisture management properties;
� SteriPur® AM is a polyester staple fiber with antimicrobial properties featuring AlphaSan® by Milliken that inhibits growth of bacteria, odor, discoloration and fabric deterioration;
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� HydroPur® fiber is a combination moisture management and antimicrobial fiber;
� SteriPur® FC is a polyester staple fiber certified for food contact;
� Airloft® is high void hollow fiber for high loft fiberfill applications; and
� Secure Performance®, describes a type of polyester, synthetic and/or textile fibers.
Plastics and Chemicals
Our PP business is supported by two important technologies, including LyondellBasell’s Spheripol process, the most widely used process worldwide for PP production and the latest technology developed by LyondellBasell, the Spherizone process. The Spherizone process is a state-of-the-art technology that is structurally identical to the Spheripol process, but offers a broader range of products.
In our EPS business, we use BASF’s one-step technology at the largest site in the Americas in terms of installed capacity. Conventional technologies for EPS used at other sites involve a two-step process, which we believe results in a higher conversion cost. BASF is also our technology partner for PURs and other specialty chemicals production. Even though Alpek does not have patents in these businesses, some products are registered as trademarks. Certain of these trademarks are owned by Alpek while others are owned by BASF and sold to Alpek through licenses.
The technology for the CPL production process is owned by Dutch States Mines (“DSM”) and licensed by Stamicarbon B.V., with an original plant capacity of 40 Ktons per year. The first capacity expansion was concluded in 1991 to reach a new capacity of 75 Ktons per year without any external support. In 1997, a debottlenecking started up to reach CPL current production capacity of 85 Ktons per year, as a result of improvements in existing plant equipment. We do not pay any royalties or license fees for our CPL production technology.
Research and Development
Research and new product development are an integral part of our business. Our research programs focus on the development of new and improved products for various markets and applications, as well as the development of proprietary technologies, process improvements and energy consumption efficiency. Research and development work is performed on a product-specific basis, as each product has distinct processes and market needs that require focused efforts, and is conducted from three perspectives: internal, trade leadership and innovation.
� Internal. The internal perspective focuses on technology improvements to improve costs, quality or production capacity or to meet regulatory requirements. An example is the development of Melt-Tek® technology for the production of PET, which reduces energy consumption and provides improved operating costs and customer benefits.
� Trade Leadership. Trade leadership focuses on the development of products and services that will increase customer satisfaction with the goal of becoming their preferred supplier. Trade leadership includes the development of differentiated products that may have a better sales margin.
� Innovation. Innovation identifies potential new products and market areas that will provide growth and/or differentiated products.
In 2011 and 2012 and in the three months ended March 31, 2012 and 2013, we spent approximately US$10 million, US$6 million, US$1.3 million and US$1.1 million on research and development. As of March 31, 2013, our research staff consisted of 46 full-time personnel who conduct research at our laboratories.
Environmental and Other Government Regulation
Our businesses are subject to a broad range of regulations generally applicable to manufacturing businesses. These regulations include environmental, health and safety, food and drug, transportation, anti-corruption, customs, export controls and trade sanctions, employment and labor, government contracts, and intellectual property, among others.
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Environmental
Mexico
Our Mexican operations are subject to Mexican federal, state and municipal laws and regulations relating to the protection of the environment. The primary federal environmental law is the Mexican Federal Law of Ecological Balance and Environmental Protection (Ley General de Equilibrio Ecológico y Protección al Ambiente) pursuant to which rules have been promulgated concerning water, air and noise pollution, and hazardous substances. Other laws that apply or may apply to our operations are the General Law for Prevention and Integral Management of Residues (Ley General para la Prevención y Gestión Integral de los Residuos), which regulates the generation, handling, transportation, storage and final disposal of hazardous waste, as well as imports and exports of hazardous materials and hazardous wastes, and the National Water Law (Ley de Aguas Nacionales) and regulations thereunder, which govern the prevention and control of water pollution.
The Mexican federal authority in charge of overseeing compliance with the federal environmental laws is the Ministry of Environment and Natural Resources (Secretaría del Medio Ambiente y Recursos Naturales) or SEMARNAT. An agency of SEMARNAT, the Procuraduría Federal de Protección al Ambiente or PROFEPA, has the authority to enforce the Mexican federal environmental laws. As part of its enforcement powers, PROFEPA can bring civil, administrative and criminal proceedings against companies and individuals that violate environmental laws and has the power to impose fines and close facilities that are not in compliance with federal environmental laws. As part of its enforcement powers, PROFEPA can issue sanctions that include, among others, monetary fines, revocation of authorizations, concessions, licenses, permits or registries, administrative arrests, seizure of contaminating equipment and, in certain cases, temporary or permanent closure of facilities. Furthermore, in special situations or certain areas where federal jurisdiction does not exist, the state and municipal authorities can regulate and enforce certain environmental regulations, as long as they are consistent with federal law.
We believe we are in compliance, in all material respects, with environmental laws in Mexico applicable to our operations. We have fulfilled all applicable environmental requirements, and in 2007 we obtained, and have maintained, PROFEPA’s certification of Clean Industry (Industria Limpia), which is a certification of our compliance with certain environmental laws, with respect to most of our production facilities. We were also awarded carbon dioxide emission credits by the United Nations for emission reduction at our Cosoleacaque PTA plant, which have been sold in the carbon market. There are external audits conducted on our Mexican facilities every two to four years, and we follow any recommendations that arise from such audits.
Although there can be no assurance, we do not believe that continued compliance with Mexican environmental laws and regulations applicable to our operations will require substantial expenditures or have a material adverse effect on our financial position or results of operations. We may, however, incur amounts greater than currently estimated due to changes in law, or in the interpretation or enforcement of laws, and other factors beyond our control.
United States
Our U.S. operations are subject to U.S. federal, state and local laws and regulations relating to the protection of the environment. The U.S. federal authority in charge of overseeing compliance with the federal environmental laws is the U.S. Environmental Protection Agency (“EPA”). The regulations cover all types of environmental control including air, water, waste and chemical management. As part of its enforcement powers, the EPA can bring civil, administrative and criminal proceedings against companies and individuals that violate environmental laws and has the power to close facilities not in compliance with such laws. The EPA delegates these enforcement powers to the state and municipal authorities in most cases. States can also pass their own laws as long as they are at least as stringent as those of the federal government. DAK Americas operates in the states of North Carolina, South Carolina and Mississippi in the United States, and works closely with the regulatory agencies in both states.
We believe we are in compliance, in all material respects, with U.S. federal and state environmental laws and regulations applicable to our operations. Our U.S. facilities are subject to external audits generally once every three years by a third party environmental consultant in order to validate our internal environmental programs and procedures. We also conduct mixed audits with both internal and external personnel participating. See “Risk
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Factors—Risks Relating to our Business—Compliance with environmental and other governmental laws and regulations could result in added expenditures or liabilities.”
Although we cannot make any assurances, we do not believe that continued compliance with U.S. environmental laws and regulations applicable to our operations will have a material adverse effect on our financial position or results of operations. We may, however, incur amounts greater than currently estimated due to changes in existing laws and regulations and other factors beyond our control.
Argentina
Our Argentine operations are subject to Argentine federal, state and local laws and regulations relating to the protection of the environment. We conduct environmental audits every three years at our DAK Argentina site and believe we are in compliance, in all material respects, with all such laws and regulations. We do not expect to make any significant capital expenditures over the next three years to comply with these and other Argentine environmental laws and regulations as they become effective or are modified. We may, however, incur amounts greater than currently estimated due to changes in law and other factors beyond our control. Although there can be no assurance, we do not believe that continued compliance with Argentine environmental laws and regulations applicable to our operations will have a material adverse effect on our financial position or results of operations.
The perceived effects of climate change may result in additional legal and regulatory requirements in Mexico, the United States and Argentina to reduce or mitigate the effects of our industrial facilities’ emissions. See “Risk Factors—Risks Relating to our Business—Compliance with environmental and other governmental laws and regulations could result in added expenditures or liabilities.”
Safety and Quality Control
Mexico
Our Mexican operations are subject to Mexican federal and state laws and regulations relating to the protection of our employees and contractors. We believe we are in compliance with all such laws and regulations. We are committed to promoting the health and safety of our workers and others involved in or affected by our operations. We have developed and implemented an integrated health and safety management system. As part of this system, each of our Mexican facilities is equipped with a permit administration system, an accident prevention program, a comprehensive emergency response program with emergency equipment and trained safety crews, and a risk analysis and management program. Regular external audits are conducted of the effectiveness of our internal health and safety practices, and we follow any recommendations that arise from such audits. We have been in compliance in all material respects with such audits in the past. In addition, we are committed to protecting the environment and the health and safety of the communities where we operate. Accordingly, we collaborate with local governments, advocacy organizations and industry and public interest groups to promote a culture of continuous improvement in environment, safety and health.
All of our Mexican facilities have strong quality systems in place and are ISO certified.
United States
Our U.S. operations are subject to U.S. federal and state laws and regulations relating to the protection of our employees and contractors. The U.S. federal authority in charge of overseeing compliance with the federal occupational safety laws is the U.S. Occupational Health and Safety Administration (“OHSA”). The regulations cover all types of occupational exposure such as chemical, heat, fall protection, scaffolding and moving and lifting equipment. As part of its enforcement powers, OHSA can bring civil, administrative and criminal proceedings against companies and individuals that violate occupational and health laws and has the power to close facilities not in compliance with such laws. OHSA also delegates these enforcement powers to the state and municipal authorities in most cases. States can also pass their own laws as long as they are at least as stringent as those of the federal government. We operate in the states of North Carolina and South Carolina and work closely with the occupational safety departments in each state.
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We believe we are in compliance, in all material respects, with the federal and state occupational safety laws applicable to our operations. We routinely conduct internal occupational safety audits to validate our safety programs and procedures. We believe our injury rates are less than 50% of the industry average, which we believe indicates a strong safety program.
All of our U.S. facilities have strong quality systems in place and are ISO 9001 certified.
Insurance
We are insured with coverage against three key categories of risk: (i) assets and business interruption; (ii) transportation; and (iii) general liability. Our insurance policies are negotiated on our behalf at the parent company level through Alfa and apply to our operations in Mexico, the United States and Argentina.
Our all-risk policy insures assets and protects us against business interruptions caused by hurricanes and other weather conditions, earthquakes, equipment malfunctions and other catastrophic events. Our transportation policies provide coverage for all import and export merchandise, such as raw materials, inventories and products, whether shipped by air, land and/or sea. We also maintain general liability policies that provide coverage for damage to third parties and insure properties, products and individuals, including our directors and officers. In addition, each subsidiary maintains other insurance policies as necessary to comply with local regulations or specific needs, such as commercial auto, workers compensation, environmental liability and employee practices.
We believe that our insurance coverage is reasonable in amount and consistent with industry standards applicable to petrochemical companies operating in the regions in which we operate and do not anticipate having any difficulties in renewing any of our insurance policies.
Legal Proceedings
In the ordinary course of our business, we have been involved in various disputes and litigation. While the results of any such disputes cannot be predicted with certainty, we do not believe that there are any pending or threatened actions, suits or proceedings against or affecting us which, if determined adversely to us, would in our view, individually or in the aggregate, materially harm our business, financial condition or results of operations. Also, we are not aware of any governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which we are aware), during the past 12 months, which may have, or have had in the recent past, significant effects on our financial position or profitability.
Employees
Our operations in Mexico are subject to the LFT and the general labor regulations issued by the Mexican Ministry of Labor and Social Prevention (Secretaría del Trabajo y Previsión Social) on issues such as employees’ hours and working conditions, health risks, fringe benefits and the dismissal of employees.
Mexican employers are required to pay PTU to their employees in an aggregate amount equal to 10% of the employer’s taxable income (calculated in accordance with the applicable provisions of the Mexican Income Tax Law without reference to dividends, inflation adjustments or tax loss carry forwards, among other items). Employers are liable for PTU regardless of agreed compensation and benefits. It is uncertain how the Mexican authorities will interpret recent amendments to the LFT, and other existing applicable legislation, such as the Mexican Income Tax Law on matters related to the payment of PTU. Some of our employees in Mexico are employed by a services company, and we currently pay labor benefits based on the taxable income of the employee’s direct employer (our services company) without considering our taxable income or that of any other company within our group. As a result of the recent amendments to the LFT, we could potentially be considered an employer of the employees of our services companies, and as such could be required to pay an increased PTU taking into account the taxable income of a company other than the employees’ direct employer. See “Risk Factors— Risks Related to our Company—Recent amendments to the Mexican labor law regime may have an adverse effect on our business, results of operations and financial condition.”
As of March 31, 2013, we employed 4,731 employees, of whom 47.2% were represented by labor unions and 52.8% were non-union managerial employees (empleados de confianza). Some of our employees in Mexico and
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Argentina belong to labor unions. Under Mexican law, collective bargaining agreements with these trade unions are renegotiated on an annual basis with respect to wages and every two years with respect to wages and all other benefits. Our most recent negotiation was completed without any disputes. In general, we consider our relationship with our workforce and various trade unions to be good.
The following table shows our employees by geographic location as of March 31, 2013 and December 31, 2012 and 2011:
Number of Employees December 31 March 31
2011 2012 2013 Mexico .................................................. 3,193 3,171 3,200 United States ......................................... 1,125 1,303 1,309 Argentina .............................................. 196 222 222 Total employees ................................ 4,514 4,696 4,731 Percentage of employees
represented by labor unions ............. 49.4% 47.2% 47.2%
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MANAGEMENT
Our Board of Directors is responsible for the management of our business. The Board of Directors is comprised of a number of permanent and alternate members, as determined from time to time at the shareholders’ meeting. Directors serve in their positions for a term of one year and may be re-elected.
Our current Board of Directors was appointed at the general ordinary and extraordinary shareholders’ meeting held on April 10, 2012. The address for each of our directors and executive officers is Ave. Gómez Morín No. 1111 Sur, Col. Carrizalejo, San Pedro Garza García, Nuevo León, 66254 México.
Except as disclosed in this offering memorandum, the members of our Board of Directors and our executive officers have no conflicts of interest with us.
Our Board of Directors
The following table sets forth our current directors and their alternates, as appointed by our shareholders:
Name Age Armando Garza Sada - Chairman 56 Álvaro Fernández Garza 45 Francisco José Calderón Rojas* 47 Rodrigo Fernández Martínez 37 Andrés Garza Herrera* 46 Merici Garza Sada 55 Pierre Francis Haas García* 61 Jaime Serra Puche* 62 Enrique Zambrano Benítez* 57
*Independent Directors.
Armando Garza Sada is the current Chairman of the Board of Directors of Alfa. He joined Alfa in 1978. Prior to his current position as Chairman of the Board of Directors, he held the positions of Vice Chairman of the Board of Directors, President of Development and President of Corporate Planning for Alfa. He has also served as President of Versax, S.A. de C.V. and Sigma Alimentos, S.A. de C.V.(“Sigma”), both subsidiaries of Alfa, and as President of Polioles and Acojinamientos Selther, S.A. de C.V. He is a member of the Boards of Fomento Económico Mexicano, S.A.B. de C.V., El Puerto de Liverpool, S.A.B. de C.V., Grupo Lamosa, S.A.B. de C.V., Frisa Industrias, S.A. de C.V., and the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). He obtained a degree from the Massachusetts Institute of Technology, as well as a Master’s degree in Business Administration from the Stanford Graduate School of Business. Mr. Garza Sada is the brother of Merici Garza Sada and the cousin of Álvaro Fernández Garza.
Álvaro Fernández Garza is the Vice Chairman of the Board of Directors of Alfa. He joined Alfa in 1991. Prior to his current position as President of Alfa, he held various positions at Sigma, including President, Commercial Director and Director of Foodservices. He was also President of Terza, S.A. de C.V., and held various high management positions in Alestra, S. de R.L. de C.V. He is a member of the Boards of Vitro, S.A.B. de C.V., Cydsa, S.A.B. de C.V., Pigmentos y Óxidos, S.A. de C.V., the University of Monterrey (UDEM) and the Monterrey Museum of Modern Art (Museo de Arte Contemporáneo de Monterrey), as well as of the Regional Board of BBVA Bancomer. He obtained a degree in economics from the University of Notre Dame, a Master’s degree from ITESM and a Master’s degree in Business Administration from Georgetown University. Mr. Fernández Garza is the cousin of Armando Garza Sada and Merici Garza Sada and the uncle of Rodrigo Fernández Martínez.
Francisco José Calderón Rojas is currently the Director of Planning and Finance for Grupo Franca, which he joined in 1988. He previously served in various other positions in the areas of real estate, treasury and information technology. He is a member of the Boards of Franca Industrias, S.A de C.V., Franca Servicios, S.A. de C.V., Franca Desarrollos, Capital Inmobiliario Institucional, S. de R.L de C.V., Fomento Económico Mexicano, S.A. de C.V. (alternate), Coca Cola-Femsa, S.A. de C.V. (alternate), Banco Nacional de México, S.A. (Advisory Board), BBVA Bancomer, S.A. (Regional Board), the Chamber of Real Estate Owners of Nuevo León (Cámara de Propietarios de Bienes Raíces de Nuevo León, A.C.), the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM), and
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the University of Monterrey (UDEM). He obtained a degree in economics from ITESM and a Master’s degree in Business Administration from the University of California in Los Angeles (UCLA).
Rodrigo Fernández Martínez joined Alfa in 1998. He is currently the Director of Marketing for Sigma, and he previously served as President of New Businesses for Sigma Alimentos, as well as in other positions related to commercial and strategic planning. He obtained a degree in economics from the University of Virginia and a Master’s degree in Business Administration from the Wharton Business School at the University of Pennsylvania. Mr. Fernández Martínez is the nephew of Álvaro Fernández Garza.
Andrés E. Garza Herrera is President of Qualtia Alimentos, S.A. de C.V. (“Qualtia”), the food division of Xignux. He joined Xignux (previously Axa) in 1990 and is a member of its Board. Prior to his position as President of Qualtia, he held the position of Director of Planning and Development of the infrastructure division of Xignux. From 1990 until 2008, he worked at Xignux-Yasaki, the auto parts division of Xignux, where he held various positions, eventually becoming Director of the Business Unit for Harnesses for Mexico, Central and South America. He is a member of the Regional Board of BANORTE and the General Council (Consejo General) of UDEM. He was President of CAINTRA (Cámara de la Industria de Transformación de Nuevo León) in 2009 and 2010. He is also a member of the Boards of the City of Children of Nuevo León (Ciudad de los Niños de Nuevo León) and the Patronato Papalote Verde de Nuevo León. He graduated from ITESM in 1989 with a Bachelor’s degree in Mechanical Administrator Engineering and obtained a Master’s degree in Business Administration from the University of San Diego, California in 1994. He participated in the Global Leadership Program at the IMD in Laussane, Switzerland in 2007.
Merici Garza Sada obtained a degree in Business Administration from the Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). Mrs. Garza Sada is the sister of Armando Garza Sada and the cousin of Álvaro Fernández Garza.
Pierre Francis Haas García is a Senior Advisor to McKinsey & Co., based in Los Angeles, California. For several years he was a McKinsey & Co. Partner based out of Houston, Texas. Previously, he was the Chief Executive Officer of KoSa, the polyester successor of Hoechst-Celanese. Prior to that, he was Managing Director for Latin America for Koch Industries, Inc. During his 14 year-long professional career at Pemex, he served as General Director of Pemex Gas, General Director of PMI and as Director of Pemex’s offices in London and Paris. Previously, he served as an Economic Counsellor with the Mexican Embassy in Japan. He is a member of the Oxford Energy Policy Club, the Paris Petroleum Club and the Mexican Energy Colloqium (Coloquio Mexicano de Energía.) He studied economics at UNAM, Vanderbilt University and Cambridge University.
Jaime Serra Puche is chairman of SAI Law and Economics (consulting firm) and founder of Aklara (electronic auctions), CAM (Arbitration Center of Mexico) and the NAFTA Fund of Mexico (private equity fund). He worked in the Mexican government from 1986 to 1994 where he served as Undersecretary of Finance, Secretary of Trade and Industry and Secretary of Finance. As Secretary of Trade and Industry he led the negotiation and implementation of NAFTA; headed the negotiations of free trade agreements with Chile, Colombia, Venezuela, Bolivia and Costa Rica; and promoted the creation of the Federal Competition Commission in Mexico. His experience on not-for profit Boards include the Corporation of Yale University (1994-2001), where he currently co-chairs The President's Council on International Activities. He is a trustee of the National Institute for Genomic Medicine in Mexico and of The Trilateral Commission. Mr. Serra is a Director of the Board of the following publicly listed companies on the NYSE: Chiquita Brands International (cqb), The Mexico Fund (mxf), Tenaris (ts), and Grupo Modelo (gmodeloc). Mr. Serra is a graduate of UNAM. He earned his Masters in Economics at El Colegio de Mexico and his Ph.D. in Economics at Yale University. He has been professor of Economics at El Colegio de Mexico, Stanford, Princeton and NYU. He received the Wilbur Lucius Cross Medal, Yale University (1993), National Prize for Social Sciences, Mexico (1986), and National Prize for Economics (Banamex,1979).
Enrique Zambrano Benítez has been the President of Grupo Proeza, S.A. de C.V. (“Grupo Proeza”) since 1988. He is member of the Boards of Grupo Proeza , Frisa Industrias, S.A. de C.V., ITESM, the Regional Board of Banco de México and the State Board for the Rebuilding of Nuevo León. He graduated from the Massachusetts Institute of Technology and obtained a Master’s degree in Business Administration from Stanford University.
Our Audit and Corporate Practices Committee
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Our Audit and Corporate Practices Committee was appointed at the general ordinary and extraordinary shareholders’ meeting held on April 10, 2012. The members of the committee are: Andrés Garza Herrera, Jaime Serra Puche and Enrique Zambrano Benítez (Chairman), all of whom are independent directors pursuant to Article 26 of the LMV.
Our Main Executive Officers
The following table lists the names, ages, positions and years of service of our main executive officers:
Name Age Position Years with Alpek José de Jesús Valdez Simancas 60 Chief Executive Officer 38 Raúl Millares Neyra 60 Finance and Administration Senior Vice President 30 Felipe Garza Medina 56 President, PTA 10 Jorge P. Young Cerecedo 44 President, PET and PSF 23 Jorge Gonzalez Escobedo 61 President, Polyester Filaments 39 Alejandro Llovera Zambrano 51 President, Polypropylene 16 Jose Luis Zepeda Peña 58 President, EPS, PURs and Chemicals 17 Eduardo Escalante Castillo 55 President, CPL and Ammonium sulfate 7
Certain information with respect to our executive officers that have not been disclosed in “Our Board of
Directors,” above is set out below:
José de Jesús Valdez Simancas is the current Chief Executive Officer of Alpek. He joined Alfa in 1976. He has been Chairman of the Board of Directors of Mexico’s National Chemical Industry Association (Asociación Nacional de la Industria Química), President of the Energy commission for Mexico’s Confederation of Industrial Chambers (Confederación de Cámaras Industriales de los Estados Unidos Mexicanos), and President of Nuevo Leon’s Industry Chamber (Cámara de la Industria de Transformación de Nuevo León). At Alpek, he has served as the Chief Operating Officer of the polypropylene, and EPS and chemical businesses, as well as Chief Operating Officer of Petrocel. He holds a Bachelor’s degree in mechanical engineering and a Master’s degree in Business Administration from the Instituto Tecnológico y de Estudios Superiores de Monterrey (“ITESM”) and a Master’s degree in industrial engineering from Stanford University.
Raúl Millares Neyra joined Alfa in 1981 and is currently the Finance and Administration Senior Vice President of Alpek. From 2006 to May 2009, Mr. Millares was the Planning Vice President for Nemak and co-CEO of Nemak Europe, the automotive division of Alfa. He has also held positions as President and CEO in other petrochemical subsidiaries of Alfa, including Indelpro, Akra Nylon and Polioles. He has been Chairman of the Board of Directors of Mexico’s National Chemical Industry Association (Asociación Nacional de la Industria Química). Mr. Millares holds a Master’s degree in Business Administration from the Wharton Business School at the University of Pennsylvania and a Bachelor’s degree in chemical engineering from Universidad Iberoamericana.
Felipe Garza Medina is the President of the PTA business, a position he has held since 2008. He joined Alfa in 1977. He was previously the President and CEO of Indelpro and the Chief Operating Officer of Galvacero, a subsidiary of Hylsamex (formerly owned by Alfa). He has also held numerous other positions in his 30-year career with Alfa. He holds a Master’s degree in Business Administration from Cornell University and a Bachelor’s degree in chemical engineering from Stanford University.
Jorge P. Young Cerecedo became the President of DAK Americas LLC in 2012. He has held numerous leadership positions within DAK since he initiated the company in 2001 as part of Alfa’s mergers and acquisitions group. Prior to the position of President, Jorge served as Executive VP, PET resins and VP of Planning and Administration for the company, covering both PET resins and polyester fibers. Jorge has spent the majority of his career with Alfa and its Alpek Petrochemicals division. He holds a Bachelor’s degree in Chemical Engineering from the Monterrey Institute of Technology and a Master’s degree in Business Administration from the Wharton Business School at the University of Pennsylvania.
Jorge Gonzalez Escobedo joined Alpek’s polyester business in 1974 and has been the President of the polyester filaments business since 2005. From 1994 to 2005, he served as the Vice President of the industrial business unit. Previously, Mr. Gonzalez held various responsibilities in areas such as export sales, processes and production.
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Mr. Gonzalez holds a Master’s degree in Business Administration and a Bachelor’s degree in mechanical engineering from ITESM.
Alejandro Llovera Zambrano is the President of the polypropylene business. He has 28 years of experience at Alfa, where he has occupied several executive positions that include: Human Resources Director of Nemak, the automotive division of Alfa; Director of the polyester filament business; Finance and Administration Director of the fibers division; and Director of Human Capital of Alfa. He holds a Master’s degree in Business Administration and a Bachelor’s degree in Mechanical and Electrical Engineering from ITESM. He completed the D-1 Program for executives at Instituto Panamericano de Alta Dirección de Empresas (IPADE).
Jose Luis Zepeda Peña is the President of the EPS, PURs and Chemicals businesses, a position he has held since 1999. He has 27 of experience at Alfa, where he has occupied several executive positions that include: Planning Vice President, Finance & Administrative Vice President and Commercial Vice President of Grupo Petrotemex. He has been Chairman of the Board of Directors of Mexico’s National Chemical Industry Association (Asociación Nacional de la Industria Química). Mr. Zepeda holds a Bachelor’s degree in chemical engineering from the Universidad Nacional Autónoma de México and a Master’s degree in Business Administration from ITESM.
Eduardo Escalante Castillo is the President of the CPL and ammonium sulfate businesses, a position he has held since 2009. He joined Alfa in 1980. He has held key positions in senior management, marketing and strategic planning at Hylsamex, Sigma Alimentos, Alestra and Colombin Bel. He was also President of AOL México from 1999 to 2006. Mr. Escalante holds a Bachelor’s degree in electronic and communications engineering from ITESM and received a Master’s degree in engineering from Stanford University. Additionally, he attended the Accounting and Financial Management Executive Program at Columbia Business School.
Compensation of Directors and Executive Officers
Salaries and benefits received by our senior officers that were paid or accrued by us in 2012 and 2011 amounted to Ps. 180 million and Ps. 188 million, respectively, consisting of base salary amounts, benefits and variable compensation programs.
Stock Option and Share Compensation Plans
We do not currently have any stock option or share compensation plans for our employees or executive officers.
Share Ownership
See “Principal Shareholders” for a description of the current ownership of our common stock by directors and executive officers.
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PRINCIPAL SHAREHOLDERS
We are a subsidiary of Alfa, which beneficially owns 82.9% of our outstanding common shares. The table below sets forth certain information regarding the ownership of our capital structure as of the date of this offering memorandum.
Shareholder Number of
Shares %
Alfa, S.A.B. de C.V. ......................................... 1,738,865,065 82.1
Acciones Alfa Operadora, S.A. de C.V. ........... 17,393,617 0.8
Alfa Subsidiarias Servicios, S.A. de C.V. ......... 350 0.0
Public float ........................................................ 361,904,603 17.1
Total ................................................................2,118,163,635 100.0
To the best of our knowledge, none of our officers or directors own more than 1% of our common shares.
Alpek’s common shares are listed on the Mexican Stock Exchange. On April 26, 2012, we conducted an initial public offering in Mexico and a private offering of shares in the international markets. We issued a total of 379,298,220 shares (including the exercise of an overallotment option) at the offering price of Ps. 27.50 per share, for a total of Ps. 10,431 million.
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RELATED PARTY TRANSACTIONS
Related Party Transactions
From time to time, we may enter into transactions with parties that have relationships with Alfa, officers, directors or entities in which we have an ownership interest. It is our policy to conduct all of these transactions on an arms-length basis and, in accordance with the LMV, to have these transactions approved by the Audit Committee, subject to certain exceptions, such as related party transactions that (i) by reason of their economic value, can be considered non-material for the Company and its affiliates, (ii) are carried out in the ordinary course of business and on an arms-length basis, and (iii) are carried out with employees on terms that are substantially the same as the terms of transactions carried out with non-related third parties or as a result of general employee-related contractual obligations.
Amounts representing related party transactions for 2011 and 2012 and for the three months ended March 31, 2012 and 2013 are as follows:
Year Ended December 31, Three Months Ended March
31,
2011 2012 2012 2012 2013 2013 (Ps.) (Ps.) (US$) (Ps.) (Ps.) (US$) (in thousands) Income: Sales of finished goods .............................. 1,817,627 1,790,254 135,950 549,212 385,734 30,475 Sale of raw materials ................................. 9,145 - - - - - Interest income .......................................... 56,808 49,144 3,732 11,996 9,088 718 Administrative services ............................. 29,547 37,714 2,864 4,104 26,338 2,081 Leasing ...................................................... - 5,312 403 1,327 1,347 106 Other ......................................................... 6,404 1,807 137 - 931 74 Expense: Purchase of finished goods ........................ 1,171,345 1,212,510 92,077 197,177 321,442 25,395 Purchase of raw materials ......................... 307,289 292,268 22,194 55,733 63,427 5,011 Purchase of electric power ........................ 51,831 93,323 7,087 11,216 47,586 3,759 Administrative services ............................. 361,137 393,592 29,889 95,499 64,735 5,114 Interest expenses ....................................... 49,246 56,362 4,280 41,768 - - Royalties and technical assistance ............. 55,059 59,165 4,493 17,248 18,595 1,469 Lease ......................................................... 2,259 2,406 183 581 584 46 Commissions ............................................. 21,927 26,985 2,049 7,212 7,839 619 Other costs and expenses........................... 1,610 808 61 49 769 61
Services Provided by Affiliates
In the ordinary course of our business, we obtain administrative and corporate services from Alfa and several subsidiaries, including, among others, Alliax, S.A. de C.V., Alfa Corporativo, S.A. de C.V. and Alestra, S. de R.L. de C.V.
We have paid Alfa for the following administrative and support services, among others: government and institutional lobbying; human resources planning; financial and treasury planning; legal and tax advice; strategic planning; communication; and investor relations. Such payments were made on market terms. Through Alliax, we outsource certain administrative services, including accounts payable, travel expense processing, payroll and accounting services. We also lease office space for our headquarters from Alfa Corporativo. Alestra provides us with telecommunications (voice, data and video) services. Following the Corporate Reorganization, our intention is to continue obtaining most of the above mentioned services from Alfa and its subsidiaries under arms-length basis agreements.
Additionally, some of our affiliates provide certain services, to us and our subsidiaries such as air transportation, security services, leases and other corporate and administrative services. As required under IFRS, these transactions are valued on an arms-length basis.
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Affiliates Outstanding Balances
As of March 31, 2013 and December 31, 2012 and 2011, we had amounts due to related parties of Ps. 492 million, Ps. 465 million and Ps. 3,603 million, respectively.
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DESCRIPTION OF THE NOTES
We issued the notes under an indenture dated November 20, 2012, entered into by and among the Company, the Subsidiary Guarantors (as defined below), The Bank of New York Mellon, as trustee (which term includes any successor as trustee under the indenture), paying agent and transfer agent, and he Bank of New York Mellon SA/NV Dublin Branch, as listing agent and paying agent in Ireland. A copy of the indenture, including the form of notes, is available for inspection during normal business hours at the offices of the trustee and any of the other paying agents set forth on the inside back cover page of this offering memorandum. The trustee or any other paying agent, as applicable, will also act as transfer agent and registrar if we issue certificates for the notes in definitive registered form.
This Description of the Notes is a summary of the material provisions of the notes and the indenture. You should refer to the indenture for a complete description of the terms and conditions of the notes and the indenture, including our obligations and your rights.
You will find the definitions of capitalized terms used in this section under “—Certain definitions.” For purposes of this section of this offering memorandum, when we refer to:
• “we,” “us,” “our,” “the Company” or “Alpek,” we mean Alpek, S.A.B. de C.V. (parent company only) and not its Subsidiaries;
• the “Subsidiary Guarantors,” we mean the existing and future Subsidiaries of the Company that will issue guarantees of the notes, which initially are those Subsidiaries identified under “—General”; and
• the “notes,” we mean the notes offered pursuant to this offering memorandum and, unless the context otherwise requires, any additional notes, as described below in “—General.”
General
The notes:
• will be our senior unsecured obligations (junior to certain obligations that are preferred by statute, as tax and labor claims);
• will initially be limited to an aggregate principal amount of U.S.$650,000,000;
• will mature at 100% of their principal amount then outstanding on November 20, 2022;
• will be issued in denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof;
• will be represented by one or more registered notes in global form and may be exchanged for notes in definitive form only in limited circumstances; and
• will be unconditionally and irrevocably guaranteed by the following direct and indirect Subsidiaries: (i) Grupo Petrotemex, S.A. de C.V., (ii) DAK Americas LLC, (iii) DAK Resinas Americas Mexico, S.A. de C.V., (iv) Tereftalatos Mexicanos, S.A. de C.V., (v) Akra Polyester, S.A. de C.V. and (vi) DAK Americas Mississippi, Inc. (collectively, the “Subsidiary Guarantors”). As of and for the three months ended March 31, 2013, the Subsidiary Guarantors (in addition to Alpek, on a stand-alone basis) accounted for 68% of our total assets and 72% of our Adjusted EBITDA on a consolidated basis.
We will initially issue U.S.$650.0 million aggregate principal amount of notes, but may, subject to the limitations set forth under “—Covenants,” issue an unlimited principal amount of securities under the indenture. We may, without your consent, issue additional notes in one or more transactions, which have substantially identical terms (other than issue price, issue date and date from which the interest will accrue) as notes issued on the issue date. Such additional notes may be issued in one or more series and with the same or different CUSIP number; provided, however, that unless such additional notes are issued under a separate CUSIP number, either such
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additional notes are part of the same “issue” for U.S. federal income tax purposes or are issued pursuant to a “qualified reopening” for U.S. federal income tax purposes. Any additional notes will be consolidated and form a single class with the notes issued on the issue date, so that, among other things, holders of any additional notes will have the right to vote together with holders of notes issued on the issue date as one class.
Interest on the notes:
• will accrue at the rate of 4.500% per annum;
• will accrue from the date of issuance or from the most recent interest payment date;
• will be payable in cash, semi-annually in arrears on May 20 and November 20 of each year, commencing on May 20, 2013;
• will be payable to the persons in whose name the notes are registered at the close of business on the May 5 and November 5 immediately preceding each interest payment date; and
• will be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of, and interest, including any Additional Amounts on, the notes will be payable, and the transfer of notes will be registrable, at the office of the trustee, and at the offices of the paying agents and transfer agents, respectively. For so long as the notes are listed on the Official List of the Irish Stock Exchange and trading on the Global Exchange Market, we will maintain a paying agent in Ireland.
Ranking of notes and guarantees
The notes will constitute our direct senior unsecured obligations. The notes rank pari passu in priority of payment with each other and if we were to issue any debt other than the notes, the notes would rank at least pari passu in priority of payment with all our other existing and future senior unsecured indebtedness.
In the event of a bankruptcy, concurso mercantil, quiebra or liquidation proceeding by or against us, our obligations under the notes will rank equal in right of payment to all other of our existing and future senior unsecured indebtedness, junior to certain obligations given preference under applicable law, including labor and tax claims.
The Subsidiary Guarantors will fully, jointly and severally, unconditionally and irrevocably guarantee the full and punctual payment of principal, premium, if any, interest, including any Additional Amounts, and any other amounts that may become due and payable by us in respect of the notes. The Subsidiary Guarantors will waive any defenses provided under applicable law.
The Subsidiary Guarantors’ guarantees of the notes will not be secured by any of their assets or properties. As a result, if the Subsidiary Guarantors are required to pay under the guarantees, holders of the notes would be unsecured creditors of the Subsidiary Guarantors. The guarantees will not be subordinated to any of the Subsidiary Guarantors’ other unsecured debt obligations. In the event of a bankruptcy, concurso mercantil, quiebra or liquidation proceeding against any of the Subsidiary Guarantors, the guarantees would rank equally in right of payment with all of such Subsidiary Guarantors’ other unsecured and unsubordinated debt.
None of our Subsidiaries other than the existing Subsidiary Guarantors will have any obligations with respect to the notes unless other entities become guarantors. As a result, the notes and guarantees will be effectively subordinated to claims of creditors (including trade creditors and preferred stockholders, if any) of each of our Subsidiaries other than the existing Subsidiary Guarantors.
As of March 31, 2013, we and our subsidiaries had total consolidated indebtedness of Ps. 13,827 million (US$1,119 million), Ps. 3,521 million (US$285 million) of which was unsecured indebtedness of the Subsidiary Guarantors and Ps. 2,370 million (US$192 million) of which was unsecured indebtedness of our non-guarantor subsidiaries. As of March 31, 2013, on a stand-alone basis the Company had Ps. 7,936 million (US$642 million) of
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outstanding indebtedness, and none of the Company, any Subsidiary Guarantor or any non-guarantor subsidiary had any secured indebtedness.Payments.
As of December 31, 2012, Alpek had net assets of PS. 311 million (accounting for 7% of our consolidated net assets) and for the year ended December 31, 2012, Alpek had an EBITDA of Ps. 0 (accounting for 0% of our consolidated EBITDA). As of December 31, 2012, the Subsidiary Guarantors had net assets of PS. 2,940 million (accounting for 62% of our consolidated net assets) and for the year ended December 31, 2012, the Subsidiary Guarantors had an EBITDA of Ps. 511 million (accounting for 70% of our consolidated EBITDA). As of December 31, 2012, our non-guarantor subsidiaries had net assets of PS. 1,491million (accounting for 31% of our consolidated net assets) and for the year ended December 31, 2012, our non-guarantor subsidiaries had an EBITDA of Ps. 217 million (accounting for 30% of our consolidated EBITDA). As of December 31, 2012, DAK Americas LLC had net assets of PS. 1,110 million (accounting for 23% of our consolidated net assets) and for the year ended December 31, 2012, DAK Americas LLC had an EBITDA of Ps. 212 (accounting for 29% of our consolidated EBITDA). For more information on DAK Americas LLC, see “Business––DAK Americas LLC”
We will make all payments on the notes exclusively in such coin or currency of the United States as at the time of payment will be legal tender for the payment of public and private debts.
We will make payments of principal and interest on the notes to the trustee (as identified on the inside back cover page of this offering memorandum), which will pass such funds to the paying agents or to the holders. Initially, the trustee will act as registrar, transfer agent and paying agent for the notes.
We will make payments of principal upon surrender of the relevant notes at the specified office of the trustee or any of the paying agents. We will pay interest on the notes to the persons in whose name the notes are registered at the close of business on the fifteenth day immediately preceding the due date for payment. Payments of principal and interest in respect of each global note will be paid by wire transfer of immediately available funds to DTC. Payments of principal and interest in respect of any certificated notes will be made by U.S. dollar check drawn on a bank in the City of New York and mailed to the holder of such note at its registered address. Upon application by the holder of at least U.S.$1.0 million in aggregate principal amount of the notes to the specified office of the trustee or any paying agent not less than 15 days before the due date for any payment in respect of a note, such payment may be made by transfer to a U.S. dollar account maintained by the payee with a bank in The City of New York.
All payments will be subject in all cases to any applicable tax or other laws and regulations, but without prejudice to the provisions of “—Additional amounts.” No commissions or expenses will be charged to the holders in respect of such payments.
We shall, to the extent permitted by law, use commercially reasonable efforts to maintain a paying agent in an EU Member State that is not obliged to withhold or deduct tax pursuant to European Council Directive 2003/48 EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of November 26-27, 2000, or any law implementing or complying with or introduced in order to conform to, such Directive.
Subject to any applicable abandoned property law, the trustee and the paying agents will pay to us upon our request any monies held by them for the payment of principal or interest that remains unclaimed for two years, and, thereafter, holders entitled to such monies must look to us and the Subsidiary Guarantors for payment as our and their general creditors. After the return of such monies by the trustee or the paying agents to us, neither the trustee nor the paying agents shall be liable to the holders in respect of such monies.
Form, denomination and title
The notes will be in registered form without coupons attached in amounts of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof.
Notes sold in offshore transactions in reliance on Regulation S will be represented by one or more permanent global notes in fully registered form without coupons deposited with a custodian for and registered in the name of a nominee of DTC. Notes sold in reliance on Rule 144A will be represented by one or more permanent global notes in fully registered form without coupons deposited with a custodian for and registered in the name of a nominee of DTC. Beneficial interests in the global notes will be shown on, and transfers thereof will be effected only through,
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records maintained by DTC and its direct and indirect participants, including Euroclear and Clearstream Luxembourg. Except in certain limited circumstances, definitive registered notes will not be issued in exchange for beneficial interests in the global notes.
Title to the notes will pass by registration in the register. The registered holder of any note will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it, writing on, or theft or loss of, the definitive note issued in respect of it) and no person will be liable for so treating the holder.
Redemption
No sinking fund is provided for the notes.
We will give not less than 30 days’ nor more than 60 days’ notice of any optional redemption to holders of the notes, which notice will be irrevocable and will be mailed to the registered address of each holder of notes and published in Ireland as described in “—Notices” below. On and after any redemption date, interest will cease to accrue on any notes called for redemption as long as we have deposited with the trustee funds in satisfaction of the applicable redemption price pursuant to the indenture.
Optional make-whole redemption
The notes will be redeemable as a whole or in part, at our option at any time, at a redemption price, as calculated by the Company, equal to the greater of (i) 100% of the then-outstanding principal amount of the notes and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon (exclusive of interest accrued to the date of redemption) discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus 45 basis points, plus accrued interest thereon to the date of redemption and any Additional Amounts payable with respect thereto.
On and after the redemption date, interest on the notes or any portion of the notes called for redemption will cease to accrue (unless we default in the payment of the redemption price and accrued interest). By 11:00 a.m. (New York time) on the business day prior to the redemption date, we will deposit with the trustee funds sufficient to pay the redemption price and accrued interest, through the redemption date, on the notes subject to redemption. If the redemption date falls after a record date but on or prior to the corresponding interest payment date, we will pay accrued interest to the holder of record on the corresponding record date, which may or may not be the person who will receive payment of the redemption price (which will exclude such accrued interest). If less than all the notes are to be redeemed, the notes to be redeemed will be selected by the trustee by lot or by such method in accordance with DTC procedures.
Optional redemption upon tax event
We may at any time redeem the notes, at our option, in whole, but not in part, at a redemption price equal to 100% of the then-outstanding principal amount, together with accrued and unpaid interest to, but excluding, the date of redemption, including any Additional Amounts, if any, if we certify to the trustee (in the manner prescribed below) that:
(a) we (or a Subsidiary Guarantor) have or will become obligated to pay Additional Amounts in connection with payments of interest on the notes in respect of withholding taxes in excess of a 4.9% rate (the “Excess Additional Amounts”) as a result of any generally applicable change in or amendment to the laws or regulations of a Relevant Jurisdiction or any political subdivision or governmental authority thereof or therein having power to tax, or any generally applicable change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective or, in the case of a change in official position, is announced on or after the date of issuance of the notes; and
(b) such obligation cannot be avoided by taking reasonable measures available to us or, as the case may be, the relevant Subsidiary Guarantor;
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provided, however, that the notice of redemption, which will specify the date of redemption and redemption price, will not be given earlier than 60 days before the earliest date on which we or, as the case may be, a Subsidiary Guarantor, would be obligated to pay such Excess Additional Amounts if a payment in respect of the notes were then due.
No later than 15 days (unless a shorter period is acceptable to the trustee) before giving any notice of redemption as described in the preceding clauses, we will deliver an officer’s certificate to the trustee stating that we are entitled to effect such redemption in accordance with the terms of the indenture and setting forth in reasonable detail a statement of facts relating thereto. The officer’s certificate will be accompanied by a written opinion of recognized independent counsel experienced in tax and other related matters in the relevant jurisdiction to the effect that:
(a) we or, as the case may be, the relevant Subsidiary Guarantor, have or will become obligated to pay the Excess Additional Amounts as a result of such change or amendment; and
(b) all governmental approvals necessary for us to effect the redemption have been obtained and are in full force and effect or specifying any such necessary approvals that as of the date of such opinion have not been obtained.
Change of control triggering event
Upon the occurrence of a Change of Control Triggering Event, the holders of notes will have the right to require us to purchase all or a portion of their notes (in integral multiples of U.S.$1,000) pursuant to a Change of Control Offer (as defined below) at a purchase price equal to 101% of the then-outstanding principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase, including any Additional Amounts payable with respect thereto (the “Change of Control Payment” and the date of such purchase, the “Change of Control Payment Date”), in accordance with the procedures set forth below. If the date of purchase is on a date that is after a record date and on or prior to the corresponding interest payment date, we will pay such interest to the holder of record on the corresponding record date, which may or may not be the same person to whom we will pay the purchase price.
Within 30 days following the consummation of any transaction constituting a Change of Control Triggering Event, we will send, by first-class mail, a notice to each holder with a copy to the trustee (the “Change of Control Offer”) and publish the notice in a newspaper having a general circulation in Mexico, the United States of America and, as long as the notes are listed on the Official List of the Irish Stock Exchange and trading on the Global Exchange Market and the rules of such exchange so require, in Ireland. Our failure to give notice in the manner described herein will not affect the rights of the holders to require us to purchase the notes. The notice of the Change of Control Offer will state, among other things:
(a) that a Change of Control Triggering Event has occurred and that such holder has the right to require us to purchase such holder’s notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest on the relevant interest payment date);
(b) the circumstances and relevant facts regarding such Change of Control Triggering Event;
(c) the Change of Control Payment Date, which will be no earlier than 30 days nor later than 60 days from the date such notice is mailed, other than as may be required by law;
(d) the jurisdiction of incorporation of the successor controlling entity; and
(e) the instructions, as determined by us, consistent with the covenant described hereunder, that a holder of notes must follow in order to have its notes purchased.
By 11:00 a.m. (New York time) on the business day prior to the Change of Control Payment Date, we will deposit with the trustee or a paying agent funds in an amount equal to the Change of Control Payment in respect of all notes or portion thereof so tendered.
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On the Change of Control Payment Date, we will, to the extent lawful:
(a) accept for payment all notes or portions thereof properly tendered pursuant to the Change of Control Offer; and
(b) deliver or cause to be delivered to the trustee the notes so accepted together with an officer’s certificate stating the aggregate principal amount of notes or portions thereof we are purchasing.
If only a portion of a note is purchased pursuant to a Change of Control Offer, a new note in a principal amount equal to the portion not purchased will be issued in the name of the holder of such note upon cancellation of the original note, or appropriate adjustments to the amount and beneficial interests in a global note will be made, as appropriate. The minimum amount of such new note will be U.S.$200,000.
We will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other applicable securities laws or regulations in connection with the repurchase of notes in connection with a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, we will comply with the applicable securities laws and regulations and will not be deemed to have breached our obligations under the covenant described hereunder by virtue of our compliance with such securities laws or regulations.
We will not be required to make a Change of Control Offer following a Change of Control Triggering Event if a third party makes a Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the indenture applicable to a Change of Control Offer and purchases all notes validly tendered and not withdrawn under such Change of Control Offer.
Open market purchases
We may at any time purchase notes in the open market or otherwise at any price.
Transfer of notes
The certificated, non-global notes may be transferred in whole or in part in an authorized denomination upon the surrender of the note to be transferred, together with the form of transfer endorsed on it duly completed and executed, at the specified office of the registrar or the specified office of any transfer agent. Each new note to be issued upon exchange of notes or transfer of notes will, within three business days of the receipt of a request for exchange or form of transfer, be mailed or otherwise provided to, at the risk of, the holder entitled to the note to such address as may be specified in such request or form of transfer.
The notes will be subject to certain restrictions on transfer as more fully set out in the indenture. See “Transfer Restrictions.” Transfer of beneficial interests in the global notes will be effected only through records maintained by DTC and its participants, including Euroclear and Clearstream Luxembourg.
Transfers will be effected without charge by, or on our behalf of, the registrar or the transfer agents, but upon payment, or the giving of such indemnity or security as the registrar or the relevant transfer agent may require, in respect of any tax or other governmental charges which may be imposed in relation to it. We are not required to transfer or exchange any note selected for redemption.
No holder may require the transfer of a note to be registered during the period of 15 days ending on the due date for any payment of principal or interest on that note.
Additional amounts
All payments by us or the Subsidiary Guarantors in respect of the notes will be made free and clear of, and without withholding or deduction for or on account of, any present or future taxes, duties, assessments, fees or other governmental charges of whatever nature (and any fines, penalties or interest related thereto) imposed or levied by or on behalf of a Relevant Jurisdiction, or any political subdivision or authority of or in such jurisdiction having power to tax, unless such withholding or deduction is required by law. In that event, we or the relevant Subsidiary
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Guarantor will pay to each holder such additional amounts (“Additional Amounts”) as may be necessary in order that every net payment made on each note after deduction or withholding for or on account of any present or future tax, penalty, fine, duty, assessment or other governmental charge imposed upon or as a result of such payment by such Relevant Jurisdiction or any political subdivision or taxing authority thereof or therein, will not be less than the amount then due and payable on such note; it being understood, that for tax purposes the payment of such Additional Amounts, will be deemed and construed as additional interest. The foregoing obligation to pay Additional Amounts to any holder of notes, however, will not apply to or in respect of:
(a) any tax, assessment or other governmental charge which would not have been imposed but for the existence of any present or former connection between such holder (or between a fiduciary, settlor, beneficiary, member or shareholder of such holder, if such holder is an estate, a trust, a partnership or a corporation), on the one hand, and the applicable Relevant Jurisdiction, on the other hand (including, without limitation, such holder (or such fiduciary, settlor, beneficiary, member or shareholder) being or having been a citizen or resident thereof or having been engaged in a trade or business or present therein or having, or having had, a permanent establishment therein), other than the mere receipt of such payment or the ownership or holding of such note;
(b) any tax, assessment or other governmental charge which would not have been so imposed but for the presentation by such holder of a note for payment on a date more than 20 days after the date on which such payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later, except to the extent that the holder would have been entitled to such Additional Amounts on presenting such note for payment on any date during such 20-day period (and no Additional Amounts shall be paid for or on account of any additional withholdings or deductions that arise as a result of such presentment after such 20- day period);
(c) any tax, duty, assessment or other governmental charge to the extent that such tax, duty, assessment or other governmental charge would not have been imposed but for the failure of such holder to comply with any certification, identification or other reporting requirements concerning the nationality, residence, identity or connection with the applicable Relevant Jurisdiction of the holder if (i) such compliance is required or imposed by law as a precondition to exemption or reduction from all or a part of such tax, duty, assessment or other governmental charge and (ii) at least 30 days prior to the date on which we will apply this clause (c), we shall have notified all holders of notes that some or all holders of notes will be required to comply with such requirement;
(d) any estate, inheritance, gift, sales, transfer, excise or personal property or similar tax, assessment or governmental charge imposed with respect to the notes;
(e) any withholding or deduction imposed on a payment to or for the benefit of an individual that is required to be made pursuant to European Council Directive 2003/48 EC or any other Directive on the taxation of savings implementing the conclusion of the ECOFIN council meeting on November 26-27, 2000, or any law implementing or complying with, or introduced in order to conform to, such Directive;
(f) any tax, assessment or other governmental charge which would have been avoided by a holder presenting the relevant note (if presentation is required) or requesting that such payment be made to another paying agent in a member state of the European Union;
(g) any tax, assessment or other governmental charge which is payable other than by deduction or withholding from payments on the note;
(h) any tax, assessment or other governmental charge imposed with respect to a payment on any note to a holder that is a fiduciary or partnership or other than the sole beneficial owner of such payment to the extent a beneficiary or settlor with respect to such fiduciary or a member of such partnership or beneficial owner would not have been entitled to receive payment of the Additional Amounts had the beneficiary, settlor, member or beneficial owner been the holder of the note; or
(i) any combination of the above.
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The limitations on our obligations and of any Subsidiary Guarantor to pay Additional Amounts set forth in clause (c) above shall not apply if (i) the provision of information, documentation or other evidence described in such clause (c) would be materially more onerous, in form, in procedure or in the substance of information disclosed, to a holder of a note, than comparable information or other reporting requirements imposed under U.S. tax law (including the United States-Mexico income tax treaty), regulations (including temporary or proposed regulations) and administrative practice, or (ii) Article 195, Section II, paragraph (a) of the Mexican Income Tax Law (Ley de Impuestos Sobre la Renta) (or a substitute or equivalent provision) is in effect, unless (A) the provision of the information, documentation or other evidence described in such clause (c) above is expressly required by the applicable Mexican laws and regulations in order to apply Article 195, Section II, paragraph (a) of the Mexican Income Tax Law (or substitute or equivalent provision), (B) we or any Subsidiary Guarantor cannot obtain the information, documentation or other evidence necessary to comply with the applicable Mexican laws and regulations on our own through reasonable diligence and (C) we or any Subsidiary Guarantor otherwise would meet the requirements for application of the applicable Mexican laws and regulations.
In addition, such clause (c) above does not require, and shall not be construed to require, that any holder, including any non-Mexican pension fund, retirement fund, tax-exempt organization or financial institution, register with the Tax Management Service (Servicio de Administración Tributaria) or the Mexican Ministry of Finance and Public Credit (Secretaría de Hacienda y Crédito Público) to establish eligibility for an exemption from, or a reduction of, Mexican withholding taxes.
We will also pay any present or future stamp, court or documentary taxes or any other excise or property taxes, charges or similar levies, and any penalties, additions to tax or interest due with respect thereto, which arise in any jurisdiction from the execution, delivery, registration or the making of payments in respect of the notes, excluding any such taxes, charges or similar levies imposed by any jurisdiction outside of a Relevant Jurisdiction, other than those resulting from, or required to be paid in connection with, the enforcement of the notes following the occurrence of any Default or Event of Default.
We will provide the trustee with the official acknowledgment of the relevant taxing authority (or, if such acknowledgment is not available, a certified copy thereof) evidencing any payment of taxes in respect of which we or a Subsidiary Guarantor have paid any Additional Amounts. Copies of such documentation will be made available to the holders of the notes or the paying agents, as applicable, upon request therefor.
All references in this offering memorandum to principal (and premium, if any) of and interest on the notes will include any Additional Amounts payable by us or a Subsidiary Guarantor in respect of such principal (and premium, if any) and such interest.
Covenants
The indenture will contain the following covenants in addition to customary covenants regarding maintenance of office or agency, maintenance of corporate existence and payments of taxes and claims:
Limitation on liens
We will not, and will not permit any Subsidiary to, create or suffer to exist any Lien upon any of our or such Subsidiary’s Operating Property now owned or hereafter acquired by us or such Subsidiary securing any Debt, unless contemporaneously therewith effective provision is made to secure the notes equally and ratably with such Debt for so long as such Debt is so secured. The preceding sentence will not require us or any Subsidiary to equally and ratably secure the notes if the Lien consists of the following:
(a) any Lien existing on the date of the indenture, and any extension, renewal or replacement thereof or of any Lien in clause (b), (c), (d) or (m) below; provided, however, that the total amount of Debt so secured is not increased;
(b) any Lien on any property or assets securing Debt incurred solely for purposes of financing the acquisition, construction or improvement of such property or assets after the date of the indenture; provided that (i) the aggregate principal amount of Debt secured by the Liens will not exceed (but may be less than) the cost (i.e., purchase price) of the property or assets so acquired, constructed or improved and (ii) the Lien is incurred
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before, or within 180 days after the completion of, such acquisition, construction or improvement and does not encumber any other property or assets (other than any of the property or assets acquired in connection with any such acquisition, construction or improvement) owned by us or any Subsidiary; and provided, further, that to the extent that the property or asset acquired is Capital Stock, the Lien also may encumber other property or assets of the person so acquired;
(c) any Lien securing Debt for the purpose of financing all or part of the cost of the acquisition, construction or development of a project; provided that the lenders of such Debt expressly agree to limit their collateral in respect of such Debt to assets (including Capital Stock of the project entity) and/or revenues of such project; and provided, further, that the Lien is incurred before, or within 180 days after the completion of, that acquisition, construction or development and does not apply to any other property or assets owned by us or any Subsidiary;
(d) any Lien existing on any property or assets of any person before that person’s acquisition by, merger into or consolidation with us or any Subsidiary after the date of the indenture; provided that (i) the Lien is not created in contemplation of or in connection with such acquisition, merger or consolidation, (ii) the Debt secured by the Liens may not exceed the Debt secured on the date of such acquisition, merger or consolidation, (iii) the Lien will not apply to any other property or assets (other than any of the property or assets in connection with any such acquisition, merger or consolidation) owned by us or any of our Subsidiaries and (iv) the Lien will secure only the Debt that it secures on the date of such acquisition, merger or consolidation;
(e) any Lien imposed by law that was incurred in the ordinary course of business, including, without limitation, carriers’, suppliers’, materialmen’s, repairmen’s, warehousemen’s and mechanics’ liens and other similar encumbrances arising in the ordinary course of business, in each case for sums not yet due or being contested in good faith by appropriate proceedings;
(f) any pledge or deposit made in connection with workers’ compensation, unemployment insurance or other similar social security legislation, any deposit to secure appeal notes in proceedings being contested in good faith to which we or any Subsidiary is a party, good faith deposits in connection with bids, tenders, contracts (other than for the payment of Debt) or leases to which we or any Subsidiary is a party or deposits for the payment of rent, in each case made in the ordinary course of business;
(g) any Lien in favor of issuers of surety notes or letters of credit issued pursuant to the request of and for the account of the Company or any Subsidiary in the ordinary course of business;
(h) any Lien securing taxes, assessments or other governmental charges, the payment of which is not yet due or that are being contested in good faith by appropriate proceedings and for which reserves or other appropriate provisions, if any, have been established as required by IFRS;
(i) minor defects, easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, licenses, restrictions on the use of property or assets or minor imperfections in title that do not materially impair the value or use of the property or assets affected thereby, and any leases and subleases of real property that do not interfere with the ordinary conduct of the business of the Company or any Subsidiary, and which are made on customary and usual terms applicable to similar properties;
(j) any rights of set-off of any person with respect to any deposit account of the Company or any Subsidiary arising in the ordinary course of business and not constituting a financing transaction;
(k) any Liens granted, directly or indirectly, to secure borrowings from (i) Banco Nacional de Obras y Servicios Públicos, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo (BANOBRAS), Nacional Financiera, Sociedad Nacional de Crédito, Institución de Banca de Desarrollo (NAFINSA), or any other Mexican governmental development bank or government credit institution or (ii) any international or multilateral development bank, government-sponsored agency, export-import bank or official, export-import credit insurer;
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(l) any Lien which secures any Hedging Obligations;
(m) any Lien which secures Debt owing by any Subsidiary to us or any other Subsidiary;
(n) any Lien which secures Debt of any Joint Venture Company; and
(o) in addition to the foregoing Liens set forth in clauses (a) through (n) above, Liens securing Debt of the Company or any Subsidiary (including, without limitation, guarantees of the Company or any Subsidiary) which do not in aggregate principal amount (without duplication), together with the aggregate amount of the Attributable Value of sale and leaseback transactions entered into (without duplication) pursuant to the third paragraph under “Limitation on sale and leaseback transactions,” at any time of determination, exceed 15% of the Company’s Consolidated Tangible Assets.
Limitation on sale and leaseback transactions
We will not, nor will we permit any of our Subsidiaries to, enter into any sale and leaseback transaction with respect to any Operating Property of ours or of any of our Subsidiaries, unless, concurrently with such sale and leaseback transaction, the notes are secured equally and ratably with (or prior to) such sale and leaseback transaction, unless after giving effect thereto:
(a) we or such Subsidiary would be entitled pursuant to the provisions (other than paragraph (o)) of the indenture described under “—Limitation on Liens” to issue or assume Debt (in an amount equal to the Attributable Value with respect to such sale and leaseback transactions) secured by a Lien on such Operating Property without equally and ratably securing the notes; or
(b) we or such Subsidiary apply or cause to be applied, in the case of a sale or transfer for cash, an amount equal to the net cash proceeds thereof and, in the case of a sale or transfer otherwise than for cash, an amount equal to the fair market value of the Operating Property so leased (as determined in good faith by our board of directors), (a) to the retirement, within 12 months after the effective date of such sale and leaseback transaction, of (i) our Debt ranking at least on a parity with the notes or (ii) Debt of any Subsidiary, in each case owing to a Person other than us or any of our Affiliates, or (b) to the acquisition, purchase, construction, development, extension or improvement of any of our or our Subsidiaries’ fixed or capital assets or other real and tangible property, plant or equipment to be used by or for the benefit of us or any of our Subsidiaries, in each case, in the ordinary course of business.
These restrictions will not apply to (i) transactions providing for a lease term, including any renewal, of not more than three years and (ii) transactions between us and any of our Subsidiaries or between any of our Subsidiaries.
Notwithstanding the foregoing, the Company or any Subsidiary may enter into a sale and leaseback transaction which would otherwise be prohibited under the provisions of the indenture described in this “Limitation on sale and leaseback transactions” section provided that the Attributable Value of such sale and leaseback transaction (without duplication) of the Company and its Subsidiaries measured at the closing date of such sale and leaseback transaction together with the Attributable Value of sale and leaseback transactions previously incurred (without duplication) pursuant to this paragraph by the Company and its Subsidiaries and the aggregate amount (without duplication) of Debt (including, without limitation, guarantees of the Company or any Subsidiary) incurred under “—Limitation on liens” outstanding at such time, will not exceed 15% of the Company’s Consolidated Tangible Assets.
Limitation on consolidation, merger or transfer of assets
We will not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of our assets to, any person, unless:
(a) the resulting, surviving or transferee person (if not the Company) will be a person organized and existing under the laws of Mexico, the United States of America, any State thereof or the District of Columbia, any other country that is a member country of the European Union or of the Organization for Economic
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Cooperation and Development and such person expressly assumes, by supplemental indenture to the indenture, executed and delivered to the trustee, all of our obligations under the notes and the indenture;
(b) the resulting, surviving or transferee person (if not the Company), if not organized and existing under the laws of Mexico and the United States of America, any State thereof or the District of Columbia, undertakes, in such supplemental indenture, to pay such additional amounts in respect of principal and interest as may be necessary in order that every payment made in respect of the notes after deduction or withholding for or on account of any present or future tax, duty, assessment or other governmental charge imposed by such other country or any political subdivision or taxing authority thereof or therein will not be less than the amount of principal (and premium, if any) and interest then due and payable on the notes, subject to the same exceptions set forth under “—Additional amounts” but replacing existing references in such clause to Mexico with references to such other country;
(c) immediately prior to such transaction and immediately after giving effect to such transaction, no Default or Event of Default will have occurred and be continuing; and
(d) we will have delivered to the trustee an officers’ certificate and an opinion of legal counsel (which may be in-house counsel to the Company or to a direct or indirect parent of the Company), each stating that such consolidation, merger or transfer and such supplemental indenture, if any, comply with the indenture.
A Subsidiary Guarantor will not consolidate with or merge with or into, or convey, transfer or lease all or substantially all of its assets to, any person, unless:
(a) the resulting, surviving or transferee person (if not such Subsidiary Guarantor) will be a person organized and existing under the laws of Mexico, the United States of America, any State thereof or the District of Columbia, any other country that is a member country of the European Union or of the Organization for Economic Cooperation and Development, or the jurisdiction of incorporation of the relevant Subsidiary Guarantor on the date of the indenture, and such person expressly assumes, by supplemental indenture to the indenture, executed and delivered to the trustee, all the obligations of such Subsidiary Guarantor under the indenture;
(b) the resulting, surviving or transferee person (if not such Subsidiary Guarantor), if not organized and existing under the laws of Mexico and the United States of America, any State thereof or the District of Columbia, undertakes, in such supplemental indenture, to pay such additional amounts in respect of principal and interest as may be necessary in order that every payment made in respect of the notes after deduction or withholding for or on account of any present or future tax, duty, assessment or other governmental charge imposed by such other country or any political subdivision or taxing authority thereof or therein will not be less than the amount of principal (and premium, if any) and interest then due and payable on the notes, subject to the same exceptions set forth under “—Additional amounts” but replacing existing references in such clause to Mexico with references to such other country;
(c) immediately prior to such transaction and immediately after giving effect to such transaction, no Default or Event of Default will have occurred and be continuing; and
(d) such Subsidiary Guarantor will have delivered to the trustee an officers’ certificate and an opinion of legal counsel (which may be in-house counsel to the Company or to a direct or indirect parent of the Company), each stating that such consolidation, merger or transfer and such supplemental indenture, if any, comply with the indenture.
In case of any such consolidation, merger or transfer of assets, such successor person will succeed to and be substituted for us as obligor of the notes or for a Subsidiary Guarantor of the notes, as the case may be, with the same effect as if it had been named in the indenture as the issuer or a Subsidiary Guarantor of the notes, respectively.
These restrictions will not apply to transactions between us and any of our Subsidiaries or between any of our Subsidiaries.
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The trustee will accept such certificates and opinions as sufficient evidence of the satisfaction of the conditions precedent set forth in this covenant, in which event it will be conclusive and binding on the holders.
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Reporting requirements
We will provide the trustee and, upon request, the holders of the notes, with the following reports:
(a) an English language version in electronic format of our annual audited consolidated financial statements prepared in accordance with IFRS promptly upon such financial statements becoming available but not later than 135 days after the close of each fiscal year;
(b) an English language version in electronic format of our unaudited quarterly financial statements prepared in accordance with IFRS, promptly upon such financial statements becoming available but not later than 60 days after the close of each fiscal quarter (other than the last fiscal quarter of each fiscal year);
(c) without duplication, upon request, English language versions or summaries in electronic format of such other reports or notices as may be filed or submitted by (and within 10 days after filing or submission by) us with (i) the CNBV and (ii) the Global Exchange Market of the Irish Stock Exchange, or any other stock exchange on which the notes may be listed, in each case, to the extent that any such report or notice is generally available to our securityholders or the public in Mexico or elsewhere, provided, however, that we shall not be required to furnish such information to the extent such information is available on our website or to the extent that the information contained therein is not materially different than the information provided pursuant to clause (a) and (b) above; and
(d) so long as we are not subject to Section 13 or Section 15(d) of the Exchange Act and exempt from reporting pursuant to Rule 12g3-2(b) of the Exchange Act, upon request, to any holder and any prospective purchaser of the notes, the information required pursuant to Rule 144A(d)(4) under the Securities Act.
We will maintain a public website or, at our option, a non-public website or other electronic distribution system to which the beneficial owners of the notes, prospective investors and security analysts will be given access and on which the reports and information referred to in clauses (a), (b), (c) and (d) above are posted; provided, however, that we may, in our sole discretion, exclude direct competitors, customers and suppliers from access to such website or electronic distribution system.
Simultaneously with the delivery of each set of financial statements referred to in clause (a) above, we will provide the trustee with an officers’ certificate stating whether a Default or Event of Default exists on the date of such certificate and, if a Default or Event of Default exists, setting forth the details thereof and the action which we are taking or propose to take with respect thereto. Upon any of our directors or executive officers becoming aware of the existence of a Default or Event of Default or any event by reason of which payments of either principal or interest on the notes are prohibited, we will provide the trustee with an officers’ certificate setting forth the details thereof and the action we are taking or propose to take with respect thereto.
In addition, so long as the notes are listed on the Official List of the Irish Stock Exchange for trading on the Global Exchange Market, we will make available the information specified in the foregoing clauses (a), (b) and (c) at the specified office of the paying agent in Ireland.
Delivery of the above reports to the trustee is for informational purposes only and the trustee’s receipt of such reports will not constitute constructive notice of any information contained therein or determinable from information contained therein, including our compliance with any covenant in the indenture (as to which the trustee is entitled to rely exclusively on officers’ certificates).
Events of default
An “Event of Default” under the notes will occur if:
(a) we fail to pay interest (including any related Additional Amounts) on the notes within 30 days from the due date;
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(b) we default in the payment of principal (including any related Additional Amounts) on the notes on the due date;
(c) we fail to comply with any of the covenants described under “—Covenants—Limitation on liens”, “—Limitation on consolidation, merger or transfer of assets”, and such failure continues for 30 days after the notice specified below;
(d) we fail to comply with any of our covenants or agreements in the notes or the indenture (other than those referred to in clauses (a), (b) and (c) above), and such failure continues for 60 days after the notice specified below;
(e) we or any Significant Subsidiary defaults under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Debt for money borrowed by us or any such Significant Subsidiary (or the payment of which is guaranteed by us or any such Significant Subsidiary) whether such Debt or guarantee now exists, or is created after the date of the indenture (provided that for purposes of this clause (e), Debt will not be deemed to include any Non-Recourse Debt), which default (i) is caused by failure to pay principal of or premium, if any, or interest on such Debt after giving effect to any grace period provided in such Debt on the date of such default (“Payment Default”) or (ii) results in the acceleration of such Debt prior to its express maturity and, in each case, the principal amount of any such Debt, together with the principal amount of any other such Debt under which there has been a Payment Default or the maturity of which has been so accelerated, totals U.S.$50 million (or the equivalent thereof at the time of determination) or more in the aggregate;
(f) one or more final judgments or decrees for the payment of money of U.S.$50 million (or the equivalent thereof at the time of determination) or more in the aggregate are rendered against us or any Significant Subsidiary and are not paid (whether in full or in installments in accordance with the terms of the judgment) or otherwise discharged and, in the case of each such judgment or decree, either (i) an enforcement proceeding has been commenced by any creditor upon such judgment or decree and is not dismissed within 30 days following commencement of such enforcement proceedings or (ii) there is a period of 60 days following such judgment during which such judgment or decree is not discharged, waived or the execution thereof stayed;
(g) any guarantee of the notes is held in any judicial proceeding to be unenforceable or invalid or ceases for any reason to be in full force and effect, or any Subsidiary Guarantor (or any person acting on behalf of any Subsidiary Guarantor) denies or disaffirms its obligations under the guarantees of the notes; or,
(h) certain events of bankruptcy, insolvency or liquidation relating to us or any Significant Subsidiary.
A Default under clause (c) or (d) above will not constitute an Event of Default under the notes until the trustee or the holders of at least 25% in principal amount of the notes then outstanding, as the case may be, notify us of the Default and we do not cure such Default within the time specified after receipt of such notice.
The trustee is not to be charged with knowledge of any Default or Event of Default or knowledge of any cure of any Default or Event of Default with respect to the notes unless either (i) an authorized officer of the trustee with direct responsibility for the indenture has actual knowledge of such Default or Event of Default or (ii) written notice of such Default or Event of Default has been given to the trustee by us or any holder in the manner specified in the indenture.
If an Event of Default (other than an Event of Default specified in clause (h) above) with respect to the notes occurs and is continuing, the trustee or the holders of not less than 25% in principal amount of the notes then outstanding, as the case may be, may declare all unpaid principal of and accrued interest on the of notes to be due and payable immediately, by a notice in writing to us, and upon any such declaration such amounts will become due and payable immediately. If an Event of Default specified in clause (h) above with respect to any note occurs and is continuing, then the principal of and accrued interest on all notes will become and be immediately due and payable without any declaration or other act on the part of the trustee or any holder.
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Subject to the provisions of the indenture relating to the duties of the trustee in case an Event of Default under the notes will occur and be continuing, the trustee will be under no obligation to exercise any of its rights or powers under the indenture at the request or direction of any of the holders, unless such holders will have offered to the trustee indemnity and/or security reasonably satisfactory to the trustee. Subject to such provision for the indemnification of and security to the trustee, the holders of a majority in aggregate principal amount of the outstanding notes will have the right to direct the time, method and place of conducting any proceeding for any remedy available to the trustee or exercising any trust or power conferred on the trustee.
Defeasance
We may at any time terminate all of our obligations and those of the Subsidiary Guarantors with respect to the notes (“defeasance”), except for certain obligations, including those regarding any trust established for a defeasance and obligations to register the transfer or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes and to maintain agencies in respect of notes. We may at any time terminate our obligations under certain covenants set forth in the indenture, and any omission to comply with such obligations will not constitute a Default or an Event of Default with respect to the notes issued under the indenture (“covenant defeasance”). In order to exercise either defeasance or covenant defeasance, we must irrevocably deposit in trust, for the benefit of the holders of the notes, with the trustee money or U.S. government obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of an internationally recognized firm of independent public accountants expressed in a written certificate delivered to the trustee, without consideration of any reinvestment, to pay the principal of and interest on the notes to redemption or maturity and comply with certain other conditions, including the delivery of an opinion of legal counsel of recognized standing to the effect that the holders will not recognize income, gain or loss for U.S. federal income tax purposes as a result of the defeasance and will be subject to U.S. federal income tax on the same amount and in the same manner and at the same time as would otherwise have been the case (and in the case of a defeasance that is not a covenant defeasance, such opinion shall be based on a change in law or a ruling of the U.S. Internal Revenue Service).
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the notes, as expressly provided for in the indenture) as to all outstanding notes when:
(a) either:
(i) all the notes theretofor authenticated and delivered (except lost, stolen or destroyed notes which have been replaced or paid and notes for whose payment money has theretofor been deposited in trust or segregated and held in trust by us and thereafter repaid to us or discharged from such trust) have been delivered to the trustee for cancellation; or
(ii) all notes not theretofor delivered to the trustee for cancellation (i) have become due and payable or will become due and payable within one year or (ii) are to be called for redemption within one year under irrevocable arrangements satisfactory to the trustee for the giving of notice of redemption by the trustee in the name, and at our expense, and, in each case, we have irrevocably deposited or caused to be deposited with the trustee funds or certain direct, non-callable obligations of, or guaranteed by, the United States sufficient without reinvestment to pay and discharge the entire indebtedness on the notes not theretofor delivered to the trustee for cancellation, for principal of, premium, if any, and interest on the notes to the date of deposit (in the case of notes that have become due and payable) or to the maturity or redemption date, as the case may be, together with irrevocable instructions from us directing the trustee to apply such funds to the payment;
(b) we have paid all other sums payable under the indenture and the notes by us; and
(c) we have delivered to the trustee an officers’ certificate stating that all conditions precedent under the indenture relating to the satisfaction and discharge of the indenture have been complied with.
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Amendment, supplement, waiver
Subject to certain exceptions, the indenture may be amended or supplemented with the consent of the holders of at least a majority in principal amount of notes then outstanding, and any past Default or compliance with any provision may be waived with the consent of the holders of at least a majority in principal amount of notes then outstanding. However, without the consent of each holder of an outstanding note affected thereby, no amendment may:
(a) reduce the rate of or extend the time for payment of interest on any note;
(b) reduce the principal, or extend the Stated Maturity, of any note;
(c) reduce the amount payable upon redemption of any note or change the time at which any note may be redeemed;
(d) change the currency for, or place of payment of, principal or interest on any note;
(e) impair the right to institute suit for the enforcement of any payment on or with respect to any note;
(f) waive certain payment defaults with respect to the notes;
(g) reduce the principal amount of notes whose holders must consent to any amendment or waiver; or
(h) make any change in the amendment or waiver provisions which require each holder’s consent.
The holders of notes will receive prior notice as described under “—Notices” of any proposed amendment to the notes or the indenture described in this paragraph. After an amendment described in the preceding paragraph becomes effective, we are required to deliver to the holders a notice briefly describing such amendment. However, the failure to give such notice to all holders of notes, or any defect therein, will not impair or affect the validity of the amendment.
The consent of the holders of notes is not necessary to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment.
We and the trustee may, without the consent or vote of any holder of notes, amend or supplement the indenture or the notes for the following purposes:
(a) to cure any ambiguity, omission, defect or inconsistency; provided that such amendment or supplement does not materially and adversely affect the rights of any holder;
(b) to comply with the covenant described under “—Covenants—Limitation on consolidation, merger or transfer of assets”;
(c) to add guarantees or collateral with respect to the notes;
(d) to add to the covenants of the Company for the benefit of holders of the notes;
(e) to surrender any right conferred upon us;
(f) to evidence and provide for the acceptance of an appointment by a successor trustee;
(g) to provide for the issuance of additional notes; or
(h) to make any other change that does not materially and adversely affect the rights of any holder of the notes.
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In executing any amendment, waiver or supplemental indenture to the indenture or the notes, the trustee will be entitled to receive an officers’ certificate and an opinion of legal counsel of recognized standing, each stating that such amendment, waiver or supplemental indenture is authorized or permitted by the indenture, that it is not inconsistent with the terms of the indenture, and that it shall be valid and binding upon the Company in accordance with its terms.
Notices
For so long as notes in global form are outstanding, notices to be given to holders will be given to the depositary, in accordance with its applicable policies as in effect from time to time. If notes are issued in individual definitive form, notices to be given to holders will be deemed to have been given upon the mailing by first class mail, postage prepaid, of such notices to holders of the notes at their registered addresses as they appear in the registrar’s records. For so long as the notes are listed on the Official List of the Irish Stock Exchange and trading on the Global Exchange Market and the rules of such exchange so require, publication of such notice to the holders of the notes will be in English in a leading newspaper having general circulation in Ireland (which is expected to be the Irish Times). Notices may also be published on the website of the Irish Stock Exchange (www.ise.ie). Neither the failure to give any notice to a particular holder of the notes, nor any defect in a notice given to a particular holder of the notes, will affect the sufficiency of any notice given to another holder of the notes.
Trustee
The Bank of New York Mellon is the trustee under the indenture. Its address is 101 Barclay Street, Floor 4E, New York, New York, 10286.
Except during the continuance of an Event of Default, the trustee will perform only such duties as are specifically set forth in the indenture. During the existence of an Event of Default of which a responsible officer of the trustee has actual knowledge, the trustee will exercise such rights and powers vested in it by the indenture, and use the same degree of care and skill in its exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.
The trustee may resign at any time by so notifying the Company. In addition, the holders of a majority in aggregate principal amount of the notes then outstanding may remove the trustee by so notifying the trustee and may appoint a successor trustee. The Company will remove the trustee if (1) the trustee is no longer eligible; (2) the trustee is adjudged bankrupt or insolvent; (3) a receiver or other public officer takes charge of the trustee or its property; or (4) the trustee otherwise becomes incapable of acting under the indenture.
If the trustee resigns, is removed by the Company or by the holders of a majority in aggregate principal amount of the notes then outstanding and such holders do not reasonably promptly appoint a successor trustee, or if a vacancy exists in the office of trustee for any reason, the Company will promptly appoint a successor trustee. The successor trustee will give notice of its succession to the holders of the notes and, as long as the notes are listed on the Irish Stock Exchange for trading on the Global Exchange Market and the rules of the exchange so require, the successor trustee will also publish notice as described under “— Notices.”
We and our affiliates may from time to time enter into normal banking and trustee relationships with the trustee and its affiliates.
Prescription
Claims against the Company (if any) for payment in respect to the notes shall be prescribed and become void unless made within a period of six years from the appropriate payment date.
Governing law and submission to jurisdiction
The notes and the indenture will be governed by, and construed in accordance with, the laws of the State of New York.
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Each of the parties to the indenture will submit to the jurisdiction of the U.S. federal and New York State courts located in the Borough of Manhattan, City and State of New York and to the courts of its own corporate domicile in respect of actions brought against it as a defendant for purposes of all legal actions and proceedings instituted in connection with the notes and the indenture. We and the Subsidiary Guarantors have appointed CT Corporation System at 111 Eighth Avenue, New York, New York 10011, as our authorized agent upon which process may be served in any such action.
Currency indemnity
U.S. dollars are the sole currency of account and payment for all sums payable by us and the Subsidiary Guarantors under or in connection with the notes, including damages. Any amount received or recovered in a currency other than dollars (whether as a result of, or of the enforcement of, a judgment or order of a court of any jurisdiction, in the winding-up or dissolution of the Company or otherwise) by any holder of a note in respect of any sum expressed to be due to it from us or a Subsidiary Guarantor will only constitute a discharge to us and the relevant Subsidiary Guarantor to the extent of the dollar amount which the recipient is able to purchase with the amount so received or recovered in that other currency on the date of that receipt or recovery (or, if it is not practicable to make that purchase on that date, on the first date on which it is practicable to do so). If that dollar amount is less than the dollar amount expressed to be due to the recipient under any note, we and the Subsidiary Guarantors will indemnify such holder against any loss sustained by it as a result; and if the amount of U.S. dollars so purchased is greater than the sum originally due to such holder, such holder will, by accepting a note, be deemed to have agreed to repay such excess. In any event, we and the Subsidiary Guarantors will indemnify the recipient against the cost of making any such purchase.
For the purposes of the preceding paragraph, it will be sufficient for the holder of a note to certify in a satisfactory manner (indicating the sources of information used) that it would have suffered a loss had an actual purchase of dollars been made with the amount so received in that other currency on the date of receipt or recovery (or, if a purchase of dollars on such date had not been practicable, on the first date on which it would have been practicable, it being required that the need for a change of date be certified in the manner mentioned above). These indemnities constitute a separate and independent obligation from the other obligations of the Company and the Subsidiary Guarantors, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted by any holder of a note and will continue in full force and effect despite any other judgment, order, claim or proof for a liquidated amount in respect of any sum due under any note.
Certain definitions
The following is a summary of certain defined terms used in the indenture. Reference is made to the indenture for the full definition of all such terms as well as other capitalized terms used herein for which no definition is provided.
“Additional Amounts” has the meaning set forth under “Additional Amounts” above.
“Advance Transaction” means an advance from a financial institution involving either (i) a foreign exchange contract or (ii) an export contract.
“Alfa” means Alfa, S.A.B. de C.V., the parent company of the Company.
“Attributable Value” means as to any particular lease under which the Company or any Subsidiary is at any time liable as lessee and any date as of which the amount thereof is to be determined, the total net obligation of the lessee for rental payments during the remaining term of the lease (including any period for which such lease has been extended or may, at the option of the lessor, be extended) discounted from the respective due dates thereof to such date at a rate per annum equivalent to the interest rate inherent in such lease (as determined in good faith by the Company in accordance with generally accepted financial practice).
“Board of Directors” means, with respect to any Person, the board of directors or similar governing body of such Person.
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“Capital Lease Obligation” means, at the time any determination is to be made, the amount of the liability in respect of a capital lease that would at that time be required to be capitalized on a balance sheet in accordance with IFRS, and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be prepaid by the lessee without payment of a penalty.
“Capital Stock” means, with respect to any person, any and all shares of stock, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated, whether voting or non-voting), such person’s equity including any preferred stock, but excluding any debt securities convertible into or exchangeable for such equity.
“Change of Control” means the occurrence of one or more of the following events:
(1) (a) the consummation of any transaction (including without limitation any merger or consolidation) the result of which is that any “person” (as defined in Section 13d and 14d under the Exchange Act), other than Alfa and its Affiliates, becomes the beneficial owner, directly or indirectly, or more than 35% of the Voting Stock of the Company and (b) Alfa and its Affiliates beneficially own, directly or indirectly, in the aggregate, a lesser percentage of the total Voting Stock of the Company than such other person and do not have the right or ability by voting power, contract or otherwise to elect or designate for election a majority of the Board of Directors of the Company, unless, as a result of such transaction, the ultimate direct or indirect ownership of the Company is substantially the same immediately after such transaction as it was immediately prior to such transaction;
(2) the sale, conveyance, assignment, transfer, lease or other disposition of all or substantially all of the assets of the Company, determined on a consolidated basis, to any “person” (as defined in Sections 13d and 14d under the Exchange Act) other than Alfa, or any subsidiary of Alfa that is a holding company for Alfa’s interest in the Company (or one or more of the Subsidiaries of the Company), whether or not otherwise in compliance with the indenture; and
(3) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company, whether or not otherwise in compliance with the indenture.
Notwithstanding the foregoing, a transaction will not be deemed to involve a Change of Control if (i)(A) the Company becomes a wholly-owned Subsidiary of a holding company and (B) the holders of the Voting Stock of such holding company immediately following that transaction are substantially the same as the holders of the Company’s Voting Stock immediately prior to that transaction, (ii) pursuant to a transaction in which the shares of the Company’s Voting Stock of the surviving person immediately after giving effect to such transaction or (iii) the “person” referenced in clause (1) or (2) of the preceding sentence previously became the beneficial owner of the Company’s Voting Stock so as to have constituted a Change of Control in respect of which a Change of Control Offer was made (or otherwise would have required a Change of Control Offer in the absence of the waiver of such requirement by the holders of the notes).
“Change of Control Triggering Event” means the occurrence of a Change of Control that results in a Ratings Decline.
“Comparable Treasury Issue” means the United States Treasury security or securities selected by an Independent Investment Banker as having an actual or interpolated maturity comparable to the remaining term of the notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of a comparable maturity to the remaining term of such notes.
“Comparable Treasury Price” means, with respect to any redemption date, (A) the average of the Reference Treasury Dealer Quotations for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, as determined by the Company, or (B) if the Company obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations.
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“Consolidated Tangible Assets” means, as of any date of determination, the total amount of assets of the Company and its Subsidiaries less Intangible Assets of the Company and its Subsidiaries, on a consolidated basis and according to IFRS, as of the end of the fiscal year immediately preceding such date.
“CNBV” means the Mexican National Banking and Securities Commission, or Comisión Nacional Bancaria y de Valores.
“Debt” means, with respect to any person, without duplication:
(a) the principal of and premium, if any, in respect of (i) indebtedness of such person for money borrowed and (ii) indebtedness evidenced by the notes, debentures, notes or other similar instruments for the payment of which such person is responsible or liable;
(b) all Capital Lease Obligations of such person;
(c) all obligations of such person issued or assumed as the deferred purchase price of property, all conditional sale obligations of such person and all obligations of such person under any title retention agreement (but excluding trade accounts payable or other short-term obligations to suppliers payable within 180 days, in each case arising in the ordinary course of business);
(d) all obligations of such person for the reimbursement of any obligor on any letter of credit, banker’s acceptance or similar credit transaction (other than obligations with respect to letters of credit securing obligations (other than obligations described in clauses (a) through (c) above) entered into in the ordinary course of business of such person to the extent such letters of credit are not drawn upon or, if and to the extent drawn upon, such drawing is reimbursed no later than the tenth business day following receipt by such person of a demand for reimbursement following payment on the letter of credit);
(e) all Hedging Obligations;
(f) all obligations of the type referred to in clauses (a) through (d) of other persons and all dividends of other persons for the payment of which, in either case, such person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any guarantee (other than obligations of other persons that are customers or suppliers of such person for which such person is or becomes so responsible or liable in the ordinary course of business to (but only to) the extent that such person does not, or is not required to, make payment in respect thereof);
(g) all obligations of the type referred to in clauses (a) through (e) of other persons secured by any Lien on any property or asset of such person (whether or not such obligation is assumed by such person), the amount of such obligation being deemed to be the lesser of the value of such property or assets or the amount of the obligation so secured; and
(h) any other obligations of such person which are required to be, or are in such person’s financial statements, recorded or treated as debt under IFRS.
“Default” means any event which is, or after notice or passage of time or both would be, an Event of Default.
“Fitch” means Fitch Inc., or any successor thereto.
“guarantee” means any obligation of any person directly or indirectly guaranteeing any Debt or other obligation of any person and any obligation, direct or indirect, contingent or otherwise, of such person, including an aval (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation of such person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or pay, or to maintain financial statement conditions or otherwise) or (b) entered into for purposes of assuring in any other manner the obligee of such Debt or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided, however,
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that the term “guarantee” will not include endorsements for collection or deposit in the ordinary course of business. The term “guarantee” used as a verb has a corresponding meaning.
“Hedging Obligations” means, with respect to any specified Person, the obligations of such Person under:
(a) interest rate swap agreements (whether from fixed to floating or from floating to fixed), interest rate cap agreements, cross currency swaps and interest rate collar agreements;
(b) other agreements or arrangements designed to manage interest rates or interest rate risk; and
(c) other agreements or arrangements designed to protect such Person against fluctuations in currency exchange rates or commodity prices;
provided, however, that the amount of Debt with respect to any Hedging Obligation is the new amount payable if such Hedging Obligation terminated at that time due to a default by such Person.
“holder” means the person in whose name a note is registered in the register.
“IFRS” means the International Financial Reporting Standards as issued by the International Accounting Standards Board as in effect from time to time, or any financial reporting standards required for public companies by the Mexican Comisión Nacional Bancaria de Valores.
“Independent Investment Banker” means one of the Reference Treasury Dealers appointed by the Company.
“Investment” means, with respect to any person, any loan or advance to, any acquisition of Capital Stock, equity interest, obligation or other security of, or capital contribution or other investment in, such person.
“Intangible Assets” means, with respect to the Company and its Subsidiaries, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, write-ups of assets over their carrying value at the end of each fiscal year, and all other items which would be treated as intangibles on the balance sheet of the issuer and its Subsidiaries (except unamortized debt discount and expense), according to IFRS.
“Joint Venture Company” means any Subsidiary of the Company, or a Person in which the Company or any of its Subsidiaries participates or holds, directly or indirectly, an interest, in each case substantially all of whose activities are governed by a joint venture agreement or similar arrangement set forth in the joint venture entity’s charter documents, bylaws or similar entity level documentation, with a third party that is not an Affiliate of the Company.
“Lien” means any mortgage, pledge, security interest, conditional sale or other title retention agreement or other similar lien.
“Mexico” means the United Mexican States.
“Moody’s” means Moody’s Investors Service, Inc., or any successor thereto.
“Non-Recourse Debt” means Debt (or any portion thereof) of a Subsidiary of the Company that is not a Subsidiary Guarantor (the “Non-Recourse Debtor”) used to finance (i) the creation, development, construction, improvement or acquisition of projects, properties or assets and any increases in or extensions, renewals or refinancings of such Debt or (ii) the operations of projects, properties or assets of such Non-Recourse Debtor or its Subsidiaries; provided that the recourse of the lender thereof (including any agent, trustee, receiver or other person acting on behalf of such entity) in respect of such Debt is limited to the Non-Recourse Debtor, any debt securities issued by the Non-Recourse Debtor, the Capital Stock of the Non-Recourse Debtor, and any assets, receivables, inventory, equipment, chattels, contracts, intangibles, rights and any other assets of such Non-Recourse Debtor and its Subsidiaries connected with the projects, properties or assets created, developed, constructed, improved, acquired or operated, as the case may be, in respect of which such Debt has been incurred.
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“Operating Property” means, as of any date of determination, any real and tangible property owned by us or any Subsidiary that constitutes all or any part of any manufacturing facility and processing facility, and is used in the ordinary course of its business, the gross book value (without duplication of any depreciation reserves) of which piece of real or tangible property exceeds US$5,000,000.
“Person” means an individual, partnership, limited partnership, corporation, company, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof.
“Ratings Decline” means that at any time within 90 days (which period shall be extended so long as the rating of the notes is under publicly announced consideration for possible downgrade by Moody’s, S&P or Fitch (or any rating agency) or a substitute or successor of any thereof) after the date of public notice of a Change of Control, of an arrangement that could result in a Change of Control, or of the Company’s intention or that of any other person to effect a Change of Control, the then-applicable rating of the notes is decreased by either Moody’s, S&P or Fitch (or any other rating agency) or a substitute or successor of any thereof; provided that any such rating decline is in whole or in part in connection with a Change of Control.
“Reference Treasury Dealer Quotations” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as determined by the Company, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Company by such Reference Treasury Dealer at 3:30 p.m. New York time on the third business day preceding such redemption date.
“Reference Treasury Dealer” means each of Citigroup Global Markets Inc., Goldman Sachs & Co., HSBC Securities (USA) Inc. and J.P. Morgan Securities LLC, or their respective affiliates or successors which are primary U.S. Government securities dealers, and no less than two other leading primary U.S. Government securities dealers in The City of New York reasonably designated by the Company; provided, however, that if any of the foregoing or their affiliates shall cease to be a primary U.S. Government securities dealer in The City of New York (a “Primary Treasury Dealer”), the Company shall substitute therefor another Primary Treasury Dealer.
“Relevant Jurisdiction” means Mexico or any other jurisdiction in which the Company or a Subsidiary Guarantor is organized or resident for tax purposes or through or from which payment on the notes is made.
“Significant Subsidiary” means any Subsidiary of the Company that at the time of determination (a) had assets which, as of the date of the Company’s most recent quarterly consolidated balance sheet, constituted at least 10% of the Company’s total assets on a consolidated basis as of such date or (b) had operating income for the 12-month period ending on the date of the Company’s most recent quarterly consolidated statement of income which constituted at least 10% of the Company’s total operating income, on a consolidated basis for such period.
“S&P” means Standard and Poor’s Rating Services, or any successor thereto.
“Stated Maturity” means, with respect to any security, the date specified in such security as the fixed date on which the principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred).
“Subsidiary” means any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Capital Stock or other interests (including partnership interests) entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (a) the Company, (b) the Company and one or more Subsidiaries or (c) one or more Subsidiaries.
“Treasury Rate” means, with respect to any redemption date, the rate per annum, as determined by an Independent Investment Banker, to be equal to the semiannual equivalent yield to maturity or interpolated (on a day count basis) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.
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“Voting Stock” means, with respect to any Person, securities of any class of Capital Stock of such Person entitling the holders thereof (whether at all times or only so long as no senior class of stock has voting power by reason of any contingency) to vote in the election of members of the Board of Directors (or equivalent governing body) of such Person.
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BOOK-ENTRY, DELIVERY AND FORM
The notes are being offered and sold to qualified institutional buyers in reliance on Rule 144A (“Rule 144A notes”). Notes also may be offered and sold in offshore transactions in reliance on Regulation S (“Regulation S notes”). Notes will be issued at the closing of this offering only against payment in immediately available funds.
Rule 144A notes initially will be represented by one or more notes in registered, global form without interest coupons (collectively, the “Rule 144A global notes”). Regulation S notes initially will be represented by one or more notes in registered, global form without interest coupons (collectively, the “Regulation S global notes” and, together with the Rule 144A global notes, the “global notes”).
The global notes will be deposited upon issuance with the Trustee as custodian for DTC, in New York, New York, and registered in the name of DTC or its nominee, in each case, for credit to an account of a direct or indirect participant in DTC as described below. Through and including the 40th day after the later of the commencement of this offering and the closing of this offering (such period through and including such 40th day, the “restricted period”), beneficial interests in the Regulation S global notes may be held only through Euroclear and Clearstream (as indirect participants in DTC), unless transferred to a person that takes delivery through a Rule 144A global note in accordance with the certification requirements described below. Beneficial interests in the Rule 144A global notes may not be exchanged for beneficial interests in the Regulation S global notes at any time except in the limited circumstances described below. See “—Exchanges Between Regulation S Notes and Rule 144A Notes.”
Except as set forth below, the global notes may be transferred, in whole and not in part, only to another nominee of DTC or to a successor of DTC or its nominee. Beneficial interests in the global notes may not be exchanged for notes in certificated form except in the limited circumstances described below. See “—Exchange of Global Notes for Certificated Notes.” Except in the limited circumstances described below, owners of beneficial interests in the global notes will not be entitled to receive physical delivery of notes in certificated form.
Rule 144A notes (including beneficial interests in the Rule 144A global notes) will be subject to certain restrictions on transfer and will bear a restrictive legend as described under “Transfer Restrictions.” Regulation S notes will also bear the legend as described under “Transfer Restrictions.” In addition, transfers of beneficial interests in the global notes will be subject to the applicable rules and procedures of DTC and its direct or indirect participants (including, if applicable, those of Euroclear and Clearstream), which may change from time to time.
Depository Procedures
The following description of the operations and procedures of DTC, Euroclear and Clearstream is provided solely as a matter of convenience. These operations and procedures are solely within the control of the respective settlement systems and are subject to changes by them. We take no responsibility for these operations and procedures and urge investors to contact the system or their participants directly to discuss these matters.
DTC has advised us that DTC is a limited purpose trust company created to hold securities for its participating organizations (collectively, the “participants”) and to facilitate the clearance and settlement of transactions in those securities between participants through electronic book entry changes in accounts of its participants. The participants include securities brokers and dealers (including the initial purchasers), banks, trust companies, clearing corporations and certain other organizations. Access to DTC’s system is also available to other entities such as banks, brokers, dealers and trust companies that clear through or maintain custodial relationship with a participant, either directly or indirectly (collectively, the “indirect participants”). Persons who are not participants may beneficially own securities held by or on behalf of DTC only through the participants or the indirect participants. The ownership interests in, and transfers of ownership interests in, each security held by or on behalf of DTC are recorded on the records of the participants and indirect participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the global notes, DTC will credit the accounts of participants designated by the initial purchasers with portions of the principal amount of the global notes; and
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(2) ownership of these interests in the global notes will be shown on, and the transfer of ownership of these interests will be effected only through, records maintained by DTC (with respect to the participants) or by the participants and the indirect participants (with respect to other owners of beneficial interests in the global notes).
Investors in the global notes who are participants in DTC’s system may hold their interests therein directly through DTC. Investors in the Rule 144A global notes who are not participants may hold their interests therein indirectly through organizations (including Euroclear and Clearstream) which are participants in such system. Euroclear and Clearstream will hold interests in the global notes on behalf of their participants through customers’ securities accounts in their respective names on the books of their respective depositories, which are Euroclear Bank S.A./N.V., as operator of Euroclear, and Citibank, N.A., as operator of Clearstream. All interests in a global note, including those held through Euroclear or Clearstream, may be subject to the procedures and requirements of DTC. Those interests held through Euroclear or Clearstream may also be subject to the procedures and requirements of such systems. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interests in a global note to such persons will be limited to that extent. Because DTC can act only on behalf of participants, which in turn act on behalf of indirect participants, the ability of a person having beneficial interests in a global note to pledge such interests to persons that do not participate in the DTC system, or otherwise take actions in respect of such interests may be affected by the lack of a physical certificate evidencing such interests.
Except as described below, owners of interests in the global notes will not have notes registered in their names, will not receive physical delivery of notes in certificated form and will not be considered the registered owners or “holders” thereof under the indenture for any purpose.
Payments in respect of the principal of, and interest and premium and additional interest, if any, on a global note registered in the name of DTC or its nominee will be payable to DTC in its capacity as the registered holder under the indenture. Under the terms of the indenture, the Issuer and the Trustee will treat the persons in whose names the notes, including the global notes, are registered as the owners of the notes for the purpose of receiving payments and for all other purposes. Consequently, neither the Issuer, the Trustee, the transfer agent, registrar, the paying agent nor any agent of the Issuer, nor the Trustee has or will have any responsibility or liability for:
(1) any aspect of DTC’s records or any participant’s or indirect participant’s records relating to or payments made on account of beneficial ownership interest in the global notes or for maintaining, supervising or reviewing any of DTC’s records or any participant’s or indirect participant’s records relating to the beneficial ownership interests in the global notes; or
(2) any other matter relating to the actions and practices of DTC or any of its participants or indirect participants.
DTC has advised us that its current practice, upon receipt of any payment in respect of securities such as the notes (including principal and interest) is to credit the accounts of the relevant participants with the payment on the payment date unless DTC has reason to believe it will not receive payment on such payment date. Each relevant participant is credited with an amount proportionate to its beneficial ownership of an interest in the principal amount of the relevant security as shown on the records of DTC. Payments by the participants and the indirect participants to the beneficial owners of notes will be governed by standing instructions and customary practices and will be the responsibility of the participants or the indirect participants and will not be our responsibility or that of DTC or the Trustee. Neither the Issuer nor the Trustee will be liable for any delay by DTC or any of its participants in identifying the beneficial owners of the notes, and the Issuer and the Trustee may conclusively rely on and will be protected in relying on instructions from DTC or its nominee for all purposes.
Subject to the transfer restrictions set forth under “Transfer Restrictions,” transfers between participants in DTC will be effected in accordance with DTC’s procedures, and will be settled in same-day funds, and transfers between participants in Euroclear and Clearstream will be effected in accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the notes described herein, cross-market transfers between the participants in DTC, on the one hand, and Euroclear or Clearstream participants, on the other
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hand, will be effected through DTC in accordance with DTC’s rules on behalf of Euroclear or Clearstream, as the case may be, by its respective depositary; however, such cross market transactions will require delivery of instructions to Euroclear or Clearstream, as the case may be, by the counter-party in such system in accordance with the rules and procedures and within the established deadlines (Brussels time) of such system. Euroclear or Clearstream, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf of delivering or receiving interests in the relevant global note in DTC, and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Euroclear participants and Clearstream participants may not deliver instructions directly to the depositories for Euroclear or Clearstream.
DTC has advised us that it will take any action permitted to be taken by a holder of notes only at the direction of one or more participants to whose account DTC has credited the interests in the global notes and only in respect of such portion of the aggregate principal amount of the notes as to which such participant or participants has or have given such direction. However, if there is an event of default under the notes, DTC reserves the right to exchange the global notes for legended notes in certificated form, and to distribute such notes to its participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing procedures to facilitate transfers of interests in the Rule 144A global notes and the Regulation S global notes among participants in DTC, Euroclear and Clearstream, they are under no obligation to perform or to continue to perform such procedures, and may discontinue such procedures at any time. Neither the Issuer nor the Trustee nor any of their respective agents will have any responsibility for the performance by DTC, Euroclear or Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.
Exchange of Global Notes for Certificated Notes
A global note is exchangeable for definitive notes in registered certificated form (“certificated notes”) if:
(1) DTC (a) notifies the Issuer that it is unwilling or unable to continue as depositary for the global notes and DTC fails to appoint a successor depositary or (b) has ceased to be a clearing agency registered under the Exchange Act;
(2) The Issuer, at its option, notifies the Trustee in writing that it has elected to cause the issuance of the certificated notes; or
(3) there has occurred and is continuing a Default or Event of Default with respect to the notes.
In addition, beneficial interests in a global note may be exchanged for certificated notes upon prior written notice given to the Trustee by or on behalf of DTC in accordance with the indenture. In all cases, certificated notes delivered in exchange for any global note or beneficial interests in global notes will be registered in the names, and issued in any approved denominations, requested by or on behalf of the depositary (in accordance with its customary procedures) and will bear the applicable restrictive legend referred to in “Transfer Restrictions,” unless that legend is not required by applicable law.
Exchange of Certificated Notes for Global Notes
Certificated notes may not be exchanged for beneficial interests in any global note unless the transferor first delivers to the Trustee a written certificate (in the form provided in the indenture) to the effect that such transfer will comply with the appropriate transfer restrictions applicable to such notes. See “Transfer Restrictions.”
Exchanges Between Regulation S Notes and Rule 144A Notes
Beneficial interests in the Regulation S global notes may be exchanged for beneficial interests in the Rule 144A global notes only if:
(1) such exchange occurs in connection with a transfer of the notes pursuant to Rule 144A; and
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(2) the transferor first delivers to the Trustee a written certificate (in the form provided in the indenture) to the effect that the notes are being transferred to a person:
(A) who the transferor reasonably believes to be a qualified institutional buyer within the meaning of Rule 144A;
(B) purchasing for its own account or the account of a qualified institutional buyer in a transaction meeting the requirements of Rule 144A; and
(C) in accordance with all applicable securities laws of the states of the United States and other jurisdictions.
Beneficial interest in a Rule 144A global note may be transferred to a person who takes delivery in the form of an interest in the Regulation S global note, whether before or after the expiration of the restricted period, only if the transferor first delivers to the Trustee a written certificate (in the form provided in the indenture) to the effect that such transfer is being made in accordance with Rule 903 or 904 of Regulation S.
Transfers involving exchanges of beneficial interests between the Regulation S global notes and the Rule 144A global notes will be effected in DTC by means of an instruction originated by the DTC participant and approved by the Trustee through the DTC Deposit/ Withdraw at Custodian system. Accordingly, in connection with any such transfer, appropriate adjustments will be made to reflect a decrease in the principal amount of the Regulation S global note and a corresponding increase in the principal amount of the Rule 144A global note or vice versa, as applicable. Any beneficial interest in one of the global notes that is transferred to a person who takes delivery in the form of an interest in the other global note will, upon transfer, cease to be an interest in such global note and will become an interest in the other global note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interest in such other global note for so long as it remains such an interest. Transfers between Regulation S and Rule 144A notes will need to be done on a delivery free of payment basis and separate arrangements will need to be made outside of DTC for payment.
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TRANSFER RESTRICTIONS
The notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act. Accordingly, the notes are being offered hereby only (a) to “qualified institutional buyers” (as defined in Rule 144A under the Securities Act), or QIBs, in compliance with Rule 144A under the Securities Act and (b) in offers and sales that occur outside the United States to persons other than U.S. persons (“non-U.S. purchasers,” which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for non-U.S. beneficial owners (other than an estate or trust)), in offshore transactions meeting the requirements of Rule 903 of Regulation S. As used herein, the terms “offshore transactions,” “United States” and “U.S. person” have the respective meanings given to them in Regulation S.
Each purchaser of notes will be deemed to have represented and agreed with us and the initial purchasers as follows:
(1) It is purchasing the notes for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is (a) a QIB, and is aware that the sale to it is being made in reliance on Rule 144A under the Securities Act or (b) a non-U.S. purchaser that is outside the United States (or a non-U.S. purchaser that is a dealer or other fiduciary as referred to above);
(2) It understands that the notes are being offered in a transaction not involving any public offering in the United States within the meaning of the Securities Act, that the notes have not been and will not be registered under the Securities Act, and that the notes may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as set forth below;
(3) It shall not resell or otherwise transfer any of such notes except:
• to the Company or any of its subsidiaries;
• pursuant to a registration statement which has been declared effective under the Securities Act;
• within the United States to a QIB in compliance with Rule 144A under the Securities Act;
• outside the United States to non-U.S. purchasers in offshore transactions meeting the requirements of Rule 903 or Rule 904 of Regulation S under the Securities Act; or
• pursuant to another available exemption from the registration requirements of the Securities Act;
(4) It agrees that it will give notice of any restrictions on transfer of such notes to each person to whom it transfers the notes;
(5) It understands that the certificates evidencing the notes (other than the Regulation S global notes) will bear a legend substantially to the following effect unless otherwise determined by us:
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE OR OTHER SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT, AND ANY ACCOUNT FOR WHICH IT IS ACTING, (A) IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT) OR (B) IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN “OFFSHORE TRANSACTION” PURSUANT TO RULE 903 OR 904 OF REGULATION S AND, WITH RESPECT TO (A) AND (B), EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO SUCH ACCOUNT, (2) AGREES FOR THE BENEFIT OF THE COMPANY THAT IT WILL NOT OFFER, SELL, PLEDGE OR OTHERWISE
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TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN, EXCEPT (A) (I) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (II) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BECOME EFFECTIVE UNDER THE SECURITIES ACT, (III) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (IV) IN AN OFFSHORE TRANSACTION COMPLYING WITH THE REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT OR (V) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT (IF AVAILABLE), AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES AND OTHER JURISDICTIONS, AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS “OFFSHORE TRANSACTION,” “UNITED STATES” AND “U.S. PERSON” HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH PARAGRAPH 2A(V) ABOVE, THE COMPANY RESERVES THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL OPINIONS, CERTIFICATIONS, OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS MADE AS TO THE AVAILABILITY OF ANY EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND SHALL ONLY BE REMOVED AT THE OPTION OF THE ISSUER. ____________
(6) If it is a non-U.S. purchaser acquiring a beneficial interest in a Regulation S global note offered pursuant to this offering memorandum, it acknowledges and agrees that, until the expiration of the 40 day “distribution compliance period” within the meaning of Regulation S, any offer, sale, pledge or other transfer shall not be made by it in the United States or to, or for the account or benefit of, a U.S. person, except pursuant to Rule 144A to a QIB taking delivery thereof in the form of a beneficial interest in a U.S. global note, and that each Regulation S global note will contain a legend to substantially the following effect:
PRIOR TO EXPIRATION OF THE 40-DAY DISTRIBUTION COMPLIANCE PERIOD (AS DEFINED IN REGULATION S (“REGULATION S”) UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”)), THIS SECURITY MAY NOT BE REOFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED STATES (AS DEFINED IN REGULATION S) OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, A U.S. PERSON (AS DEFINED IN REGULATION S), EXCEPT TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT IN A TRANSACTION MEETING THE REQUIREMENTS OF THE INDENTURE REFERRED TO HEREIN.
(7) It acknowledges that the foregoing restrictions apply to holders of beneficial interests in the notes, as well as holders of the notes;
(8) It acknowledges that the Company will not be required to accept for registration of transfer any notes acquired by it, except upon presentation of evidence satisfactory to the Company that the restrictions set forth herein have been complied with; and
(9) It acknowledges that the Company, the trustee, the initial purchasers and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that if any of the acknowledgments, representations or agreements deemed to have been made by its purchase of the notes are no longer accurate, it shall promptly notify the Company, the trustee and the initial purchasers. If it is acquiring the notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and it has full power to make the foregoing acknowledgments, representations and agreements on behalf of each such account.
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TAXATION
General
The following summary contains a description of the material U.S. and Mexican federal tax consequences of the purchase, ownership and disposition of the notes by certain foreign holders that are non-resident of Mexico for tax purposes.
This summary is based upon federal tax laws of the United States and Mexico as in effect on the date of this offering memorandum, including the provisions of the income tax treaty between the United States and Mexico, which we refer to in this offering memorandum as the Tax Treaty, all of which are subject to change. This summary does not purport to be a comprehensive description of all the U.S. or Mexican federal income tax considerations that may be relevant to a decision to purchase, hold or dispose of the notes. The summary does not address any tax consequences under the laws of any state, municipality or locality of Mexico or the United States or the laws of any taxing jurisdiction other than the federal laws of Mexico and the United States.
Prospective investors should consult their own tax advisors as to the Mexican and United States tax consequences of the purchase, ownership and disposition of notes, including, in particular, the effect of any foreign (non-Mexican and non-U.S.), state or local tax laws.
Mexico has also entered into or is negotiating several double taxation treaties with various countries that may have an impact on the tax treatment of the purchase, ownership or disposition of notes. Prospective purchasers of notes should consult their own tax advisors as to the tax consequences, if any, of the application of any such treaties.
Mexican Federal Tax Considerations
General
The following is a general summary of the principal Mexican federal income tax consequences of the purchase, ownership and disposition of the notes by holders that are not residents of Mexico, for Mexican federal income tax purposes, and that do not hold such notes through a permanent establishment for tax purposes in Mexico, to which income under the notes is attributable; for purposes of this summary, each such holder is referred to as a foreign holder.
This summary is based on the Mexican Income Tax Law (Ley del Impuesto sobre la Renta) and regulations in effect on the date of this offering memorandum, all of which are subject to change, possibly with retroactive effect, or to new or different interpretations, which could affect the continued validity of this general summary.
This summary does not address all of the Mexican tax consequences that may be applicable to specific holders of the notes and does not purport to be a comprehensive description of all the Mexican tax considerations that may be relevant to a decision to purchase, own or dispose of the notes. In particular, this summary does not describe any tax consequences arising under the laws of any state, municipality or taxing jurisdiction other than certain federal laws of Mexico.
Potential investors should consult with their own tax advisors regarding the particular consequences of the purchase, ownership or disposition of the notes under the federal laws of Mexico or any other jurisdiction or under any applicable double taxation treaty to which Mexico is a party, which is in effect.
For purposes of Mexican taxation, an individual or corporation that does not satisfy the requirements to be considered a resident of Mexico for tax purposes, as specified below, is deemed as a non-resident of Mexico for tax purposes and a foreign holder for purposes of this summary.
An individual is a resident of Mexico for tax purposes, if he/she established his/her home in Mexico. When the individual in question has a home in another country, the individual will be deemed a resident in Mexico if his/her center of vital interests is located in Mexican territory. This will be deemed to occur if (i) more than 50.0% of the aggregate income realized by such individual in the calendar year is from a Mexican source, or (ii) the principal center of his/her professional activities is located in Mexico. Mexican nationals who filed a change of tax residence to a country or jurisdiction that does not have a comprehensive exchange of information agreement with Mexico and
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where his/her income is subject to a preferred tax regime as defined by Mexican law, will be considered Mexican residents for tax purposes during the year of the filing of notice of such residence change and during the following three years. Unless otherwise proven, a Mexican national is deemed a resident of Mexico for tax purposes.
A legal entity is a resident of Mexico if it maintains the principal administration of its business or the effective location of its management in Mexico.
If a legal entity or an individual is deemed to have a permanent establishment in Mexico for Mexican tax purposes, any and all income attributable to that permanent establishment will be subject to Mexican income taxes, in accordance with applicable tax laws.
Payments of Interest
Pursuant to the Mexican Income Tax Law, payments of interest on the notes (including original issue discount, which is deemed to be interest) made by us or by any of the Subsidiary Guarantors to foreign holders will be subject to Mexican withholding tax at a rate of 4.9%, if, as expected, the following requirements are met:
� the issuance of the notes (including the principal characteristics of the notes) is notified to the CNBV pursuant to Article 7 of the Mexican Securities Market Law;
� the notes, as expected, are placed outside of Mexico through banks or brokerage houses, in a country with which Mexico has in force a treaty for the avoidance of double taxation which is in effect (which currently includes the United States of America); and
� we timely file with the Servicio de Administración Tributaria or SAT, fifteen days after the placement of the notes, information regarding such placement, and on a quarterly basis, information, among other things, setting forth that no party related to us, jointly or individually, directly or indirectly, is the effective beneficiary of more than 5.0% of the aggregate amount of each interest payment, and we maintain records that evidence compliance with this requirement.
If any of the above mentioned requirements is not met, the Mexican withholding tax will be 10.0% or higher.
As of the date of this offering memorandum, the Tax Treaty is not expected to have any effect on the Mexican tax consequences described in this summary, because, as described above, under Mexico’s Income Tax Law, we expect to be entitled to withhold taxes in connection with interest payments under the notes at a 4.9% rate.
Payments of interest on the notes made by us to non-Mexican pension and retirement funds will be exempt from Mexican withholding tax provided that:
� the applicable fund is duly incorporated pursuant to the laws of its country of residence and is the effective beneficiary of the interest payment;
� such income is exempt from taxes in its country of residence; and
� such fund is registered with the SAT in accordance with rules issued by SAT for these purposes.
Holders or beneficial owners of the notes may be requested to, subject to specified exceptions and limitations, provide certain information or documentation necessary to enable us and the Subsidiary Guarantors to apply the appropriate Mexican withholding tax rate on interest payments under the notes made by us or the Subsidiary Guarantors to such holders or beneficial owners. In the event that the specified information or documentation concerning the holder or beneficial owner, if requested, is not timely provided, we or the Subsidiary Guarantors may withhold Mexican tax from interest payments on the notes to that holder or beneficial owner at the maximum applicable rate in effect, and our obligation to pay Additional Amounts relating to those withholding taxes will be limited as described under “Description of the Notes—Additional Amounts.”
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Payments of Principal
Under Mexican Income Tax Law, payments of principal on the notes made by us or by the Subsidiary Guarantors to foreign holders will not be subject to any Mexican withholding tax.
Taxation of Capital Gains
Under the Mexican Income Tax Law and regulations thereunder, capital gains resulting from the sale or other disposition of the notes by a foreign holder to another foreign holder are not taxable in Mexico. Gains resulting from the sale of the notes by a foreign holder to a Mexican resident for tax purposes or to a foreign holder deemed to have a permanent establishment in Mexico for tax purposes, will be subject to the Mexican taxes pursuant to the rules described above with respect to interest payments.
Taxation of Make-Whole Amount
Under the Mexican Income Tax Law and regulations thereunder, the payment of the Make-Whole Amount as a result of the optional redemption of the notes, as provided in “Description of Notes—Redemption—Optional make-whole redemption,” will be subject to the Mexican taxes pursuant to the rules described above with respect to interest payments.
Other Mexican Taxes
Under current Mexican tax laws, generally there are no estate, inheritance, succession or gift taxes applicable to the purchase, ownership or disposition of the notes by a foreign holder. Gratuitous transfers of the notes in certain circumstances may result in the imposition of a Mexican federal tax upon the recipient. There are no Mexican stamp, issuer registration or similar taxes or duties payable by foreign holders of the notes with respect to the notes.
U.S. Federal Income Tax Considerations
To ensure compliance with Internal Revenue Service (“IRS”) Circular 230, prospective investors are hereby notified that: (a) any discussion of U.S. federal tax issues contained or referred to in this offering memorandum or any document referred to herein is not intended or written to be used, and cannot be used by prospective investors for the purpose of avoiding penalties that may be imposed on them under the United States Internal Revenue Code of 1986, as amended (the “Code”); (b) such discussion is written for use in connection with the promotion or marketing of the transactions or matters addressed herein; and (c) prospective investors should seek advice based on their particular circumstances from an independent tax advisor.
The following is a general summary of certain U.S. federal income tax consequences of the ownership and disposition of the notes. This summary is limited to holders of the notes that purchase the notes at the original issuance, at their “issue price” (as defined below) and who hold the notes as capital assets (within the meaning of the Code). This summary is based upon provisions of the Code and U.S. Treasury regulations, rulings and judicial decisions as of the date hereof. Those authorities may be changed, perhaps retroactively, so as to result in United States federal income tax consequences different from those summarized below. This summary does not address all aspects of U.S. federal income taxation that may be relevant to a particular holder or to certain types of holders subject to special treatment, such as persons subject to certain U.S. federal income tax laws regarding expatriates, dealers in securities or foreign currency, financial institutions, insurance companies, tax-exempt organizations, real estate investment trusts, regulated investment companies, partnerships, pass-through entities or persons that hold the notes through partnerships or pass through entities, “U.S. Holders” (as defined below) whose functional currency is not the U.S. Dollar, or persons who hold the notes as part of a “straddle,” “hedge,” “conversion transaction,” “synthetic security” or other integrated investment. In addition, this summary does not address alternative minimum tax consequences or the indirect effects on holders of interests in a holder of the notes. This summary also does not describe any tax consequences arising under the laws of any taxing jurisdiction other than the U.S. federal government.
Each investor should consult its own tax advisor with respect to the U.S. federal, state, local and foreign tax consequences of the ownership and disposition of the notes.
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As used in this section, the term “U.S. Holder” means a beneficial owner of the notes that is for U.S. federal income tax purposes: (i) a citizen or individual resident of the United States; (ii) a corporation created or organized in or under the laws of the United States or any state thereof (including the District of Columbia); (iii) any estate the income of which is subject to U.S. federal income tax regardless of its source; or (iv) any trust if (A) a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all substantial decisions of the trust or (B) the trust has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.
A “Non-U.S. Holder” is a beneficial owner of the notes that is neither a U.S. Holder nor a partnership (or entity treated as such for U.S. federal income tax purposes).
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds notes, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner in a partnership that acquires or holds the notes should consult its own tax advisers.
If you are considering the purchase of notes, you should consult your own tax advisors concerning the particular United States federal income tax consequences to you regarding ownership of the notes, as well as the consequences to you arising under the laws of any other taxing jurisdiction.
U.S. Holders
The following summary applies to you if you are a holder of notes that is a U.S. Holder.
Contingent Payment Debt Obligations
Certain debt instruments that provide for one or more contingent payments are subject to U.S. Treasury regulations governing contingent payment debt instruments. A payment is not treated as a contingent payment under these regulations if, as of the issue date of the debt instrument, the likelihood that such payment will be made is remote and/or the payments are incidental. In certain circumstances as set forth in the Description of the Notes, we may redeem the notes in advance of their stated maturity, in which case we may pay amounts on the notes that are in excess of the stated interest or principal of the notes. We intend to take the position that the possibility that any such payment will be made is remote and/or the payments are incidental and therefore the notes are not subject to the rules governing contingent debt instruments. Our determination that these contingencies are remote and/or incidental is binding on you unless you disclose your contrary position to the IRS in the manner that is required by applicable U.S. Treasury regulations. Our determination is not, however, binding on the IRS. It is possible that the IRS might take a different position from that described above, in which case the timing, character and amount of taxable income in respect of the notes may differ adversely from that described herein. The remainder of this discussion assumes that the notes will not be treated as contingent payment debt instruments.
Stated Interest
The amount of stated interest payments on a note will generally be taxable to you as ordinary income at the time it is paid or accrued in accordance with your method of accounting for tax purposes. The notes will be treated as issued with original issue discount (“OID”) for U.S. federal income tax purposes if their stated redemption price at maturity exceeds their “issue price” by more than a de minimis amount. The “issue price” of a note generally is the first price at which a substantial amount of the issue of which the note is a part is sold to persons other than bond houses, brokers or similar persons acting in the capacity of underwriters, placement agents or wholesalers. If a note is treated as issued with more than a de minimis amount of OID, you will be required, regardless of your tax accounting method, to include in ordinary income a portion of the OID for each day during each taxable year in which you held the note, determined by using a constant yield-to-maturity method that reflects compounding interest. In addition to interest on the notes, you will be required to include in income any Additional Amounts and any tax withheld from the interest payments you receive, even if you do not in fact receive this withheld tax. You may be entitled to deduct or credit this tax, subject to certain limitations (including that the election to deduct or credit foreign taxes applies to all of your foreign taxes for a particular tax year). Interest income (including Mexican taxes withheld from the interest payments and any Additional Amounts) on a note generally will be considered foreign source income and generally should constitute “passive category income.” You may be denied a foreign tax credit for foreign taxes imposed with respect to the notes where you do not meet a minimum holding period
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requirement during which you are not protected from risk of loss. The rules governing the foreign tax credit are complex. You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances.
Sale, Exchange and Retirement of Notes
Your tax basis in a note will, in general, be your cost for that note increased by any OID previously included in gross income and reduced (but not below zero) by payments, if any, you have previously received (other than payments of qualified stated interest) on such note. Upon the sale, exchange, retirement or other disposition of a note, you will recognize gain or loss equal to the difference between the amount you realize upon the sale, exchange, retirement or other disposition (including any make-whole amount received upon redemption, but less an amount equal to any accrued interest that you did not previously include in income, which will be taxable as such) and the adjusted tax basis of the note. Such gain or loss will be capital gain or loss and will generally be treated as United States source gain or loss. Consequently, you may not be able to claim a credit for any Mexican tax imposed upon a disposition of a note unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.
Medicare Contribution Tax on Unearned Income
Certain U.S. Holders who are individuals, estates or trusts are subject to an additional 3.8% tax on, among other things, interest on the notes and capital gain from the sale or other taxable disposition of the notes . U.S. Holders should consult their tax advisors regarding the effect, if any, of the Medicare tax on their ownership and disposition of the notes.
Non-U.S. Holders
The following summary applies to you if you are a holder of notes that is a Non-U.S. Holder.
The interest income that you derive with respect to the notes (including the amount of any Mexican tax withheld and any Additional Amounts) generally will be exempt from United States federal income taxes, including United States withholding tax on payments of interest (other than as described below under “–Information Reporting and Backup Withholding”), unless such income is effectively connected with your conduct of a trade or business in the United States (and, if required by an applicable tax treaty, is attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States).
If you are a Non-U.S. Holder, any gain you realize on a sale of the notes generally will be exempt from United States federal income tax, including United States withholding tax, unless:
� your gain is effectively connected with your conduct of a trade or business in the United States (and, if required by applicable tax treaty, are attributable to a permanent establishment maintained by the Non-U.S. Holder in the United States).; or
� you are an individual holder and are present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.
Backup Withholding and Information Reporting
Generally, information reporting requirements will apply to all payments we make to a U.S. Holder and the proceeds from a sale of a note paid to a U.S. Holder unless such U.S. Holder is an “exempt recipient” (such as a corporation). To avoid the imposition of backup withholding, a U.S. Holder should (i) provide its taxpayer identification number, (ii) certify that it is not subject to backup withholding, and (iii) otherwise comply with the applicable requirements of the backup withholding rules. Although Non-U.S. Holders generally are exempt from backup withholding and information reporting, a Non-U.S. Holder may, in certain circumstances, be required to comply with certification procedures to prove entitlement to this exemption.
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Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a holder’s United States federal income tax liability, provided the required information is furnished to the IRS.
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PLAN OF DISTRIBUTION
Citigroup Global Markets Inc., Goldman, Sachs & Co., HSBC Securities (USA) Inc. and J.P. Morgan Securities LLC are acting as initial purchasers.
Subject to the terms and conditions stated in the purchase agreement, dated November 15, 2012, each initial
purchaser named below has severally agreed to purchase, and we have agreed to sell to the initial purchasers, the principal amount of the notes set forth opposite such initial purchaser’s name.
Initial Purchaser Principal Amount
of Notes
Citigroup Global Markets Inc.. ................................................................................................US$ 162,500,000 Goldman, Sachs & Co. ...............................................................................................................................162,500,000 HSBC Securities (USA) Inc. ......................................................................................................................162,500,000 J.P. Morgan Securities LLC........................................................................................................................162,500,000
Total ...........................................................................................................................................................US$ 650,000,000
Subject to the terms and conditions set forth in the purchase agreement, the initial purchasers have agreed to purchase all of the notes sold under the purchase agreement if any notes are purchased. If an initial purchaser defaults, the purchase agreement provides that the purchase commitments of the non-defaulting initial purchasers may be increased or the purchase agreement may be terminated.
We have agreed to indemnify the initial purchasers and their controlling persons against certain liabilities in connection with this offering, including liabilities under the Securities Act, or to contribute to payments the initial purchasers may be required to make in respect of those liabilities.
The initial purchasers are offering the notes, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the notes, and other conditions contained in the purchase agreement, such as the receipt by the initial purchasers of officer’s certificates and legal opinions. The initial purchasers reserve the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
The initial purchasers have advised us that they propose initially to offer the notes at the offering price set forth on the cover page of this offering memorandum and to certain dealers at that price less a selling concession. After the initial offering, the offering price, concession or any other term of the offering may be changed. The initial purchasers may offer and sell notes through certain of their affiliates.
Notes Are Not Being Registered
The notes have not been registered under the Securities Act, or the securities law of any other jurisdiction, and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S) except in transactions exempt from, or not subject to, the registration requirements of the Securities Act. Each purchaser of the notes will be deemed to have made acknowledgements, representations and agreements as described under “Transfer Restrictions.” In connection with sales outside the United States, each of the initial purchasers has agreed that it will not offer, sell or deliver the notes to, or for the account of, U.S. persons (unless in reliance on Rule 144A) (i) as part of their distribution at any time or (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, and it will send to each dealer to whom it sells such notes during such period a confirmation or other notice setting forth the restrictions on offers and sales of the notes within the United States or to, or for the account or benefit of, U.S. persons. Resales of the notes are restricted as described below under “Transfer Restrictions.”
Further, until 40 days after the commencement of the offering, an offer or sale of the notes within the United States by a dealer that is not participating in the offering may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A.
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New Issue of Notes
The notes will constitute a new issue of securities with no established trading market. Application will be made to list the notes on the Official List of the Irish Stock Exchange and to admit them to trading on the Global Exchange Market. However, we cannot assure you that the listing application will be approved. We have been advised by the initial purchasers that they presently intend to make a market in the notes after completion of the offering. However, they are under no obligation to do so and may discontinue any market-making activities at any time without any notice. We cannot assure the liquidity of the trading market for the notes. If an active trading market for the notes does not develop, the market price and liquidity of the notes may be adversely affected. If the notes are traded, they may trade at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, our operating performance and financial condition, general economic conditions and other factors.
No Sales of Similar Securities
We and our subsidiary guarantors have agreed that for a period of 60 days after the date of this offering memorandum, we and our subsidiary guarantors will not without first obtaining the prior written consent of the initial purchasers, directly or indirectly, sell, offer, announce the offering of, or file any registration statement under the Securities Act in respect of, any of our or our subsidiary guarantors ‘debt securities offered or sold in the domestic or international capital markets, except for the notes sold to the initial purchasers pursuant to the purchase agreement.
Short Positions
In connection with the offering, the initial purchasers may purchase and sell the notes in the open market. These transactions may include short sales and purchases on the open market to cover positions created by short sales. Short sales involve the sale by the initial purchasers of a greater principal amount of notes than they are required to purchase in the offering. The initial purchasers must close out any short position by purchasing notes in the open market.
Similar to other purchase transactions, purchases by the initial purchasers to cover the syndicate short sales may have the effect of raising or maintaining the market price of the notes or preventing or retarding a decline in the market price of the notes. As a result, the price of the notes may be higher than the price that might otherwise exist in the open market.
Neither we nor the initial purchasers make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the notes. In addition, neither we nor the initial purchasers make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Other Relationships
The initial purchasers and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. The initial purchasers and their affiliates have provided, and may in the future provide, a variety of these services to the issuer and to persons and entities with relationships with the issuer, for which it received or will receive customary fees and expenses.
Sales Outside the United States
Neither we nor the initial purchasers are making an offer to sell, or seeking offers to buy, the notes in any jurisdiction where the offer and sale is not permitted. You must comply with all applicable laws and regulations in force in any jurisdiction in which you purchase, offer or sell the notes or possess or distribute this offering memorandum, and you must obtain any consent, approval or permission required for your purchase, offer or sale of the notes under the laws and regulations in force in any jurisdiction to which you are subject or in which you make such purchases, offers or sales. Neither we nor the initial purchasers will have any responsibility therefor.
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Notice to Prospective Investors in Mexico
The notes have not been and will not be registered with the National Securities Registry maintained by the CNBV, and may not be offered or sold publicly in Mexico, except pursuant to the private placement exemption set forth in article 8 of the Mexican Securities Market Law. We will notify the CNBV of the terms and conditions of this offering as required under applicable law and for informational purposes only. Delivery or receipt of such notice does not constitute or imply a certification as to the investment quality of the notes, our solvency, liquidity or credit quality or the accuracy or completeness of the information set forth in this offering memorandum. This offering memorandum is solely our responsibility and has not been reviewed or authorized by the CNBV.
Notice to Prospective Investors in the EEA
In any Member State of the European Economic Area that has implemented the Prospectus Directive (each, a “Relevant Member State”), this communication is only addressed to and is only directed at qualified investors in that Member State within the meaning of the Prospectus Directive.
This offering memorandum has been prepared on the basis that any offer of notes in any Relevant Member State will be made pursuant to an exemption under the Prospectus Directive from the requirement to publish a prospectus for offers of notes. Accordingly any person making or intending to make any offer within the European Economic Area of notes which are the subject of the offering contemplated in this offering memorandum may only do so in circumstances in which no obligation arises for us or any of the initial purchasers to publish a prospectus pursuant to Article 3 of the Prospectus Directive in relation to such offer. Neither we nor the initial purchasers have authorized, nor do they authorize, the making of any offer (other than permitted public offers) of notes in circumstances in which an obligation arises for us or the initial purchasers to publish a prospectus for such offer.
For the purposes of this provision, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.”
Purchasers’ representation
Each person in a Relevant Member State who receives any communication in respect of, or who acquires any notes under, the offers contemplated in this offering memorandum will be deemed to have represented, warranted and agreed to and with each initial purchaser and us that:
(a) it is a qualified investor within the meaning of the law in that Relevant Member State implementing Article 2(1)(e) of the Prospectus Directive; and
(b) in the case of any notes acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, (i) the notes acquired by it in the offer have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than qualified investors, as that term is defined in the Prospectus Directive, or in circumstances in which the prior consent of the initial purchasers has been given to the offer or resale; or (ii) where notes have been acquired by it on behalf of persons in any Relevant Member State other than qualified investors, the offer of those notes to it is not treated under the Prospectus Directive as having been made to such persons.
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For the purposes of this representation, the expression an “offer to the public” in relation to any notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any notes to be offered so as to enable an investor to decide to purchase or subscribe for the notes, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State and the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
Notice to Prospective Investors in United Kingdom
This communication is only being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”) or (iii) high net worth companies, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). The notes are only available to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such notes will be engaged in only with, relevant persons. Any person who is not a relevant person should not act or rely on this document or any of its contents.
Notice to Prospective Investors in Switzerland
This offering memorandum, as well as any other material relating to the notes which are the subject of the offering contemplated by this offering memorandum, do not constitute an issue prospectus pursuant to Article 652a of the Swiss Code of Obligations. The notes will not be listed on the SWX Swiss Exchange and, therefore, the documents relating to the notes, including, but not limited to, this document, do not claim to comply with the disclosure standards of the listing rules of the SWX Swiss Exchange and corresponding prospectus schemes annexed to the listing rules of the SWX Swiss Exchange. The notes are being offered in Switzerland by way of a private placement, (i.e., to a small number of selected investors only, without any public offer and only to investors who do not purchase the notes with the intention to distribute them to the public). The investors will be individually approached by the initial purchasers from time to time. This document, as well as any other material relating to the notes, do not constitute an offer to any other person. This document may only be used by those investors to whom it has been provided in connection with the offering described herein and may neither directly nor indirectly be distributed or made available to other persons without our express consent. It may not be used in connection with any other offer and shall in particular not be copied and/or distributed to the public in (or from) Switzerland.
Notice to Prospective Investors in Japan
The notes have not been and will not be registered under the Securities and Exchange Law of Japan (the “Securities and Exchange Law”) and, accordingly, each initial purchaser has undertaken that it will not offer or sell any notes, directly or indirectly, in Japan or to, or for the benefit of any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Securities and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan. For purposes of this paragraph, “resident of Japan” shall have the meaning as defined under the Foreign Exchange and Foreign Trade Law of Japan.
Notice to Prospective Investors in Hong Kong
This offering memorandum has not been approved by or registered with the Securities and Futures Commission of Hong Kong or the Registrar of Companies of Hong Kong. No person may offer or sell in Hong Kong, by means of any document, any notes other than (i) to “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that Ordinance; or (ii) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not constitute an offer to the public within the meaning of that Ordinance. No person may issue or have in its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement, invitation or document relating to the notes which is directed at, or the contents of which are likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect
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to notes which are or are intended to be disposed of only to persons outside Hong Kong or to “professional investors” as defined in the Securities and Futures Ordinance and any rules made under that Ordinance or to any persons in the circumstances referred to in paragraph (ii) above.
Notice to Prospective Investors in Singapore
This offering memorandum has not been registered as a prospectus with the Monetary Authority of Singapore (the “MAS”) under the Securities and Futures Act, Chapter 289 of Singapore (the “Securities and Futures Act”). Accordingly, this offering memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the notes may not be circulated or distributed, nor may the notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (a) to an institutional investor pursuant to Section 274 of the Securities and Futures Act, (b) to a relevant person, or any person pursuant to Section 275(1A) of the Securities and Futures Act, and in accordance with the conditions specified in Section 275 of the Securities and Futures Act, or (c) pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities and Futures Act.
Each of the following relevant persons specified in Section 275 of the Securities and Futures Act which has subscribed or purchased notes, namely a person who is: (i) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (ii) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, should note that shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the notes under Section 275 of the Securities and Futures Act except: (a) to an institutional investor under Section 274 of the Securities and Futures Act or to a relevant person, or any person pursuant to Section 275(1A) of the Securities and Futures Act, and in accordance with the conditions, specified in Section 275 of the Securities and Futures Act; (b) where no consideration is given for the transfer; or (c) by operation of law.
Notice to Prospective Investors in Chile
The notes being offered are not registered in the Securities Registry (Registro de Valores) or in the Foreign Securities Registry (Registro de Valores Extranjeros) of the SVS and, therefore, the notes are not subject to the supervision of the SVS. As unregistered securities, we are not required to disclose public information about the notes in Chile. The notes may not be publicly offered in Chile unless they are registered in the corresponding securities registry. Notice to Prospective Investors in Peru
The offer of the notes, this offering memorandum and the notes have not been, and will not be, registered with the Comisión Nacional Supervisora de Empresas y Valores (the Peruvian Securities and Exchange Commission). The offer of the notes in Peru is not considered a public offering and will not be launched in Peru except in circumstances which do not constitute public offering or distribution under Peruvian laws and regulations. This notice is for informative purposes and it does not constitute public offering of any kind.
159
ENFORCEMENT OF CIVIL LIABILITIES
We are a company organized under the laws of Mexico. Most of our directors, executive officers and controlling persons named herein are non-residents of the United States and substantially all of the assets of such non-resident persons and a significant portion of all of our assets are located in Mexico or elsewhere outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or us or to enforce against them or us in courts of any jurisdiction outside Mexico, judgments predicated upon the laws of any such jurisdiction, including any judgment predicated substantially upon the civil liability provisions of United States federal and state securities laws. We have appointed CT Corporation System, New York, New York, as an agent to receive service of process with respect to any action brought against us in any federal or state court in the State of New York arising from this offering.
No treaty exists between the United States and Mexico for the reciprocal enforcement of judgments issued in the other country. Generally, Mexican courts would enforce final judgments rendered in the United States if certain requirements were met, including the review in Mexico of the U.S. judgment to ascertain compliance with certain basic principles of due process and the non-violation of Mexican law or public policy, provided that U.S. courts would grant reciprocal treatment to Mexican judgments. Additionally, there is doubt as to the enforceability, in original actions in Mexican courts, of liabilities predicated, in whole or in part, on U.S. federal securities laws and as to the enforceability in Mexican courts of judgments of U.S. courts obtained in actions predicated on the civil liability provisions of U.S. federal securities laws.
160
LISTING AND GENERAL INFORMATION
Clearing Systems
Application has been made to have the notes accepted for clearance through Euroclear and Clearstream. In addition, application has been made to have the notes accepted for trading in book-entry form by DTC. For the Rule 144A notes, the ISIN number is US020564AA87 and the CUSIP number is 020564 AA8. For the Regulation S notes, the ISIN number is USP01703AA82 and the CUSIP number is P01703 AA8.
Listing
Application has been made to the Irish Stock Exchange, for the notes to be traded on the Global Exchange Market. Expenses for the admission of the notes to be traded on the Global Exchange Market will be €4,940.
Physical copies of our by-laws, the by-laws of our subsidiary guarantors, the indenture which contains the terms of the subsidiary guarantees, as may be amended or supplemented from time to time, the registration rights agreement, our published annual audited consolidated financial statements and any published interim unaudited consolidated financial statements will be available at our expense at our principal executive offices, as well as at the offices of the trustee, registrar, paying agent and transfer agent, and at the offices of the Irish paying agent, as such addresses are set forth in this offering memorandum. Our subsidiary guarantors do not publish separate non-consolidated financial statements. Their financial statements are consolidated with ours when we publish financial statements. We do not publish non-consolidated financial statements. We believe the auditor’s reports included herein have been accurately reproduced.
The notes have not been and will not be listed in the BMV or registered with the National Securities Registry and therefore the notes may not be offered or sold publicly, or otherwise be the subject of brokerage activities in Mexico, except pursuant to a private placement exemption set forth under Article 8 of the Mexican Securities Market Law.
Authorization
We have obtained all necessary consents, approvals and authorizations in connection with the issuance and performance of the notes.
On November 1, 2012, our Board of Directors authorized the issuance of the notes.
No Material Adverse Change
Except as disclosed in this offering memorandum, there has been no material adverse change in the prospects of the issuer since December 31, 2012, the date of its last published audited financial statements.
Except as disclosed in this offering memorandum, there has been no material adverse change in the financial or trading position or prospects of us and our subsidiaries taken as a whole since March 31, 2013, the last financial period for which either audited financial information or interim financial information has been published.
161
LEGAL MATTERS
The validity of the notes will be passed upon for us by Paul Hastings LLP, our United States counsel, and for the initial purchasers by Cleary Gottlieb Steen & Hamilton LLP, United States counsel to the initial purchasers. Certain matters of Mexican law relating to the notes will be passed upon for the initial purchasers by Ritch Mueller, S.C., Mexican counsel to the initial purchasers.
162
INDEPENDENT ACCOUNTANT
The audited consolidated and combined financial statements as of December 31, 2012 and 2011 and January 1, 2011 and for the years ended December 31, 2012 and 2011, together with the notes thereto, included in this offering memorandum have been audited by PricewaterhouseCoopers, S.C., independent accountant, as stated in their report appearing herein. PricewaterhouseCoopers, S.C. is registered with and a member of the Public Company Accounting Oversight Board (PCAOB) in the United States and the Chatered Accountants in Mexico.
INDEX TO FINANCIAL STATEMENTS
Annual Consolidated and Combined Financial StatementsPage
Report of Independent Accountant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated and Combined Balance Sheets at December 31, 2012 and 2011 and January 1, 2011 . . . . . . . F-5
Consolidated and Combined Statements of Income for the years ended December 31, 2012 and 2011 . . . . F-6
Consolidated and Combined Statements of Changes in Stockholders’ Equity for the years endedDecember 31, 2012 and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2012and 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to the Consolidated and Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10
Unaudited Interim Consolidated Financial Statements
Unaudited Consolidated Balance Sheet as of March 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-85
Unaudited Consolidated Statement of Operations for the Three Months Ended March 31, 2013and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-86
Unaudited Consolidated Statement of Changes in Shareholders’ Equity for the Three Months EndedMarch 31, 2013 and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-88
Unaudited Consolidated Statement of Cash Flows for the Three Months Ended March 31, 2013and 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-89
Notes to the Unaudited Interim Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-90
F-1
Alpek, S. A. B. de C. V. and subsidiariesConsolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
F-2
Alpek, S. A. B. de C. V. and subsidiariesContentAs of December 31, 2012 and 2011 and January 1, 2011
Contents Page
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated and combined financial statements:
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9
Notes to the financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-10 to F-82
F-3
Report of the Independent Auditors
Monterrey, N. L., February 1, 2013
To the Stockholders’ Meeting ofAlpek, S. A. B. de C. V.
We have audited the accompanying consolidated and combined financial statements of Alpek, S. A. B. de C. Vand subsidiaries, which comprise the consolidated and combined balance sheets as of December 31, 2012 and2011, and January 1, 2011, and the consolidated and combined statements of income, comprehensive income,changes in stockholders’ equity and cash flows for the years ended December 31, 2012 and 2011, and a summaryof significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated and combined financialstatements in accordance with International Financial Reporting Standards (IFRS, see Note 3), and for suchinternal control as Management determines is necessary to enable the preparation of consolidated and combinedfinancial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated and combined financial statements based on ouraudit. We conducted our audit in accordance with International Standards on Auditing. Those standards requirethat we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated and combined financial statements are free from material misstatement.
An audit consists of examining, on a test basis, evidence supporting the figures and disclosures in theconsolidated and combined financial statements. The procedures selected depend on the auditor’s judgment,including the assessment of the risks of material misstatement of the consolidated and combined financialstatements, whether due to fraud or error. In making those risk assessments, the auditor considers internal controlrelevant to the entity’s preparation and fair presentation of the consolidated and combined financial statements inorder to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressingan opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating theappropriateness of the accounting policies used and the reasonableness of accounting estimates made byManagement, as well as evaluating the overall presentation of the consolidated and combined financialstatements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our auditopinion.
Opinion
In our opinion, the accompanying consolidated and combined financial statements present fairly, in all materialrespects, the consolidated and combined financial position of Alpek, S. A. B. de C. V. and subsidiaries as ofDecember 31, 2012 and 2011, and January 1, 2011, and their financial performance and their cash flows for theyears ended December 31, 2012 and 2011, in accordance with International Financial Reporting Standards(IFRS).
PricewaterhouseCoopers, S. C.
Héctor Rábago SaldívarAudit Partner
F-4
Alpek, S. A. B. de C. V. and subsidiariesConsolidated and Combined Balance SheetsAs of December 31, 2012 and 2011 and January 1, 2011
(In thousands of Mexican pesos)
NoteDecember 31,
2012December 31,
2011January 1,
2011
AssetsCurrent Assets:Cash and cash equivalents 6 Ps 6,654,561 Ps 3,584,287 Ps 3,231,935Restricted cash and cash equivalents 7 2,992 1,925 283,647Trade and other receivables, net 8 13,368,995 13,281,161 9,262,717Inventories 11 11,582,045 12,320,163 6,580,709Derivative financial instruments 20 107,297 49,450 207,100Other current assets 9 243,991 231,295 186,594
Total current assets 31,959,881 29,468,281 19,752,702
Non-current Assets:Derivative financial instruments 20 — 26,630 104,720Property, plant and equipment, net 12 26,695,410 28,879,082 22,125,158Goodwill and intangible assets, net 13 2,243,495 2,549,420 188,355Deferred income tax 19 504,613 939,983 706,139Other non-current assets 14 292,774 289,561 137,626
Total non-current assets 29,736,292 32,684,676 23,261,998
Total Assets Ps61,696,173 Ps62,152,957 Ps43,014,700
Liability and EquityLiabilitiesCurrent liabilities:Current debt 17 Ps 500,641 Ps 2,141,974 Ps 1,428,999Trade and other payables 16 9,696,234 13,218,369 7,699,308Derivative financial instruments 20 287,510 438,741 88,418Income tax payable 101,807 301,293 279,849Other current liabilities 21 1,462,261 2,578,872 1,696,129
Total current liabilities 12,048,453 18,679,249 11,192,703
Non-current liabilities:Non-current debt 17 13,939,767 17,544,786 7,786,884Derivative financial instruments 20 208,218 743,063 1,150,668Deferred income tax 19 4,718,445 5,125,673 4,638,388Employees’ benefits 18 1,130,128 1,261,062 572,432
Total non-current liabilities 19,996,558 24,674,584 14,148,372
Total Liability 32,045,011 43,353,833 25,341,075
EquityControlling portion:Capital stock 22 6,051,880 4,968,187 2,917,204Share premium 22 9,071,074 — —Retained earnings 22 11,006,758 9,139,157 11,617,447Other reserves 22 50,264 1,147,204 49,584
Stockholders’ equity controlling portion 26,179,976 15,254,548 14,584,235Non-controlling portion 22 3,471,186 3,544,576 3,089,390
Total Equity 29,651,162 18,799,124 17,673,625
Total Liabilities and Equity Ps61,696,173 Ps62,152,957 Ps43,014,700
The accompanying notes are an integral part of these consolidated and combined financial statements.
José de Jesús Valdez Simancas Raúl Millares NeyraChief Executive Officer Chief Financial Officer
F-5
Alpek, S. A. B. de C. V. and subsidiariesConsolidated and Combined Statements of IncomeFor the years ended December 31, 2012 and 2011
(In thousands of Mexican pesos)
Note 2012 2011
Net sales Ps 96,163,456 Ps 90,666,561Cost of sales 23 (86,766,710) (80,653,169)
Gross profit 9,396,746 10,013,392Selling expenses 23 (1,072,461) (972,751)Administrative expenses 23 (1,158,708) (1,126,593)Other income (expenses), net 24 310,836 (325,482)
Operating profit 7,476,413 7,588,566
Financial income (including foreign exchange gain) 25 565,716 224,508Financial expenses (including foreign exchange loss) 25 (1,896,979) (1,414,731)
Comprehensive financing expense, net (1,331,263) (1,190,223)
Share of losses of associates (39,055) (22,965)
Profit before income tax 6,106,095 6,375,378Income tax 27 (1,723,293) (1,947,625)
Profit for the year Ps 4,382,802 Ps 4,427,753
Profit attributable to:Controlling portion Ps 3,662,549 Ps 3,899,342Non-controlling portion 720,253 528,411
Ps 4,382,802 Ps 4,427,753
Basic and diluted earnings per share (in pesos) Ps 1.83 Ps 2.24
Weighted average of outstanding shares (in thousands) 1,996,475 1,738,865
The accompanying notes are an integral part of these consolidated and combined financial statements.
José de Jesús Valdez Simancas Raúl Millares NeyraChief Executive Officer Chief Financial Officer
F-6
Alpek, S. A. B. de C. V. and subsidiariesConsolidated and Combined Statements of Comprehensive IncomeFor the years ended December 31, 2012 and 2011
(In thousands of Mexican pesos)
Note 2012 2011
Profit for the year Ps 4,382,802 Ps4,427,753
Other comprehensive income for the year, net of taxes:Effect of derivative financial instruments designated as cash flows
hedging 20 64,971 (239,535)Actuarial losses of labor obligations 18 (62,153) (242,128)Translation effect of foreign entities 3c (1,406,694) 1,716,956
Total items of the comprehensive income for the year, net of tax (1,403,876) 1,235,293
Total comprehensive income for the year Ps 2,978,926 Ps5,663,046
Attributable to:Controlling portion Ps 2,504,925 Ps4,754,154Non-controlling portion 474,001 908,892
Comprehensive income for the year Ps 2,978,926 Ps5,663,046
The accompanying notes are an integral part of these consolidated and combined financial statements.
José de Jesús Valdez Simancas Raúl Millares NeyraChief Executive Officer Chief Financial Officer
F-7
Alp
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F-8
Alpek, S. A. B. de C. V. and subsidiariesConsolidated and Combined Statements of Cash FlowsFor the years ended December 31, 2012 and 2011
(In thousands of Mexican pesos)
Note 2012 2011
Cash flows from operating activitiesProfit before income tax Ps 6,106,095 Ps 6,375,378Depreciation and amortization 12, 13 2,129,374 1,818,776Impairment of property, plant and equipment 4,798 137,897Loss (gain) on the sale of property, plant and equipment 375 (3,034)Gain on sale on available for sale investments 24 — (88,531)Share of losses of associates 14 39,055 22,965Finance result, net 1,273,831 1,095,797Gain on changes in the fair value of cash flow hedges (221,202) (3,833)Employees’ profit sharing 26,979 111,175
Subtotal 9,359,305 9,466,590
Increase in trade receivables (108,926) (191,368)(Increase) decrease in trade receivables from related parties (440,565) 162,786Increase in other receivables (720,176) (87,489)Decrease (increase) in inventories 117,939 (3,221,330)(Decrease) increase in trade payables (1,236,125) 1,089,932Increase (decrease) in trade payables from related parties 454,186 (84,427)Income tax paid (1,709,084) (2,278,334)Employees’ profit sharing paid (103,136) (39,101)Net liability for retirement obligation (130,014) (155,106)
Net cash generated from operating activities 5,483,404 4,662,153
Cash flows from investing activitiesInterest received 137,152 24,668Purchase of property, plant and equipment (1,521,542) (588,060)Business acquisitions, net of cash acquired 2 — (9,038,215)(Acquisition) sale of shares on available for sale investments (54,055) 88,557Derivative financial instruments (319,363) (269,564)Dividends received — 632Other (47,419) 341,826
Net cash used in investing activities (1,805,227) (9,440,156)
Cash flows from financing activitiesProceeds from loans and debt 9,888,096 9,778,060Payments of loans and debt (13,918,319) (2,127,782)Interest paid (1,452,276) (1,109,312)Dividends paid (2,297,822) (1,678,839)Increase in capital stock 2 10,154,767 51Payments of loans to ultimate parent company 1 (2,654,568) —
Net cash flows (used in) provided from financing activities (280,122) 4,862,178
Increase in cash and cash equivalents 3,398,055 84,175Foreign exchange on cash and cash equivalents (327,781) 268,177Cash and cash equivalents at the beginning of the period 3,584,287 3,231,935
Cash and cash equivalents at the end of the period Ps 6,654,561 Ps 3,584,287
The accompanying notes are an integral part of these consolidated and combined financial statements.
José de Jesús Valdez Simancas Raúl Millares NeyraChief Executive Officer Chief Financial Officer
F-9
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
(In thousands of Mexican pesos, except where otherwise indicated)
Note 1 – General information
Alpek, S.A.B. de C.V. (“Alpek”, or the “Company”) operates through two major business segments: polyesterchain products and plastic and chemical products. The polyester chain business segment, comprising theproduction of purified terephthalic acid (PTA), polyethylene terephthalate (PET) and polyester fibers, serves thefood and beverage packaging, textile and industrial filament markets. The plastics and chemicals businesssegment, comprising the production of polypropylene, expandable polystyrene, polyurethanes, caprolactam,fertilizers and other chemicals, serves a wide range of markets, including the consumer goods, food and beveragepackaging, automotive, construction, agriculture, oil industry, pharmaceutical markets and other markets.
The address of Alpek’s registered office is in Avenida Gomez Morin Sur No. 1111, Col. Carrizalejo, San PedroGarza Garcia, Nuevo Leon, Mexico and operates plants located in Mexico, the United States of America andArgentina.
The following notes to the financial statements when referring to “Pesos” or “Ps”, it means thousands of MexicanPesos. When referring to “US$” or “Dollars”, it means thousands of dollars from the United States of America.
The financial statements and other financial information presented herein were prepared on a combined basisuntil June 15, 2011 and on a consolidated basis starting on June 16, 2011. Prior to June 15, 2011, Alfa operatedin the petrochemical industry through several entities grouped into a business unit informally known as “Alpek”that did not constitute a legal group or entity. However, on April 18, 2011, the Company was incorporated asAlpek, S. A. de C. V. with an initial capital contribution of Ps 50 and on June 16, 2011, Alfa, S. A. B. de C. V.(“Alfa”) transferred to Alpek, through direct or indirect transfers, in the following companies:
Percentage ofdirect ownership
by Alfa prior to theCorporate
Reorganization
Percentage ofdirect and indirect
ownership by Alpekpost CorporateReorganization
Grupo Petrotemex, S. A. de C. V. and its subsidiaries (Petrotemex) (1) 100% 100%Akra Polyester, S. A. de C. V. and its subsidiary (Akra) (2) 51% 100%Indelpro S. A. de C. V. and its subsidiary (Indelpro) (3) 51% 51%Polioles, S. A. de C. V. and its subsidiary (Polioles) (4) 50% plus 1 share 50% plus 1 shareUnimor, S. A. de C. V. and its subsidiaries (Unimor) (5) 100% 100%Copeq Trading Co. (Copeq) 100% 100%
(1) Alfa Corporativo, S. A. de C. V. (a wholly owned subsidiary of Alfa) owns 2,015 shares, which representsan approximately 0.0000666% share participation out of a total of 3,027,257,764 shares.
(2) Petrotemex owned the 49% remaining shares prior to the Corporate Reorganization. Immediately after theCorporate Reorganization, Petrotemex owned 100% and currently it owns approximately 93.35% of theshares and BP Amoco Chemical Company owns approximately 6.65% of shares.
(3) LyondellBasell Industries Holdings, B.V. (“LyondellBasell”) owns the 49% remaining shares.(4) BASF de México, S. A. de C. V. owns 50% of the shares, minus one share.(5) Alfa Subsidiarias, S. A. de C. V. (a wholly owned subsidiary of Alfa) owns 50,000 shares, which represents
an approximately 0.0006997% share participation out of a total of 7,146,015,147 shares.
The transfers of the shares from Alfa to Alpek were completed as follows:
• Alfa increased Alpek’s capital stock in the amount of Ps 4,968,137 through a contribution of its shareownership in Petrotemex and Indelpro (non-cash transactions). Upon such contribution, Alpek owns100% and 51%, of the shares of these companies, respectively.
F-10
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
• Alfa sold its share ownership in Polioles, Unimor and Copeq to Alpek for Ps 2,220,504. As a result,Alpek recognized an account payable that was settled in 2012, and it owns 50% plus 1 share, 100% and100% of the shares of these companies, respectively (see Note 10).
• Alpek assumed a liability of Petrotemex due to Alfa in the amount of Ps 638,254, derived from the salethat Alfa made to Petrotemex of its ownership interest of 51% in Akra. As a result, Petrotemex owned100% of Akra’s shares. The account payable assumed by Alpek was settled in 2012 (see Note 10).
Prior to the completion of the Corporate Reorganization on June 16, 2011, Petrotemex, Akra, Indelpro, Polioles,Unimor and Copeq were under common direct ownership and control of Alfa throughout the reporting periods.For comparative purposes the financial statements prior to June 16, 2011, are prepared on a combined basis,combined with the accounts of Petrotemex, Akra, Indelpro, Polioles, Unimor and Copeq (together the“Combined affiliates”). The Corporate Reorganization was completed on June 16, 2011; as of such date, Alpekassumed ownership and control of the Combined Affiliates and therefore, as of June 16, 2011, our financialinformation is prepared on a consolidated instead of combined basis.
The transfer of the shares from Alfa to Alpek was completed as follows:
Capital Stock Total
Contribution of share ownership in Petrotemex and Indelpro Ps 4,968,137 Ps 4,968,137Sale of share ownership in Polioles, Unimor and Copeq — 2,220,504Sale of share ownership in Akra — 638,254
Purchase price of the net assets acquired on June 16, 2011 Ps 4,968,137 Ps 7,826,895
Capital Stock Retained Earnings Total
Petrotemex and Indelpro combined stockholders’ equity atJune 16, 2011 Ps 1,856,862 Ps 10,052,963 Ps 11,909,825
Unimor, Polioles, Akra and Copeq combined stockholders’ equityat June 16, 2011 1,060,342 2,028,611 3,088,953
Carrying amounts values of the net assets acquired at June 16,2011 Ps 2,917,204 Ps 12,081,574 Ps 14,998,778
Corporate reorganization net effect Ps 2,050,933 (Ps 12,081,574) (Ps 7,171,883)
The transfer of the shares was accounted for, as a corporate reorganization of companies under common control,therefore, the net assets transferred were accounted by Alpek at its carrying amount (after adjustments for firstadoption of IFRS) according to Alfa’s consolidated financial statements (predecessor cost basis). The differencebetween the historical book values of the net assets acquired and the value of the contribution or purchase price,whichever is applicable, was considered a transaction between common shareholders and its effects wereaccounted in Alpek’s equity; as a result, the book value of the net assets obtained by Alpek are equal to thoseAlfa had in its consolidated financial statements where no goodwill nor fair value adjustments were recognizedfor financial reporting purposes.
F-11
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 2 – Significant events
2012
a) Debt issuance of Alpek 144A
During November 2012, Alpek, S. A. B. de C. V., (Alpek) completed an issuance of debt (“Senior Notes”)for a nominal amount of US$650 million which mature on 2022. Interest relating to the Senior Notes will bepayable every six months at an annual interest rate of 4.5% starting on May 20, 2013.
b) Public offering of Alpek’s Capital
On April 26, 2012, Alpek, S. A. B. de C. V. performed an initial public offering (IPO) in Mexico and aprivate offering of shares in international markets (together “Global Offering”). The total amount of theGlobal Offering was Ps 9,082 million (330,259,322 shares at a placement price of Ps 27.50 per share).
On May 8, 2012, following the global offering, the underwriters, both in Mexico and abroad, exercised theoverallotment option granted. The total amount of the overallotment was Ps 1,349 million (49,038,898shares at the placement price of Ps 27.50 per share) so that the total resources Alpek obtained as a result ofthe Global Offering and the exercise of these options was Ps 10,155 million, net of issuance costs.
Resulting from the exercise of such public offering and overallotment options, the subscribed and paidcapital of Alpek, S. A. B. de C.V. is represented by a total of 2,118,163,635 shares class I, Series A.
c) Incorporation of a new entity
Beginning in 2012 and over the next two years, Alpek plans to invest approximately US$130 million in anelectrical and steam energy cogeneration project through its subsidiary Petrotemex. This cogeneration plant,which will supply its PTA and PET plants located in Cosoleacaque, Veracruz, Mexico, will generateapproximately 95 megawatts of electricity as well as all the steam needed to cover the requirements of theseplants. The cogeneration plant will also supply energy to other Alfa entities outside of Cosoleacaque.
In order to implement this project, on January 31, 2012, Petrotemex and its subsidiary Dak ResinasAmericas Mexico, S. A. de C. V. (both subsidiaries of Alpek) formed a corporation named Cogeneración deEnergía Limpia de Cosoleacaque, S. A. de C. V. (“Cogeneradora”). The project will increase the plant’sefficiency by ensuring a supply of low cost energy with low emissions.
As of December 31, 2012, Cogeneradora is in the pre-operating stage.
2011
a) Acquisition of Eastman (Columbia)
On January 31, 2011, through its subsidiary DAK Americas, L. L. C., Alpek acquired the PurifiedTerephthalic Acid (“PTA”) and Polyethylene Terephthalate (“PET”) facilities located in the United States ofAmerica owned by Eastman Chemical Company (“Columbia Assets”). The acquisition of the ColumbiaAssets complied with the requirements of a business combination. As a result of this transaction theCompany acquired a modern petrochemical complex which is comprised of three plants located inColumbia, South Carolina, with a combined total annual capacity of 1.26 million tons to produce PTA andPET. This acquisition also included working capital, patents and intellectual property rights relating to theIntegRexTM technology used in the production of PTA and PET. A total of 415 employees includingadministrative personnel, work in these plants. The consolidated and combined financial statements includethe assets and results of operations of Columbia from February 1, 2011. This business acquisition isincluded in the Polyester segment (see Note 28).
F-12
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The final allocation of the purchase price was determined during the fourth quarter of 2011 according to thefair value at the acquisition date, these adjustments were recognized retrospectively from the date ofacquisition to December 31, 2011 in accordance with accounting guidance applicable under IFRS. The totalconsideration paid by the Company amounted to Ps 7,533,452 (US$ 621,572) in cash.
The purchase price allocation is as follows:
Current assets (1) US$ 226,123Property, plant and equipment 271,196Intangible assets (3) 156,300Current liabilities (2) (36,410)Goodwill 4,363
US$ 621,572(4)
(1) Current assets mainly consist of accounts receivable and inventories amounting to US$121,799 andUS$104,207, respectively.
(2) Current liabilities mainly consist of amounts payable to suppliers amounting to US$36,287.(3) The information, classification and percentage of amortization are part of the assets described in Note 13.(4) The purchase price allocation is presented in US dollars because that is the functional and recording
currency of the subsidiary acquired, the exchange rate at the date of the transaction was Ps 12.12 pesos bydollar. Additionally, in Note 3.c the main exchange rates used in the translation processes are shown.
The goodwill is comprised primarily of the advantageous global market position obtained through theexpanded capabilities of the Company’s asset base. The registered goodwill is not deductible for taxpurposes.
The acquisition was funded through a syndicated credit loan with several banks and HSBC Securities (USA)Inc. and Credit Suisse Securities (USA) L. L. C. as Administrative Agent, for a total of US$600,000. Theloan agreement was signed on December 16, 2010 and fully disbursed on January 31, 2011.
The value of the acquired receivables approximates their fair value due to their short maturities. Thereceivables are expected to be recovered in the short term.
No contingent liability to be registered has arisen from this acquisition and there is not any contingentagreement. The Company is not responsible for environmental liabilities except for those that may haveoriginated from the acquisition date.
Costs related to the acquisition were Ps 77,589 (US$ 6,401) and were recognized in the income statement inthe item of other expenses.
Revenue contributed by Columbia Assets included in the consolidated and combined income statement fromthe date of acquisition to December 31, 2011 was Ps 12,995 million (US$ 1,046 million).
This transaction corresponds to an acquisition of assets, therefore the Company was unable to get financialinformation from the counterparty corresponding to these assets prior to the date of the acquisition todetermine the amount of annual revenue and net income as if the acquisition had taken place on January 1,2011.
b) Acquisition of Wellman
On August 31, 2011, Alpek acquired through its subsidiary DAK Americas L. L. C., 100% shares ofWellman, Inc. (“Wellman”). As a result of this transaction, Alpek acquired a plant located in Bay St. Louis,
F-13
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Mississippi, United States of America with an annual production capacity of 430,000 tons of PET. The plantemploys 165 persons. The consolidated financial statements include the financial information of Wellmanfrom September 1, 2011, this business acquisition is included in the Polyester segment (see Note 28).
The final allocation of the purchase price was determined during the fourth quarter of 2011 according to thefair value at the acquisition date; these adjustments were recognized retrospectively from the date ofacquisition to December 31, 2011 in accordance with accounting guidance applicable under IFRS. The totalconsideration paid by the Company amounted to Ps 1,535,589 (US$ 123,044) in cash.
The purchase price allocation is as follows:
Current assets (1) US$ 89,731Property, plant and equipment 110,728Intangible assets (3) 7,130Other assets 11,796Current liabilities (2) (44,617)Provision for labor obligations (27,900)Other non-current liabilities (38,238)Goodwill 14,414
US$123,044(4)
(1) Current assets consist of cash and cash equivalents of US$1,402, accounts receivable of US$56,414 andinventories of US$31,915.
(2) Current liabilities consist of amount payable to suppliers and other accounts payable amounting toUS$39,460 and US$5,157, respectively.
(3) The information, classification and percentage of amortization are part of the assets described in Note 13.(4) The purchase price allocation is presented in US dollars because that is the functional and recording
currency of the subsidiary acquired, the exchange rate at the date of the transaction was $12.48 pesos bydollar. Additionally, in Note 3.c the main exchange rates used in the translation processes are shown.
The goodwill is comprised primarily of the advantageous global market position obtained through the expandedcapabilities of the Company’s asset base. The registered goodwill is not deductible for tax purposes.
The value of the acquired receivables approximates their fair value due to their short maturities. The receivablesare expected to be recovered in the short term.
No contingent liability to be registered has arisen from this acquisition and there is not any contingent agreement.The Company is not responsible for environmental liabilities except for those that may have originated from theacquisition date.
Costs related to the acquisition were Ps 30,760 (US$ 2,464) and were recognized in the income statement in theitem of other expenses.
Revenue contributed by Wellman Mississippi included in the consolidated income statement from the date ofacquisition to December 31, 2011 was Ps 1,858 million (US$ 149 million).
F-14
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
At the date of issuance of these financial statements, Alpek was unable to obtain the audited financialinformation before the date of the acquisition under the accounting standards used by Alpek in order to determinethe amount of annual revenue and net income as if the acquisition had taken place on January 1, 2011.
Note 3 – Summary of significant accounting policies
These consolidated and combined financial statements and notes have been approved for issuance on February 1,2013, by the officers with legal power to sign at the bottom of the basic financial statements and accompanyingnotes.
Following is a summary of the most significant accounting policies followed by the Company and itssubsidiaries, which have been applied on a consistent basis in the preparation of their financial information forthe periods presented, unless otherwise indicated:
a) Basis for preparation
The consolidated and combined financial statements of Alpek S. A. B. de C.V. and subsidiaries have beenprepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by theInternational Accounting Standards Board (“IASB”). The IFRS include all the effective InternationalAccounting Standards (“IAS”), and the related interpretations issued by the International FinancialReporting Interpretations Committee (“IFRIC”), including those issued previously by the StandingInterpretations Committee (“SIC”).
In accordance with the amendments to the regulations for Public Companies and Other Participants of theMexicans Securities Market, issued by the National Banking and Securities Commission (“ComisiónNacional Bancaria y de Valores”) (“CNBV”) on January 27, 2009, the Company is required to prepare itsfinancial statements starting from 2012, using the IFRS accounting policy framework.
For comparison purposes, the consolidated and combined financial statements as of December 31, 2011 andfor the year then ended, and the consolidated and combined balance sheet as of January 1, 2011 have beenprepared in accordance with IFRS.
The Company changed its accounting policies from Mexican Financial Reporting Standards (“MFRS”) tocomply with IFRS as of January 1, 2012. The transition from MFRS to IFRS has been registered inaccordance with IFRS 1, setting January 1, 2011 as the transition date. Even though Alpek was formed untilJune 16, 2011, the transition date corresponds to the transition date of the combined entities that werepreviously consolidated in Alfa, who has also adopted IFRS starting from January 1, 2012. Thereconciliation of the effects of the transition from MFRS to IFRS is disclosed in Note 30 on the consolidatedand combined financial statements.
The consolidated and combined financial statements have been prepared under the historical cost basis,except for the exemptions applied for the Company disclosed in Note 30 and for the cash flow hedgingfinancial instruments measured at fair value, and the financial assets at fair value through profit or loss andavailable for sale financial assets.
The preparation of the consolidated and combined financial statements requires the use of certain criticalaccounting estimates. It also requires Management to exercise its judgment in the process of applying theCompany’s accounting policies. The areas involving a higher degree of judgment or complexity, or areaswhere assumptions and estimates are significant to the consolidated and combined financial statements aredisclosed in Note 5.
F-15
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
b) Consolidation
i. Subsidiaries
Subsidiaries are all entities over which the Company has the power to govern the financial andoperating policies generally accompanying a shareholding of more than one half of the voting rights.When the interest of the Company in a subsidiary is less than 100%, the interest related to the externalshareholders is reflected as non-controlling portion.
Subsidiaries are fully consolidated from the date on which control is transferred to the Company, anduntil the date that control ceases.
The Company applies the acquisition method to account for business combinations. The Companydefines a business combination as a transaction in which the Company obtains control of a business,which is defined as the application of inputs and processes that produce, or have the ability to produceproducts that have the ability to provide a return in the form of dividends, lower costs or othereconomic benefits directly to the investors.
The consideration transferred for the acquisition of a subsidiary is the fair values of the assetstransferred, the liabilities incurred and the equity interests issued by the Company. The considerationtransferred includes the fair value of any asset or liability resulting from a contingent considerationarrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a businesscombination are measured initially at their fair values at the acquisition date. The Company recognizesany non-controlling portion in the acquiree on an acquisition -by-acquisition basis, either at fair valueor at the non-controlling portion’s proportionate share of the recognized amounts of acquiree’sidentifiable net assets.
The Company applies predecessor accounting for business combinations of an entity under commoncontrol. This consists of incorporating the carrying amounts of the acquired entity, which includes anygoodwill recorded at the consolidated level in respect of the acquired entity. Any difference betweenthe carrying amounts of the net assets acquired at a subsidiary level and their carrying amounts at theCompany level are recognized in equity.
Acquisition-related costs are expensed as incurred.
Goodwill is initially measured as the excess of the aggregate of the consideration transferred and thefair value of non-controlling portion over the net identifiable assets acquired and liabilities assumed. Ifthis consideration is lower than the fair value of the net assets of the subsidiary acquired, the differenceis recognized in the consolidated statement of income.
Inter-company transactions and balances, and unrealized gains between group companies areeliminated in the preparation of the consolidated and combined financial statements. Unrealized lossesare eliminated unless the transaction provides evidence of impairment in the asset transferred.Accounting policies of subsidiaries have been changed where necessary to ensure consistency with thepolicies adopted by the Company.
F-16
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
At December 31, 2012, the main subsidiaries that comprise the consolidation of the Company were asfollows:
Country (1)Percentage of
OwnershipFunctionalcurrency
Alpek, S. A. B. de C. V. (Holding) Mexican PesosGrupo Petrotemex, S. A. de C. V. 100 US Dollar
DAK Americas, L.L.C. USA 100 US DollarDak Resinas Americas México, S. A. de C. V. 100 US DollarDAK Americas Exterior, S. L. (Holding) Spain 100 Euro
DAK Americas Argentina, S. A. Argentina 100 Argentinean pesoTereftalatos Mexicanos, S. A. de C. V. 91 US DollarAkra Polyester, S. A. de C. V. (2) 93 US Dollar
Indelpro, S. A. de C. V. 51 US DollarPolioles, S. A. de C. V. 50 US DollarUnivex, S. A. 100 Mexican Pesos
(1) Companies incorporated in Mexico, except were otherwise indicated.(2) At September 1, 2012, Productora de Tereftalatos de Altamira, S. A. de C. V. (“Petal”), merged into Akra
Polyester, S. A de C. V. Prior to the merger, Grupo Petrotemex (“Petrotemex”) owned 100% of the shares ofAkra and 91% of the shares of Petal and BP Amoco Chemical Company (“BP Amoco”) the remaining 9%.After the merge, Petrotemex owns 93.35% of the shares of Akra and BP Amoco the remaining 6.65%.
ii. Absorption (dilution) of control in subsidiaries
The effect of absorption (dilution) of control in subsidiaries companies, reflecting an increase ordecrease in the percentage of control, is recorded in stockholders’ equity, directly in the retainedearnings account, in the period in which the transactions that cause such effects occur. The effect ofabsorption (dilution) of control is determined by comparing the book value of the investment in sharesbased on the equity before the absorption (dilution) of control against the book value after the relevantevent. In the event of a loss of control the related effect is included in income.
iii. Sale or disposal of subsidiaries
When the Company ceases to have control, any retained interest in the entity is re-measured to its fairvalue at the date when control is lost, and the change in its carrying amount is recognized in profit orloss. The fair value is the initial carrying amount for the purposes of subsequently accounting for theretained interest as an associate, joint venture or financial asset. In addition, any amounts previouslyrecognized in other comprehensive income in respect of that entity are accounted for as if the Companyhad directly disposed of the related assets or liabilities. This may mean that amounts previouslyrecognized in other comprehensive income are reclassified to profit or loss.
iv. Associates
Associates are all entities over which the Company has significant influence but not control, generallyaccompanying a shareholding of between 20% and 50% of the voting rights. Investments in associatesare accounted for using the equity method of accounting and recognized initially at cost. TheCompany’s investment in associates includes goodwill identified on acquisition, net of any accruedimpairment loss.
F-17
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
If the ownership interest in an associate is reduced but significant influence is retained, only aproportionate share of the amounts previously recognized in other comprehensive income isreclassified to profit or loss where appropriate.
The Company’s share of post-acquisition profit or loss is recognized in the income statement, and itsshare of post acquisition movements in other comprehensive income is recognized in othercomprehensive income. The accrued movements after the acquisition will be adjusted against thecarrying value of the investment. When the Company’s share of losses in an associate equals orexceeds its interest in the associate, including any other unsecured receivables, the Company does notrecognize further losses, unless it has incurred legal or constructive obligations or made payments onbehalf of the associate.
The Company assesses at each reporting date whether there is any objective evidence that theinvestment in the associate is impaired. If this is the case, the Company calculates the amount ofimpairment as the difference between the recoverable amount of the associate and its carrying valueand recognizes it in ‘share of loss/profit of associates’ in the income statement.
Unrealized gains on transactions between the Company and its associates are eliminated in function ofthe interest in them. Unrealized losses are eliminated unless the transaction provides evidence of animpairment of the asset transferred. Accounting policies of associates have been changed wherenecessary to ensure consistency with the policies adopted by the Company. When the Company ceasesto have significant influence over an associate, any difference between the fair value and the retainedinterest is recognized in the income statement, including any consideration received for the disposal ofpart of the interest and the carrying amount of the investment.
c) Foreign currency translation
i. Functional and presentation currency
Items included in the financial statements of each of the Company’s entities are measured using thecurrency of the primary economic environment in which the entity operates (“the functionalcurrency”). The consolidated and combined financial statements are presented in Mexican Pesos,which is the Company’s presentation currency.
ii. Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange ratesprevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchangegains and losses resulting from the settlement of such transactions and from the translation at closingdate exchange rates of monetary assets and liabilities denominated in foreign currencies are recognizedin the income statement, except when deferred in other comprehensive income as qualifying cash flowhedges.
Foreign exchange gain and losses resulted from changes in the fair value of monetary financial assetsand liabilities denominated in a foreign currency are recognized in the consolidated income statement,except when the item has been designated as cash flow hedging or net investment hedge.
Translation differences on monetary financial assets and liabilities classified as fair value throughprofit or loss are recognized in the consolidated income statement as part of the fair value gain or loss.Translation differences on non-monetary financial assets classified as available for sale are included inother comprehensive income.
F-18
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
iii. Consolidation of foreign subsidiaries
Inclusion of subsidiaries with a functional currency different from its transaction currency
The financial statements of foreign subsidiaries with a transaction currency different than thefunctional currency were converted to the functional currency in accordance with the followingprocedures:
a. The balances of monetary assets and liabilities expressed in the transaction currency wereconverted using the exchange rates at closing period.
b. For non-monetary assets and liabilities and stockholders’ equity which were already converted tothe functional currency the changes during the period were added, the changes were convertedusing the historical exchange rate. In the case of changes in the non-monetary items recorded attheir fair value, occurred during the period expressed at the transaction currency, were convertedusing the actual exchange rates as of the date in which such fair values were determined.
c. Revenues, costs and expenses expressed in the transaction currency were translated usinghistorical exchange rates at the date the transactions occurred and were recorded in the statementof income, except if the amounts related to nonmonetary items, in which case the historicalexchange rates related to the non-monetary items were used.
d. The differences in changes originated from the conversion of the transaction currency to thefunctional currency were recorded as income or expense in the income statement in the period inwhich they were originated.
Inclusion of subsidiaries with a functional currency different from its presentation currency
The results and financial position of all the company entities (none of which has the currency of a hyper-inflationary economy) that have a functional currency different from the presentation currency are translated intothe presentation currency as follows:
a. Assets and liabilities at December 31, 2012 and 2011 and January 1, 2011 were translated at the closingexchange rates of Ps 13.01, Ps 13.98 and to Ps 12.36 to U.S. dollars, respectively.
b. The equity of each statement of financial position is presented translated at its historical rate.
c. Income and expenses for each income statement are translated at average exchange rates (unless thisaverage is not a reasonable approximation of the cumulative effect of the rates prevailing on the transactiondates, in which case income and expenses are translated at the rate on the dates of the transactions), whichamounted Ps 13.21 and Ps 12.42 for the years ended December 31, 2012 and 2011, respectively.
d. All resulting translation adjustments are recognized in other comprehensive income.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets andliabilities of the foreign entity and translated at the closing rate. Translation adjustments arising arerecognized in equity.
d) Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-termhighly liquid investments with original maturities of three months or less and bank overdrafts, all of theseare subject to a low significant risk in changes in value. Bank overdrafts are presented as other currentliabilities.
F-19
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
e) Restricted cash and cash equivalents
Cash and cash equivalents which restrictions originate to not meet the definition of cash and cashequivalents described above, are presented in a separate line in the statement of financial position and areexcluded from cash and cash equivalents in the statement of cash flow.
f) Financial instruments
Financial assets
The Company classifies its financial assets in the following categories: at fair value through profit or loss,loans and receivables, held to maturity investments and available for sale investments. The classificationdepends on the purpose for which the financial assets were acquired. Management determines theclassification of its financial assets at initial recognition. Regular purchases and sales of financial assets arerecognized on the settlement date.
Financial assets are derecognized when the rights to receive cash flows from the investments have expired orhave been transferred and the Company has transferred substantially all risks and rewards of ownership and thecontrol of the financial asset.
i. Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset isclassified in this category if acquired principally for the purpose of selling in the short term. Derivatives arealso categorized as held for trading unless they are designated as hedges.
Financial assets carried at fair value through profit or loss, are initially recognized at fair value, andtransaction costs are expensed in the income statement. Gains or losses arising from changes in the fairvalue of the financial assets at fair value through profit or loss category are presented in the incomestatement in the period in which they arise.
ii. Loans and trade receivables
Trade receivables are non-derivative financial assets with fixed or determinable payments that are notquoted in an active market. They are included in current assets, except for maturities greater than 12 monthsafter the end of the reporting period. These are classified as non-current assets.
Loans and trade receivables are measured initially at fair value, plus directly attributable transaction costs,and subsequently at amortized cost. When circumstances occur that indicate that the amounts receivable willnot be collected by the amounts originally agreed or will be in a different period, the trade receivables areimpaired.
iii. Held to maturity investments
If the Company has demonstrable intention and ability to hold debt securities to maturity, they are classifiedas held to maturity. Assets in this category are classified as current assets if expected to be settled within thenext 12 months, otherwise are classified as noncurrent. Initially, are recognized at fair value plus anydirectly attributable transaction costs, are subsequently are measured at amortized cost using the effectiveinterest method. Investments held to maturity are recognized or derecognized on the day they are transferredto, or from the Company.
F-20
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
iv. Financial assets available for sale
Available for sale financial assets are non-derivatives that are either designated in this category or notclassified in any of the other categories. They are included in non-current assets unless the investmentmatures in a period less than 12 months or Management intends to dispose of it within the following 12months after the date of the balance sheet.
Available for sale financial assets are recognized initially at its fair value plus any directly attributabletransaction costs. Subsequently, these assets are measured at its fair value (unless it cannot be measured byits price in an active market and the fair value cannot be measured reliably, in which case they arerecognized at cost less impairment).
Changes in the fair value of monetary and non-monetary financial assets classified as available for sale arerecognized in other comprehensive income.
When securities classified as available for sale are sold or impaired, the accumulated fair value adjustmentsrecognized in equity are included in the income statement.
Financial liabilities
Financial liabilities that are not derivatives are initially recognized at fair value and are subsequently measured atamortized cost using the effective interest method. Liabilities in this category are classified as current liabilities ifare expected to be settled within the next 12 months; otherwise, they are classified as non-current.
Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course ofbusiness from suppliers. Loans are initially recognized at fair value, net of transaction costs incurred. Loans aresubsequently recognized at amortized cost, any difference between the amounts received (net of transactioncosts) and the settlement value is recognized in the income statement over the term of the loan using the effectiveinterest method.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legallyenforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize theasset and settle the liability simultaneously.
Impairment of financial instruments
a. Assets carried at amortized cost
The Company assesses at the end of each reporting period whether there is objective evidence that afinancial asset or group of financial assets is impaired. A financial asset or a group of financial assets isimpaired and impairment losses are incurred only if there is objective evidence of impairment as a result ofone or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event(or events) has an impact on the estimated future cash flows of the financial asset or group of financialassets that can be reliably estimated.
Aspects to evaluate by the Company to determine whether there is objective evidence of impairment are:
• Significant financial difficulty of the issuer or debtor.
• Default of contract, such as late payments of interest or principal.
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
• Granting a concession to the issuer or debtor by the Company, as a result of financial difficulties of theissuer or debtor and that would not being considered in other circumstances.
• There is likelihood that the issuer or debtor is declared in bankruptcy or other type of financialreorganization.
• Disappearance of an active market for the financial asset due to financial difficulties.
• Verifiable information indicates that a measurable decrease exists in the estimated future cash flowsrelated to a group of financial assets after initial recognition, although the decrease cannot yet beidentified with the individual financial assets of the Company, including:
(i) Adverse changes in the payment status of debtors of the group of assets.
(ii) National or local conditions that correlate with defaults of the issuers or debtors of the asset group.
Based in the aspects mentioned above, the Company assesses if objective evidence of impairment exists. Forloans and receivables category, if impairment exists, the amount of the loss is measured as the differencebetween the asset’s carrying amount and the present value of estimated future cash flows (excluding futurecredit losses that have not been incurred) discounted at the financial asset’s original effective interest rate.The carrying amount of the asset is reduced and the amount of the loss is recognized in the consolidatedincome statement in the line administrative expenses. If a loan or held to maturity investment has a variableinterest rate, the discount rate for measuring any impairment loss is the current effective interest ratedetermined under the contract. Alternatively, the Company may measure impairment on the basis of aninstrument’s fair value using an observable market price.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be relatedobjectively to an event occurring after the impairment was recognized (such as an improvement in thedebtor’s credit rating), the reversal of the previously recognized impairment loss is recognized in theconsolidated income statement.
The calculations for the accounts receivables impairment are described in Note 8.
b. Assets classified as available for sale
In the case of debt financial instruments, the Company also uses the previously listed criteria to identifywhether there is objective evidence of impairment. In the case of equity financial instruments, a significantor prolonged decrease in its fair value below its cost is also considered objective evidence of impairment.
Subsequently, in the case of financial assets available for sale, an impairment loss determined by thedifference between the acquisition cost and the current fair value of the asset, less any impairment losspreviously recognized is reclassified from the accounts of other comprehensive income and is registered inthe income statement. Impairment losses recognized in the consolidated income statement on equityinstruments are not reversed through the consolidated income statement. Impairment losses recognized inthe income statement related to financial debt instruments could be reversed in subsequent years if the fairvalue of the asset is increased as a result of any subsequent events.
g) Derivative financial instruments and hedging activities
All derivative financial instruments entered into and identified are classified as fair value hedges or cash flowhedges, are included in the balance sheet as assets and/or liabilities at fair value and are measured subsequentlyat its fair value. The fair value is determined based on the prices in recognized markets; when no quotedmarket prices are available, it is determined based on valuation techniques accepted in the financial sector.
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The fair value of financial instruments hedging derivatives is classified as a non-current asset or liability ifthe remaining maturity of the hedged item is more than 12 months and as a current asset or liability if theremaining maturity of the hedged item is less than 12 months.
The changes in the fair value of derivative financial instruments are recognized in financing income orexpense, except for changes in the fair value of derivative financial instruments associated to cash flowhedging, in such case, the changes are recognized in equity. These derivative financial instruments forhedging are entered to hedge against an existing risk and they comply with the related hedge accountingrequirements, its designation as a hedge is documented at the inception of the transaction, specifying therelated objective, initial position, risks to be hedged, type of hedge relationship, characteristics, accountingrecognition and how their effectiveness will be assessed. Fair value hedges are stated at fair value andchanges in valuation are recorded in income under the same caption as the hedged item. In the case of cashflow hedges, the effective portion is temporarily included in other comprehensive income in stockholders’equity and is reclassified to income when the hedged item affects income; the ineffective portion isrecognized immediately in income.
The Company suspends accounting for hedge transactions when the derivative instrument has expired, beencancelled or been exercised, when it has not reached a high degree of effectiveness to offset the changes inthe fair value or cash flow of the hedged item, or when its designation as a hedge is cancelled.
When suspending accounting for hedge transactions, in the case of fair value hedges, the adjustment to thecarrying amount of a hedged item for which the effective interest method is used is amortized to incomestatement over the period to maturity, in the case of cash flow hedges, the amounts accumulated instockholders’ equity forming part of other comprehensive income, remain in stockholders’ equity until theeffect of the forecasted transaction affects income. In the case the forecasted transaction seems unlikely tooccur, the gains or losses accumulated in other comprehensive income are recognized immediately inincome. When the hedge of a forecasted transaction is effective but later does not comply with theeffectiveness test, the effects accumulated in other comprehensive income in stockholders’ equity arereclassified to income in proportion as the forecasted asset or liability affects income.
The derivative financial instruments were privately negotiated with various financial institutions whosestrong financial condition was supported by high ratings assigned by securities and credit risk ratingagencies. The documentation used to formalize the operations entered into was that commonly used; ingeneral terms, it follows the “Master Agreement” generated by the “International Swaps & DerivativesAssociation” (“ISDA”), and is accompanied by the annexes commonly known as “Schedule”, “CreditSupport Annex” and “Confirmation”.
The fair values of the financial derivative instruments reflected in the Company’s financial statementsrepresent a mathematical estimate of their fair values. The fair values are determined using models whichbelong to independent experts and involve the use of assumptions based on, past and current marketconditions, and future expectations at the corresponding closing date.
h) Inventories
Inventories are stated at the lower of cost and net realizable value. Cost is determined using the average costmethod. The cost of finished goods and work in progress comprises design costs, raw materials, direct labor,other direct costs and related production overheads (based on normal operating capacity). It excludesborrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, lessapplicable variable selling expenses. Costs of inventories include the transfer from equity of any gains orlosses on qualifying cash flow hedges purchases of raw materials.
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
i) Property, plant and equipment
Items of property, plant and equipment are recognized at cost less accumulated depreciation and anyaccumulated impairment losses in its value. The cost includes expenses directly attributable to theacquisition of the asset.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, asappropriate, only when it is probable that future economic benefits associated with the item will flow to theCompany and the cost of the item can be measured reliably. The carrying amount of the replaced part isderecognized. Repairs and maintenance are charged to the income statement during the financial period inwhich they are incurred. Significant improvements are depreciated over the remaining useful life of therelated asset.
Depreciation is determined using the straight line method, considering each of the components of the assetseparately. The useful life of the classes of depreciable assets is as follows:
Building and constructions 40 to 50 yearsMachinery and equipments 10 to 40 yearsRail road equipments 15 yearsFurniture and laboratory and IT equipment 2 to 13 years
The spare parts or replacements to be used for more than one year and attributable to specific machinery areclassified as property, plant and equipment in other fixed assets.
Borrowing costs related to financing of property, plant and equipment whose acquisition or constructionrequires a substantial period, are capitalized as part of the acquisition cost of such qualifying assets, untilthey are ready for the use to which they are intended or for its sale.
Assets classified as property, plant and equipment are subject to impairment tests when events orcircumstances occur indicating that the carrying amount of the assets may not be recoverable. Animpairment loss is recognized for the amount by which the carrying amount of the asset exceeds itsrecoverable amount. The recoverable amount is the higher of fair value less costs to sell and value in use.
The residual value and useful lives of the assets are reviewed at least at the end of each reporting period and,if expectations differ from previous estimates, the changes are accounted as a change in accountingestimates.
In case that the carrying value is greater than the estimated recoverable amount, a decrease in the carryingamount of the asset is recognized immediately to its recoverable amount.
Gains and losses on disposal of assets are determined by comparing the value of the sale with the carryingamount and are recognized in other expense or income in the income statement.
j) Leases
The classification as finance or operating leases depends on the substance of the transaction rather than theform of the contract.
Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor areclassified as operating leases. Payments made under operating leases (net of any incentives received fromthe lessor) are charged to the income statement on a straight line basis over the period of the lease.
Leases where the Company has substantially all the risks and rewards of the property are classified asfinance leases. Finance leases are capitalized at the beginning of the lease at the lower of fair value of the
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
leased property and the present value of the minimum lease payments. If its determination is practical, fordiscounting to present value the minimum lease payments, the implicit interest rate in the lease is used;otherwise, the incremental borrowing rate of the lessee should be used. Any initial direct cost of the lesseewill be added to the original amount recognized as an asset.
Each lease payment is allocated between the liability and finance charges until reach a constant rate in theactual amount. The corresponding rental obligations are included in long term debt. The interest element of thefinance cost is charged to the income statement over the lease period so as to produce a constant periodic rateof interest on the remaining balance of the liability for each period. The property, plant and equipment acquiredunder finance leases are depreciated over the shorter of the useful life of the asset and the lease term.
k) Intangible assets
Goodwill represents the excess of the consideration transferred over the Company’s interest in net fair valueof the net identifiable assets acquired determined at the acquisition date. Goodwill is presented in thecaption of goodwill and intangible assets, and is recognized at its cost less accumulated impairment losses,which are not reversed. Gains or losses in the disposition of an entity include the carrying amount of thegoodwill related to the entity disposed.
Intangible assets are recognized when complying with the following characteristics: the asset is identifiable,will generate future economic benefits and the Company has control over such benefits.
Intangible assets are classified as follows:
i) Indefinite useful life. – These intangible assets are not amortized and are subject to impairment testsannually. No circumstances that might affect their useful lives have been identified.
ii) Finite useful life. – These intangible assets are recognized at cost less the accumulated amortizationand the recognized impairment losses. These assets are amortized using the straight line method basedon their estimated useful lives, determined in accordance with the expected generation of futureeconomic benefits, and are also subject to impairment tests, if triggering events are identified.
The estimated useful lives of the intangible assets with finite useful lives are as follows:
Development costs 15.5 yearsTrademarks 10 yearsNon-compete agreements 10 yearsCustomer relationships 6 to 7 yearsSoftware and licenses 3 to 7 yearsIntellectual property rights 20 to 25 years
Research costs are recognized in income as incurred. Expenditures on development activities are recognizedas intangible assets when such costs can be measured reliably, the product or process is technically andcommercially feasible, the asset will generate potentially future economic benefits and the Company intendsto and has sufficient resources to complete the development and to use or sell the asset. The amortization isrecognized in income based on the straight line method over the estimated useful life of the asset.Development expenditures that do not qualify for capitalization are recognized in income as incurred.
l) Impairment of non financial assets
Assets that have an indefinite useful life, for example goodwill, are not subject to depreciation oramortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
impairment whenever events or changes in circumstances indicate that the carrying amount may not berecoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceedsits recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell andvalue in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for whichthere are separately identifiable cash flows (cash-generating units). Non financial assets other than goodwillthat suffered impairment are reviewed for possible reversal of the impairment at each reporting date.
m) Income taxes
The income tax reflected in the consolidated income statement, represents the tax incurred in the year, andthe effects of deferred income tax determined in each subsidiary using the asset and liability method,applying the rate established by the enacted legislation or substantially enacted at the balance date where theCompany and its subsidiaries operate and generate taxable income to the total temporary differencesresulting from comparing the accounting and tax bases of assets and liabilities and that are expected to applywhen the deferred tax asset is realized or deferred tax liability is settled, considering in any case, the tax losscarry forwards to be recoverable. The effect of a change in income tax rates is recognized in income in theperiod in determining the exchange rate.
Management periodically evaluates positions taken in tax returns with respect to situations in whichapplicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basisof amounts expected to be paid to the tax authorities.
Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit willbe available against which the temporary differences can be utilized.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries andassociates, except for deferred income tax liability where the timing of the reversal of the temporarydifference is controlled by the Company and it is probable that the temporary difference will not reverse inthe foreseeable future.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right and when thetaxes are levied by the same tax authority.
n) Employee Benefits
i. Pension plans
Defined contribution plans:
A defined contribution plan is a pension plan under which the Company pays fixed contributions into aseparate entity. The Company has no legal or constructive obligations to pay further contributions if thefund does not hold sufficient assets to pay all employees the benefits relating to employee service inthe current and prior periods. The contributions are recognized as employee benefit expense when theCompany has the obligation of the contribution.
Defined benefit plans:
A defined benefit plans is defined as an amount of pension benefit that an employee will receive onretirement, usually dependent on one or more factors such as age, years of service and compensation.
The liability recognized in the balance sheet in respect of defined benefit pension plans is the presentvalue of the defined benefit obligation at the end of the reporting period less the fair value of planassets, together with adjustments for unrecognized past service costs. The defined benefit obligation is
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
calculated annually by independent actuaries using the projected unit credit method. The present valueof the defined benefit obligation is determined by discounting the estimated future cash outflows usinginterest rates according to the NIC 19 that are denominated in the currency in which the benefits will bepaid, and that have terms to maturity approximating to the terms of the related pension obligation. Thediscount rate reflects the value of money over time but not the actuarial or investment risk.Additionally, the discount rate does not reflect the credit risk of the entity, nor does it reflect the riskthat future experience may differ from actuarial assumptions.
Actuarial gains and losses arising from employee benefits are recognized directly in the othercomprehensive income.
Past-service costs are recognized immediately in income, unless the changes to the pension plan areconditional on the employees remaining in service for a specified period of time (the vesting period). Inthis case, the past service costs are amortized on a straight line basis over the vesting period.
ii. Other post employment obligations
The Company provides health benefits after concluded the labor relationship to its retired employees.The entitlement to these benefits is usually conditional on the employee remaining in service up toretirement age and the completion of a minimum service period. The expected costs of these benefitsare accrued over the period of employment using the same accounting methodology as used for definedbenefit pension plans.
iii. Termination benefits
Termination benefits are payable when employment is terminated by the Company before the normalretirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits.The Company recognizes termination benefits when it is demonstrably committed to a terminationwhen the entity has a detailed formal plan to terminate the employment of current employees withoutpossibility of withdrawal. In the case of an offer made to encourage voluntary redundancy, thetermination benefits are measured based on the number of employees expected to accept the offer.Benefits falling due more than 12 months after the end of the reporting period are discounted to theirpresent value.
iv. Short term benefits
The Company provides employee benefits in the short term, which may include wages, salaries, annualcompensation and bonuses payable within 12 months. The Company recognizes undiscountedprovision when it is contractually obliged or where past practice has created an obligation.
v. Profit sharing and bonus plans
The Company recognizes a liability and an expense for bonuses and employee profit sharing when ithas a legal or assumed obligation to pay these benefits and determines the amount to be recognizedbased on the profit for the year after certain adjustments.
o) Provisions
Liability provisions represent a present legal obligation or constructive obligation as a result of past eventswhere it is probable an outflow of resources to comply with the obligation and where the amount has beenreliably estimated. Provisions are not recognized for future operating losses.
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
p) Shared based payments
The Company has established a payment option plan based on shares of its holding entity in favor of certaindirectors of the Company. The conditions for its granting to the eligible executives include, among otherthings, the achievement of certain financial performance metrics, such as the level of income achieved,continuous employment, etc. The Board of Directors has designated a Technical Committee for the plan’sManagement, which reviews the estimate of the payment of this compensation by the end of the year.Adjustments to such estimate are charged or credited to income statement.
The fair value of the amount payable to employees in respect of share based payments which are settled incash is recognized as an expense with a corresponding increase in liabilities, over the period of servicerequired. The liability is updated at each reporting date and the settlement date. Any change in the fair valueof the liability is recognized as compensation expense in the income statement.
q) Shares held in treasury
The maximum limit for the acquisition of the Company’s own shares is determined through thestockholders’ resolutions. In the case of a repurchase of own shares, shares acquired are held in treasury andtheir acquisition cost is charged to stockholders’ equity at its acquisition cost, as follows: a portion ischarged to capital stock at restated theoretical value and the difference to retained earnings. These amountsare stated at historical cost.
r) Common Stock
Common stock is classified as equity. Incremental costs directly attributable to the issuance of new commonstock or options are shown in equity as a deduction, net of tax, from the proceeds.
s) Comprehensive income
Comprehensive income is composed of net income plus other capital reserves, net of taxes, which areintegrated by the effects of translation of foreign subsidiaries, the effects of derivative financial instrumentsfor cash flow hedges, the actuarial gains or losses, the effects of the change in fair value of financialinstruments available for sale, the participation in other comprehensive income items of associates and otheritems that for specific requirements are reflected in stockholders’ equity and are not contributions,reductions and distribution of capital.
t) Information by segments
Segment information is presented in a manner consistent with the internal reporting provided to the chiefexecutive, who is the highest authority in the operational decision making, resource allocation andperformance assessment of the operating segments.
u) Revenue recognition
Revenue is measured at the fair value of the consideration received or receivable for the sale of goods andservices in the normal course of operations. Revenues are presented net of discounts, returns, and valueadded taxes, and after eliminate the intercompany sales.
Revenue is recognized when the following conditions have been satisfied:
• The risks and rewards of ownership are transferred
• The amount of revenue can be reliably measured
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
• It is probable that future economic benefits will flow to the entity
• The Company retains neither continuing managerial involvement to the degree usually associated withownership nor effective control over the goods sold
• The costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue recognition criteria depend on contractual conditions with its customers. In some cases dependingof the agreements with each customer the risks and rewards of ownership are transferred when the goods aretaken from customers on the plant of the Company, in other cases the risks and rewards of ownership aretransferred when the good are delivered in the plant of the customers.
The Company bases its estimate on historical results, taking into consideration the type of customer, thetype of transaction and the specifics of each arrangement.
v) Earnings per share
Earnings (losses) per share are computed by dividing the net income (loss) by the weighted average ofcommon shares outstanding during the year. There are no effects arising from potentially dilutive shares.
w) Changes in accounting policy and disclosures
New pronouncements and amendments issued but not yet effective for periods starting January 1, 2012 andhave not been adopted by the company.
• IFRS 7, “Financial Instruments Disclosures”
In October 2010 the IASB amended IFRS 7, “Financial instruments: Disclosures”. The standardamends the required disclosures to enable users of the financial statements to evaluate risk exposurerelated to transfers of financial assets and the effect of these risks on the financial position of the entity.For the Company, this amendment is effective on January 1, 2013.
• IAS 1, “Presentation of Financial Statements”
In June 2011 the IASB amended IAS 1, “Presentation of financial statements”. The main changeresulting from this modification is the requirement to group items presented in other comprehensiveincome, on the basis of whether they are potentially reclassified to the income statement in later years.The amendments do not consider which items are presented in other comprehensive income. For theCompany, this amendment is effective on January 1, 2013.
• IFRS 9, “Financial Instruments”
IFRS 9, “Financial Instruments” was issued in November 2009 and contained requirements forclassification and measurement of financial assets. Requirements for financial liabilities were includedas part of IFRS 9 in October 2010. Most of the requirements for financial liabilities were taken fromIAS 39 without making any changes. However, some amendments were made to the fair value optionfor financial liabilities to include own credit risk. In December 2011, the IASB made amendments toIFRS 9 to require its application for annual periods beginning on or after January 1, 2015.
• IFRS 10, “Consolidated Financial Statements”
In May 2011 the IASB issued IFRS 10, “Consolidated Financial Statements”. This standard outlinesthe principles for the presentation of consolidated financial statements when an entity controls one or
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
more entities. IFRS 10 defines the principle of control and establishes control as the basis fordetermining the entities to be consolidated in the financial statements. The standard also includes theaccounting requirements for the preparation of the consolidated financial statements, as well as therequirements for application of the principle of control. IFRS 10 replaces IAS 27, “Consolidated andseparate financial statements” and SIC 12 “Consolidation Special purpose entities” and for theCompany this amendment is effective on January 1, 2013.
• IFRS 11, “Joint Arrangements”
In May 2011 the IASB issued IFRS 11 “Joint Arrangements”. IFRS 11 classifies joint arrangementsinto two types: joint operations and joint ventures. The entity determines the type of joint arrangementin which it participates considering their rights and obligations. Joint operations arise where a jointoperator has rights to the assets and obligations relating to the arrangement and hence accounts for itsinterest in assets, liabilities, revenue and expenses. Joint ventures arise where the joint operator hasrights to the net assets of the arrangement and hence equity accounts for its interest. In a joint venturean investment is recognized and recorded using the equity method. For the Company, IFRS 11 iseffective on January 1, 2013.
• IFRS 12, “Disclosure of Interest in Other Entities”
The IASB issued IFRS 12, “Disclosure of Interests in Other Entities” in May 2011. IFRS 12 requiresan entity to disclose information to evaluate the nature and risks associated with its interests in otherentities, including joint arrangements, associates and special purpose entities. For the Company, IFRS12 is effective on January 1, 2013.
• IFRS 13, “Fair Value Measurement”
In May 2011 the IASB issued IFRS 13, “Fair Value Measurements”. The objective of IFRS 13 is toprovide a precise definition of fair value and be a single source for the measurement and disclosurerequirements for fair value when it is required or permitted by other IFRSs. For the Company, IFRS 13is effective on January 1, 2013.
• IAS 19, “Employee Benefits”
In June 2011 the IASB amended IAS 19, “Employee Benefits”. The amendments eliminate the corridormethod and show the calculation of interest expense on a net basis. For the Company this amendmentis effective on January 1, 2013.
• IAS 27, “Separate Financial Statements”
In May 2011 the IASB amended IAS 27 under a new title “Separate Financial Statements”. Thisstandard includes guidelines for separate financial statements that remained in place after the controlprovisions were included in IFRS 10. For the Company, this standard is effective on January 1, 2013.
• IAS 28, “Investments in Associates and Joint Ventures”
In May 2011 the IASB amended IAS 28 under a new heading “Investments in Associates and JointVentures”. The new standard includes requirements for joint ventures and associates for recognition inaccordance with the equity method. For the Company, this standard is effective on January 1, 2013.
The Company’s Management believes that the adoption of new standards and amendments outlined above, willhave no significant impact on its financial statements.
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 4 – Financial risk management
4.1 Financial risk factors
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, price risk,interest rate risk on cash flows, and interest rate risk on fair values), credit risk and liquidity risk. The overall riskmanagement program of the Company focuses on the unpredictability of financial markets and seeks to minimizepotential adverse effects on the financial performance of the Company. The Company uses derivative financialinstruments to hedge certain risk exposures.
The objective is to protect the financial health of the business considering the volatility associated to exchangerates and interest rates. Additionally, by the nature of the industries in which it participates, the Company hasentered into commodity prices derivative hedge.
The parent company of Alpek has a Risk Management Committee (RMC), constituted by the Committee’sChairman, the General Director, the Financial Director of the parent company and a top Risk Managementofficer of the parent company acting as technical secretary. The RMC supervises derivative transactionsproposed by the parent’s subsidiaries, in which a worst case scenario analysis surpasses US$1,000. Thiscommittee supports both the Chairman and the President of the parent company. All new derivative transactionswhich the Company propose to enter into, as well as the renewal or cancellation of derivative arrangements, arerequired to be approved both by the Company and the parent company according to the following schedule ofauthorizations:.
Maximum Possible LossUS$ millions
IndividualTransaction
AnnualCumulativeTransactions
Company’s Chief Executive Officer 1 5Parent’s Risk Management Committee 30 100Finance Committee 100 300Parent’s Board of Directors >100 >300
Proposed transactions must satisfy certain criteria, including that hedge should be lower than speculations, shouldbe product of a fundamental analysis and should be properly documented. Sensitivity analysis and other riskanalyses should be performed before the transaction is entered into.
(a) Market risk
(i) Foreign exchange risk
The Company operates internationally and is exposed to foreign exchange risk, primarily with respectto Mexican Pesos and Euros. The Company is exposed to foreign exchange risk arising from futurecommercial transactions in foreign currency assets and liabilities in foreign currencies.
The respective exchange rates of the Mexican Pesos, the U.S. dollar, are very important factors forAlpek by the effect they have on their performance. Moreover, in its determination, Alpek has nointerference. Moreover, Alpek estimated that its revenues are denominated in foreign currency, eitherbecause they come from products that are exported from Mexico, or because the products that aremanufactured and sold abroad, or because even sold in Mexico, the price of such products are set basedon international prices in foreign currencies such as the U.S. dollar.
F-31
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
For this reason, in the past, in times when the Mexican Peso has appreciated in real terms against othercurrencies such as the dollar, Alpek profit margins have been reduced. On the other hand, when theMexican Peso has lost value, Alpek profit margins have been increased. However, although this factorcorrelation has appeared on several occasions in the close past, there is no assurance that it will happenagain if the exchange rate between the Mexican Peso and other currencies fluctuate again.
The Company participates in operations of derivative financial instruments on exchange rates with thepurpose of controlling the total comprehensive cost of their financing and the volatility associated withexchange rates. Additionally, it is important to note the high “dollarization” of the Company’srevenues, since most of its sales are performed abroad, providing a natural hedging to the obligations indollars and as counterparty to their income level is affected in the event exchange rate appreciation.Based on the exchange rate exposure, generally at December 31, 2012 and 2011, a hypotheticalvariation of 5% in the exchange rate MXN/USD and holding all other variables constant, would resultin an effect on the income statement by Ps 7,061 and Ps 4,579 respectively.
(ii) Price risk
In carrying out its activities, the Company depends on the supply of raw materials provided by itssuppliers, both in Mexico and abroad, among which are intermediate petrochemicals, mainly.
In recent years, the price of some inputs have observed volatility, especially those from the oil andnatural gas.
In order to fix the selling prices of certain of its products, the Company has entered into agreementswith certain customers. At the same time, it has entered into transactions involving derivatives onnatural gas that seek to reduce price volatility of the prices of such input.
Additionally, it has entered into derivative financial instruments transactions to hedge purchases ofcertain raw materials, since these inputs have a direct or indirect relationship with the prices of theirproducts.
Regarding natural gas, Pemex is the only supplier in Mexico. The selling price of natural gas at firsthand is determined by the price of that product on the “spot” market of South Texas, USA, which hasexperienced the same volatility. For its part, the CFE is a decentralized public company in charge ofproducing and distributing electricity in Mexico. Electricity rates have been influenced also by thevolatility of natural gas, as it is used to generate it.
The Company entered into various derivative agreements with various counterparties to protect theCompany against increases in prices of natural gas and other raw materials. In the case of natural gasderivatives, hedging strategies for products, were designed to mitigate the impact of potential increasesin prices. The purpose is to protect the price of volatility having positions that provide stable cash flowexpectations, and avoid the uncertainty in prices. The reference market price for natural gas is theHenry Hub is the “New York Mercantile Exchange” (NYMEX). The average price in dollars perMMBTU for 2012 and 2011 were 2.79 and 4.04 respectively.
At December 31, 2012, the Company had hedging of natural gas prices for a portion of consumptionneeds expected in Mexico and the United States. Based on the general input exposure at December 31,2012 and 2011, and an hypothetical increase (decrease) of 10% in market prices applied to fair valueand keeping all other variables constant, such as exchange rates, the increase (decrease) would result inan immaterial effect for the year ended at December 31, 2011 and 2012 to the income statement.
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Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
(iii) Interest rate and cash flow risk
The interest rate risk arises from the Company’s long-term loans. Loans issued at variable rates exposethe Company to interest rate risk on cash flows that are partially offset by cash held at variable rates.Loans issued at fixed rates expose the Company to interest rate risk at fair value.
When the objective of controlling the total comprehensive cost of its financing and the volatility ofinterest rates, the Company has hired interest rate swaps to convert certain variable rate loans to fixedrates.
At December 31, 2012 and 2011, if interest rates on variable rate loans were increased or decreased by10%, in interest expense would change results in Ps 1,540 and Ps 6,575 respectively.
(b) Credit risk
Credit risk is managed on a group basis, except for the credit risk related to accounts receivable balances. Eachsubsidiary is responsible for managing and analyzing credit risk for each of its new customers before settingthe terms and conditions of payment. Credit risk is generated from cash and cash equivalents, derivativefinancial instruments and deposits with banks and financial institutions, as well as credit exposure tocustomers, including receivables and committed transactions. If clients are independent qualified wholesaling,these scores are used. If there is no independent rating, risk control of the Company evaluates thecreditworthiness of the customer, taking into account their financial position, past experience and other factors.
Individual risk limits are determined based on internal and external ratings in accordance with limits set bythe Board. The use of credit risk is monitored regularly. Sales to retail customers are using cash or creditcards.
During 2012 and 2011, the credit limits were not exceeded and Management does not expect impairmentlosses recognized in excess of the corresponding periods.
The impairment provision for doubtful accounts represents estimated losses resulting from the inability ofcustomers to make required payments. In determining the allowance for doubtful accounts, requiressignificant estimates. The Company performs ongoing credit evaluations of its customers and adjusts creditlimits based upon payment history and the customer’s current creditworthiness, as determined by a reviewof their current credit information. In addition, the Company considers a number of factors to determine thesize and adequate time for recognition and the amount of reserves, including historical collectionexperience, customer base, current economic trends and the age of the accounts receivable portfolio.
(c) Liquidity risk
Historically, the Company has generated and expects to continue to generate positive cash flow fromoperations. Cash flow from operations primarily represents inflows from net earnings (adjusted fordepreciation and other non-cash items) and outflows from increases in working capital needed to grow thebusiness. Cash flow used in investing activities, represents investment in property and capital equipmentrequired for growth, as well as business acquisitions. Cash flow from financing activities is primarily relatedto changes in indebtedness borrowed, to grow the business or indebtedness repaid with cash from operationsor refinancing transactions as well as dividends paid.
The Company’s principal capital needs are for working capital, capital expenditures related to maintenance,expansion and acquisitions and debt service. The Company’s ability to fund capital needs depends on theongoing ability to generate cash from operations, overall capacity and terms of financing arrangements and
F-33
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
access to the capital markets. The Company believes that future cash from operations together with accessto funds available under such financing arrangements and the capital markets will provide adequateresources to fund foreseeable operating requirements, capital expenditures, acquisitions and new businessdevelopment activities.
The table below analyzes the Company’s non-derivative financial liabilities and net settled derivativefinancial liabilities into relevant maturity groupings based on the remaining period at the balance sheet dateto the contractual maturity date. Derivative financial liabilities are included in the analysis if theircontractual maturities are essential for an understanding of the timing of the cash flows. The amountsdisclosed in the table are the contractual undiscounted cash flows.
Less than1 year
Between 1and 2years
Between 2and 5years
Over5 years
At December 31, 2012Current portion of long-term debt Ps 358,274 Ps — Ps — Ps —Short-term bank loans 140,184 — — —Notes payable 2,183 — — —Accrued interest payable 148,433 — — —Affiliated companies 464,527 — — —Suppliers 9,231,707 — — —Other accounts payables and accrued expenses 1,313,828 — — —Debt (excluding debt issuance costs) — — 4,023,048 —Senior notes (excluding debt issuance costs) — 1,563,979 — 8,432,510
Less than1 year
Between 1and 2years
Between 2and 5years
Over5 years
At December 31, 2011Current portion of long-term debt Ps 491,251 Ps — Ps — Ps —Short-term bank loans 1,645,698 — — —Notes payable 5,025 — — —Accrued interest payable 246,259 — — —Affiliated companies 3,602,314 — — —Suppliers 9,616,055 — — —Other accounts payables and accrued expenses 2,332,613 — — —Debt (excluding debt issuance costs) — 2,367,732 8,891,851 2,236,592Senior notes (excluding debt issuance costs) — 229,650 4,072,986 —
F-34
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Less than1 year
Between 1and 2years
Between 2and 5years
Over5 years
At January 1, 2011Current portion of long-term debt Ps1,181,853 Ps — Ps — Ps —Short-term bank loans 247,146 — —Notes payable — — — —Accrued interest payable 177,698 — — —Affiliated companies 387,772 — — —Suppliers 7,311,536 — — —Other accounts payables and accrued expenses 1,518,431 — — —Debt (excluding debt issuance costs) — 625,254 1,110,903 1,977,136Senior notes (excluding debt issuance costs) — 335,407 3,803,061 —
The Company expects to meet its obligations with the cash flows generated by its operations. Additionally,the Company has access to credit lines with different financial institutions to meet possible requirements.
4.2 Capital Management
The Company’s objectives when managing capital are the safeguard the Company’s ability to continue as a goingconcern business, so that it can continue to provide returns for shareholders and benefits for other stakeholders,and also to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid toshareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Company monitors capital based on the degree of leverage. This percentage is calculated by dividing thetotal liabilities by total capital.
The total liabilities / total capital ratio (expressed in times multiple) amounts to 1.08, 2.31 and 1.43 as ofDecember 31, 2012 and 2011 and January 1, 2011, respectively.
4.3 Estimation of Fair Value
Below is an analysis of financial instruments measured at fair value by the valuation method. Three differentlevels were used as presented below:
• Level 1: Quoted prices for identical instruments in active markets.
• Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similarinstruments in inactive markets, and valuations through models where all significant inputs areobservable in active markets.
• Level 3: Valuations made through techniques in which one or more of its significant data are notobservable.
F-35
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The following table presents the assets and liabilities that are measured at fair value at December 31, 2012:
Level 1 Level 2 Level 3 Total
AssetsFinancial assets at fair value through profit or loss:
– Trading derivatives Ps 29,494 Ps 5,659 Ps — Ps 35,153Derivatives used for hedging 29,645 42,499 — 72,144Available for sale financial assets — — 92,208 92,208
Total assets Ps 59,139 Ps 48,158 Ps92,208 Ps199,505
Level 1 Level 2 Level 3 Total
LiabilitiesFinancial assets at fair value through profit or loss:
– Trading derivatives Ps240,923 Ps 36,000 Ps — Ps276,923Derivatives used for hedging — 218,805 — 218,805
Total liabilities Ps240,923 Ps254,805 Ps — Ps495,728
The following table presents the assets and liabilities that are measured at fair value at December 31, 2011:
Level 1 Level 2 Level 3 Total
AssetsFinancial assets at fair value through profit or loss:
– Trading derivatives Ps 6,997 Ps 59,777 Ps — Ps 66,774Derivatives used for hedging — 9,306 — 9,306Available for sale financial assets — — 40,249 40,249
Total assets Ps 6,997 Ps 69,083 Ps40,249 Ps116,329
Level 1 Level 2 Level 3 Total
LiabilitiesFinancial assets at fair value through profit or loss:
– Trading derivatives Ps671,447 Ps286,924 Ps — Ps 958,371Derivatives used for hedging 30,092 193,341 — 223,433
Total liabilities Ps701,539 Ps480,265 Ps — Ps1,181,804
The following table presents the assets and liabilities that are measured at fair value at January 1, 2011:
Level 1 Level 2 Level 3 Total
AssetsFinancial assets at fair value through profit or loss:
– Trading derivatives Ps119,986 Ps 71,793 Ps — Ps191,779Derivatives used for hedging — 120,041 — 120,041Available for sale financial assets — — 40,249 40,249
Total assets Ps119,986 Ps191,834 Ps40,249 Ps352,069
F-36
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Level 1 Level 2 Level 3 Total
LiabilitiesFinancial assets at fair value through profit or loss:
– Trading derivatives Ps728,795 Ps508,196 Ps— Ps1,236,991Derivatives used for hedging — 2,095 — 2,095
Total liabilities Ps728,795 Ps510,291 Ps— Ps1,239,086
Level 1
The fair value of financial instruments traded in active markets is based on quoted market prices at the balancesheet date general. A market is considered active if quoted prices are clearly and regularly available from anexchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actualand regularly transactions market at arm. The trading price used for financial assets held by the Company is thecurrent bid price.
Valuation techniques and data used in the financial statements of the Company to measure fair value includequoted market prices of ethylene, natural gas, ethane and gasoline listed on the “New York MercantileExchange” (NYMEX).
Level 2
The fair value of financial instruments that are not traded in an active market is determined using valuationtechniques. These valuation techniques maximize the use of observable market data when available and relies aslittle as possible on estimates specific to the Company. If all significant inputs required to measure the fair valuean instrument are observable, the instrument is classified at Level 2.
Level 3
If one or more of the significant inputs not based on observable market data, the instrument is categorized inLevel 3.
Specific valuation techniques used to value financial instruments include:
• Rates of market traders or quotes for similar instruments.
• The fair value of interest rate swaps is calculated as the present value of estimated future cash flowsbased on observable yield curves.
• The fair value of forward exchange contracts is determined using the exchange rates at the balancesheet date, with the resulting value discounted to present value.
• Other techniques, such as the analysis of discounted cash flows, which is used to determine fair valuefor the remaining financial instruments.
Note 5 – Critical accounting estimates and judgments
The Company has identified certain key accounting estimates on which its financial condition and results ofoperations are dependent. These key accounting estimates most often involve complex matters or are based onsubjective judgments or decisions that require Management to make estimates and assumptions which affectedthe amounts reported in these financial statements. The Company’s estimates are based on historical information,where applicable and other assumptions that they believe are reasonable under the circumstances.
F-37
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Actual results may differ from estimates under different assumptions or conditions. In addition, estimatesroutinely require adjustments based on changing circumstances and the receipt of new or more accurateinformation.
The Company’s most critical accounting estimates under IFRS are those that require Management to makeestimates and assumptions that affect the reported amounts related to the accounting for fair value for financialinstruments, valuation of non-current assets, goodwill and other indefinite-lived intangible assets as a result of abusiness acquisition, deferred taxes and pension benefits.
The estimates and assumptions that have a risk of causing material adjustments to the values in the financialstatements are as follows:
a) Non-current assets
The Company estimates the useful lives of long-lived assets in order to determine depreciation andamortization expense to be recorded during any reporting period. The useful life of an asset is estimated atthe time the asset is acquired and is based on historical experience with similar assets, taking into accountanticipated technological or other changes. If technological changes were to occur more rapidly thananticipated, or in a different form than anticipated, the useful lives assigned to these assets may need to beshortened. This would result in the recognition of increased depreciation and amortization expense in futureperiods. Alternatively, these types of technological changes could result in the recognition of an impairmentcharge to reflect the write-down in asset’s value. The Company review assets for impairment annually, orwhen events or circumstances indicate that the carrying amount may not be recoverable over the remaininglives of the assets.
In assessing impairments, the Company uses discounted cash flows, which take into account Management’sassumptions and estimates regarding matters that are inherently uncertain, such as estimating the remaininguseful life of an asset and the possible impact that inflation may have on its ability to generate cash flow, aswell as customer growth and the appropriate discount rate.
Although the Company believes that their estimates are reasonable, different assumptions regarding suchremaining useful life or future cash flows could materially affect the valuation of its long-lived assets. TheCompany also evaluates the useful life used to depreciate long-lived assets, periodically considering theiroperating and use conditions. As of December 31, 2012 and 2011, and January 1, 2011 there were noindicators of impairment; therefore the Company did not undertake any study to determine the value in useof such assets.
b) Basis for Consolidation and Combination
The Financial Statements include the assets, liabilities and results of all entities in which the Company has acontrolling portion after the Corporate Reorganization. The significant outstanding balances andtransactions between companies have been eliminated in the combination and consolidation. To determinecontrol, the Company analyze whether or not it has the power to govern the strategic financial and operatingpolicies of the respective entity, and not only power over the portion of the equity the Company owned. As aresult of this analysis, the Company has exercised critical judgment in determining whether to combine orconsolidate the financial statements of Polioles, as applicable, where the determination of control is notstraightforward. Management has reached the conclusion that there are factors and circumstances describedin the by-laws of Polioles and applicable law that allow the Company to carry out the daily operations of
F-38
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Polioles and therefore to demonstrate control. The Company will continue assessing these circumstances ateach balance sheet date to determine whether or not this critical judgment will continue to be appropriate. Ifthe Company determines that it no longer controls Polioles, would need to be deconsolidated and accountedfor under the equity method. The significant outstanding balances and transactions between companies havebeen eliminated in the consolidation and combination.
c) Estimated impairment of other intangible assets with indefinite useful life
The identification and measurement of impairment to intangible assets with indefinite lives involves theestimation of fair values. These estimates and assumptions could have a significant impact on whether ornot an impairment charge is recognized and also the magnitude of any such charge. The Company performsvaluation analyses with the assistance of third parties and consider relevant internal data, as well as othermarket information that is publicly available. Estimates of fair value are primarily determined usingdiscounted cash flows and market comparisons. These approaches use significant estimates andassumptions, including projected future cash flows (including timing), discount rate reflecting the inherentrisk in future cash flows, perpetual growth rate, determination of appropriate market comparables and thedetermination of whether a premium or discount should be applied to comparables. Inherent in theseestimates and assumptions is a certain level of risk, which the Company believes has considered in theirvaluations. Nevertheless, if future actual results differ from estimates, a possible impairment charge may berecognized in future periods related to the write-down of the carrying value of other intangibles in additionto the amounts recognized previously.
d) Business combinations and acquisitions – purchase price allocations
For business a combination, IFRS requires that a fair value exercise is undertaken allocating the purchaseprice (cost) to the fair value of the acquired identifiable assets and liabilities. Any difference between thecost of acquiring the interest and the fair value of the acquired net assets is recognized as acquired goodwill.The fair value exercise is performed at the date of acquisition.
As a result of the nature of fair value assessments, the purchase price allocation exercise and acquisition-date fair value determinations require subjective judgments based on a wide range of complex variables at apoint in time. Management uses all available information to make the fair value determinations.
e) Income taxes
As part of the process of preparing these financial statements, the Company is required to estimate incometaxes. This process involves estimating actual current tax exposure together with assessing temporarydifferences resulting from differing item treatment, such as impairment on trade receivables, deferred assets,inventories, property, machinery and equipment, accrued expenses and tax loss carryforwards, for tax andaccounting purposes. These differences result in deferred tax assets and liabilities, which are included withinthe balance sheet. The Company then assesses the likelihood that their deferred tax assets will be recovered.
f) Fair value of derivatives and other financial instruments
The fair value of financial instruments is determined based upon liquid market prices evidenced byexchange traded prices, broker-dealer quotations or prices of other transactions with similarly ratedcounterparties. If available, quoted market prices provide the best indication of value. If quoted marketprices are not available for fixed maturity securities and derivatives, the Company discounts expected cashflows using market interest rates commensurate with the credit quality and maturity of the investment.
F-39
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Derivative financial instruments used for hedging are designated either as cash-flow hedges or fair valuehedges. The changes in the fair value of cash flow hedges are reported in other comprehensive income,while the changes in the fair value of fair value hedges (along with the change in the fair value of the hedgeditem) are recorded in earnings. Fair value amounts are based on either quoted market prices or estimatedvalues derived utilizing dealer quotes or internally generated modeling techniques.
As market conditions change, adjustments to the fair value of these derivatives are made to reflect thoseconditions. In addition, hedging effectiveness needs to be evaluated on a periodic basis and to the extent thehedge is not deemed effective, hedge accounting ceases to be applied. Actual settlements of thesederivatives will reflect the market conditions at the time and may differ significantly from the estimated fairmarket value reflected on the balance sheet.
The degree of Management’s judgment involved in determining the fair value of a financial instrument isdependent upon the availability of quoted market prices. When observable market prices and parameters donot exist, Management’s judgment is necessary to estimate fair value, in terms of estimating the future cashflows, based on variable terms of the instruments and the credit risk and in defining the applicable interestrate to discount those cash flows.
g) Pension Benefits
The present value of the pension obligations depends on a number of factors that are determined on anactuarial basis using a variety of assumptions. The assumptions used in determining the cost (income) forpensions include the net discount rate. Any changes in these assumptions will impact the carrying value ofthe pension obligations.
The Company determines the appropriate discount rate at the end of each year. This interest rate should beused to determine the present value of cash outflows required to settle expected future pension obligations.In determining the appropriate discount rate, the Company considers the discount interest rate in accordancewith IAS 19 “Employee benefits” that are denominated in the currency in which the benefits will be paidand that have terms to maturity approximating the terms of the related pension obligation.
Note 6 – Cash and cash equivalents
Cash and cash equivalents are comprised as follows:
At December 31,2012
At December 31,2011
At January 1,2011
Cash at bank and on hand Ps1,851,076 Ps2,967,476 Ps2,659,240Short term bank deposits 4,803,485 616,811 572,695
Cash and cash equivalents (excluding bank overdrafts) Ps6,654,561 Ps3,584,287 Ps3,231,935
Note 7 – Restricted cash and cash equivalents
The Company had restricted cash approximately Ps 2,992, Ps 1,925 and Ps 283,647, at December 31, 2012 and2011 and January 1, 2011, respectively. The balances were required to be held in escrow by the Company’sworkers compensation service administrator. The restricted cash balance is classified as a current asset on theCompany’s balance sheets based on the expiration date of the restriction.
F-40
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 8 – Trade and other receivables, net
Trade and other receivables are comprised as follows:
At December 31,2012
At December 31,2011
At January 1,2011
Trade receivables Ps10,707,247 Ps11,059,356 Ps7,341,813Provision for impairment of trade receivables (241,897) (248,135) (225,255)
Trade receivables, net 10,465,350 10,811,221 7,116,558
Accounts receivables from related parties (Note 10) 1,292,387 1,550,920 1,497,005Recoverable taxes 517,316 464,540 150,705Interest receivable 27 2 —Other debtors 1,386,689 744,039 647,274Less: non-current portion (1) (292,774) (289,561) (137,626)
Current portion Ps13,368,995 Ps13,281,161 Ps9,262,717
(1) The portion of non-current receivables corresponds to trade receivable, and are presented within othernon-current assets. See Note 14.
Trade and other receivables include past due but not impaired balances amounting to Ps 1,981,667, Ps 2,049,094,Ps 1,966,864 at December 31, 2012 and 2011 and January 1, 2011, respectively.
The aging analysis of balances due from trade and other receivables not impaired is as follows:
At December 31, 2012
Past due
1 to 30days
30 to 90days
90 to 180days
More than180 days
Trade and other receivables Ps1,218,072 Ps182,733 Ps180,568 Ps400,294
At December 31, 2011
Past due
1 to 30days
30 to 90days
90 to 180days
More than180 days
Trade and other receivables Ps1,237,140 Ps209,370 Ps115,710 Ps486,874
At January 1, 2011
Past due
1 to 30days
30 to 90days
90 to 180days
More than180 days
Trade and other receivables Ps1,146,493 Ps184,219 Ps 22,250 Ps613,902
F-41
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The movements of the provision for impairment of trade receivables are analyzed as follows:
2012 2011
Opening balance (January 1) (Ps248,135) (Ps225,255)Provisions for impairment of trade receivables (99,647) (70,061)Write-offs of trade receivables 49,110 —Cancel of provision for impairment not used 56,775 47,181
Ending balance (December 31) (Ps241,897) (Ps248,135)
Note 9 – Other current assets
At December 31,2012
At December 31,2011
At January 1,2011
Prepaid expenses Ps243,991 Ps231,295 Ps186,594
Total other current assets Ps243,991 Ps231,295 Ps186,594
Note 10 – Transactions with related parties
Related party transactions were carried out at market values.
December 31, 2012
Loans granted to related parties Loans received from related parties
Accountsreceivable Amount Currency
Maturitydate
DD/MM/YYInterest
rateAccountspayable Amount Currency
Maturitydate
DD/MM/YYInterest
rate
Parent Ps196,094 Ps310,983 USD 27/12/2013 7.33% Ps — Ps —69,499 USD — —
Affiliates 227,164 4,589 USD 26/06/2013 5.15% 40,700 103,586 MXN52,040 USD 26/06/2013 5.15%
319,941 USD 16/12/2013 5.15%13,010 USD 16/12/2013 3.59%13,000 MXN 21/01/2013 7.30%
579 MXNPartners with significant
influence over certainsubsidiaries 85,488 — 320,241 —
Total Ps508,746 Ps783,641 Ps360,941 Ps 103,586
December 31, 2011
Loans granted to related parties Loans received from related parties
Accountsreceivable Amount Currency
Maturitydate
DD/MM/YYInterest
rateAccountspayable Amount Currency
Maturitydate
DD/MM/YYInterest
rate
Parent Ps189,776 Ps383,909 USD 28/12/12 7.33% Ps — Ps2,908,004(1) MXN 4.89%Affiliates 472,400 392,951 USD 30/12/12 7.12% 52,277 219,630 MXN —Partners with significant
influence over certainsubsidiaries 111,884 — 422,403 —
Total Ps774,060 Ps776,860 Ps474,680 Ps3,127,634
F-42
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
January 1, 2011
Loans granted to related parties Loans received from related parties
Accountsreceivable Amount Currency
Maturitydate
DD/MM/YYInterest
rateAccountspayable Amount Currency
Maturitydate
DD/MM/YYInterest
rate
Parent Ps189,776 Ps317,422 USD 29/12/2011 7.28% Ps — Ps —11,199 USD 28/08/2011 7.12%
Affiliates 474,551 182,955 USD 23/02/2011 7.12% 129,999182,955 USD 23/08/2011 7.12%23,558 USD 23/02/2011 7.12%13,071 MXN 25/05/2011 5.62%12,472 USD 25/05/2011 9.29%
Partners with significantinfluence over certainsubsidiaries 89,046 — — 257,773
Total Ps753,373 Ps743,632 Ps — Ps 387,772
(1) Includes accounts payable to Alfa amounting to Ps 2,858,758 related to the acquisition of the shares ofPolioles, Unimor, Akra and Copeq (see Note 1) and the related accrued interest.
Sales of good and other income with related parties
Year ended December 31, 2012
Finished goods InterestAdministrative
services Leases Other
Parent Ps — Ps23,457 Ps — Ps — Ps —Affiliates 321,844 25,687 37,714 1,807Partners with significant influence over certain
subsidiaries 1,468,410 — — 5,312 —
Total Ps1,790,254 Ps49,144 Ps37,714 Ps5,312 Ps1,807
Year ended December 31, 2011
Finished goodsRaw
materials InterestAdministrative
services Leases Other
Parent Ps — Ps — Ps32,279 Ps — Ps— Ps —Affiliates 285,789 23 24,529 24,351 — 5,508Partners with significant influence over
certain subsidiaries 1,531,478 9,122 — 5,196 — 896
Total Ps1,817,627 Ps9,145 Ps56,808 Ps29,547 Ps— Ps6,404
F-43
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Cost of sales and other expenses with related parties
Year ended December 31, 2012
Finishedgoods
Rawmaterials Interest
Administrativeservices
Technicalassistance Electricity Leases Other Fees
Parent Ps — Ps — Ps56,362 Ps122,121 Ps — Ps — Ps — Ps — Ps —Affiliates — 14,135 — 125,042 — 93,323 808Partners with significant influence
over certain subsidiaries 1,212,510 278,133 — 146,429 59,165 — 2,406 — 26,985
Total Ps1,212,510 Ps292,268 Ps56,362 Ps393,592 Ps59,165 Ps93,323 Ps2,406 Ps 808 Ps26,985
Year ended December 31, 2011
Finishedgoods
Rawmaterials Interest
Administrativeservices
Technicalassistance Electricity Leases Other Fees
Parent Ps — Ps — Ps49,246 Ps108,295 Ps — Ps — Ps — Ps — Ps —Affiliates 12,177 117,194 51,831 1,610Partners with significant influence
over certain subsidiaries 1,171,345 295,112 — 135,648 55,059 — 2,259 — 21,927
Total Ps1,171,345 Ps307,289 Ps49,246 Ps361,137 Ps55,059 Ps51,831 Ps2,259 Ps1,610 Ps21,927
For the years ended December 31, 2012, salaries and benefits received by senior officers of the Companyamounted to Ps 179,858 (Ps 187,612 in 2011), comprising of base salary and law benefits and supplemented by avariable compensation program that is basically based on the performance of the Company and by the marketvalue of its stocks.
The Company and its subsidiaries declared that neither they have significant transactions with related parties norconflicts of interest to disclose.
Note 11 – Inventories
At December 31,2012
At December 31,2011
At January 1,2011
Finished goods Ps 5,969,149 Ps 6,370,557 Ps3,237,748Raw material and other consumables 4,452,073 4,848,218 2,632,347Materials and spare parts 719,237 658,771 485,344Work in process 441,586 442,617 225,270
Ps11,582,045 Ps12,320,163 Ps6,580,709
For the years ended December 31, 2012 and 2011, the cost of raw materials consumed and the changes ininventories of work in progress and finished goods recorded in the cost of sale were Ps 86,766,710 andPs 80,653,169, respectively.
For the years ended December 31, 2012 and 2011, the Company recognized as an expense Ps 9,260 and Ps 3,913,respectively, corresponding to inventory that was damaged, slow-moving and obsolete.
F-44
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 12 – Property, plant and equipment, net
LandBuildings andconstruction
Machinery andequipment
Transportationequipment
Furniture,lab and
informationtechnologyequipment
Constructionin progress
Other fixedassets Total
At January 1, 2011Deemed cost Ps3,017,704 Ps 4,123,393 Ps 31,879,620 Ps 162,396 Ps 858,697 Ps 642,651 Ps 456,550 Ps 41,141,011Accumulated depreciation (235,809) (1,850,804) (16,047,193) (107,009) (667,963) — (107,075) (19,015,853)
Carrying value at January 1,2011 2,781,895 2,272,589 15,832,427 55,387 190,734 642,651 349,475 22,125,158
For the year endedDecember 31, 2011
Translation adjustments 152,075 343,281 2,298,711 14,050 26,138 107,914 34,409 2,976,578Additions 20,202 58,947 295,617 3,969 34,692 437,374 20,628 871,429Additions due to business
combinations 180,141 698,182 3,510,309 32,906 25,389 167,672 20,895 4,635,494Disposals (17,961) (10) (6,305) (819) (125) (11,532) (11,997) (48,749)Depreciation charge
recognized in the year (24,005) (106,040) (1,472,254) (17,645) (53,047) — (2,926) (1,675,917)Transfers 1,016 14,725 375,480 4,565 16,989 (426,350) 8,664 (4,911)
Balance at December 31,2011 3,093,363 3,281,674 20,833,985 92,413 240,770 917,729 419,148 28,879,082
At December 31, 2011Cost 3,924,535 7,797,879 43,136,307 251,324 1,058,022 917,729 529,149 57,614,945Accumulated depreciation (831,172) (4,516,205) (22,302,322) (158,911) (817,252) — (110,001) (28,735,863)
Carrying value atDecember 31, 2011 3,093,363 3,281,674 20,833,985 92,413 240,770 917,729 419,148 28,879,082
For the year endedDecember 31, 2012
Translation adjustments (96,466) (207,677) (1,389,292) (6,650) (16,972) (59,494) (24,086) 1,800,637)Additions 2,567 3,495 57,781 1,932 2,906 1,502,862 42,107 1,613,650Additions due to business
combinationsDisposals (7,406) (213) (15,306) (175) (135) (20) (25,314) (48,569)Depreciation charge
recognized in the year (11,344) (118,710) (1,726,550) (22,852) (78,722) — (1,789) (1,959,967)Transfers 5,952 60,984 878,957 32,568 68,163 (1,030,571) (4,202) 11,851
Balance at December 31,2012 2,986,666 3,019,553 18,639,575 97,236 216,010 1,330,506 405,864 26,695,410
At December 31, 2012Cost 3,777,881 7,414,917 41,281,791 265,114 947,776 1,330,506 433,733 55,451,718Accumulated depreciation (791,215) (4,395,364) (22,642,216) (167,878) (731,766) — (27,869) (28,756,308)
Carrying value atDecember 31, 2012 Ps2,986,666 Ps 3,019,553 Ps 18,639,575 Ps 97,236 Ps 216,010 Ps 1,330,506 Ps 405,864 Ps 26,695,410
Depreciation expense of Ps 1,942,073 and Ps 1,649,277, has been charged in cost of sales, Ps 2,306 and Ps 1,864, inselling expenses and Ps 15,588 and Ps 24,775, in administrative expenses, for the years ended December 31, 2012and 2011, respectively.
The Company has capitalized financing costs amounting to Ps 2,853 and Ps 2,679 for the year ended December 31,2012 and 2011, respectively. Financing costs were capitalized at a weighted average rate of approximately 2.26% ofits loans.
F-45
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 13 – Goodwill and intangible assets, net
Finite life Indefinite life
Developmentcosts Trademarks
Non-competeagreements
Customerrelationships
Softwareand
licenses
Intellectualproperty
rights Goodwill Other Total
CostAt January 1, 2011 Ps 274,231 Ps 381 Ps — Ps — Ps 30,822 Ps — Ps — Ps2,946 Ps 308,380Amortization at
January 1, 2011 (96,602) (259) — — (23,164) — — — (120,025)
Total January 1, 2011 177,629 122 — — 7,658 — — 2,946 188,355
At January 1, 2011 274,231 381 — — 30,822 — — 2,946 308,380Translation adjustments 37,040 50 — — 3,220 234,185 391 387 275,273Additions 5,092 — — — — — 236,784 983 242,859Additions due to business
combinations — — 65,700 508,126 — 1,440,463 — — 2,014,289
At December 31, 2011 316,363 431 65,700 508,126 34,042 1,674,648 237,175 4,316 2,840,801
Translation adjustments (22,100) (30) (4,552) (35,217) (2,041) (123,682) (16,434) (302) (204,358)Additions 5,284 — — 528 33,415 7,644 — 167 47,038
At December 31, 2012 299,547 401 61,148 473,437 65,417 1,558,610 220,741 4,181 2,683,483
Accumulatedamortization andimpairment
At January 1, 2011 (96,602) (259) — — (23,164) — — — (120,025)Amortization (28,384) (108) (14,704) (28,629) (2,699) (68,336) — — (142,860)Transfers 126 — — — 2 — — — 128Exchange differences (16,212) (48) (352) (657) (2,937) (8,418) — — (28,624)
At December 31, 2011 (141,072) (415) (15,056) (29,286) (28,798) (76,754) — — (291,381)
Amortization (29,031) (17) (15,519) (39,176) (6,528) (79,136) — — (169,407)Transfers 4,539 8 (256) (41) 4,250Translation adjustments 5,024 22 1,275 2,584 1,121 6,524 — — 16,550
At December 31, 2012 (160,540) (402) (29,300) (66,133) (34,246) (149,367) — — (439,988)
Net book valueCost 316,363 431 65,700 508,126 34,042 1,674,648 237,175 4,316 2,840,801Accumulated
amortization andimpairment (141,072) (415) (15,056) (29,285) (28,798) (76,755) — — (291,381)
At December 31, 2011 175,291 16 50,644 478,841 5,244 1,597,893 237,175 4,316 2,549,420
Cost 299,548 401 61,147 473,438 65,417 1,558,610 220,741 4,181 2,683,483Accumulated
amortization andimpairment (160,540) (401) (29,300) (66,135) (34,246) (149,367) — — (439,988)
At December 31, 2012 Ps 139,008 Ps — Ps 31,847 Ps407,303 Ps 31,171 Ps1,409,243 Ps220,741 Ps4,181 Ps2,243,495
Amortization for the years ended December 31, 2012 and 2011 amounting to (Ps 162,198) and (Ps 139,218), hasbeen recorded in cost of sales, (Ps 7,071) and (Ps 193) in selling expenses and (Ps 138) and (Ps 3,449) inadministrative expenses, respectively.
Research and development expenses incurred and recorded in the income statement for the years endedDecember 31, 2012 and 2011 were Ps 40,744 and Ps 37,294, respectively.
Management evaluates its operations in two business segments: polyester chain business and plastics andchemicals business. Management also assesses goodwill at the operating segment level and has allocated theentire amount to the polyester segment. See Note 28.
F-46
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 14 – Other non-current assets
At December 31,2012
At December 31,2011
At January 1,2011
Other receivables, net Ps190,523 Ps195,045 Ps 24,737Available for sale financial assets (1) 92,208 40,249 40,249Investment is associate (2) 1,528 42,914 61,441Other non-current assets 8,515 11,353 11,199
Total other non-current assets Ps292,774 Ps289,561 Ps137,626
(1) Available for sale financial assets include the following:
At December 31,2012
At December 31,2011
At January 1,2011
Unquoted shares:- Share investments in third parties Ps92,208 Ps40,249 Ps40,249
The movement of available for sale financial assets is the following:
2012 2011
Opening balance at January 1 Ps40,249 Ps40,249Translation effect (2,015) —Additions 54,055 —Impairment (81) —
Balance as of December 31 Ps92,208 Ps40,249
Available for sale financial assets are denominated in the following currencies:
At December 31,2012
At December 31,2011
At January 1,2011
USD Ps52,040 Ps — Ps —MXN 40,168 40,249 40,249
Total Ps92,208 Ps40,249 Ps40,249
None of the available for sale financial assets are past due or impaired.
(2) The movement of investments in associates is the following:
2012 2011
Balance at January 1 Ps 42,914 Ps 61,441Share of losses (39,055) (22,965)Translation effect (2,331) 5,182Other — (744)
Balance at December 31 Ps 1,528 Ps 42,914
F-47
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The participation of the Company in the results of its main associates, as well as their assets and liabilities, arepresented as follows:
Country ofIncorporation Assets Liabilities Revenues Gain (Loss)
Interest %held
At December 31, 2012Terminal Petroquímica de Altamira,
S.A. de C.V. México Ps 52,857 Ps 24,982 Ps 27,511 Ps 5,948 21.07%Clear Path Recycling, L. L. C. USA Ps575,543 Ps491,780 Ps479,598 (Ps161,232) 25.00%
At December 31, 2011Terminal Petroquímica de Altamira,
S.A. de C.V. México Ps 50,185 Ps 27,329 Ps 27,674 Ps 9,603 21.07%Clear Path Recycling, L. L. C. USA Ps598,297 Ps337,452 Ps516,417 (Ps 99,952) 25.00%
Note 15 – Financial Instruments
a. Financial instruments by category
At December 31, 2012
Accountsreceivable and
liabilities atamortized cost
Investmentsavailable for
sale
Derivativefinancial
instruments Total
Financial assets:Cash and cash equivalents Ps 6,654,561 Ps — Ps — Ps 6,654,561Restricted cash and cash equivalents 2,992 — — 2,992Trade and other receivables excluding prepayments 13,368,995 — — 13,368,995Financial assets at fair value through profit or loss — — 35,153 35,153Derivatives used for hedging — — 72,144 72,144Financial assets available for sale — 92,208 — 92,208
Ps20,026,548 Ps92,208 Ps107,297 Ps20,226,053
Financial liabilities:Debt Ps14,440,408 Ps — Ps — Ps14,440,408Trade and other payables 9,696,234 — — 9,696,234Derivatives used for hedging — — 218,805 218,805Financial liabilities at fair value through profit or loss — — 276,923 276,923
Ps24,136,642 Ps — Ps495,728 Ps24,632,370
F-48
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
At December 31, 2011
Accountsreceivable and
liabilities atamortized cost
Investmentsavailablefor sale
Derivativefinancial
instruments Total
Financial assets:Cash and cash equivalents Ps 3,584,287 Ps — Ps — Ps 3,584,287Restricted cash and cash equivalents 1,925 — — 1,925Trade and other receivables excluding prepayments 13,281,161 — — 13,281,161Financial assets at fair value through profit or loss — — 66,774 66,774Derivatives used for hedging 9,306 9,306Financial assets available for sale — 40,249 — 40,249
Ps16,867,373 Ps40,249 Ps 76,080 Ps16,983,702
Financial liabilities:Debt Ps19,686,760 Ps — Ps — Ps19,686,760Trade and other payables 13,218,369 — — 13,218,369Derivatives used for hedging — — 223,433 223,433Financial liabilities at fair value through profit or loss — — 958,371 958,371
Ps32,905,129 Ps — Ps1,181,804 Ps34,086,933
At January 1, 2011
Accountsreceivable and
liabilities atamortized cost
Investmentsavailablefor sale
Derivativefinancial
instruments Total
Financial assets:Cash and cash equivalents Ps 3,231,935 Ps — Ps — Ps 3,231,935Restricted cash and cash equivalents 283,647 — — 283,647Trade and other receivables excluding prepayments 9,262,717 — — 9,262,717Financial assets at fair value through profit or loss — — 191,779 191,779Derivatives used for hedging 120,041 120,041Financial assets available for sale — 40,249 — 40,249
Ps12,778,299 Ps40,249 Ps 311,820 Ps13,130,368
Financial liabilities:Debt Ps 9,215,883 Ps — Ps — Ps 9,215,883Trade and other payables 7,699,308 — — 7,699,308Derivatives used for hedging — — 2,095 2,095Financial liabilities at fair value through profit or loss — — 1,236,991 1,236,991
Ps16,915,191 Ps — Ps1,239,086 Ps18,154,277
F-49
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
b. Credit quality of financial assets
The credit quality of financial assets that are neither past due nor impaired can be assessed either byreference to external credit ratings (if available) or to historical information about counterparty default rates:
At December 31,2012
At December 31,2011
At January 1,2011
Trade and other receivables,Excluding prepaymentsCounterparties with external credit rating“A” Ps 43,796 Ps 620 Ps 1,117Other categories 827,617 980,243 435,477
871,413 980,863 436,594
Counterparties without external credit ratingType of clients X 10,819,011 11,425,031 7,974,325Type of clients Y 1,147,847 1,146,032 1,072,194Type of clients Z 13,382 43,264 66,320
11,980,240 12,614,327 9,112,839
Total receivables not impaired Ps12,851,653 Ps13,595,190 Ps9,549,433
Cash and cash equivalents, with and withoutrestriction, except cash in hand
“A” Ps 842,263 Ps 679,381 Ps 783,467Other categories 5,814,631 2,900,172 2,711,236
6,656,894 3,579,553 3,494,703Derivative financial instruments“A” Ps 35,847 Ps 44,978 Ps 106,802Other categories 71,451 31,102 205,018
Ps 107,298 Ps 76,080 Ps 311,820
Group X – new customers / related parties (less than 6 months).
Group Y – clients / current related parties (more than 6 months) without default in the past.
Group Z – clients / current related parties (more than 6 months) with defaults in the past. All defaults were fullyrecovered.
c. Fair value of financial assets and liabilities
The amount of cash and cash equivalents, restricted cash and cash equivalents, trade and other receivables,trade and other payables, current debt and other current liabilities approximate their fair value due to theirshort maturity date. The carrying value of these accounts represents the expected cash flow.
The carrying value and estimated fair value of other financial assets and liabilities are presented below:
At December 31, 2012 At December 31, 2011 At January 1, 2011
Book Value Fair value Book value Fair value Book value Fair value
Financial assetsNon-current trade receivables Ps 190,523 Ps 184,521 Ps 195,045 Ps 194,921 Ps 24,737 Ps 24,721Financial liabilitiesNon-current debt 14,019,537 14,809,233 17,798,811 18,193,828 7,851,761 8,486,588
F-50
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The estimated fair values are based on discounted cash flows. These fair values consider the non-currentportion of financial assets and liabilities since the current portion approximates its fair value.
Note 16 – Trade and other payables
At December 31,2012
At December 31,2011
At January 1,2011
Trade payables Ps9,231,707 Ps 9,616,055 Ps7,311,536Balances due to related parties (Note 10) 464,527 3,602,314 387,772
Ps9,696,234 Ps13,218,369 Ps7,699,308
Note 17 – Debt
At December 31,2012
At December 31,2011
At January 1,2011
Current:Bank loans (1) Ps 358,274 Ps 1,645,698 Ps 247,146Current portion of non-current debt 140,184 491,251 1,181,853Notes payable (1) 2,183 5,025 —
Current debt Ps 500,641 Ps 2,141,974 Ps 1,428,999
Non-current:Senior Notes (2) Ps 9,996,489 Ps 4,682,058 Ps 4,473,875Secured bank loans (2) — 495,984 —Unsecured bank loans (2) 4,163,232 13,112,020 4,559,739Debt issuance costs (79,770) (254,025) (64,877)
Total 14,079,951 18,036,037 8,968,737Less: current portion of non-current debt (140,184) (491,251) (1,181,853)
Non-current debt Ps13,939,767 Ps17,544,786 Ps 7,786,884
(1) The fair value of bank loans and notes payable approximated their current carrying amounts, as the impactof discounting is not significant.
F-51
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
(2) The carrying amounts, terms and conditions of non-current debt are as follows:
Currency
Balance atDecember 31,
2012
BalanceDecember 31,
2011
Balance atJanuary 1,
2011Maturity dateDD/MM/YY
Interestrate
Private placement Senior Notesbearing interest at an annual rateof 8.31%, maturing in October2012, in one annual installment.Guaranteed by its subsidiariesTemex, Ptal, Dak Resinas, DakArgentina and DAK Americas. USD Ps — Ps 149,772 Ps 264,795 30-Oct-12 8.31%
Private Placement Senior Notesissued by DAK Americas bearinginterest at an annual rate of6.85%, maturing on June 2014, inthree annual installments.Guaranteed by Petrotemex and itssubsidiaries Temex, Ptal, DakResinas and Dak Argentina. USD — 688,950 812,038 24-Jun-14 6.85%
Senior Notes 144-A/Reg. S bearinginterest at an annual rate of9.50%, maturing on August 2014.Guaranteed by Temex, Akra,DAK Americas and Dak Resinas. USD 1,563,979 3,843,336 3,397,042 19-Aug-14 9.50%
Senior Notes 144A/Reg. S bearingan interest at an annual rate of4.50%, maturing on November,2022. Guaranteed by Petrotemex,Temex, Akra, DAK Americas andDak Resinas. USD 8,432,510 — — 20-Nov-22 4.50%
Total Senior Notes Ps9,996,489 Ps4,682,058 Ps4,473,875
Currency
Balance atDecember 31,
2012
BalanceDecember 31,
2011
Balance atJanuary 1,
2011Maturity dateDD/MM/YY
Interestrate
Committed credit line bearinginterest at an annual rate ofLibor+3.5%, maturing onNovember 2013 and guaranteedby Wellman Holdings and FiberInd. USD Ps — Ps 495,984 Ps — 02-Nov-13 4.03%
Total secured bank loans Ps — Ps 495,984 Ps —
Syndicated loan with annual interestat Libor+2.25%, maturing onDecember 2016. Guaranteed byTemex, Akra, Dak Resinas, DAKAmericas and Dak Mississippi. USD Ps — Ps8,387,220 Ps — 08-Dec-16 2.79%
F-52
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Currency
Balance atDecember 31,
2012
BalanceDecember 31,
2011
Balance atJanuary 1,
2011Maturity dateDD/MM/YY
Interestrate
Syndicated loan bearing interest atan annual rate of TIIE + 0. 20%maturing in December 2012, infour semiannual installments.Guaranteed by its subsidiariesTemex, Ptal, Dak Resinas, DakArgentina and DAK Americas. MXN — — 117,912 11-Dec-12 5.10%
Syndicated loan bearing interest atan annual rate of Libor + 0. 40%,maturing on December 2012, infour semiannual installments.Guaranteed by Temex, Ptal, DakResinas, Dak Argentina and DAKAmericas. USD — — 383,323 11-Dec-12 0.86%
Bank loan with annual interest atLibor + 3.07%, maturing onAugust 2017. Guaranteed by itssubsidiaries Temex, Akra, DakResinas and DAK Americas. USD 2,081,616 2,236,592 1,977,136 23-Aug-17 3.79%
Committed credit line bearingannual interest rate of Libor +2.0%, maturing on September2015. Guaranteed by Petrotemex,Temex, Akra y Dak Resinas. USD 65,050 — — 24-Sep-15 2.31%
Committed credit line bearingannual interest rate of Libor +1.60%, maturing on July 2016.Guaranteed by Temex, Akra andDak Resinas. USD — 419,361 — 22-Jul-16 2.05%
Committed credit line bearingannual interest rate of Libor +0.50%, maturing on September2012. USD — — 54,804 30-Sep-12 1.14%
Syndicated loan with annual interestrate of Libor + 0.60% to be paidon April 2011. USD — — 222,428 25-Apr-11 1.05%
Bank loan with annual interest rateof Libor + 3.0% to be paid onJanuary 2012. USD — — 308,927 30-Jan-12 3.30%
Bank loan with annual interest rateof Libor + 0.50% to be paid onAugust 2012. USD — 111,829 197,714 17-Aug-12 1.00%
F-53
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Currency
Balance atDecember 31,
2012
BalanceDecember 31,
2011
Balance atJanuary 1,
2011Maturity dateDD/MM/YY
Interestrate
Bank loan with annual interest rateof Libor + 2.70% to be paid onApril 2016. USD — — 308,927 21-Apr-16 2.99%
Bank loan with annual interest rateof Libor + 1.80% to be paid onApril 2016. USD 780,606 838,722 — 01-Apr-16 2.16%
Bank loan with annual interest rateof Libor + 1.60% to be paid onAugust 2016. USD 650,505 698,935 — 16-Aug-16 1.98%
Bank loan with annual interest rateof Libor + 0.50% to be paid onAugust 2012. USD — — 494,284 21-Aug-12 1.06%
Bank loan with annual interest rateof Libor + 2.15% to be paid onAugust 2012. Guaranteed by itssubsidiaries Univex and Nyltek. USD 390,303 419,361 494,284 20-Sep-15 2.46%
Bank loan with annual interest rateof Libor + 2.50% to be paid onFebruary 2017. Guaranteed by itssubsidiaries Univex and Nyltek. USD 195,152 — — 28-Feb-17 2.81%
Total unsecured bank loans Ps 4,163,232 Ps13,112,020 Ps4,559,739
TOTAL Ps14,159,721 Ps18,290,062 Ps9,033,614
At December 31, 2012, the annual maturities of non-current debt are as follows:
2014 2015 20162017
onwards Total
Bank loans Ps 449,499 Ps508,044 Ps959,495 Ps 2,106,010 Ps 4,023,048Senior notes 1,563,979 — — 8,432,510 9,996,489Less: debt issuance costs — — — — (79,770)
Ps2,013,478 Ps508,044 Ps959,495 Ps10,538,520 Ps13,939,767
At December 31, 2011, the annual maturities of non-current debt are as follows:
2013 2014 20152016
onwards Total
Bank loans Ps2,367,732 Ps1,478,946 Ps3,568,762 Ps6,080,735 Ps13,496,175Senior notes 229,650 4,072,986 — — 4,302,636Less: debt issuance costs — — — — (254,025)
Ps2,597,382 Ps5,551,932 Ps3,568,762 Ps6,080,735 Ps17,544,786
F-54
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
At January 1, 2011, the annual maturities of non-current debt are as follows:
2012 2013 20142015
onwards Total
Bank loans Ps1,070,110 Ps205,698 Ps 213,303 Ps2,224,183 Ps3,713,294Senior notes 335,407 203,009 3,600,051 — 4,138,467Less: debt issuance costs — — — — (64,877)
Ps1,405,517 Ps408,707 Ps3,813,354 Ps2,224,183 Ps7,786,884
Covenants:
The majority of existing banking debt agreements contains restrictions of the Company, principally forcompliance with certain financial ratios, among they mainly include:
a) Interest coverage ratio: which is defined as the ratio of consolidated EBITDA to consolidated net interestcharges for the period of the four consecutive fiscal quarters ending on such date, which may not be lessthan 3.0 times.
b) Leverage ratio: this is defined as the ratio of dividing the consolidated net debt by the consolidated EBITDAfor the last twelve months. This ratio may not be greater than 3.5 times.
Additionally, there are other restrictions on incurring additional debt or taking loans that require mortgage assets,dividend payments and submission of financial information, which is not fulfilled or remedied within a specificperiod to the satisfaction of creditors, may require immediate early maturity. During 2012 and 2011, financialratios were calculated according to formulas set out in loan agreements. At December 31, 2012, and the date ofissuance of these financial statements, the Company and its subsidiaries complied with such covenants andrestrictions.
Relevant debt transactions:
(a) On August 13, 2012, Grupo Petrotemex acquired US$154.2 million (“Tender Offer”) of the principalamount of the “Senior Notes” 144A/Reg. S issued in 2009, remaining a balance at December 31, 2012 ofUS$120.8 million maturing on 2014. Additionally, after the Tender Offer, Grupo Petrotemex obtained theconsent of the majority of the holders of the Senior Notes to amend certain terms of the contract thatgoverns them, and as a result, the Senior Notes that were not included into the tender offer remain effectivebut without the effect of the financial covenants.
(b) On November 20, 2012, the Company completed an issuance of debt (“Senior Notes”) for a nominal amountof US$650 million maturing on November 20, 2022. Interests on the Senior Notes will be payablesemiannually at 4.50% from May 20, 2013. The “Senior Notes” were issued through a private placementunder the Rule 144A of the “Securities Act” of 1933 of the United States of America and areunconditionally guaranteed, unsubordinated, by joint obligation of certain subsidiaries of the Company.
In addition, the issuance of the “Senior Notes” resulted in emission costs and expenses in the amount ofUS$6 million. The costs and expenses of the issuance, including the discount on the placement of the SeniorNotes, are presented net of debt and are amortized along with the loan based on the effective interest rate method.
The net proceeds of the issuance of the Senior Notes, were used primarily to make debt prepayments of certainsubsidiaries of the Company.
F-55
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 18 – Employee Benefits
The valuation of retirement plan employee benefits, formal (covering approximately 65% of workers in 2012 and66% of workers in 2011) and informal, covers all employees and is based primarily on years of servicecompleted by them, their current age and estimated salary at retirement date.
Certain subsidiaries of the Company have defined contribution plans. In accordance with the structure of theseplans, the reduction in labor liabilities is reflected progressively.
The principal subsidiaries of the Company have established irrevocable trust funds for payment of pensions andseniority premiums and health-care expenses. The contributions in 2012 amounted to Ps 114,579 (Ps 114,115 in2011).
Following is a summary of the principal consolidated financial data relative to these obligations:
At December 31,2012
At December 31,2011
At January 1,2011
Obligation in the balance sheet:Pension benefits Ps 927,679 Ps1,001,711 Ps349,426Post-employment medical benefits 202,450 259,351 223,006
Liability in balance sheet Ps1,130,129 Ps1,261,062 Ps572,432
2012 2011
Charge in the income statement:Pension benefits Ps 15,717 Ps 27,640Post-employment medical benefits (10,619) (12,273)
5,098 15,367
Actuarial losses recognized in the statement of other comprehensive income for theperiod Ps (88,387) (Ps393,583)
Cumulative actuarial losses recognized in other comprehensive income (Ps481,970) (Ps393,583)
The total recognized expenses for the years ended December 31, were distributed as follows:
2012 2011
Cost of sales (Ps15,072) Ps 7,398Selling expenses (1,646) (1,888)Administrative expenses (1,743) (3,417)
Total (Ps18,461) Ps 2,093
Pension Benefits
The Company operates defined benefits pension plan based on employee pensionable remuneration and length ofservice. Most plans are externally funded. Plan assets are held in trusts, foundations or similar entities, governedby local regulations and practice in each country, as is the nature of the relationship between the Company andthe trustees (or equivalent) and their composition.
F-56
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The amounts recognized in the balance sheet are determined as follows:
At December 31,2012
At December 31,2011
At January 1,2011
Present value of defined benefit obligations Ps 3,150,577 Ps 3,130,999 Ps 1,761,152Fair value of plan assets (2,195,740) (2,098,529) (1,375,579)
Defined benefit liability, net 954,837 1,032,470 385,573Unrecognized past service costs (27,158) (30,759) (36,147)
Liability in the balance sheet Ps 927,679 Ps 1,001,711 Ps 349,426
The movement in the defined benefit obligation over the year is as follows:
2012 2011
At January 1 Ps3,131,000 Ps1,761,153Current service costs 15,565 16,462Interest cost 134,263 111,454Actuarial losses 239,477 214,516Translation adjustments (192,768) 291,587Benefits paid (176,960) (91,872)Liabilities acquired in a business combination — 853,686Curtailments — (25,987)
At December 31 Ps3,150,577 Ps3,130,999
The movement in the fair value of the plan assets over the year is as follows:
2012 2011
At January 1 (Ps2,098,529) (Ps1,375,579)Expected return on plan assets (167,479) (134,957)Actuarial gain (losses) (107,842) 171,716Translation adjustments 122,239 (219,895)Contributions (114,579) (114,115)Benefits paid 170,450 83,214Plan assets acquired in a business combination — (508,913)
At December 31 (Ps2,195,740) (Ps2,098,529)
The amounts recognized in the income statement for the years ended December 31, 2012 and 2011 are asfollows:
2012 2011
Current service cost (Ps 15,565) (Ps 16,462)Interest cost (134,263) (111,454)Expected return on plan assets 167,479 134,957Effect of curtailments and/or settlements — 22,730Past service cost (1,934) (2,131)
Total, included in staff costs Ps 15,717 Ps 27,640
F-57
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The principal actuarial assumptions were as follows:
At December 31,2012
At December 31,2011
At January 1,2011
Discount rateMX5.50% MX8.25% MX7.50%US3.80% US4.48% US5.81%
Inflation rate 3.57% 3.82% 4.40%Growth rate of wages 5.25% 5.25% 5.25%
Expected return on plan assets MX9.75% MX10.25% MX10.50%US8.25% US8.25% US8.50%
Future salary increases 5.25% 5.25% 5.25%
Post employment medical benefits
The Company operates a number of post-employment medical benefits schemes mainly in DAK Americas. Themethod of accounting, assumptions and the frequency of valuations are similar to those used for defined benefitpension schemes. Most of these plans are unfunded.
In addition to the assumptions set out above, the main actuarial assumption is a long-term increase in health costsannually 9.00% and 9.50% in 2012 and 2011, respectively.
The amounts recognized in the balance sheet were determined as follows:
At December 31,2012
At December 31,2011
At January 1,2011
Present value of defined benefit obligations Ps202,450 Ps259,351 Ps218,467Fair value of plan assets — — —
Defined benefit liability, net 202,450 259,351 218,467Past service costs not recognized — — 4,539
Liability in balance sheet Ps202,450 Ps259,351 Ps223,006
Movement in defined benefit obligation is as follows:
2012 2011
At January 1 Ps 259,351 Ps218,467Current service costs 2,542 2,044Interest cost 7,152 10,229Contributions 9,657 —Actuarial (gain) losses (43,248) 7,351Translation adjustments (17,991) 29,209Benefits paid (15,013) (7,949)
At December 31 (Ps202,450) Ps259,351
F-58
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The amounts recognized in the income statement for the years ended December 31, were as follows:
2012 2011
Current service cost (Ps 2,542) (Ps 2,044)Interest cost (9,657) (10,229)Expected return on plan assets 1,580 —
Total, included in staff costs (Ps10,619) (Ps 12,273)
At December 31, 2012 the effect of a 1% movement in the assumed medical cost trend rate is as follows:
Increase Decrease
Effect on the aggregate of the current service cost and interest cost Ps 4,385 (Ps 4,895)Effect on the defined benefit obligation 18,019 (21,737)
At December 31, 2011 the effect of a 1% movement in the assumed medical cost trend rate is as follows:
Increase Decrease
Effect on the aggregate of the current service cost and interest cost Ps 35,758 (Ps 42,775)Effect on the defined benefit obligation 110,306 (130,938)
Post employment benefits
Plan assets are comprised as follows:
AtDecember 31,
2012
AtDecember 31,
2011
AtJanuary 1,
2011
Equity instruments Ps1,036,816 Ps1,389,042 Ps751,074Cash and cash equivalents 1,158,924 709,487 624,505
Note 19 – Deferred Income Tax
The analysis of deferred tax assets and deferred tax liabilities is as follows:
AtDecember, 31,
2012
AtDecember 31,
2011
AtJanuary 1,
2011
Deferred tax asset:– To be recovered after more than 12 months Ps 700,264 Ps 1,081,711 Ps 633,186– To be recovered within 12 months 418,243 257,862 186,233
1,118,507 1,339,573 819,419
Deferred tax liabilities– To be recovered after more than 12 months (3,787,918) (4,843,538) (4,297,626)– To be recovered within 12 months (1,544,421) (681,725) (454,042)
(5,332,339) (5,525,263) (4,751,668)
Deferred tax, net (Ps 4,213,832) (Ps 4,185,690) (Ps 3,932,249)
F-59
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The gross movement on the deferred income tax account is as follows:
2012 2011
At January 1 (Ps4,185,690) (Ps3,932,249)Translation Effect 236,309 (507,188)Acquisition of subsidiary — 37,370Income state charge: (268,017) (39,785)Tax charged (credit) relating to components of other comprehensive income 3,566 256,162
At December 31 (Ps4,213,832) (Ps4,185,690)
Temporary differences requiring recognition of deferred income tax for the year ended December 31, 2012 is asfollows:
2012 2011
Assets:Inventories (Ps18,659) Ps 38,744Trade accounts receivable (89,453) 69,478Property, plant and equipment (3,787,918) (4,843,538)Valuation of derivative instruments 122,266 315,745Tax loss carryforwards 635,022 562,509
Total (Ps3,138,742) (Ps3,857,062)
Liabilities:Accrued expenses (Ps 914,092) (Ps 328,628)Other temporary differences, net (160,998) —
Total (Ps1,075,090) (Ps 328,628)
Deferred income tax liability (Ps4,213,832) (Ps4,185,690)
Deferred income tax assets are recognized for tax loss carryforwards to the extent that the realizations of therelated tax benefit through future taxable profits is probable. The Company did not recognize deferred incometax assets of Ps 372,170 for December 31, 2011, in respect of losses amounting to Ps 1,329,179 that can becarried forward against future taxable income. On September 2012, Akra Polyester recognized a deferred incometax asset of Ps 351,166 in respect of losses amounting to Ps 1,254,165 because of the merge with PTAL.
At December 31, 2012, the subsidiaries have cumulative tax loss carry forwards for a total of Ps 2,267,933 whichexpire as shown below:
Year loss incurredTax loss
carryforwardsYear of
expiration
2003 Ps 273,323 20132004 55,886 20142005 268,295 20152006 74,562 20162007 15,868 20172008 350,466 20182009 5,685 20192010 133,545 20202011 1,090,303 2021
Ps2,267,933
F-60
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 20 – Derivative Financial Instruments
The effectiveness of derivative financial instruments classified as hedge instruments is assessed on a periodicbasis. At December 31, 2012 and 2011 and January 1, 2011 the subsidiaries’ management had assessed theeffectiveness of its hedges and have considered that they were highly effective.
The notional amounts related to derivative financial instruments reflect the reference volume contracted, but donot reflect the amounts at risk in regard to future cash flows. The amounts at risk are generally limited to theunrealized gain or loss on market valuation of these instruments, which may vary according to changes in marketvalue of the underlying asset, its volatility and the credit quality of counterparties.
The principal obligations to which the subsidiaries are subject depend on the contracting mechanics and terms ofeach derivative financial instrument existing at December 31, 2012 and 2011 and January 1, 2011.
Derivatives held for trading are classified as current assets or liabilities. The total fair value of a hedgingderivative is classified as non-current asset or liability if the remaining maturity of the hedged item is more than12 months and as a current asset or liability if the maturity of the hedged item is less than 12 months.
a) Exchange rate derivatives
The positions of exchange rate derivatives held for trading purposes were as follows (millions of MexicanPesos):
At December 31, 2012
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
US$/MXN (Ps 325) Pesos / Dollar 13.01 Ps 6 Ps 6 Ps— Ps— Ps—
At December 31, 2011
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2012 2013 2014+
US$/MXN (CCS) (1) (Ps 76) Pesos / Dollar 13.98 (Ps 16) (Ps 16) Ps— Ps— Ps—US$/MXN (349) Pesos / Dollar 13.98 (7) (7) — — —Euro / US$ (288) Dollars / Euro 1.30 14 14 — — —Euro /MXN (82) Pesos / Euro 18.14 (4) (4) — — —
(Ps 13) (Ps 13) Ps— Ps— Ps—
At January 1, 2011
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2011 2012 2013+
US$/MXN (CCS) (1) (Ps 134) Pesos / Dollar 12.36 (Ps 16) (Ps 6) (Ps10) Ps— Ps—
1 Cross currency swaps
F-61
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
b) Interest rate swaps
The positions of derivative financial instruments of interest rate swaps were as follows (millions of Mexicanpesos):
At December 31, 2012
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
Hedging purposes:Over Libor 1 Ps2,862 % per year 0.39 (Ps200) (Ps 42) (Ps 56) (Ps102) Ps—Trading purposes:Over Libor 1,008 % per year 0.39 (36) (36) — — —
(Ps236) (Ps 78) (Ps 56) (Ps102) Ps—
At December 31, 2011
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2012 2013 2014+
Hedging purposes:Over Libor 1 Ps 3,075 % per year 0.73 (Ps176) (Ps41) (Ps50) (Ps85) Ps—Trading purposes:Over Libor 2,761 % per year 0.73 (210) (192) (23) 5 —
(Ps386) (Ps233) (Ps73) (Ps80) Ps—
At January 1, 2011
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2011 2012 2013+
Hedging purposes:Over Libor 1 Ps1,977 % per year 0.80 Ps 49 (Ps 2) (Ps 30) Ps 81 Ps—Trading purposes:Over Libor 5,565 % per year 0.80 (421) (242) (159) (20) —
(Ps 372) (Ps 244) (Ps 189) Ps 61 Ps—
1 Cash flows hedge
F-62
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
c) Energy
The positions of derivative financial instruments for natural gas, gasoline and ethylene were as follows(millions of Mexican Pesos):
At December 31, 2012
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
Hedging purposes:Ethylene (1) Ps 476 Cent Dollar/lb 55.1 Ps 40 Ps 42 (Ps 2) Ps— Ps —Natural gas (1) 606 Dollar / MBTU 3.60 30 30 — — —Ethane 1 55 Cent Dollar/ Gallon 23.9 (16) (16) — — —
Trading purposes:Ethylene 4 Cent Dollar/lb 55.1 — — — —Natural gas 28 Dollar / MBTU 3.60 (226) (226) — — —Gasoline 1,138 Dollar / Gallon 2.70 14 20 (6) — —
(Ps 158) (Ps 150) (Ps 8) Ps— Ps —
At December 31, 2011
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2012 2013 2014+
Hedging purposes:Ethylene (1) Ps 601 Cent Dollar/lb 51.7 (Ps 8) (Ps 8) Ps — Ps— Ps—Natural gas (1) 706 Dollar / MBTU 3.25 (30) (30) — — —
Trading purposes:Ethylene 51 Cent Dollar/lb 51.7 (4) (4) — — —Natural gas 67 Dollar / MBTU 3.25 (536) (279) (257) — —Gasoline 1,348 Dollar / Gallon 2.60 (129) (113) (16) — —
(Ps 707) (Ps 434) (Ps 273) Ps— Ps—
At January 1, 2011
Type of derivative, Valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2011 2012 2013+
Hedging purposes:Ethylene (1) Ps 473 Cent Dollar / lb 45.5 Ps 69 Ps 65 Ps 4 Ps — Ps—
Trading purposes:Natural gas 257 Dollar / MBTU 4.09 (728) — (397) (331) 283Gasoline 928 Dollar / Gallon 2.36 120 113 7 — —
(Ps 539) Ps178 (Ps 386) (Ps 331) Ps283
1 Cash flows hedge
F-63
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The principal obligations to which the subsidiaries are subject depend on the contracting mechanics and terms ofeach derivative financial instrument existing at December 31, 2012 and 2011 and January 1, 2011.
At December 31, 2012 and 2011 and January 1, 2011 the net fair value position liability of the aforementionedderivative financial instruments amounted to (Ps 388,431), (Ps 1,105,724) and (Ps 927,266), respectively, it isincluded in the consolidated statement of financial position as follows:
Fair value at:
December 31,2012
December 31,2011
January 1,2011
Current assets Ps 107,297 Ps 49,450 Ps 207,100Non-current assets — 26,630 104,720Current liabilities (287,510) (438,741) (88,418)Non-current liabilities (208,218) (743,063) (1,150,668)
Net position (Ps 388,431) (Ps1,105,724) (Ps 927,266)
At January 1, 2011, the collateral required in derivative financial instruments described above were Ps 283,406,and were represented by cash, which is included under the caption “Restricted cash” in current assets. AtDecember 31, 2012 and 2011 there are no collaterals required in derivative financial instruments.
Note 21 – Other current liabilities
At December 31,2012
At December 31,2011
At January 1,2011
Taxes Ps 401,406 Ps 689,666 Ps 485,888Accrued expenses 522,942 1,124,324 807,790Accrued interest payable 148,433 246,259 177,698Short-term employee benefits 295,497 207,442 95,071Employees’ profit sharing 32,710 108,867 36,794Deferred revenue — 80,980 —Advances from customers 6,943 3,734 928Other 54,330 117,600 91,960
Total other current liabilities Ps1,462,261 Ps2,578,872 Ps1,696,129
Note 22 – Stockholders’ equity
At December 31, 2012, the common stock is variable, with a fixed minimum of Ps 50 retired, represented by5,000 Series “A” shares, with par value of 10 Mexican Pesos, fully subscribed and paid. The variable capitalwithdrawal rights will be represented, if any, with registered shares without par value, Series “B”.
Net income for the year is subject to the decisions taken at the general stockholders’ meeting, to the Company’sby-laws and to the General Law of Mercantile Corporations. In accordance with the General Law of MercantileCorporations, the legal reserve must be increased annually by 5% of annual net profits until it reaches 20% of thefully paid capital stock amount.
F-64
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The movements of the other reserve items for 2012 and 2011 are as follows:
Effect of foreigncurrency
translation
Effect ofderivativefinancial
instrumentsdesignated as
cash flowhedges Total
At January 1, 2011 Ps — Ps 49,584 Ps 49,584
Fair value losses — (344,241) (344,241)Tax on fair value losses — 104,706 104,706Gains on foreign currency translation 1,716,956 — 1,716,956
At December 31, 2011 Ps 1,716,956 Ps (239,535) Ps 1,477,421
Fair value gains — 87,638 87,638Tax on fair value gains — (22,667) (22,667)Losses on foreign currency translation (1,406,694) — (1,406,694)
At December 31, 2012 (Ps 1,406,694) Ps 64,971 (Ps 1,341,723)
In Alpek’s General Ordinary Meeting held on January 10, 2012, the stockholders agreed to declare dividends incash for a total amount of Ps 139,973.
In Alpek’s General Ordinary Meeting held on February 20, 2012, the stockholders agreed to declare dividends incash for a total amount of Ps 641,470.
In Alpek’s General Ordinary Meeting held on August 30, 2012, the stockholders agreed to declare dividends incash for a total amount of Ps 910,810.
In Alpek’s General Ordinary Meeting held on September 26, 2011, the stockholders agreed to declare dividendsin cash for a total amount of Ps 263,667.
In Alpek’s General Ordinary Meeting held on December 6, 2011, the stockholders agreed to declare dividends incash for a total amount of Ps 131,319.
For the years ended December 31, 2012 and 2011, the contributed capital of the subsidiaries had the followingchanges:
a) Petrotemex:
The capital stock at January 1, 2011 was composed for ordinary nominative shares with par value of 1Mexican Peso each totally subscribed and paid in as follows: 255,301,000 of shares type: Series “A”representing the fixed portion of Ps 255,301 of the capital stock and 2,133,702,581 of shares type: Series“B” representing the variable portion of Ps 2,133,702 of the capital stock.
b) Indelpro:
At January 1, 2011, the capital stock is variable with a fixed minimum of Ps 200 and unlimited maximumrepresented by 368,765,200 common shares, nominative, without par value expression fully subscribed and
F-65
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
paid, and divided into Series “A” shares (51%) restricted to Mexican investors and Series “B” shares(49%) without ownership restrictions.
c) Polioles:
At January 1, 2011, the capital stock is variable is represented by 34,800,000 common shares nominative,without par value expression fully subscribed and paid, and divided into Series “B-1” composed of17,400,001 and Series “B-2” shares composed of 17,399,999 without ownership restrictions.
d) Unimor:
The capital stock fully subscribed and paid of Ps 714,602 is composed of common shares with a par value often cents of Mexican Pesos and is divided into 500,000 shares series “A” representing the fixed part andSeries “B” shares composed of 7,145,515,147 that represents the variable portion.
In General Ordinary Meetings held on June 15, 2009 the stockholders of Unimor agreed to increase thecapital stock by Ps 102,282, through a contribution in cash, therefore, at January 1, 2011, the capital stock isvariable with a fixed minimum of Ps 50 and unlimited maximum.
e) Copeq:
At January 1, 2011, the capital stock issued and authorized was 1,000 shares at US$1 par value per share.
At December 31, 2012 and 2011, the stockholders equity has the following changes:
a) Petrotemex:
In Petrotemex’s General Ordinary Meeting held on February 20, 2012, the stockholders declared and paiddividends in cash for a total amount of Ps 24,596 to the non-controlling portion.
In Petrotemex’s General Ordinary Meeting held on September 5, 2012, the stockholders declared and paiddividends in cash for a total amount of Ps 25,290 to the non-controlling portion.
In Petrotemex’s General Ordinary Meeting held on April 13, 2011, the stockholders declared and paiddividends in cash for a total amount of Ps 571,381.
b) Indelpro:
In Indelpro’s General Ordinary Meeting held on January 6, 2012, the stockholders declared and paiddividends in cash for a total amount of Ps 134,483 to the non-controlling portion.
In Indelpro’s General Ordinary Meeting held on August 3, 2012, the stockholders declared and paiddividends in cash for a total amount of Ps 128,094 to the non-controlling portion.
In Indelpro’s General Ordinary Meeting held on August 8, 2011, the stockholders declared and paiddividends in cash for a total amount of Ps 120,532 to the non-controlling portion.
In Indelpro’s General Ordinary Meeting held on April 04, 2011, the stockholders declared and paiddividends in cash for a total amount of Ps 237,066.
In Indelpro’s General Ordinary Meeting held on January 7, 2011, the stockholders declared and paiddividends in cash for a total amount of Ps 122,369.
F-66
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
c) Polioles:
In Polioles’ General Ordinary Meeting held on February 20, 2012, the stockholders declared and paiddividends in cash for a total amount of Ps 128,294 to the non-controlling portion.
In Polioles’ General Ordinary Meeting held on August 30, 2012, the stockholders declared and paiddividends in cash for a total amount of Ps 164,809 to the non-controlling portion.
In Polioles’ General Ordinary Meeting held on April 26, 2011, the stockholders declared and paid dividendsin cash for a total amount of Ps 232,504.
d) Unimor:
In Unimor’s General Ordinary Meeting held on February 20, 2012, the stockholders declared and paiddividends in cash for a total amount of Ps 1 to the non-controlling portion.
In Unimor’s General Ordinary Meeting held on July 31, 2012, the stockholders declared and paid dividendsin cash for a total amount of Ps 1 to the non-controlling portion.
In Unimor’s General Ordinary Meeting held on September 23, 2011, the stockholders declared and paiddividends in cash for a total amount of Ps 1 to the non-controlling portion.
In Unimor’s General Ordinary Meeting held on November 23, 2011, the stockholders declared and paiddividends in cash for a total amount of Ps 1 to the non-controlling portion.
In accordance with the General Law of Mercantile Corporations, the income for the period is subject to thelegal provision, requiring that at least 5% of the income for each period to be set aside to increase the legalreserve until it reaches an amount equivalent to 20% of the capital stock paid. The legal reserve is presentedwithin retained earnings. As the legal reserve reached 20% of the capital stock, no additional increases wererequired in December 31, 2012 and 2011 and January 1, 2011.
Dividends paid are not subject to income tax if they are paid from the after-tax earnings account (CUFIN forits Spanish acronym). Dividends paid in excess of this account are subject to a tax equivalent to 42.86% ifpaid in 2013. The tax is payable by the Company and may be credited against the income tax payable by theCompany in the present year or in the following two immediate years or, if applicable, against the flat tax ofthe year. Dividends paid from retained earnings previously taxed are not subject to any tax withholding orpayment.
In the case of capital stock reductions and in accordance with the Mexican Income Tax Law, any excess ofstockholders’ equity over capital contributions, receives the same tax treatment as dividends.
F-67
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 23 – Expenses by nature
Cost of sales and expenses classified by nature are as follows:
December 31,
2012 2011
Raw material and other (Ps 73,584,231) (Ps 69,203,340)Employee benefits expenses (Note 26) (2,860,519) (2,461,808)Human resources expense (21,034) (50,031)Maintenance (921,734) (974,954)Depreciation and amortization (2,129,374) (1,818,776)Advertising expenses (2,145) (3,417)Freight expenses (3,400,967) (2,518,165)Energy and combustible consumption (gas, electricity, etc.) (2,861,575) (2,777,807)Traveling expenses (106,059) (87,756)Operating lease expenses (263,785) (206,678)Technical assistance, professional fees and administrative services (920,204) (970,714)Other (1,926,252) (1,679,067)
Total (Ps 88,997,879) (Ps 82,752,513)
Note 24 – Other income (expenses), net
Other income (expenses) for the years ended December 31, are comprised as follows:
2012 2011
Gain on sale of waste Ps 1,136 Ps 7,424Reorganization expenses (*) — (313,900)Expenses related to potential acquisition projects — (161,873)Gain on sale of property, plant and equipment 375 3,034Impairment of property, plant and equipment (4,798) (137,897)Valuation of derivative financial instruments 152,275 —Indemnity insurance recovery 6,009 8,888taxes and surcharges 9,204 6,030Gain on sale of investments available for sale (**) — 88,531Other income, net 146,635 174,281
Total Ps310,836 (Ps 325,482)
(*) The expenses refer to an organizational restructure occurred during 2011 in which part of the personnelwere dismissed.
(**) This income mainly corresponds to the gain from the sale of shares of Enka de Colombia, S.A. carried outduring 2011.
F-68
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 25 – Finance income (expenses)
Finance income (expenses) for the years ended on December 31, are as follows:
2012 2011
Finance income:Interest income in short-term bank deposits Ps 133,569 Ps 21,883Interest income in loans to related parties 49,151 56,808Other 172,845 141,984Exchange rate gains 141,224 —Gains for changes in the fair value of financial assets at
fair value throughprofit or loss 68,927 3,833
Total finance income Ps 565,716 Ps 224,508
2012 2011
Finance expenses:Interest expense in bank borrowings (Ps 751,306) (Ps 539,905)Interest expense with related parties (56,362) (49,246)Interest expense in non banking borrowings (619,700) (347,852)Finance cost on employee benefits (140,868) (122,722)Other (328,743) (263,418)Exchange rate losses — (91,588)
Total finance expenses (1,896,979) (1,414,731)
Finance expenses, net (Ps 1,331,263) (Ps 1,190,223)
Note 26 – Employee benefits expenses
Employee benefits expenses for the years ended on December 31, are as follows:
2012 2011
Salaries, wages and benefits (Ps2,091,768) (Ps1,852,883)Social security contributions (187,301) (168,328)Employee benefits (Note 18) (18,461) 2,093Other contributions (562,989) (442,690)
Total (Ps2,860,519) (Ps2,461,808)
Note 27 – Income tax
Income tax for the years ended on December 31, are as follows:
2012 2011
Total current income tax (Ps1,458,257) (Ps1,908,211)Adjustment to the provision of income tax from prior years 2,982 371Total deferred tax (268,018) (39,785)
Income tax expense (Ps1,723,293) (Ps1,947,625)
F-69
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The reconciliation between statutory and effective income tax rate for the years ended on December 31 is asfollows:
2012 2011
Income before income tax Ps 6,106,095 Ps 6,375,378Statutory tax rate 30% 30%
Income tax at statutory rate (1,831,829) (1,912,614)Add (deduct) effect of income tax on:Annual inflationary adjustment (71,823) (139,365)Non-deductible expenses (32,673) (35,266)Non-taxable income 30,392 —Tax losses for which no deferred income tax asset was
recognizedTranslation effect from the functional 65,446 27,420currency to the reporting currency (171,247) 214,838Effect of different tax rates in countries other than
Mexico (85,088) (96,120)Adjustment to the income tax liability from prior years 8,880 371Effect for reactivation of tax losses 376,366 —Share of losses of associates (11,717) (6,889)
Total income tax (Ps 1,723,293) (Ps 1,947,625)
Effective income tax rate 28% 31%
On December 9, 2012, the Income Law in Mexico was published for the year 2013, in which the income tax ratein Mexico (ISR) applicable for 2013 will be 30%, 29% for 2014 and from 2015 will be 28%.
At the end of 2012, the Senate of the United States of America approved and passed by the House ofRepresentatives changes in the US Tax Act of that country, and were signed by the President at the beginning ofJanuary, 2013, these changes are considered as substantially enacted. As of December 31, 2012, this does notcause any impact in the current or deferred income tax determined by the Company.
The charge (credit) of the tax related to the components of other comprehensive income for the years endedDecember 31, are:
2012 2011
Before TaxesTax charge(in favor) After tax Before taxes
Tax charge(in favor) After tax
Foreign currency translationeffect (Ps 1,406,694) Ps — (Ps 1,406,694) Ps 1,716,956 Ps — Ps 1,716,956
Actuarial losses (88,386) 26,233 (62,153) (393,583) 151,455 (242,128)Effect of derivative financial
Instruments designated asCash flow hedging 87,638 (22,667) 64,971 (344,241) 104,706 (239,535)
Other comprehensive income (Ps 1,407,442) Ps 3,566 (Ps 1,403,876) Ps 979,132 Ps 256,161 Ps 1,235,293
Deferred tax Ps 3,566 Ps 256,161
F-70
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
Note 28 – Financial information by segments
Segment information is presented in a manner consistent with the internal reporting provided to the chiefoperating officer, which has been identified as the Company’s Chief Executive Officer, who is the highestauthority in the operational decision making, resource allocation and performance assessment of the operatingsegments.
An operating segment is defined as a component of an entity about which separate financial information isregularly being evaluated.
Alpek controls and evaluates its continuing operations through two business segments based on products:Polyester Chain Business and Plastics & Chemicals Business. These segments are managed independentlybecause their products mix and the markets they attend are different. Their activities are carried out throughvarious subsidiaries.
Transactions between operating segments are carried out at market value and the accounting policies whichprepares segment information are consistent with those described in Note 3.
The Company evaluates the performance of each of the operating segments based on income before financialincome, taxes, depreciation and amortization (EBITDA), this indicator represents a good measure to evaluateoperating performance and ability to meet obligations principal and interest in respect of the indebtedness, andthe ability to fund capital expenditures and working capital requirements. Nevertheless, EBITDA is not ameasure of financial performance under IFRS and should not be considered as an alternative to net income as ameasure of operating performance or cash flows as a measure of liquidity.
The Company has defined adjusted EBITDA as consolidated and combined profit (loss) before tax after addingback or subtracting, as the case may be: (1) depreciation, amortization and impairment of non-current assets;(2) the financial result, net (which includes interest expense, interest income, foreign exchange gains (losses), netand gain (loss) of derivative financial instruments and (3) share of loss of associates.
Below is the consolidated financial information of the operating segments to report (million of Mexican Pesos):
For the year ended December 31, 2012:
PolyesterPlastics andChemicals
Segmenttotal
Income statement:Sales by segment Ps 75,249 Ps 21,068 Ps 96,317Inter-segment sales (49) (105) (154)
Sales to external clients Ps 75,200 Ps 20,963 Ps 96,163
Operating income 5,319 2,161 7,480Depreciation, amortization and impairment of fixed assets 1,689 445 2,134
Adjusted EBITDA Ps 7,008 Ps 2,606 Ps 9,614
Capital expenditures (Capex) Ps 1,400 Ps 122 Ps 1,522
F-71
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
For the year ended December 31, 2011:
PolyesterPlastics andChemicals
Segmenttotal
Income statementSales by segment Ps 70,050 Ps 20,781 Ps 90,831Inter-segment sales (52) (112) (164)
Sales to external clients Ps 69,998 Ps 20,669 Ps 90,667
Operating income 5,195 2,394 7,589Depreciation, amortization and impairment of fixed assets 1,537 419 1,956
Adjusted EBITDA Ps 6,732 Ps 2,813 Ps 9,545
Capital expenditures (Capex) Ps 471 Ps 117 Ps 588
The reconciliation between “Adjusted EBITDA” and profit before tax for the years ended December 31 is asfollows:
2012 2011
Adjusted EBITDA Ps 9,610 Ps 9,545Depreciation and amortization (2,134) (1,956)
Operating profit 7,476 7,589Financial result (1,331) (1,191)Share of loss of associates (39) (23)
Profit before tax Ps 6,106 Ps 6,375
The following table shows the net sales breakdown by country of origin for the years ended December 31, (inmillions of Mexican Pesos):
2012 2011
Mexico Ps53,456 Ps53,142United States 38,609 33,363Argentina 4,098 4,162
Net sales Ps96,163 Ps90,667
The Company’s main customer generated revenues of Ps 10,121 and Ps 13,833 for the years ended December 31,2012 and 2011, respectively; these revenues were generated in the reporting segment Polyester which represents11% and 15% of consolidated revenues to external customers.
F-72
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
The following tables show the intangible assets and property plant and equipment by country of origin (inmillions of Mexican Pesos):
At December 31,2012
At December 31,2011
At January 1,2011
Mexico Ps 1,552 Ps 1,778 Ps 180United States 690 768 3Argentina 1 3 5
Total intangible assets Ps 2,243 Ps 2,549 Ps 188
At December 31,2012
At December 31,2011
At January 1,2011
Mexico Ps 18,439 Ps 19,397 Ps 17,867United States 7,985 9,161 3,944Argentina 271 321 314
Total Property, plant and equipment Ps 26,695 Ps 28,879 Ps 22,125
Note 29 – Commitments and contingencies
At December 31, 2012 and 2011 and January 1, 2011, the subsidiaries had entered into various agreements withsuppliers and customers for purchases of raw material used for production and the sale of finished goods,respectively. These agreements, with a term between one and five years, generally contain price adjustmentclauses.
Some of the subsidiaries use hazardous materials to manufacture polyester staple fiber, polyethyleneterephthalate (“PET”) resin and terephthalic acid and generates and disposes of wastes, such as finishes andglycol. These and other activities of the subsidiaries are subject to various federal, state and local laws andregulations governing the generation, handling, storage, treatment and disposal of hazardous substances andwastes. Under such laws, an owner or lessee of real estate may be liable for, among other things, (i) the costs ofremoval or remediation of certain hazardous or toxic substances located on, in, or emanating from, such property,as well as the related cost of investigation and property damage and substantial penalties for violations of suchlaw, and (ii) environmental contamination of facilities where its waste is or has been disposed of. Such laws oftenimpose such liability without regard to whether the owner or lessee knew of, or was responsible for, the presenceof such hazardous or toxic substances.
Although the subsidiaries believe that there are no existing material liabilities relating to noncompliance withenvironmental laws and regulations, there can be no assurance that there are no undiscovered potential liabilitiesrelating to noncompliance with environmental laws and regulations, that historic or current operations have notresulted in undiscovered conditions that will require investigation and/or remediation under environmental laws,or that future uses or conditions will not result in the imposition of environmental liability upon the subsidiariesor expose it to third-party actions, such as tort suits. Furthermore, there can be no assurance that changes inenvironmental regulations in the future will not require the subsidiaries to make significant capital expendituresto change methods of disposal of hazardous materials or otherwise alter aspects of its operations.
DAK Americas, L. L. C. provided a corporate guarantee to Clear Path Recycling, L. L. C. in favor of ShawIndustries Group, Inc. At December 31, 2012 and 2011, this guarantee amounts to US$5,928 and US$3,400,respectively.
F-73
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
In September, 2007, the subsidiary Indelpro renewed the agreement it had entered into with “PEMEXRefinación” covering the supply of polypropylene at chemical and refining ending in 2018. Purchases for theyear ended on December 31, 2012 and 2011 and January 1, 2011 under this agreement amounted to Ps 4,532,035,Ps 4,352,839 and Ps 3,989,666, respectively and there are purchase commitments of approximately Ps 5,015,005for the year 2013.
In connection with the construction of its second production line of polypropylene, in 2008 the subsidiaryIndelpro entered into an agreement with Basell Poliolefine Italia S. r. L., (subsidiary of the other partner inIndelpro S. A. de C. V.) related to engineering licenses, use of patents and technical information for theproduction of polypropylene by which Indelpro paid a down payment of US$9.5 million to use such licenses,patents and technical information to build the production line. This contract provides additional annual paymentsof royalties from 2013, which are determined on the basis of 1.22% of net sales value. As of December 31, 2012there is no obligation for paying these royalties, the obligation will be generated when the sales of 2013 occur.The duration of royalty payments will be until Indelpro should have completed a cumulative US$11 million ascompensation. Indelpro has the option to pay this obligation in advance.
On February 1, 2005, the subsidiary Polioles and BASF Corporation (the other partner of the CombinedAffiliate) signed a license contract related to the use of patents and technical information for the production ofpolystyrene pearl in the Altamira plant, based in Tamaulipas. Under the mentioned contract, Polioles pays BASFCorporation the difference between an annual minimum of US$ 9 million and the gain before financing and taxesplus depreciation and amortization generated by the line of polystyrene pearl. The term of the present contractwill be until Polioles had covered in an accrual basis US$ 15 million as consideration. For the year ended atDecember 31, 2012 and 2011 the threshold was not reached and therefore there is no payment obligationgenerated.
The Company leases equipment under non-cancelable operating leases, primarily related to transportationequipment for PTA and PET businesses, which normally include renewal options. These options are generallyrenewed under the same conditions of the existing leases.
Future payments under these operating leases with non-cancelable terms longer than one year are summarizedbelow:
2013 US$ 12,4142014 9,2092015 6,8672016 6,2042017 4,200Subsequent years 12,099
Note 30 – First time adoption of International Financial Reporting Standards
Until 2011, the Company issued its consolidated and combined financial statements in accordance with MexicanFinancial Reporting Standards (MFRS). Since 2012, Alpek issued its consolidated and combined financialstatements in accordance with IFRS issued by the International Accounting Standards Board (IASB).
According to IFRS 1 “First-time Adoption of IFRS” the Company considered January 1, 2011 as its transitiondate and January 1, 2012 as its date of adoption. The amounts included in the consolidated and combinedfinancial statements for 2011 have been reconciled to be presented under the same standards and criteria in 2012.
F-74
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
For the transition, the Company identified and quantified the differences between MFRS and IFRS for purposesof its opening balance sheet at January 1, 2011 and its conversion to IFRS on its financial information systems.
In preparing its opening balance sheet, based on the IFRS 1, the Company has adjusted amounts reportedpreviously in financial statements prepared under MFRS. An explanation of how the transition from MFRS toIFRS has affected the Company’s financial position, its financial performance and cash flows shown in thefollowing tables and notes:
1. Decisions on Adoption
1.1. IFRS optional exemptions
1.1.1. Exemption of fair value as assigned cost
IFRS 1 provides the option to measure the property, plant and equipment at fair value as well as certainintangible assets at the date of transition to IFRS and to use that fair value as its assigned cost at thatdate or to use an updated carrying amount determined under the previous GAAP (Generally AcceptedAccounting Principles), if such updated carrying amount is comparable to: a) fair value or b) cost ordepreciated cost in accordance with IFRS, adjusted to recognize changes in an inflation rate.
The Company chose, at its transition date, to reevaluate their land and property, plant and equipment atfair value. For smaller equipment, the Company chose to use their values recognized under MFRS asassigned cost under IFRS. The net effect on valuation is recognized against the opening balance ofretained earnings under IFRS at the transition date. Thereafter, the Company uses the cost method forproperty, plant and equipment in accordance with IFRS.
1.1.2. Exemption for business combinations
IFRS 1 allows applying IFRS 3, “Business Combinations” (“IFRS 3”), prospectively as of thetransition date or a specific date before the transition date. An entity that chooses to restore theirpurchases from a specific date before the transition date must include all acquisitions occurring in thatperiod. This option allows avoiding retrospective application that would reset all businesscombinations that occurred before the transition date. The Company chose to prospectively apply IFRS3 to business combinations occurring on or after the transition date. The business combinations beforethe transition date were not modified.
1.1.3. Exemption to remove a cumulative foreign currency translation
IFRS 1 allows canceling cumulative gains and losses in the foreign currency translation at thetransition date. This exemption allows not calculating the cumulative translation effect in accordancewith IAS 21, “The effects of changes in foreign exchange rates” (“IAS 21”), as of the date on which thesubsidiary or investment accounted through the equity method was established or acquired. TheCompany chose to zero all cumulative gains and losses from translation against retained earnings underIFRS at the transition date.
1.1.4. Exemption for labor obligations
The IFRS 1 allows not applying IAS 19, “Employee Benefits” (“IAS 19”) retrospectively, for therecognition of actuarial gains and losses. In line with this exemption, the Company chose to recognizeall cumulative actuarial gains and losses that existed at the transition date against retained earningsunder IFRS.
F-75
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
1.1.5. Exemption to capitalize borrowing costs
IFRS 1 allows entities to apply the transitional guidelines included in the revised IAS 23,“Capitalization of borrowing costs” (“IAS 23”), which interpret that the effective date of the rule isJanuary 1, 2009 or the transition date to IFRS, whichever comes later.
For any cost by unfunded loan at the transition date, the Company chose to apply this exemption andbegin to capitalize borrowing costs from the transition date prospectively.
1.2. Mandatory exceptions of IFRS
1.2.1. Exception of hedging accounting
Hedging accounting can only be applied prospectively from the transition date to transactions that meetthe criteria of IAS 39 “Financial Instruments: Recognition and Measurement “, at that time. Hedgingaccounting can only be applied prospectively from the transition date and is not allowed to createretrospectively documentation supporting a hedging relationship. All hedging transactions contractedby the Company met the criteria for hedging accounting as of January 1, 2011 and, accordingly, arereflected as hedging in the statements of financial position of the Company under IFRS.
1.2.2. Exception for accounting estimates
Estimates under IFRS at the transition date are consistent with those made under MFRS around thesame time .
Additionally, the Company prospectively applied the following mandatory exceptions from January 1, 2011:derecognition (disposal) of financial assets and financial liabilities and non-controlling portion, withoutsignificant impact.
2. Reconciliations from MFRS to IFRS
IFRS 1 require a reconciliation of equity, comprehensive income statement and cash flows for the prior periods.The first time adoption of the Company had no impact in the total operating, investing and financing operation.The following tables represent the reconciliations of MFRS to IFRS for the respective periods in equity,statement of comprehensive income and consolidated and combined.
A) Reconciliation of consolidated and combined Balance Sheets.
B) Reconciliation of consolidated and combined Statements of Income.
C) Reconciliation of consolidated and combined Statements of Comprehensive Income.
D) Description of the effects from the transition to IFRS.
E) Explanation of significant effects of transition to IFRS in the consolidated statement of cash flows for theyear ended on December.
F-76
Alp
ek,S
.A.B
.de
C.V
.and
subs
idia
ries
Not
esto
the
Con
solid
ated
and
Com
bine
dFi
nanc
ialS
tate
men
tsA
sof
Dec
embe
r31
,201
2an
d20
11an
dJa
nuar
y1,
2011
A)
Rec
onci
liati
onof
cons
olid
ated
and
com
bine
dB
alan
ceSh
eets
:
Dec
embe
r31
,201
1Ja
nuar
y1,
2011
Not
eM
FRS
Adj
.IF
RS
MFR
SA
dj.
IFR
S
Ass
ets
Cur
rent
asse
tsC
ash
and
cash
equi
vale
nts
Ps3,
584,
287
Ps—
Ps3,
584,
287
Ps3,
231,
935
Ps—
Ps3,
231,
935
Res
tric
ted
cash
and
cash
equi
vale
nts
1,92
5—
1,92
528
3,64
7—
283,
647
Tra
dean
dot
her
rece
ivab
les,
net
g)13
,347
,056
(65,
895)
13,2
81,1
619,
328,
612
(65,
895)
9,26
2,71
7In
vent
orie
sb)
12,3
24,9
68(4
,805
)12
,320
,163
6,89
5,56
5(3
14,8
56)
6,58
0,70
9D
eriv
ativ
efi
nanc
iali
nstr
umen
ts49
,450
—49
,450
207,
100
—20
7,10
0O
ther
curr
enta
sset
sc)
231,
295
—23
1,29
512
0,28
466
,310
186,
594
Tot
alcu
rren
tass
ets
29,5
38,9
81(7
0,70
0)29
,468
,281
20,0
67,1
43(3
14,4
41)
19,7
52,7
02
Non
-cur
rent
:D
eriv
ativ
efi
nanc
iali
nstr
umen
ts26
,630
—26
,630
104,
720
—10
4,72
0Pr
oper
ty,p
lant
and
equi
pmen
t,ne
tb)
23,1
73,0
725,
706,
010
28,8
79,0
8216
,547
,186
5,57
7,97
222
,125
,158
Goo
dwill
and
inta
ngib
leas
sets
,net
a)c)
g)2,
762,
591
(213
,171
)2,
549,
420
355,
349
(166
,994
)18
8,35
5D
efer
red
inco
me
tax
asse
tse)
1,18
1,50
4(2
41,5
21)
939,
983
966,
730
(260
,591
)70
6,13
9O
ther
non-
curr
enta
sset
sg)
278,
206
11,3
5528
9,56
113
7,62
6—
137,
626
Tot
alno
n-cu
rren
tass
ets
27,4
22,0
035,
262,
673
32,6
84,6
7618
,111
,611
5,15
0,38
723
,261
,998
Tot
alA
sset
sPs
56,9
60,9
84Ps
5,19
1,97
3Ps
62,1
52,9
57Ps
38,1
78,7
54Ps
4,83
5,94
6Ps
43,0
14,7
00
F-77
Alp
ek,S
.A.B
.de
C.V
.and
subs
idia
ries
Not
esto
the
Con
solid
ated
and
Com
bine
dFi
nanc
ialS
tate
men
tsA
sof
Dec
embe
r31
,201
2an
d20
11an
dJa
nuar
y1,
2011
Dec
embe
r31
,201
1Ja
nuar
y1,
2011
Not
eM
FRS
Adj
.IF
RS
MFR
SA
dj.
IFR
S
Lia
bilit
ies
and
equi
tyL
iabi
litie
s:C
urre
ntlia
bilit
ies:
Cur
rent
debt
Ps2,
141,
974
Ps—
Ps2,
141,
974
Ps1,
428,
999
Ps—
Ps1,
428,
999
Tra
dean
dot
her
paya
bles
g)13
,215
,063
3,30
613
,218
,369
7,69
6,00
23,
306
7,69
9,30
8D
eriv
ativ
efi
nanc
iali
nstr
umen
ts43
8,74
1—
438,
741
88,4
18—
88,4
18In
com
eta
xpa
yabl
e30
1,29
3—
301,
293
279,
849
—27
9,84
9O
ther
curr
entl
iabi
litie
sh)
2,55
8,45
020
,422
2,57
8,87
21,
717,
916
(21,
787)
1,69
6,12
9
Tot
alcu
rren
tlia
bilit
ies
18,6
55,5
2123
,728
18,6
79,2
4911
,211
,184
(18,
481)
11,1
92,7
03
Non
-cur
rent
liabi
litie
s:N
on-c
urre
ntde
btc)
17,7
98,8
11(2
54,0
25)
17,5
44,7
867,
851,
761
(64,
877)
7,78
6,88
4D
eriv
ativ
efi
nanc
iali
nstr
umen
ts74
3,06
3—
743,
063
1,15
0,66
8—
1,15
0,66
8D
efer
red
inco
me
tax
liabi
litie
se)
4,00
0,06
41,
125,
609
5,12
5,67
33,
507,
086
1,13
1,30
24,
638,
388
Em
ploy
eebe
nefi
tsd)
345,
983
915,
079
1,26
1,06
236
,469
535,
963
572,
432
Tot
alno
n-cu
rren
tlia
bilit
ies
22,8
87,9
211,
786,
663
24,6
74,5
8412
,545
,984
1,60
2,38
814
,148
,372
Tot
alL
iabi
litie
s41
,543
,442
1,81
0,39
143
,353
,833
23,7
57,1
681,
583,
907
25,3
41,0
75
Equ
ity:
Con
trol
ling
port
ion:
Com
mon
stoc
ka)
4,96
8,18
7—
4,96
8,18
74,
467,
467
(1,5
50,2
63)
2,91
7,20
4R
etai
ned
earn
ings
a)b)
d)e)
h)6,
264,
594
2,87
4,56
39,
139,
157
7,05
7,42
64,
560,
021
11,6
17,4
47O
ther
rese
rves
j)1,
176,
887
(29,
683)
1,14
7,20
425
0,18
5(2
00,6
01)
49,5
84
Stoc
khol
ders
’eq
uity
cont
rolli
ngpo
rtio
n12
,409
,668
2,84
4,88
015
,254
,548
11,7
75,0
782,
809,
157
14,5
84,2
35N
on-
cont
rolli
ngpo
rtio
n3,
007,
874
536,
702
3,54
4,57
62,
646,
508
442,
882
3,08
9,39
0
Tot
alE
quity
15,4
17,5
423,
381,
582
18,7
99,1
2414
,421
,586
3,25
2,03
917
,673
,625
Tot
alL
iabi
litie
san
dE
quity
Ps56
,960
,984
Ps5,
191,
973
Ps62
,152
,957
Ps38
,178
,754
Ps4,
835,
946
Ps43
,014
,700
F-78
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
B) Reconciliation of consolidated and combined Statements of Income:
For the year ended December 31, 2011
Note MFRS Adj. IFRS
Net sales Ps 90,666,561 Ps — Ps 90,666,561Cost of sales b) h) (80,529,352) (123,817) (80,653,169)
Gross profit 10,137,209 (123,817) 10,013,392Selling expenses d) (961,285) (11,466) (972,751)Administrative expenses d) (1,131,129) 4,536 (1,126,593)Other expenses, net g) (553,119) 227,637 (325,482)
Operating Profit 7,491,676 96,890 7,588,566
Financial income d) i) 86,611 137,897 224,508Financial expenses i) (1,185,998) (137,145) (1,323,143)Foreign exchange loss b) (106,524) 14,936 (91,588)
Comprehensive financing expense, net (1,205,911) 15,688 (1,190,223)Share of losses of associates (22,965) — (22,965)Profit before income tax 6,262,800 112,578 6,375,378Income tax e) (1,972,651) 25,026 (1,947,625)
Profit of the year Ps 4,290,149 Ps 137,604 Ps 4,427,753
Attributable to:Controlling portion Ps 3,791,728 Ps 107,614 Ps 3,899,342
Non- controlling portion Ps 498,421 Ps 29,990 Ps 528,411
C) Reconciliation of consolidated and combined Statements of Comprehensive Income:
For the year ended December 31, 2011
Note MFRS Adj. IFRS
Profit for period Ps4,290,149 Ps 137,604 Ps4,427,753
Other comprehensive income, net of taxesEffect of derivative financial instruments designated as cash
flows hedging (264,596) 25,061 (239,535)Actuarial losses of labor obligations d) — (242,128) (242,128)Translation effect of foreign entities j) 1,507,950 209,006 1,716,956
Total items of the comprehensive income for the year 1,243,354 (8,061) 1,235,293
Total comprehensive income for the year Ps5,533,503 Ps 129,543 Ps5,663,046
Attributable to:Controlling portion Ps4,718,430 Ps 35,724 Ps4,754,154Non-controlling portion 815,073 93,819 908,892
Total comprehensive income for the year Ps5,533,503 Ps 129,543 Ps5,663,046
F-79
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
D) Description of the effects from the transition to IFRS
a) Recognition of effects of inflation
In accordance with IAS 29, “Financial reporting in hyper-inflationary economies”, the effects of inflation inthe financial information must be recognized for hyper-inflationary economies, when the accumulatedinflation rate for the last three years is approaching, or exceeds 100%, whereas under MFRS, such thresholdis met at 26% during the same period. Since the Company and its main subsidiaries are located in non-hyper-inflation economies such as United States of America and Mexico, the effects of inflation recognizedunder MFRS until 2007 were cancelled for the non-hyper-inflationary periods, except for “Property, plantand equipment (due to the deemed cost exception of IFRS 1) and for “Goodwill” (due to the businesscombinations exception).
b) Property, plant and equipment, net
The transition to IFRS adjustment made to property, plant and equipment has been the most important to theCompany. At the transition date, the Company chose to revalue the most important items of property, plantand equipment (land, building and machinery) at fair value by an independent appraiser, and use therevalued amount as deemed cost at the transition date according to the options identified under IFRS 1,“First-time Adoption of IFRS”; for the rest of the assets that are part of the property, plant and equipment,the Company considered the values recorded in books as deemed cost at the transition date.
The previous carrying amounts and fair values of the assets revalued at the transition date are as follows:
Carrying value Adjustment Fair Value
Land Ps 777,832 Ps2,004,063 Ps 2,781,895Buildings 1,804,510 468,079 2,272,589Machinery 13,964,845 3,105,829 17,070,674
Total Ps16,547,187 Ps5,577,971 Ps22,125,158
At January 1, 2011, some components of machinery and equipment were classified as inventories underMFRS. These components met the definition of property, plant and equipment in accordance with IAS 16under IFRS, so that in its opening balance sheet, the Company reclassified them inventory under MFRS toproperty, plant and equipment under IFRS of Ps 314,856 to his historical cost.
c) Intangible assets, net
At the transition date, the cumulative update of intangible assets (including goodwill) that was generatedafter December 31, 1997 for companies in Mexico was eliminated. The debt issuance costs that meet thecapitalization criteria must be submitted as part of net debt balance. The amortization and recognition ofdebt issuance costs will be based on the effective interest method. At the transition date, the Companyreclassified the debt issuance costs recorded as intangible assets to non-current debt in the calculation ofamortized cost.
F-80
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
d) Employee benefits
The MFRS D-3 “Employee’s Benefits” all termination benefits, including those that are paid in the event ofinvoluntary termination, are considered in the actuarial calculation to estimate the liability for laborobligations. For IAS 19 “Employees’ Benefits”, an entity recognizes termination benefits as a liability aslong as the entity is required to:
(a) terminate the contract of an employee before the retirement date; or
(b) establish termination benefits as a result of offers made to encourage voluntary waiver. Therefore, theCompany canceled the provision recorded at the transition date.
Under MFRS, the Company had a liability of transition, which is amortized over a maximum period of 5years. Under IFRS, these liabilities had been recognized since the creation of plans and consequently therewould be no transition liability and their respective amortization.
In accordance with IFRS 1, the Company recognized actuarial gains and losses accumulated in retainedearnings at the transition date.
Additionally, in accordance with IAS 19 “Employee Benefits”, the employees’ statutory profit sharing(ESPS) is considered as a benefit given to employees who paid based on the service provided by theemployee. No deferred ESPS is recognized based on the asset and liability method given that this methodonly applies to taxes on profits, so Alpek, as of the transition date, eliminated the deferred ESPS balancefrom the financial statements.
e) Deferred taxes
Derived from the exemptions applied as well as the differences described here, the accounting value ofcertain assets and liabilities were modified, so deferred taxes were recalculated using the guidelines of IAS12 “Income Taxes”.
f) Other income (expense), net
Under IFRS, “other expenses/income” should be presented as part of operating income previously presentedunder MFRS after operating income, because they are considered unusual or infrequent items. Alpekreclassified the other expenses/income to be part of operating income.
g) IFRS reclassifications
Arising from the adoption of IFRS, the Company made certain reclassification to adjust the figures to thenew presentation rules.
h) Sale and leaseback
Under MFRS, the gain from the sale of this type of lease is amortized over the life of the operating lease.Arising from the adoption of IFRS, the gain from the sale is immediately recognized in income.
F-81
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Consolidated and Combined Financial StatementsAs of December 31, 2012 and 2011 and January 1, 2011
i) Effective interest rate
In accordance with IFRS, financial liabilities are initially recognized at fair value and subsequentlymeasured at amortized cost, using the effective interest rate method, which is based on the discount rate thatequates to the cash flows estimated to pay over the expected life of the debt. The Company recognizes thevalue of its debt at amortized cost.
j) Cumulative translation adjustment
According to IFRS 1 “First-time Adoption of International Financial Reporting Standards”, Alpek adoptedthe exemption applying the cumulative translation effect to retained earnings on the transition date andrestart the calculation.
E) Description of significant effects from the transition to IFRS in the consolidated cash flow statementfor the year ended December 31, 2011
The Company uses the indirect method to present the cash flow statement, both under Mexican FRS andIFRS, which do not differ significantly in their presentation.
Note 31 – Share-based payments
The Company has a compensation scheme referenced to the value of the shares of its parent company for seniorexecutives of Alpek and its subsidiaries. According to the terms of the plan, eligible executives will receive acash payment conditional on the achievement of certain quantitative and qualitative metrics based on thefollowing financial measures:
• Improvement in the share price
• Improvement in the net profit
• Permanence of the executives in the Company
The program consists of determining a number of shares to which the executives shall have rights, the bonus willbe paid in cash over the next five years, i.e. 20% each year, at the average price of the share at the end of eachyear. The average price of the share in 2012, 2011 and 2010 was Ps 28.23 pesos, Ps 15.77 pesos and Ps 11.67pesos, respectively.
Note 32 – Subsequent Events
At the Annual General Meeting held on Indelpro on January 6, 2013, the stockholders declared and paiddividends in cash for a total amount of Ps 134,483 to the non-controlling portion.
José de Jesús Valdez SimancasChief Executive Officer
Raúl Millares NeyraChief Financial Officer
F-82
Alpek, S. A. B. de C. V. and subsidiariesCondensed Consolidated Interim Financial Statements(unaudited)As of March 31, 2013 and December 31, 2012 and for thethree months ended March 31, 2013 and 2012
F-83
Alpek, S. A. B. de C. V. and subsidiariesContentAs of March 31, 2013 and December 31, 2012
Contents Page
Condensed consolidated interim financial statements (unaudited):
Balance sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-85
Statements of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-86
Statements of comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-87
Statements of changes in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-88
Statements of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-89
Notes to the interim financial statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-90 to F-106
F-84
Alpek, S. A. B. de C. V. and subsidiariesCondensed Consolidated Interim Balance SheetsAs of March 31, 2013 and December 31, 2012
(In thousands of Mexican pesos)
Notes
March 31,2013
(Unaudited)
December 31,2012
(Audited)
AssetsCurrent Assets:Cash and cash equivalents 6 Ps 4,832,704 Ps 6,654,561Restricted cash and cash equivalents 7 2,638 2,992Trade and other receivables, net 14,203,347 13,368,995Inventories 11,567,237 11,582,045Derivative financial instruments 13 202,047 107,297Other current assets 195,651 243,991
Total current assets 31,003,624 31,959,881
Non-current Assets:Property, plant and equipment, net 9 25,449,042 26,695,410Goodwill and intangible assets, net 2,095,931 2,243,495Deferred income tax 409,952 504,613Prepayments 10 432,411 —Other non-current assets 265,452 292,774
Total non-current assets 28,652,788 29,736,292
Total Assets Ps59,656,412 Ps61,696,173
Liabilities and Stockholders’ EquityLiabilitiesCurrent Liabilities:Current debt 12 Ps 611,303 Ps 500,641Trade and other payables 10,171,147 9,696,234Derivative financial instruments 13 68,084 287,510Income tax payable 179,462 101,807Dividends payable 575,719 —Other current liabilities 1,330,880 1,462,261
Total current liabilities 12,936,595 12,048,453
Non-current Liabilities:Non-current debt 12 13,215,468 13,939,767Derivative financial instruments 172,919 208,218Deferred income tax 4,497,176 4,718,445Employees’ benefits 1,107,029 1,130,128
Total non-current liabilities 18,992,592 19,996,558
Total Liabilities 31,929,187 32,045,011
EquityControlling portion:Capital stock 6,051,880 6,051,880Share premium 9,071,074 9,071,074Retained earnings 10,292,869 11,006,758Other reserves (850,250) 50,264
Stockholders’ equity controlling portion 24,565,573 26,179,976Non-controlling portion 3,161,652 3,471,186
Total Equity 27,727,225 29,651,162
Total Liabilities and Equity Ps59,656,412 Ps61,696,173
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
F-85
Alpek, S. A. B. de C. V. and subsidiariesCondensed Consolidated Interim Statements of IncomeFor the three months ended March 31, 2013 and 2012
(In thousands of Mexican pesos)
Unaudited
Notes 2013 2012
Net sales Ps 23,283,622 Ps 24,828,722Cost of sales (21,331,791) (22,235,726)
Gross profit 1,951,831 2,592,996Selling expenses (235,572) (245,526)Administrative expenses (273,251) (323,562)Other income (expenses), net 79,872 12,711
Operating profit 1,522,880 2,036,619
Financial income (including foreign exchange gain) 130,396 435,355Financial expenses (247,135) (398,821)
Comprehensive financing expense, net (116,739) 36,534
Share of losses of associates (11,281) (7,949)
Profit before income tax 1,394,860 2,065,204Income tax 15 (415,242) (812,999)
Profit for the period Ps 979,618 Ps 1,252,205
Profit attributable to:Controlling portion Ps 775,517 Ps 1,012,231Non-controlling portion 204,101 239,974
Ps 979,618 Ps 1,252,205
Basic and diluted earnings per share (in pesos) Ps 0.37 Ps 0.58
Weighted average of outstanding shares (in thousands) 2,118,163 1,738,865
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
F-86
Alpek, S. A. B. de C. V. and subsidiariesCondensed Consolidated Interim Statements of Comprehensive IncomeFor the three months ended March 31, 2013 and 2012
(In thousands of Mexican pesos)
Unaudited
Notes 2013 2012
Profit for the period Ps 979,618 Ps 1,252,205
Other comprehensive income for the period, net of taxes:Items that will be reclassified to the statement of income in the future:
Effect of derivative financial instruments designated as cash flowshedging 58,054 1,547
Translation effect of foreign entities (1,122,448) (1,243,718)
Total items of the comprehensive income for the period, net of tax (1,064,394) (1,242,171)
Total comprehensive income for the period (Ps 84,776) Ps 10,034
Attributable to:Controlling portion (Ps 124,997) Ps 51,772Non-controlling portion 40,221 (41,738)
Comprehensive income for the period (Ps 84,776) Ps 10,034
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
F-87
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F-88
Alpek, S. A. B. de C. V. and subsidiariesCondensed Consolidated Interim Statements of Cash FlowsFor the three months ended March 31, 2013 and 2012
(In thousands of Mexican pesos)
Unaudited
Notes 2013 2012
Cash flows from operating activitiesProfit before income tax Ps 1,394,860 Ps 2,065,204Depreciation and amortization 511,964 513,077(Gain) loss on the sale of property, plant and equipment (381) 1,291Share of losses of associates 11,281 7,949Finance result, net 93,144 207,577Gain on changes in the fair value of cash flow hedges (81,797) (278,601)Employees’ profit sharing 1,074 8,479
Subtotal 1,930,145 2,524,976
Increase in trade receivables (1,447,870) (1,452,094)Increase in trade receivables from related parties (320,186) (501,473)Increase in other receivables (40,150) (265,494)(Increase) decrease in inventories (319,636) 60,680Increase in trade payables 687,504 822,669Increase in trade payables from related parties 381,099 524,461Income tax paid (237,434) (428,176)Employees’ profit sharing paid (1,025) (91,142)Net liability for retirement obligation 6,761 (57,637)
Net cash generated from operating activities 639,208 1,136,770
Cash flows from investing activitiesInterest received 24,745 8,794Purchase of property, plant and equipment (385,838) (152,199)Purchase of intangible assets (5,593) (5,200)Prepayments (441,396) —Acquisition of shares in available for sale investments — (26,929)Derivative financial instruments (171,402) 39,731Other (2,395) (12,347)
Net cash used in investing activities (981,879) (148,150)
Cash flows from financing activitiesProceeds from loans and debt 178,130 587,348Payments of loans and debt (53,839) (571,111)Interest paid (187,772) (387,665)Dividends paid (1,209,714) (1,068,818)
Net cash flows (used in) provided from financing activities (1,273,195) (1,440,246)
Increase in cash and cash equivalents (1,615,866) (451,626)Foreign exchange on cash and cash equivalents (205,991) (192,905)Cash and cash equivalents at the beginning of the period 6,654,561 3,584,287
Cash and cash equivalents at the end of the period Ps 4,832,704 Ps 2,939,756
The accompanying notes are an integral part of these condensed consolidated interim financial statements.
F-89
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
(In thousands of Mexican pesos, except where otherwise indicated)
Note 1 – General information
Alpek, S.A.B. de C.V. (“Alpek”, or the “Company”) operates through two major business segments: polyesterchain products and plastic and chemical products. The polyester chain business segment, comprising theproduction of purified terephthalic acid (PTA), polyethylene terephthalate (PET) and polyester fibers, serves thefood and beverage packaging, textile and industrial filament markets. The plastics and chemicals businesssegment, comprising the production of polypropylene, expandable polystyrene, polyurethanes, caprolactam,fertilizers and other chemicals, serves a wide range of markets, including the consumer goods, food and beveragepackaging, automotive, construction, agriculture, oil industry, pharmaceutical markets and other markets.
Alpek’s shares are listed and trade on the Mexican Stock Exchange.
The address of Alpek’s registered office is in Avenida Gomez Morin Sur No. 1111, Col. Carrizalejo, San PedroGarza Garcia, Nuevo Leon, Mexico and operates plants located in Mexico, the United States of America andArgentina.
The following notes to the financial statements when referring to “Pesos” or “Ps”, it means thousands of MexicanPesos. When referring to “US$” or “Dollars”, it means thousands of dollars from the United States of America.
The condensed consolidated interim financial statements were authorized for its issuance on May 23, 2013 by themanagement with legal power, signing the consolidated financial statements and the accompanying notes, andare subject to the approval of the administration, which may be modified in accordance with the pronouncementsof the General Corporation Mexican Law.
These condensed consolidated interim financial statements have been reviewed, not audited.
Note 2 – Basis for preparation
These condensed consolidated interim financial statements for the three months ended March 31, 2013 areunaudited and have been prepared in accordance with IAS 34, ‘Interim financial reporting’. The condensedinterim consolidated financial statements should be read in conjunction with the annual financial statements forthe year ended December 31, 2012, which have been prepared in accordance with IFRS.
Note 3 – Summary of significant accounting policies
The accounting policies adopted are consistent with those of the previous financial year except for the adoptionof new standards effective as of January 1, 2013. The nature and the impact of each new standard/amendment isdescribed below.
• IAS 1 (amended) – “Presentation of Financial Statements”. The amendment requires entities to separate theitems presented in other comprehensive income in two groups based on whether they can be recycled to theincome statement in the future or not. Items that cannot be recycled will be presented separately from itemsthat can be recycled in the future. Entities that decide to present items of other comprehensive incomebefore taxes should show taxes related to the two groups separately. For the Company, this amendment iseffective on January 1, 2013. The amendment affected presentation only and had no impact on theCompany’s financial position or performance.
F-90
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
• IAS 19 (Revised) – “Employee Benefits”. There are a number of amendments which have been appliedretrospectively; it eliminates the option to defer the recognition of actuarial gains and losses from definedbenefit post-employment plans, known as the ‘corridor method’. The Company has not previously appliedthis option, and has used the option to recognize such gains and losses in other comprehensive income.Therefore this change in the new standard has no impact on the Company’s condensed interim financialstatements. Expected returns on plan assets that are no longer recognized in profit or loss, instead, there is arequirement to recognize interest on the net defined benefit liability (asset) in profit or loss, calculated usingthe discount rate used to measure the defined benefit obligation. This change has no material impact on theCompany’s financial statements for 2012. Past service cost is recognized in the income statement in theperiod of a plan amendment instead of deferring the portion related to unvested benefits. Previously theCompany recognized past-service costs immediately in income, unless the changes to the pension plan areconditional on the employees remaining in service for a specified period of time (the vesting period), theimpact on the Company’s net profit for 2012 is not material. As a result of the adoption of the amended IAS19, the Company adjusted a consolidated unamortized past service cost balance in the aggregate amount of(Ps 28,826) as of January 1, 2013, and recognized a related charge net of income tax to consolidatedretained earnings of (Ps 20,754) as of January 1, 2013. The amended IAS19 was adopted prospectively andprior periods were not restated as the effect was not material to the financial position of the Company.
• IFRS 10, ‘Consolidated financial statements’ – IFRS 10 was issued in May 2011 and replaces all theguidance on control and consolidation in IAS 27, ‘Consolidated and separate financial statements’, andSIC-12, ‘Consolidation – special purpose entities’. Under IFRS 10, subsidiaries are all entities (includingstructured entities) over which the Company has control. The Company controls an entity when theCompany has power over an entity, is exposed to, or has rights to, variable returns from its involvementwith the entity and has the ability to affect these returns through its power over the entity. Subsidiaries arefully consolidated from the date on which control is transferred to the Company. They are deconsolidatedfrom the date that control ceases. The Company has applied IFRS 10 retrospectively in accordance with thetransition provisions of IFRS 10. This had no impact on the consolidation of investments held by theCompany.
• IFRS 12 “Disclosure of Interests in Other Entities” requires disclosure of information that enables users offinancial information to evaluate the nature and risk associated with their interest in other entities, includingjoint arrangements, associates, special purpose entities and other off balance sheet entities, in addition to theeffects of those interest in its financial position and performance, and its cash flows. None of thesedisclosure requirements are applicable for interim condensed consolidated financial statements, unlesssignificant events and transactions in the interim period require that they are provided. Accordingly, theCompany has not made such disclosures in the condensed consolidated interim financial statements as ofMarch 31, 2013.
• IFRS 13 “Fair Value Measurement” objective is to define the fair value and establish in a single standard, aframework for measuring fair value and disclosure requirements on these measurements. This standardapplies when other IFRS require or permit fair value measurement, except for transactions within the scopeof IFRS 2 “Share based Payments”, IAS 17 “Leases”, measurements that have similarities to fair value butare not considered as such, and the net realizable value under the scope of IAS 2 “Inventories” or the valuein use in IAS 36 “Impairment of Long-Lived Assets”. The application of IFRS 13 has not materiallyimpacted on the fair value measurements carried out by the Company, however the additional disclosurerequirements by IAS 34 have been applied in the condensed consolidated interim financial statements as ofMarch 31, 2013.
F-91
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Note 4 – Critical accounting estimates and judgments
In preparing of the condensed consolidated interim financial statements requires the use of certain criticalaccounting estimates. Additionally, it requires the Company’s management to use judgment in the process ofapplying the accounting policies of the Company and the reported amounts of assets and liabilities, income andexpenses. Actual results may differ from the estimates.
In preparing these condensed consolidated interim financial statements, the significant judgments made by themanagement in the process of applying the Company’s accounting policies and the key sources of estimationuncertainty were the same as those that applied to the consolidated and combined financial statements for theyear ended December 31, 2012, with the exception of changes in judgments required in determining the basis ofconsolidation due to the new definition of control in IFRS 10 “Consolidated financial statements” which requiresan analysis as to whether or not the Company has the power over the investee, has exposure, or rights, to variablereturns from its involvement with the investee and the ability to use its power over the investee to affect theamount of the Company’s returns. As a result of this analysis, the Company has exercised critical judgment indetermining whether to consolidate the financial statements of Polioles, S.A. de C.V. (Polioles), as applicable,where the determination of control is not straightforward. Management has reached the conclusion that there arefactors and circumstances described in the by-laws of Polioles and applicable law that allow the Company tocarry out the daily operations of Polioles and therefore to demonstrate control. The Company will continueassessing these circumstances at each balance sheet date to determine whether or not this critical judgment willcontinue to be appropriate. If the Company determines that it no longer controls Polioles, Polioles would need tobe deconsolidated and accounted for under the equity method. The significant outstanding balances andtransactions between companies have been eliminated in the consolidation.
Note 5 – Financial risk management
5.1 Financial risk factors
The Company’s activities expose it to a variety of financial risks: market risk (including foreign exchange risk,price risk, interest rate and cash flow risk), credit risk, liquidity risk and capital risk.
The condensed consolidated interim financial statements do not include all financial risk managementinformation and disclosures required in the annual financial statements; they should be read in conjunction withthe Company’s annual financial statements as of December 31, 2012. There have been no changes in the riskmanagement department since year end or in any risk management policies.
During the three months ended March 31, 2013 and 2012, the Mexican peso to US dollar exchange rate fluctuatedfrom 13.01 to 12.35 and from 13.98 to 12.85, respectively which resulted in a loss on translation effect ofPs 1,122,448 and Ps 1,243,718, respectively, both recognized in other comprehensive income during those periods.
5.2 Estimation of Fair Value
Below is an analysis of financial instruments measured at fair value by the valuation method. Three differentlevels were used as presented below:
• Level 1: Quoted prices for identical instruments in active markets.
• Level 2: Quoted prices for similar instruments in active markets, quoted prices for identical or similarinstruments in inactive markets, and valuations through models where all significant inputs are observablein active markets.
• Level 3: Valuations made through techniques in which one or more of its significant data are not observable.
F-92
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
The following table presents the assets and liabilities that are measured at fair value at March 31, 2013:
Level 1 Level 2 Level 3 Total
AssetsFinancial assets at fair value through profit or loss:
– Trading derivatives Ps — Ps 76,908 Ps — Ps 76,908Derivatives used for hedging — 125,139 — 125,139Available for sale financial assets — — 89,586 89,586
Total assets Ps — Ps 202,047 Ps 89,586 Ps 291,633
Level 1 Level 2 Level 3 Total
LiabilitiesFinancial assets at fair value through profit or loss:
– Trading derivatives Ps — Ps 60,530 Ps — Ps 60,530Derivatives used for hedging — 180,473 — 180,473
Total liabilities Ps — Ps 241,003 Ps — Ps 241,003
The following table presents the assets and liabilities that are measured at fair value at December 31, 2012:
Level 1 Level 2 Level 3 Total
AssetsFinancial assets at fair value through profit or loss:
– Trading derivatives Ps — Ps 35,153 Ps — Ps 35,153Derivatives used for hedging — 72,144 — 72,144Available for sale financial assets — — 92,208 92,208
Total assets Ps — Ps 107,297 Ps 92,208 Ps 199,505
Level 1 Level 2 Level 3 Total
LiabilitiesFinancial assets at fair value through profit or loss:
– Trading derivatives Ps — Ps 276,923 Ps — Ps 276,923Derivatives used for hedging — 218,805 — 218,805
Total liabilities Ps — Ps 495,728 Ps — Ps 495,728
There were no transfers between Levels 1 and 2 during the period. There were also no transfers between Level 2and Level 3 during the period.
Level 1
The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheetdate general. A market is considered active if quoted prices are clearly and regularly available from an exchange,dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularlytransactions market at arm. The trading price used for financial assets held by the Company is the current bid price.
F-93
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Level 2
The fair value of financial instruments that are not traded in an active market is determined using valuationtechniques. These valuation techniques maximize the use of observable market data when available and relies aslittle as possible on estimates specific to the Company. If all significant inputs required to measure the fair valuean instrument are observable, the instrument is classified at Level 2.
Valuation data used in the financial statements of the Company to measure fair value include market prices ofethylene, natural gas, ethane, and gasoline, as well as interest rates and exchange rates.
The fair values represent a mathematical approximation of its market value at the measurement date. Theestimation of the market value consists of, taking into account the corresponding forward rates from theunderlying asset. These forward rates are obtained from observable market curves from third party sources (suchas, but not exclusively, CMAI, OPIS). These estimations are generally confirmed with the valuations of thecounterparties which issue each instrument.
Level 3
If one or more of the significant inputs not based on observable market data, the instrument is categorized inLevel 3.
Specific valuation techniques used to value financial instruments include:
• Rates of market traders or quotes for similar instruments.
• The fair value of interest rate swaps is calculated as the present value of estimated future cash flows basedon observable yield curves.
• The fair value of forward exchange contracts is determined using the exchange rates at the balance sheetdate, with the resulting value discounted to present value.
• Other techniques, such as the analysis of discounted cash flows, which is used to determine fair value for theremaining financial instruments.
The amounts relating to share investments in third parties presented in other non-current assets, have all beenclassified within the Level 3 fair value hierarchy, as they cannot be measured by the price in an active market andthe fair value cannot be measured reliably, they are recognized at cost less impairment. Therefore there are nounobservable inputs used to calculate the fair value of the Level 3 financial instruments.
The movement of available for sale financial assets is the following:
2013 2012
Opening balance at January 1 Ps 92,208 Ps 40,249Translation effect (2,622) (1,230)Additions — 26,929
Balance as of March 31 Ps 89,586 Ps 65,948
None of the available for sale financial assets are past due or impaired.
F-94
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Note 6 – Cash and cash equivalents
Cash and cash equivalents are comprised as follows:
At March 31,2013
At December 31,2012
Cash at bank and on hand Ps 1,529,617 Ps 1,851,076Short term bank deposits 3,303,087 4,803,485
Cash and cash equivalents (excluding bank overdrafts) Ps 4,832,704 Ps 6,654,561
Note 7 – Restricted cash and cash equivalents
The Company had restricted cash approximately Ps 2,638 and Ps 2,992, at March 31, 2013 and December 31,2012, respectively. The balances were required to be held in escrow by the Company’s workers compensationservice administrator. The restricted cash balance is classified as a current asset on the Company’s balance sheetsbased on the expiration date of the restriction.
Note 8 – Transactions with related parties
Related party transactions were carried out at market values.
March 31, 2013
Loans grantedto related parties
Loans receivedfrom related parties
Tradereceivable Amount Currency
Tradepayable Amount Currency
Parent Ps189,781 Ps295,314 USD Ps — Ps —— 71,410 USD — —
Affiliates 240,939 4,357 USD 42,112 103,586 MXN— 49,418 USD — —— 303,821 USD — —— 12,355 USD — —— 13,000 MXN — —— 3,549 MXN — —
Partners with significant influence overcertain subsidiaries 67,236 — 346,355 —
Total Ps497,956 Ps753,224 Ps388,467 Ps103,586
F-95
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
December 31, 2012
Loans grantedto related parties
Loans receivedfrom related parties
Tradereceivable Amount Currency
Tradepayable Amount Currency
Parent Ps196,094 Ps310,983 USD Ps — Ps —— 69,499 USD — —
Affiliates 227,164 4,589 USD 40,700 103,586 MXN— 52,040 USD — —— 319,941 USD — —— 13,010 USD — —— 13,000 MXN — —— 579 MXN —
Partners with significant influence overcertain subsidiaries 85,488 — 320,241 —
Total Ps508,746 Ps783,641 Ps360,941 Ps103,586
Sales of good and other income with related parties
Three months ended March 31, 2013
Finishedgoods Interest
Administrativeservices Leases Other
Parent Ps — Ps5,536 Ps — Ps — Ps—Affiliates 88,199 3,552 26,338 — 931Partners with significant influence over certain
subsidiaries 297,535 — — 1,347 —
Total Ps385,734 Ps9,088 Ps26,338 Ps1,347 Ps931
Three months ended March 31, 2012
Finishedgoods Interest
Administrativeservices Leases Other
Parent Ps — Ps 5,710 Ps — Ps — Ps—Affiliates 74,069 6,286 4,104 — —Partners with significant influence over certain
subsidiaries 475,143 — — 1,327 —
Total Ps549,212 Ps11,996 Ps4,104 Ps1,327 Ps—
F-96
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Cost of sales and other expenses with related parties
The three months ended March 31, 2013
Finishedgoods
Rawmaterials Interest
Administrativeservices
Technicalassistance Electricity Leases Other Fees
Parent Ps — Ps — Ps— Ps — Ps — Ps — Ps— Ps— Ps —Affiliates — 3,334 — 28,401 — 47,586 — 754 —Partners with significant
influence over certainsubsidiaries 321,442 60,093 — 36,334 18,595 — 584 15 7,839
Total Ps321,442 Ps63,427 Ps— Ps64,735 Ps18,595 Ps47,586 Ps584 Ps769 Ps7,839
Three months ended March 31, 2012
Finishedgoods
Rawmaterials Interest
Administrativeservices
Technicalassistance Electricity Leases Other Fees
Parent Ps — Ps — Ps41,768 Ps28,462 Ps — Ps — Ps— Ps— Ps —Affiliates — 3,607 — 28,915 — 11,216 — 49 —Partners with significant
influence over certainsubsidiaries 197,177 52,126 — 38,122 17,248 — 581 — 7,212
Total Ps197,177 Ps55,733 Ps41,768 Ps95,499 Ps17,248 Ps11,216 Ps581 Ps 49 Ps7,212
For the three months ended March 31, 2013, salaries and benefits received by senior officers of the Companyamounted to Ps 129,368 (31 March 2012: Ps 87,323), comprising of base salary and law benefits andsupplemented by a variable compensation program that is basically based on the performance of the Companyand by the market value of its parent shares.
Note 9 – Property, plant and equipment, net
During the three months ended March 31, 2013, the Company invested Ps 386,792 in property plant andequipment as capital expenditures, which the majority related to constructions in progress.
Depreciation charged to the statement of income in the three months ended March 31, 2013 and 2012 was Ps470,852 and Ps 472,063, respectively.
Note 10 – Prepayments
In the first quarter of 2013, the Company entered into a master agreement with Gruppo Mossi & Ghisolfi (M&G)under which M&G will license the Company’s IntegRex® PTA technology for the construction of its newintegrated PTA-PET plant in Corpus Christi, Texas (the M&G Facility). In addition, the Company will pay US$350 million to M&G during the Facility’s construction, which will be paid over time from cash flows fromoperations and will receive contractual rights to 400 thousand tons of PET (made with 336 thousand tons ofPTA) per year from the M&G Facility. The Company will supply the raw materials for its portion of PTA-PETunder the agreement. M&G’s Corpus Christi site is currently expected to begin operations in 2016.
During the three months ended March 31, 2013 the Company paid US $35 million to M&G as part of thecontractual rights to receive 400 thousand tons of PET, which has been classified as a prepayment of a noncurrent asset in the balance sheet.
F-97
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Note 11 – Financial Instruments
a. Financial instruments by category
At March 31, 2013
Accountsreceivable and
liabilities atamortized cost
Investmentsavailablefor sale
Derivativefinancial
instruments Total
Financial assets:Cash and cash equivalents Ps 4,832,704 Ps — Ps — Ps 4,832,704Restricted cash and cash equivalents 2,638 — — 2,638Trade and other receivables 14,203,347 — — 14,203,347Financial assets at fair value through profit or loss — — 76,908 76,908Derivatives used for hedging — — 125,139 125,139Prepayments 432,411 — — 432,411Financial assets available for sale — 89,586 — 89,586
Ps19,471,100 Ps89,586 Ps202,047 Ps19,762,733
Financial liabilities:Debt Ps13,826,771 Ps — Ps — Ps13,826,771Trade and other payables 10,171,147 — — 10,171,147Derivatives used for hedging — — 180,473 180,473Financial liabilities at fair value through profit or loss — — 60,530 60,530
Ps23,997,918 Ps — Ps241,003 Ps24,238,921
At December 31, 2012
Accountsreceivable and
liabilities atamortized cost
Investmentsavailablefor sale
Derivativefinancial
instruments Total
Financial assets:Cash and cash equivalents Ps 6,654,561 Ps — Ps — Ps 6,654,561Restricted cash and cash equivalents 2,992 — — 2,992Trade and other receivables 13,368,995 — — 13,368,995Financial assets at fair value through profit or loss — — 35,153 35,153Derivatives used for hedging — — 72,144 72,144Financial assets available for sale — 92,208 — 92,208
Ps20,026,548 Ps92,208 Ps107,297 Ps20,226,053
F-98
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
At December 31, 2012
Accountsreceivable and
liabilities atamortized cost
Investmentsavailable for
sale
Derivativefinancial
instruments Total
Financial liabilities:Debt Ps14,440,408 Ps— Ps — Ps14,440,408Trade and other payables 9,696,234 — — 9,696,234Derivatives used for hedging — — 218,805 218,805Financial liabilities at fair value through profit or loss — — 276,923 276,923
Ps24,136,642 Ps— Ps495,728 Ps24,632,370
b. Fair value of financial assets and liabilities
The amount of cash and cash equivalents, restricted cash and cash equivalents, trade and other receivables, tradeand other payables, current debt and other current liabilities approximate their fair value due to their shortmaturity date. The fair value of bank loans and notes payable approximated their current carrying amounts as theimpact of discounting is not significant. The carrying value of these accounts represents the expected cash flow.
The carrying value and estimated fair value of other financial assets and liabilities are presented below:
At March 31, 2013 At December 31, 2012
Bookvalue
Fairvalue
Bookvalue
Fairvalue
Financial assetsNon-current trade receivables Ps 177,184 Ps 172,663 Ps 190,523 Ps 184,521Financial liabilitiesNon-current debt 13,215,468 13,887,793 13,939,767 14,809,233
The estimated fair values are based on discounted cash flows.
Note 12 – Debt
At March 31,2013
At December 31,2012
Current:Bank loans Ps 429,671 Ps 358,274Current portion of non-current debt 179,759 140,184Notes payable 1,873 2,183
Current debt Ps 611,303 Ps 500,641
Non-current:Senior Notes Ps 9,494,145 Ps 9,996,489Unsecured bank loans 3,976,477 4,163,232Debt issuance costs (75,395) (79,770)
Total 13,395,227 14,079,951Less: current portion of non-current debt (179,759) (140,184)
Non-current debt Ps13,215,468 Ps13,939,767
F-99
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Covenants:
The majority of existing banking debt agreements contains restrictions of the Company, principally forcompliance with certain financial ratios, among they mainly include:
a) Interest coverage ratio: which is defined as the ratio of consolidated Earnings before interest, tax,depreciation and amortization (“EBITDA”) to consolidated net interest charges for the period of the fourconsecutive fiscal quarters ending on such date, which may not be less than 3.0 times.
b) Leverage ratio: this is defined as the ratio of dividing the consolidated net debt by the consolidated EBITDAfor the last twelve months. This ratio may not be greater than 3.5 times.
Additionally, there are other restrictions set forth in the banking debt agreements and other credit documents onincurring additional debt or taking loans that require mortgage assets, dividend payments and submission offinancial information, which is not fulfilled or remedied within a specific period to the satisfaction of creditors,may require immediate early maturity. During the three months ended March 2013 and 2012, financial ratioswere calculated according to formulas set out in loan agreements. At March 31, 2013, and the date of issuance ofthese financial statements, the Company and its subsidiaries complied with such covenants and restrictions.
Note 13 – Derivative Financial Instruments
The effectiveness of derivative financial instruments classified as hedge instruments is assessed on a periodicbasis. At March 31, 2013 and December 31, 2012 the subsidiaries’ management had assessed the effectiveness ofits hedges and have considered that they were highly effective.
The notional amounts related to derivative financial instruments reflect the reference volume contracted, but donot reflect the amounts at risk in regard to future cash flows. The amounts at risk are generally limited to theunrealized gain or loss on market valuation of these instruments, which may vary according to changes in marketvalue of the underlying asset, its volatility and the credit quality of counterparties.
The principal obligations to which the subsidiaries are subject depend on the contracting mechanics and terms ofeach derivative financial instrument existing at March 31, 2013 and December 31, 2012.
Derivatives held for trading are classified as current assets or liabilities. The total fair value of a hedgingderivative is classified as non-current asset or liability if the remaining maturity of the hedged item is more than12 months and as a current asset or liability if the maturity of the hedged item is less than 12 months.
a) Exchange rate derivatives
The positions of exchange rate derivatives held for trading purposes were as follows (millions of MexicanPesos):
As of March 31, 2013, the company did not have any financial derivative instruments relating to exchangerates because they matured in the period ended March 31, 2013.
At December 31, 2012
Type of derivative, value orcontract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
US$/MXN (Ps325) Pesos / Dollar 13.01 Ps6 Ps6 Ps— Ps— Ps—
F-100
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
b) Interest rate swaps
The positions of derivative financial instruments of interest rate swaps were as follows (millions of Mexicanpesos):
At March 31, 2013
Type of derivative, value orcontract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
Hedging purposes:Over Libor (1) Ps2,718 % per year 0.42 (Ps173) (Ps 27) (Ps 52) (Ps 94) Ps—Trading purposes:Over Libor 957 % per year 0.42 (17) (17) — — —
(Ps190) (Ps 44) (Ps 52) (Ps 94) Ps—
At December 31, 2012
Type of derivative, value orcontract
Notionalamount
Underlyingasset
Fairvalue
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
Hedging purposes:Over Libor (1) Ps2,862 % per year 0.39 (Ps200) (Ps 42) (Ps 56) (Ps102) Ps—Trading purposes:Over Libor 1,008 % per year 0.39 (36) (36) — — —
(Ps236) (Ps 78) (Ps 56) (Ps102) Ps—
(1) Cash flows hedge
c) Energy
The positions of derivative financial instruments for natural gas, gasoline and ethylene were as follows(millions of Mexican Pesos):
At March 31, 2013
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
Hedging purposes:Ethylene (1) Ps317 Cents Dollar/lb 63.7 Ps 41 Ps 44 (Ps 3) Ps— Ps—Natural gas (1) 502 Dollars / MBTU 3.91 84 84 — — —Ethane (1) 36 Cents Dollar/Gallon 27.9 (7) (7) — — —
Trading purposes:Natural gas 17 Dollars / MBTU 3.91 (44) (44) — — —Gasoline 812 Dollars / Gallon 3.12 77 78 (1) — —
Ps151 Ps155 (Ps 4) Ps— Ps—
F-101
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
At December 31, 2012
Type of derivative, valueor contract
Notionalamount
Underlyingasset Fair
value
Maturity Collateral/guaranteeUnit Reference 2013 2014 2015+
Hedging purposes:Ethylene (1) Ps 476 Cents Dollar/lb 55.1 Ps 40 Ps 42 (Ps 2) Ps— Ps—Natural gas (1) 606 Dollars / MBTU 3.60 30 30 — — —Ethane (1) 55 Cents Dollar/Gallon 23.9 (16) (16) — — —
Trading purposes:Ethylene 4 Cents Dollar/lb 55.1 — — — —Natural gas 28 Dollars / MBTU 3.60 (226) (226) — — —Gasoline 1,138 Dollars / Gallon 2.70 14 20 (6) — —
(Ps 158) (Ps 150) (Ps 8) Ps— Ps—
(1) Cash flows hedge
The principal obligations to which the subsidiaries are subject depend on the contracting mechanics and terms ofeach derivative financial instrument existing at March 31, 2013 and December 31, 2012.
At March 31, 2013 and December 31, 2012 the net fair value position liability of the aforementioned derivativefinancial instruments amounted to (Ps 38,956) and (Ps 388,431), respectively, it is included in the consolidatedstatement of financial position as follows:
Fair value at:
March 31,2013
December 31,2012
Current assets Ps 202,047 Ps 107,297Non-current assets — —Current liabilities (68,084) (287,510)Non-current liabilities (172,919) (208,218)
Net position (Ps 38,956) (Ps 388,431)
At March 31, 2013 and December 31, 2012 there are no collaterals required in derivative financial instruments.
Note 14 – Dividends
2013
In Alpek’s General Ordinary Meeting held on February 28, 2013, the stockholders agreed to declaredividends in cash for a total amount of Ps 1,471,853.
2012
In Alpek’s General Ordinary Meeting held on January 10, 2012, the stockholders agreed to declaredividends in cash for a total amount of Ps 139,973.
In Alpek’s General Ordinary Meeting held on February 20, 2012, the stockholders agreed to declaredividends in cash for a total amount of Ps 641,470.
F-102
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Dividends paid are not subject to income tax if they are paid from the after-tax earnings account (CUFIN for itsSpanish acronym). Dividends paid in excess of this account are subject to a tax equivalent to 42.86% if paid in2013. The tax is payable by the Company and may be credited against the income tax payable by the Company inthe present year or in the following two immediate years or, if applicable, against the flat tax of the year.Dividends paid from retained earnings previously taxed are not subject to any tax withholding or payment.
Note 15 – Income tax
Income taxes in the interim periods are accrued using the income tax rate that would be applicable to expectedtotal annual earnings.
Income tax for the three months ended on March 31, are as follows:
2013 2012
Total current income tax (Ps374,016) (Ps 668,413)Adjustment to the provision of income tax from prior years 35,803 (6,328)Total deferred tax (77,029) (138,258)
Income tax expense (Ps415,242) (Ps 812,999)
Interim period income tax expense is accrued using the tax rate that would be applicable to expected total annualearnings, that is, the estimated average annual effective income tax rate applied to the pre-tax income of theinterim period. The estimated average annual tax rate used for 2013 is 30%. The effective income tax rate for thethree months ended March 31, 2013 and 2012 was 30% and 39%, respectively.
Note 16 – Financial information by segments
Segment information is presented in a manner consistent with the internal reporting provided to the chiefoperating officer, which has been identified as the Company’s Chief Executive Officer, who is the highestauthority in the operational decision making, resource allocation and performance assessment of the operatingsegments.
An operating segment is defined as a component of an entity about which separate financial information isregularly being evaluated.
Alpek controls and evaluates its continuing operations through two business segments based on products:Polyester Chain Business and Plastics & Chemicals Business. These segments are managed independentlybecause their products mix and the markets they attend are different. Their activities are carried out throughvarious subsidiaries.
Transactions between operating segments are carried out at market value and the accounting policies whichprepares segment information are consistent with those described in Note 3.
The Company evaluates the performance of each of the operating segments based on income before financialincome, taxes, depreciation and amortization (EBITDA), this indicator represents a good measure to evaluateoperating performance and ability to meet obligations principal and interest in respect of the indebtedness, andthe ability to fund capital expenditures and working capital requirements. Nevertheless, EBITDA is not ameasure of financial performance under IFRS and should not be considered as an alternative to net income as ameasure of operating performance or cash flows as a measure of liquidity.
F-103
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
The Company has defined adjusted EBITDA as consolidated profit (loss) before tax after adding back orsubtracting, as the case may be: (1) depreciation, amortization and impairment of non-current assets; (2) thefinancial result, net (which includes interest expense, interest income, foreign exchange gains (losses), net andgain (loss) of derivative financial instruments and (3) share of loss of associates.
Sales occur consistently throughout the year and therefore revenues and operating profits are even spread duringthe period. The company does not consider there to be an effect of a seasonal nature.
Below is the consolidated financial information of the operating segments to report (million of Mexican Pesos):
For the three months ended March 31, 2013:
Plasticsand
Polyester Chemicals Other Total
Income statementSales by segment Ps18,155 Ps5,171 Ps (42) Ps23,284Inter-segment sales (15) (27) 42 —
Sales to external clients Ps18,140 Ps5,144 — Ps23,284
Operating profit 1,099 402 22 1,523Depreciation, amortization and impairment of non-
current assets 414 98 — 512
Adjusted EBITDA Ps 1,513 Ps 500 Ps 22 Ps 2,035
Capital expenditures (Capex) Ps 347 Ps 44 Ps— Ps 391
For the three months ended March 31, 2012:
Plasticsand
Polyester Chemicals Other Total
Income statementSales by segment Ps19,605 Ps5,243 Ps (19) Ps24,829Inter-segment sales (12) (7) 19 —
Sales to external clients Ps19,593 Ps5,236 — Ps24,829
Operating profit 1,404 633 — 2,037Depreciation, amortization and impairment of non-
current assets 409 104 — 513
Adjusted EBITDA Ps 1,813 Ps 737 Ps— Ps 2,550
Capital expenditures (Capex) Ps 138 Ps 20 Ps— Ps 158
F-104
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
The reconciliation between “Adjusted EBITDA” and profit before tax for the three months ended March 31 is asfollows:
2013 2012
Adjusted EBITDA Ps2,035 Ps2,550Depreciation and amortization (512) (513)Operating profit 1,523 2,037Comprehensive financing expense, net (117) 36Share of losses of associates (11) (8)
Profit before income tax Ps1,395 Ps2,065
The following table shows the net sales breakdown by country of origin for the three months ended March 31, (inmillions of Mexican Pesos):
2013 2012
Mexico Ps12,748 Ps14,158United States 9,360 9,549Argentina 1,176 1,122
Net sales Ps23,284 Ps24,829
The Company’s main customer generated revenues of Ps 2,946 and Ps 3,104 for the three months endedMarch 31, 2013 and 2012, respectively; these revenues were generated in the reporting segment of polyesterwhich represents 12% in both years of consolidated revenues to external customers.
The following tables show the intangible assets and property plant and equipment by country of origin (inmillions of Mexican Pesos):
At March 31,2013
At December 31,2012
Mexico Ps1,453 Ps1,552United States 1,074 690Argentina 1 1
Total intangible assets Ps2,528 Ps2,243
At March 31,2013
At December 31,2012
Mexico Ps17,727 Ps18,439United States 7,480 7,985Argentina 242 271
Total Property, plant and equipment Ps25,449 Ps26,695
Note 17 – Contingencies
There have been no significant changes in contingencies with what was disclosed in the previous year’s annualfinancial statements.
F-105
Alpek, S. A. B. de C. V. and subsidiariesNotes to the Condensed Consolidated Interim Financial StatementsAs of March 31, 2013 and December 31, 2012
Note 18 – Subsequent Events
On April 26, 2013, Indelpro S.A. de C.V. (a subsidiary of Alpek) paid Basell Poliolefine Italia S. r. L.,(subsidiary of the other partner in Indelpro S. A. de C. V.) an amount of US$21,054 in connection to the use ofthe Spherizone® technology at its second polypropylene production line, which began operations in 2008. Inaccordance with the terms of the license agreement, Indelpro exercised its option to pay a lump sum royaltyamount.
F-106
ISSUER
Alpek, S.A.B. de C.V. Ave. Gómez Morín 1111 Sur
Col. Carrizalejo, San Pedro Garza García 66254 Nuevo León
México +52 (81) 8748-1146
Tax ID: ALP110418K7A
LEGAL ADVISORS
To the Issuer
As to U.S. law Paul Hastings LLP 75 East 55th street
New York, New York 10022 United States of America
To the Initial Purchasers
As to U.S. law Cleary Gottlieb Steen & Hamilton LLP
One Liberty Plaza New York, New York 10006
United States of America
As to Mexican law Mijares Angoitia Cortés y Fuentes, S.C.
Javier Barros Sierra 540, 4to piso Colonia Santa Fe
Delegación Álvaro Obregón C.P. 01210, México, D.F.
INDEPENDENT ACCOUNTANT
PricewaterhouseCoopers, S.C. Ave. Rufino Tamayo No. 100
Col. Valle Oriente 66269 Garza García, Nuevo León
México
TRUSTEE, REGISTRAR, PAYING AGENT AND TRANSFER AGENT
The Bank of New York Mellon 101 Barclay Street, Floor 4 East
New York, New York 10286 United States of America
IRISH PAYING AGENT AND LISTING AGENT
The Bank of New York Mellon SA/NV, Dublin Branch Hanover Building, Windmill Lane
Dublin 2, Ireland
US$ 650,000,000
Alpek, S.A.B. de C.V.
4.500% Senior Notes due 2022
________________________________
O F F E R I N G M E M O R A N D U M
________________________________
HSBC J.P. Morgan