Alpek
Annual Report 2012

Plain-text annual report

t R o P E R L A U N N A 2 1 0 2 K E P L A Alpek, S.A B. de C.V. Av. Gómez Morín 1111 Sur Col. Carrizalejo San Pedro Garza García Nuevo León CP. 66254, Mexico www.alpek.com track record • strength • potential 2 0 1 2 A N N U AL R E P o R t Polyurethane Thermal insulation Polypropylene Refrigerator lining PET Food tray Polypropylene Containers Fiber Clothing PET Soft drink bottles CoNtENts overview and track Record Financial and operating Highlights Letter to shareholders Differentiated Business Model Polyester Chain Plastics and Chemicals social Responsibility Board of Directors Management team Corporate Governance Financial section Glossary 2 4 5 8 10 14 16 18 19 20 21 93 Polypropylene Caps Investor Relations Hernán F. Lozano Sabino Parra Av. Gómez Morín 1111-C Sur San Pedro Garza García, N.L., Mexico 66254 IR@alpek.com www.alpek.com Corporate Profile • Mexico’s largest petrochemical company and the second-largest in Latin America • Operating in two business segments: Polyester, and Plastics and Chemicals • North America’s leading polyester producer • Only manufacturer of polypropylene and caprolactam in Mexico • Operates the largest expandable polystyrene (EPS) plant in the Americas • 20 plants and 4,700 employees in Mexico, the United States and Argentina • 91% of Alpek’s products used for food, beverage and consumer goods packaging • Listed on the Mexican Stock Exchange since April 2012 Alpek boasts a track record of growth and success, capitalizing on opportunities for consolidation and implementing high value added projects, since 1975. Through organic growth, acquisitions and strategic joint ventures, we have become Mexico’s largest petrochemical company and number two in Latin America. 1 PET Water bottle PET Sauce bottle US$7,277 million in income in 2012 6.5 million tonnes per year in installed capacity 78% of sales Polyester Chain • PTA • PET • Fibers 22% of sales Plastics and Chemicals • Polypropylene • Expandable Polystyrene (EPS) • Polyurethane • Caprolactam • Fertilizers • Specialty Chemicals Installation of propylene splitter Univex acquisition (Caprolactam) Cogeneration project Acquisitions in USA (Polyester) Consolidation of EPS in Altamira Polypropylene plant startup 1985 1988 1991 1994 1997 2000 w e i v r e v O d r o c e R k c a r T 2 DMT expansionAcquisition of PTA plant 20 plants in 3 countries: Mexico, the United States and Argentina 1986-2012 sales volume CAGR: 11% Clear Path Recycling Polypropylene expansion Expansion of EPS in Altamira PTA/PET acquisitions in USA PET acquisitions in Mexico and Argentina Initial Public Offering (BMV) 2003 2006 2009 2012 3 Financial and Operating Highlights RESUlTS Net sales Operating income EBITDA1 Majority net income Millions of dollars Millions of pesos 2012 2011 % VAR. 2012 2011 % VAR. 7,277 7,356 -1% 96,163 90,667 566 728 277 616 771 332 -8% -6% 7,476 7,589 9,611 9,545 -17% 3,663 3,899 6% -1% 1% -6% Net income per share2 0.14 0.19 -27% 1.83 2.24 -18% BAlAnCE Assets Liabilities 4,742 4,446 7% 61,696 62,153 -1% 2,463 3,101 -21% 32,045 43,354 -26% Stockholders´ equity 2,279 1,345 69% 29,651 18,799 58% Majority interest 2,012 1,091 84% 26,180 15,254 72% Book value per share 3 0.95 0.63 51% 12.36 8.77 41% nOTE: In this annual report, monetary figures are expressed in nominal Mexican pesos (Ps.) and in nominal dollars (US$) unless otherwise specified. The financial information for 2011 and 2012 was prepared in accordance with IFRS, in effect in Mexico as of January 2012. Conversions from pesos to dollars were made using the weighted average rate of the month in which the revenues or disbursements were made. The percentage variations between 2012 and 2011 are expressed in nominal terms. (1) EBITDA = operating income plus depreciation, amortization and impairment of non-current assets. (2) Based on the weighted average number of outstanding shares (1,996 million in 2012 and 1,739 million in 2011). (3) Based on the number of outstanding shares (2,118 million at the end of 2012 and 1,739 million at the end of 2011). 1 7 7 8 2 7 2 8 4 0 2 4 2 3 3 7 7 2 3 0 2 4 1 1 2 4 7 , 4 6 4 4 4 , 5 9 9 2 , 0 9 0 3 , 4 9 0 0 1 1 1 2 1 9 0 0 1 1 1 2 1 9 0 0 1 1 1 2 1 EBITDAUS$ MillionsAssetsUS$ MillionsMajority net incomeUS$ MillionsLetter to Shareholders To our shareholders: 2012 was a very important year for Alpek, with the implementation of fundamental initiatives that enhance our potential to continue growing. Two events of great significance during the year were our initial public offering in the Mexican Stock Exchange and the issuance of our first bond in the international debt market. These actions strengthened the Company’s financial position and constitute a first step in the development of strategic projects, such as the modernization of our installed capacity in the United States and vertical integration into certain raw materials. Our performance in 2012 was positive, considering that the global petrochemical industry faced important challenges as a result of recent production capacity expansions in China and the slowdown in export markets such as Europe. Our low- cost operations and focus on consumer related end-uses in North America allowed us to mitigate the volatility in the environment and generate more than US$728 million in operating cash flow (EBITDA). In the Polyester Chain, we finished integrating the strategic acquisitions made in 2011 that positioned us as the largest integrated PTA-PET producer in North America. We also sold the first Integrex® license, leveraging the advantages of our Polyester technology. Polyester volume grew 6% in 2012 and EBITDA reached US$531 million, despite an adjustment in the PTA price formula and pressure on our export markets. In the Plastics and Chemicals Segment, the polypropylene (PP) volume grew more than 19% in 2012, driven by enhanced operating efficiency and an increased supply of propylene from the Pemex refineries and from imports. We also posted strong results for most of the businesses in this segment. Excluding caprolactam, EBITDA for Plastics and Chemicals grew 9% during 2012. Caprolactam (CPL) was the product in our portfolio that faced the greatest challenges in 2012. Unlike our other products, which largely compete in North America, Alpek’s caprolactam is exported to China. The production capacity that recently came on line in that country and weak global demand resulted in an industry margin contraction. Left Armando Garza Sada Chairman of the Board Right José de Jesús Valdez Simancas Chief Executive Officer 5 Undoubtedly, 2012 saw the greatest financial transformation in our history. As a result, Alpek is today a publicly traded company with “investment grade” ratings from Fitch, Moody’s and Standard & Poor’s. During the year, debt amounting to US$308 million was paid and US$650 million were refinanced to ten years. The net debt to EBITDA ratio fell from 1.5 times in 2011 to 0.8 times in 2012, while the average lifetime of our debt increased from 3.2 at year-end 2011 to 6.9 at the close of 2012. The strength of our balance sheet, combined with our access to capital and debt markets, gives us the financial flexibility needed to invest in attractive growth projects. 2012 capital expenditures totaled US$115 million. In addition to investments in standard maintenance activities, we began strategic projects that will further strengthen our low-cost position. “The strength of our balance sheet, combined with our access to capital and debt markets, gives us the financial flexibility needed to invest in highly attractive growth projects.” In May 2012, ground was broken for the construction of our electricity co-generation project in Cosoleacaque, Veracruz. With a total investment of US$130 million, the plant will come on line in the next twelve months. It will satisfy on-site steam needs and produce more than 95 megawatts of efficient electricity per year for internal consumption, and the sale of any excess. 66 “2012 saw the greatest financial transformation in the history of our Company.” cost position, capitalizing on attractive growth opportunities with sustainable competitive advantages. Alpek is beginning this new phase of its history from a position of strength, that will allow it to realize its full potential and extend its track record of disciplined growth, generating value for all our stakeholders. Sincerely, Armando Garza Sada Chairman of the Board of Directors During the year, we also began a project for eliminating bottlenecks at the Columbia plant in the United States. The project will add 65 thousand tons per year of PET-producing capacity as early as the first months of 2013 through a total investment of US$20 million. Other strategic projects, such as the co-generation plant in Altamira, the integration to MEG (monoethylene glycol) and the modernization of our PTA-PET capacity in North America progressed as planned. We also continue to seek additional growth opportunities related to raw material integration and cost reduction. Knowing that our people are the basis of our success, we will continue supporting the development of all our associates. It is an honor and a pleasure to work with Alpek’s committed and talented team on a daily basis. Our environmental management initiatives are also an integral part of our business strategy. All our plants have programs to optimize the use of natural resources by encouraging emissions and input reduction and material recycling. On behalf of the Board of Directors, I would like to thank you, our shareholders, for your trust during 2012, Alpek’s first year as a publicly traded company. We are also sincerely grateful to our customers, creditors, suppliers, associates and the community in general for their great support. The confidence you have shown motivates us to work even harder to exceed your expectations. We reiterate our commitment to continue enhancing the Company’s low- José de Jesús Valdez Simancas Chief Executive Officer 77 Differentiated Business Model Alpek produces and markets diverse petrochemical products. Its success in the industry has been driven by structural competitive strengths: leadership position in north America: Alpek is the region’s number one producer of PTA, PET and polyester fibers, with 14 polyester plants and a total installed capacity of 5.2 million tons. Capacity to mitigate volatility: 91% of our production is directed to stable industries: Food and Beverages and Consumer Goods. Our price policy, based on a cost-plus methodology, reduces exposure to volatility in raw-material prices. 88 leading-edge technology: We own Integrex®, the world’s most advanced PTA and PET production technology, and also use other widely recognized technologies, such as Spheripol®, Spherizone® and Single Step®. low-cost production: Our strict operating and investing discipline, combined with a high level of integration, positions us at the bottom of the cost curve and enables a greater return on assets. Financial performance: Over the past 26 years, Alpek has posted an annual compound growth of 11%, while maintaining a low level of leverage and consistently paying dividends. 6 8 0 4 , 4 7 8 3 , 4 0 3 3 , 9 3 1 3 , 9 0 0 1 1 1 2 1 An experienced team: Made up of professionals with wide experience in the industry, it has led Alpek’s extensive track record of outstanding growth over the past 30 years. 99 Sales volumeThousands of tonsPolyester Chain PTA (purified terephthalic acid), a petroleum derivative, is the main raw material for the production of PET resins and polyester fibers. PET (polyethylene terephthalate) is a plastic resin that is widely used in containers for soft drinks and water, as well as in packaging for food and other consumer products. 10 78% of sales • PTA • PET • Fibers The Polyester Chain Business produces and markets PTA, PET and polyester fibers. On the basis of installed capacity, we are the largest PTA producer in North America and the second largest PET producer in the world, as well as the leading polyester fiber producer in North America. In 2012, the Polyester Chain represented 78% of Alpek’s consolidated sales, with net sales of US$5,691 million and an EBITDA of US$531 million. Our leadership position in North America is underpinned by the efficient, high-tech production processes at our 14 plants in the United States, Mexico and Argentina. These production facilities have a total installed capacity of approximately 5.2 million tons per year and 3,500 employees. We operate with diverse patents for own and acquired technologies, including IntegRex®, the world’s most advanced REFInERy PARAxylEnE PTA AlPEk PET FIBER 1111 In 2012, we signed the first IntegRex® licensing agreement with a renowned company in the polyester industry, reaffirming the outstanding benefits of this technology and underscoring its licensing potential.Polyester fibers are used to produce rugs, seatbelts and clothing, and have many other personal and industrial uses. Our efficient production with cutting- edge technology has positioned us at the forefront of the North American market. 12 technology for PTA and PET production. IntegRex® reduces the PTA and PET conversion cost per ton by more than 20% in comparison to other available technologies and requires a smaller investment per ton of installed capacity. In 2012, we signed the first IntegRex® PTA licensing agreement with a renowned company in the polyester industry, reaffirming the outstanding benefits of this technology and underscoring its licensing potential. The main raw material in the Polyester Chain Business is paraxylene, which is used to produce PTA. The PTA is then reacted with another important ethylene- derived raw material, monoethylene glycol (MEG), to produce PET. Our customer base includes PET producers who purchase our PTA and companies that make plastic bottles and other containers from PET for large consumer products companies. Alpek products are found in the containers of many world- famous brands, including Coca-Cola, Pepsi, Heinz and Kraft Foods. Mexico, the United States and Canada are Alpek’s core markets. Additionally, polyester products are exported to countries such as Argentina, Brazil, Colombia, Spain and Lithuania. In line with the growing trend to include recycled material in PET and polyester fiber production, we recycle post- consumption PET bottles. Alpek’s recycling facility in North Carolina, that began operations at the end of 2010, currently has the capacity to recycle 73 thousand tons of PET, or more than three billion PET bottles, annually. 3 6 2 , 3 4 8 0 3 , 6 4 4 2 , 4 6 3 2 , 2 8 6 5 , 1 9 6 , 5 7 3 3 3 , 1 0 9 2 , 4 4 5 1 3 5 4 0 3 2 8 2 9 0 0 1 1 1 2 1 9 0 0 1 1 1 2 1 9 0 0 1 1 1 2 1 13 In line with the growing trend to include recycled material in PET and polyester fiber production, we recycle post-consumption PET bottles.Sales volume Thousands of tonsSalesUS$ MillionsEBITDAUS$ MillionsPlastics and Chemicals Polypropylene (PP) is a versatile plastic used in a wide range of products, including food packaging, reusable containers, auto parts, medical supplies and toys. Expandable polystyrene (EPS) is a rigid, lightweight, cellular plastic that is used for packaging, insulation and as a material to lighten structures. 22% of sales • Polypropylene • Caprolactam • Expandable Polystyrene (EPS) • Fertilizers • Polyurethane • Specialty Chemicals The main products of the Plastics and Chemicals Business include polypropylene, expandable polystyrene, polyurethanes and caprolactam, which are used in a wide range of industries, including consumer goods, food and beverages, the automotive industry, construction, agriculture, oil and gas, and pharmaceuticals. In 2012, the sales of Plastics and Chemicals totaled US$1,586 million, 22% of Alpek’s consolidated net sales, and US$197 million in EBITDA were generated. Plastics and Chemicals operates an installed capacity of approximately 1.4 million tons per year, through six plants in Mexico with 1,170 employees. Being Mexico’s only producer of polypropylene and caprolactam is among the business’s competitive advantages. We also operate the largest EPS plant on the American continent. leading-edge technologies such as Lyondell Bassell’s Spheripol®/Spherizone® for PP and BASF’s Single Step® for EPS. We have joint ventures with other world- leading companies for the production and marketing of polypropylene and expandable polystyrene, enhanced by Besides marketing the products of Plastics and Chemicals in North America, we export to Asia, Europe, and Central and South America. 8 5 8 0 9 7 3 2 8 5 7 7 8 6 4 1 , 4 7 6 1 , 6 8 5 , 1 0 1 0 1 , 7 2 2 7 9 1 9 7 1 8 3 1 9 0 0 1 1 1 2 1 9 0 0 1 1 1 2 1 9 0 0 1 1 1 2 1 15 We have joint ventures with other world-leading companies for the production and marketing of polypropylene and expandable polystyrene, enhanced by leading-edge technologies such as Lyondell Bassell’s Spheripol®/Spherizone® for PP and BASF’s Single Step® for EPS.Sales volume Thousands of tonsSalesUS$ MillionsEBITDAUS$ MillionsSocial Responsibility Our plants operate in accordance with the most important Mexican and international standards in the industry. We seek to promote the development of our employees and communities, and work in harmony with the environment. We seek to create economic value, while at the same time promoting the growth and wellbeing of our associates and communities and operating in harmony with nature. We know that our people are an invaluable asset and therefore offer the training they need to grow both professionally and personally. In 2012, we provided more than 100 thousand hours of training for our associates. We are firmly committed to offering working conditions that guarantee health and safety. We operate with strict, safe working procedures and programs that reinforce a culture of safety. During the year, almost 3,200 employees benefitted from our health and nutrition campaigns, which included influenza vaccination programs, informational sessions on how to prevent diabetes and obesity, and visual health support. We also made an annual survey that covers safety and environmental issues, as well as the community’s perception of how we are doing in relation to topics such as environmental protection and risk management. Every Alpek plant has programs to reduce the consumption of electricity and natural gas, monitor CO2 emissions, handle hazardous materials appropriately and recycle process water. As a result, all our production facilities operate in accordance with the most important Mexican and international standards for the industry. Some examples of the certifications are: • Clean Industry (Mexican Environmental Protection Agency, PROFEPA) • ISO 9001 • ISO 14001 • Self-regulation of Health and Safety in the Workplace, Level 4 Certification (Mexican Ministry of Work and Social Welfare, STPS) • Comprehensive Responsibility Management System (Mexican National Association of the Chemical Industry, ANIQ) 17 Every Alpek plant has programs to reduce the consumption of electricity and natural gas, monitor CO2 emissions, handle hazardous materials appropriately and recycle process water. Board of Directors Armando Garza Sada (3) Chairman of the Board of ALFA, S.A.B. de C.V. Member of the Board of Alpek since April 2012. Member of the Boards of ALFA, FEMSA, Frisa, Grupo Financiero Banorte, Lamosa, Liverpool, Proeza, ITESM and Stanford University. Álvaro Fernández Garza (3) President of ALFA, S.A.B. de C.V. Member of the Board of Alpek since April 2012. Member of the Boards of ALFA, Vitro, Cydsa and Universidad de Monterrey. Francisco José Calderón Rojas (2) Chief Financial Officer of Grupo Franca Industrias, S.A. de C.V. Member of the Board of Alpek since April 2012. Member of the Boards of Franca Industrias, Franca Servicios, Franca Desarrollos, Capital Inmobiliario Institucional, ITESM and Universidad de Monterrey. Rodrigo Fernández Martínez (3) Marketing Director of Sigma Alimentos, S.A. de C.V. Member of the Board of Alpek since April 2012. Previously Sigma Alimentos, S.A. de C.V.’s Director of New Businesses. Andrés E. Garza Herrera (1A) Chief Executive Officer of Qualtia Alimentos, S.A. de C.V. Member of the Board of Alpek since April 2012. Member of the Regional Board of Banorte and of the General Councils of Universidad de Monterrey, Ciudad de los Niños and Patronato Papalote Verde in Monterrey, Nuevo León. Pierre Francis Haas García (1) Senior Advisor of the Global Oil Practice of McKinsey & Co. Member of the Board of Alpek since April 2012. Member of the Oxford Energy Policy Club, the Paris Petroleum Club and Coloquio Mexicano de Energía. Jaime Serra Puche (1A) President of SAI Derecho & Economía Member of the Board of Alpek since April 2012. Member of the Boards of Chiquita Brands (CQB), Fondo México (MXF), Tenaris (TS), Vitro (VTO) and Grupo Modelo (GMODELOC). Enrique Zambrano Benítez (1A) Chief Executive Officer of Grupo Proeza, S.A. de C.V. Member of the Board of Alpek since April 2012. Member of the Boards of Grupo Proeza, Xignux, Frisa Industrias and ITESM. Merici Garza Sada (3) Member of the Board of ALFA since April 2012. Carlos Jiménez Barrera Secretary of the Board Key 1. Independent board member 2. Independent proprietary board member 3. Related proprietary board member A) Audit and Corporate Practices Committee 1818 Management Team José de Jesús Valdez Raúl Millares neyra Felipe Garza Medina Jorge P. young Cerecedo Simancas Chief Financial Officer President of the PTA President of the PET and Chief Executive Officer Joined ALFA in 1981. He has Business Unit Staple Fibers Business Unit Joined ALFA in 1976. He has a Bachelor’s in Engineering Joined ALFA in 1977. He has a Joined ALFA in 1991. He has a Bachelor’s in Engineering from Universidad Bachelor’s in Engineering from a Bachelor’s in Engineering and an MBA from ITESM, Iberoamericana and an MBA Stanford University and an from ITESM and an MBA as well as a Master’s in from Wharton. MBA from Cornell University. from Wharton. Industrial Engineering from Stanford University. Jorge González Escobedo Alejandro llovera José luís Zepeda Peña Eduardo Escalante Castillo President of the Filament Zambrano President of the EPS, President of the Caprolactam Fibers Business Unit President of the Polyurethanes and Specialty and Ammonium Sulfate Joined ALFA in 1974. He has Polypropylene Business Chemicals Business Unit Business Unit a Bachelor’s in Engineering Unit Joined ALFA in 1986. He has Joined ALFA in 1981. He has and an MBA from ITESM. Joined ALFA in 1985. He has a Bachelor’s in Engineering a Bachelor’s in Engineering a Bachelor’s in Engineering from UNAM and an MBA from ITESM and a Master’s and an MBA from ITESM. from ITESM. in Engineering from Stanford University. 1919 Corporate Governance Alpek operates in accordance with the Mexican Code of Best Corporate Practices (CMPC) instituted in the year 2000 by the Mexican securities commission. The purpose of the Code is to establish a frame of reference for corporate governance and thereby increase investor confidence in Mexican companies. Once a year, all companies that quote on the Mexican Stock Exchange (BMV) must disclose the extent to which they adhere to the CMPC by answering a questionnaire. The responses of the different companies may be consulted on the BMV’s website. A summary of Alpek’s principles of corporate governance is presented below, reflecting the answers the company gave to the questionnaire in June 2012 and updated where necessary: A) The Board of Directors is made up of nine members, who have no alternates. Of the nine directors, four are independent board members, four are related proprietary board members and one is an independent proprietary board member. This annual report provides information on all the board members, identifying those who are independent and the Committees on which they sit. B) To ensure it performs its duties appropriately, the Board of Directors is advised by the Audit and Corporate Practices Committee, which is made up of independent board members. The Committee Chairman is an independent board member. C) The Board of Directors meets every three months. Meetings of the Board may be called by the Chairman of the Board, the Chairman of the Audit and Corporate Practices Committee, the Secretary of the Board or at least 25% of its members. At least one such meeting every year is dedicated to defining the company’s medium- and long-term strategies. D) Members must inform the Chairman of the Board of any conflicts of interest that may arise, and abstain from participating in any related deliberations. E) The Audit and Corporate Practices Committee studies and issues recommendations to the Board of Directors on matters such as selecting and determining the fees to be paid to the external auditor, coordinating with the company’s internal audit area and studying accounting policies, among others. F) The company has internal control systems with general guidelines that are submitted to the Audit and Corporate Practices Committee for its opinion. In addition, the external auditor validates the effectiveness of the internal control system and issues reports thereon. G) The Board of Directors is advised by the planning and finance department when evaluating matters relating to the feasibility of investments, strategic positioning of the company, alignment of investing and financing policies, and review of investment projects. This is carried out in coordination with the planning and finance department of the holding company, ALFA, S.A.B. de C.V. H) The Audit and Corporate Practices Committee is responsible for issuing recommendations to the Board of Directors on such matters as employment terms and severance payments for senior executives, and compensation policies, among others. I) Alpek has a department specifically dedicated to maintaining an open line of communication between the company and its stockholders and investors. This ensures that investors have the financial and general information they require to evaluate the company’s development and progress. 20 20 Consolidated and Combined Financial Statements 22 27 28 30 31 32 34 35 Management´s Analysis Report of the Independent Auditors Consolidated and Combined Balance Sheets Consolidated and Combined Statements of Income Consolidated and Combined Statements of Comprehensive Income Consolidated and Combined Statements of Changes in Equity Consolidated and Combined Statements of Cash Flows Notes to the Consolidated and Combined Financial Statements 21 Management´s Analysis 2012 The following report should be considered in conjunction with the Letter to the Shareholders, Audited Financial Statements and Complementary Information. Unless otherwise indicated, figures in the 2011 and 2012 information are expressed in millions of nominal Mexican pesos. Additionally, certain figures are expressed in millions of dollars (US$), reflecting the considerable dollarization of Alpek’s revenues. Percentage variations are presented in nominal terms and the information is presented on the basis of International Financial Reporting Standards. ECONOMIC ENVIRONMENT During the second half of 2011, the economic environment continued to deteriorate because of debt-related issues in several peripheral European countries. Since the situation remained unresolved in 2012, the United States and Europe continued facing problems. Despite this backdrop, the Mexican economy posted healthy growth, significantly above that of Europe and the United States. The figures below describe the economic environment that prevailed during 2012: As of the date of this report, 2012 growth in Mexico’s Gross Domestic Product (GDP) is estimated at 3.9%, the same as in 2011. The consumer price index rose 3.6%(b) in 2012, a rate below the 3.8%(b) posted in 2011. The Mexican peso appreciated 6.9%(c) in nominal terms during the year, compared to a 13.1%(c) depreciation in 2011. The average annual overvaluation of the Mexican peso vis-à-vis the US dollar was 14.2%(d) in real terms in 2012 and 16.1%(d) in 2011. With regard to interest rates in Mexico, the TIIE was 4.8%(b) in nominal terms in 2012, unchanged from 2011. In real terms, this rate grew, from an annual accumulated rate of 1.1% in 2011 to 1.3% in 2012. The average annualized nominal 3-month LIBOR rate in dollars was 0.4%(e) in 2012, similar to the 0.3%(e) of 2011. If the nominal appreciation of the Mexican peso vis-à-vis the US dollar is included in this figure, the LIBOR rate in constant pesos declined from 9.3%(a) in 2011 to -9.7%(a) in 2012. Sources: (a) Consultores Económicos Especializados, S. A. de C. V. (CEE) (b) Banco de México (Banxico) (c) Banxico. Tipo de cambio para solventar obligaciones denominadas en moneda extranjera pagaderas en la República Mexicana (Exchange rate to meet foreign currency denominated obligations payable in Mexico) (d) CEE. Base 1990. Bilateral with the United States, taking into consideration consumer prices (e) British Bankers Association 22 INdusTRy Global prices of petrochemical products fell in 2012 compared to 2011, partly reflecting the decline in oil prices during the first half of the year. There were pressures on the polyester industry in Asia during 2012 because of the recent increase in installed capacity in the region and a decline in demand in a number of markets, such as Europe. Additionally, caprolactam imports into China were under pressure during the year because of incremental Chinese production capacity compared to the previous year. However, the North American market showed a sustained growth in demand and more stable margins. VOluME - (Thousands of Tons) 2011 2012 VaR. % Polyester and Polyester Products 3,084 3,263 Plastics and Chemicals 790 823 TOTal VOluME 3,874 4,086 6 4 5 salEs - (Millions of Pesos) 2011 2012 VaR. % Polyester and Polyester Products 70,050 75,249 Plastics and Chemicals 20,781 21,068 Eliminations TOTal salEs (164) (154) 90,667 96,163 7 1 (7) 6 salEs - (US$ Millions) Polyester and Polyester Products Plastics and Chemicals Eliminations TOTal salEs salEs 2011 5,686 1,683 (14) 7,356 2012 VaR. % 5,695 1,594 (12) 7,277 0 (5) (14) (1) In 2012, Alpek’s net sales totaled $96,163 million (US$7,277 million), 6% more than the $90,667 million (US$7,356 million) posted in 2011. The sales volume grew 5%, largely reflecting the integration of acquisitions made in 2011 and an increase in polypropylene volume. The growth in volume was offset by a generalized reduction in prices, because of a decline in the prices of petrochemical raw materials and an adjustment in the PTA price formula in North America. Figures in pesos were benefited by the foreign exchange rate so that, when figures are compared in dollars, there was a 1% decline in sales. 23 salEs by busINEss sEgMENT In 2012, net sales of Polyester and Polyester Products totaled $75,249 million (US$5,695 million), 7% above the $70,050 million (US$5,686 million) of 2011. The sales volume grew 6%, largely reflecting the integration of acquisitions made in 2011 and stable demand for Alpek products in the North American region. The growth in volume was offset by a generalized reduction in prices and by non-recurring events related to the climate and to the interruption of an important customer’s production during 3Q12. Figures in pesos were benefited by the foreign exchange rate so that, when figures are compared in dollars, there was no significant variation in sales. In 2012, net sales of Plastics and Chemicals totaled $21,068 million (US$1,594 million), 1% more than the $20,781 million (US$1,683 million) of 2011. Volume rose 4%, largely reflecting an increase in polypropylene volume because of growth in propylene supply, offset by a generalized decline in prices. Figures in pesos were benefited by the exchange rate, so that, when figures are compared in dollars, there was a 5% reduction in sales. OpERaTINg INCOME aNd OpERaTINg Cash FlOw (EbITda) In 2012, operating income totaled $7,476 million (US$566 million), 1% less than the $7,589 million (US$616 million) of 2011. Figures in pesos were benefited by the foreign exchange rate, so that, when figures are compared in dollars, there was an 8% reduction in operating income. The decline largely reflects the contraction in margins of caprolactam and other export products, the adjustment in the PTA price formula in North America and certain non-recurring events, such as Hurricane Isaac. However, it is important to note the increase in the incomes of expandable polystyrene, polyurethane, industrial chemicals and specialty chemicals. In 2012, EBITDA totaled $9,610 million (US$728 million), 1% more than the $9,545 million (US$771 million) of 2011. Figures in pesos were benefited by the exchange rate, so that, when figures are compared in dollars, there was a 6% reduction in EBITDA. EbITda (Millions of Pesos) Polyester and Polyester Products Plastics and Chemicals Eliminations and Others 2011 6,732 2,813 0 7,008 2,606 (4) TOTal OpERaTINg Cash FlOw 9,545 9,610 4 (7) N/A 1 2012 VaR. % EbITda (US$ Millions) Polyester and Polyester Products Plastics and Chemicals Eliminations and Others TOTal OpERaTINg Cash FlOw 2011 2012 VaR. % 544 227 0 771 531 197 0 728 (3) (13) N/A (6) 24 COMpREhENsIVE FINaNCINg INCOME (ExpENsE) (CFI/E) In 2012, the comprehensive financing expense totaled $1,331 million, 12% above the $1,190 million of 2011. This rise largely reflects an increase in financial expense related to the prepayment of Grupo Petrotemex debt, offset by growth in financial income, a foreign exchange gain and an increase in the valuation of financial derivative instruments. CFI/E- (Millions of Pesos) 2011 2012 VaR. % Financial expense Financial income Foreign exchange gain (loss) Valuation of financial derivative instruments CFI/E TaxEs (1,323) (1,897) 221 (92) 4 356 141 69 (1,190) (1,331) 43 61 254 1,698 12 In 2012, income taxes totaled $1,723 million, 12% below the $1,948 million of 2011. This reduction largely reflects the recognition of certain losses that reduced the tax amount. NET INCOME The 2012 net income totaled $4,383 million (US$332 million), 1% less than the $4,428 million (US$362 million) of 2011. This decline largely reflects the reduction in operating income and increased comprehensive financing expense, offset by the reduction in income taxes. Figures in pesos were benefited by the exchange rate, so that, when figures are compared in dollars, there was an 8% reduction in net income. CapITal ExpENdITuREs In 2012, capital expenditures amounted to $1,522 million (US$115 million), 159% more than the $588 million (US$46 million) of 2011. This increase largely reflects the construction of the cogeneration plant at the PTA-PET complex in Cosoleacaque, Veracruz. Capital expenditures during the year also included the elimination of bottlenecks at the PET plant in Columbia, other smaller projects and the replacement of certain assets. NET dEbT1 2012 net debt amounted to $8,011 million (US$616 million), 52% less than the $16,601 million (US$1,188 million) of 2011. The reduction largely reflects a 22% decline in the balance of gross debt in 2012, combined with an increase in cash because of the resources obtained from the Initial Public Offering of Shares in April 2012. As a result, the ratio of Net Debt to EBITDA fell from 1.5 to 0.8 times during the course of the year. FINaNCIal INdICaTORs - (TIMEs) 2011 2012 Net debt / EBITDA (US$) Interest coverage (US$) Total liabilities / Capital 1.5 8.7 2.3 0.8 6.2 1.1 (1) Net Debt = Current Debt plus Non-Current Debt excluding debt issuance costs, plus accrued Interest Payable less (Cash and Cash Equivalents plus Restricted Cash and Cash Equivalents). 25 2012 hIghlIghTs Initial public Offering of shares On April 26, 2012, the Company concluded an Initial Public Offering of Shares in Mexico and a Private Offering of Shares in international markets. A total of 379,298,220 shares (including the overallotment option) were issued at an offering price of $27.50 per share, resulting in resources amounting to $10,431 million. Because of its high level of capitalization and trading volume, the Mexican Stock Exchange included Alpek in its Stock Market Index (IPC) as of September 3, 2012. Issue of a us$650 million 144a/Reg. s bond On November 20, 2012, the Company concluded an issue of Senior Notes for a nominal amount of US$650 million with a single maturity in 2022. The interest on the Senior Notes will be paid every six months at a rate of 4.5% annually starting on May 20, 2013. The Senior Notes were placed through a private issue in accordance with Rule 144A, Regulation S of the 1933 Securities Act of the United States of America. The net resources obtained from the issue of Senior Notes were mainly used to prepay the debt of certain of the Company’s subsidiaries. Cogeneration project In 2012, ground was broken for the construction of an electricity and steam cogeneration project in which the Company plans to invest approximately US$130 million through its subsidiary Grupo Petrotemex, S.A. de C.V. The new plant will generate approximately 95 megawatts of electricity, as well as steam, to cover the requirements of the PTA-PET complex in Cosoleacaque, Veracruz. Tender Offer On August 13, 2012, Grupo Petrotemex made a Tender Offer for approximately US$154 million of the principal amount of the 144A/Reg. S Senior Notes it had issued in 2009. As of December 31, 2012, a balance of approximately US$121 million with a single maturity in 2014 remained. In addition, Grupo Petrotemex, S.A. de C.V. obtained the approval of the majority of the holders of its Senior Notes to amend certain related contractual conditions. dividends The Ordinary Stockholders’ Assembly of August 30, 2012 approved the payment of Alpek’s first dividend as a publicly traded company. The total amount of the dividend was $911 million, equivalent to $0.43 pesos per share. 26 ALPEk, S. A. B. DE C. V. AND SUBSIDIARIES Report of the Independent Auditors Monterrey, N. L., February 1, 2013 TO ThE sTOCKhOldERs’ MEETINg OF alpEK, s. a. b. dE C. V. We have audited the accompanying consolidated and combined financial statements of Alpek, S. A. B. de C. V. and subsidiaries, which comprise the consolidated and combined balance sheets as of December 31, 2012 and 2011, 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 summary of 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 financial statements in accordance with International Financial Reporting Standards (IFRS, see Note 3), and for such internal control as Management determines is necessary to enable the preparation of consolidated and combined financial 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 our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether 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 the consolidated 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 financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated and combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of the accounting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the consolidated and combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the accompanying consolidated and combined financial statements present fairly, in all material respects, the consolidated and combined financial position of Alpek, S. A. B. de C. V. and subsidiaries as of December 31, 2012 and 2011, and January 1, 2011, and their financial performance and their cash flows for the years ended December 31, 2012 and 2011, in accordance with International Financial Reporting Standards (IFRS). PricewaterhouseCoopers, S. C. héCTOR RábagO saldíVaR Audit Partner 27 27 Consolidated and Combined Balance Sheets As of December 31, 2012 and 2011 and January 1, 2011 (In thousands of Mexican pesos) assets Current Assets: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables, net Inventories Derivative financial instruments Other current assets Total current assets Non-current Assets: Derivative financial instruments Property, plant and equipment, net Goodwill and intangible assets, net Deferred income tax Other non-current assets Total non-current assets Note December 31, 2012 December 31, 2011 January 1, 2011 6 7 8 11 20 9 20 12 13 19 14 Ps 6,654,561 2,992 13,368,995 11,582,045 107,297 243,991 31,959,881 Ps 3,584,287 1,925 13,281,161 12,320,163 49,450 231,295 29,468,281 Ps 3,231,935 283,647 9,262,717 6,580,709 207,100 186,594 19,752,702 - 26,695,410 2,243,495 504,613 292,774 29,736,292 26,630 28,879,082 2,549,420 939,983 289,561 32,684,676 104,720 22,125,158 188,355 706,139 137,626 23,261,998 Total Assets Ps 61,696,173 Ps 62,152,957 Ps 43,014,700 The accompanying notes are an integral part of these consolidated and combined financial statements. JOsé dE JEsús ValdEz sIMaNCas Chief Executive Officer Raúl MIllaREs NEyRa Chief Financial Officer 28 Alpek, S. A. B. de C. V. And SuBSidiArieS liability and Equity liabilities Current liabilities: Current debt Trade and other payables Derivative financial instruments Income tax payable Other current liabilities Total current liabilities Non-current liabilities: Non-current debt Derivative financial instruments Deferred income tax Employees’ benefits Total non-current liabilities Total Liability Equity Controlling portion: Capital stock Share premium Retained earnings Other reserves Stockholders’ equity controlling portion Non-controlling portion Total Equity Total Liabilities and Equity Note December 31, 2012 December 31, 2011 January 1, 2011 17 16 20 21 17 20 19 18 22 22 22 22 22 Ps Ps 500,641 9,696,234 287,510 101,807 1,462,261 12,048,453 13,939,767 208,218 4,718,445 1,130,128 19,996,558 32,045,011 Ps 2,141,974 13,218,369 438,741 301,293 2,578,872 18,679,249 17,544,786 743,063 5,125,673 1,261,062 24,674,584 43,353,833 6,051,880 9,071,074 11,006,758 50,264 26,179,976 3,471,186 29,651,162 61,696,173 4,968,187 - 9,139,157 1,147,204 15,254,548 3,544,576 18,799,124 Ps 62,152,957 Ps Ps 1,428,999 7,699,308 88,418 279,849 1,696,129 11,192,703 7,786,884 1,150,668 4,638,388 572,432 14,148,372 25,341,075 2,917,204 - 11,617,447 49,584 14,584,235 3,089,390 17,673,625 43,014,700 29 Alpek, S. A. B. de C. V. And SuBSidiArieS Consolidated and Combined Statements of Income For the years ended December 31, 2012 and 2011 (In thousands of Mexican pesos) Net sales Cost of sales Gross profit Selling expenses Administrative expenses Other income (expenses), net Operating profit Financial income (including foreign exchange gain) Financial expenses (including foreign exchange loss) Comprehensive financing expense, net Share of losses of associates Profit before income tax Income tax Profit for the year Profit attributable to: Controlling portion Non-controlling portion Basic and diluted earnings per share (in pesos) Note 23 23 23 24 25 25 27 2012 96,163,456 (86,766,710) 9,396,746 (1,072,461) (1,158,708) 310,836 7,476,413 565,716 (1,896,979) (1,331,263) (39,055) 6,106,095 (1,723,293) 4,382,802 3,662,549 720,253 4,382,802 2011 90,666,561 (80,653,169) 10,013,392 (972,751) (1,126,593) (325,482) 7,588,566 224,508 (1,414,731) (1,190,223) (22,965) 6,375,378 (1,947,625) 4,427,753 3,899,342 528,411 4,427,753 Ps Ps Ps Ps 1.83 Ps 2.24 Ps Ps Ps Ps Ps 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 Chief Executive Officer Raúl MIllaREs NEyRa Chief Financial Officer 30 Alpek, S. A. B. de C. V. And SuBSidiArieS Consolidated and Combined Statements of Comprehensive Income For the years ended December 31, 2012 and 2011 (In thousands of Mexican pesos) Profit for the year Other comprehensive income for the year, net of taxes: Effect of derivative financial instruments designated as cash flows hedging Actuarial losses of labor obligations Translation effect of foreign entities Note 20 18 3c 2012 4,382,802 Ps 2011 4,427,753 Ps 64,971 (62,153) (1,406,694) (239,535) (242,128) 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 Ps 5,663,046 Attributable to: Controlling portion Non-controlling portion Comprehensive income for the year Ps Ps 2,504,925 474,001 2,978,926 Ps Ps 4,754,154 908,892 5,663,046 The accompanying notes are an integral part of these consolidated and combined financial statements. JOsé dE JEsús ValdEz sIMaNCas Chief Executive Officer Raúl MIllaREs NEyRa Chief Financial Officer 31 Alpek, S. A. B. de C. V. And SuBSidiArieS Consolidated and Combined Statements of Changes in Equity For the years ended December 31, 2012 and 2011 (In thousands of Mexican pesos) Balance at January 1, 2011 Profit for the year Other comprehensive income for the period Total comprehensive income for the period Dividends declared Corporate Reorganization (Note 1): Initial capital contribution Increase in capital stock Decrease in Alpek combined stockholders’ equity Corporate reorganization net effect Balance at December 31, 2011 Profit for the year Other comprehensive income for the period Total comprehensive income for the period Other Dividends declared Increase in capital stock Movements in non-controlling portion Balance at December 31, 2012 Note Capital stock 2,917,204 Ps Share premium - Ps Other reserves Total attributable to controlling portion Ps 11,617,447 Ps 49,584 Ps 14,584,235 Ps 3,089,390 Ps 17,673,625 22 1 1 1 1 22 22 22 50 4,968,137 (2,917,204) 4,968,187 - - 1,083,693 9,071,074 Ps 6,051,880 Ps 9,071,074 Ps 11,006,758 Ps 50,264 Ps 26,179,976 Ps 3,471,186 Ps 29,651,162 Retained earnings 3,899,342 (242,808) 3,656,534 (1,225,133) (12,081,574) 7,171,883 9,139,157 3,662,549 (60,684) 3,601,865 16,167 (1,692,253) (58,178) 1,097,620 1,097,620 1,147,204 (1,096,940) (1,096,940) 3,899,342 854,812 4,754,154 (1,225,133) 50 4,968,137 (14,998,778) 7,171,883 15,254,548 3,662,549 (1,157,624) 2,504,925 16,167 (1,692,253) 10,154,767 (58,178) Non- controlling portion 528,411 380,481 908,892 (453,706) - - - - - - 3,544,576 720,253 (246,252) 474,001 (605,569) 58,178 Total equity 4,427,753 1,235,293 5,663,046 (1,678,839) 50 4,968,137 (14,998,778) 7,171,883 18,799,124 4,382,802 (1,403,876) 2,978,926 16,167 (2,297,822) 10,154,767 - The accompanying notes are an integral part of these consolidated and combined financial statements. JOsé dE JEsús ValdEz sIMaNCas Chief Executive Officer Raúl MIllaREs NEyRa Chief Financial Officer 32 Alpek, S. A. B. de C. V. And SuBSidiArieS (In thousands of Mexican pesos) Balance at January 1, 2011 Profit for the year Other comprehensive income for the period Total comprehensive income for the period Dividends declared Corporate Reorganization (Note 1): Initial capital contribution Increase in capital stock Decrease in Alpek combined stockholders’ equity Corporate reorganization net effect Balance at December 31, 2011 Profit for the year Other comprehensive income for the period Total comprehensive income for the period Other Dividends declared Increase in capital stock Movements in non-controlling portion Balance at December 31, 2012 22 1 1 1 1 22 22 22 50 4,968,137 (2,917,204) - 4,968,187 - Note Capital stock Share premium Ps 2,917,204 Ps - Ps Retained earnings 11,617,447 3,899,342 (242,808) 3,656,534 (1,225,133) (12,081,574) 7,171,883 9,139,157 3,662,549 (60,684) 3,601,865 16,167 (1,692,253) Other reserves 49,584 Ps 1,097,620 1,097,620 Ps Total attributable to controlling portion 14,584,235 3,899,342 854,812 4,754,154 (1,225,133) 1,147,204 (1,096,940) (1,096,940) 50 4,968,137 (14,998,778) 7,171,883 15,254,548 3,662,549 (1,157,624) 2,504,925 16,167 (1,692,253) 10,154,767 (58,178) 26,179,976 1,083,693 9,071,074 Ps 6,051,880 Ps 9,071,074 (58,178) 11,006,758 Ps Ps 50,264 Ps Non- controlling portion 3,089,390 528,411 380,481 908,892 (453,706) - - - - 3,544,576 720,253 (246,252) 474,001 - (605,569) - 58,178 3,471,186 Ps Ps Total equity 17,673,625 4,427,753 1,235,293 5,663,046 (1,678,839) 50 4,968,137 (14,998,778) 7,171,883 18,799,124 4,382,802 (1,403,876) 2,978,926 16,167 (2,297,822) 10,154,767 - 29,651,162 Ps Ps 33 Alpek, S. A. B. de C. V. And SuBSidiArieS Consolidated and Combined Statements of Cash Flows For the years ended December 31, 2012 and 2011 (In thousands of Mexican pesos) Cash flows from operating activities Profit before income tax Depreciation and amortization Impairment of property, plant and equipment Loss (gain) on the sale of property, plant and equipment Gain on sale on available for sale investments Share of losses of associates Finance result, net Gain on changes in the fair value of cash flow hedges Employees’ profit sharing Subtotal Increase in trade receivables (Increase) decrease in trade receivables from related parties Increase in other receivables Decrease (increase) in inventories (Decrease) increase in trade payables Increase (decrease) in trade payables from related parties Income tax paid Employees’ profit sharing paid Net liability for retirement obligation Net cash generated from operating activities Cash flows from investing activities Interest received Purchase of property, plant and equipment Business acquisitions, net of cash acquired (Acquisition) sale of shares on available for sale investments Derivative financial instruments Dividends received Other Net cash used in investing activities Cash flows from financing activities Proceeds from loans and debt Payments of loans and debt Interest paid Dividends paid Increase in capital stock Payments of loans to ultimate parent company Net cash flows (used in) provided from financing activities Increase in cash and cash equivalents Foreign exchange on cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Note 2012 2011 Ps 12, 13 24 14 2 2 1 Ps 6,106,095 2,129,374 4,798 375 - 39,055 1,273,831 (221,202) 26,979 9,359,305 (108,926) (440,565) (720,176) 117,939 (1,236,125) 454,186 (1,709,084) (103,136) (130,014) 5,483,404 137,152 (1,521,542) - (54,055) (319,363) - (47,419) (1,805,227) 9,888,096 (13,918,319) (1,452,276) (2,297,822) 10,154,767 (2,654,568) (280,122) 3,398,055 (327,781) 3,584,287 6,375,378 1,818,776 137,897 (3,034) (88,531) 22,965 1,095,797 (3,833) 111,175 9,466,590 (191,368) 162,786 (87,489) (3,221,330) 1,089,932 (84,427) (2,278,334) (39,101) (155,106) 4,662,153 24,668 (588,060) (9,038,215) 88,557 (269,564) 632 341,826 (9,440,156) 9,778,060 (2,127,782) (1,109,312) (1,678,839) 51 - 4,862,178 84,175 268,177 3,231,935 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 Chief Executive Officer Raúl MIllaREs NEyRa Chief Financial Officer 34 Alpek, S. A. B. de C. V. And SuBSidiArieS Notes to the Consolidated and Combined Financial Statements As of December 31, 2012 and 2011 and January 1, 2011 (In thousands of Mexican pesos, except where otherwise indicated) 1 - General information Alpek, S. A. B. de C. V. (“Alpek”, or the “Company”) operates through two major business segments: polyester chain products and plastic and chemical products. The polyester chain business segment, comprising the production of purified terephthalic acid (PTA), polyethylene terephthalate (PET) and polyester fibers, serves the food and beverage packaging, textile and industrial filament markets. The plastics and chemicals business segment, 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 beverage packaging, 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 Pedro Garza Garcia, Nuevo Leon, Mexico and operates plants located in Mexico, the United States of America and Argentina. The following notes to the financial statements when referring to “Pesos” or “Ps”, it means thousands of Mexican Pesos. 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 basis until June 15, 2011 and on a consolidated basis starting on June 16, 2011. Prior to June 15, 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. 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: Grupo Petrotemex, S. A. de C. V. and its subsidiaries (Petrotemex) (1) Akra Polyester, S. A. de C. V. and its subsidiary (Akra) (2) Indelpro S. A. de C. V. and its subsidiary (Indelpro) (3) Polioles, S. A. de C. V. and its subsidiary (Polioles) (4) Unimor, S. A. de C. V. and its subsidiaries (Unimor) (5) Copeq Trading Co. (Copeq) Percentage of direct ownership by Alfa prior to the Corporate Reorganization 100% 51% 51% 50% plus 1 share 100% 100% Percentage of direct and indirect ownership by Alpek post Corporate Reorganization 100% 100% 51% 50% plus 1 share 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. Immediately after the Corporate Reorganization, Petrotemex owned 100% and currently it 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. 35 35 Alpek, S. A. B. de C. V. And SuBSidiArieS 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 share ownership in Petrotemex and Indelpro (non-cash transactions). Upon such contribution, Alpek owns 100% and 51%, of the shares of these companies, respectively. • Alfa sold its share ownership in Polioles, Unimor and Copeq to Alpek for Ps 2,220,504. As a result, Alpek recognized an account payable that was settled in 2012, and it owns 50% plus 1 share, 100% and 100% 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 sale that Alfa made to Petrotemex of its ownership interest of 51% in Akra. As a result, Petrotemex owned 100% 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, 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 transfer of the shares from Alfa to Alpek was completed as follows: Contribution of share ownership in Petrotemex and Indelpro Sale of share ownership in Polioles, Unimor and Copeq Sale of share ownership in Akra Purchase price of the net assets acquired on June 16, 2011 Capital Stock 4,968,137 - - 4,968,137 Ps Ps Total 4,968,137 2,220,504 638,254 7,826,895 Ps Ps Petrotemex and Indelpro combined stockholders’ equity at June 16, 2011 Unimor, Polioles, Akra and Copeq combined stockholders’ equity at June 16, 2011 Carrying amounts values of the net assets acquired at June 16, 2011 Corporate reorganization net effect Capital Stock Retained Earnings Total Ps 1,856,862 Ps 10,052,963 Ps 11,909,825 1,060,342 2,028,611 3,088,953 Ps Ps 2,917,204 2,050,933 Ps Ps 12,081,574 (12,081,574) Ps Ps 14,998,778 (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 first adoption of IFRS) according to Alfa’s consolidated financial statements (predecessor cost basis). The difference between 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 were accounted in Alpek’s equity; as a result, the book value of the net assets obtained by Alpek are equal to those Alfa had in its consolidated financial statements where no goodwill nor fair value adjustments were recognized for financial reporting purposes. 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 be payable 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. de C. V. performed an initial public offering (IPO) in Mexico and a private offering of shares in international markets (together “Global Offering”). The total amount of the Global Offering was Ps 9,082 million (330,259,322 shares at a placement price of Ps 27.50 per share). 36 Alpek, S. A. B. de C. V. And SuBSidiArieS On May 8, 2012, following the global offering, the underwriters, both in Mexico and abroad, exercised the overallotment option granted. The total amount of the overallotment was Ps 1,349 million (49,038,898 shares at the placement price of Ps 27.50 per share) so that the total resources Alpek obtained as a result of the 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 paid capital 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 an electrical 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 generate approximately 95 megawatts of electricity as well as all the steam needed to cover the requirements of these plants. 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. (“Cogeneradora”). The project will increase the plant’s efficiency 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 Purified Terephthalic Acid (“PTA”) and Polyethylene Terephthalate (“PET”) facilities located in the United States of America owned by Eastman Chemical Company (“Columbia Assets”). The acquisition of the Columbia Assets complied with the requirements of a business combination. As a result of this transaction the Company acquired a modern petrochemical complex which is comprised of three plants located in Columbia, South Carolina, with a combined total annual capacity of 1.26 million tons to produce PTA and PET. This acquisition also included working capital, patents and intellectual property rights relating to the IntegRexTM technology used in the production of PTA and PET. A total of 415 employees including administrative personnel, work in these plants. The consolidated and combined financial statements include the assets and results of operations of Columbia from February 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 the fair value at the acquisition date, these adjustments were recognized retrospectively from the date of acquisition to December 31, 2011 in accordance with accounting guidance applicable under IFRS. The total consideration paid by the Company amounted to Ps 7,533,452 (US$621,572) in cash. The purchase price allocation is as follows: Current assets (1) Property, plant and equipment Intangible assets (3) Current liabilities (2) Goodwill US$ 226,123 271,196 156,300 (36,410) 4,363 US$ 621,572 (4) (1) Current assets mainly consist of accounts receivable and inventories amounting to US$121,799 and US$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 by dollar. 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 expanded capabilities of the Company’s asset base. The registered goodwill is not deductible for tax purposes. 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$600,000. The loan agreement was signed on December 16, 2010 and fully disbursed on January 31, 2011. The value of the acquired receivables approximates their fair value due to their short maturities. The receivables are expected to be recovered in the short term. 37 Alpek, S. A. B. de C. V. And SuBSidiArieS No contingent liability to be registered has arisen from this acquisition and there is not any contingent agreement. The Company is not responsible for environmental liabilities except for those that may have originated from the acquisition date. Costs related to the acquisition were Ps 77,589 (US$ 6,401) and were recognized in the income statement in the item of other expenses. Revenue contributed by Columbia Assets included in the consolidated and combined income statement from the 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 financial information from the counterparty corresponding to these assets prior to the date of the acquisition to determine 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 of Wellman, Inc. (“Wellman”). As a result of this transaction, Alpek acquired a plant located in Bay St. Louis, Mississippi, United States of America with an annual production capacity of 430,000 tons of PET. The plant employs 165 persons. The consolidated financial statements include the financial information of Wellman from 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 the fair value at the acquisition date; these adjustments were recognized retrospectively from the date of acquisition to December 31, 2011 in accordance with accounting guidance applicable under IFRS. The total consideration 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) Property, plant and equipment Intangible assets (3) Other assets Current liabilities (2) Provision for labor obligations Other non-current liabilities Goodwill US$ US$ 89,731 110,728 7,130 11,796 (44,617) (27,900) (38,238) 14,414 123,044 (4) (1) Current assets consist of cash and cash equivalents of US$1,402, accounts receivable of US$56,414 and inventories of US$31,915. (2) Current liabilities consist of amount payable to suppliers and other accounts payable amounting to US$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 $12.48 pesos by dollar. Additionally, in Note 3.c the main exchange rates used in the translation processes are shown. The goodwill is comprised primarily of the advantageous global market position obtained through the expanded capabilities of the Company’s asset base. The registered goodwill is not deductible for tax purposes. The value of the acquired receivables approximates their fair value due to their short maturities. The receivables are expected to be recovered in the short term. No contingent liability to be registered has arisen from this acquisition and there is not any contingent agreement. The Company is not responsible for environmental liabilities except for those that may have originated from the acquisition date. Costs related to the acquisition were Ps 30,760 (US$ 2,464) and were recognized in the income statement in the item of other expenses. Revenue contributed by Wellman Mississippi included in the consolidated income statement from the date of acquisition to December 31, 2011 was Ps 1,858 million (US$ 149 million). At the date of issuance of these financial statements, Alpek was unable to obtain the audited financial information before the date of the acquisition under the accounting standards used by Alpek in order to determine the amount of annual revenue and net income as if the acquisition had taken place on January 1, 2011. 38 Alpek, S. A. B. de C. V. And SuBSidiArieS 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 accompanying notes. Following is a summary of the most significant accounting policies followed by the Company and its subsidiaries, which have been applied on a consistent basis in the preparation of their financial information for the 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 been prepared in accordance with the International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). The IFRS include all the effective International Accounting Standards (“IAS”), and the related interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”), including those issued previously by the Standing Interpretations Committee (“SIC”). In accordance with the amendments to the regulations for Public Companies and Other Participants of the Mexicans Securities Market, issued by the National Banking and Securities Commission (“Comisión Nacional Bancaria y de Valores”) (“CNBV”) on January 27, 2009, the Company is required to prepare its financial statements starting from 2012, using the IFRS accounting policy framework. For comparison purposes, the consolidated and combined financial statements as of December 31, 2011 and for the year then ended, and the consolidated and combined balance sheet as of January 1, 2011 have been prepared in accordance with IFRS. The Company changed its accounting policies from Mexican Financial Reporting Standards (“MFRS”) to comply with IFRS as of January 1, 2012. The transition from MFRS to IFRS has been registered in accordance with IFRS 1, setting January 1, 2011 as the transition date. Even though Alpek was formed until June 16, 2011, the transition date corresponds to the transition date of the combined entities that were previously consolidated in Alfa, who has also adopted IFRS starting from January 1, 2012. The reconciliation of the effects of the transition from MFRS to IFRS is disclosed in Note 30 on the consolidated and 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 hedging financial instruments measured at fair value, and the financial assets at fair value through profit or loss and available for sale financial assets. The preparation of the consolidated and combined financial statements requires the use of certain critical accounting estimates. It also requires Management to exercise its judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated and combined financial statements are disclosed in Note 5. b) Consolidation i. Subsidiaries Subsidiaries are all entities over which the Company has the power to govern the financial and operating 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 external shareholders is reflected as non-controlling portion. Subsidiaries are fully consolidated from the date on which control is transferred to the Company, and until the date that control ceases. The Company applies the acquisition method to account for business combinations. The Company defines 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 produce products that have the ability to provide a return in the form of dividends, lower costs or other economic benefits directly to the investors. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The Company recognizes any non-controlling portion in the acquiree on an acquisition -by-acquisition basis, either at fair value or at the non-controlling portion’s proportionate share of the recognized amounts of acquiree’s identifiable net assets. The Company applies predecessor accounting for business combinations of an entity under common control. This consists of incorporating the carrying amounts of the acquired entity, which includes any goodwill recorded at the consolidated level in respect of the acquired entity. Any difference between the carrying amounts of the net assets acquired at a subsidiary level and their carrying amounts at the Company level are recognized in equity. 39 Alpek, S. A. B. de C. V. And SuBSidiArieSAcquisition-related costs are expensed as incurred. Goodwill is initially measured as the excess of the aggregate of the consideration transferred and the fair value of non-controlling portion over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the consolidated statement of income. Inter-company transactions and balances, and unrealized gains between group companies are eliminated in the preparation of the consolidated and combined financial statements. Unrealized losses are 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 the policies adopted by the Company. At December 31, 2012, the main subsidiaries that comprise the consolidation of the Company were as follows: Alpek, S. A. B. de C. V. (Holding) Grupo Petrotemex, S. A. de C. V. DAK Americas, L. L. C. Dak Resinas Americas México, S. A. de C. V. DAK Americas Exterior, S. L. (Holding) DAK Americas Argentina, S. A. Tereftalatos Mexicanos, S. A. de C. V. Akra Polyester, S. A. de C. V. (2) Indelpro, S. A. de C. V. Polioles, S. A. de C. V. Univex, S. A. Country (1) Percentage of Ownership USA Spain Argentina 100 100 100 100 100 91 93 51 50 100 Functional currency Mexican Pesos US Dollar US Dollar US Dollar Euro Argentinean peso US Dollar US Dollar US Dollar US Dollar 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 of Akra 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 or decrease in the percentage of control, is recorded in stockholders’ equity, directly in the retained earnings account, in the period in which the transactions that cause such effects occur. The effect of absorption (dilution) of control is determined by comparing the book value of the investment in shares based on the equity before the absorption (dilution) of control against the book value after the relevant event. 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 fair value at the date when control is lost, and the change in its carrying amount is recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Company had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized 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, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and recognized initially at cost. The Company’s investment in associates includes goodwill identified on acquisition, net of any accrued impairment loss. If the ownership interest in an associate is reduced but significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income is reclassified to profit or loss where appropriate. The Company’s share of post-acquisition profit or loss is recognized in the income statement, and its share of post acquisition movements in other comprehensive income is recognized in other comprehensive income. The accrued movements after the acquisition will be adjusted against the carrying value of the investment. When the Company’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Company does not recognize further losses, unless it has incurred legal or constructive obligations or made payments on behalf of the associate. 40 Alpek, S. A. B. de C. V. And SuBSidiArieS The Company assesses at each reporting date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying value and 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 of the interest in them. Unrealized losses are eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Company. When the Company ceases to have significant influence over an associate, any difference between the fair value and the retained interest is recognized in the income statement, including any consideration received for the disposal of part 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 the currency of the primary economic environment in which the entity operates (“the functional currency”). 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 rates prevailing at the dates of the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at closing date exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in other comprehensive income as qualifying cash flow hedges. Foreign exchange gain and losses resulted from changes in the fair value of monetary financial assets and 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 through profit 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 in other comprehensive income. 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 the functional currency were converted to the functional currency in accordance with the following procedures: a. The balances of monetary assets and liabilities expressed in the transaction currency were converted using the exchange rates at closing period. b. For non-monetary assets and liabilities and stockholders’ equity which were already converted to the functional currency the changes during the period were added, the changes were converted using the historical exchange rate. In the case of changes in the non-monetary items recorded at their fair value, occurred during the period expressed at the transaction currency, were converted using 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 using historical exchange rates at the date the transactions occurred and were recorded in the statement of income, except if the amounts related to nonmonetary items, in which case the historical exchange rates related to the non-monetary items were used. d. The differences in changes originated from the conversion of the transaction currency to the functional currency were recorded as income or expense in the income statement in the period in which 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 into the presentation currency as follows: a. Assets and liabilities at December 31, 2012 and 2011 and January 1, 2011 were translated at the closing exchange rates of Ps 13.01, Ps 13.98 and to Ps 12.36 to U.S. dollars, respectively. 41 Alpek, S. A. B. de C. V. And SuBSidiArieS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 this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the rate on the dates of the transactions), which amounted 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 and liabilities of the foreign entity and translated at the closing rate. Translation adjustments arising are recognized in equity. d) Cash and cash equivalents Cash and cash equivalents includes cash in hand, deposits held at call with banks and other short-term highly liquid investments with original maturities of three months or less and bank overdrafts, all of these are subject to a low significant risk in changes in value. Bank overdrafts are presented as other current liabilities. e) Restricted cash and cash equivalents Cash and cash equivalents which restrictions originate to not meet the definition of cash and cash equivalents described above, are presented in a separate line in the statement of financial position and are excluded 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 classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. Regular purchases and sales of financial assets are recognized on the settlement date. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership and the control 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 is classified in this category if acquired principally for the purpose of selling in the short term. Derivatives are also 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, and transaction costs are expensed in the income statement. Gains or losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are presented in the income statement 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 not quoted in an active market. They are included in current assets, except for maturities greater than 12 months after 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 will not be collected by the amounts originally agreed or will be in a different period, the trade receivables are impaired. iii. Held to maturity investments If the Company has demonstrable intention and ability to hold debt securities to maturity, they are classified as held to maturity. Assets in this category are classified as current assets if expected to be settled within the next 12 months, otherwise are classified as noncurrent. Initially, are recognized at fair value plus any directly attributable transaction costs, are subsequently are measured at amortized cost using the effective interest method. Investments held to maturity are recognized or derecognized on the day they are transferred to, or from the Company. 42 Alpek, S. A. B. de C. V. And SuBSidiArieSiv. Financial assets available for sale Available for sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless the investment matures in a period less than 12 months or Management intends to dispose of it within the following 12 months after the date of the balance sheet. Available for sale financial assets are recognized initially at its fair value plus any directly attributable transaction costs. Subsequently, these assets are measured at its fair value (unless it cannot be measured by its price in an active market and the fair value cannot be measured reliably, in which case they are recognized at cost less impairment). Changes in the fair value of monetary and non-monetary financial assets classified as available for sale are recognized in other comprehensive income. When securities classified as available for sale are sold or impaired, the accumulated fair value adjustments recognized 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 at amortized cost using the effective interest method. Liabilities in this category are classified as current liabilities if are 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 of business from suppliers. Loans are initially recognized at fair value, net of transaction costs incurred. Loans are subsequently recognized at amortized cost, any difference between the amounts received (net of transaction costs) and the settlement value is recognized in the income statement over the term of the loan using the effective interest method. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or realize the asset 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 a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one 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 financial assets 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. - Granting a concession to the issuer or debtor by the Company, as a result of financial difficulties of the issuer 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 financial reorganization. - 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 flows related to a group of financial assets after initial recognition, although the decrease cannot yet be identified 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. 43 Alpek, S. A. B. de C. V. And SuBSidiArieSBased in the aspects mentioned above, the Company assesses if objective evidence of impairment exists. For loans and receivables category, if impairment exists, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit 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 consolidated income statement in the line administrative expenses. If a loan or held to maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. Alternatively, the Company may measure impairment on the basis of an instrument’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 related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously recognized impairment loss is recognized in the consolidated 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 identify whether there is objective evidence of impairment. In the case of equity financial instruments, a significant or 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 the difference between the acquisition cost and the current fair value of the asset, less any impairment loss previously recognized is reclassified from the accounts of other comprehensive income and is registered in the income statement. Impairment losses recognized in the consolidated income statement on equity instruments are not reversed through the consolidated income statement. Impairment losses recognized in the income statement related to financial debt instruments could be reversed in subsequent years if the fair value 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 flow hedges, are included in the balance sheet as assets and/or liabilities at fair value and are measured subsequently at its fair value. The fair value is determined based on the prices in recognized markets; when no quoted market prices are available, it is determined based on valuation techniques accepted in the financial sector. The fair value of financial instruments hedging derivatives is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and as a current asset or liability if the remaining 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 or expense, except for changes in the fair value of derivative financial instruments associated to cash flow hedging, in such case, the changes are recognized in equity. These derivative financial instruments for hedging are entered to hedge against an existing risk and they comply with the related hedge accounting requirements, its designation as a hedge is documented at the inception of the transaction, specifying the related objective, initial position, risks to be hedged, type of hedge relationship, characteristics, accounting recognition and how their effectiveness will be assessed. Fair value hedges are stated at fair value and changes in valuation are recorded in income under the same caption as the hedged item. In the case of cash flow 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 is recognized immediately in income. The Company suspends accounting for hedge transactions when the derivative instrument has expired, been cancelled or been exercised, when it has not reached a high degree of effectiveness to offset the changes in the 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 the carrying amount of a hedged item for which the effective interest method is used is amortized to income statement over the period to maturity, in the case of cash flow hedges, the amounts accumulated in stockholders’ equity forming part of other comprehensive income, remain in stockholders’ equity until the effect of the forecasted transaction affects income. In the case the forecasted transaction seems unlikely to occur, the gains or losses accumulated in other comprehensive income are recognized immediately in income. When the hedge of a forecasted transaction is effective but later does not comply with the effectiveness test, the effects accumulated in other comprehensive income in stockholders’ equity are reclassified to income in proportion as the forecasted asset or liability affects income. 44 Alpek, S. A. B. de C. V. And SuBSidiArieSThe derivative financial instruments were privately negotiated with various financial institutions whose strong financial condition was supported by high ratings assigned by securities and credit risk rating agencies. The documentation used to formalize the operations entered into was that commonly used; in general terms, it follows the “Master Agreement” generated by the “International Swaps & Derivatives Association” (“ISDA”), and is accompanied by the annexes commonly known as “Schedule”, “Credit Support Annex” and “Confirmation”. The fair values of the financial derivative instruments reflected in the Company’s financial statements represent a mathematical estimate of their fair values. The fair values are determined using models which belong to independent experts and involve the use of assumptions based on, past and current market conditions, 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 cost method. 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 excludes borrowing costs. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Costs of inventories include the transfer from equity of any gains or losses on qualifying cash flow hedges purchases of raw materials. i) Property, plant and equipment Items of property, plant and equipment are recognized at cost less accumulated depreciation and any accumulated impairment losses in its value. The cost includes expenses directly attributable to the acquisition of the asset. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized. Repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Significant improvements are depreciated over the remaining useful life of the related asset. Depreciation is determined using the straight line method, considering each of the components of the asset separately. The useful life of the classes of depreciable assets is as follows: Building and constructions Machinery and equipments Rail road equipments Furniture and laboratory and IT equipment 40 to 50 years 10 to 40 years 15 years 2 to 13 years The spare parts or replacements to be used for more than one year and attributable to specific machinery are classified as property, plant and equipment in other fixed assets. Borrowing costs related to financing of property, plant and equipment whose acquisition or construction requires a substantial period, are capitalized as part of the acquisition cost of such qualifying assets, until they 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 or circumstances occur indicating that the carrying amount of the assets may not be recoverable. An impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its recoverable 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 accounting estimates. In case that the carrying value is greater than the estimated recoverable amount, a decrease in the carrying amount 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 carrying amount 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 the form of the contract. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight line basis over the period of the lease. 45 Alpek, S. A. B. de C. V. And SuBSidiArieSLeases where the Company has substantially all the risks and rewards of the property are classified as finance leases. Finance leases are capitalized at the beginning of the lease at the lower of fair value of the leased property and the present value of the minimum lease payments. If its determination is practical, for discounting 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 lessee will 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 the actual amount. The corresponding rental obligations are included in long term debt. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under 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 value of the net identifiable assets acquired determined at the acquisition date. Goodwill is presented in the caption 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 the goodwill 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 tests annually. 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 amortization and the recognized impairment losses. These assets are amortized using the straight line method based on their estimated useful lives, determined in accordance with the expected generation of future economic 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 Trademarks Non-compete agreements Customer relationships Software and licenses Intellectual property rights 15.5 years 10 years 10 years 6 to 7 years 3 to 7 years 20 to 25 years Research costs are recognized in income as incurred. Expenditures on development activities are recognized as intangible assets when such costs can be measured reliably, the product or process is technically and commercially feasible, the asset will generate potentially future economic benefits and the Company intends to and has sufficient resources to complete the development and to use or sell the asset. The amortization is recognized 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 or amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash- generating units). Non financial assets other than goodwill that 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, and the 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 the Company and its subsidiaries operate and generate taxable income to the total 46 Alpek, S. A. B. de C. V. And SuBSidiArieStemporary differences resulting from comparing the accounting and tax bases of assets and liabilities and that are expected to apply when the deferred tax asset is realized or deferred tax liability is settled, considering in any case, the tax loss carry forwards to be recoverable. The effect of a change in income tax rates is recognized in income in the period in determining the exchange rate. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of 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 will be available against which the temporary differences can be utilized. Deferred income tax is provided on temporary differences arising on investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right and when the taxes 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 a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. The contributions are recognized as employee benefit expense when the Company 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 on retirement, 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 present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates according to the NIC 19 that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related pension obligation. The discount 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 risk that future experience may differ from actuarial assumptions. Actuarial gains and losses arising from employee benefits are recognized directly in the other comprehensive income. Past-service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this 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 to retirement age and the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment using the same accounting methodology as used for defined benefit pension plans. iii. Termination benefits Termination benefits are payable when employment is terminated by the Company before the normal retirement 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 termination when the entity has a detailed formal plan to terminate the employment of current employees without possibility of withdrawal. In the case of an offer made to encourage voluntary redundancy, the termination 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 their present value. 47 Alpek, S. A. B. de C. V. And SuBSidiArieSiv. Short term benefits The Company provides employee benefits in the short term, which may include wages, salaries, annual compensation and bonuses payable within 12 months. The Company recognizes undiscounted provision 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 it has a legal or constructive obligation to pay these benefits and determines the amount to be recognized based 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 events where it is probable an outflow of resources to comply with the obligation and where the amount has been reliably estimated. Provisions are not recognized for future operating losses. p) Shared based payments The Company has established a payment option plan based on shares of its holding entity in favor of certain directors of the Company. The conditions for its granting to the eligible executives include, among other things, 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’s Management, 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 in cash is recognized as an expense with a corresponding increase in liabilities, over the period of service required. The liability is updated at each reporting date and the settlement date. Any change in the fair value of 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 the stockholders’ resolutions. In the case of a repurchase of own shares, shares acquired are held in treasury and their acquisition cost is charged to stockholders’ equity at its acquisition cost, as follows: a portion is charged to capital stock at restated theoretical value and the difference to retained earnings. These amounts are stated at historical cost. r) Common Stock Common stock is classified as equity. Incremental costs directly attributable to the issuance of new common stock 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 are integrated by the effects of translation of foreign subsidiaries, the effects of derivative financial instruments for cash flow hedges, the actuarial gains or losses, the effects of the change in fair value of financial instruments available for sale, the participation in other comprehensive income items of associates and other items 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 chief executive, who is the highest authority in the operational decision making, resource allocation and performance 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 and services in the normal course of operations. Revenues are presented net of discounts, returns, and value added 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 - It is probable that future economic benefits will flow to the entity - The Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold - The costs incurred or to be incurred in respect of the transaction can be measured reliably. 48 Alpek, S. A. B. de C. V. And SuBSidiArieSRevenue recognition criteria depend on contractual conditions with its customers. In some cases depending of the agreements with each customer the risks and rewards of ownership are transferred when the goods are taken from customers on the plant of the Company, in other cases the risks and rewards of ownership are transferred when the goods are delivered in the plant of the customers. The Company bases its estimate on historical results, taking into consideration the type of customer, the type 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 of common 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 and have not been adopted by the company. - IFRS 7, “Financial Instruments: Disclosures” In October 2010 the IASB amended IFRS 7, “Financial instruments: Disclosures”. The standard amends the required disclosures to enable users of the financial statements to evaluate risk exposure related 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 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. For the Company, this amendment is effective 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 for the Company 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 arrangements into two types: joint operations and joint ventures. The entity determines the type of joint arrangement in which it participates considering its 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. For the Company, IFRS 11 is effective 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. For the Company, IFRS 12 is effective on January 1, 2013. 49 Alpek, S. A. B. de C. V. And SuBSidiArieS- 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. For the Company, IFRS 13 is effective 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. For the Company this amendment is 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”. This standard includes guidelines for separate financial statements that remained in place after the control provisions 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 Joint Ventures”. The new standard includes requirements for joint ventures and associates for recognition in accordance 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, will have no significant impact on its financial statements. 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 risk management program of the Company focuses on the unpredictability of financial markets and seeks to minimize potential adverse effects on the financial performance of the Company. The Company uses derivative financial instruments to hedge certain risk exposures. The objective is to protect the financial health of the business considering the volatility associated to exchange rates and interest rates. Additionally, by the nature of the industries in which it participates, the Company has entered into commodity prices derivative hedge. The parent company of Alpek has a Risk Management Committee (RMC), constituted by the Committee’s Chairman, the General Director, the Financial Director of the parent company and a top Risk Management officer of the parent company acting as technical secretary. The RMC supervises derivative transactions proposed by the parent’s subsidiaries, in which a worst case scenario analysis surpasses US$1,000. This committee supports both the Chairman and the President of the parent company. All new derivative transactions which the Company propose to enter into, as well as the renewal or cancellation of derivative arrangements, are required to be approved both by the Company and the parent company according to the following schedule of authorizations:. Company’s Chief Executive Officer Parent’s Risk Management Committee Finance Committee Parent’s Board of Directors Maximum Possible Loss US$ millions Individual Transaction 1 30 100 >100 Annual Cumulative Transactions 5 100 300 >300 Proposed transactions must satisfy certain criteria, including that hedge should be lower than speculations, should be product of a fundamental analysis and should be properly documented. Sensitivity analysis and other risk analyses should be performed before the transaction is entered into. 50 Alpek, S. A. B. de C. V. And SuBSidiArieS (a) Market risk (i) Foreign exchange risk The Company operates internationally and is exposed to foreign exchange risk, primarily with respect to Mexican Pesos and Euros. The Company is exposed to foreign exchange risk arising from future commercial 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 for Alpek by the effect they have on their performance. Moreover, in its determination, Alpek has no interference. Moreover, Alpek estimated that its revenues are denominated in foreign currency, either because they come from products that are exported from Mexico, or because the products that are manufactured and sold abroad, or because even sold in Mexico, the price of such products are set based on international prices in foreign currencies such as the U.S. dollar. For this reason, in the past, in times when the Mexican Peso has appreciated in real terms against other currencies such as the dollar, Alpek profit margins have been reduced. On the other hand, when the Mexican Peso has lost value, Alpek profit margins have been increased. However, although this factor correlation has appeared on several occasions in the close past, there is no assurance that it will happen again 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 the purpose of controlling the total comprehensive cost of their financing and the volatility associated with exchange rates. Additionally, it is important to note the high “dollarization” of the Company’s revenues, since most of its sales are performed abroad, providing a natural hedging to the obligations in dollars 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 hypothetical variation of 5% in the exchange rate MXN/USD and holding all other variables constant, would result in 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 its suppliers, 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 and natural gas. In order to fix the selling prices of certain of its products, the Company has entered into agreements with certain customers. At the same time, it has entered into transactions involving derivatives on natural 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 of certain raw materials, since these inputs have a direct or indirect relationship with the prices of their products. Regarding natural gas, Pemex is the only supplier in Mexico. The selling price of natural gas at first hand is determined by the price of that product on the “spot” market of South Texas, USA, which has experienced the same volatility. For its part, the CFE is a decentralized public company in charge of producing and distributing electricity in Mexico. Electricity rates have been influenced also by the volatility of natural gas, as it is used to generate it. The Company entered into various derivative agreements with various counterparties to protect the Company against increases in prices of natural gas and other raw materials. In the case of natural gas derivatives, hedging strategies for products, were designed to mitigate the impact of potential increases in prices. The purpose is to protect the price of volatility having positions that provide stable cash flow expectations, and avoid the uncertainty in prices. The reference market price for natural gas is the Henry Hub is the “New York Mercantile Exchange” (NYMEX). The average price in dollars per MMBTU 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 consumption needs 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 value and keeping all other variables constant, such as exchange rates, the increase (decrease) would result in an immaterial effect for the year ended at December 31, 2011 and 2012 to the income statement. 51 Alpek, S. A. B. de C. V. And SuBSidiArieS(iii) Interest rate and cash flow risk The interest rate risk arises from the Company’s long-term loans. Loans issued at variable rates expose the 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 of interest rates, the Company has hired interest rate swaps to convert certain variable rate loans to fixed rates. At December 31, 2012 and 2011, if interest rates on variable rate loans were increased or decreased by 10%, 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. Each subsidiary is responsible for managing and analyzing credit risk for each of its new customers before setting the terms and conditions of payment. Credit risk is generated from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposure to customers, 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 the creditworthiness 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 by the Board. The use of credit risk is monitored regularly. Sales to retail customers are using cash or credit cards. During 2012 and 2011, the credit limits were not exceeded and Management does not expect impairment losses recognized in excess of the corresponding periods. The impairment provision for doubtful accounts represents estimated losses resulting from the inability of customers to make required payments. In determining the allowance for doubtful accounts, requires significant estimates. The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current creditworthiness, as determined by a review of their current credit information. In addition, the Company considers a number of factors to determine the size and adequate time for recognition and the amount of reserves, including historical collection experience, 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 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 the business. Cash flow used in investing activities, represents investment in property and capital equipment required for growth, as well as business acquisitions. 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. 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 the ongoing ability to generate cash from operations, overall capacity and terms of financing arrangements and access to the capital markets. The Company believes that future cash from operations together with access to funds available under such financing arrangements and the capital markets will provide adequate resources to fund foreseeable operating requirements, capital expenditures, acquisitions and new business development activities. The table below analyzes the Company’s non-derivative financial liabilities and net settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for an understanding of the timing of the cash flows. The amounts disclosed in the table are the contractual undiscounted cash flows. 52 Alpek, S. A. B. de C. V. And SuBSidiArieSPs Ps Ps At December 31, 2012 Current portion of long-term debt Short-term bank loans Notes payable Accrued interest payable Affiliated companies Suppliers Other accounts payables and accrued expenses Debt (excluding debt issuance costs) Senior notes (excluding debt issuance costs) At December 31, 2011 Current portion of long-term debt Short-term bank loans Notes payable Accrued interest payable Affiliated companies Suppliers Other accounts payables and accrued expenses Debt (excluding debt issuance costs) Senior notes (excluding debt issuance costs) At January 1, 2011 Current portion of long-term debt Short-term bank loans Notes payable Accrued interest payable Affiliated companies Suppliers Other accounts payables and accrued expenses Debt (excluding debt issuance costs) Senior notes (excluding debt issuance costs) Less than 1 year Between 1 and 2 years Between 2 and 5 years Over 5 years Ps 358,274 140,184 2,183 148,433 464,527 9,231,707 1,313,828 - Ps - - - - - - - - Ps - - - - - - - 4,023,048 - - - - - - - - - 1,563,979 - 8,432,510 Less than 1 year Between 1 and 2 years Between 2 and 5 years Over 5 years Ps 491,251 1,645,698 5,025 246,259 3,602,314 9,616,055 2,332,613 - Ps - - - - - - Ps - - - - - - - - - - - - - 2,367,732 - 8,891,851 - 2,236,592 - 229,650 4,072,986 Less than 1 year Between 1 and 2 years Between 2 and 5 years Ps 1,181,853 247,146 - 177,698 387,772 7,311,536 1,518,431 - Ps - - - - - - Ps - - - - - - - 625,254 - 1,110,903 - 1,977,136 - 335,407 3,803,061 - - Over 5 years - - - - - 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 going concern 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 to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. 53 Alpek, S. A. B. de C. V. And SuBSidiArieS The Company monitors capital based on the degree of leverage. This percentage is calculated by dividing the total liabilities by total capital. The total liabilities / total capital ratio (expressed in times multiple) amounts to 1.08, 2.31 and 1.43 as of December 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 different levels 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 similar instruments in inactive markets, and valuations through models where all significant inputs are observable in active markets. - Level 3: Valuations made through techniques in which one or more of its significant data are not observable. 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 Assets Financial assets at fair value through profit or loss: - Trading derivatives Derivatives used for hedging Available for sale financial assets Total assets Liabilities Financial assets at fair value through profit or loss: - Trading derivatives Derivatives used for hedging Total liabilities Ps Ps Ps Ps 29,494 29,645 - 59,139 Ps Ps 5,659 42,499 - 48,158 Ps Ps - - 92,208 92,208 Ps Ps 35,153 72,144 92,208 199,505 Level 1 Level 2 Level 3 Total 240,923 - 240,923 Ps Ps 36,000 218,805 254,805 Ps Ps - - - Ps Ps 276,923 218,805 495,728 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 Assets Financial assets at fair value through profit or loss: - Trading derivatives Derivatives used for hedging Available for sale financial assets Total assets Liabilities Financial assets at fair value through profit or loss: - Trading derivatives Derivatives used for hedging Total liabilities Ps Ps Ps Ps 6,997 - - 6,997 Ps Ps 59,777 9,306 - 69,083 Ps Ps - - 40,249 40,249 Ps Ps 66,774 9,306 40,249 116,329 Level 1 Level 2 Level 3 Total 671,447 30,092 701,539 Ps Ps 286,924 193,341 480,265 Ps Ps - - - Ps 958,371 223,433 Ps 1,181,804 54 Alpek, S. A. B. de C. V. And SuBSidiArieS 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 Assets Financial assets at fair value through profit or loss: - Trading derivatives Derivatives used for hedging Available for sale financial assets Total assets Liabilities Financial assets at fair value through profit or loss: - Trading derivatives Derivatives used for hedging Total liabilities Ps Ps Ps Ps 119,986 - - 119,986 Ps Ps 71,793 120,041 - 191,834 Ps Ps - - 40,249 40,249 Ps Ps 191,779 120,041 40,249 352,069 Level 1 Level 2 Level 3 Total 728,795 - 728,795 Ps Ps 508,196 2,095 510,291 Ps Ps - - - Ps 1,236,991 2,095 Ps 1,239,086 Level 1 The fair value of financial instruments traded in active markets is based on quoted market prices at the balance sheet date 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 regularly transactions market at arm. The trading price used for financial assets held by the Company is the current bid price. Valuation techniques and data used in the financial statements of the Company to measure fair value include quoted market prices of ethylene, natural gas, ethane and gasoline listed on the “New York Mercantile Exchange” (NYMEX). Level 2 The fair value of financial instruments that are not traded in an active market is determined using valuation techniques. These valuation techniques maximize the use of observable market data when available and relies as little as possible on estimates specific to the Company. If all significant inputs required to measure the fair value an 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 in Level 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 based on observable yield curves. - The fair value of forward exchange contracts is determined using the exchange rates at the balance sheet 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 value for the remaining financial instruments. 5 - Critical accounting estimates and judgments The Company has identified certain key accounting estimates on which its financial condition and results of operations are dependent. These key accounting estimates most often involve complex matters or are based on subjective judgments or decisions that require Management to make estimates and assumptions which affected the 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. Actual results may differ from 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. 55 Alpek, S. A. B. de C. V. And SuBSidiArieS The Company’s 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 for financial instruments, valuation of non-current assets, goodwill and other indefinite-lived intangible assets as a result of a business acquisition, deferred taxes and pension benefits. The estimates and assumptions that have a risk of causing material adjustments to the values in the financial statements are as follows: a) Non-current assets The Company estimates the useful lives of long-lived 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 asset’s value. The Company 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, the Company uses discounted cash flows, which take into account Management’s assumptions and estimates regarding matters that are inherently uncertain, such as estimating the remaining useful life of an asset and the possible impact that inflation may have on its ability to generate cash flow, as well as customer growth and the appropriate discount rate. Although the Company believes that their estimates are reasonable, different assumptions regarding such remaining useful life or future cash flows could materially affect the valuation of its long-lived assets. The Company also evaluates the useful life used to depreciate long-lived assets, periodically considering their operating and use conditions. As of December 31, 2012 and 2011, and January 1, 2011 there were no indicators of impairment; therefore the Company did not undertake any study to determine the value in use of 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 a controlling portion after the Corporate Reorganization. The significant outstanding balances and transactions between companies have been eliminated in the combination and consolidation. To determine control, the Company analyze whether or not it has the power to govern the strategic financial and operating policies of the respective entity, and not only power over the portion of the equity the Company owned. As a result of this analysis, the Company has 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. Management has reached the conclusion that there are factors and circumstances described in the by-laws of Polioles and applicable law that allow the Company to carry out the daily operations of Polioles and therefore to demonstrate control. The Company will continue assessing these circumstances at each balance sheet date to determine whether or not this critical judgment will continue to be appropriate. If the Company determines that it no longer controls Polioles, would need to be deconsolidated and accounted for under the equity method. The significant outstanding balances and transactions between companies have been 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 the estimation of fair values. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the magnitude of any such charge. The Company performs valuation analyses with the assistance of third parties and consider relevant internal data, as well as other market information that is publicly available. Estimates of fair value are primarily determined using discounted cash flows and market comparisons. These approaches use significant estimates and assumptions, including projected future cash flows (including timing), discount rate reflecting the inherent risk in future cash flows, perpetual growth rate, determination of appropriate market comparables and the determination of whether a premium or discount should be applied to comparables. Inherent in these estimates and assumptions is a certain level of risk, which the Company believes has considered in their valuations. Nevertheless, if future actual results differ from estimates, a possible impairment charge may be recognized in future periods related to the write-down of the carrying value of other intangibles in addition to the amounts recognized previously. 56 Alpek, S. A. B. de C. V. And SuBSidiArieSd) Business combinations and acquisitions – purchase price allocations For business a combination, IFRS requires that a fair value exercise is undertaken allocating the purchase price (cost) to the fair value of the acquired identifiable assets and liabilities. Any difference between the cost 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 a point 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 income taxes. This process involves estimating actual current tax exposure together with assessing temporary differences 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 and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the 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 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, the Company discounts 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. g) Pension Benefits The present value of the pension obligations depends on a number of factors that are determined on an actuarial basis using a variety of assumptions. The assumptions used in determining the cost (income) for pensions include the net discount rate. Any changes in these assumptions will impact the carrying value of the pension obligations. The Company determines the appropriate discount rate at the end of each year. This interest rate should be used 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 accordance with IAS 19 “Employee benefits” that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension obligation. 6 - Cash and cash equivalents Cash and cash equivalents are comprised as follows: Cash at bank and on hand Short term bank deposits Cash and cash equivalents (excluding bank overdrafts) At December 31, 2012 At December 31, 2011 Ps Ps 1,851,076 4,803,485 6,654,561 Ps Ps 2,967,476 616,811 3,584,287 Ps Ps At January 1, 2011 2,659,240 572,695 3,231,935 57 Alpek, S. A. B. de C. V. And SuBSidiArieS 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 and 2011 and January 1, 2011, respectively. The balances were required to be held in escrow by the Company’s workers compensation service administrator. The restricted cash balance is classified as a current asset on the Company’s balance sheets based on the expiration date of the restriction. 8 - Trade and other receivables, net Trade and other receivables are comprised as follows: Trade receivables Provision for impairment of trade receivables Trade receivables, net Accounts receivables from related parties (Note 10) Recoverable taxes Interest receivable Other debtors Less: non-current portion (1) Current portion At December 31, 2012 10,707,247 (241,897) 10,465,350 1,292,387 517,316 27 1,386,689 (292,774) 13,368,995 Ps Ps At December 31, 2011 Ps 11,059,356 (248,135) 10,811,221 1,550,920 464,540 2 744,039 (289,561) 13,281,161 Ps At January 1, 2011 7,341,813 (225,255) 7,116,558 1,497,005 150,705 - 647,274 (137,626) 9,262,717 Ps Ps (1) The portion of non-current receivables corresponds to trade receivable, and are presented within other non-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 30 days 30 to 90 days 90 to 180 days More than 180 days Trade and other receivables Ps 1,218,072 Ps 182,733 Ps 180,568 Ps 400,294 Trade and other receivables Ps 1,237,140 Ps 209,370 Ps 115,710 Ps 486,874 At December 31, 2011 Past due 1 to 30 days 30 to 90 days 90 to 180 days More than 180 days Trade and other receivables Ps 1,146,493 Ps 184,219 Ps 22,250 Ps 613,902 The movements of the provision for impairment of trade receivables are analyzed as follows: At Januay 1, 2011 Past due 1 to 30 days 30 to 90 days 90 to 180 days More than 180 days Opening balance (January 1) Provisions for impairment of trade receivables Write-offs of trade receivables Cancel of provision for impairment not used Ending balance (December 31) 58 2012 (248,135) (99,647) 49,110 56,775 (241,897) Ps Ps 2011 (225,255) (70,061) - 47,181 (248,135) Ps Ps Alpek, S. A. B. de C. V. And SuBSidiArieS 9 - Other current assets Prepaid expenses Total other current assets 10 - Transactions with related parties Related party transactions were carried out at market values. At December 31, 2012 At December 31, 2011 Ps Ps 243,991 243,991 Ps Ps 231,295 231,295 Ps Ps At January 1, 2011 186,594 186,594 Loans granted to related parties Loans received from related parties December 31, 2012 Accounts receivable Amount Currency Maturity date DD/MM/YYYY Interest rate Accounts payable Parent Ps 196,094 Affiliates 227,164 Ps 310,983 69,499 4,589 52,040 319,941 13,010 13,000 579 USD 27/12/2013 USD USD 26/06/2013 USD 26/06/2013 USD 16/12/2013 USD 16/12/2013 MXN 21/01/2013 MXN 7.33% Ps 5.15% 5.15% 5.15% 3.59% 7.30% Maturity date Currency DD/MM/YYYY Interest rate Amount - - - Ps - 40,700 103,586 MXN Partners with significant influence over certain subsidiaries Total 85,488 Ps 508,746 - Ps 783,641 320,241 - Ps 360,941 Ps 103,586 Loans granted to related parties December 31, 2011 Accounts receivable Amount Currency Maturity date DD/MM/YYYY Interest rate Accounts payable Loans received from related parties Maturity date Currency DD/MM/YYYY Amount Parent Affiliates Ps 189,776 472,400 Ps 383,909 392,951 USD USD 28/12/12 30/12/12 7.33% Ps 7.12% - Ps 2,908,004 (1) MXN 219,630 MXN 52,277 Partners with significant influence over certain subsidiaries Total 111,884 Ps 774,060 - Ps 776,860 422,403 - Ps 474,680 Ps 3,127,634 Interest rate 4.89% - 59 Alpek, S. A. B. de C. V. And SuBSidiArieS Loans granted to related parties Loans received from related parties January 1, 2011 Accounts receivable Amount Currency Maturity date DD/MM/YYYY Interest rate Accounts payable Amount Maturity date Currency DD/MM/YYYY Interest rate Parent Ps 189,776 Affiliates 474,551 Ps 317,422 11,199 182,955 182,955 23,558 13,071 12,472 USD 29/12/2011 USD 28/08/2011 USD 23/02/2011 USD 23/08/2011 USD 23/02/2011 MXN 25/05/2011 USD 25/05/2011 7.28% Ps 7.12% 7.12% 7.12% 7.12% 5.62% 9.29% - Ps - 129,999 Partners with significant influence over certain subsidiaries Total 89,046 Ps 753,373 - Ps 743,632 Ps - 257,773 - Ps 387,772 (1) Includes accounts payable to Alfa amounting to Ps 2,858,758 related to the acquisition of the shares of Polioles, 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 Ps - 321,844 1,468,410 Ps 1,790,254 Ps Ps Interest 23,457 25,687 - 49,144 Ps Ps Administrative services - 37,714 - 37,714 Ps Ps Leases - - 5,312 5,312 year ended december 31, 2011 Finished goods Raw materials Ps - 285,789 Ps Ps - 23 Interest 32,279 24,529 Administrative services Leases Ps - 24,351 Ps 1,531,478 Ps 1,817,627 Ps 9,122 9,145 Ps - 56,808 Ps 5,196 29,547 Ps Ps Ps Ps Other - 1,807 - 1,807 Other - 5,508 896 6,404 Ps - - - - Parent Affiliates Partners with significant influence over certain subsidiaries Total Parent Affiliates Partners with significant influence over certain subsidiaries Total 60 Alpek, S. A. B. de C. V. And SuBSidiArieS Ps Parent Affiliates Partners with significant influence over certain subsidiaries 1,171,345 Total Cost of sales and other expenses with related parties year ended december 31, 2012 Parent Affiliates Partners with significant influence over certain subsidiaries Total Finished goods Raw materials Interest Administrative services Technical assistance Electricity Leases Other Fees Ps - Ps - - Ps 56,362 - 14,135 Ps 122,121 Ps 125,042 - - Ps - 93,323 Ps - Ps - - 808 Ps - - - 1,212,510 Ps 1,212,510 Ps 292,268 Ps 56,362 278,133 146,429 59,165 Ps 393,592 Ps 59,165 - Ps 93,323 2,406 2,406 Ps - 808 26,985 Ps 26,985 Ps Finished goods Raw materials Interest Administrative services Technical assistance Electricity Leases Other year ended december 31, 2011 - Ps - Ps 49,246 12,177 Ps 108,295 Ps 117,194 - Ps - 51,831 Ps - Ps Ps - 1,610 Fees - - Ps 1,171,345 Ps 307,289 Ps 49,246 295,112 135,648 55,059 Ps 361,137 Ps 55,059 - Ps 51,831 2,259 - 2,259 Ps 1,610 21,927 Ps 21,927 Ps For the years ended December 31, 2012, salaries and benefits received by senior officers of the Company amounted to Ps 179,858 (Ps 187,612 in 2011), comprising of base salary and law benefits and supplemented by a variable compensation program that is basically based on the performance of the Company and by the market value of its stocks. The Company and its subsidiaries declared that neither they have significant transactions with related parties nor conflicts of interest to disclose. 11 - Inventories Finished goods Raw material and other consumables Materials and spare parts Work in process At December 31, 2012 5,969,149 4,452,073 719,237 441,586 11,582,045 Ps Ps At December 31, 2011 Ps Ps 6,370,557 4,848,218 658,771 442,617 12,320,163 At January 1, 2011 3,237,748 2,632,347 485,344 225,270 6,580,709 Ps Ps For the years ended December 31, 2012 and 2011, the cost of raw materials consumed and the changes in inventories of work in progress and finished goods recorded in the cost of sale were Ps 86,766,710 and Ps 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. 61 Alpek, S. A. B. de C. V. And SuBSidiArieS 12 - Property, plant and equipment, net At January 1, 2011 Deemed cost Accumulated depreciation Carrying value at January 1, 2011 For the year ended December 31, 2011 Translation adjustments Additions Additions due to business combinations Disposals Depreciation charge recognized in the year Transfers Balance at December 31, 2011 At December 31, 2011 Cost Accumulated depreciation Carrying value at December 31, 2011 For the year ended December 31, 2012 Translation adjustments Additions Additions due to business combinations Disposals Depreciation charge recognized in the year Transfers Balance at December 31, 2012 At December 31, 2012 Cost Accumulated depreciation Carrying value at December 31, 2012 Land Buildings and construction Machinery and equipment Transportation equipment Construction in progress Other fixed assets Total Ps Ps 3,017,704 (235,809) 2,781,895 4,123,393 (1,850,804) 2,272,589 Ps 31,879,620 (16,047,193) 15,832,427 Ps 162,396 (107,009) 55,387 Ps 858,697 Ps 642,651 Ps (667,963) 190,734 - 642,651 Ps 456,550 (107,075) 349,475 41,141,011 (19,015,853) 22,125,158 152,075 20,202 180,141 (17,961) (24,005) 1,016 3,093,363 343,281 58,947 698,182 (10) (106,040) 14,725 3,281,674 2,298,711 295,617 3,510,309 (6,305) (1,472,254) 375,480 20,833,985 14,050 3,969 32,906 (819) (17,645) 4,565 92,413 3,924,535 (831,172) 3,093,363 7,797,879 (4,516,205) 3,281,674 43,136,307 (22,302,322) 20,833,985 251,324 (158,911) 92,413 (96,466) 2,567 (7,406) (11,344) 5,952 2,986,666 (207,677) 3,495 (1,389,292) 57,781 (213) (118,710) 60,984 3,019,553 (15,306) (1,726,550) 878,957 18,639,575 (6,650) 1,932 (175) (22,852) 32,568 97,236 3,777,881 (791,215) 2,986,666 Ps 7,414,917 (4,395,364) 3,019,553 41,281,791 (22,642,216) Ps 18,639,575 Ps 265,114 (167,878) 97,236 Ps 947,776 (731,766) 1,330,506 - Ps 216,010 Ps 1,330,506 Ps 433,733 (27,869) 405,864 Ps 55,451,718 (28,756,308) 26,695,410 Furniture, lab and information technology equipment 26,138 34,692 25,389 (125) (53,047) 16,989 240,770 1,058,022 (817,252) 240,770 (16,972) 2,906 (135) (78,722) 68,163 216,010 107,914 437,374 167,672 (11,532) (426,350) 917,729 917,729 917,729 - - (59,494) 1,502,862 (20) - (1,030,571) 1,330,506 34,409 20,628 20,895 (11,997) (2,926) 8,664 419,148 529,149 (110,001) 419,148 (24,086) 42,107 (25,314) (1,789) (4,202) 405,864 2,976,578 871,429 4,635,494 (48,749) (1,675,917) (4,911) 28,879,082 57,614,945 (28,735,863) 28,879,082 (1,800,637) 1,613,650 (48,569) (1,959,967) 11,851 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, in selling expenses and Ps 15,588 and Ps 24,775, in administrative expenses, for the years ended December 31, 2012 and 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% of its loans. 62 Alpek, S. A. B. de C. V. And SuBSidiArieS 12 - Property, plant and equipment, net At January 1, 2011 Deemed cost Accumulated depreciation Carrying value at January 1, 2011 For the year ended December 31, 2011 Translation adjustments Additions due to business combinations Depreciation charge recognized in the year Additions Disposals Transfers Balance at December 31, 2011 At December 31, 2011 Cost Accumulated depreciation Carrying value at December 31, 2011 For the year ended December 31, 2012 Translation adjustments Additions due to business combinations Depreciation charge recognized in the year Additions Disposals Transfers Balance at December 31, 2012 At December 31, 2012 Cost Accumulated depreciation Carrying value at December 31, 2012 152,075 20,202 180,141 (17,961) (24,005) 1,016 3,093,363 343,281 58,947 698,182 (10) (106,040) 14,725 3,281,674 2,298,711 295,617 3,510,309 (6,305) (1,472,254) 375,480 20,833,985 3,924,535 (831,172) 3,093,363 7,797,879 (4,516,205) 3,281,674 43,136,307 (22,302,322) 20,833,985 251,324 (158,911) 92,413 (96,466) 2,567 (7,406) (11,344) 5,952 2,986,666 (207,677) 3,495 (1,389,292) 57,781 (213) (118,710) 60,984 3,019,553 (15,306) (1,726,550) 878,957 18,639,575 162,396 (107,009) 55,387 14,050 3,969 32,906 (819) (17,645) 4,565 92,413 (6,650) 1,932 (175) (22,852) 32,568 97,236 265,114 (167,878) 97,236 Land Buildings and construction Machinery and equipment Transportation equipment Furniture, lab and information technology equipment Construction in progress Other fixed assets Total Ps 3,017,704 Ps 4,123,393 Ps 31,879,620 Ps (235,809) 2,781,895 (1,850,804) 2,272,589 (16,047,193) 15,832,427 Ps Ps 858,697 (667,963) 190,734 Ps 642,651 - 642,651 Ps 456,550 (107,075) 349,475 41,141,011 (19,015,853) 22,125,158 26,138 34,692 25,389 (125) (53,047) 16,989 240,770 1,058,022 (817,252) 240,770 (16,972) 2,906 (135) (78,722) 68,163 216,010 107,914 437,374 167,672 (11,532) - (426,350) 917,729 917,729 - 917,729 (59,494) 1,502,862 (20) - (1,030,571) 1,330,506 34,409 20,628 20,895 (11,997) (2,926) 8,664 419,148 529,149 (110,001) 419,148 (24,086) 42,107 (25,314) (1,789) (4,202) 405,864 2,976,578 871,429 4,635,494 (48,749) (1,675,917) (4,911) 28,879,082 57,614,945 (28,735,863) 28,879,082 (1,800,637) 1,613,650 (48,569) (1,959,967) 11,851 26,695,410 3,777,881 (791,215) 7,414,917 (4,395,364) 41,281,791 (22,642,216) Ps 2,986,666 Ps 3,019,553 Ps 18,639,575 Ps 947,776 (731,766) 216,010 Ps 1,330,506 - 1,330,506 Ps Ps 433,733 (27,869) 405,864 Ps 55,451,718 (28,756,308) 26,695,410 63 Alpek, S. A. B. de C. V. And SuBSidiArieS 13 - Goodwill and intangible assets, net Cost At January 1, 2011 Amortization at January 1, 2011 At January 1, 2011 Al 1 de enero de 2011 Translation adjustments Additions Additions due to business combinations At December 31, 2011 Translation adjustments Additions At December 31, 2012 Accumulated amortization and impairment At January 1, 2011 Amortization Transfers Exchange differences At December 31, 2011 Amortization Transfers Translation adjustments At December 31, 2012 Net book value Cost Accumulated amortization and impairment At December 31, 2011 Cost Accumulated amortization and impairment At December 31, 2012 Development costs Trademarks Non-compete agreements Ps Ps 274,231 (96,602) 177,629 274,231 37,040 5,092 - 316,363 (22,100) 5,284 299,547 (96,602) (28,384) 126 (16,212) (141,072) (29,031) 4,539 5,024 (160,540) 316,363 (141,072) 175,291 299,548 (160,540) 139,008 Ps Ps 381 (259) 122 381 50 - - 431 (30) 401 (259) (108) - (48) (415) (17) 8 22 (402) 431 (415) 16 401 (401) - Ps Ps - - - - - 65,700 65,700 (4,552) 61,148 - (14,704) - (352) (15,056) (15,519) 1,275 (29,300) 65,700 (15,056) 50,644 61,147 (29,300) 31,847 Ps Ps Finite life Customer relationships - - - - - 508,126 508,126 (35,217) 528 473,437 - (28,629) - (657) (29,286) (39,176) (256) 2,584 (66,133) 508,126 (29,285) 478,841 473,438 (66,135) 407,303 Software and licenses Intellectual property rights Goodwill Other Total Indefinite life Ps 30,822 Ps Ps Ps 2,946 Ps (23,164) 7,658 30,822 3,220 - - 34,042 (2,041) 33,415 65,417 (23,164) (2,699) 2 (2,937) (28,798) (6,528) (41) 1,121 (34,246) 34,042 (28,798) 5,244 65,417 (34,246) - - - - - - - - 234,185 1,440,463 1,674,648 (123,682) 7,644 1,558,610 (68,336) (8,418) (76,754) (79,136) 6,524 (149,367) 1,674,648 (76,755) 1,597,893 1,558,610 (149,367) - - - - - - - - - - - - - - - - - 391 236,784 237,175 (16,434) 220,741 237,175 237,175 220,741 - 2,946 2,946 387 983 - 4,316 (302) 167 4,181 - - - - - - - - - - - 4,316 4,316 4,181 308,380 (120,025) 188,355 308,380 275,273 242,859 2,014,289 2,840,801 (204,358) 47,038 2,683,483 (120,025) (142,860) 128 (28,624) ( 291,381) (169,407) 4,250 16,550 (439,988) 2,840,801 (291,381) 2,549,420 2,683,483 (439,988) 2,243,495 Ps 31,171 Ps 1,409,243 Ps 220,741 Ps 4,181 Ps Amortization for the years ended December 31, 2012 and 2011 amounting to (Ps 162,198) and (Ps 139,218), has been recorded in cost of sales, (Ps 7,071) and (Ps 193) in selling expenses and (Ps 138) and (Ps 3,449) in administrative expenses, respectively. Research and development expenses incurred and recorded in the income statement for the years ended December 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 and chemicals business. Management also assesses goodwill at the operating segment level and has allocated the entire amount to the polyester segment (see Note 28). 64 Alpek, S. A. B. de C. V. And SuBSidiArieS 13 - Goodwill and intangible assets, net Development costs Trademarks Non-compete agreements Software and licenses Intellectual property rights Goodwill Other Total Indefinite life Ps Ps Ps Ps Ps Ps 139,008 Ps - Ps 31,847 Ps Ps 30,822 (23,164) 7,658 30,822 3,220 - - 34,042 (2,041) 33,415 65,417 (23,164) (2,699) 2 (2,937) (28,798) (6,528) (41) 1,121 (34,246) 34,042 (28,798) 5,244 65,417 (34,246) 31,171 Ps Ps - - - - 234,185 - 1,440,463 1,674,648 (123,682) 7,644 1,558,610 - (68,336) - (8,418) (76,754) (79,136) - 6,524 (149,367) 1,674,648 (76,755) 1,597,893 1,558,610 (149,367) 1,409,243 Ps Ps - - - - 391 236,784 - 237,175 (16,434) - 220,741 - - - - - - - - - Ps 2,946 - 2,946 2,946 387 983 - 4,316 (302) 167 4,181 - - - - - - - - - 237,175 - 237,175 220,741 - 220,741 Ps Ps 4,316 - 4,316 4,181 - 4,181 Ps 308,380 (120,025) 188,355 308,380 275,273 242,859 2,014,289 2,840,801 (204,358) 47,038 2,683,483 (120,025) (142,860) 128 (28,624) ( 291,381) (169,407) 4,250 16,550 (439,988) 2,840,801 (291,381) 2,549,420 2,683,483 (439,988) 2,243,495 Cost At January 1, 2011 Amortization at January 1, 2011 Additions due to business combinations At January 1, 2011 Al 1 de enero de 2011 Translation adjustments Additions At December 31, 2011 Translation adjustments Additions At December 31, 2012 At January 1, 2011 Amortization Transfers Exchange differences At December 31, 2011 Amortization Transfers Translation adjustments At December 31, 2012 Net book value Cost Accumulated amortization and impairment Accumulated amortization and impairment At December 31, 2011 Cost Accumulated amortization and impairment At December 31, 2012 65,700 65,700 (4,552) 61,148 508,126 508,126 (35,217) 528 473,437 (14,704) (28,629) Finite life Customer relationships - - - - - - - (657) (29,286) (39,176) (256) 2,584 (66,133) 508,126 (29,285) 478,841 473,438 (66,135) 407,303 - - - - - - - (352) (15,056) (15,519) 1,275 (29,300) 65,700 (15,056) 50,644 61,147 (29,300) 381 (259) 122 381 50 - - 431 (30) 401 (259) (108) - (48) (415) (17) 8 22 (402) 431 (415) 16 401 (401) 274,231 (96,602) 177,629 274,231 37,040 5,092 - 316,363 (22,100) 5,284 299,547 (96,602) (28,384) 126 (16,212) (141,072) (29,031) 4,539 5,024 (160,540) 316,363 (141,072) 175,291 299,548 (160,540) 65 Alpek, S. A. B. de C. V. And SuBSidiArieS 14 - Other non-current assets Other receivables, net Available for sale financial assets (1) Investment is associate (2) Other non-current assets Total other non-current assets (1) Available for sale financial assets include the following: At December 31, 2012 190,523 92,208 1,528 8,515 292,774 Ps Ps At December 31, 2011 195,045 40,249 42,914 11,353 289,561 Ps Ps Ps Ps At December 31, 2012 At December 31, 2011 At January 1, 2011 24,737 40,249 61,441 11,199 137,626 At January 1, 2011 Unquoted shares: - Share investments in third parties Ps 92,208 Ps 40,249 Ps 40,249 The movement of available for sale financial assets is the following: Opening balance at January 1 Translation effect Additions Impairment Balance as of December 31 Available for sale financial assets are denominated in the following currencies: USD MXN Total At December 31, 2012 52,040 40,168 92,208 Ps Ps None of the available for sale financial assets are past due or impaired. (2) The movement of investments in associates is the following: Balance at January 1 Share of losses Translation effect Other Balance at December 31 2012 40,249 (2,015) 54,055 (81) 92,208 At December 31, 2011 - 40,249 40,249 2012 42,914 (39,055) (2,331) - 1,528 Ps Ps Ps Ps Ps Ps 2011 40,249 - - - 40,249 At January 1, 2011 - 40,249 40,249 2011 61,441 (22,965) 5,182 (744) 42,914 Ps Ps Ps Ps Ps Ps The participation of the Company in the results of its main associates, as well as their assets and liabilities, are presented as follows: Country of Incorporation Assets Liabilities Revenues Gain (Loss) Interest % held At December 31, 2012 Terminal Petroquímica de Altamira, S. A. de C. V. Clear Path Recycling, L. L. C. At December 31, 2011 Terminal Petroquímica de Altamira, S. A. de C. V. Clear Path Recycling, L. L. C. 66 México USA Ps 52,857 Ps 575,543 Ps 24,982 Ps 491,780 Ps 27,511 Ps 479,598 Ps Ps 5,948 (161,232) 21.07% 25.00% México USA Ps 50,185 Ps 598,297 Ps 27,329 Ps 337,452 Ps 27,674 Ps 516,417 Ps Ps 9,603 (99,952) 21.07% 25.00% Alpek, S. A. B. de C. V. And SuBSidiArieS 15 - Financial Instruments a. Financial instruments by category Financial assets: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables excluding prepayments Financial assets at fair value through profit or loss Derivatives used for hedging Financial assets available for sale Financial liabilities: Debt Trade and other payables Derivatives used for hedging Financial liabilities at fair value through profit or loss Financial assets: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables excluding prepayments Financial assets at fair value through profit or loss Derivatives used for hedging Financial assets available for sale Financial liabilities: Debt Trade and other payables Derivatives used for hedging Financial liabilities at fair value through profit or loss Accounts receivable and liabilities at amortized cost At December 31, 2012 Investments available for sale Derivative financial instruments Total Ps 6,654,561 2,992 Ps Ps - - - - Ps 6,654,561 2,992 Ps Ps Ps 13,368,995 - - - 20,026,548 14,440,408 9,696,234 - - 24,136,642 Accounts receivable and liabilities at amortized cost Ps Ps Ps - - - 92,208 92,208 - - - - - Ps Ps Ps - 35,153 72,144 - 107,297 13,368,995 35,153 72,144 92,208 Ps 20,226,053 - - 218,805 276,923 495,728 Ps 14,440,408 9,696,234 218,805 276,923 Ps 24,632,370 At December 31, 2011 Investments available for sale Derivative financial instruments Total Ps 3,584,287 1,925 Ps 13,281,161 - - 16,867,373 19,686,760 13,218,369 - - 32,905,129 Ps Ps Ps Ps Ps Ps - - - - 40,249 40,249 - - - - - Ps Ps Ps Ps - - Ps 3,584,287 1,925 - 66,774 9,306 - 76,080 13,281,161 66,774 9,306 40,249 Ps 16,983,702 - - 223,433 958,371 1,181,804 Ps 19,686,760 13,218,369 223,433 958,371 Ps 34,086,933 67 Alpek, S. A. B. de C. V. And SuBSidiArieS Financial assets: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables excluding prepayments Financial assets at fair value through profit or loss Derivatives used for hedging Financial assets available for sale Financial liabilities: Debt Trade and other payables Derivatives used for hedging Financial liabilities at fair value through profit or loss Accounts receivable and liabilities at amortized cost At January 1, 2011 Investments available for sale Derivative financial instruments Total Ps 3,231,935 283,647 Ps 9,262,717 - - 12,778,299 9,215,883 7,699,308 - - 16,915,191 Ps Ps Ps Ps Ps Ps - - - - 40,249 40,249 - - - - - Ps Ps Ps Ps - - Ps 3,231,935 283,647 - 191,779 120,041 - 311,820 9,262,717 191,779 120,041 40,249 Ps 13,130,368 - - 2,095 1,236,991 1,239,086 Ps 9,215,883 7,699,308 2,095 1,236,991 Ps 18,154,277 b. Credit quality of financial assets The credit quality of financial assets that are neither past due nor impaired can be assessed either by reference to external credit ratings (if available) or to historical information about counterparty default rates: Trade and other receivables, excluding prepayments Counterparties with external credit rating “A” Other categories Counterparties without external credit rating Type of clients X Type of clients Y Type of clients Z Total receivables not impaired Cash and cash equivalents, with and without restriction, except cash in hand “A” Other categories Derivative financial instruments “A” Other categories At December 31, 2012 At December 31, 2011 At January 1, 2011 Ps Ps Ps Ps Ps 43,796 827,617 871,413 10,819,011 1,147,847 13,382 11,980,240 12,851,653 842,263 5,814,631 6,656,894 35,847 71,451 107,298 Ps Ps Ps Ps Ps 620 980,243 980,863 11,425,031 1,146,032 43,264 12,614,327 13,595,190 679,381 2,900,172 3,579,553 44,978 31,102 76,080 Ps Ps Ps Ps Ps 1,117 435,477 436,594 7,974,325 1,072,194 66,320 9,112,839 9,549,433 783,467 2,711,236 3,494,703 106,802 205,018 311,820 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 fully recovered. 68 Alpek, S. A. B. de C. V. And SuBSidiArieS 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 their short 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 Book Value Fair value At December 31, 2011 Book value Fair value At January 1, 2011 Book value Fair value Financial assets Non-current trade receivables Financial liabilities Non-current debt Ps 190,523 Ps 184,521 Ps 195,045 Ps 194,921 Ps 24,737 Ps 24,721 14,019,537 14,809,233 17,798,811 18,193,828 7,851,761 8,486,588 The estimated fair values are based on discounted cash flows. These fair values consider the non-current portion of financial assets and liabilities since the current portion approximates its fair value. 16 – Trade and other payables Trade payables Balances due to related parties (Note 10) 17 – Debt Current: Bank loans (1) Current portion of non-current debt Notes payable (1) Current debt Non-current: Senior Notes (2) Secured bank loans (2) Unsecured bank loans (2) Debt issuance costs Total Less: current portion of non-current debt Non-current debt At December 31, 2012 At December 31, 2011 Ps Ps 9,231,707 464,527 9,696,234 Ps Ps 9,616,055 3,602,314 13,218,369 Ps Ps At January 1, 2011 7,311,536 387,772 7,699,308 At December 31, 2012 At December 31, 2011 At January 1, 2011 Ps Ps Ps Ps 358,274 140,184 2,183 500,641 9,996,489 - 4,163,232 (79,770) 14,079,951 (140,184) 13,939,767 Ps Ps Ps Ps 1,645,698 491,251 5,025 2,141,974 4,682,058 495,984 13,112,020 (254,025) 18,036,037 (491,251) 17,544,786 Ps Ps Ps Ps 247,146 1,181,853 - 1,428,999 4,473,875 - 4,559,739 (64,877) 8,968,737 (1,181,853) 7,786,884 (1) The fair value of bank loans and notes payable approximated their current carrying amounts, as the impact of discounting is not significant. (2) The carrying amounts, terms and conditions of non-current debt are as follows: 69 Alpek, S. A. B. de C. V. And SuBSidiArieS Balance at December 31, Currency Balance December 31, 2012 Balance at January 1, 2011 Maturity date 2011 Interest DD/MM/YY rate Private placement Senior Notes bearing interest at an annual rate of 8.31%, maturing in October 2012, in one annual installment. Guaranteed by its subsidiaries Temex, Ptal, Dak Resinas, Dak Argentina and DAK Americas. Private Placement Senior Notes issued by DAK Americas bearing interest at an annual rate of 6.85%, maturing on June 2014, in three annual installments. Guaranteed by Petrotemex and its subsidiaries Temex, Ptal, Dak Resinas and Dak Argentina. Senior Notes 144-A/Reg. S bearing interest at an annual rate of 9.50%, maturing on August 2014. Guaranteed by Temex, Akra, DAK Americas and Dak Resinas. USD Ps - Ps 149,772 Ps 264,795 30-Oct-12 8.31% USD - 688,950 812,038 24-Jun-14 6.85% USD 1,563,979 3,843,336 3,397,042 19-Aug-14 9.50% Senior Notes 144A/Reg. S bearing an interest at an annual rate of 4.50%, maturing on November, 2022. Guaranteed by Petrotemex, Temex, Akra, DAK Americas and Dak Resinas. Total Senior Notes USD 8,432,510 - Ps 9,996,489 Ps 4,682,058 Ps 4,473,875 - 20-Nov-22 4.50% Committed credit line bearing interest at an annual rate of Libor+3.5%, maturing on November 2013 and guaranteed by Wellman Holdings and Fiber Ind. Total secured bank loans USD Ps Ps - Ps 495,984 Ps - Ps 495,984 Ps - - 02-Nov-13 4.03% Syndicated loan with annual interest at Libor+2.25%, maturing on December 2016. Guaranteed by Temex, Akra, Dak Resinas, DAK Americas and Dak Mississippi. USD Syndicated loan bearing interest at an annual rate of TIIE + 0.20% maturing in December 2012, in four semiannual installments. Guaranteed by its subsidiaries Temex, Ptal, Dak Resinas, Dak Argentina and DAK Americas. MXN Syndicated loan bearing interest at an annual rate of Libor + 0.40%, maturing on December 2012, in four semiannual installments. Guaranteed by Temex, Ptal, Dak Resinas, Dak Argentina and DAK Americas. USD Ps - Ps 8,387,220 Ps - 08-Dec-16 2.79% - - - 117,912 11-Dec-12 5.10% - 383,323 11-Dec-12 0.86% Bank loan with annual interest at Libor + 3.07%, maturing on August 2017. Guaranteed by its subsidiaries Temex, Akra, Dak Resinas and DAK Americas. Committed credit line bearing annual interest rate of Libor + 2.0%, maturing on September 2015. Guaranteed by Petrotemex, Temex, Akra y Dak Resinas. Committed credit line bearing annual interest rate of Libor +1.60%, maturing on July 2016. Guaranteed by Temex, Akra and Dak Resinas. Committed credit line bearing annual interest rate of Libor + 0.50%, maturing on September 2012. Syndicated loan with annual interest rate of Libor + 0.60% to be paid on April 2011. USD 2,081,616 2,236,592 1,977,136 23-Aug-17 3.79% USD 65,050 - USD USD USD - - - 419,361 - - - - 24-Sep-15 2.31% 22-Jul-16 2.05% 54,804 30-Sep-12 1.14% 222,428 25-Apr-11 1.05% 70 Alpek, S. A. B. de C. V. And SuBSidiArieS Bank loan with annual interest rate of Libor + 3.0% to be paid on January 2012. Bank loan with annual interest rate of Libor + 0.50% to be paid on August 2012. Bank loan with annual interest rate of Libor + 2.70% to be paid on April 2016. Bank loan with annual interest rate of Libor + 1.80% to be paid on April 2016. Bank loan with annual interest rate of Libor + 1.60% to be paid on August 2016. Bank loan with annual interest rate of Libor + 0.50% to be paid on August 2012. Bank loan with annual interest rate of Libor + 2.15% to be paid on August 2012. Guaranteed by its subsidiaries Univex and Nyltek. Bank loan with annual interest rate of Libor + 2.50% to be paid on February 2017. Guaranteed by its subsidiaries Univex and Nyltek. Total unsecured bank loans TOTAL December 31, Currency December 31, 2012 January 1, 2011 date 2011 Interest DD/MM/YY rate USD USD USD USD USD USD - - - - 308,927 30-Jan-12 3.30% 111,829 197,714 17-Aug-12 1.00% - 308,927 21-Apr-16 2.99% 780,606 838,722 650,505 698,935 - - 01-Apr-16 2.16% 16-Aug-16 1.98% - - 494,284 21-Aug-12 1.06% USD 390,303 419,361 494,284 20-Sep-15 2.46% USD 195,152 - Ps 4,163,232 Ps 13,112,020 Ps 4,559,739 Ps 14,159,721 Ps 18,290,062 Ps 9,033,614 - 28-Feb-17 2.81% At December 31, 2012, the annual maturities of non-current debt are as follows: Bank loans Senior notes Less: debt issuance costs 2014 449,499 1,563,979 - 2,013,478 Ps Ps Ps Ps 2015 508,044 - - 508,044 Ps Ps 2016 959,495 - - 959,495 2017 onwards Total Ps 2,106,010 8,432,510 - Ps 10,538,520 Ps 4,023,048 9,996,489 (79,770) Ps 13,939,767 At December 31, 2011, the annual maturities of non-current debt are as follows: 2013 2014 2015 2016 onwards Total Bank loans Senior notes Minus debt issuance costs Ps Ps 2,367,732 229,650 - 2,597,382 Ps Ps 1,478,946 4,072,986 - 5,551,932 At January 1, 2011, the annual maturities of non-current debt are as follows: Bank loans Senior notes Minus debt issuance costs 2012 1,070,110 335,407 - 1,405,517 Ps Ps Ps Ps 2013 205,698 203,009 - 408,707 Ps Ps Ps Ps 3,568,762 - - 3,568,762 Ps Ps 6,080,735 - - 6,080,735 Ps 13,496,175 4,302,636 (254,025) Ps 17,544,786 2014 2015 onwards Total 213,303 3,600,051 - 3,813,354 Ps Ps 2,224,183 - - 2,224,183 Ps 3,713,294 4,138,467 (64,877) Ps 7,786,884 71 Alpek, S. A. B. de C. V. And SuBSidiArieS Covenants: The majority of existing banking debt agreements contains restrictions of the Company, principally for compliance with certain financial ratios, among they mainly include: a) Interest coverage ratio: which is defined as the ratio of consolidated EBITDA to consolidated net interest charges for the period of the four consecutive 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 EBITDA for 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 specific period to the satisfaction of creditors, may require immediate early maturity. During 2012 and 2011, financial ratios were calculated according to formulas set out in loan agreements. At December 31, 2012, and the date of issuance of these financial statements, the Company and its subsidiaries complied with such covenants and restrictions. Relevant debt transactions: (a) On August 13, 2012, Grupo Petrotemex acquired US$154.2 million (“Tender Offer”) of the principal amount of the “Senior Notes” 144A/Reg. S issued in 2009, remaining a balance at December 31, 2012 of US$120.8 million maturing on 2014. Additionally, after the Tender Offer, Grupo Petrotemex obtained the consent of the majority of the holders of the Senior Notes to amend certain terms of the contract that governs them, and as a result, the Senior Notes that were not included into the tender offer remain effective but without the effect of the financial covenants. (b) On November 20, 2012, the Company completed an issuance of debt (“Senior Notes”) for a nominal amount of US$650 million maturing on November 20, 2022. Interests on the Senior Notes will be payable semiannually at 4.50% from May 20, 2013. The “Senior Notes” were issued through a private placement under the Rule 144A of the “Securities Act” of 1933 of the United States of America and are unconditionally 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 of US$6 million. The costs and expenses of the issuance, including the discount on the placement of the Senior Notes, 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 certain subsidiaries of the Company. 18 – Employee Benefits The valuation of retirement plan employee benefits, formal (covering approximately 65% of workers in 2012 and 66% of workers in 2011) and informal, covers all employees and is based primarily on years of service completed 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 these plans, the reduction in labor liabilities is reflected progressively. The principal subsidiaries of the Company have established irrevocable trust funds for payment of pensions and seniority premiums and health-care expenses. The contributions in 2012 amounted to Ps 114,579 (Ps 114,115 in 2011). 72 Alpek, S. A. B. de C. V. And SuBSidiArieS 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 Post-employment medical benefits Liability in balance sheet Charge in the income statement: Pension benefits Post-employment medical benefits Actuarial losses recognized in the statement of other comprehensive income for the period Cumulative actuarial losses recognized in other comprehensive income Ps Ps 927,679 202,450 1,130,129 Ps Ps Ps Ps Ps 1,001,711 259,351 1,261,062 2012 15,717 (10,619) 5,098 (88,387) (481,970) The total recognized expenditure for the years ended December 31, were distributed as follows: Cost of sales Selling expenses Administrative expenses Total 2012 (15,072) (1,646) (1,743) (18,461) Ps Ps Ps Ps Ps Ps Ps Ps Ps 349,426 223,006 572,432 2011 27,640 (12,273) 15,367 (393,583) (393,583) 2011 7,398 (1,888) (3,417) 2,093 Pension Benefits The Company operates defined benefits pension plan based on employee pensionable remuneration and length of service. Most plans are externally funded. Plan assets are held in trusts, foundations or similar entities, governed by local regulations and practice in each country, as is the nature of the relationship between the Company and the trustees (or equivalent) and their composition. The amounts recognized in the balance sheet are determined as follows: Present value of defined benefit obligations Fair value of plan assets Defined benefit liability, net Unrecognized past service costs Liability in the balance sheet At December 31, 2012 3,150,577 (2,195,740) 954,837 (27,158) 927,679 Ps Ps The movement in the defined benefit obligation over the year is as follows: At January 1 Current service costs Interest cost Actuarial losses Translation adjustments Benefits paid Liabilities acquired in a business combination Curtailments At December 31 At December 31, 2011 3,130,999 (2,098,529) 1,032,470 (30,759) 1,001,711 2012 3,131,000 15,565 134,263 239,477 (192,768) (176,960) - - 3,150,577 Ps Ps Ps Ps At January 1, 2011 1,761,152 (1,375,579) 385,573 (36,147) 349,426 2011 1,761,153 16,462 111,454 214,516 291,587 (91,872) 853,686 (25,987) 3,130,999 Ps Ps Ps Ps 73 Alpek, S. A. B. de C. V. And SuBSidiArieS The movement in the fair value of the plan assets over the year is as follows: At January 1 Expected return on plan assets Actuarial gain (losses) Translation adjustments Contributions Benefits paid Plan assets acquired in a business combination At December 31 2012 (2,098,529) (167,479) (107,842) 122,239 (114,579) 170,450 - (2,195,740) Ps Ps The amounts recognized in the income statement for the years ended December 31, 2012 and 2011 are as follows: Current service cost Interest cost Expected return on plan assets Effect of curtailments and/or settlements Past service cost Total, included in staff costs The principal actuarial assumptions were as follows: Discount rate Inflation rate Growth rate of wages Expected return on plan assets Future salary increases 2012 (15,565) (134,263) 167,479 - (1,934) 15,717 Ps Ps At December 31, 2011 MX 8.25% US 4.48% 3.82% 5.25% MX 10.25% US 8.25% 5.25% At December 31, 2012 MX 5.50% US 3.80% 3.57% 5.25% MX 9.75% US 8.25% 5.25% Ps Ps Ps Ps 2011 (1,375,579) (134,957) 171,716 (219,895) (114,115) 83,214 (508,913) (2,098,529) 2011 (16,462) (111,454) 134,957 22,730 (2,131) 27,640 At January 1, 2011 MX 7.50% US 5.81% 4.40% 5.25% MX 10.50% US 8.50% 5.25% Post employment medical benefits The Company operates a number of post-employment medical benefits schemes mainly in DAK Americas. The method of accounting, assumptions and the frequency of valuations are similar to those used for defined benefit pension 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 costs annually 9.00% and 9.50% in 2012 and 2011, respectively. The amounts recognized in the balance sheet were determined as follows: Present value of defined benefit obligations Fair value of plan assets Defined benefit liability, net Past service costs not recognized Liability in balance sheet At December 31, 2012 At December 31, 2011 Ps Ps 202,450 - 202,450 - 202,450 Ps Ps 259,351 - 259,351 - 259,351 Ps Ps At January 1, 2011 218,467 - 218,467 4,539 223,006 74 Alpek, S. A. B. de C. V. And SuBSidiArieS Movement in defined benefit obligation is as follows: At January Current service costs Interest cost Contributions Actuarial (gain) losses Translation adjustments Benefits paid At December 31 2012 259,351 2,542 7,152 9,657 (43,248) (17,991) (15,013) (202,450) Ps Ps The amounts recognized in the income statement for the years ended December 31, were as follows: Current service cost Interest cost Expected return on plan assets Total, included in staff costs 2012 (2,542) (9,657) 1,580 (10,619) Ps Ps At December 31, 2012 the effect of a 1% movement in the assumed medical cost trend rate is as follows: Effect on the aggregate of the current service cost and interest cost Effect on the defined benefit obligation Ps Increase 4,385 18,019 At December 31, 2011 the effect of a 1% movement in the assumed medical cost trend rate is as follows: Effect on the aggregate of the current service cost and interest cost Effect on the defined benefit obligation Post employment benefits Plan assets are comprised as follows: Equity instruments Cash and cash equivalents 19 – Deferred Income Tax Ps Increase 35,758 110,306 At December 31, 2012 At December 31, 2011 Ps 1,036,816 1,158,924 Ps 1,389,042 709,487 Ps Ps Ps Ps Ps Ps Ps 2011 218,467 2,044 10,229 - 7,351 29,209 (7,949) 259,351 2011 (2,044) (10,229) - (12,273) Decrease (4,895) (21,737) Decrease (42,775) (130,938) At January 1, 2011 751,074 624,505 The analysis of deferred tax assets and deferred tax liabilities is as follows: Deferred tax asset: - To be recovered after more than 12 months - To be recovered within 12 months Deferred tax liabilities - To be recovered after more than 12 months - To be recovered within 12 months Deferred tax, net At December 31, 2012 At December 31, 2011 At January 1, 2011 Ps Ps 700,264 418,243 1,118,507 (3,787,918) (1,544,421) (5,332,339) (4,213,832) Ps 1,081,711 257,862 1,339,573 (4,843,538) (681,725) (5,525,263) (4,185,690) Ps Ps Ps 633,186 186,233 819,419 (4,297,626) (454,042) (4,751,668) (3,932,249) 75 Alpek, S. A. B. de C. V. And SuBSidiArieS The gross movement on the deferred income tax account is as follows: At January 1 Translation Effect Acquisition of subsidiary Income state charge: Tax charged (credit) relating to components of other comprehensive income At December 31 2012 (4,185,690) 236,309 - (268,017) 3,566 (4,213,832) Ps Ps 2011 (3,932,249) (507,188) 37,370 (39,785) 256,162 (4,185,690) Ps Ps Temporary differences requiring recognition of deferred income tax for the year ended December 31, 2012 is as follows: Assets: Inventories Trade accounts receivable Property, plant and equipment Valuation of derivative instruments Tax loss carryforwards Total Liabilities: Accrued expenses Other temporary differences, net Total Deferred income tax liability 2012 2011 Ps Ps Ps Ps Ps (18,659) (89,453) (3,787,918) 122,266 635,022 (3,138,742) (914,092) (160,998) (1,075,090) (4,213,832) Ps Ps Ps Ps Ps 38,744 69,478 (4,843,538) 315,745 562,509 (3,857,062) (328,628) - (328,628) (4,185,690) Deferred income tax assets are recognized for tax loss carryforwards to the extent that the realizations of the related tax benefit through future taxable profits is probable. The Company did not recognize deferred income tax assets of Ps 372,170 for December 31, 2011, in respect of losses amounting to Ps 1,329,179 that can be carried forward against future taxable income. On September 2012, Akra Polyester recognized a deferred income tax 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 which expire as shown below: Year loss incurred 2003 2004 2005 2006 2007 2008 2009 2010 2011 Tax loss carryforwards 273,323 55,886 268,295 74,562 15,868 350,466 5,685 133,545 1,090,303 2,267,933 Ps Ps Year of expiration 2013 2014 2015 2016 2017 2018 2019 2020 2021 20 - Derivative Financial Instruments The effectiveness of derivative financial instruments classified as hedge instruments is assessed on a periodic basis. At December 31, 2012 and 2011 and January 1, 2011 the subsidiaries’ management had assessed the effectiveness 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 do not reflect the amounts at risk in regard to future cash flows. The amounts at risk are generally limited to the unrealized gain or loss on market valuation of these instruments, which may vary according to changes in market value of the underlying asset, its volatility and the credit quality of counterparties. 76 Alpek, S. A. B. de C. V. And SuBSidiArieS The principal obligations to which the subsidiaries are subject depend on the contracting mechanics and terms of each 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 hedging derivative is classified as non- current asset or liability if the remaining maturity of the hedged item is more than 12 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 Mexican Pesos): At December 31, 2012 Type of derivative, value or contract Notional amount Underlying asset Unit Reference Fair value 2013 Maturity 2014 2015+ Collateral/ guarantee US$/MXN Ps (325) Pesos / Dollar 13.01 Ps 6 Ps 6 Ps - Ps - Ps - At December 31, 2011 Type of derivative, value or contract US$/MXN (CCS)(1) US$/MXN Euro / US$ Euro /MXN Notional amount Underlying asset Unit Reference Ps (76) Pesos / Dollar (349) Pesos / Dollar (288) Dollars / Euro (82) Pesos / Euro 13.98 13.98 1.30 18.14 Fair value (16) Ps (7) 14 (4) (13) Ps Ps Ps 2012 (16) (7) 14 (4) (13) Ps Ps Maturity 2013 Collateral/ 2014+ guarantee - - - - - Ps Ps - Ps - - - - Ps - - - - _- Type of derivative, value or contract Notional amount Underlying asset Unit Reference Fair value 2011 Maturity 2012 Collateral/ 2013+ guarantee US$/MXN (CCS)(1) Ps (134) Pesos / Dollar 12.36 Ps (16) Ps (6) Ps (10) Ps - Ps - At January 1, 2011 (1) Cross currency swaps b) Interest rate swaps The positions of derivative financial instruments of interest rate swaps were as follows (millions of Mexican pesos): Type of derivative, value or contract Hedging purposes: Over Libor (1) Trading purposes: Over Libor Type of derivative, value or contract Hedging purposes: Over Libor (1) Trading purposes: Over Libor Notional amount Underlying asset Unit Reference Fair value 2013 Maturity 2014 2015+ Collateral/ guarantee At December 31, 2012 Ps 2,862 % per year 0.39 Ps (200) Ps (42) Ps (56) Ps (102) Ps 1,008 % per year 0.39 (36) (236) Ps Ps (36) (78) - Ps (56) Ps - (102) Ps - - - At December 31, 2011 Notional amount Underlying asset Unit Reference Fair value 2012 Maturity 2013 Collateral/ 2014+ guarantee Ps 3,075 % per year 0.73 Ps (176) Ps (41) Ps (50) Ps (85) Ps 2,761 % per year 0.73 (210) (386) Ps Ps (192) (233) Ps (23) (73) Ps 5 (80) Ps - - - 77 Alpek, S. A. B. de C. V. And SuBSidiArieS Notional amount Underlying asset Unit Reference Fair value 2011 Maturity 2012 Collateral/ 2013+ guarantee At January 1, 2011 Ps 1,977 % per year 0.80 Ps 49 Ps (2) Ps (30) Ps 81 Ps 5,565 % per year 0.80 (421) (372) Ps Ps (242) (244) Ps (159) (189) Ps (20) 61 Ps - - - Type of derivative, value or contract Hedging purposes: Over Libor (1) Trading purposes: Over Libor (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): Type of derivative, value or contract Notional amount Underlying asset Unit Reference Fair value 2013 Maturity 2014 2015+ Collateral/ guarantee At December 31, 2012 Hedging purposes: Ethylene (1) Ps Natural gas (1) Ethane (1) Trading purposes: Ethylene Natural gas Gasoline 476 606 Cent Dollar/lb Dollar / MBTU 55 Cent Dollar /Gallon 4 28 1,138 Cent Dollar/lb Dollar / MBTU Dollar / Gallon 55.1 Ps 40 Ps 42 Ps (2) Ps - Ps 3.60 23.9 55.1 3.60 2.70 30 (16) - (226) 14 (158) Ps Ps At December 31, 2011 30 (16) - (226) 20 (150) - - - - - - - Ps (6) (8) Ps - - Ps - - - - - - - Underlying asset Unit Reference Fair value 2012 Maturity 2013 Collateral/ 2014+ guarantee Cent Dollar/lb Dollar / MBTU Cent Dollar/lb Dollar / MBTU Dollar / Gallon 51.7 Ps (8) Ps (8) Ps 3.25 (30) (30) 51.7 3.25 2.60 (4) (536) (129) (707) Ps Ps (4) (279) (113) (434) - - - (257) Ps - Ps - - - (16) (273) Ps Ps - - Ps - - - - - - Type of derivative, value or contract Hedging purposes: Ethylene (1) Natural gas (1) Trading purposes: Ethylene Natural gas Gasoline Notional amount Ps 601 706 51 67 1,348 78 Alpek, S. A. B. de C. V. And SuBSidiArieS Notional amount Underlying asset Unit Reference Fair value 2011 Maturity 2012 Collateral/ 2013+ guarantee At January 1, 2011 Ps 473 Cent Dollar / lb 257 928 Dollar / MBTU Dollar / Gallon 45.5 Ps 69 Ps 65 Ps 4 Ps - Ps - 4.09 2.36 (728) 120 (539) Ps Ps - 113 178 (397) (331) 7 (386) Ps - (331) Ps Ps 283 - 283 Type of derivative, Value or contract Hedging purposes: Ethylene (1) Trading purposes: Natural gas Gasoline (1) Cash flows hedge The principal obligations to which the subsidiaries are subject depend on the contracting mechanics and terms of each 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 aforementioned derivative financial instruments amounted to (Ps 388,431), (Ps 1,105,724) and (Ps 927,266), respectively, it is included in the consolidated statement of financial position as follows: Current assets Non-current assets Current liabilities Non-current liabilities Net position At December 31, 2012 107,297 - (287,510) (208,218) (388,431) Ps Ps Fair value at: At December 31, 2011 Ps Ps 49,450 26,630 (438,741) (743,063) (1,105,724) At January 1, 2011 207,100 104,720 (88,418) (1,150,668) (927,266) Ps Ps 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. At December 31, 2012 and 2011 there are no collaterals required in derivative financial instruments. 21 – Other current liabilities Taxes Accrued expenses Accrued interest payable Short-term employee benefits Employees’ profit sharing Deferred revenue Advances from customers Other Total other current liabilities At December 31, 2012 At December 31, 2011 Ps Ps 401,406 522,942 148,433 295,497 32,710 - 6,943 54,330 1,462,261 Ps Ps 689,666 1,124,324 246,259 207,442 108,867 80,980 3,734 117,600 2,578,872 At January 1, 2011 485,888 807,790 177,698 95,071 36,794 - 928 91,960 1,696,129 Ps Ps 79 Alpek, S. A. B. de C. V. And SuBSidiArieS 22 - Stockholders’ equity At December 31, 2012, the common stock is variable, with a fixed minimum of Ps 50 retired, represented by 5,000 Series “A” shares, with par value of 10 Mexican Pesos, fully subscribed and paid. The variable capital withdrawal 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’s by-laws and to the General Law of Mercantile Corporations. In accordance with the General Law of Mercantile Corporations, the legal reserve must be increased annually by 5% of annual net profits until it reaches 20% of the fully paid capital stock amount. The movements of the other reserve items for 2012 and 2011 are as follows: At January 1, 2011 Fair value losses Tax on fair value losses Gains on foreign currency translation At December 31, 2011 Fair value gains Tax on fair value gains Losses on foreign currency translation At December 31, 2012 Effect of foreign currency translation - - - 1,716,956 1,716,956 - - (1,406,694) (1,406,694) Ps Ps Ps Effect of derivative financial designated instruments as cash flow hedges Ps Ps Ps 49,584 (344,241) 104,706 - (239,535) 87,638 (22,667) - 64,971 Total 49,584 (344,241) 104,706 1,716,956 1,477,421 87,638 (22,667) (1,406,694) (1,341,723) Ps Ps Ps In Alpek’s General Ordinary Meeting held on January 10, 2012, the stockholders agreed to declare dividends 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 declare dividends in cash 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 in cash for a total amount of Ps 910,810. In Alpek’s General Ordinary Meeting held on September 26, 2011, the stockholders agreed to declare dividends in 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 in cash 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 following changes: a) Petrotemex: The capital stock at January 1, 2011 was composed for ordinary nominative shares with par value of 1 Mexican 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 maximum represented by 368,765,200 common shares, nominative, without par value expression fully subscribed and 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 of 17,400,001 and Series “B-2” shares composed of 17,399,999 without ownership restrictions. 80 Alpek, S. A. B. de C. V. And SuBSidiArieS d) Unimor: The capital stock fully subscribed and paid of Ps 714,602 is composed of common shares with a par value of ten cents of Mexican Pesos and is divided into 500,000 shares Series “A” representing the fixed part and Series “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 the capital stock by Ps 102,282, through a contribution in cash, therefore, at January 1, 2011, the capital stock is variable 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 paid dividends 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 paid dividends 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 paid dividends 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 paid dividends 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 paid dividends 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 paid dividends 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 paid dividends 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 paid dividends in cash for a total amount of Ps 122,369. c) Polioles: In Polioles´ General Ordinary Meeting held on February 20, 2012, the stockholders declared and paid dividends 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 paid dividends 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 dividends in 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 paid dividends 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 dividends in 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 paid dividends 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 paid dividends in cash for a total amount of Ps 1 to the non-controlling portion. 81 Alpek, S. A. B. de C. V. And SuBSidiArieSIn accordance with the General Law of Mercantile Corporations, the income for the period is subject to the legal provision, requiring that at least 5% of the income for each period to be set aside to increase the legal reserve until it reaches an amount equivalent to 20% of the capital stock paid. The legal reserve is presented within retained earnings. As the legal reserve reached 20% of the capital stock, no additional increases were required 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 for its Spanish acronym). Dividends paid in excess of this account are subject to a tax equivalent to 42.86% if paid in 2013. The tax is payable by the Company and may be credited against the income tax payable by the Company in the 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. In the case of capital stock reductions and in accordance with the Mexican Income Tax Law, any excess of stockholders’ equity over capital contributions, receives the same tax treatment as dividends. 23 – Expenses by nature Cost of sales and expenses classified by nature are as follows: Raw material and other Employee benefits expenses (Note 26) Human resources expense Maintenance Depreciation and amortization Advertising expenses Freight expenses Energy and combustible consumption (gas, electricity, etc.) Traveling expenses Operating lease expenses Technical assistance, professional fees and administrative services Other Total 24 – Other income (expenses), net Other income (expenses) for the years ended December 31, are comprised as follows: Gain on sale of waste Reorganization expenses (*) Expenses related to potential acquisition projects Gain on sale of property, plant and equipment Impairment of property, plant and equipment Valuation of derivative financial instruments Indemnity insurance recovery Taxes and surcharges Gain on sale of investments available for sale (**) Other income, net Total December 31, 2012 Ps (73,584,231) (2,860,519) (21,034) (921,734) (2,129,374) (2,145) (3,400,967) (2,861,575) (106,059) (263,785) (920,204) (1,926,252) Ps ( 88,997,879) 2012 1,136 - - 375 (4,798) 152,275 6,009 9,204 - 146,635 310,836 Ps Ps 2011 (69,203,340) (2,461,808) (50,031) (974,954) (1,818,776) (3,417) (2,518,165) (2,777,807) (87,756) (206,678) (970,714) (1,679,067) (82,752,513) 2011 7,424 (313,900) (161,873) 3,034 (137,897) - 8,888 6,030 88,531 174,281 (325,482) Ps Ps Ps Ps (*) The expenses refer to an organizational restructure occurred during 2011 in which part of the personnel were dismissed. (**) This income mainly corresponds to the gain from the sale of shares of Enka de Colombia, S. A. carried out during 2011. 82 Alpek, S. A. B. de C. V. And SuBSidiArieS 25 – Finance income (expenses) Finance income (expenses) for the years ended on December 31, are as follows: Finance income: Interest income in short-term bank deposits Interest income in loans to related parties Other Foreign exchange gain Gains for changes in the fair value of financial assets at fair value through profit or loss Total finance income Finance expenses: Interest expense in bank borrowings Interest expense with related parties Interest expense in non banking borrowings Finance cost on employee benefits Other Exchange rate losses Total finance expenses Finance expenses, net 26 – Employee benefits expenses Employee benefits expenses for the years ended on December 31, are as follows: Salaries, wages and benefits Social security contributions Employee benefits (Note 18) Other contributions Total 27 – Income tax Income tax for the years ended on December 31, are as follows: Total current income tax Adjustment to the provision of income tax from prior years Total deferred tax Income tax expense 2012 133,569 49,151 172,845 141,224 68,927 565,716 2012 (751,306) ( 56,362) (619,700) (140,868) (328,743) - (1,896,979) (1,331,263) 2012 (2,091,768) (187,301) (18,461) (562,989) (2,860,519) 2012 (1,458,257) 2,982 (268,018) (1,723,293) Ps Ps Ps Ps Ps Ps Ps Ps 2011 21,883 56,808 141,984 - 3,833 224,508 2011 (539,905) (49,246) (347,852) (122,722) (263,418) (91,588) (1,414,731) (1,190,223) 2011 (1,852,883) (168,328) 2,093 (442,690) (2,461,808) 2011 (1,908,211) 371 (39,785) (1,947,625) Ps Ps Ps Ps Ps Ps Ps Ps 83 Alpek, S. A. B. de C. V. And SuBSidiArieS The reconciliation between statutory and effective income tax rate for the years ended on December 31 is as follows: Income before income tax Statutory tax rate Income tax at statutory rate Add (deduct) effect of income tax on: Annual inflationary adjustment Non-deductible expenses Non-taxable income Tax losses for which no deferred income tax asset was recognized Translation effect from the functional currency to the reporting currency Effect of different tax rates in countries other than Mexico Adjustment to the income tax liability from prior years Effect for reactivation of tax losses Share of losses of associates Total income tax Effective income tax rate Ps Ps 2012 6,106,095 30% (1,831,829) (71,823) (32,673) 30,392 65,446 (171,247) (85,088) 8,880 376,366 (11,717) (1,723,293) 28% Ps Ps 2011 6,375,378 30% (1,912,614) (139,365) (35,266) - 27,420 214,838 (96,120) 371 - (6,889) (1,947,625) 31% On December 9, 2012, the Income Law in Mexico was published for the year 2013, in which the income tax rate in 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 of Representatives changes in the US Tax Act of that country, and were signed by the President at the beginning of January, 2013, these changes are considered as substantially enacted. As of December 31, 2012, this does not cause 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 ended December 31, are: 2012 Tax charge (in favor) Before Taxes After tax Before taxes 2011 Tax charge (in favor) After tax Ps (1,406,694) (88,386) Ps - 26,233 (Ps 1,406,694) (62,153) Ps 1,716,956 (393,583) Ps - 151,455 Ps 1,716,956 (242,128) 87,638 Ps (1,407,442) (22,667) 3,566 3,566 Ps Ps 64,971 (1,403,876) Ps Ps (344,241) 979,132 104,706 Ps 256,161 Ps 256,161 (239,535) Ps 1,235,293 Foreign currency translation effect Actuarial losses Effect of derivative financial Instruments designated as Cash flow hedging Other comprehensive income Deferred tax 28 - Financial information by segments Segment information is presented in a manner consistent with the internal reporting provided to the chief operating officer, which has been identified as the Company’s Chief Executive Officer, who is the highest authority in the operational decision making, resource allocation and performance assessment of the operating segments. An operating segment is defined as a component of an entity about which separate financial information is regularly 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 independently because their products mix and the markets they attend are different. Their activities are carried out through various subsidiaries. Transactions between operating segments are carried out at market value and the accounting policies which prepares 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 financial income, taxes, depreciation, amortization and impairment of non-current assets (EBITDA), this indicator represents a good measure to evaluate operating performance and ability to meet obligations principal and interest in respect of the indebtedness, and the ability to fund capital expenditures and 84 Alpek, S. A. B. de C. V. And SuBSidiArieS working capital requirements. Nevertheless, EBITDA is not a measure of financial performance under IFRS and should not be considered as an alternative to net income as a measure 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 adding back 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), net and 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: Income statement: Sales by segment Inter-segment sales Sales to external clients Operating income Depreciation, amortization and impairment of fixed assets Adjusted EBITDA Capital expenditures (Capex) For the year ended December 31, 2011: Income statement Sales by segment Inter-segment sales Sales to external clients Operating income Depreciation, amortization and impairment of fixed assets Adjusted EBITDA Capital expenditures (Capex) Polyester 75,249 (49) 75,200 5,319 1,689 7,008 1,400 Polyester 70,050 (52) 69,998 5,195 1,537 6,732 471 Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps Plastics and Chemicals 21,068 (105) 20,963 2,161 445 2,606 122 Plastics and Chemicals 20,781 (112) 20,669 2,394 419 2,813 117 The reconciliation between “Adjusted EBITDA” and profit before tax for the years ended December 31 is as follows: Adjusted EBITDA Depreciation, amortization and impairment of fixed assets Operating profit Financial result Share of loss of associates Profit before tax 2012 9,610 (2,134) 7,476 (1,331) (39) 6,106 Ps Ps Segment total 96,317 (154) 96,163 7,480 2,134 9,614 1,522 Segment total 90,831 (164) 90,667 7,589 1,956 9,545 588 2011 9,545 (1,956) 7,589 (1,191) (23) 6,375 Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps The following table shows the net sales breakdown by country of origin for the years ended December 31, (in millions of Mexican Pesos): Mexico United States Argentina Net sales 2012 53,456 38,609 4,098 96,163 Ps Ps 2011 53,142 33,362 4,162 90,667 Ps Ps 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 represents 11% and 15% of consolidated revenues to external customers. 85 Alpek, S. A. B. de C. V. And SuBSidiArieS The following tables show the intangible assets and property, plant and equipment by country of origin: (in millions of Mexican Pesos): Mexico United States Argentina Total intangible assets Mexico United States Argentina Total Property, plant and equipment At December 31, 2012 At December 31, 2011 At January 1, 2011 Ps Ps Ps Ps 1,552 690 1 2,243 At December 31, 2012 18,439 7,985 271 26,695 Ps Ps Ps Ps 1,778 768 3 2,549 At December 31, 2011 19,397 9,161 321 28,879 Ps Ps Ps Ps 180 3 5 188 At January 1, 2011 17,867 3,944 314 22,125 29 - Commitments and contingencies At December 31, 2012 and 2011 and January 1, 2011, the subsidiaries had entered into various agreements with suppliers 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 adjustment clauses. Some of the subsidiaries use hazardous materials to manufacture polyester staple fiber, polyethylene terephthalate (“PET”) resin and terephthalic acid and generates and disposes of wastes, such as finishes and glycol. These and other activities of the subsidiaries are subject to various federal, state and local laws and regulations governing the generation, handling, storage, treatment and disposal of hazardous substances and wastes. Under such laws, an owner or lessee of real estate may be liable for, among other things, (i) the costs of removal 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 such law, and (ii) environmental contamination of facilities where its waste is or has been disposed of. Such laws often impose such liability without regard to whether the owner or lessee knew of, or was responsible for, the presence of such hazardous or toxic substances. Although the subsidiaries believe that there are no existing material liabilities relating to noncompliance with environmental laws and regulations, there can be no assurance that there are no undiscovered potential liabilities relating to noncompliance with environmental laws and regulations, that historic or current operations have not resulted 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 subsidiaries or expose it to third-party actions, such as tort suits. Furthermore, there can be no assurance that changes in environmental regulations in the future will not require the subsidiaries to make significant capital expenditures to 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 Shaw Industries Group, Inc. At December 31, 2012 and 2011 this guarantee amounts to US$5,928 and US$3,400, respectively. In September, 2007, the subsidiary Indelpro renewed the agreement it had entered into with “PEMEX Refinación” covering the supply of polypropylene at chemical and refining ending in 2018. Purchases for the year 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 5,015,005 for the year 2013. In connection with the construction of its second production line of polypropylene, in 2008 the subsidiary Indelpro entered into an agreement with Basell Poliolefine Italia S. r. l., (subsidiary of the other partner in Indelpro S. A. de C. V.) related to engineering licenses, use of patents and technical information for the production 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 payments of royalties from 2013, which are determined on the basis of 1.22% of net sales value. As of December 31, 2012 there 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$11 million as compensation. Indelpro has the option to pay this obligation in advance. On February 1, 2005, the subsidiary Polioles and BASF Corporation (the other partner of the Combined Affiliate) signed a license contract related to the use of patents and technical information for the production of polystyrene pearl in the Altamira plant, based in Tamaulipas. Under the mentioned contract, Polioles pays BASF Corporation the difference between an annual minimum of US$ 9 million and the 86 Alpek, S. A. B. de C. V. And SuBSidiArieS gain before financing and taxes plus depreciation and amortization generated by the line of polystyrene pearl. The term of the present contract will be until Polioles had covered in an accrual basis US$ 15 million as consideration. For the year ended at December 31, 2012 and 2011 the threshold was not reached and therefore there is no payment obligation generated. The Company leases equipment under non-cancelable operating leases, primarily related to transportation equipment for PTA and PET businesses, which normally include renewal options. These options are generally renewed under the same conditions of the existing leases. Future payments under these operating leases with non-cancelable terms longer than one year are summarized below: 2013 2014 2015 2016 2017 Subsequent years US$ 12,414 9,209 6,867 6,204 4,200 12,099 30 - First time adoption of International Financial Reporting Standards Until 2011, the Company issued its consolidated and combined financial statements in accordance with Mexican Financial Reporting Standards (MFRS). Since 2012, Alpek issued its consolidated and combined financial statements 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 transition date and January 1, 2012 as its date of adoption. The amounts included in the consolidated and combined financial statements for 2011 have been reconciled to be presented under the same standards and criteria in 2012. For the transition, the Company identified and quantified the differences between MFRS and IFRS for purposes of 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 reported previously in financial statements prepared under MFRS. An explanation of how the transition from MFRS to IFRS has affected the Company’s financial position, its financial performance and cash flows shown in the following 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 certain intangible assets at the date of transition to IFRS and to use that fair value as its assigned cost at that date or to use an updated carrying amount determined under the previous GAAP (Generally Accepted Accounting Principles), if such updated carrying amount is comparable to: a) fair value or b) cost or depreciated 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 at fair value. For smaller equipment, the Company chose to use their values recognized under MFRS as assigned cost under IFRS. The net effect on valuation is recognized against the opening balance of retained earnings under IFRS at the transition date. Thereafter, the Company uses the cost method for property, 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 the transition date or a specific date before the transition date. An entity that chooses to restore their purchases from a specific date before the transition date must include all acquisitions occurring in that period. This option allows avoiding retrospective application that would reset all business combinations that occurred before the transition date. The Company chose to prospectively apply IFRS 3 to business combinations occurring on or after the transition date. The business combinations before the transition date were not modified. 87 Alpek, S. A. B. de C. V. And SuBSidiArieS 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 the transition date. This exemption allows not calculating the cumulative translation effect in accordance with IAS 21, “The effects of changes in foreign exchange rates” (“IAS 21”), as of the date on which the subsidiary or investment accounted through the equity method was established or acquired. The Company chose to zero all cumulative gains and losses from translation against retained earnings under IFRS 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 the recognition of actuarial gains and losses. In line with this exemption, the Company chose to recognize all cumulative actuarial gains and losses that existed at the transition date against retained earnings under IFRS. 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 is January 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 and begin 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 meet the criteria of IAS 39 “Financial Instruments: Recognition and Measurement “, at that time. Hedging accounting can only be applied prospectively from the transition date and is not allowed to create retrospectively documentation supporting a hedging relationship. All hedging transactions contracted by the Company met the criteria for hedging accounting as of January 1, 2011 and, accordingly, are reflected 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 the same 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, without significant 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 and statement of comprehensive income consolidated and combined. A) Reconciliation of consolidated and combined Balance Sheet. B) Reconciliation of consolidated and combined Statements of Income. C) Reconciliation of consolidated and combined Statement 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 the year ended on December 31, 2012. 88 Alpek, S. A. B. de C. V. And SuBSidiArieSA) Reconciliation of consolidated and combined Balance Sheets: Note December 31, 2011 Adj. MFRS IFRS MFRS January 1,2011 Adj. IFRS Assets Current assets: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables, net Inventories Derivative financial instruments Other current assets Total current assets Ps 3,584,287 Ps - Ps 3,584,287 Ps 3,231,935 Ps - Ps 3,231,935 g) b) c) 1,925 13,347,056 12,324,968 49,450 231,295 29,538,981 - 1,925 (65,895) 13,281,161 (4,805) 12,320,163 49,450 231,295 (70,700) 29,468,281 - - 283,647 9,328,612 6,895,565 207,100 120,284 20,067,143 - (65,895) (314,856) - 66,310 (314,441) 283,647 9,262,717 6,580,709 207,100 186,594 19,752,702 Non-current: Derivative financial instruments Property, plant and equipment, net b) Goodwill and intangible assets, net a) c) g) e) Deferred income tax assets g) Other non-current assets Total non-current assets Total Assets 26,630 - 26,630 104,720 - 104,720 23,173,072 2,762,591 1,181,504 278,206 27,422,003 22,125,158 188,355 706,139 137,626 23,261,998 Ps 56,960,984 Ps 5,191,973 Ps 62,152,957 Ps 38,178,754 Ps 4,835,946 Ps 43,014,700 5,706,010 28,879,082 2,549,420 (213,171) 939,983 (241,521) 289,561 11,355 5,262,673 32,684,676 16,547,186 355,349 966,730 137,626 18,111,611 5,577,972 (166,994) (260,591) - 5,150,387 Note December 31, 2011 Adj. MFRS IFRS MFRS Adj. IFRS January 1,2011 Liabilities and equity Liabilities: Current liabilities: Current debt Trade and other payables Derivative financial instruments Income tax payable Other current liabilities Total current liabilities Non-current liabilities: Non-current debt Derivative financial instruments Deferred income tax liabilities Employee benefits Total non-current liabilities Total Liabilities g) h) c) e) d) Equity: Controlling portion: Common stock Retained earnings Other reserves Stockholders’ equity controlling portion Non- controlling portion Total Equity Total Liabilities and Equity a) a) b) d) e) h) j) Ps 2,141,974 Ps 13,215,063 438,741 301,293 2,558,450 18,655,521 - Ps 2,141,974 Ps 1,428,999 Ps 3,306 13,218,369 - 438,741 - 301,293 2,578,872 20,422 23,728 18,679,249 7,696,002 88,418 279,849 1,717,916 11,211,184 - Ps 1,428,999 7,699,308 88,418 279,849 1,696,129 11,192,703 3,306 - - (21,787) (18,481) 17,798,811 743,063 4,000,064 345,983 22,887,921 41,543,442 - 1,125,609 915,079 (254,025) 17,544,786 743,063 5,125,673 1,261,062 1,786,663 24,674,584 1,810,391 43,353,833 7,851,761 1,150,668 3,507,086 36,469 12,545,984 23,757,168 (64,877) - 1,131,302 535,963 1,602,388 1,583,907 7,786,884 1,150,668 4,638,388 572,432 14,148,372 25,341,075 - 2,874,563 (29,683) 4,968,187 6,264,594 1,176,887 12,409,668 3,007,874 15,417,542 2,917,204 11,617,447 49,584 14,584,235 3,089,390 17,673,625 Ps 56,960,984 Ps 5,191,973 Ps 62,152,957 Ps 38,178,754 Ps 4,835,946 Ps 43,014,700 4,968,187 9,139,157 1,147,204 2,844,880 15,254,548 3,544,576 3,381,582 18,799,124 4,467,467 7,057,426 250,185 11,775,078 2,646,508 14,421,586 (1,550,263) 4,560,021 (200,601) 2,809,157 442,882 3,252,039 536,702 89 Alpek, S. A. B. de C. V. And SuBSidiArieS B) Reconciliation of consolidated and combined Statements of Income: For the year ended December 31, 2011 Net sales Cost of sales Gross profit Selling expenses Administrative expenses Other expenses, net Operating Profit Financial income Financial expenses Foreign exchange loss Comprehensive financing expense, net Share of losses of associates Profit before income tax Income tax Profit of the year Attributable to: Controlling portion Non- controlling portion Note b) h) d) d) g) d) i) i) b) e) MFRS 90,666,561 (80,529,352) 10,137,209 (961,285) (1,131,129) (553,119) 7,491,676 86,611 (1,185,998) (106,524) (1,205,911) (22,965) 6,262,800 (1,972,651) 4,290,149 3,791,728 498,421 Ps Ps Ps Ps Adj. - (123,817) (123,817) (11,466) 4,536 227,637 96,890 137,897 (137,145) 14,936 15,688 - 112,578 25,026 137,604 107,614 29,990 Ps Ps Ps Ps IFRS 90,666,561 (80,653,169) 10,013,392 (972,751) (1,126,593) (325,482) 7,588,566 224,508 (1,323,143) (91,588) (1,190,223) (22,965) 6,375,378 (1,947,625) 4,427,753 3,899,342 528,411 Ps Ps Ps Ps C) Reconciliation of consolidated and combined Statements of Comprehensive Income: Profit for period Other comprehensive income, net of taxes Effect of derivative financial instruments designated as cash flows hedging Actuarial losses of labor obligations Translation effect of foreign entities Total items of the comprehensive income for the year Total comprehensive income for the year Attributable to: Controlling portion Non-controlling portion Total comprehensive income for the year D) Description of the effects from the transition to IFRS For the year ended December 31, 2011 Note MFRS Adj. IFRS Ps 4,290,149 Ps 137,604 Ps 4,427,753 d) j) (264,596) - 1,507,950 1,243,354 5,533,503 4,718,430 815,073 5,533,503 Ps Ps Ps 25,061 (242,128) 209,006 (8,061) 129,543 35,724 93,819 129,543 (239,535) (242,128) 1,716,956 1,235,293 5,663,046 4,754,154 908,892 5,663,046 Ps Ps Ps Ps Ps Ps a) Recognition of effects of inflation In accordance with IAS 29, “Financial reporting in hyper-inflationary economies”, the effects of inflation in the financial information must be recognized for hyper-inflationary economies, when the accumulated inflation rate for the last three years is approaching, or exceeds 100%, whereas under MFRS, such threshold is 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 recognized under MFRS until 2007 were cancelled for the non-hyper-inflationary periods, except for “Property, plant and equipment (due to the deemed cost exception of IFRS 1) and for “Goodwill” (due to the business combinations exception). b) Property, plant and equipment, net The transition to IFRS adjustment made to property, plant and equipment has been the most important to the Company. At the transition date, the Company chose to revalue the most important items of property, plant and equipment (land, building and machinery) at fair value by an independent appraiser, and use the revalued 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. 90 Alpek, S. A. B. de C. V. And SuBSidiArieS The previous carrying amounts and fair values of the assets revalued at the transition date are as follows: Land Buildings Machinery Total Carrying value 777,832 1,804,510 13,964,845 16,547,187 Ps Ps Adjustment 2,004,063 468,079 3,105,829 5,577,971 Ps Ps Fair Value Ps Ps 2,781,895 2,272,589 17,070,674 22,125,158 At January 1, 2011, some components of machinery and equipment were classified as inventories under MFRS. These components met the definition of property, plant and equipment in accordance with IAS 16 under IFRS, so that in its opening balance sheet, the Company reclassified them inventory under MFRS to property, 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 generated after December 31, 1997 for companies in Mexico was eliminated. The debt issuance costs that meet the capitalization criteria must be submitted as part of net debt balance. The amortization and recognition of debt issuance costs will be based on the effective interest method. At the transition date, the Company reclassified the debt issuance costs recorded as intangible assets to non-current debt in the calculation of amortized cost. d) Employee benefits The MFRS D-3 “Employee’s Benefits” all termination benefits, including those that are paid in the event of involuntary termination, are considered in the actuarial calculation to estimate the liability for labor obligations. For IAS 19 “Employees’ Benefits”, an entity recognizes termination benefits as a liability as long 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, the Company 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 5 years. Under IFRS, these liabilities had been recognized since the creation of plans and consequently there would be no transition liability and their respective amortization. In accordance with IFRS 1, the Company recognized actuarial gains and losses accumulated in retained earnings 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 the employee. No deferred ESPS is recognized based on the asset and liability method given that this method only applies to taxes on profits, so Alpek, as of the transition date, eliminated the deferred ESPS balance from the financial statements. e) Deferred taxes Derived from the exemptions applied as well as the differences described here, the accounting value of certain assets and liabilities were modified, so deferred taxes were recalculated using the guidelines of IAS 12 “Income Taxes”. f) Other income (expense), net Under IFRS, “other expenses/income” should be presented as part of operating income previously presented under MFRS after operating income, because they are considered unusual or infrequent items. Alpek reclassified 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 the new 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. i) Effective interest rate In accordance with IFRS, financial liabilities are initially recognized at fair value and subsequently measured at amortized cost, using the effective interest rate method, which is based on the discount rate that equates to the cash flows estimated to pay over the expected life of the debt. The Company recognizes the value of its debt at amortized cost. 91 Alpek, S. A. B. de C. V. And SuBSidiArieS ALPEk, S. A. B. DE C. V. AND SUBSIDIARIES j) Cumulative translation adjustment According to IFRS 1 “First-time Adoption of International Financial Reporting Standards”, Alpek adopted the exemption applying the cumulative translation effect to retained earnings on the transition date and restart the calculation. E) Description of significant effects from the transition to IFRS in the consolidated cash flow statement for the year ended December 31, 2011. The Company uses the indirect method to present the cash flow statement, both under Mexican FRS and IFRS, which do not differ significantly in their presentation. 31 – Share-based payments The Company has a compensation scheme referenced to the value of the shares of its parent company for senior executives of Alpek and its subsidiaries. According to the terms of the plan, eligible executives will receive a cash payment conditional on the achievement of certain quantitative and qualitative metrics based on the following 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 will be paid in cash over the next five years, i.e. 20% each year, at the average price of the share at the end of each year. The average price of the share in 2012, 2011 and 2010 in pesos was Ps 28.23, Ps 15.77 and Ps 11.67, respectively. 32 – Subsequent Events At the Annual General Meeting held on Indelpro on January 6, 2013, the stockholders declared and paid dividends in cash for a total amount of Ps 134,483 to the non-controlling portion. JOsé dE JEsús ValdEz sIMaNCas Chief Executive Officer Raúl MIllaREs NEyRa Chief Financial Officer 92 Glossary Purified Terephthalic Acid (PTA) Aromatic dicarboxylic acid, the main raw material in polyester production. PTA is produced by the oxidation of paraxylene. It is used to manufacture PET, which is then used to make bottles for water, soft drinks and other beverages, containers and other packaging, and polyester fiber for rugs, clothing, furniture and industrial applications, as well as other consumer products. by credit-risk rating agencies such as Fitch Ratings, Standard & Poor’s and Moody’s. Integrex® Alpek-owned technology for producing PTA and PET from paraxylene (PX) and monoethylene glycol (MEG), offering significant cost savings and fewer intermediate steps in the production process. Self-regulation of Health and Safety in the Workplace, Level 4 Certification Program implemented by the Mexican Ministry of Work and Social Welfare to verify that companies have implemented administrative systems that promote safe, hygienic work centers. Polyester Chain Alpek business that comprises all the companies involved in polyester production, from the raw material (PTA) to the production of PET and fibers. Caprolactam (CPL) CPL is made by reacting cyclohexane, ammonia and sulfur and is the raw material for the production of Nylon 6 polymer. Nylon 6 is a synthetic resin that, because of its strength, flexibility and softness, has a range of end uses, including for sportswear, underclothes and engineering plastics. Clean Industry Certification Certification granted by the Mexican Environmental Protection Agency (PROFEPA) to companies that comply with environmental legislation. ISO 9001 Certification Certification issued by rating agencies to those companies that operate with proven procedures for assuring the quality of their products, in accordance with the standard defined by the International Organization for Standardization (ISO). ISO 14001 Certification Internationally accepted standard for establishing an efficient Environmental Management System (EMS). The standard is designed to support companies’ profitability and at the same time minimize environmental impact. CO2 Emissions Unit to measure the carbon dioxide produced by the burning of solid, liquid and gaseous fuels, including natural gas. Investment Grade Rating given to a company as a result of an evaluation made Megawatt Unit of power, equal to 1 million watts. Watt Unit of power in the International System of Units (SI). Monoethylene Glycol (MEG) Raw material with diverse industrial uses, especially for producing polyester (PET and fiber), antifreeze, refrigerants and solvents. Paraxylene (PX) Hydrocarbon in the xylene family used to produce PTA. It is also a component of gasoline. Expandable Polystyrene (EPS) Light, rigid, cellular plastic, product of the polymerization of styrene monomer. EPS is a versatile material because of its properties as an impact reducer and thermal insulator, and customized molding capacity. These properties, combined with the ease with which it can be processed, make EPS a popular packaging for impact-sensitive items and for protecting perishables. It is also widely used in construction systems, to lighten floor and roof structures, and as an insulator. Polyethylene Terephthalate (PET) Material widely used in the manufacture of bottles and other containers for liquids, food and personal hygiene, household and healthcare products. PET flakes and films are used to produce caps, trays and recipients. Because of its transparency, strength, durability and high protection barriers, PET presents no known health risks, is light and recyclable, and has a wide range of applications in reusable, temperature-sensitive packaging. PET has replaced glass and aluminum, as well as other plastics such as PVC and polyethylene, for making containers. Polypropylene (PP) Thermoplastic polymer, produced from the polymerization of propylene monomer. Its properties include a low specific gravity, great rigidity, resistance to relatively high 93 temperatures and good resistance to chemicals and fatigue. PP has diverse applications, including for packaging, textiles, recyclable plastic parts and different kinds of containers, auto-parts and polymer (plastic) banknotes. Spherizone® LyondellBasell’s most recent technology, which offers great flexibility in polypropylene production and is used to make a wide range of products. Polyurethanes (PURs) Rigid, flexible or elastic, durable materials that are produced by the reaction of a polyol with an isocyanate. They are very versatile, offering the elasticity of rubber, combined with the hardness and durability of a metal. PURs may be hard like fiberglass, spongy like upholstery foam, protective like varnish, elastic like tire rubber or sticky like glue. Single Step® One-step technology for the production of EPS, where the EPS pearls are impregnated with a pre-expanded agent during the polymerization process. Comprehensive Responsibility Administrative System (Mexican National Association of the Chemical Industry, ANIQ) Certification given to companies that comply with the six comprehensive responsibility requirements established by the ANIQ, covering Process safety, Health and safety in the workplace, Product safety, Transportation and distribution, Prevention and control of environmental pollution and Community protection. Spheripol® LyondellBasell-owned technology which is the world’s most common way of producing polypropylene. Styrene Monomer Unsaturated hydrocarbon used to make a variety of plastics, synthetic rubber, protective coatings and resins. It is the main raw material in EPS production and also used as a solvent and chemical intermediate. Propylene Unsaturated, 3-carbon hydrocarbon, co-product of the cracking process at petrochemical complexes and a by- product at oil refineries. It is used in the petrochemical industry to produce PP, propylene oxide, cumene, isopropanol, acrylic acid and acrylnitrile. It is also converted into a gasoline component by alkylation with butanes or pentanes. Cyclohexane Compound produced by the hydrogenation of benzene and used in caprolactam production. Ethylene Oxide Compound produced from ethylene and used as an intermediate in the production of MEG and other chemicals. Propylene Oxide Compound produced from propylene and used to manufacture commercial and industrial products, including polyols, glycols and glycoethers. 94 Polyurethane Thermal insulation Polypropylene Refrigerator lining PET Food tray Polypropylene Containers Fiber Clothing PET Soft drink bottles CoNtENts overview and track Record Financial and operating Highlights Letter to shareholders Differentiated Business Model Polyester Chain Plastics and Chemicals social Responsibility Board of Directors Management team Corporate Governance Financial section Glossary 2 4 5 8 10 14 16 18 19 20 21 93 Polypropylene Caps Investor Relations Hernán F. Lozano Sabino Parra Av. Gómez Morín 1111-C Sur San Pedro Garza García, N.L., Mexico 66254 IR@alpek.com www.alpek.com t R o P E R L A U N N A 2 1 0 2 K E P L A Alpek, S.A B. de C.V. Av. Gómez Morín 1111 Sur Col. Carrizalejo San Pedro Garza García Nuevo León CP. 66254, Mexico www.alpek.com track record • strength • potential 2 0 1 2 A N N U AL R E P o R t 

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