Alpek Annual Report 2014

Plain-text annual report

2014 Annual Report 2 0 1 4 A n n u a l R e p o r t A l p e k Alpek, S.A B. de C.V. Av. Gómez Morín 1111 Sur Col. Carrizalejo, San Pedro Garza García Nuevo León, Mexico, 66254 www.alpek.com 2014 Annual Report Table of Contents Corporate Proﬁle Financial Highlights Footprint Petrochemical Chains Letter to Shareholders Polyester Plastics & Chemicals Integration, Efficiency and Expansion Sustainability Board of Directors Management Team Corporate Governance Glossary Consolidated Financial Statements 1 2 3 4 6 10 14 18 22 40 41 42 43 45 Throughout the report, the blue guidelines show the Global Reporting Initiative (GRI) indicators that are discussed in the paragraph. n o t s u o H , r o l o c h t r a E : g n i t n i r P | l a u s i V 3 3 : y h p a r g o t o h P & n g i s e D Investor Relations Hernán F. Lozano Sabino Parra Av. Gómez Morín 1111 Sur Col. Carrizalejo, San Pedro Garza García Nuevo León CP. 66254, Mexico IR@alpek.com www.alpek.com Corporate Profile DAK Americas (PTA/PET). Columbia, United States 2.1, 2.2, 2.5, 2.7 Corporate Proﬁle Alpek is 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 integrated polyester producer. • Only manufacturer of polypropylene (PP) and caprolactam (CPL) in Mexico. • Operates the largest expandable polystyrene (EPS) plant in the Americas. • 17 plants and 4,669 employees in Mexico, the United States and Argentina. • 90% of Alpek’s products used for food, beverage and consumer goods packaging. • Listed on the Mexican Stock Exchange since 2012. 1 ALPEK 2014 ANNUAL REPORT Financial Highlights EC1 INCOME STATEMENT Net Sales Operating Income EBITDA (1) Majority Net Income (2) Net Income per Share (3) (5) BALANCE SHEET Assets Liabilities Stockholders’ Equity Majority Interest (2) Book Value per Share (4) (5) Millions of dollars Millions of pesos 2014 6,471 286 434 65 0.03 4,442 2,414 2,028 1,763 0.87 2013 7,028 228 572 21 0.01 4,445 2,374 2,071 1,837 0.87 % var. 2014 2013 % var. (8) 25 (24) 202 0 2 (2) (4) 86,072 90,061 3,739 5,710 801 0.38 65,371 35,526 29,845 25,949 12.25 2,926 7,344 262 0.12 58,128 31,040 27,088 24,018 11.34 (4) 28 (22) 206 12 14 10 8 EBITDA (1) Millions of dollars MAJORITY NET INCOME (2) Millions of dollars ASSETS Millions of dollars 10 11 12 13 14 482 572 434 771 728 10 11 12 13 14 21 65 203 332 277 10 11 12 13 14 3,090 4,446 4,742 4,445 4,442 NOTE: In this annual report, monetary ﬁgures are expressed in nominal Mexican pesos ($) and in nominal dollars (US $) unless otherwise speciﬁed. The ﬁnancial information for 2014, 2013 and 2012 was prepared in accordance with IFRS, in effect in Mexico since January 2012. Conversions from pesos to dollars were made using the weighted average exchange rate of the period in which the transactions were carried out. The percentage variations between 2014 and 2013 are expressed in nominal terms. 1) EBITDA = Operating income plus depreciation, amortization and impairment of non-current assets. 2) Attributable to the controlling interest. 3) Based on the weighted average number of outstanding shares (2,118 million shares). 4) Based on the number of outstanding shares (2,118 million shares). 5) Dollars or pesos per share, accordingly. 2 Financial Highlights | Footprint 3 17 plants in 3 countries: Mexico, the United States and Argentina Polyester Plastics & Chemicals Alpek participates in several petrochemical chains through its two business segments: Polyester, and Plastics and Chemicals. It employs 4,669 workers and operates 17 plants in Mexico, the United States and Argentina, with a total capacity of 5.5 million tons per year. 2.3, 2.7, 2.8 Petrochemical Chains Oil Reﬁnery Naphtha Reformer Paraxylene PTA Cracker Benzene Propane Cracker H H C C H CH3 Propylene PP Methane N H H H Ammonia PET Fibers Ethane Cracker H H C C H H Ethylene Cracker Cyclohexane CH2 Styrene CPL EPS Ammonium Sulfate Oil Reﬁnery Naphtha O CH2 CH2 Ethylene Oxide Monoethylene Glycol 4 ALPEK 2014 ANNUAL REPORT Oil Reﬁnery Naphtha Reformer Paraxylene PTA Cracker Benzene Propane Cracker H H C C H CH3 Propylene PP Methane H N H H Ammonia Ethane Cracker H H C C H H Ethylene Cracker Cyclohexane CH2 Styrene CPL Ammonium Sulfate EPS Oil Reﬁnery Naphtha Monoethylene Glycol O CH2 CH2 Ethylene Oxide Petrochemical Chains PET Fibers Alpek products are used by millions of people every day in a wide range of applications. Polyester Plastics & Chemicals 5 ALPEK 2014 ANNUAL REPORT Letter to Shareholders Dear Shareholders: 1.1, 1.2, 2.9 This last year was particularly challenging for our industry due to falling oil prices and sustained pressure on polyester and caprolactam margins. However, 2014 was also a signiﬁcant investment year for Alpek with the completion of numerous integration, efficiency and expansion projects which further enhance our competitiveness. In markets outside North America, polyester (PTA/PET) and caprolactam (CPL) margins reached historically low levels. Margin pressure began in 2012 with the entry of new produc- tion capacity in China, which increased at estimated annual- ized rates of 26% and 53% for PTA and CPL, respectively, over the two-year period. Events during the year which are supportive for gradual margin recovery include: a call from major Chinese PTA producers for greater market discipline, the slowing growth rate of new capacity, and announced plant closures in Asia and around the world. However, these encouraging developments were overshadowed by the fall in oil and feedstock prices. After posting an average price of US $108 per barrel between January and June 2014, Brent crude dropped 48% to US $56 per barrel at the close of the year, reaching its lowest level in ﬁve years and driving down prices of petroleum derivatives. The price of paraxylene, our main feedstock, fell 34% during the year from US $1,543 per ton to US $1,014 per ton. This decline caused temporary distortions in margins and demand which negatively impacted results despite our position as a low-cost producer and “cost-plus” product pricing. Consolidated sales in 2014 fell 8% year-on-year, to US $6.5 billion. The year’s 1% sales volume increase was more than offset by a 9% drop in average prices, reﬂecting the lower price of oil. Consolidated EBITDA was US $434 million, 24% less than in 2013. This reduction mainly reﬂects a US $71 million non-cash inventory devaluation charge that was recognized as a result of the decline in paraxylene prices. The Polyester segment posted sales of US $4.8 billion in 2014, 11% lower than the previous year due to the 13% drop in average prices. However, volume grew 2% year-on-year despite the unfavorable demand environment. Polyester EBITDA fell 30% to US $270 million. This segment was the most affected by the falling crude price, with an estimated total impact of US $87 million, including inventory devaluation. The Plastics and Chemicals segment posted sales of US $1.7 billion, 3% above 2013. The rise is attributable to increases of 1% in volume and 2% in average prices. Plastics and Chemicals EBITDA decreased by 12%, pressured mainly by lower margins in expandable polystyrene (EPS) and polypropylene (PP). EPS and PP margins normalized after reaching record highs in 2013 as a result of favorable market dynamics. In addition, the highly volatile price of benzene and Chinese production further reduced CPL margins in 2014. While our results for the year were affected by external market factors, we maintain a healthy ﬁnancial position with solid leverage and coverage ratios based on a robust free cash ﬂow. 6 Letter to Shareholders At the close of the year, net debt declined 7% compared to 2013, the net debt to EBITDA ratio was 1.6 times and interest coverage 6.5 times. Other key ﬁnancial elements are our long-term debt proﬁle, 86% of which matures as of 2022 with ﬁxed interest rate, and a high dollarization of cash ﬂow that mitigates our exposure to exchange rate volatility. Our strong ﬁnancial position, coupled with a philosophy of disciplined growth, support the development of investment projects even at the bottom of the cycle in order to maximize the beneﬁts of the eventual recovery. Capital expenditures (Capex) in 2014 increased by 79% to US $320 million. The majority of these funds were allocated to a number of integration, operating efficiency and expansion projects that further enhance our competitiveness. The startup of our cogeneration plant in Cosoleacaque, Veracruz, marks the culmination of the ﬁrst major integration project since we became a public company. With a total investment of US $137 million and a 95 megawatt capacity, the new plant is expected to generate annual savings of approximately US $40 million. In addition to the economic beneﬁt, this project has given us valuable experience for the construction of a second cogeneration plant in Altamira, Tamaulipas, with three times the capacity of Cosoleacaque. We expect to break ground for the new facility in 2015. Our main integration project, for the production of monoeth- yleneglycol (MEG), advanced on several fronts, including ethane supply, technology selection and site evaluation. Supported by the region’s competitive natural gas and ethane prices, we esti- mate that Alpek could achieve the lowest polyester conversion cost in the world through its investments in MEG integration and power cogeneration. Armando Garza Sada Chairman of the Board José de Jesús Valdez Simancas Chief Executive Officer 7 8 DAK Americas (PET). Bay St. Louis, United States ALPEK 2014 ANNUAL REPORTLetter to Shareholders 2014 Capex was largely dedicated to further enhancing our operating efficiency. The most important of these investments was the construction of the integrated PTA/PET plant in Corpus Christi, Texas, which is being developed under the agreements signed with Gruppo M&G in 2013. This facility will use Alpek’s IntegRex® PTA technology. In 2014 we continued to reinforce our sustainability strategy under a model that involves interaction with all our stakeholders, based on four pillars: i) Internal Well-being, ii) Community, iii) Environment, and iv) Sustainable Economic Value Creation. We are committed to generating economic, environmental and social beneﬁts through our operations. In addition, the technology upgrade of our CPL plant was successfully completed. By year-end, the facility had achieved the expected improvements in production and raw material consumption, which will generate estimated annual savings of US $8 million. In 2014 we also leveraged selected expansion opportunities. One was the agreement signed with BASF to acquire its EPS business in the Americas and 100% of Polioles’ EPS business, while BASF acquired Polioles’ polyurethane business. Besides positioning Alpek as the leading EPS producer in the Americas, the transaction will give us full control over this business unit in order to boost its growth. We expect to close the agreement with BASF during the ﬁrst quarter of 2015. Furthermore, we acquired CabelmaPET, S.A., which operates the only food-grade recycled PET (r-PET) facility in Argentina. The plant’s 16 thousand ton r-PET capacity will complement Alpek’s virgin PET resin production in the country, and will enable us to offer PET resin that incorporates virgin and recycled material in a single pellet. Along with contributing to improved sustainability and environmental well-being, PET resin products with integrated recycled content will allow our customers to streamline their operations by eliminating unnecessary feed and blending processes. One of the most signiﬁcant developments of the year was to establish the medium-term objective to intensify our com- munity engagement programs, working alongside the commu- nities that are closest to our operations. In 2014, for example, we helped more than 7,000 students from 53 neighboring schools, and more than 130 students completed their intern- ships at our companies. Although we faced challenges in 2014, there are signs that point to a bright future for Alpek. Among these we can high- light the following: the start-up of our ﬁrst cogeneration proj- ect; healthy cash ﬂow generation and a strong balance sheet that assure the continuity of our investments in integration, efficiency and expansion; the slowdown in Asian production capacity growth combined with greater discipline from Chi- nese producers; and the energy reform being implemented in Mexico, which will increase feedstock and energy availability at competitive prices in our country. On behalf of the Board of Directors, we would like to thank our employees, customers, suppliers, creditors, community and, in particular, our shareholders who put their trust in us year after year. Sincerely, Armando Garza Sada Chairman of the Board José de Jesús Valdez Simancas José de Jesús Valdez Simancas Chief Executive Officer 9 ALPEK 2014 ANNUAL REPORT Polyester 2.2, 2.7, 2.9, EN26 Our main business segment is Polyester, which includes the produc- tion and marketing of PTA (puriﬁed terephthalic acid), PET (polyeth- ylene terephthalate) and polyester ﬁbers. PTA is manufactured from paraxylene and is reacted with monoethylene glycol (MEG) to produce PET and polyester ﬁbers. Our clients use PET primarily to manufacture packaging for beverages, food and consumer products. Polyester ﬁbers are used in the manufacture of textiles for the home, clothing and various industrial applications such as seat belts. Alpek is the only integrated manufacturer of PTA and PET in North America and has the only PET plant in Argentina. Furthermore, with the acquisition of CabelmaPET, it also operates the only food-grade recycled PET (r-PET) plant in Argentina. The Polyester segment consists of twelve plants located in the United States, Mexico and Argentina, with an aggregate annual capacity of 4.4 million tons and a workforce of 3,441. 10 Polyester 11 ALPEK 2014 ANNUAL REPORT In line with our commitment to sustainability and environmental well-being, we increased our recycling capacity by 22% in 2014. We are now able to recycle up to 89 thousand tons of PET per year (equivalent to 4.0 billion bottles). Approximately 84% of our polyester products are sold in Mexico, the United States and Canada, while the manufacture of packaging for beverage, food and consumer products accounts for 90% of the segment’s revenue. The high share of sales to stable consumer segments within NAFTA contributes to the steady sales volume. Our Polyester segment represented 73% of the company’s total income in 2014, posting sales of US $4.8 billion, with a volume of 3.1 million tons. Sales declined 11% year-on-year, as a result of a 13% drop in the average sales price reﬂecting the fall in crude prices. EBITDA was US $270 million, 30% less than the previous year, driven primarily by an estimated US $90 million impact related to the drop in crude oil and feedstock prices in 2014. There are elements that point to a brighter outlook in the near future. On the one hand, leading Chinese producers called for greater market discipline, and Asian capacity growth rate has slowed down. Moreover, there have been capacity shutdowns in Asia and other regions of the world. 12 DAK Americas (PET). Bay St. Louis, United States Polyester DAK Americas (PTA/PET). Columbia, United States 16% rest of the world 73% of Alpek’s total 2014 revenues came from the Polyester segment Sales in Mexico, the United States and Canada Polyester 27% Plastics & Chemicals 84% of Polyester sales came from North America 13 ALPEK 2014 ANNUAL REPORT Plastics & Chemicals 2.2, 2.7, EN18 Our Plastics and Chemicals segment integrates the production and marketing of polypropylene (PP), expandable polystyrene (EPS), poly- urethanes (PURs), caprolactam (CPL) and ammonium sulfate (fertiliz- er), among other products. We are the only producer of PP and CPL in Mexico and, following the acquisition agreement with BASF, will be- come the largest EPS producer in the Americas. PP, a plastic made from propylene, is widely used in containers and packaging for food and consumer products. Other applications include auto parts and medical instruments. EPS is commonly used in packaging for impact-sensitive products, such as televisions and other consumer electronics. Construction and thermal insulation are also common EPS applications. CPL is the main raw material for the production of Nylon 6, used in the manufacture of clothing, industrial textiles, engineering plastics and tire cord, among others. The Plastics and Chemicals segment has an annual installed capacity of 1.0 million tons in ﬁve plants, all of which are located in Mexico, and are operated by a workforce of 1,209. 14 Plastics & Chemicals 15 16 Univex (CPL). Salamanca, Mexico ALPEK 2014 ANNUAL REPORTPlastics & Chemicals Although 84% of the segment’s sales are for the NAFTA region, we also have a market presence in Central and South America, Asia and Europe. In 2014, Plastics and Chemicals contributed 27% of Alpek’s total income. The segment posted sales of US $1.7 billion, 3% higher than 2013, due to a combination of increased volume (1%) and average price (2%). The most noteworthy event of 2014 was the signing of agreements with BASF to acquire its EPS operations and sell our polyurethane business. In addition to strengthening our Plastics and Chemicals portfolio, this transaction is an attractive opportunity to leverage the sound operational track record of our team and expand our presence to become the leading EPS producer in the Americas. Plastics and Chemicals EBITDA was US $159 million, 12% less than the previous year. The decline mainly reﬂects a high comparative base in 2013, a year in which, driven by favorable market dynamics, EPS and PP margins reached record levels, returning to normal during 2014. CPL margins also declined due to the highly volatile price of benzene and the recent increase in Chinese production. Univex (CPL). Salamanca, Mexico 27% of Alpek’s total revenues came from Plastics & Chemicals segment Sales in Mexico, the United States and Canada 16% rest of the world 73% Polyester 84% of Plastics & Chemicals sales came from North America 17 ALPEK 2014 ANNUAL REPORT Integration, Efficiency and Expansion 1.2, 2.9, 3.8, EC2, EC9, EN6, EN7, EN14, EN26, EN30 In 2014, we boosted our strategy based on integration, efficiency and expansion initiatives with a Capex investment of US $320 million, 79% more than the previous year. Integration Our power cogeneration and monoethyleneglycol integration projects will give us the world’s lowest polyester cost structure. This year, our 95 Megawatt (MW) cogeneration plant in Cosolea- caque, Veracruz, came on line, generating a total of 98.7 Giga- watts/h. The construction of a second cogeneration plant in Altami- ra, Tamaulipas, with an approximate capacity of 300 MW, was also approved. When completed, we will have invested around US $500 million in power cogeneration to achieve an- nual savings in excess of US $120 million. 18 Integration, Efficiency and Expansion Integration, Efficiency and Expansion Power cogeneration. Cosoleacaque, Mexico 19 ALPEK 2014 ANNUAL REPORT During the year, we moved forward on several fronts of the MEG integration project, which carries the highest priority, inluding ethane supply, technology selection and site evaluation. The in- vestment program for this major project is planned to start in 2015. Efficiency As a low-cost producer, efficiency is fundamental to our operations. The construction of the new PTA/PET complex in Corpus Chris- ti, under agreements signed with Gruppo M&G, is the most im- portant initiative to enhance our operating efficiency. The facil- ity, which will use Alpek’s IntegRex® PTA technology, will have the most competitive cost structure in North America and fur- ther consolidate our leadership position in the region. We also ﬁnished the technological upgrade of our CPL plant, with which we expect to achieve savings of US $8 million per year by reducing the consumption of raw materials and increas- ing production. Expansion During 2014, we leveraged selected opportunities to expand our international footprint and consolidate our business portfolio. 2,9 We signed an agreement with BASF that will transform our EPS business. The agreement includes Alpek’s acquisition of BASF’s EPS operations in America and 100% of Polioles’ EPS business, while BASF will gain ownership of Polioles’ polyurethane business. The transaction will position Alpek as the leading EPS producer in the Americas, with an aggregate installed capacity of 230 thou- sand tons per year. In addition to growing and obtaining total control of the EPS business, Alpek will strengthen its Plastics and Chemicals portfolio through the divestment of polyurethanes. Moreover, we acquired CabelmaPET, S.A., which operates the only food-grade recycled PET (r-PET) plant in Argentina. The 16 thousand tons per year of r-PET, integrated into our virgin PET production in Argentina, will enable us to offer virgin and recycled material in a single pellet. This initiative will contribute to environmental well-being and also streamline customer oper- ations by eliminating unnecessary supply and mixing processes. 20 Polioles (EPS). Altamira, Mexico Integration, Efficiency and Expansion 21 2014 Acquisitions EPS: BASF (the United States, Canada, Brazil, Chile and Argentina) r-PET: CabelmaPET, S.A. (Argentina) ALPEK 2014 ANNUAL REPORT Sustainability 3.11 We are aware of the different challenges society faces with regard to sustainability. In response, our business strategy integrates sustain- able practices into daily operations and the decision-making process. As a result, we are presenting a sustainability report based on the Global Reporting Initiative methodology, in its G3.1 version. This year we have complied with a total of 121 complete indicators, allowing us to declare the reporting to be consistent with the cri- teria for Application Level B. For details of the GRI indicators contained in this 2014 Annual Report, and those included within the GRI index, please refer to the following link: www.alpek.com. 4.14, 41.5 Our Sustainability Approach Based on the commitment we made in 2013, this year we struc- tured a sustainability model that allows us to continuously adapt to the changes in our environment. Our philosophy is based on the generation of economic and social value, as well as on en- vironmental care. 22 Sustainability DAK Americas (PET). Bay St. Louis, United States 23 ALPEK 2014 ANNUAL REPORT To implement the model, we based our actions on four speciﬁc pillars: • Internal well-being • Community • Environment • Sustainable economic value creation Each of the pillars focuses on one or more speciﬁc stakeholders, which we have deﬁned according to the impact our operations have on them and vice versa. Our commitment to our stake- holders is clear: to operate in a way that the beneﬁts generated are reﬂected both economically and socially. 4.16, 4.17 Our Sustainability Model Communication with our stakeholders is key to building rela- tionships of trust, mutual respect and long-term collaboration. In 2014, we continued implementing different forms of commu- nication and dialogue channels with each one, with the results that appear in the table “Communication with our stakeholders”: To ensure that the sustainability strategy described is implement- ed correctly, we actively participate in ALFA’s Sustainability Com- mittee, adding our efforts to develop joint actions that allow us to achieve common goals in the ﬁeld. Our values and ethical behavior guidelines strictly adhere to the ALFA’s Code of Ethics, which can be downloaded from the following link: 4.8 http://www.alfa.com.mx/NC/ﬁlosoﬁa.htm We also follow ALFA’s Anti-corruption and Bribery Policies and Practices*, recognizing the importance of operating under controls that enable us to ensure the legality of our processes. *To ﬁnd out more about the ALFA Anti-corruption and Bribery Policies and Practices, please download the Social Corporate Responsibility Re- port 2013 from the following link: http://www.alfa.com.mx/RS/reportes.htm Our sustainability model o m i c n Biene Intern sta l r i a w n Internal well-being: Provide healthy, safe working conditions and opportunities for employee development. Focused on: Employees Sustainable economic value creation: Obtain satisfactory returns on business activities considering the investment made and risks undertaken. Focused on: Shareholders n o tainable e c alue cre a ti o s u S v n o i s s i M t n e m n o Envir Environment: Decrease the impact of our operations, reducing emissions and conserving resources, soil and water. Focused on: Resources, emissions, energy and organic growth 24 e t l l e r - n b o e i n g C o m V i s i o n munity EN30 Community: Be a responsible citizen in the community. Focused on: Communities, customers and suppliers 4.8 Communication with our stakeholders Stakeholder group Communication channel Frequency Main concerns/ Response to concerns/ suggestions suggestions Sustainability Review and approval of innovation ideas, and carrying out of suggested improvements. Generation of reports, minutes and agreements. Board discussion of results and reaching of agreements. Encouragement of participation and ideas from personnel. Intranet, suggestion box. Ongoing Innovation and improvement ideas. Employees Bulletins, emails, presentations and Ongoing Quarterly results. diverse events. Workplace diagnostics. Annual Work climate. Informative personnel talks. Telephone, Internet, Biannual Business vision. Clients plant visits, surveys and Ongoing e-mail. Shareholders Meetings, telephone, Internet, e-mail. Ongoing Suppliers Internet, plant visits, Ongoing clariﬁcations, quotes and Meetings, telephone, Trade and quality issues, surveys and e-mail. deliveries. Product quality, trade Improvement of time frames and issues and delivery in procedures that enable quality due time and form, assurance, technical visits and delivery of technical services. requested information. Business strategy, proﬁtability, ﬁnancial condition and operating performance. Detailed follow-up of fulﬁllment of indicators, concerns mentioned in Board Meetings and agreements reached. Implementation of supplier development programs, generation of agreements and forwarding of detailed information on company needs. Meetings, perception surveys, alliances Monthly, Communities with society groups quarterly, such as the Industrial biannual Emergency Response Group, GIREL . Industrial safety and contingency management, and processes and mechanisms, training En 2013 aplicamos 56 Report on safety and emergency programas para contribuir a mejorar la salud de nuestros colaboradores, en beneﬁcio de 4,138 personas. of neighborhood evacuation brigades, ongoing support and training. support for civil protection activities, and company perception and support. EN30 Nature and Sustainable Operation Our greatest commitment is to care for the environment as we understand its signiﬁcance in terms of permanence over time and quality of life. Our operating capacity is closely linked to the preservation of our surroundings. Our approach is to optimize the consumption of natural re- sources and raw materials, reduce emissions and waste, and enhance process efficiency. All our companies have their own policies that enable them to deﬁne the procedures to follow under any given scenario. These policies are aligned to Alpek’s environmental objectives. Internal and external audits are carried out on a monthly, quar- terly and/or annual basis to ensure the proper management of all procedures. External audits are performed by government agencies, such as SEMARNAT, and quality and environmental certiﬁcation agencies under ISO international standards. 25 ALPEK 2014 ANNUAL REPORT Environmental investments in 2014 were distributed as follows: Investment (Millions of US $) For example, as part of the implementation of the Environmental Management System in our Polyester operations, we carried out the following activities aimed at protecting the environment: Treatment of emissions Environmental management costs Prevention costs Waste disposal Remediation costs Total 8.5 7.0 4.3 1 NA 20.8 During 2014, we invested US $21 million in actions that beneﬁt the environment. • We identiﬁed the environmental issues applicable to each of the company’s processes and services (generation of air pollutants, waste management, wastewater discharge, energy consumption, etc.), and established the operational controls applicable to each issue in order to minimize the environmental impact. • We trained the personnel on said issues and on the proper execution of the operational controls applicable to the pro- cesses and services. • We identiﬁed all the company’s legal requirements related to its operations to avoid ﬁnes and environmental pollution. 26 DAK Americas (PTA/PET). Columbia, United States Sustainability Consumption of raw materials in 2014 Weight in thousand tons Raw material Terephthalic Acid (TPA) Paraxylene Monoethyleneglycol (Glycol) Propylene Ammonia Sulfur Acetic Acid Propylene Oxide Pentane Ethylene 2013 1,586 1,008 633 412 112 79 61 26 9 5 2014 1,465 998 582 447 106 77 61 26 9 5 Renewable Yes/No No No No No No No No No No No Raw Materials and Use of Resources The majority of the raw materials used in our processes come from oil, a non-renewable resource. We are, therefore, constant- ly striving to make the best possible use of them. EN1, PR1, PR3 One of the most important actions in this regard is a construc- tion project for a storage sphere for propylene, a particularly sig- niﬁcant commodity since it is available from a single supplier in Mexico. The proper storage facilities will bring several beneﬁts, including: • Stable feedstock inventory. • Reduction in the supplier’s emissions as we maximize the use of this raw material. The reuse of materials is one of our most important actions. Our PET bottle recycling plant in the United States has a ca- pacity to recycle up to 73 thousand tons (more than 3.4 bil- lion PET bottles) per year, representing the annual PET bottle consumption of more than four million Mexicans. In 2014 the plant recycled 48.6 thousand tons of PET bottles. Further- more, we acquired CabelmaPET, S.A., which operates the only food-grade recycled PET (r-PET) plant in Argentina, with an annual capacity of 16 thousand tons. In addition to com- plementing Alpek’s capacity in Argentina for virgin PET resin, this purchase will enable us to offer virgin and recycled resin in a single pellet, helping to conserve the environment and streamlining customer operations by eliminating unneces- sary supply and mixing processes. Life-cycle phases of products submitted to evaluation processes in 2014 DAK Indelpro Polioles Univex Akra Petrotemex Product development Manufacture Marketing and promotion Storage, distribution and supply Consumption and service Disposal, reuse or recycling Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes NIA Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes Yes NA Yes NA NA Yes Yes Percentage of products to which these evaluation procedures apply 100% 100% 100% 100% 100% NIA = No info available NA = Not applicable NA NA NA NA NA NA NA 27 ALPEK 2014 ANNUAL REPORT We also complied with the legal regulations on the speciﬁcation of the information contained in our products’ packaging, when applicable: Origin of the components of the product or service Content (if there are substances that may have an environmental or social impact) Safe use of the product Method of disposal of the product and its environ- mental or social impact Other (specify) DAK Yes Yes Yes Yes NA Polioles Univex Petrotemex Indelpro Akra No No Yes Yes Yes Yes No No No Batch number for tracking NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 28 DAK Americas (PET). Bay St. Louis, United States Sustainability Energy Efficiency Lower energy consumption and the constant search for alter- native renewable sources for procurement are priority issues. The start-up of our co-generation plant in Cosoleacaque, Ve- racruz, is evidence of the intense efforts we are undertaking in this issue. EN3, EN4, EN5, EN7, EC2 The plant started operations in the last quarter of 2014 and is ex- pected to generate approximately 2.77 million GJ of energy per year, enough to satisfy the annual consumption needs of approx- imately 360,000 users. It will also produce 2.1 million GJ a year of steam, equivalent to the annual energy demand of 63,605 homes. Steam generation has also enabled us to shut off the plant’s furnaces, reducing our environmental impact even further. Program Reduction of electrical energy consumption in polymerization plants Reduction of electrical energy consumption in splitter Result 361.6 KWh/Ton PP 161.1 KWh/Ton PP Our EPS plant generated 50% of the electrical energy consumed in its installations through its cogeneration plant. Similarly, at our polypropylene production plant we were able to ﬁne-tune ener- gy consumption in critical processes and thus achieve signiﬁcant reductions. Another of the opportunities arising from this project is that, in addition to covering our own electricity needs, we can supply the power surplus to other industrial users at more competitive prices. 93% of our installations use natural gas as their energy source, the cleanest fuel to date. Water Care We know it is impossible to maintain sustainable operations without committing to a responsible consumption of water, one of the most important and vulnerable natural resources. For this reason, we are continuously implementing strategies for a con- scientious water management. EN8, EN10 In 2014 our energy consumption was distributed in the fol- lowing way: In 2014, water in Mexico tripled in price compared to the previ- ous year. This, together with our environmental objective, drove us to enhance our water consumption efficiency. Energy consumption Direct Indirect (millions of GJ) consumption consumption Natural gas Electricity Coal Biofuel Fuel oil Diesel Other Total 15.7 1.0 0.2 0.1 0.0 NA 16.9 5.9 Total (%) 68.6 25.9 4.4 0.7 0.3 0.1 5.9 100 As a result of other energy saving initiatives, we recorded a sav- ing of 815 thousand GJ at the close of the year. This represented a 3.5% of our total consumption, equivalent to the annual con- sumption of approximately 25,178 Mexican families. Other undertakings in 2014 also brought positive results. In the Plastics and Chemicals segment, for example, we were able to reduce the energy requirement per ton of polypropyl- ene produced: In 2014, our total water consumption was distributed in the fol- lowing way: Water capture by source Rivers or lakes Company’s wells Third parties Public services Total Volume in 2014 (millions of m3) 91.6 3.5 1.4 1.0 97.5 Thus, throughout the year we carried out actions that enable us to optimize our processes and advance towards our goals to re- duce consumption and reuse a considerable percentage of the resource. By 2020, we expect to be recycling 90% of wastewater at our polyester plants. 29 ALPEK 2014 ANNUAL REPORT Among the initiatives put into practice during 2014 were: • Inverse osmosis project, which recovers water from the cooling towers and subsequently sends it as the input current to the ultraﬁltration section. • Optimization of cooling tower ﬂoats, helping us to achieve a level of 1.33 m3/t efficiency in extracted water. 100% fulﬁllment of water reuse activities through the ef- ﬂuent treatment plant at our caprolactam plant. • • 25% reduction in the use of ﬁltered river water at our Coo- per River facilities. • Recovery of 1.8 million m3 at our PET and PTA facilities, as a result of the reuse of output ﬂows from one area as the input for another area. We treated 10.3 million m3 at our ten treatment plants, reducing total consumption by 11%, enough to cover the annual water needs of approximately 78,300 people. We were able to reuse 19% of it in our processes. Biodiversity Conservation Our facilities in Columbia, in the United States, and Zárate, Ar- gentina, are the only ones located close to natural areas of high biodiversity. In both cases, the plants contribute economically and with human resources to support conservation. In 2012, the Columbia site obtained Wildlife Habitat at Work certiﬁca- tion, granted by the association of the same name, which rec- ognized companies that go beyond standard regulations and coordinate efforts between the company, the community and employees to beneﬁt biodiversity in and around the workplace. EN11, EN12, EN13, EN14 Furthermore, we carried out actions to preserve and enhance all our green areas and participated in reforestation activities in the different communities where we operate. The me- dium-term commitment is to develop integrated practices across all our facilities. Actions carried out during the year included: In addition, in 2014 we reduced our total water consumption by 10% year-over-year. . • The celebration of Earth Day, with talks on environmen- tal care, the community helped with the reforestation of surrounding areas and school visits were made to talk to 30 GPT (PTA/PET). Cosoleacaque, Mexico the students about the importance of looking after nat- ural resources. • Participation in Sustainability Week in coordination with ALFA. Invitation to employees to contribute ideas on how we • can improve our environmental performance. • More intense involvement with government authori- ties such as CONAFOR to join forces and participate in pro-biodiversity programs. Reduction of Emissions and Smart Waste Management One of the most important objectives of our sustainability strategy is the reduction of emissions and waste that have neg- ative impacts on the planet. EN16, EN17, EN18, EN20, EN21, In 2014, emissions from our operations were as follows: EN22, EC2 Emissions (millions of CO2e) Indirect 0.87 Direct 1.28 Total 2.15 The following information is from the PET plant in Cosolea- caque, Veracruz, which generates NOx emissions due to the use of a chimney: Total NOx emissions (tons of CO2) 224 Measurement factor Direct measurement Through our cogeneration plant in Cosoleacaque we will be able to avoid emitting an estimated 200 thousand tons of CO2. We will report these results in 2015. Waste Biological sludge Ash Hazardous waste Washing of process lines (hazardous) Urban solid waste Mineral oil Spent aluminum Liquid styrene (hazardous) Spent batteries Fluorescent lamps Weight (in tons) 13,014 3,572 380 89 71 34 29 10 15 2 Sustainability Through other initiatives, we covered 100% of the Manage- ment Program to improve the air in Salamanca and eliminated steam leakages at our caprolactam production plants, avoid- ing the emission of 16 t/CO2 per day. All of this motivates us to continue along the road we have taken. It is important to note that, year after year, we have signiﬁcantly reduced our emissions, as certiﬁed by international bodies such as ISO and UNFCCC. Our PET and PTA operations in Mexico, for exam- ple, maintain an average annual reduction of 100,000 t/CO2. In 2014, they certiﬁed 390,000 t/CO2 in carbon bonds, thanks to the implementation of an Energy Integration Project, bringing the total to 900,000 t/CO2 at year-end. The implementation of other actions in our companies record- ed a total of 83.6 thousand tons of CO2 that were not emitted into the atmosphere, equivalent to taking 17,606 cars out of circulation for one year. Regarding responsible, proper and smart waste management, DAK Americas continued to be a spearhead with its Zero Waste program. During the year, all its plants in the United States, Mexico and Argentina implemented the program, with actions including recycling, composting and/or converting waste into energy to meet by 90% our goal of non-delivery to more than 200 landﬁll sites. Three have fully met this goal and the three remaining plants expect to do so by the end of 2015. In addi- tion, a total of almost 3,175 tons of biological sludge was sent for composting. The total of the most signiﬁcant waste generated in 2014 was 17,216 tons, distributed as follows: Treatment method / conﬁnement (compost, reuse, recycling, incineration, landﬁll, etc.) 25% in landﬁll, 75% recycled 27% in landﬁll, 73% recycled Thermal destruction for energy recovery Co-processing Controlled conﬁnement Reuse as alternative fuel Reuse as alternative fuel Co-processing External recycling Controlled conﬁnement 31 ALPEK 2014 ANNUAL REPORT Our objective is not only to properly manage waste, but also to reduce waste production. At our PET and PTA production plants, for example, we have achieved a 10% reduction in the genera- tion of hazardous waste. Our Employees Employees are our most important resource. For this reason, we make a constant effort to ensure the well-being and personal and professional development of every one. Results of wastewater discharge in 2014: Water discharge into Discharge volume in 2014 (m3) Rivers or lakes Sea Other Public drainage Total 85,120,000 10,080,018 404,637 22,869 95,627,524 Due to the nature of our operations, there is a predominance of male workers. However, Alpek is committed to gender equality in terms of beneﬁts, opportunities and responsibilities. We ad- here to the provisions of the ALFA Code of Ethics; our compa- nies apply policies and use measurement systems and tabulators to ensure the equitable treatment of men and women, and avoid any gender distinction in the determination of wages or apti- tudes when ﬁlling vacancies. One example of these policies is DAK Americas’ Equal Employment Opportunity Policy. One major action carried out in 2014 was the reduction of COD (Chemical Oxygen Demand) in the wastewater we send to the sea. This means that the water is increasingly cleaner when dis- charged, and as a result, has less environmental impact. Furthermore, Alpek does not discriminate on ethnic, disability, religious or any other grounds; the only relevant criteria for se- lecting our employees are their abilities and experience. In 2014, 15 handicapped people collaborated with us. LA1, LA3, LA4, LA5, LA14 Short- and medium-term environmental performance goals: Our workforce in 2014 was distributed as follows: • Construction of the polypropylene storage sphere. • Development of a biodiversity policy across Alpek. • Reaching the goal of Zero Waste in all DAK Americas operations. Human Value and Social Action We are convinced that the human element is the basis of any organization. We understand that our internal and external com- munities are vital for ensuring our permanence over time and obtaining a license to operate. In addition, the generation of so- cial beneﬁts allows us to ensure that the decisions we make have a positive impact on our people. Employee category Executives and employees Unionized Men 1,178 Women 555 Total 1,733 2,853 83 2,936 Gender Men Women Contract type Permanent Temporary Professional fees Totales Number % of total 4,031 638 86 14 Men 3,903 127 1 4,031 Women 633 5 0 Total 4,536 132 1 638 4,669 Under 30 years Between 30 and 50 years Over 50 years 821 174 995 2,168 361 2,529 1,042 103 1,145 Total 4,031 638 4,669 Group Men Women Total 32 It should be noted that our commitment to the personal and professional growth and development of our employees is on- going. In 2014, internal mobility to cover vacancies was 66% at our PET and PTA operations. The beneﬁts and allowances that employees receive include an annual bonus, vacation pay, grocery vouchers, a savings fund, long-service recognition and a pension plan, which consists of a ﬁxed contribution by the company which starts at 4% of the employees’ salary with a ceiling of 17%. In accordance with our commitment to human rights, we re- spect the decision of our workers to organize through collective agreements. 63% of our employees belong to a union. As part of our duty to keep employees informed, Alpek gives prior notice of four to eight weeks before any important change(s). LA7, LA8, LA9 Occupational Health and Safety Ensuring a safe and healthy working environment for those who work in our company is one of our biggest responsibil- ities and we comply with, and go beyond, the provisions of the law. We are constantly implementing programs aimed at increasing safety in processes, employee training for a correct performance in the workplace and initiatives that encourage healthy living practices. During the year, we invested a total of US $4.4 million in actions to enhance the safety of the entire workforce. Several of our facilities accomplished important results, for example: • Indelpro reached 2.3 years without any disabling accidents. • DAK Americas in Cosoleacaque achieved six years without any disabling accidents. • Petrotemex implemented more than twenty risk reduction actions and no signiﬁcant incidents were reported in the handling of container units. Accident rates in 2014 compared to 2013: Loss ratio Frequency Accidents Days lost Physical losses 2013 102.05 2.32 22 969 0 2014 58.72 1.27 12 555 0 Sustainability It is a priority for Alpek to ensure that employees work under the strictest protection controls, especially because some of the activities carried out at the plants involve a certain degree of risk. For this reason, and in adherence to ALFA practices, we are constantly working on initiatives to reduce accidents and occu- pational illnesses, with the support of safety, health and hygiene committees on which employees participate. Our plants have health units, speciﬁc programs to educate and contribute to employee health, and vaccination, nutrition and physical activity campaigns. These aspects are covered by internal regulations. This year we invested US $14.3 million in close to 40 campaigns, programs and initiatives to beneﬁt the physical and emotional well being of the workforce. Among other activities, we gave talks on speciﬁc topics, such as the prevention of hearing impair- ment and osteomuscular injuries, among others. A total of 3,391 employees were beneﬁtted. DAK Americas (PTA/PET). Columbia, United States 33 ALPEK 2014 ANNUAL REPORT LA10, LA11 Training and Development The training of our employees is fundamental for Alpek; in 2014, we invested US $1.4 million in this matter. A total of 2,374 em- ployees beneﬁtted from an average of 39 training hours per person. We provided training from induction into the company to talks on handling retirement, through programs such as the Employee Assistance Program in the United States, or the dis- tribution of shares for retirement and pensions granted by the IMSS in Mexico. In addition, during 2014 we authorized a total of 132 scholarships for employees who wished to continue with graduate studies. Average training hours per employee in the year 39 Average training hours per employee in the year by gender Men Women 44 30 Average training hours per employee in the year by employee category Unionized Employee 51 34 Alpek’s commitment to education is not limited to company em- ployees. In 2014, 192 of our employees’ children received sup- port and scholarships from elementary school to high school. We also understand the need to live a balanced life and offer ample opportunities for recreation activities and development programs for our employees and their families. In 2014, we in- vested US $155 thousand in this area with the participation of 4,052 people. Our Communities We are aware of our responsibility to the communities close to the places where we operate. All our sites constantly evaluate the risk of negative impacts on the communities and undertake actions to mitigate them. Preventing negative impacts is not enough. We strive to ensure that our operations have a positive impact on the community through health programs, safety training measures, meetings with neighbors of the plants, support programs for the cre- ation of infrastructure, and direct support for the most vulner- able sectors. SO1, SO9, SO10, EC6, EC7, EC8 34 Univex (CPL). Salamanca, Mexico Sustainability Actual and/or potential risks and mitigation measures. Company Indelpro Polioles Actual or potential impact Impact mitigation action Emission of hydrocarbons, emission of combustion gases. Maintenance of installations, instrumented safety systems and vent control program, personnel training, audits. Release of energy or hazardous substances. Compliance with regulations, implementation of the Integrated Responsibility Administration System. DAK Americas Leakages, spills or system failures that result in the emission of toxic gases or contaminated materials. Constant on-off-failure control which ensures prompt detection and shutdown in case of any incident. Similarly, a system is in place to send emissions to a control mechanism, even during normal operations. Continuous audits, visual and technical monitoring, implementation of new processes. Akra Polyester Chlorine gas or thermal oil leakage. Univex Ammonia and cyclohexane leakage. Water sprays, control valves, and ﬁre detection systems. Trained emergency brigades. Participation in the Local Committee for Mutual Help (CLAMCAP) with neighboring companies. Coordination and implementation of the Internal Emergency Response Plan (Emergency and Evacuation Plan). Periodic inspection of safety devices in chlorine and dowtherm installations. Execution of practical exercises to attend to chlorine leaks. Automatic electronic monitoring system for cyclohexane leaks, emergency brigade with the necessary equipment for contingency control. The company is a member of the mutual help group SAMI. In 2014, we invested US $31 thousand in actions to improve in- frastructure in our neighboring communities, beneﬁtting more than 1,650 people. Other actions carried out were: • Petrotemex implemented its Vive Verde program, through which it holds talks in schools on sustainability. • Univex began to offer free medical consultations to mem- bers of its most vulnerable communities. In addition, as part of its process activities, it tests its fertilizer on land ac- quired for the purpose. This year it donated the entire crop produced as a result to neighboring communities, and will continue to do so in the future. • Talks were given on safety in the home, ﬁrst aid and burns. We also implemented programs for young students in our com- munities: more than 7,000 students beneﬁtted from support and donations to 53 schools near our operating sites, and 135 stu- dents completed their internships at our companies. Furthermore, in an effort to increase local economic develop- ment, our companies use criteria to select suppliers from the city, state or country where they operate. Approximately 62.5% of our suppliers are local. Alpek adheres to ALFA recruitment practices, considering local candidates ﬁrst to cover vacancies and keeping the workforce in the companies we acquire, as far as possible. One of our short- and medium-term commitments is the devel- opment of community engagement policies at the business unit level and as a group. As part of the community engagement strategy we have already implemented, we collaborate with associations, institutions and business chambers to create strategic partnerships that enable us to generate actions that are mutually beneﬁcial. In 2014, we participated in the following: 35 ALPEK 2014 ANNUAL REPORT Company Association 4.12, 4.13 Does the company participate in governing bodies? Does the company provide contributions in excess of those required from other members? Is participation in these associations strategic? ANIQ (National Chemi- cal Industry Association) ANIQ (National Chemical Industry Association) ACIA (Industrial Credit Association of Argentina) AFMA (America Fiber Manufacturers Association) CAIRPLAS (Recycled Plastics Chamber) CAPCA (Carolinas Air Pollution Control Association) CCAM (Argentina- Mexico Chamber of Commerce) CEMPRE (Business Commitment to Recycling) CERA (Chamber of Exporters of the Argentine Republic) CICAZ (Zárate- Campana Inter- industrial Committee for Environmental Preservation) CIPETAR (Chamber of the PET Industry in Argentina) CIQyP (Chamber of the Chemical and Petrochemical Industry) CIRA (Chamber of Importers of the Argentine Republic) Yes Yes No Yes Yes Yes No No No Yes Yes No No Akra Polyester DAK Americas 36 No No No Yes No No No No No No No No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes DAK Americas Petrotemex Zárate-Campana Regional Committee on Health and Safety IAE (Argentine Packaging Institute) INDA (Association of the Nonwoven Fabrics Industry) IPA (Argentine Petrochemical Institute) MMA (Mississippi Manufacturers Association) National Associate for PET Container Resources NCMA (North Carolina Manufacturers Alliance) NCTO (National Council of Textile Organizations) SCMA (South Carolina Manufacturers Alliance) STA (Southern Textile Association) SYFA (Synthetic Yarn and Fiber Association) The PET Resin Association UET (Business Union of the Municipality of Tigre) UIZ (Industrial Union of Zárate) ANIQ (National Chemical Industry Association) Association of Industrials from the South of Tamaulipas C.A. Import-Export National Association of the Mexican Republic, C.A. No No No No No Yes Yes Yes Yes No Yes Yes No Yes Yes Yes No No No No No No No No Yes Yes No Yes Yes No No No Yes No Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes Yes No No Sustainability 37 ALPEK 2014 ANNUAL REPORT Petrotemex Mexican Arab Chamber of Industry and Commerce No COMCE NORESTE, A.C No Indelpro AISTAC Association of Industrials from the South of Tamaulipas C.A. ANIQ (National Chemical Industry Association) ANIQ (National Chemical Industry Association) ANIQ (National Chemical Industry Association) Polioles Univex Yes Yes Yes Yes Yes No No No No No No No Yes No Yes Yes Yes Yes Yes 38 Polioles (EPS). Altamira, Mexico Sustainability Country Mexico Mexico Mexico Mexico Mexico Awards and certiﬁcations 2014 2.10 Company Recognition or certiﬁcation Granted by Indelpro ISO 14001:2004 ABS Quality Evaluations, Inc Clean Industry Certiﬁcation Federal Environmental Protection Agency Certiﬁcate of Comprehensive Responsibility ISO 9001:2008 Recognition for publication of the First Guide to Environmental Culture Appreciation for the solidarity in emergency care at the Madero Reﬁnery National Chemical Industry Association (ANIQ) ABS Quality Evaluations, Inc Municipal Government of Tampico Pemex Francisco I. Madero Reﬁnery Mexico Voluntary Environmental Compliance Government of the State of Tamaulipas Petrotemex Clean Industry Certiﬁcate Federal Environmental Protection Agency Safe Company Certiﬁcate Comprehensive Responsibility ISO-14000 Management System Certiﬁcation Recognition Award AISTAC 2014 Ministry of Labor and Social Welfare National Chemical Industry Association (ANIQ) AENOR México Industrial Association of the South of Tamaulipas New Certiﬁed Company Scheme Tax Administration Service (SAT) Polioles Comprehensive Responsibility Award for Energy Efficiency National Chemical Industry Association (ANIQ) Mexico Mexico Mexico Mexico Mexico Mexico Mexico DAK Americas CR - SC Manufacturers Alliance Award South Carolina Department of Labor United States DAK Cosoleacaque – ﬁve years without recordable OSHA DAK Americas Mexico Climate Registry Certiﬁcation Climate Registry Zero Waste Operation Award 2014 Recycling Association of Carolina NCDOL 3-year Award North Carolina Department of Labor Akra Polyester Oeko-Tex Standard 100 Certiﬁcate Hohenstein Textile Testing Institute ISO 14001 Bureau Veritas United States- Mexico United States United States Germany France 39 Board of Directors Armando Garza Sada (3) Chairman of the Board of Alpek, S.A.B. de C.V. Andrés E. Garza Herrera (1A) Chief Executive Officer of Qualtia Alimentos, S.A. de C.V. Chairman of the Board of ALFA. Member of the Boards of FEMSA, Frisa Industrias, Grupo Financiero Banorte, Lamosa, Liverpool, Proeza, ITESM, and Stanford University. President of the Mexican Council of the Consumer Goods Industry (ConMexico). Member of the Board of Xignux, the Regional Board of Banorte, the General Councils of UDEM and Ciudad de los Niños. Álvaro Fernández Garza (3) President of ALFA, S.A.B. de C.V. Member of the Boards of ALFA, Vitro, Cydsa, Grupo Aeroportuario del Pacífico, and the University of Monterrey (UDEM). Current President of the Chamber of Industry of Nuevo León (CAINTRA). Francisco José Calderón Rojas (2) Chief Financial Officer of Grupo Franca Industrias, S.A. de C.V. Member of the Boards of Franca Industrias, Franca Servicios, Franca Desarrollos, Capital Inmobiliario Institucional, and UDEM. Pierre Francis Haas García (1) Advisory Services Director of Hess Energy Trading Company (HETCO). Jaime Serra Puche (1A) Founding Partner and Chief Executive Officer of SAI Consultores, S.C. Member of the Boards of Fondo México, Tenaris, Vitro, Grupo Modelo, Rotoplas, Fresnillo plc, and Grupo Financiero BBVA Bancomer. Enrique Zambrano Benítez (1A) Chief Executive Officer of Grupo Proeza, S.A. de C.V. Rodrigo Fernández Martínez (3) Marketing and Finance Director of Sigma Alimentos, S.A. de C.V. Member of the Boards of Grupo Proeza, Frisa Industrias, CFE, and ITESM. President of the Regional Board of Banco Ve por Más. Merici Garza Sada (3) Investor 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 40 ALPEK 2014 ANNUAL REPORTBoard of Directors | Management Team Management Team 1 1 2 3 4 5 6 7 8 José de Jesús Valdez Simancas Chief Executive Officer 2 Eduardo Escalante Castillo Chief Financial Officer 3 Felipe Garza Medina President of the PTA Business 4 Unit Jorge P. Young Cerecedo President of the PET and Staple Fibers Business Unit CEO of Alpek since 1988. Former Chief Financial Officer of Alpek President of Alpek’s PTA Business President of Alpek’s PET and Staple CEO of Petrocel, Indelpro, and Po- since 2013. Former President of the Unit since 2008. Joined Alfa in 1977 Fibers Business Unit since 2012. lioles, and former Chairman of the Caprolactam Division of Alpek and and is former CEO of Indelpro and Former Executive Vice President of National Association of the Chem- President of AOL Mexico. Holds a Galvacer. Holds an MBA from Cor- PET Resins and Vice President of ical Industry (ANIQ). Holds an MBA Master’s in Engineering from Stan- nell University. Planning and Administration of DAK from ITESM and a Master’s in In- ford University. dustrial Engineering from Stanford University. Americas LLC. Holds an MBA from the University of Pennsylvania. 5 Jorge González Escobedo President of the Filament Fibers 6 Alejandro Llovera Zambrano President of the Polypropylene 7 José Luís Zepeda Peña President of the EPS and Chemi- Business Unit Business Unit cal Business Unit 8 Gustavo Talancón Gómez President of the Caprolactam and Fertilizers Business Unit President of Alpek’s Filaments Fi- President of Alpek’s Polypropylene President of Alpek’s EPS and Chemi- President of the Caprolactam and bers Business Unit since 2005. Business Unit since 2008. Joined cal Business Unit since 1999. Joined Fertilizer Business Unit since 2013. Joined Alfa in 1974 and is former Alfa in 1985, is former Director of Alpek in 1986 and is former Vice Joined Alfa in 1989, is former CEO Vice President of Alpek’s Industrial Human Resources at Alfa, held sev- President of Planning, Finance and of Terza, and held several executive Filaments Business Unit. Holds an eral executive positions in Alpek’s Administration, and Sales in Gru- positions in Alpek’s Polypropylene MBA from ITESM. Synthetic Fibers Business Unit and po Petrotemex. Holds a Master’s in and Nylon and Polyester Filaments . was Chairman of ANIQ. Holds an Chemical Sciences from UNAM and Business Units. Holds a graduate de- MBA from ITESM. an MBA from ITESM. gree from IPADE. 41 ALPEK 2014 ANNUAL REPORT Corporate Governance 4.1, 4.3, 4.4, 4.6, LA13 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 are listed 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. 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 audi- tor, coordinating with the company’s internal audit area and study- A summary of Alpek’s principles of corporate governance is pre- sented below, reﬂecting the answers the company gave to the questionnaire in June 2014 and updated where necessary: ing accounting policies. F) Additionally, the Audit and Corporate Practices Committee is re- sponsible for issuing recommendations to the Board of Directors on matters related to corporate practices, such as employment A) The Board of Directors is made up of nine members, who have terms and severance payments for senior executives, and com- no alternates. Of the nine directors, four are independent board pensation policies. members, four are related proprietary board members and one is an independent proprietary board member. This annual report G) The company has internal control systems with general guidelines provides information on all the board members, identifying those that are submitted to the Audit and Corporate Practices Commit- who are independent and their participation in the Audit and Cor- tee for its opinion. In addition, the external auditor validates the porate Practices Committee. effectiveness of the internal control system and issues reports B) The Board of Directors is advised by the Audit and Corporate Prac- thereon. tices Committee, which is made up of independent board mem- H) The Board of Directors is advised by the planning and ﬁnance de- bers. The Committee Chairman is an independent board member. partment when evaluating matters relating to the feasibility of in- vestments, strategic positioning of the company, alignment of in- C) The Board of Directors meets every three months. Meetings of the vesting and ﬁnancing policies, and review of investment projects. Board may be called by the Chairman of the Board, the Chairman This is carried out in coordination with the planning and ﬁnance of the Audit and Corporate Practices Committee, the Secretary of department of the holding company, ALFA, S.A.B. de C.V. the Board or at least 25% of its members. At least one such meet- ing every year is dedicated to deﬁning the company’s medium and I) Alpek has a department speciﬁcally dedicated to maintaining an long-term strategies. open line of communication between the company and its share- holders and investors. This ensures that investors have the ﬁnancial D) Members must inform the Chairman of the Board of any conﬂicts and general information they require to evaluate the company’s of interest that may arise, and abstain from participating in any development and progress. Alpek uses press releases, notices of related deliberations. material events, quarterly results conference calls, investor meet- ings, its website and other communication channels. J) Alpek promotes good corporate citizenship and adheres to the recommendations of its holding company, ALFA, S.A.B. de C.V. It has a mission, vision and values, and code of ethics that are pro- moted within the organization. 42 Corporate Governance | Glossary Glossary Caprolactam (CPL) IntegRex® 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, un- derclothes and engineering plastics. Alpek-owned technology for producing PTA and PET from par- axylene (PX) and monoethylene glycol (MEG), offering signiﬁcant cost savings and fewer intermediate steps in the production pro- cess. Clean Industry Certiﬁcation Certiﬁcation granted by the Mexican Environmental Protection Agency (PROFEPA) to companies that comply with environmen- tal legislation. CO2 Emissions Unit to measure the carbon dioxide produced by the burning of solid, liquid and gaseous fuels, including natural gas. Comprehensive Responsibility Administrative System (Mex- ican National Association of the Chemical Industry, ANIQ) Certiﬁcation given to companies that comply with the six com- prehensive 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. Investment Grade Rating given to a company as a result of an evaluation made by credit-risk rating agencies such as Fitch Ratings, Standard & Poor’s and Moody’s. ISO 14001 Certiﬁcation Internationally accepted standard for establishing an efficient Environmental Management System (EMS). The standard is de- signed to support companies’ proﬁtability and at the same time minimize environmental impact. 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 Inter- national Organization for Standardization (ISO). Cyclohexane Megawatt (MW) Unit of power, equal to 1 million watts. Compound produced by the hydrogenation of benzene and used in caprolactam production. Monoethylene Glycol (MEG) Ethylene Oxide Raw material with diverse industrial uses, especially for produc- ing polyester (PET and ﬁber), antifreeze, refrigerants and solvents. Compound produced from ethylene and used as an intermedi- ate in the production of MEG and other chemicals. Paraxylene (pX) Expandable Polystyrene (EPS) Light, rigid, cellular plastic, product of the polymerization of sty- rene monomer. EPS is a versatile material because of its proper- ties 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 packag- ing 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. Hydrocarbon in the xylene family used to produce PTA. It is also a component of gasoline. Polyester Chain Alpek business that comprises all the companies involved in polyester production, from the raw material (PTA) to the produc- tion of PET and ﬁbers. 43 ALPEK 2014 ANNUAL REPORT Polyethylene Terephthalate (PET) Puriﬁed Terephthalic Acid (PTA) 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 pro- duce caps, trays and recipients. Because of its transparency, strength, durability and high protection barrier, 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 grav- ity, great rigidity, resistance to relatively high temperatures and good resistance to chemicals and fatigue. PP has diverse appli- cations, including for packaging, textiles, recyclable plastic parts and different kinds of containers, auto-parts and polymer (plas- tic) banknotes. 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. Self-regulation of Health and Safety in the Workplace, Level 4 Certiﬁcation Program implemented by the Mexican Ministry of Work and So- cial Welfare to verify that companies have implemented adminis- trative systems that promote safe, hygienic work centers. 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. Polyurethanes (PURs) Spheripol® Rigid, ﬂexible or elastic, durable materials that are produced by the reaction of a polyol with an isocyanate. They are very ver- satile, offering the elasticity of rubber, combined with the hard- ness 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. Propylene Unsaturated, 3-carbon hydrocarbon, co-product of the cracking process at petrochemical complexes and a byproduct at oil re- ﬁneries. It is used in the petrochemical industry to produce PP, propylene oxide, cumene, isopropanol, acrylic acid and acrylo- nitrile. It is also converted into a gasoline component by alkyla- tion with butanes or pentanes. LyondellBasell-owned technology which is the world’s most common way of producing polypropylene. Spherizone® LyondellBasell’s most recent technology, which offers great ﬂex- ibility in polypropylene production and is used to make a wide range of products. 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 Oxide Unit of power in the International System of Units (SI). Watt Compound produced from propylene and used to manufacture commercial and industrial products, including polyols, glycols and glycoethers. 44 Consolidated Financial Statements Alpek, S. A. B. de C. V. and subsidiaries At December 31, 2014 and 2013 Management’s Discussion and Analysis Report of the Independent Auditors Statements of ﬁnancial position Statements of income Statements of comprehensive income Statements of changes in stockholders’ equity Statements of cash ﬂows Notes to the ﬁnancial statements 46 52 53 54 55 56 57 58 45 ALPEK 2014 ANNUAL REPORT Management’s Discussion and Analysis 2014 The following analysis complements the Letter to the Shareholders, the Audited Financial Statements and Complementary Information. Unless otherwise stated, ﬁgures are expressed in millions of nominal pesos, with certain ﬁgures expressed in millions of dollars (US $) due to the high level of dollarization of Alpek’s revenues. Percentage variations are presented in nominal terms. The information is presented in accordance with International Financial Reporting Standards (IFRS). Economic Environment During 2014, the global economy experienced a divergence in regional growth rates. While in the United States, the economy showed robust growth of 2.4%, growth in the Eurozone was 0.9%. In addition to the divergent growth rates, developed economies implemented opposing monetary policies, causing a sharp appreciation of the United States dollar. Meanwhile, there was a slowdown in emerging economies. In China, growth was among the lowest in the last two decades, at 7.4%, and in Mexico growth was 2.1%. Finally, the global surplus of oil production led to prices plummeting by more than 50% during the second half of the year. The gross domestic product (GDP) and other economic variables in Mexico are described in the following paragraphs: Mexico’s GDP grew 2.1% in 2014, slightly more than growth in 2013. Inﬂation to the consumer was 4.0% (b) in 2014, also higher than the 3.8% (b) reported in 2013. The Mexican peso had an annual nominal depreciation in 2014 of 12.5% (c), compared to the 0.5 % (c) depreciation in 2013. As far as interest rates in Mexico, the Tasa de Interés Interbancaria de Equilibrio (TIIE) stood at 3.5% (b) in 2014 in nominal terms, compared to 4.3% (b) in 2013. In real terms, there was a decline, going from an annual cumulative of 0.4% in 2013 to -0.5% in 2014. The annual average nominal 3-month dollar London Interbank Offered Rate (LIBOR) stood at 0.2% (b) in 2014, similar to the 0.3% (b) observed in 2013. If the nominal depreciation of the peso is incorporated, LIBOR in constant pesos went from -3.1% (a) in 2013 to 8.4% (a) in 2014. Sources: (a) National Institute of Statistics and Geography (INEGI). (b) Banco de México (Banxico). (c) Banxico. Exchange rate for liquidating liabilities denominated in foreign currency and payable in Mexico. (d) Alpek calculations with data from INEGI, bilateral with the United States, considering consumer prices. 46 Management’s Analysis Volume – (Thousand tons) 2014 2013 2012 VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 Polyester Plastics and Chemicals TOTAL VOLUME 3,082 849 3,931 3,035 839 3,874 3,263 823 4,086 2 1 1 (7) 2 (5) Income POLYESTER Million pesos Million dollars PLASTICS AND CHEMICALS Million pesos Million dollars TOTAL INCOME Million pesos Million dollars Price Index POLYESTER Pesos Dollars PLASTICS AND CHEMICALS Pesos Dollars TOTAL Pesos Dollars 2014 2013 2012 VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 63,228 4,752 22,844 1,719 86,072 6,471 68,636 5,356 21,425 1,671 90,061 7,028 75,200 5,691 20,963 1,586 96,163 7,277 (8) (11) 7 3 (4) (8) (9) (6) 2 5 (6) (3) 2014 2013 2012 VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 89 88 106 105 93 92 98 101 100 103 99 102 100 100 100 100 100 100 (9) (13) 5 2 (6) (9) (2) 1 0 3 (1) 2 Revenues Alpek’s net revenue in 2014 amounted to $86,072 million (US $6.471 billion), 4% less than the $90,061 million (US $7.028 billion) posted in 2013. The decrease was due to a 6% drop in average prices caused by the falling price of oil and feedstocks. A 1% increase in volume was not enough to offset the decline in price. Revenues by Business Segment Revenue from Polyester in 2014 was $63,228 million (US $4.752 billion), 8% less than the $68,636 million (US $5.356 billion) in 2013, due to a decrease of 9% in average sales price and a 2% increase in volume. The lower average price reﬂects the impact from the decline in oil price. 47 ALPEK 2014 ANNUAL REPORT In 2014, revenue from Plastics and Chemicals reached $22,844 million (US $1.719 billion), 7% above the $21,425 million (US $1.671 billion) in 2013. The increase was driven by 1% and 5% growth in volume and average sales price, respectively. Operating Proﬁt and EBITDA The operating proﬁt for 2014 was $3,739 million (US $286 million), 28% above the $2,926 million (US $228 million) in 2013. This rise was a result of the $2,421 million in restructuring costs and asset impairment charge associated with the closing of our Cape Fear site in 2013. Excluding that impact, operating proﬁt was 31% lower year-on-year, mainly due to the extraordinary impact from the decline in oil and feedstock prices, as well as lower Polyester and Plastics and Chemicals margins. EBITDA was at $5,710 million (US $434 million) in 2014, a decrease of 22% compared to the $7,344 million (US $572 million) posted in 2013. The drop in the price of crude in 2014 is estimated to have had a negative impact on EBITDA of approximately US $90 million, including a non-cash inventory devaluation expense. EBITDA – (million pesos) Polyester Plastics and Chemicals Others and eliminations TOTAL EBITDA 2014 3,541 2,110 59 5,710 2013 4,974 2,304 66 7,344 2012 7,008 2,607 (4) 9,611 VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 (29) (8) (11) (22) (29) (12) (1,671) (24) EBITDA – (million dollars) 2014 2013 2012 VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 Polyester Plastics and Chemicals Others and eliminations TOTAL EBITDA 270 159 5 434 388 180 5 572 531 197 0 728 (30) (12) 0 (24) (27) (9) 100 (21) Financial cost, net During 2014, the ﬁnancial cost, net expense was -$1,497 million (-US $111 million), 28% more than the -$1,172 million (-US $91 million) in 2013. This increase was mainly due to the recognition of a non-cash exchange rate loss of $629 million caused by the depreciation of the Mexican peso against the US dollar in 2014. Financial Cost, Net - (million pesos) Financial expenses Financial income Net Financial Expense Foreign exchange gain (loss) Valuation of ﬁnancial derivative instruments 2014 (956) 166 (791) (629) (77) 2013 (1,114) 159 (955) (146) (71) 2012 (1,894) 353 (1,541) 141 69 FINANCIAL COST, NET (1,497) (1,172) (1,331) VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 14 4 17 (331) (8) (28) 41 (55) 38 (203) (203) 12 48 Management’s Analysis Taxes Income tax in 2014 was $883 million (US $68 million), 8% more than the $817 million (US $63 million) reported in 2013. It should be noted that the tax amount for 2013 includes a $920 million deferred tax beneﬁt associated with the Cape Fear site closure. Taxes - (million pesos) 2014 2013 2012 VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 Proﬁt before income taxes Statutory tax rate Income tax at statutory rate Taxes for permanent differences between accounting and taxable proﬁt Income tax Effective tax rate Made up as follows: Current Adjustment to the provision of income tax from prior years Deferred Income tax 2,197 30% (659) (224) (883) 40% 1,723 30% (517) 6,106 30% (1,832) (300) 109 (817) 47% (1,723) 28% (975) (1,137) (1,458) (6) 98 (883) (44) 364 (817) 3 (268) (1,723) 28 (28) 25 (8) 14 86 (73) (8) (72) 72 (377) 53 22 (1,567) 236 53 Net Income Attributable to the Controlling Interest Net income attributable to the controlling interest reached $801 million (US $65 million) in 2014, 206% above the income of $262 million (US $21 million) posted in 2013. This mainly reﬂects the negative impact of $1,501 million that the closure of the Cape Fear site had on 2013 Net income. Statement of income - (million pesos) Operating proﬁt Financial cost, net Share in losses of associates Income tax Net consolidated proﬁt Proﬁt attributable to controlling interest 2014 3,739 (1,497) (45) (883) 1,314 801 2013 2,926 (1,172) (30) (817) 906 262 2012 7,476 (1,331) (39) (1,723) 4,383 3,663 VAR. % 2014 vs 2013 VAR. % 2013 vs 2012 28 (28) (48) (8) 45 206 (61) 12 23 53 (79) (93) 49 ALPEK 2014 ANNUAL REPORT Capital Expenditures In 2014, capital expenditures were $4,359 million (US $320 million), 92% higher than the $2,275 million (US $179 million) of 2013. The funds were used primarily for strategic projects such as the integrated PTA/PET site in Corpus Christi, the cogeneration plant in Cosoleacaque, the acquisition of CabelmaPET, S.A. in Argentina and the technology upgrade of the caprolactam plant. Net Debt1 Net debt rose to $10,519 million (US $715 million) as of December 31, 2014, 5% above the net debt of $10,015 million (US $766 million) as of December 31, 2013, due to the depreciation of the Mexican peso against the US dollar. Excluding the effect of exchange rate, net debt decreased mainly due to the increase in Alpek’s cash balance which rose from $4,740 million (US $362 million) in 2013 to $5,747 million (US $390 million) by year end. Short and long-term debt 2014 2013 Var. 2014 2013 Million dollars % integrated Short-term debt Long term 1 year 2 3 4 5 years or more TOTAL DEBT Avg. maturity of long-term debt (years) Avg. maturity of total debt (years) 21 1 24 22 48 978 1,094 7.3 7.2 38 20 67 45 0 948 1,118 8.1 7.7 (44) (96) (63) (51) 100 3 (2) 2 0 2 2 4 89 100 3 2 6 4 0 85 100 Financial indicators (Times) 2014 2013 2012 Net debt / EBITDA (US$) Interest coverage (US$) Total liabilities / Stockholder’s equity 1.6 6.5 1.2 1.3 7.1 1.1 0.8 6.2 1.1 (1) Net Debt = Current debt plus non-current debt excluding debt issuance costs, plus accrued payable interest less cash and cash equivalents plus restricted cash and cash equivalents. 50 Management’s Analysis 2014 HIGHLIGHTS Acquisition of CabelmaPET, S.A. In April 2014, we ﬁnalized the acquisition of CabelmaPET, S.A. (“CabelmaPET”), which operates the only food-grade recycled PET (r-PET) plant in Argentina. Its annual capacity of 16 thousand tons will complement the 190 thousand tons per year capacity for virgin PET that Alpek currently operates in Zárate, Argentina. We intend to incorporate the food-grade r-PET from CabelmaPET into the Zárate manufacturing process which will enable us to offer PET resin that incorporates virgin and recycled material in a single pellet. In addition to contributing to sustainability and environmental well-being, the PET resin products with recycled content will help customers streamline their operations by eliminating unnecessary supply and mixing processes. Caprolactam Plant Technology Upgrade In June 2014, Alpek completed the technology upgrade of its caprolactam (CPL) plant under the technology license agreement signed with DSM Fiber Intermediates, global leader in CPL technology. By year-end, the facility had achieved the expected efficiencies in production and raw material consumption that will generate estimated annual savings of US $8 million. Agreement Signed with BASF for EPS and PU Business in the Americas In July 2014, Alpek signed an agreement with BASF to acquire its expandable polystyrene (EPS) business in the Americas and 100% of Polioles’ EPS business. BASF will acquire Polioles’ polyurethane (PU) business. In addition to positioning Alpek as the leading EPS producer in the Americas, this transaction will give us full control over this business unit in order to boost its growth. We expect to close the agreement with BASF during the ﬁrst quarter of 2015. Start-up of the Cogeneration Plant in Cosoleacaque In December 2014, Alpek’s cogeneration plant in Cosoleacaque, Veracruz began operations. With a total investment of US $137 million and a 95 megawatt capacity, the new plant is expected to generate annual savings of approximately US $40 million. The plant will supply all the steam and electricity requirements for Alpek’s PTA and PET plants in Cosoleacaque. In addition, it will supply excess electricity to third parties around the country. Termination of JV agreement with UPC in Russia In December 2014, Alpek decided to terminate the JV agreement signed with United Petrochemical Company (UPC) in 2013 to evaluate the construction of an integrated PTA/PET plant in Ufa, Bashkortostan, Russia. The termination agreement provides for the sale of the shares of Grupo Petrotemex, S.A. de C.V. in RusPET Holding B.V. at a price of €3.6 million ($63 million). As a result, Alpek recognized an impairment loss on its investment of $127 million in the fourth quarter of 2014. Dividends Alpek’s Shareholders’ Meeting approved the payment of a cash dividend of US $114 million on December 9, 2013, as an advance on the 2014 dividend. As a result, no dividends were paid in 2014. 51 ALPEK 2014 ANNUAL REPORT Report of the Independent Auditors Monterrey, N. L., January 28, 2015 To the Shareholders’ Meeting of Alpek, S. A. B. de C. V. We have audited the accompanying consolidated ﬁnancial statements of Alpek, S. A. B. de C. V. and subsidiaries, which comprise the consolidated statements of ﬁnancial position as at December 31, 2014 and 2013, and the consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash ﬂows for the years then ended, and a summary of signiﬁcant accounting policies and other explanatory information. Management’s Responsibility for the Consolidated Financial Statements The Management of the Company and subsidiaries is responsible for the preparation and fair presentation of these ﬁnancial statements in accordance with International Financial Reporting Standards, and for such internal control as Management determines is necessary to enable the preparation of consolidated 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 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 ﬁnancial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁnancial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated 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 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 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 consolidated ﬁnancial statements present fairly, in all material respects, the consolidated ﬁnancial position of Alpek, S. A. B. de C. V. and subsidiaries as at December 31, 2014 and 2013, and its ﬁnancial performance and its cash ﬂows for the years then ended, in accordance with International Financial Reporting Standards. PricewaterhouseCoopers, S. C. PricewaterhouseCoopers, S. C. Héctor Rábago Saldívar Héctor Rábago Saldívar Audit Partner Audit Partner 52 Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Financial Position At December 31, 2014 and 2013 (In thousands of Mexican pesos) Asset Current asset: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables, net Inventories Derivative ﬁnancial instruments Prepayments an others Total current asset Non-current asset: Property, plant and equipment, net Goodwill and intangible assets, net Deferred income tax Other assets Total non-current asset Total asset Liability and Stockholders’ equity Liability Current liability: Debt Suppliers and other accounts payable Derivative ﬁnancial instruments Income tax payable Provisions Other liabilities Total current liability Non-current liability: Debt Derivative ﬁnancial instruments Deferred income tax Provisions Employee beneﬁts Total non-current liability Total liability Stockholders’ equity: Controlling interest: Capital stock Share premium Retained earnings Other reserves Total controlling interest Non-controlling interest Total stockholders’ equity Consolidated Financial Statements Note 2014 2013 At December 31 6 7 8 10 16 11 12 21 13 19 17 16 18 22 19 16 21 18 20 23 23 23 23 14 Ps 5,743,816 3,185 13,246,370 11,485,908 - 461,870 30,941,149 27,392,275 6,082,910 256,997 697,879 34,430,061 Ps 4,737,088 2,840 12,834,935 11,777,714 86,492 232,720 29,671,789 24,705,889 2,906,470 216,597 627,085 28,456,041 Ps 65,371,210 Ps 58,127,830 Ps 326,914 10,564,770 757,011 78,100 761,652 1,836,744 14,325,191 15,665,652 287,925 4,255,606 28,243 963,983 21,201,409 35,526,600 6,051,880 9,071,074 8,880,764 1,945,717 25,949,435 3,895,175 29,844,610 Ps 753,083 9,243,781 7,315 152,951 832,632 1,315,344 12,305,106 13,756,342 25,836 4,344,268 51,682 556,932 18,735,060 31,040,166 6,051,880 9,071,074 8,292,566 602,358 24,017,878 3,069,786 27,087,664 Total liability and stockholders’ equity Ps 65,371,210 Ps 58,127,830 The accompanying notes are an integral part of these consolidated ﬁnancial statements. José de Jesús Valdez Simancas José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Eduardo Alberto Escalante Castillo Chief Financial Officer Chief Financial Officer 53 ALPEK 2014 ANNUAL REPORT Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Income For the years ended December 31, 2014 and 2013 (In thousands of Mexican pesos) Revenue Cost of sales Gross proﬁt Selling expenses Administrative expenses Other expenses, net Operating proﬁt before non-recurring items Non-recurring items Operating proﬁt Financial income (including foreign exchange gain) Financial cost (including foreign exchange loss) Financial cost, net Share in losses of associates Proﬁt before income tax Income tax Net consolidated proﬁt Proﬁt attributable to: Controlling interest Non-controlling interest Note 2014 2013 25 25 25 26 2 c) 27 27 29 Ps 86,072,058 ( 79,757,100 ) Ps 90,061,169 ( 82,436,458 ) 6,314,958 7,624,711 ( 1,218,824 ) ( 1,325,744 ) ( 31,807 ) 3,738,583 ( 1,077,708 ) ( 1,092,131 ) ( 107,856 ) 5,347,016 - ( 2,421,373 ) 3,738,583 2,925,643 135,437 ( 1,632,107 ) ( 1,496,670 ) ( 44,779 ) 2,197,134 ( 883,032 ) 136,803 ( 1,308,737 ) ( 1,171,934 ) ( 30,249 ) 1,723,460 ( 817,330 ) Ps 1,314,102 Ps 906,130 Ps 800,901 513,201 Ps 261,785 644,345 Ps 1,314,102 Ps 906,130 Basic and diluted earnings per share (in Mexican pesos) Ps 0.38 Ps 0.12 Weighted average of outstanding shares (in thousands) 2,118,164 2,118,164 The accompanying notes are an integral part of these consolidated ﬁnancial statements. José de Jesús Valdez Simancas José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Eduardo Alberto Escalante Castillo Chief Financial Officer Chief Financial Officer 54 Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Comprehensive Income For the years ended December 31, 2014 and 2013 (In thousands of Mexican pesos) Consolidated Financial Statements Note 2014 2013 Net consolidated proﬁt Ps 1,314,102 Ps 906,130 Other items of comprehensive income of the year, net of taxes: Items that will not be reclassiﬁed to the statement of income: Remeasurement of obligations for employee beneﬁts 20, 29 ( 217,489 ) 377,934 Items that will be reclassiﬁed to the statement of income: Effect of derivative ﬁnancial instruments designated as cash ﬂow hedges Translation effect Share on other comprehensive income of associates and joint ventures 16, 29 23, 29 ( 674,507 ) 2,416,988 1,694 196,931 27,918 - Total other comprehensive income for the year 1,526,686 602,783 Total comprehensive income for the year Ps 2,840,788 Ps 1,508,913 Attributable to: Controlling interest Non-controlling interest Ps 1,931,557 909,231 Ps 813,879 695,034 Total comprehensive income for the year Ps 2,840,788 Ps 1,508,913 The accompanying notes are an integral part of these consolidated ﬁnancial statements. José de Jesús Valdez Simancas José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Eduardo Alberto Escalante Castillo Chief Financial Officer Chief Financial Officer 55 ALPEK 2014 ANNUAL REPORT Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Changes in Stockholders’ Equity For the years ended December 31, 2014 and 2013 (In thousands of Mexican pesos) Note Capital stock Share premium Retained earnings Other reserves Total attributable to controling interest Non- controlling interest Total stockholders’ equity Balances at January 1, 2013 Net proﬁt Total other comprehensive income for the year Total comprehensive income for the year Dividends declared Effects from adoption of new accounting policies 23 Balances at December 31, 2013 Net proﬁt Total other comprehensive income for the year Total comprehensive income for the year Dividends declared to the non-controlling interest Changes of the non-controlling interest 23 23 Balances at December 31, 2014 Ps 6,051,880 Ps 9,071,074 Ps 11,006,758 Ps 50,264 Ps 26,179,976 Ps 3,471,186 Ps 29,651,162 261,785 - 261,785 644,345 906,130 552,094 552,094 50,689 602,783 261,785 552,094 813,879 695,034 1,508,913 ( 2,959,455 ) ( 2,959,455 ) ( 1,093,233 ) ( 4,052,688 ) ( 16,522 ) ( 16,522 ) ( 3,201 ) ( 19,723 ) 6,051,880 9,071,074 8,292,566 602,358 24,017,878 3,069,786 27,087,664 800,901 - 800,901 513,201 1,314,102 ( 212,703 ) 1,343,359 1,130,656 396,030 1,526,686 588,198 1,343,359 1,931,557 909,231 2,840,788 Ps 6,051,880 Ps 9,071,074 Ps 8,880,764 Ps 1,945,717 Ps 25,949,435 Ps 3,895,175 Ps 29,844,610 - - ( 96,129 ) ( 96,129 ) 12,287 12,287 The accompanying notes are an integral part of these consolidated ﬁnancial statements. José de Jesús Valdez Simancas José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Eduardo Alberto Escalante Castillo Chief Financial Officer Chief Financial Officer 56 Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Cash Flows For the years ended December 31, 2014 and 2013 (In thousands of Mexican pesos) Cash ﬂows from operating activities Proﬁt before income tax Depreciation and amortization Impairment of property, plant and equipment Impairment of investment in joint ventures Gain on sale of property, plant and equipment Share in losses of associates Finance cost, net Loss on changes in the fair value of derivative ﬁnancial instruments Employees’ proﬁt sharing and provisions Subtotal Decrease in trade receivables Decrease (increase) in accounts receivable from related parties Decrease (increase) in other accounts receivable Decrease (increase) in inventories Increase (decrease) in accounts payable (Decrease) increase in accounts payable to related parties Income tax paid Employees’ proﬁt sharing paid Net liability for retirement obligation Net cash ﬂows generated from operating activities Cash ﬂows from investing activities Interest received Acquisition of property, plant and equipment Acquisition of intangible assets Business acquisitions, net of cash acquired Investment in joint ventures and associates Derivative ﬁnancial instruments Dividends received Others Net cash ﬂows used in investing activities Cash ﬂows from ﬁnancing activities Proceeds from debt Payments of debt Interest paid Dividends paid Dividends paid to the non-controlling interest Changes in the non-controlling interest Payment on loans to related parties Net cash ﬂows used in ﬁnancing activities Increase (decrease) in cash and cash equivalents Foreign exchange on cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Consolidated Financial Statements Note 2014 2013 Ps 11, 12 2c), 11, 26 13 23 9 2,197,134 1,839,420 4,948 126,906 ( 286 ) 44,779 1,293,363 95,366 ( 193,331 ) 5,408,299 978,763 724,793 106,652 695,120 171,404 ( 130,155 ) ( 1,337,962 ) ( 6,528 ) ( 17,398 ) 6,592,988 102,485 ( 1,437,108 ) ( 2,753,643 ) ( 170,200 ) ( 352,481 ) ( 23,346 ) 927 216,863 ( 4,416,503 ) 4,637,739 ( 5,083,537 ) ( 870,239 ) - ( 96,129 ) 12,287 ( 103,586 ) ( 1,503,465 ) 673,020 333,708 4,737,088 Ps 1,723,460 2,024,584 2,394,025 - ( 2,505 ) 30,249 953,330 25,119 19,152 7,167,414 678,107 ( 101,764 ) ( 181,312 ) ( 478,671 ) ( 584,257 ) 173,536 ( 1,093,442 ) ( 32,717 ) ( 5,063 ) 5,541,831 98,156 ( 1,482,807 ) ( 792,671 ) - ( 69,270 ) ( 128,399 ) 1,745 ( 9,703 ) ( 2,382,949 ) 7,143,535 ( 7,083,615 ) ( 1,058,968 ) ( 2,953,020 ) ( 1,093,233 ) - - ( 5,045,301 ) ( 1,886,419 ) ( 31,054 ) 6,654,561 Ps 5,743,816 Ps 4,737,088 The accompanying notes are an integral part of these consolidated ﬁnancial statements. José de Jesús Valdez Simancas José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Eduardo Alberto Escalante Castillo Chief Financial Officer Chief Financial Officer 57 ALPEK 2014 ANNUAL REPORT Alpek, S. A. B. de C. V. and subsidiaries Notes to the consolidated ﬁnancial statements At December 31, 2014 and 2013 (In thousands of Mexican pesos, except where otherwise indicated) Note 1 – General information Alpek, S. A. B. de C. V. and subsidiaries (“Alpek” or the “Company”) operates through two major business segments: polyester chain products and plastic 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 (PP), expandable polystyrene (EPS), polyurethane (PU), caprolactam (CPL), 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. Alpek is the most important petrochemical company in Mexico and second largest in Latin America, is the leading producer of PTA and polyester ﬁbers in America and second most important producer of PET. Besides, it also operates the largest EPS plant in the continent, one of the largest Polypropylene plants in North America and is the only producer of Caprolactam in Mexico. Alpek’s shares are traded on the Mexican Stock Exchange, S. A. B. de C. V., and Alfa, S. A. B. de C. V. (“Alfa”) is its main controlling company. The Company is located in Avenida Gómez Morín Sur No. 1111, Col. Carrizalejo, San Pedro Garza García, Nuevo León, Mexico and operates plants located in Mexico, the United States of America and Argentina. The following notes to the ﬁnancial statements when referring to peso or “Ps”, it means thousands of Mexican pesos. When referring to dollars or “US$”, it means thousands of dollars from the United States. When referring to euros or “€” it means thousands of euros. Note 2 – Signiﬁcant events 2014 a) Buy/sale of assets agreement of Polyurethane (PU) business in the Americas During the month of July 2014, Alpek and BASF (“BASF”) announced the signature of agreement related to their business of EPS and PU of their joint venture Polioles, S. A. de C. V. (“Polioles”) in Mexico, as well as the EPS business of BASF in North and South America, excluding the business Neopor ® (grey EPS). Afterwards, in December 2014, in order to carry out the transactions the ﬁnal agreements were signed considering March 31, 2015 as the closing date. 58 Consolidated Financial Statements b) Start-up of the operations of the cogeneration plant On December 1, 2014, Cogeneración de Energía Limpia de Cosoleacaque, S. A. de C. V. (“Cogeneradora”) began operations, this was derived from the agreement signed by Alpek in 2012 to invest approximately US$130 million in an electrical and steam energy cogeneration project through its subsidiary Grupo Petrotemex, S. A. de C. V. (“Grupo 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, Grupo Petrotemex and its subsidiary Dak Resinas Americas México, S. A. de C. V. (both subsidiaries of Alpek) formed a corporation named Cogeneración de Energía Limpia de Cosoleacaque, S. A. de C. V. The project will increase the plant’s efficiency by ensuring a supply of low cost energy with low emissions. c) Joint venture agreement On September 26, 2013, the subsidiary Grupo Petrotemex, signed a joint venture agreement with United Petrochemical Company (“UPC”), a subsidiary of Sistema JSFC (“Sistema”), for the construction of an integrated plant of puriﬁed terephthalic acid (“PTA”) - and polyethylene terephthalate (“PET”) in Ufa, Baskortostan, Russia. Under the terms of the agreement, two new entities will be created: “RusPET Holding B. V.” (“JVC”) and “RusPET Limited Liability Company” (“RusCo”) and reserved matters of operations of the entities requiring approval by both shareholders. On December 6, 2013 the incorporation by-laws of JVC were signed. The JVC issued initial capital of €8,000 of which UPC has 51% (represented by Class A ordinary shares) acquired with a contribution of €4,080 and GPT has 49% (represented by Class B ordinary shares) acquired with a contribution of €3,920. In an analysis performed by Management, it was assessed whether Alpek has control over JVC in accordance with IFRS 10 “Consolidated Financial Statements”. The conclusion of such analysis on control indicates that as of the date of the acquisition and at December 31, 2013, Alpek has joint control and the investment should be treated as a joint venture, which in the opinion of Management it is not material for the group; therefore, it is accounted for using the equity method. During 2014, Alpek made payments amounting to Ps 121,014. Due to particulars circumstances of UPC during the month of December 2014, Grupo Petrotemex decided to terminate the agreement with UPC and proceed to sell the shares of JVC. The Deed of settlement and termination establishes a selling price of the shares of approximately Ps 63,271 (€3,552). According to this, Management recorded an impairment of its joint venture amounting to Ps 126,906 (see Note 26) and reclassiﬁed this investment, net of impairment, as an asset held for sale and it is presented in the consolidated statement of ﬁnancial position within the line of prepayments and other. 59 ALPEK 2014 ANNUAL REPORT 2013 a) IntegRex® technology license and signature of a supply agreement with M&G During April 2013, Alpek through its subsidiary Grupo Petrotemex held a licensing agreement for IntegRex® PTA technology and another PTA-PET supply agreement with Grupo M&G (“M&G”). These agreements will allow M&G to use the IntegRex® PTA technology in the PTA-PET integrated plant to be constructed in Corpus Christi, Texas in the United States (the Plant). On the other hand, Alpek will pay US$350 million to M&G during the construction of the Plant and will obtain supply rights of the Plant for 400 thousand tons of PET (manufactured with 336 thousand tons of PTA) a year. In accordance with the supply agreement, Alpek will supply raw materials for the manufacturing of its PTA-PET volume. It is estimated that the M&G plant in Corpus Christi will start operations in 2016. At December 31, 2014, Alpek has made payments amounting to US$198.8 million. See Note 31. b) Intangibles from licenses with Basell The subsidiary Indelpro, S. A. de C. V. (Indelpro) held a contract in 2004, with Basell Polioleﬁne Italia S. r. l. (company of the Basell Group) in relation to engineering licenses, use of patents and technical information for the production of polypropylene, to start the construction of its second production line of polypropylene; therefore, Indelpro made an initial required payment of US$9.5 million on that date, to use such licenses, patents and technical information for building the production line of the products under these patents (called the second production line) which at June 30, 2013, the Company has assessed that it has an estimated remaining useful life of 21 years. This contract, which is valid for an indeﬁnite period, provides annual royalty payments from July 2013, which would be determined based on 1.22% of the net sales value. Until July 1, 2013 it was required to pay the royalties referred to in the preceding paragraph, based on 1.22% of net sales. The royalty payments would be made until Indelpro completed a total of US$11 million as compensation, this amount was calculated as the net present value at the date the contract was signed (2004), using an annual discount rate of 8%, according to what was established in the contract. The contract also includes the option for Indelpro to pay in advance the maximum amount of royalties indicated above. On April 26, 2013, Indelpro decided to prepay to Basell Polioleﬁne Italy, S. r. l. the maximum amount of royalties and determined that the total was US$21 million (Ps 258,480), equivalent to the value of US$11 million updated by the rate previously mentioned, from the date of the contract conclusion until the date of payment. This payment was recorded as an intangible asset and will be amortized according to the useful life of the contract. See Note 12. 60 Consolidated Financial Statements c) Closing of Cape Fear plants in North Carolina In June 2013, the Company announced the planned closure of all its operations at its Cape Fear plant, in Wilmington, North Carolina. The purpose of this closing was to improve cost competitivity thru distributing production to the most efficient plants in its productive network. The closing of operations took place in September 2013. The Company had communications with authorities in North Carolina and it committed to the dismantling and demolition of assets, as well as to the environmental remediation for damages caused after the starting plant’s operations. In this sense, the Company estimated costs of Ps 859,096 (approximately US$67 million) initially recognized as part of the assets associated to the plant, additionally, for costs attributable to the closing, such as restructuring costs, the Company estimated Ps 197,624 (US$15.5 million) resulting in a total of Ps 1,056,720 (US$82.2 million) as a provision for dismantling and demolition, environmental remediation and restructuring costs. Out of this amount, the Company has disbursed Ps 190,551 (US$ 13.9 million) and Ps 191,413 (US$ 14.7 million) in 2014 and 2013, respectively. At December 31, 2014, the balance of this provision amounts to Ps 789,895 (US$ 53.6 million). This amount will be disbursed during the following two years. During 2013, the Company also performed impairment tests of assets associated to the plant and recorded a charge for impairment related to these assets for Ps 2,223,749 (US$173 million). The total impact on the net income of the Company for this restructuring event amounted to Ps 1,501,251 (US$117 million), composed of Ps 2,421,373 (US$189 million) for restructuring costs and impairment of assets, which were recorded as non-recurring items within the operating income less Ps 920,122 (US$72 million) of deferred tax. d) Issuance of debt of Alpek 144A During August 2013, Alpek completed an issuance of debt obligations (“Senior Notes”) in international markets for a nominal amount of Ps 3,993,120 (US$300 million) maturing in 2023. The interests of the Senior Notes will be payable semi-annually at a 5.375% annual rate (effective interest rate of 5.479%) as from February 20, 2014. Alpek capitalized debt issuance costs of Ps 30,556. The proceeds from the issuance were used to pay debt in advance and for general corporate purposes. This payment led to an advance amortization of issuance expenses amounting Ps 4,104. Note 3 - Summary of signiﬁcant accounting policies The accompanying consolidated ﬁnancial statements and notes were authorized for issuance on January 28, 2015, by officials with the legal power to sign the basic ﬁnancial statements and accompanying notes. The following are the most signiﬁcant accounting policies followed by the Company, which have been consistently applied in the preparation of their ﬁnancial information in the years presented, unless otherwise speciﬁed: a) Basis for preparation The consolidated 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 International Accounting Standards (“IAS”) in force and all related interpretations issued by the International Financial Reporting Interpretations Committee (“IFRS IC”), including those previously issued by the Standing Interpretations Committee (“SIC”). 61 ALPEK 2014 ANNUAL REPORT The consolidated ﬁnancial statements have been prepared on a historical cost basis, except for the derivative ﬁnancial instruments designated as hedges which are measured at fair value and for the ﬁnancial assets and liabilities at fair value through proﬁt or loss with changes reﬂected in income and for ﬁnancial assets available for sale. The preparation of the consolidated ﬁnancial statements according to IFRS requires the use of certain critical accounting estimates. Additionally, it requires Management to exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where judgments and estimates are signiﬁcant to the consolidated ﬁnancial statements are disclosed in Note 5. b) Consolidation i. Subsidiaries The subsidiaries are all the entities over which the Company has the power to govern the ﬁnancial and operating policies of the entity. The Company controls an entity when it is exposed, or has the right to variable returns from its interest in the entity and it is capable of affecting the returns through its power over the entity. Where the Company’s interest in subsidiaries is less than 100%, the share attributed to outside shareholders is presented as non-controlling interest. Subsidiaries are consolidated since the date on which the Company obtains the control and up to the date it loses that control. The Company applies the acquisition method in accounting for business combinations. The Company deﬁnes a business combination as a transaction in which obtains control over the business, which is deﬁned as a set of activities and assets which are conducted and managed in order to obtain beneﬁts in the form of dividends, less costs or other economic beneﬁts directly to investors. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred with the ex-owners of the acquired business 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 acquired assets and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Company recognizes any non-controlling interest in the acquiree based on the share of the non- controlling interest in the net identiﬁable assets of the acquired entity. The Company accounts for business combinations of entities under common control using the predecessor method. The predecessor method involves the incorporation of the carrying amounts of the acquired entity, which includes the goodwill recognized at the consolidated level with respect to the acquiree. Any difference between the consideration transferred and the carrying amount of the net assets acquired at the level of the subsidiary is recognized in stockholders’ equity. The acquisition-related costs are recognized as expenses when they are incurred. Goodwill is initially measured as excess of the sum of the consideration transferred and the fair value of the non-controlling interest over the net identiﬁable assets acquired. If the consideration transferred is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the consolidated statement of income. Transactions and intercompany balances and unrealized gains (losses) on transactions between Alpek companies are eliminated in preparing the consolidated ﬁnancial statements. In order to ensure consistency with the policies adopted by the Company, the accounting policies of subsidiaries have been changed where it was deemed necessary. 62 Consolidated Financial Statements At December 31, 2014 and 2013, the mains subsidiaries of Alpek were: Country (1) Percentage of Ownership Alpek, S. A. B. de C. V. (Holding company) Grupo Petrotemex, S. A. de C. V. (Holding company) DAK Americas, L.L.C. Dak Resinas Americas México, S. A. de C. V. DAK Americas Exterior, S. L. (Holding company) DAK Americas Argentina, S. A. Tereftalatos Mexicanos, S. A. de C. V. Akra Polyester, S. A. de C. V. USA Spain Argentina Indelpro, S. A. de C. V. Polioles, S. A. de C. V. Unimor, S. A. de C. V. Univex, S. A. (1) Companies incorporated in Mexico, except those indicated. ii. Absorption (dilution) of control in subsidiaries 100 100 100 100 100 91 93 51 50 100 100 Functional currency Mexican peso US dollar US dollar US dollar Euro Argentine peso US dollar US dollar US dollar US dollar Mexican peso Mexican peso The effect of absorption (dilution) of control in subsidiaries, i.e., an increase or decrease in the percentage of control, is recorded in stockholders’ equity, directly in retained earnings, in the period in which the transactions that cause such effects occur. The effect of absorption (dilution) of control is determined by comparing the carrying amount of the investment according to percentage of ownership before the event of dilution or absorption against the carrying amount with the new percentage of ownership after the relevant event. In the case of loss of control, the dilution effect is recognized in income. iii. Sale or disposal of subsidiaries When the Company ceases to have control any retained interest in the entity is remeasured at fair value, and the change against the carrying amount is recognized in the income statement. The fair value is the initial carrying amount for the purposes of accounting for any subsequent retained interest in the associate, joint venture or ﬁnancial asset. Any amount previously recognized in comprehensive income in respect of that entity is accounted for as if the Company had directly disposed of the related assets and liabilities. This implies that the amounts recognized in the comprehensive income are reclassiﬁed to income for the year. iv. Associates Associates are all entities over which the Company has signiﬁcant inﬂuence but not control. Generally an investor must hold between 20% and 50% of the voting rights in an investee for it to be an associate. Investments in associates are accounted for using the equity method and are initially recognized at cost. The Company’s investment in associates includes goodwill identiﬁed at acquisition, net of any accumulated impairment loss. The Company has an investment of which it owns 50% and it is consolidated. See critical judgment in Note 5.2. If the equity in an associate is reduced but signiﬁcant inﬂuence is maintained, only a portion of the amounts recognized in the comprehensive income are reclassiﬁed to income for the year, where appropriate. 63 ALPEK 2014 ANNUAL REPORT The Company’s share in proﬁts or losses of associates, post-acquisition, is recognized in the income statement and its share in the other comprehensive income of associates is recognized as other comprehensive income. The cumulative movements after acquisition are adjusted against the carrying amount of the investment. When the Company’s share of losses in an associate equals or exceeds its equity in the associate, including unsecured receivables, the Company does not recognize further losses unless it has incurred obligations or made payments on behalf of the associate. The Company assesses at each reporting date whether there is objective evidence that the investment in the associate is impaired. If so, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate and its carrying amount and recognizes it in “share in loss of associates” in the income statement. Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company´s share in such gains. Unrealized losses are also eliminated unless the transaction provides evidence that the asset transferred is impaired. In order to ensure consistency with the policies adopted by the Company, the accounting policies of associates have been modiﬁed. When the Company ceases to have signiﬁcant inﬂuence over an associate, any difference between the fair value of any retained interest plus any proceeds from disposing apart interest in the associate less the carrying amount of the investment at the date the equity method was discontinued is recognized in the income statement. v. Joint arrangements Joint arrangements are those where the parties have joint control since the decisions over relevant activities require the unanimous consent of each one of the parties sharing control. Investments in joint arrangements are classiﬁed in accordance with the contractual rights and obligations of each investor such as: joint operations or joint ventures. When the Company holds the right over assets and obligations for the liabilities related to a joint arrangement is classiﬁed as a joint operation. When the Company holds rights over net assets of the joint arrangement, is classiﬁed as a joint venture. The Company has assessed the nature of its joint arrangements and classiﬁed them as joint ventures and are accounted for by using the equity method. c) Foreign currency translation i. Functional and presentation currency The amounts included in the ﬁnancial statements of each of the Company’s subsidiaries and associates should be measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated 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 as foreign exchange gains and losses in the income statement, except when those transactions arise from cash ﬂow hedges, are recognized in other comprehensive income. Foreign exchange gains and losses resulting 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 those transactions arise from cash ﬂow hedges or hedges of a net investment in a foreign operation. 64 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. Consolidated Financial Statements iii. Consolidation of foreign subsidiaries Translation of subsidiaries with a functional currency different from their recording currency. The ﬁnancial statements of subsidiaries, having a recording currency different from their functional currency were translated into the functional currency in accordance with the following procedure: a. The balances of monetary assets and liabilities denominated in the recording currency were translated at the closing exchange rates. b. The balances and movements of non-monetary assets, liabilities and stockholders’ equity were translated at the historical exchange rates. In the case of the movements of non-monetary items recognized at fair value, which occurred during the period, stated in the recording currency, these were translated using the historical exchange rates in effect on the date when the fair value was determined. c. The revenue, costs and expenses of the periods, expressed in the recording currency, were translated at the exchange rate of the date they were accrued and recognized in the income statement, except when they arose from non- monetary items, in which case the historical exchange rate of the non-monetary items was used. d. The differences in exchange arising in the translation from the recording currency to the functional currency were recognized as income or expense in the income statement of the period they arose in. Translation of subsidiaries with a functional currency different from their presentation currency. The results and ﬁnancial position of all Company entities (none of which is in a hyperinﬂationary environment) with a functional currency different from the presentation currency are translated into the presentation currency as follows: a. Assets and liabilities at December 31, 2014 and 2013 were translated at the closing exchange rates of 14.72 and 13.08 mexican pesos/dollar, respectively. b. The stockholders’ equity of each statement of ﬁnancial position presented is translated at historical exchanges rates. 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 exchanges rates prevailing on the transaction dates, in which case income and expenses should be translated at these exchanges rates), which amounted 13.30 and 12.82 mexican pesos/dollar for the years ended December 31, 2014 and 2013, respectively. d. All resulting exchange differences are recognized in other comprehensive income. The goodwill and adjustments to fair value arising at the date of acquisition of a foreign operation so as to measure them at fair value are recognized as assets and liabilities of the foreign entity and translated at the exchange rate at the closing date. Exchange differences arising are recognized in other comprehensive income. 65 ALPEK 2014 ANNUAL REPORT d) Cash and cash equivalents Cash and cash equivalents include cash on hand, bank deposits available for operations and other short-term investments of high liquidity with original maturities of three months or less, all of which are subject to insigniﬁcant risk of changes in value. Bank overdrafts are presented as other current liabilities. e) Restricted cash and cash equivalents Cash and cash equivalents whose restrictions cause them not to comply with the deﬁnition of cash and cash equivalents given above, are presented in a separate line in the statement of ﬁnancial position and are excluded from cash and cash equivalents in the statement cash ﬂows. 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, investments held to maturity and available for sale. The classiﬁcation depends on the purpose for which the ﬁnancial assets were acquired. Management determines the classiﬁcation of its ﬁnancial assets upon initial recognition. Purchases and sales of ﬁnancial assets are recognized on the settlement date. Financial assets are written off in full when the right to receive the related cash ﬂows expires or is transferred and the Company has also transferred substantially all risks and rewards of ownership, as well as 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. Derivative ﬁnancial instruments are classiﬁed in this category, unless they are designated as hedges. Financial assets 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 from changes in fair value of these assets are presented in the income statement as incurred. ii. Accounts receivable The accounts 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 statements of ﬁnancial position date. These are classiﬁed as non-current assets. Accounts receivable are initially calculated 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 at the amounts originally agreed or will be collected in a different period, the receivables are impaired. 66 Consolidated Financial Statements iii. Investments held to maturity If the Company intends and has the demonstrable ability to hold debt securities to maturity, they are classiﬁed as investments held to maturity. Assets in this category are classiﬁed as current assets if expected to be settled within the next 12 months, otherwise they are classiﬁed as non-current. Initially they are recognized at fair value plus any directly attributable transaction costs, and subsequently they are valued at amortized cost using the effective interest method. Investments held to maturity are recognized or derecognized on the day they are transferred to or by the Company. At December 31, 2014 and 2013 the Company had no such investments. iv. Financial assets available for sale Financial assets available for sale are non-derivative ﬁnancial assets that are either designated in this category or not classiﬁed in any of the other categories. They are included in non-current assets unless their maturity is less than 12 months or Management intends to dispose of the investment within the next 12 months after the statement of ﬁnancial position date. Financial assets available for sale are initially recognized at fair value plus directly attributable transaction costs. Subsequently, these assets are carried at fair value (unless they cannot be measured by their value in an active market and the value is not reliable, in which case they will be recognized at cost less impairment). Gains or losses arising from changes in fair value of monetary and non-monetary instruments are recognized directly in the consolidated statement of comprehensive income in the period in which they occur. When instruments 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 valued at amortized cost using the effective interest method. Liabilities in this category are classiﬁed as current liabilities if expected to be settled within the next 12 months, otherwise they are classiﬁed as non-current. Suppliers are obligations to pay for goods or services that have been acquired or received in the ordinary course of business. Loans are initially recognized at fair value, net of transaction costs incurred. Debt is subsequently carried at amortized cost; any difference between the funds 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 assets and liabilities Assets and liabilities are offset and the net amount is presented in the statements of ﬁnancial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. 67 ALPEK 2014 ANNUAL REPORT Impairment of ﬁnancial instruments a. Financial assets measured at amortized cost The Company assesses at the end of each year whether there is objective evidence of impairment of each ﬁnancial asset or group of ﬁnancial assets. An impairment loss is recognized 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 provided that the loss event (or events) has an impact on the estimated future cash ﬂows arising from the ﬁnancial asset or group of ﬁnancial assets that can be reliably estimated. Aspects evaluated by the Company to determine whether there is objective evidence of impairment are: Signiﬁcant ﬁnancial difficulty of the issuer or debtor. Breach of contract, such as default in 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 otherwise would not be considered. There is likelihood that the issuer or debtor will enter bankruptcy or other ﬁnancial reorganization. • • Disappearance of an active market for that ﬁnancial asset due to ﬁnancial difficulties. • Veriﬁable information indicates that there is a measurable decrease 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) (ii) Adverse changes in the payment status of borrowers in the group of assets National or local conditions that correlate with default on the assets in the group Based on the items listed above, the Company assesses whether there is objective evidence of impairment. Subsequently, for the category accounts receivable, when impairment exists, the amount of 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 original effective interest rate. The carrying amount of the asset is reduced by that amount, which is recognized in the income statement under administrative expenses. If a 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 could determine the impairment of the asset given its fair value determined on the basis of a current observable market price. If in the subsequent years, the impairment loss decreases and the decrease can be related objectively to an event occurring after the date on which such impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the loss impairment is recognized in the income statement Impairment amounts of accounts receivable are mentioned in Note 8. b. Financial assets available for sale In the case of debt ﬁnancial instruments, the Company also uses the above-listed criteria to identify whether there is objective evidence of impairment. In the case of equity ﬁnancial instruments, a signiﬁcant reduction of approximately to 30% of the cost of the investment against its fair value or a reduction of the fair value against the cost for a period longer than 12 months is considered objective evidence of impairment. 68 Consolidated Financial Statements Subsequently, in the case of ﬁnancial assets available for sale, an impairment loss determined by computing the difference between the acquisition cost and the current fair value of the asset, less any impairment loss previously recognized, is reclassiﬁed from the other comprehensive income to the income statement. Impairment losses recognized in the income statement related to equity ﬁnancial 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 a subsequent event. g) Derivative ﬁnancial instruments and hedging activities All derivative ﬁnancial instruments are identiﬁed and classiﬁed as fair value hedges or cash ﬂow hedges, or for trading and are recognized in the statement of ﬁnancial position as assets and/or liabilities at fair value and similarly measured subsequently at fair value. The fair value is determined based on recognized market prices and its fair value is determined using valuation techniques accepted in the ﬁnancial sector. The hedging derivatives are 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. Derivative ﬁnancial instruments classiﬁed as hedges are contracted for risk hedging purposes and meet all hedging requirements; their designation at the beginning of the hedging operation is documented, describing the objective, hedge item, risks to be hedged and the effectiveness of the hedging relationship, characteristics, accounting recognition and how the effectiveness is to be measured. Fair value hedges Changes in the fair value of derivative ﬁnancial instruments are recorded in the income statement. The change in fair value of the hedging instruments and the gain or loss on the hedged item attributable to the hedged risk are recorded in the income statement. At December 31, 2014 and 2013, the Company has no derivative ﬁnancial instruments classiﬁed as fair value hedges. Cash ﬂow hedges The changes in the fair value of derivative instruments associated to cash ﬂow hedges are recorded in stockholders’ equity. The effective portion is temporarily recorded in comprehensive income, within stockholders’ equity and is reclassiﬁed to the income statement when the hedged item affects this. The ineffective portion is immediately recorded in income. Net investment hedge Net investment hedge in a foreign operation is recorded similarly to cash ﬂow hedges. Any gain or loss of the hedged instrument related to the effective portion of the hedge is recorded in other comprehensive income. The gain or loss of the ineffective portion is recorded in the statement of income. Accumulated gains and losses in equity are transferred to the statement of income on the disposal or partial disposal of the foreign operation. At December 31, 2014 and 2013, the Company has no derivative ﬁnancial instruments classiﬁed as net investment hedges. 69 ALPEK 2014 ANNUAL REPORT Discontinuation of hedge accounting The Company discontinues the hedge accounting when the derivative has expired, has been sold, cancelled or exercised, or when the hedge does not meet the criteria for hedge accounting, or when the Company decides to cancel the hedge designation. On discontinuing hedge accounting, in the case of fair value hedges, the adjustment to the carrying amount of a hedged item for which the effective interest rate method is used, is amortized to income over the period to maturity. In the case of cash ﬂow hedges, the amounts accumulated in equity as a part of comprehensive income remain in equity until the time when the effects of the forecasted transaction affect income. In the event the forecasted transaction is not likely to occur, the income or loss accumulated in comprehensive income are immediately recognized in the income statement. When the hedge of a forecasted transaction appears satisfactory and subsequently does not meet the effectiveness test, the cumulative effects in comprehensive income in stockholders’ equity are transferred proportionally to the income statement to the extent, the forecasted transaction impacts it. The fair value of derivative ﬁnancial instruments presented in the ﬁnancial statements of the Company, is a mathematical approximation of their fair value. It is computed using proprietary models of independent third parties using assumptions based on past and present market conditions and future expectations at the respective statement of ﬁnancial position 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 includes cost of product design, raw materials, direct labor, other direct costs and production overheads (based on normal operating capacity). It excludes loan costs. The net realizable value is the estimated selling price in the normal course of business, less the applicable variable selling expenses. Costs of inventories include any gain or loss transferred from equity corresponding to raw material purchases that qualify as cash ﬂow hedges. i) Property, plant and equipment Items of property, plant and equipment are recorded at cost less the accumulated depreciation and any accrued impairment losses. The costs include expenses directly attributable to the asset acquisition. 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 ﬂows to the Company and the cost of the item can be reliably measured. The carrying amount of the replaced part is derecognized. Repairs and maintenance are recognized in the income statement during the year they are incurred. Major improvements are depreciated over the remaining useful life of the related asset. Depreciation is calculated using the straight-line method, considering separately each of the asset’s components, except for land, which is not subject to depreciation. The average useful lives of assets families are as follows: Buildings and constructions Machinery and equipment Transportation equipment Furniture and laboratory equipment and information technology 40 to 50 years 10 to 40 years 15 years 2 to 13 years The spare parts to be used after one year and attributable to speciﬁc machinery are classiﬁed as property, plant and equipment in other ﬁxed assets. 70 Consolidated Financial Statements Borrowing costs directly attributable to the acquisition related to property, plant and equipment whose acquisition or construction requires a substantial period (nine months or more), are capitalized as part of the cost of acquiring such qualifying assets, up to the moment when they are suitable for their intended use or 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 in the income statement in other expenses, net, 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 its value in use. The residual value and useful lives of assets are reviewed at least at the end of each reporting period and, if expectations differ from previous estimates, the changes are accounted for as a change in accounting estimate. In the event that the carrying amount of the asset is greater than its recoverable amount, a decrease in value is recorded for presenting at its recoverable amount. Gains and losses on disposal of assets are determined by comparing the sale value with the carrying amount and are recognized in other expenses, net, in the income statement. j) Intangible assets Goodwill represents the excess of the acquisition cost of a subsidiary over the Company’s interest in the fair value of the identiﬁable net assets acquired, determined at the date of acquisition. Goodwill is shown in the statement of ﬁnancial position as goodwill and intangible assets, net and is recognized at cost less accumulated impairment losses, which are not reversed. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Intangible assets are recognized when they meet the following features: they are identiﬁable, provide future economic beneﬁts and the Company has control over such beneﬁts. Intangible assets are classiﬁed as follows: i. ii. Indeﬁnite useful life. - These intangible assets are not amortized and are subject to annual impairment assessment. As of December 31, 2014 and 2013, no factors have been identiﬁed limiting the useful life of these intangible assets. Finite useful life. - These assets are recognized at cost less accumulated amortization and impairment losses recognized. They are amortized on a straight line basis over their estimated useful life, determined based on the expectation of generating future economic beneﬁts, and are subject to impairment tests when triggering events of impairment are identiﬁed. The estimated useful lives of intangible assets with ﬁnite useful lives are summarized as follows: Development costs Trademarks No competition agreements Customer relations 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 71 ALPEK 2014 ANNUAL REPORT Research costs are recognized in income as incurred. Expenditures on development activities are recognized as intangible assets when such costs can be reliably measured, the product or process is technically and commercially feasible, potential future economic beneﬁts will be obtained and the Company intends and has sufficient resources to complete the development and to use or sell the asset. Their amortization is recognized in income by 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. k) Impairment of non-ﬁnancial assets Assets that have an indeﬁnite useful life, for example goodwill, are not depreciable or amortizable and are subject to annual impairment tests. Assets that are subject to amortization are reviewed for impairment when 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 the asset’s fair value less costs to sell and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels at which separately identiﬁable cash ﬂows exist (cash generating units). Non-ﬁnancial assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. l) Income tax The amount of the income tax reﬂected in the consolidated income statement represents the current tax in the year, as well as the effects of deferred income tax, which is determined in each subsidiary using the asset and liability method, applying the tax rate established by legislation enacted or substantially enacted at the date of the statement of ﬁnancial position to the total of the temporary differences resulting from comparing the carrying amounts and tax bases of assets and liabilities that are expected to be applied when the deferred asset tax is realized or the deferred liability tax is settled, considering the tax losses carry forward to be recoverable. The effect of a change in current tax rates is recognized in income of the period in which the rate change is enacted. Management periodically evaluates positions taken in tax returns with respect to situations in which the applicable law is subject to interpretation. Provisions are recognized when it is appropriate, based on the amounts expected to be paid to the tax authorities. Deferred income tax assets are recognized only to the extent that is probable that future taxable proﬁt will be available against which the temporary differences can be utilized. The deferred income tax on temporary differences arising from investments in subsidiaries and associates is recognized, unless the period of reversal of temporary differences is controlled by the Company and it is probable that the temporary differences will not reverse in the in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right, and when the Company intends, either to settle on net basis or to realize the asset and settle the liability simultaneously. m) Employee beneﬁts i. Pension plans Deﬁned contribution plans: 72 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 their service in the current and past periods. The contributions are recognized as employee beneﬁt expense when they are due. Consolidated Financial Statements Deﬁned beneﬁt plans: A deﬁned beneﬁt plan is a plan under which the Company has a legal or constructive obligation for paying a pension when the employee reach the retirement age, considering factors such as age, years of service and compensation. The liability recognized in the statement of ﬁnancial position in respect of deﬁned beneﬁt plans is the present value of the deﬁned beneﬁt obligation at the statement of ﬁnancial position date less the fair value of plan assets. 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 discount rates according to IAS 19 that are denominated in the currency in which the beneﬁts will be paid, and have maturities that approximate the terms of the pension liability. Actuarial gains and losses from adjustments and changes in remeasurement of the net deﬁned beneﬁt liability (asset) are recognized directly in stockholders’ equity in other items of the comprehensive income in the year they occur. The Company determines the net ﬁnance expense (income) by applying the discount rate to the net deﬁned beneﬁt liability (asset) liabilities (assets) from net deﬁned beneﬁts. Past-service costs are recognized immediately in the income statement. ii. Other post-employment beneﬁts The Company provides post-employment medical beneﬁts. The right to access these beneﬁts usually depends on the employee´s having worked until retirement age and completing a minimum of years of service. The expected costs of these beneﬁts are accrued over the period of employment using the same criteria as those described 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 when an employee accepts voluntary termination of employment in exchange for these beneﬁts. The Company recognizes termination beneﬁts in the ﬁrst of the following dates: (a) when the Company can no longer withdraw the offer of these beneﬁts, and (b) when the Company recognizes the costs from restructuring within the scope of the IAS 37 and it involves the payment of termination beneﬁts. If there is an offer that promotes the termination of the employment relationship voluntarily by employees, termination beneﬁts are valued based on the number of employees expected to accept the offer. Any beneﬁts to be paid more than 12 months after the statements of ﬁnancial position date are discounted to their present value. iv. Short-term beneﬁts The Company provides beneﬁts to employees in the short term, which may include wages, salaries, annual compensation and bonuses payable within 12 months. The Company recognizes an undiscounted provision when it is contractually obligated or when past practice has created an obligation. 73 ALPEK 2014 ANNUAL REPORT v. Employees’ proﬁt sharing and bonuses The Company recognizes a liability and an expense for bonuses and employees’ 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. n) Provisions Provisions represent a present obligation, legal or constructive as a result of past events, where an outﬂow of resources to meet the obligation is likely and the amount can be reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenses that are expected to be required to settle the obligation using a pre-tax rate that reﬂects current market value considerations, the time value of money and the speciﬁc risk of the obligation. The increase in the provision over the course of time is recognized as interest expense. o) Sharebased payments The Company’s compensation plans are based on the market value of shares of the holding in favor of certain senior executives of ALFA and its subsidiaries. The conditions for granting such compensation to the eligible executives include among other things, compliance with certain metrics such as the level of proﬁt achieved, permanence in the Company, etc. The Board of Directors has appointed a technical committee to manage the plan, and it reviews the estimated cash settlement of this compensation at the end of the year. Adjustments to this estimate are charged or credited to the 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 included under other liabilities and is adjusted 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. p) Treasury shares The Shareholders’ Meeting periodically authorizes a maximum amount for the acquisition of the Company’s own shares. Upon the occurrence of a repurchase of its own shares, they become treasury shares and the amount is charged to stockholders’ equity at purchase price: a portion to capital stock at its modiﬁed historical value, and the balance to retained earnings. These amounts are stated at their historical value. At December 31, 2014 and 2013, there aren’t shares in treasury. q) Capital stock The Company’s ordinary shares are classiﬁed as capital. Incremental costs directly attributable to the issuance of new shares are included in equity as a deduction from the consideration received, net of tax. r) Comprehensive income Comprehensive income is composed of net income plus other items of comprehensive income, net of taxes, which comprise the effects of the translation of foreign subsidiaries, the effects of derivative ﬁnancial instruments for cash ﬂow hedging, remeasurments of obligations for employee beneﬁts, the effects of changes in the fair value of ﬁnancial instruments available for sale, the equity in other items of comprehensive income of associates, and other items speciﬁcally required to be reﬂected in stockholders’ equity and which do not constitute capital contributions, reductions or distributions. 74 Consolidated Financial Statements s) Segment reporting Segment information is presented consistently with the internal reporting provided to the Chief Executive Officer who is the highest authority in operational decision-making, resource allocation and assessment of operating segment performance. t) Revenue recognition Revenue comprises the fair value of the consideration received or receivable for the sale of goods and services in the normal course of operations. Revenue is shown net of value added tax, customer returns, rebates and similar discounts and after eliminating intercompany revenue. Revenues are recognized when the following conditions are fulﬁlled: • • • • • The risks and rewards of ownership have been transferred The amount of revenue can be reliably measured It is likely that future economic beneﬁts will ﬂow to the Company The Company retains no involvement associated with ownership nor effective control of the sold goods The costs incurred or to be incurred in respect of the transaction can be measured reasonably. The revenue recognition criteria depend on the contractual conditions with the Company’s costumers. In some cases, depending on the agreements with each costumer, the risks and beneﬁts associated to the property are transferred when the goods are taken by the costumers in the Company’s plant. In other cases, the risks and beneﬁts associated to the property are transferred when the goods are delivered in the plant of the costumers. Dividend income from investments is recognized once the rights of shareholders to receive this payment have been established (when it is probable that the economic beneﬁts will ﬂow to the entity and the revenue can be reliably valued). Interest income is recognized when it is likely that the economic beneﬁts will ﬂow to the entity and the amount of revenue can be reliably valued by applying the effective interest rate. Revenues from royalties are recognized using an accrued basis, in accordance with the substance of the agreement on which they are based. u) Earnings per share Earnings (losses) per share are calculated by dividing the proﬁt (loss) attributable to the shareholders of the parent by the weighted average number of common shares outstanding during the year. At December 31, 2014 and 2013, there are no dilutive effects from ﬁnancial instruments potentially convertible into shares. v) Non-recurring items Non-recurring items require judgment from Management to be disclosed, due to their relevance and / or incidence. These items are disclosed in the consolidated statement of income and in Note 18. Operations that gave rise to non-recurring items were the restructuring activities and impairments. 75 ALPEK 2014 ANNUAL REPORT w) Changes in accounting policies and disclosures The accounting policies adopted are consistent with those of the previous ﬁnancial year except for the adoption of new standards effective at January 1, 2014. The nature and impact of each new standard or modiﬁcation are described as follows: • • • IAS 32, ‘Financial instruments: Presentation’ on December 2011, the IASB modiﬁes the IAS 32. This amendment clariﬁes that the right of set-off must not be contingent on a future event. It must also be legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The amendment also considers settlement mechanisms. The amendment did not have a signiﬁcant effect on the consolidated ﬁnancial statements. IAS 39, ‘Financial instruments: Recognition and measurement’ on September 2013, the IASB modiﬁes the IAS 39 on the novation of derivatives and the continuation of hedge accounting. This amendment considers legislative changes to ‘over-the-counter’ derivatives and the establishment of central counterparties. Under IAS 39 novation of derivatives to central counterparties would result in discontinuance of hedge accounting. The amendment provides relief from discontinuing hedge accounting when novation of a hedging instrument meets speciﬁed criteria. The Company has applied the amendment and there has been no signiﬁcant impact on the consolidated ﬁnancial statements. IFRIC 21, ‘Levies’ on May 2013, the IASB modiﬁes the IFRIC 21 the interpretation addresses what the obligating event is that gives rise to pay a levy and when a liability should be recognized. The Company is not currently subjected to signiﬁcant levies so the impact on the Company is not material. x) New accounting pronouncements not early adopted by the company Following are the new pronouncements and amendments issued and effective for years subsequent to 2014 that have not been early adopted by the Company. IFRS 15, ‘Revenue from contracts with customers’ issued on May 2014, deals with revenue recognition and establishes principles for reporting useful information to users of ﬁnancial statements about the nature, amount, timing and uncertainty of revenue and cash ﬂows arising from an entity’s contracts with customers. Revenue is recognized when a customer obtains control of a good or service and thus has the ability to direct the use and obtain the beneﬁts from the good or service. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations. The standard is effective for annual periods beginning on or after 1 January 2017 and earlier application is permitted. The Company is in the process of assessing the impact on the consolidated ﬁnancial statements. IFRS 9, ‘Financial instruments’, addresses the classiﬁcation, measurement and recognition of ﬁnancial assets and ﬁnancial liabilities. The complete version of IFRS 9 was issued in July 2014. It replaces the guidance in IAS 39 that relates to the classiﬁcation and measurement of ﬁnancial instruments. IFRS 9 retains but simpliﬁes the mixed measurement model and establishes three primary measurement categories for ﬁnancial assets: amortized cost, fair value through OCI and fair value through P&L. The basis of classiﬁcation depends on the entity’s business model and the contractual cash ﬂow characteristics of the ﬁnancial asset. Investments in equity instruments are required to be measured at fair value through proﬁt or loss with the irrevocable option at inception to present changes in fair value in OCI not recycling. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39. For ﬁnancial liabilities there were no changes to classiﬁcation and measurement except for the recognition of changes in the Company’s own credit risk in other comprehensive income, for liabilities designated at fair value through proﬁt or loss. IFRS 9 relaxes the requirements for hedge effectiveness by replacing the bright line hedge effectiveness tests. It requires an economic relationship between the hedged item and hedging instrument and for the ‘hedged ratio’ to be the same as the one Management used for risk management purposes. Contemporaneous 76 Consolidated Financial Statements documentation is still required but is different to that currently prepared under IAS 39. The standard is effective for accounting periods beginning on or after 1 January 2018. Early adoption is permitted. The Company is in the process of assessing the impact of the IFRS 9’s on the consolidated ﬁnancial statements. At the date of the ﬁnancial statements, the Company’s Management is in the process of quantifying the effects of adoption of the new standards and amendments mentioned above. There are no additional standards, amendments or interpretations issued but not effective that could have a signiﬁcant effect on the Company. Note 4 - Financial risk management 4.1 Financial risk factors The Company’s activities expose it to various ﬁnancial risks: market risk (including foreign exchange risk, interest rate risk on cash ﬂows and interest rate risk on fair value), credit risk and liquidity risk. The Company’s risk management plan considers the unpredictability of the ﬁnancial markets and seeks to minimize the potential negative effects on the ﬁnancial performance of the Company. The Company uses derivative ﬁnancial instruments to hedge some risk exposures. The objective is to protect the ﬁnancial health of the business taking into account the volatility associated with exchange rates and interest rates. Additionally, due to the nature of the industries in which it participates, the Company has entered into derivative hedges of input prices. Alpek’s controlling company has a Risk Management Committee, constituted by the Chairman, the Chief Executive Officer, the Chief Financial Officer and the ﬁnancial executive who acts as technical secretary. The Committee oversees derivative transactions proposed by the Company in which the maximum possible loss exceeds US$1,000. This Committee supports both the Executive Director and the Chairman of the Company. All new derivative transactions that the Company proposes to make, and the renewal of existing derivatives, require approval by both the Company and ALFA in accordance with the following schedule of authorizations: Company’s Chief Executive Officer ALFA Risk Management Committee Finance Committee ALFA’s Board of Directors Possible Maximum Loss US$ Individual transactions Annual cumulative transactions 1 30 100 >100 5 100 300 >300 The proposed transactions must meet certain criteria, including that the hedges are lower than exposures, and that they are the result of a fundamental analysis and properly documented. Sensitivity analyses and other risk analyses should be performed before the operation is carried out. a) Market risk i. Exchange rate risk The Company operates internationally and is exposed to foreign exchange risk, primarily related to the Mexican peso and the US dollar. The Company is exposed to foreign exchange risk arising from future commercial transactions in assets and liabilities in foreign currencies and investments abroad. 77 ALPEK 2014 ANNUAL REPORT The respective exchange rates of the Mexican peso and the US dollar are very important factors for the Company due to the effect they have on their results. Moreover, Alpek has no inﬂuence whatsoever, over their movements. On the other hand, Alpek estimates that most of its revenues are denominated in foreign currency, either because they come from products that are exported from Mexico, or because they come from products that are manufactured and sold abroad, or because even if sold in Mexico the price of such products are set based on international prices in foreign currencies such as the US dollar. For this reason, in the past, when the Mexican peso has appreciated in real terms against other currencies such as the U. S. dollar, the Company’s proﬁt margins have been reduced. On the other hand, when the Mexican peso has lost value, the Company’s proﬁt margins have been increased. However, although this factor correlation has appeared on several occasions in the recent past, there is no assurance that it will be repeated if the exchange rates between the Mexican peso and other currencies ﬂuctuate again. The Company participates in operations with derivative ﬁnancial instruments on exchange rates for the purpose of controlling the total comprehensive cost of its ﬁnancing and the volatility associated with exchange rates. Additionally, it is important to note the high “dollarization” of the Company’s revenues, since a large proportion of its sales are made abroad, providing a natural hedge against its obligations in dollars, while at the same time its income level is affected in the event exchange rate appreciation. Based on the overall exchange rate exposure at December 31, 2014 and 2013, a hypothetical variation of 5% in the exchange rate MXN/USD, holding all other variables constant, would result in an effect on the income statement by Ps 31,465 and Ps 7,295, respectively. See Note 16. 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, principally. In the most recent years, the price of some inputs has shown volatility, especially those arising from 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. The practice in the industry in North America has been to set prices on a cost plus margin basis, by reference to a price formula for transferring the variations in the costs of the main raw materials and energy to achieve a predictable margin. At the same time, the Company has entered into transactions involving derivatives on natural gas, gasoline, ethylene, ethane, paraxylene and brent crude seeking to reduce the volatility of prices of these inputs, the Company does not suffer ﬂuctuations upward or downward. 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 its products. The derivative ﬁnancial operations have been privately contracted with various ﬁnancial institutions, whose ﬁnancial strength was highly rated at the time by rating agencies. The documentation used to formalize the contract operations is that based generally on the “Master Agreement”, generated by the “International Swaps & Derivatives Association” (“ISDA”), which is accompanied by various accessory documents known in generic terms as “Schedule”, “Credit Support Annex” and “Conﬁrmation”. 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 in South Texas, USA, which has experienced the volatility. For its part, the CFE is a decentralized public company in charge of producing and distributing electricity in Mexico. Electricity rates have also been inﬂuenced by the volatility of natural gas, since most power plants are gas-based. 78 Consolidated Financial Statements The Company entered into various derivative agreements with various counterparties to protect it 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 from volatility by taking positions that provide stable cash ﬂow expectations, and thus avoid price uncertainty. The reference market price for natural gas is the “Henry Hub New York Mercantile Exchange (NYMEX)”. The average price per MMBTU for 2014 and 2013 was 4.32 and 3.72 US dollars, respectively. At December 31, 2014, the Company had hedges of natural gas, gasoline, ethylene, ethane, paraxylene and brent crude prices for a portion expected of consumption needs in Mexico and the United States. Based on the general input exposure at December 31, 2014 and 2013, a 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 on the income statement for 2014 and 2013. iii. Interest rate risk and cash ﬂow The interest rate risk for the Company arises from long-term loans. Loans at variable rates expose the Company to interest rate risk on cash ﬂows that are partially offset by cash held at variable rates. Loans at ﬁxed rates expose the Company to interest rate risk at fair value. For the purpose of controlling the total comprehensive cost of its ﬁnancing and the volatility of interest rates, the Company has contracted interest rate swaps to convert certain variable rate loans to ﬁxed rates. At December 31, 2014 and 2013, if interest rates on variable rate loans were increased/decreased by 10%, interest expense, in the income statement, would increase/decrease by Ps 3,920 and Ps 3,495, 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 wholesale customers are rated independently, these are the ratings used. If there is no independent rating, the Company´s risk control group 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 credit risk analysis is performed regularly. During 2014 and 2013, credit limits were not exceeded and Management does not expect losses in excess of the impairment recognized in 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, signiﬁcant estimates have to be made. 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 appropriate timing for the recognition of allowances, including historical collection experience, customer base, current economic trends and the ageing of the accounts receivable portfolio. 79 ALPEK 2014 ANNUAL REPORT c) Liquidity risk In the past, the Company has generated and expects to continue generating positive operation cash ﬂows. Operation cash ﬂows mainly represent the inﬂow of net income (adjusted for depreciation and other items not related to cash) and the outﬂow of working capital increases necessary to grow the business. Cash ﬂows used in investment activities, represent capital expenditures (Capex) required for the growth, as well as business acquisitions. Financing activities cash ﬂows are related mainly with the indebtedness changes to grow the business or indebtedness paid with cash of operations or reﬁnancing operations, as well as dividends paid. The main cash ﬂow needs of the Company are used for working capital, Capex, maintenance, business combinations and payment of debt. The Company’s abilities to ﬁnance cash ﬂow needs depend on the continuous ability to generate cash operations, general capacity and terms of ﬁnance agreements, as well as access to capital markets. The Company believes that the future cash ﬂows of operations together with the access to funds available under such ﬁnance agreements and capital markets, will provide it with adequate resources to ﬁnance predictable operating requirements, Capex, acquisitions and new business development activities. The following tables analyze the derivative and non-derivative ﬁnancial liabilities, grouped according to their maturity, from the statements of ﬁnancial position date to the contractual maturity date. Derivative ﬁnancial liabilities are included in the analysis to know the timing of the Company’s cash ﬂows for these liabilities. The amounts disclosed in the table are contractual undiscounted cash ﬂows. 80 Consolidated Financial Statements The detail of maturities of existing ﬁnancial liabilities at December 31, 2014 and 2013, is as follows(1): Less than 1 year Between 1 and 2 years Between 2 and 5 years More than 5 years At December 31, 2014 Current portion of long-term debt Ps 11,166 Ps Short-term bank loans Notes payable Cumulative interest payable Affiliated companies Suppliers 290,388 25,360 160,689 683,196 9,881,575 Other accounts payable and accrued expenses 1,676,055 Derivative ﬁnancial instruments 796,283 Debt (excluding issuance expenses) Senior notes (excluding issuance expenses) - - Ps - - - Ps - - - - - - 746,381 1,451,067 2,827,257 - - - 100,271 360,147 - - - - 148,382 1,026,459 - - - - 432,156 - 13,959,263 Less than 1 year Between 1 and 2 years Between 2 and 5 years More than 5 years At December 31, 2013 Current portion of long-term debt Ps 261,530 Ps Short-term bank loans Notes payable Cumulative interest payable Affiliated companies Suppliers Other accounts payable and accrued expenses Derivative ﬁnancial instruments Debt (excluding issuance expenses) Senior notes (excluding issuance expenses) 447,190 44,363 139,093 395,964 8,847,817 1,176,250 19,352 - - Ps - - - - - - Ps - - - 616,478 1,197,653 3,093,232 - - - 6,559 873,909 - - - - 7,240 588,442 - - - - - - 12,400,441 (1) Amounts included are undiscounted contractual cash ﬂows; therefore, they differ from the amounts included in the consolidated ﬁnancial statements and in Note 19. 81 ALPEK 2014 ANNUAL REPORT The Company expects to meet its obligations with cash ﬂows generated by operations. Additionally, the Company has access to credit lines with various banks to meet possible requirements. At December 31, 2014 and 2013 the Company has unused committed credit lines for a total of 345 and 273 million of US dollars, respectively. 4.2 Capital management The Company’s objectives when managing equity are to safeguard the Company’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and beneﬁts for other stakeholders and to maintain an optimal capital structure so as to reduce the cost of equity. To maintain or modify the equity structure, the Company may adjust the amount of dividends paid to shareholders, return equity to shareholders, issue new shares or sell assets to reduce debt. The Company monitors equity based on the degree of leverage. This ratio is calculated by dividing total liabilities by total equity. The ﬁnancial ratio of total liabilities/total equity was 1.19 and 1.15 at December 31, 2014 and 2013, respectively. 4.3 Fair value estimation The following is an analysis of ﬁnancial instruments measured by the fair value valuation method. The 3 different levels used are presented below: • • Level 1: Quoted prices for identical instruments in active markets. Level 2: Other valuations including quoted prices for similar instruments in active markets that are directly or indirectly observable. • Level 3: Valuations made through techniques wherein one or more of their signiﬁcant data inputs are non-observable. The following table presents the Company’s assets and liabilities that are measured at fair value at December 31, 2014: Assets Derivative ﬁnancial instruments with trading accounting treatment Derivative ﬁnancial instruments with hedge accounting treatment Financial assets available for sale Total Liabilities Derivative ﬁnancial instruments with trading accounting treatment Derivative ﬁnancial instruments with hedge accounting treatment Total 82 Level 1 Level 2 Level 3 Total Ps Ps Ps Ps - - - - - - - Ps Ps - - - - Ps Ps - - - - 128,475 128,475 Ps 128,475 Ps 128,475 Ps 85,113 Ps 959,823 Ps 1,044,936 Ps - - - Ps 85,113 959,823 Ps 1,044,936 Consolidated Financial Statements The following table presents the Company’s assets and liabilities that are measured at fair value at December 31, 2013: Assets Derivative ﬁnancial instruments with trading accounting treatment Derivative ﬁnancial instruments with hedge accounting treatment Financial assets available for sale Total Liabilities Derivative ﬁnancial instruments with trading accounting treatment Derivative ﬁnancial instruments with hedge accounting treatment Total Level 1 Level 2 Level 3 Total Ps Ps Ps Ps - - - - - - - Ps 58,477 Ps 28,015 - - - 92,581 Ps 58,477 28,015 92,581 Ps 86,492 Ps 92,581 Ps 179,073 Ps 1,832 Ps 31,319 Ps 33,151 Ps - - - Ps 1,832 31,319 Ps 33,151 There are no transfers between levels 1 and 2, or between levels 2 and 3 in the reported periods. Level 1 The fair value of ﬁnancial instruments traded in active markets is based on quoted market prices at the statement of ﬁnancial position date. A market is considered active if quoted prices are clearly and regularly available from a stock exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regular market transactions at arm-length conditions. The trading price used for ﬁnancial assets held by Alpek is the current bid price. Level 2 The fair value of ﬁnancial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximize the use of observable market data when available and rely as little as possible on estimates speciﬁc to the Company. If all signiﬁcant inputs required to measure an instrument at fair value are observable, the instrument is classiﬁed at Level 2. Level 3 If one or more of the signiﬁcant inputs is not based on observable market data, the instrument is classiﬁed at Level 3. Speciﬁc valuation techniques used to value ﬁnancial instruments include: • Market quotations or offers from retailers for similar instruments. • • The fair value of swaps is calculated as the present value of future cash ﬂows estimated in observable return curves. The fair value of forward contracts is determined using exchange rates at the statements of ﬁnancial position date, when the resulting value is discounted at present value. • Other techniques, such as the analysis of discounted cash ﬂows, used to determine the fair value of the remaining ﬁnancial instruments. 83 ALPEK 2014 ANNUAL REPORT Financial assets included within this level are only ﬁnancial assets available for sale, which correspond to investment in company’s shares that are not quoted in the active market and therefore, the fair value may not be reliably determined. Note 5 - Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 5.1 Critical accounting estimates and assumptions The Company makes estimates based on assumptions concerning the future. The resulting accounting estimates will be, by deﬁnition, seldom equal to the related actual results. The estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁnancial year are the following: a) Property, plant, equipment and ﬁnite life intangibles The Company estimates the useful lives of its property, plant and equipment and ﬁnite life intangibles in order to determine the depreciation and amortization expense, respectively, to be recorded during the reporting period. The useful life of these assets is calculated when the asset is acquired and is based on the past experience with similar assets, considering advance technological changes or changes of other kind. If technological changes would occur faster than estimated, or differently from anticipated, the useful lives assigned to these assets may need to be reduced. This would result in the recognition in a greater depreciation and amortization expense in future periods. Alternatively, these types of technological changes may result in recognizing a charge for impairment to show the reduction in the value of assets. The Company reviews assets annually to know if they show signs of impairment, or when certain events or circumstances indicate that the carrying amount cannot be recovered during the remaining life of the assets, in case there are signs of impairment, the Company carries out a study to determine the value in use of assets. At December 31, 2014 and 2013, there were no signs of impairment. b) Income tax The Company is subject to income taxes in numerous jurisdictions and critical judgment is required to determine the global income tax provisions. There are many transactions and calculations for which the ultimate tax determination could be uncertain. The Company recognizes liabilities in anticipation of a tax audit based on estimates of whether additional taxes will be paid. When the ﬁnal tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made. If income before taxes increases/decreases by 5%, income tax will be increased/decreased by Ps 32,957. c) The fair value of derivative ﬁnancial instruments The fair value of ﬁnancial instruments that are not traded in an active market is determined by using fair value hierarchies. The Company uses its judgment to select a variety of methods and make assumptions that are based mainly on market conditions existing at the end of each reporting period. If the fair value estimation varies by 5%, the effect on income would be modiﬁed by Ps 52,247. 84 Consolidated Financial Statements d) Pension beneﬁts The present value of pension obligations depends on a number of factors determined on an actuarial basis using different assumptions. Assumptions used in the determination of the net cost (income) for pensions include the discount rate. Any change in the assumptions will impact the carrying amounts of pension obligations. The Company determines the adequate discount rate at year end. This interest rate should be used to determine the present value of future cash outﬂows expected required to settle pension obligations. In the determination of the appropriate discount rate, the Company considers the discount interest rate in conformity with IAS 19 (Revised) “Employee beneﬁts” denominated in the currency used to pay beneﬁts with terms at maturity that approximate the obligations terms of related pension obligations. Other key assumptions for pension obligations are based, in part, on the current market conditions. See analysis of sensibility in Note 20. 5.2 Critical judgments in applying the entity’s accounting policies a) Basis of Consolidation The ﬁnancial statements include the assets, liabilities and results of all entities in which the Company has a controlling interest. The balances and signiﬁcant intercompany transactions have been eliminated in consolidation. To determine control, the Company considers whether it has the power to govern the ﬁnancial and operational strategy of the respective entity and not just the power of the capital held by the Company. As a result of this analysis, the Company has exercised critical judgment to decide whether to consolidate the ﬁnancial statements of Polioles and Indelpro, where the determination of control is not clear. Based on the principal substantive right of Alpek in accordance with the by-laws of Polioles to appoint the General Director, who has control over the relevant decision making and based on the by-laws of Indelpro and supported in the General Law of Mercantile Organizations, which allow Alpek to control the decisions over relevant activities by a simple majority through an ordinary shareholders’ meeting, where it holds 51% of Indelpro. Management has concluded that there are circumstances and factors described in the bylaws of Polioles and applicable standards that allow the Company to conduct the daily operations of Polioles and Indelpro, therefore, demonstrate control. The Company will continue to evaluate these circumstances at the date of each statement of ﬁnancial position to determine if this critical judgment is still valid. If the Company determines that it has no control over Polioles and Indelpro, they will need to be deconsolidated and be recorded using the equity method. Note 6 - Cash and cash equivalents The cash and cash equivalents are comprised as follows: At December 31, 2014 2013 Cash and bank accounts Short-term bank deposits Ps 1,792,869 Ps 1,790,898 3,950,947 2,946,190 Cash and cash equivalents Ps 5,743,816 Ps 4,737,088 85 ALPEK 2014 ANNUAL REPORT Note 7 - Restricted cash and cash equivalents The Company has restricted cash of approximately Ps 3,185 and Ps 2,840 at December 31, 2014 and 2013. The balances are required to be held in escrow as deposits related to workers compensation reserves. The restricted cash balance is classiﬁed as current assets in the statement of ﬁnancial position based on the maturity date of the restriction. Note 8 - Trade and other receivables, net Trade and other accounts receivable are comprised as follows: At December 31, 2014 2013 Trade receivables Ps 10,169,506 Ps 10,008,669 Provision for impairment in trade receivables ( 392,579 ) ( 332,601 ) Trade receivables, net 9,776,927 9,676,068 Accounts receivable from related parties (Note 9) Recoverable taxes Interest receivable Other debtors Current portion 1,389,713 1,819,293 15 260,422 1,429,908 1,402,607 940 325,412 Ps 13,246,370 Ps 12,834,935 Customers and other accounts receivable include past-due balances of Ps 1,476,294 and Ps 1,743,399 at December 31, 2014 and 2013, respectively. The analysis by age of the balances due from customers and other receivables not covered by impairment provisions is as follows: At December 31, 2014 Past due balances 1 to 30 days 30 to 90 days 90 to 180 days More than 180 days Trade and other accounts receivable Ps 688,165 Ps 154,115 Ps 24,421 Ps 609,593 At December 31, 2013 Past due balances 1 to 30 days 30 to 90 days 90 to 180 days More than 180 days Trade and other accounts receivable Ps 796,320 Ps 325,825 Ps 239,260 Ps 381,994 86 At December 31, 2014 and 2013, trade and other accounts receivable of Ps 392,579 and Ps 332,601, respectively were totally impaired. Trade and other accounts receivable impaired correspond mainly to companies going through difficult economic situations. Part of the impaired accounts is expected to be recovered. Movements in the provision for impairment of trade and other receivables are analyzed as follows: Consolidated Financial Statements 2014 2013 Initial balance (January 1) ( Ps 332,601 ) ( Ps 241,897 ) Provision for impairment in trade receivables Receivables written off during the year Provision for unused written off impairment ( 87,495 ) 23,928 3,589 ( 160,565 ) 4,292 65,569 Final balance (December 31) ( Ps 392,579 ) ( Ps 332,601 ) The maximum risk in accounts receivable is the carrying amount at December 31, 2013. Note 9 - Related party transactions Related party transactions were carried out at market values. At December 31, 2014 Loans granted to related parties Accounts receivable Amount Currency Maturity date DD/MM/YY Interest rate Accounts payable Ps Ps 189,781 - 228,051 - - 121,316 351,807 130,914 (1) 361,941 5,887 16 (1) - USD USD USD USD USD 23/12/2015 7.33% Ps 29/05/2015 29/05/2015 1.61% 1.61% - - 40,028 - - 643,168 Alfa Affiliate Partners with signiﬁcant inﬂuence over certain subsidiaries Total Ps 539,148 Ps 850,565 Ps 683,196 Loans granted to related parties At December 31, 2013 Accounts receivable Amount Currency Maturity date DD/MM/YY Interest rate Accounts payable Ps Ps 189,782 - 231,192 - - - - 184,774 USD USD USD USD USD USD USD / MXN 312,570 93,084 (1) 321,573 56,918 13,077 13,000 13,938 (1) - 26/12/2014 7.33% Ps 16/06/2014 30/05/2014 15/01/2014 16/06/2014 3.59% 2.53% 3.59% 6.87% - - 25,622 - - - 266,756 Amount Currency Ps - - 103,586 (2) MXN - - - - Alfa Affiliate Partners with signiﬁcant inﬂuence over certain subsidiaries Total Ps 605,748 Ps 824,160 Ps 292,378 Ps 103,586 (1) Are the interests accrued corresponding to the loans included. (2) Is an account payable from a sale of assets. 87 ALPEK 2014 ANNUAL REPORT Revenue and other with related parties Finished goods Raw materials Interest Year ended December 31, 2014 Administrative services Dividends Energetics Lease Other Alfa Affiliate Associated Shareholders with signiﬁcant inﬂuence over subsidiaries Ps Ps - 267,274 - 1,981,823 Ps Ps - 4,860 - - 23,731 8,602 165 - - - 927 - Ps Ps - 84,863 - Ps - 56,129 - Ps - - - - - 9,009 Total Ps 2,249,097 Ps 4,860 Ps 32,498 Ps 927 Ps 84,863 Ps 56,129 Ps 9,009 Ps - - - 144 144 Finished goods Raw materials Interest Year ended December 31, 2013 Administrative services Dividends Energetics Lease Other Alfa Affiliate Associated Shareholders with signiﬁcant inﬂuence over subsidiaries Ps Ps - 333,122 - 1,960,637 Ps Ps - 12,805 - - 22,775 14,537 - - Ps - - 1,745 - Ps - 43,444 - - Total Ps 2,293,759 Ps 12,805 Ps 37,312 Ps 1,745 Ps 43,444 Ps - - - - - Ps Ps - - - 7,035 - 1,301 - 275 Ps 7,035 Ps 1,576 Cost of sales and expenses with related parties Affiliate Shareholders with signiﬁcant inﬂuence over subsidiaries Finished goods Raw materials Administrative services Technical assistance Energetics Lease Commissions Other Ps - Ps 17,446 Ps 174,206 Ps - Ps 167,667 Ps - Ps - Ps - Year ended December 31, 2014 1,580,553 685,610 106,947 69,087 - 2,433 25,905 68,696 Total Ps 1,580,553 Ps 703,056 Ps 281,153 Ps 69,087 Ps 167,667 Ps 2,433 Ps 25,905 Ps 68,696 Affiliate Shareholders with signiﬁcant inﬂuence over subsidiaries Finished goods Raw materials Administrative services Technical assistance Energetics Lease Commissions Other Ps - Ps 15,771 Ps 133,815 Ps - Ps 227,099 Ps - Ps - Ps 1,308 Year ended December 31, 2013 1,331,934 279,083 151,713 82,753 - 2,413 32,756 22 Total Ps 1,331,934 Ps 294,854 Ps 285,528 Ps 82,753 Ps 227,099 Ps 2,413 Ps 32,756 Ps 1,330 For the year ended December 31, 2014, wages and beneﬁts received by top officials of the Company were Ps 250,921 (Ps 225,791 in 2013), 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 report that they had no signiﬁcant transactions with related parties or conﬂicts of interest to disclose at December 31, 2014 and 2013. The conditions of the above considerations are equivalent to those of similar transactions with independent parties and the entity. 88 Consolidated Financial Statements Note 10 - Inventories At December 31, 2014 2013 Finished goods Ps 5,937,774 Ps 6,490,653 Raw material and other consumables Materials and tools Work in process 4,175,773 877,025 495,336 4,075,258 728,708 483,095 Ps 11,485,908 Ps 11,777,714 For the years ended at December 31, 2014 and 2013, the cost of raw materials used and the changes in inventories of work in process and ﬁnished goods recognized in the cost of sales amounted to Ps 79,757,100 and Ps 82,436,458, respectively. For the years ended December 31, 2014 and 2013 it was recognized in the statement of income a provision amounting to Ps 18,894 and Ps 37,929, respectively, related to damaged, slow-moving and obsolete inventory. At December 31, 2014 and 2013 there were no inventories in guarantee. 89 ALPEK 2014 ANNUAL REPORT Note 11 – Property, plant and equipment, net Land Buildings and constructions Machinery and equipment Transportation equipment Furniture, lab and information technology equipment Construction in process Others ﬁxed assets Total Ps 2,746,401 Ps 8,816,950 Ps 41,050,792 Ps 214,804 Ps 903,908 Ps 1,330,506 Ps 388,357 Ps 55,451,718 - ( 5,386,517 ) ( 22,557,035 ) ( 138,053 ) ( 674,703 ) - - ( 28,756,308 ) Ps 2,746,401 Ps 3,430,433 Ps 18,493,757 Ps 76,751 Ps 229,205 Ps 1,330,506 Ps 388,357 Ps 26,695,410 At January 1, 2013 Deemed cost Accumulated depreciation Carrying amount at January 1, 2013 For the year ended December 31, 2013 Translation effect Additions Disposals Impairment Depreciation charge recognized in the year Transfers 2,290 594 ( 1,862 ) 7,432 19,677 ( 1,478 ) ( 24,601 ) 1,003,281 ( 5,443 ) - - ( 328,262 ) ( 1,956,524 ) ( 191,571 ) ( 1,585,695 ) 2,959 ( 31,661 ) 330,450 ( 1,194 ) 2,774 ( 370 ) ( 2,000 ) ( 15,280 ) 1,309 61,990 210,160 ( 148,170 ) ( 16 ) 13,638 12,868 1,435,187 4,491 34,532 2,040 2,508,913 ( 160 ) ( 91 ) ( 12,218 ) ( 21,622 ) - ( 25,863 ) ( 81,376 ) ( 2,394,025 ) ( 63,483 ) 52,552 230,966 - - ( 1,856,029 ) ( 662,916 ) 2,090,461 78,509 412,295 ( 228,798 ) 24,705,889 970,629 2,090,461 412,295 54,803,962 ( 739,663 ) - - ( 30,098,073 ) Carrying amount at December 31, 2013 2,750,382 2,904,570 16,255,225 At December 31, 2013 Deemed cost Accumulated depreciation 2,750,382 8,400,983 39,969,052 - ( 5,496,413 ) ( 23,713,827 ) Carrying amount at December 31, 2013 Ps 2,750,382 Ps 2,904,570 Ps 16,255,225 Ps 61,990 Ps 230,966 Ps 2,090,461 Ps 412,295 Ps 24,705,889 Additions Disposals Impairment Translation effect Depreciation charge recognized in the year Transfers 78,806 ( 1,907 ) - 21,767 - - 255,207 ( 217 ) ( 4,649 ) 159,770 338,058 1,900,474 - 1,153 ( 177,545 ) ( 1,375,170 ) 536,758 2,029,669 3,198 ( 3,301 ) ( 269 ) 6,629 ( 11,147 ) 12,014 7,246 1,385,181 ( 52 ) ( 30 ) 24,742 ( 62,202 ) ( 4,905 ) - 84,957 - 24,746 ( 15,950 ) - 1,776,151 ( 26,332 ) ( 4,948 ) 51,818 2,566,448 - ( 1,626,064 ) 36,999 ( 2,636,933 ) 21,471 1,131 Carrying amount at December 31, 2014 2,988,204 3,623,608 19,060,539 69,114 237,669 918,761 494,380 27,392,275 At December 31, 2014 Deemed cost Accumulated depreciation 2,988,204 9,965,060 47,019,030 243,598 1,131,484 918,761 494,380 62,760,517 - ( 6,341,452 ) ( 27,958,491 ) ( 174,484 ) ( 893,815 ) - - ( 35,368,242 ) Carrying amount at December 31, 2014 Ps 2,988,204 Ps 3,623,608 Ps 19,060,539 Ps 69,114 Ps 237,669 Ps 918,761 Ps 494,380 Ps 27,392,275 Depreciation expense of Ps 1,608,083 and Ps 1,840,795 has been charged in cost of sales, Ps 1,811 and Ps 2,070, in selling expenses and Ps 16,170 and Ps 13,164, in administrative expenses in 2014 and 2013, respectively. During 2013, impairment charge of Ps 2,223,749 related to the closing of the Cape Fear plant (See Note 2), was recorded in the income statement within “Non-recurring items”. Additionally, within the other expenses items, net, a charge for impairment amounting to Ps 170,276 (See note 26) was recorded. The Company has capitalized costs of loans in qualiﬁed assets for Ps 90,064 and Ps 82,298 for the years ended December 31, 2014 and 2013, respectively. Costs from loans were capitalized at the weighted average rate of loans that amount to approximately 6.42%. 90 Consolidated Financial Statements Note 12 – Goodwill and intangible assets, net Finite life Indeﬁnite life Development costs Trademarks Non-compete agreements Customer relationships Software and licenses Intellectual property rights and others Goodwill Others Total Cost At January 1, 2013 Ps 301,295 Ps 400 Ps 61,148 Ps 473,437 Ps 63,671 Ps 1,558,610 Ps 220,741 Ps 4,181 Ps 2,683,483 Translation effect Additions 18,525 263,666 At December 31, 2013 583,486 Additions Translation effect Additions through business combination Transfers 5,710 73,599 - - - - 400 - - - - At December 31, 2014 662,795 400 Amortization At January 1, 2013 ( 162,286 ) ( 400 ) Amortization Translation effect ( 35,043 ) ( 1,076 ) - - 312 - 61,460 94,387 10,324 31,709 - 197,880 ( 29,302 ) ( 15,068 ) ( 446 ) Amortization Transfers ( 39,454 ) - Translation effect ( 28,663 ) - - - At December 31, 2014 ( 266,522 ) ( 400 ) Net carrying amount Cost Amortization 583,486 ( 198,405 ) 400 ( 400 ) 2,416 - ( 1,255 ) - 21,337 527,352 1,127 - 70 1,653 42,532 792,671 475,853 62,416 2,107,299 221,868 5,904 3,518,686 - 59,735 - - 21,316 6,422 2,703,416 429,031 - - - 27,760 - 27,851 - - 310 777 - - 2,825,139 607,739 31,709 27,760 535,588 90,154 5,267,506 249,719 6,991 7,011,033 ( 66,133 ) ( 36,997 ) ( 1,066 ) ( 32,500 ) ( 149,367 ) ( 4,631 ) 1,190 ( 76,816 ) ( 2,275 ) ( 45,515 ) ( 38,363 ) ( 3,607 ) - - ( 17,180 ) ( 3,651 ) ( 86,417 ) ( 7,425 ) ( 37,187 ) ( 159,739 ) ( 43,199 ) ( 359,487 ) - ( 8,445 ) ( 98,776 ) - - - - - - - - - - - - - - - - ( 439,988 ) ( 168,555 ) ( 3,673 ) ( 612,216 ) ( 213,356 ) ( 7,425 ) ( 95,126 ) ( 928,123 ) 61,460 475,853 62,416 2,107,299 221,868 5,904 3,518,686 ( 44,816 ) ( 104,196 ) ( 35,941 ) ( 228,458 ) - - ( 612,216 ) At December 31, 2013 ( 198,405 ) ( 400 ) ( 44,816 ) ( 104,196 ) ( 35,941 ) ( 228,458 ) At December 31, 2013 Ps 385,081 Ps - Ps 16,644 Ps 371,657 Ps 26,475 Ps 1,878,841 Ps 221,868 Ps 5,904 Ps 2,906,470 Cost Amortization 662,795 ( 266,522 ) 400 ( 400 ) 197,880 ( 98,776 ) 535,588 90,154 5,267,506 249,719 6,991 7,011,033 ( 159,739 ) ( 43,199 ) ( 359,487 ) - - ( 928,123 ) At December 31, 2014 Ps 396,273 Ps - Ps 99,104 Ps 375,849 Ps 46,955 Ps 4,908,019 Ps 249,719 Ps 6,991 Ps 6,082,910 Of the total amortization expenses: Ps 213,223 and Ps 168,384 were charged to cost of sales, Ps 97 and Ps 40 to selling expenses and Ps 36 and Ps 131 to administrative expenses in 2014 and 2013, respectively. Research expenses and development incurred and recorded in the results of 2014 and 2013 were Ps 40,994 and Ps 37,872, respectively. Management assesses its operations through two business segments: the Polyester business chain and the Plastics and Chemicals business, see Note 30. The goodwill was originated and is presented in the Polyester segment. 91 ALPEK 2014 ANNUAL REPORT Impairment testing of goodwill Goodwill is allocated to operating segments that are expected to beneﬁt from the synergies of the business combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units or groups of units, goodwill arising from the Polyester segment for a total of Ps 249,719 and Ps 221,868 at December 31, 2014 and 2013, respectively. The amount of recovery from the operating segments has been determined based on calculations of values in use. These calculations use cash ﬂow projections based on pre-tax ﬁnancial budgets approved by Management covering a period of 5 years. The key assumptions used in calculating the value in use in 2014 and 2013 were as follows: Estimated gross margin Growth rate Discount rate 2014 4.0% 3.8% 9.8% 2013 4.0% 3.8% 10.2% With regard to the calculation of the value in use of the operating segments, the Company’s Management considers that a possible change in the key assumptions used, would not cause the carrying amounts of the operating segments exceed materially their value in use. Note 13 – Other non-current assets At December 31, 2014 2013 Other receivables, net Ps 103,202 Ps 190,513 Financial assets available for sale (1) Investment in associates (2) Joint agreements (3) Other non-current ﬁnancial assets 128,475 149,931 - 316,271 92,581 ( 27,862 ) 69,163 302,690 Total other non-current assets Ps 697,879 Ps 627,085 (1) Financial assets available for sale: Unlisted shares Investment in shares with third parties Ps 128,475 Ps 92,581 At December 31, 2014 2013 92 Consolidated Financial Statements The movement of ﬁnancial assets available for sale is as follows: Balance at January 1 Translation effect Additions Disposals 2014 2013 Ps 92,581 10,089 25,912 ( 107 ) Ps 92,208 266 107 - Balance at December 31 Ps 128,475 Ps 92,581 Financial assets available for sale are denominated in the following currencies: USD MXN Other currencies Total At December 31, 2014 2013 Ps 88,308 Ps 40,167 - 52,306 40,167 108 Ps 128,475 Ps 92,581 None of the ﬁnancial assets available for sale is expired or impaired. (2) Investments in associates The accumulated summarized ﬁnancial information for associated companies of the group accounted for by the equity method, not considered material, is as follows: 2014 2013 Net loss ( Ps 155,528 ) ( Ps 119,986 ) Other comprehensive income Ps - Ps - Comprehensive income ( Ps 155,528 ) ( Ps 119,986 ) Investment in associates at December 31 ( Ps 149,931 ) ( Ps 27,862 ) There are no contingent liabilities corresponding to the Company’s equity in investment of associates. (3) Joint arrangements As indicated in Note 2 2014 c) the investment in RusPet began in 2013 and corresponds to the construction of a plant, which had no operations in 2014. 93 ALPEK 2014 ANNUAL REPORT Note 14 – Subsidiaries with signiﬁcant non-controlling interest The signiﬁcant non-controlling interest for the year ended December 31, 2014 and 2013 is integrated as follows: Non-controlling ownership percentage 49% 50% Non-controlling interest income for the period Non-controlling interest at December 31, 2014 2013 2014 2013 Ps 303,590 Ps 334,119 Ps 2,574,644 Ps 2,079,547 226,241 290,620 829,038 539,058 Indelpro, S. A. de C. V. and subsidiary Polioles, S. A. de C. V. and subsidiary The summarized ﬁnancial information at December 31, 2014 and 2013 and for the year then ended, corresponding to each subsidiary with a signiﬁcant non-controlling interest is shown below: Indelpro, S. A. de C. V. and subsidiary Polioles, S. A. de C. V. and subsidiary 2014 2013 2014 2013 Ps 3,908,340 Ps 3,042,245 Ps 3,295,428 Ps 2,672,088 5,492,256 5,046,062 1,822,647 2,323,573 1,701,750 2,142,584 5,254,376 4,243,973 1,181,138 1,906,511 911,978 1,658,077 1,037,738 1,845,783 785,928 1,078,115 10,297,976 9,092,372 9,646,578 9,219,839 619,570 1,206,585 681,876 732,494 452,482 579,961 581,240 613,699 591,227 358,922 289,981 306,849 96,129 512,767 - 461,536 645,248 ( 122,026 ) ( 543,624 ) 942,966 ( 284,479 ) ( 796,086 ) 447,201 ( 101,431 ) ( 255,926 ) 784,186 ( 46,409 ) ( 814,885 ) ( 14,488 ) ( 138,394 ) 142,357 ( 67,879 ) Current asset Non-current asset Current liability Non-current liability Stockholders’ equity Revenues Net proﬁt Comprehensive income for the year Comprehensive income attributable to non-controlling interest Dividends paid to non-controlling percentage Cash ﬂows from operating activities Net cash used in investing activities Net cash used in ﬁnancing activities Net (decrease) increase in cash and cash equivalents 94 Consolidated Financial Statements Note 15 - Financial instruments a) Financial instruments by category Trade receivables and liabilities, at amortized cost Available for sale At December 31, 2014 Financial assets and liabilities at fair value through proﬁt and loss Derivative designated for hedging Total - - - - - 128,475 128,475 - - - - - - - - - - 92,581 92,581 Ps Ps Ps Ps Ps Ps - - - - - - - - - - - - - - - - - - - Ps 5,743,816 3,185 13,246,370 - - 128,475 Ps 19,121,846 Ps 326,914 10,564,770 959,823 959,823 85,113 85,113 Ps - 85,113 Ps 959,823 Ps 11,936,620 At December 31, 2013 Financial assets and liabilities at fair value through proﬁt and loss Derivative designated for hedging Total Ps Ps - - - 58,477 - - - - - - 28,015 - Ps 4,737,088 2,840 12,834,934 58,477 28,015 92,581 Ps 58,477 Ps 28,015 Ps 17,753,935 Financial assets: Cash and cash equivalents Ps 5,743,816 Ps Restricted cash and cash equivalents Trade and other receivable Derivative ﬁnancial instruments with trading accounting treatment Derivative ﬁnancial instruments with hedge accounting treatment Assets available for sale Financial liabilities: Debt 3,185 13,246,370 - - - Ps 18,993,371 Ps Ps 326,914 Ps Suppliers and other accounts payable 10,564,770 Derivative ﬁnancial instruments with hedge accounting treatment Derivative ﬁnancial instruments with trading accounting treatment - - Ps 10,891,684 Ps Trade receivables and liabilities, at amortized cost Available for sale Financial assets: Cash and cash equivalents Ps 4,737,088 Ps Restricted cash and cash equivalents Trade and other receivable Derivative ﬁnancial instruments with trading accounting treatment Derivative ﬁnancial instruments with hedge accounting treatment Assets available for sale Financial liabilities: Debt 2,840 12,834,934 - - - Ps 17,574,862 Ps Ps 753,083 Ps Suppliers and other accounts payable 9,243,781 Derivative ﬁnancial instruments with hedge accounting treatment Derivative ﬁnancial instruments with trading accounting treatment - - Ps 9,996,864 Ps - - - - - Ps Ps - - - 1,832 1,832 Ps - - Ps 753,083 9,243,781 31,319 - 31,319 1,832 Ps 31,319 Ps 10,030,015 95 ALPEK 2014 ANNUAL REPORT b) Credit quality of ﬁnancial assets The credit quality of ﬁnancial assets that are neither past due nor impaired can be assessed by reference to external credit ratings (if available) or to historical information on non-compliance rates of the counterparty: Trade and other receivables Counterparties with external credit rating "A+" "A-" "A" “AAA” “AA” “AA-“ “B” “B+” "BBB+" "BBB" "BBB-" "BB" "BB+" "BB-" Other categories Counterparties without external credit rating Type of costumers X Type of costumers Y Type of costumers Z Ps At December 31, 2014 2013 - 633 124 45,518 97,023 32 159,072 15,543 58,729 325,326 1,908 8,718 - 1,180,048 461,277 2,353,951 9,208,510 907,124 22,493 10,138,127 Ps 134,445 175,679 56,322 - - - - - 73,723 300,216 - 77,653 50,388 1,003,707 546,686 2,418,819 9,124,308 808,710 10,794 9,943,812 Total unimpaired trade receivables Ps 12,492,078 Ps 12,362,631 96 Consolidated Financial Statements At December 31, 2014 2013 Cash and cash equivalents with or without restriction, not including petty cash "A+" "A-" "A" "BBB+" "BBB" "BB+" Other categories Not rated Derivative ﬁnancial instruments "AA-" "A" “A+” “A-” “BBB+” Not rated Ps 931,412 Ps 118,337 559,217 1,868,851 1,317,396 194,785 80,916 276,986 516,495 474,787 409,644 1,452,549 280,271 100,020 1,804,502 99,217 Ps 5,746,058 Ps 4,739,327 Ps Ps - - - - - - - Ps 12,685 36,761 722 19,704 7,210 9,410 Ps 86,492 Group X – New trade and other receivables, net /related parties (less than 6 months). Group Y – Current trade and other receivables, net / related parties (more than 6 months) without default in the past. Group Z – Current trade and other receivables, net /related parties (more than 6 months) with some defaults in the past. All past-due amounts were fully recovered. c) Fair value of ﬁnancial assets and liabilities The amounts of cash and cash equivalents, restricted cash and cash equivalents, customers and other receivables, other current asset, suppliers and other payables, current debt and other current liability approximate to their fair value due to their short maturity. The carrying amount of these accounts represents the expected cash ﬂow. 97 ALPEK 2014 ANNUAL REPORT The carrying amount and the estimated fair value of the rest of the ﬁnancial assets and liabilities are presented as follows: Financial assets Non-current receivable Financial liabilities Non-current debt At December 31, 2014 At December 31, 2013 Carrying amount Fair value Carrying amount Fair value Ps 103,202 Ps 91,612 Ps 190,513 Ps 178,724 15,778,025 16,107,121 13,862,792 13,502,707 The estimated fair values were determined based on discounted cash ﬂows. These fair values consider the non-current portion, of ﬁnancial assets and liabilities, since the current portion approximates to their fair value. This is a fair value measurement of level 3. Note 16 - Derivative ﬁnancial instruments The effectiveness of derivative ﬁnancial instruments designated as hedges is measured periodically. At December 31, 2014 and 2013 the Company’s Management assessed the effectiveness of its hedges for accounting purposes and has concluded that they are highly effective. Notional amounts related to derivative ﬁnancial instruments reﬂect the contracted reference volume; however they do not reﬂect the amounts at risk with respect to future cash ﬂows. The amounts at risk are generally limited to the unrealized proﬁt or loss from the market valuation of such instruments, which may vary according to changes in the market value of the underlying, its volatility and the credit quality of the counterparties. The principal obligations which the Company is subject to depends on the type of contract and the conditions stipulated in each one of the derivative ﬁnancial instruments in force at December 31, 2014 and 2013. Trading derivatives are classiﬁed as current assets or liabilities. The fair value of hedges is classiﬁed as a non-current asset or liability if the maturity of the hedged item is greater than 12 months and as a current asset or liability if the maturity of the hedged item is lesser than 12 months. a) Exchange rate derivatives Derivative ﬁnancial instruments exchange rate positions with trading accounting treatment is summarized as follows (ﬁgures in millions of pesos): Type of derivative, value or contract Notional amount At December 31, 2014 Underlying asset Unit Reference Fair value 2015 Maturity 2016 2017+ US$/MXN ( Ps 986 ) Pesos / Dollar 14.72 ( Ps 73 ) ( Ps 73 ) Ps - Ps Type of derivative, value or contract Notional amount At December 31, 2013 Underlying asset Unit Reference Fair value 2014 Maturity 2015 2016+ US$/MXN ( Ps 837 ) Pesos / Dollar 13.08 Ps - Ps - Ps - Ps - - 98 Consolidated Financial Statements b) Interest rate swaps Positions of derivative ﬁnancial instruments interest rate swaps are summarized as follows (ﬁgures in millions of pesos): Type of derivative, value or contract Notional amount With hedge accounting treatment: At December 31, 2014 Underlying asset Unit Reference Fair value 2015 Maturity 2016 2017+ In Libor rate 1 Ps 589 % per year 0.90 ( Ps 10 ) ( Ps 8 ) ( Ps 2 ) Ps - Type of derivative, value or contract Notional amount With hedge accounting treatment: At December 31, 2013 Underlying asset Unit Reference Fair value 2014 Maturity 2015 2016+ In Libor rate 1 Ps 785 % per year 0.49 ( Ps 20 ) ( Ps 12 ) ( Ps 7 ) ( Ps 1 ) 1 Cash ﬂow hedges c) Energy Positions of derivative ﬁnancial instruments natural gas, gasoline, ethylene, ethane, paraxylene and brent crude, are summarized as follows (ﬁgures in millions of pesos): Type of derivative, value or contract Notional amount With hedge accounting treatment: At December 31, 2014 Underlying asset Unit Reference Fair value 2015 Maturity 2016 Ethylene 1 Ps 7 Cent. Dollar / lb 45.38 ( Ps 1 ) ( Ps 1 ) Ps - Ps Natural gas 1 2,600 Dollar / MBTU Ethane 1 Px 1 Gasoline 1 2 1,585 1,013 Cent. Dollar / Gallon Dollar / MT Dollar / Gallon 3.08 17.59 884 1.62 ( 260 ) ( 1 ) ( 308 ) ( 380 ) With trade accounting treatment: Brent crude 46 Dollar / BBL 63.27 ( 12 ) ( Ps 962 ) ( Ps ( 13 ) ( 1 ) ( 308 ) ( 380 ) ( 12 ) 715 ) 2017+ - ( 149 ) - - - - ( 98 ) - - - - ( Ps 98 ) ( Ps 149 ) 99 ALPEK 2014 ANNUAL REPORT Type of derivative, value or contract Notional amount With hedge accounting treatment: At December 31, 2013 Underlying asset Unit Reference Fair value 2014 Ethylene 1 Ps Natural gas 1 Ethane 1 Px 1 155 345 23 226 Cent. Dollar / lb Dollar / MBTU Cent. Dollar / Gallon Dollar / MT With trade accounting treatment: Gasoline Brent crude 923 60 Dollar / Gallon Dollar / BBL 1 Cash ﬂow hedges 58.75 Ps 4.29 28.03 1,435 2.72 108.53 Ps 12 10 ( 3 ) ( 2 ) 54 2 73 Ps Ps 11 14 ( 3 ) ( 2 ) 54 2 76 Maturity 2015 Ps 2016+ Ps - ( 4 ) - - - - 1 - - - - - Ps 1 ( Ps 4 ) At December 31, 2014 and 2013, the net fair value of derivative ﬁnancial instruments, above mentioned amounts to (Ps 1,044,936) and Ps 53,341, respectively, which is shown in the consolidated statements of ﬁnancial position as follows: Current asset Current liability Non-current liability Fair value at December 31, 2014 2013 Ps - Ps 86,492 ( 757,011 ) ( 287,925 ) ( 7,315 ) ( 25,836 ) Net position ( Ps 1,044,936 ) Ps 53,341 At December 31, 2014 and 2013 there is no collateral in derivative ﬁnancial instruments. Note 17 - Suppliers and other accounts payable At December 31, 2014 2013 Suppliers Ps 9,881,574 Ps 8,847,817 Balances with related parties (Note 9) 683,196 395,964 Ps 10,564,770 Ps 9,243,781 100 Consolidated Financial Statements Note 18 - Provisions At January 1, 2013 Ps - Ps - Ps - Ps - Restructuring and demolition Environmental remediation Indemnities from dismissal and others Total Additions from restructuring Translation effect Payments At December 31, 2013 Transfers Payments Translation effect At December 31, 2014 Short-term provisions Long-term provisions At December 31 493,891 7,225 ( 67,762 ) 433,354 ( 73,590 ) ( 76,799 ) 49,395 365,205 6,406 - 371,611 - ( 17,383 ) 46,170 197,624 5,376 ( 123,651 ) 79,349 73,590 ( 96,369 ) 567 1,056,720 19,007 ( 191,413 ) 884,314 - ( 190,551 ) 96,132 Ps 332,360 Ps 400,398 Ps 57,137 Ps 789,895 2014 2013 Ps 761,652 Ps 832,632 28,243 51,682 Ps 789,895 Ps 884,314 The provisions in the above table are related to the closing of the Cape Fear plant. See Note 2 for more details. Note 19 - Debt Current: Bank loans (1) Current portion of non-current debt Notes payable (1) Current debt Non-current: Senior Notes (3) Unsecured Bank loans (3) Total (2) At December 31, 2014 2013 Ps 290,388 Ps 447,190 11,166 25,360 261,530 44,363 Ps 326,914 Ps 753,083 Ps 13,846,890 Ps 12,293,991 1,829,928 15,676,818 1,723,881 14,017,872 Less: current portion of non-current debt ( 11,166 ) ( 261,530 ) Non-current debt Ps 15,665,652 Ps 13,756,342 (1) The fair value of bank loans and notes payable approximates their current carrying amount, due to the impact of discounting is not signiﬁcant. 101 ALPEK 2014 ANNUAL REPORT (2) These amounts are the amortized cost and include debt issuance cost of Ps 112,373 and Ps 106,450, for 2014 and 2013, respectively. (3) The carrying amounts, terms and conditions of non-current debt are as follows: Description Senior Notes 144A/Reg. S accruing annual interest of 4.50%. Guaranteed by Grupo Petrotemex, Temex, Akra, DAK Americas, DAK Resinas and DAK Mississippi Senior Notes 144A/Reg. S accruing annual interest of 5.375%. Guaranteed by Grupo Petrotemex, Temex, Akra, DAK Americas, DAK Resinas and DAK Mississippi Total Senior Notes Currency Contractual value of debt Debt issuance cost Balance at December 31, 2014 Balance at December 31, 2013 Maturity date DD/MM/YY Interest rate USD 9,566,700 74,645 9,469,218 8,405,182 20-Nov-22 4.50% USD 4,415,400 37,728 4,377,672 3,888,809 8-Aug-23 5.38% Ps 13,846,890 Ps 12,293,991 Balance at December 31, 2014 Balance at December 31, 2013 Currency Maturity date DD/MM/YY Interest rate Description Bank loan bearing annual interest of Libor + 1.60% Bank loan bearing annual interest of Libor + 1.18% Bank loan bearing annual interest of Libor + 1.10% USD USD USD 735,900 294,360 294,360 Bank loan bearing annual interest of BADLAR +2.00% Argentine Peso 43,455 Bank loan bearing annual interest of 19% Argentine Peso 167,493 - - - - - 19-Dec-19 01-Apr-17 02-Apr-18 1.93% 1.49% 1.43% 03-Oct-16 25.83% 01-Apr-20 19.00% Bank loan bearing annual interest of Libor + 1.50%. Committed credit line that accrue annual interest of Libor + 1.60% Bank loan bearing annual interest of Libor + 1.60% Total unsecured bank loans TOTAL USD USD USD 294,360 784,590 01-Apr-16 - - 285,466 31-Jan-15 653,825 16-Aug-16 1.76% 1.77% 1.84% Ps 1,829,928 Ps 1,723,881 Ps 15,676,818 Ps 14,017,872 At December 31, 2014, the annual maturities of non-current debt are as follows: 2016 2017 2018 2019 onwards Total Bank loans Senior Notes Ps 360,147 Ps 325,067 Ps 701,392 Ps 432,156 Ps 1,818,762 - - - 13,846,890 13,846,890 Ps 360,147 Ps 325,067 Ps 701,392 Ps 14,279,046 Ps 15,665,652 102 Consolidated Financial Statements Covenants: Most of the existing debt agreements contain restrictions for the Company, mainly with respect to compliance with certain ﬁnancial ratios among, the most important of which are: a. Interest hedge ratio: deﬁned as the result of dividing the consolidated net income excluding income taxes, share in net income of associates, ﬁnancial cost net, depreciation, amortization and impairment of non-current assets (EBITDA) by the consolidated net interest charges for the period. This factor cannot be lesser than 3.0 times for the last four consecutive ﬁscal quarters. b. Leverage ratio: it is deﬁned as the result of dividing the net consolidated debt by the consolidated EBITDA of the last twelve months. This factor may not be greater than 3.5 times. Additionally, there are other restrictions regarding incurring additional debt or taking loans that require mortgaging assets, dividend payments and submission of ﬁnancial information, which if not met or remedied within a speciﬁed period to the satisfaction of creditors may cause the debt to become payable immediately. During 2014 and 2013, the ﬁnancial ratios were calculated according to the formulas set out in the loan agreements. At December 31, 2014 and the date of issuance of these ﬁnancial statements, the Company and its subsidiaries complied satisfactorily with such covenants and restrictions. Relevant debt transactions: a. On November 20, 2012, Alpek completed an issuance of Senior Notes for a nominal amount of US$650 million with single maturity on November 20, 2022. Interests of Senior Notes will be payable semi-annually at a 4.50% annual rate as from Monday, May 20, 2013. The Senior Notes were issued through a private issuance under Rule 144A of the “Securities Act” of 1933 (“Rule 144A of the Securities Act of 1933”) of the United States of America and they are unconditionally guaranteed, in an unsubordinated manner, for the joint obligation of certain subsidiaries of the Company. Additionally, the issuance of Senior Notes originated issuance costs and expenses to the amount of US$6 million. Issuance of costs and expenses, including the placement discount of Senior Notes are presented net of the debt and amortized together with the loan based on the effective interest rate method. b. On August 8, 2013, Alpek completed an issuance of Senior Notes for a nominal amount of US$300 million with single maturity on August 8, 2023. Interests of Senior Notes will be payable semi-annually at a 5.375% annual rate beginning February 8, 2014. The Senior Notes were issued through a private issuance under Rule 144A of the “Securities Act” of 1933 (“Rule 144A of the Securities Act of 1933”) of the United States of America and they are unconditionally guaranteed, in an unsubordinated manner, for the joint obligation of certain subsidiaries of the Company. Additionally, the issuance of Senior Notes originated issuance costs and expenses in the amount of US$2.40 million. Issuance costs and expenses, including the placement discount of Senior Notes is presented net of the debt and amortized together with the loan based on the effective rate method. c. On September 26, 2013, Grupo Petrotemex paid in advance the principal amount of the “Senior Notes 144A/Reg.S” issued in 2009, the outstanding amount of principal at that date was US$120 million. The net proceeds of the issuance of Senior Notes were used mainly to make advance debt payments of certain subsidiaries of the Company. 103 ALPEK 2014 ANNUAL REPORT Note 20 - Employee beneﬁts The valuation of retirement plan employee beneﬁts includes formal plans (covering approximately 64% of workers in 2014 and 2013) and constructive obligations that covers all employees and is based primarily on their years of service, current age and estimated salary at retirement date. 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 2014 amounted to Ps 74,899 (Ps 43,844 in 2013). Following is a summary of the main ﬁnancial information of such employee beneﬁts: At December 31, 2014 2013 Liability for employees’ beneﬁts: Pension beneﬁts Ps 764,780 Ps 381,288 Post-employment medical beneﬁts Deﬁned contribution liability Employees’ beneﬁts in the statement of ﬁnancial position Charge to the income statement for: 154,349 919,129 44,854 175,644 556,932 - Ps 963,983 Ps 556,932 Pension beneﬁts ( Ps 42,629 ) ( Ps 34,157 ) Post-employment medical beneﬁts ( 7,466 ) ( 50,095 ) ( 11,112 ) ( 45,269 ) Remeasurement of obligations for employees’ beneﬁts recognized in the statement of comprehensive income for the year ( Ps 343,760 ) Ps 598,160 Remeasurement of accumulated obligations for employees beneﬁts ( Ps 227,570 ) Ps 116,190 Pension beneﬁts The Company operates deﬁned beneﬁt pension plans based on employees´ 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 respective trustees (or equivalent) and their composition. 104 The amounts recorded in the statement of ﬁnancial position, are determined as shown below: Consolidated Financial Statements At December 31, 2014 2013 Present value of deﬁned beneﬁt obligations Ps 3,288,794 Ps 2,700,267 Fair value of plan assets ( 2,524,014 ) ( 2,318,979 ) Employees’ beneﬁts in the statement of ﬁnancial position Ps 764,780 Ps 381,288 The movement in the deﬁned beneﬁt obligation during the year is as follows: At January 1 Service cost Interest cost Remeasurements: Gains from changes in ﬁnancial assumptions Gains from change in demographic assumptions and experience adjustments Translation effect Beneﬁts paid (1) Plan reductions (1) Settlements At December 31 2014 2013 Ps 2,700,267 Ps 3,150,578 34,622 128,846 32,154 119,474 183,286 ( 288,066 ) 221,456 286,754 ( 261,005 ) ( 1,280 ) ( 4,152 ) ( 10,768 ) 9,129 ( 280,503 ) ( 20,189 ) ( 11,542 ) Ps 3,288,794 Ps 2,700,267 The movement in the fair value of plan assets for the year is as follows: At January 1 Interest income Remeasurements return on plan assets, excluding interest income Translation effect Contributions Paid beneﬁts (1) At December 31 2014 2013 ( Ps 2,318,980 ) ( Ps 2,195,740 ) ( 115,407 ) ( 85,740 ) ( 26,394 ) ( 228,358 ) ( 74,899 ) 240,023 ( 268,388 ) ( 7,590 ) ( 43,844 ) 282,323 ( Ps 2,524,015 ) ( Ps 2,318,979 ) (1) With respect to the closing of the Cape Fear plant, the Company incurred in losses from termination and a settlement agreement with the trustees, effective as at October 10, 2013 for a total of Ps 106,533, settling all retirement beneﬁt plan obligations in relation with the site’s employees. This resulted in a modiﬁcation to plan assets. 105 ALPEK 2014 ANNUAL REPORT The amounts recorded in the statement of income for the years ended December 31 are the following: Service cost Net interest cost Effect of reductions of plan and/or settlements 2014 2013 ( Ps 34,622 ) ( Ps 32,154 ) ( 13,439 ) 5,432 ( 33,734 ) 31,731 Total included in personal costs ( Ps 42,629 ) ( Ps 34,157 ) The principal actuarial assumptions are as follows: Discount rate Inﬂation rate Salary increase rate At December 31, 2014 MX 6.75% US 3.75% 4.25% 5.25% 2013 MX 6.75% US 4.65% 4.25% 5.25% The average life of deﬁned beneﬁt obligations is of 15.6 and 17.3 years at December 31, 2014 and 2013, respectively. The sensitivity analysis of the main assumptions for deﬁned beneﬁt obligations is as follows: Discount rate Discount rate Effect in deﬁned beneﬁt obligations Change in assumption Mx 1% US 1% Increase in assumption Decreases by Ps 33,148 Decreases by Ps 329,288 Decrease in assumption Increases by Ps 28,530 Increases by Ps 402,666 Prior sensibility analyses are based on a change in assumptions, while the all other assumptions remain constant. In practice, this is slightly probable, and the changes in some assumptions may be correlated. In the calculation of the sensibility from the deﬁned beneﬁt obligation, signiﬁcant actuarial assumptions the same method (present value of calculated deﬁned beneﬁt obligation with the projected unit credit method at reporting period) has been applied as in the calculation of liabilities for pensions recognized within the statements of ﬁnancial position. Post-employment medical beneﬁts The Company has 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 not being funded. In addition to the assumptions mentioned above, the main actuarial assumption in a long-term increase in health costs by 7.5% in 2014 and 8.0% in 2013. 106 Consolidated Financial Statements Amounts recognized in the statements of ﬁnancial position are determined as follows: At December 31, 2014 2013 Present value of deﬁned beneﬁt obligations Ps 154,349 Ps 175,644 Fair value of plan assets - - Employees’ beneﬁts in the statement of ﬁnancial position Ps 154,349 Ps 175,644 The movements of deﬁned beneﬁt obligations are as follows: At January 1 Service cost Interest cost Employee contributions Remeasurements: 2014 2013 Ps 175,644 Ps 202,450 1,391 6,075 8,926 2,195 6,352 7,625 Gain from changes in ﬁnancial assumptions 4,084 ( 2,716 ) Gains from changes in demographic assumptions and experience adjustments Translation effect Plan reductions Beneﬁts paid At December 31 ( 38,672 ) 20,629 - ( 23,728 ) ( 28,222 ) 916 2,565 ( 15,521 ) Ps 154,349 Ps 175,644 The amounts recorded in the statement of income for the years ended December 31 are the following: Service cost Net interest cost Effect of reductions on plan and/or settlements 2014 2013 ( Ps 1,391 ) ( Ps 2,195 ) ( 6,075 ) - ( 6,352 ) ( 2,565 ) Total included in personal costs ( Ps 7,466 ) ( Ps 11,112 ) At December 31, 2014, the effect of a 1% in the incremental of medical expenses, as follows: Effect of the sum of the current service cost and interest cost Ps Effect in deﬁned beneﬁt obligation 641 863 ( Ps 731 ) ( 1,225 ) Increase Decrease 107 ALPEK 2014 ANNUAL REPORT Employee beneﬁts Plan assets are comprised as follows: At December 31, 2014 2013 Equity instruments Cash and cash equivalents Ps 1,633,198 Ps 1,115,852 890,816 1,203,127 Note 21 - Deferred taxes The analysis of the deferred tax asset and deferred tax liability is as follows: At December 31, 2014 2013 Deferred tax asset: - To be recovered for more than 12 months Ps 178,117 Ps 163,515 - To be recovered within 12 months 78,880 256,997 53,082 216,597 Deferred tax liability: - To be payable in more than 12 months - To be payable within 12 months ( 3,699,349 ) ( 556,257 ) ( 4,255,606 ) ( 3,912,960 ) ( 431,308 ) ( 4,344,268 ) Deferred tax, net ( Ps 3,998,609 ) ( Ps 4,127,671 ) The gross movement in the deferred income tax account is as follows: At January 1 Translation effect To retained earnings Business acquisitions Credit to income statement Credit (charge) to other items of comprehensive income 2014 2013 ( Ps 4,127,671 ) ( Ps 4,213,832 ) ( 421,032 ) ( 777 ) ( 23,919 ) 97,746 20,335 7,550 - 363,587 477,044 (305,311) At December 31 ( Ps 3,998,609 ) ( Ps 4,127,671 ) 108 The change of the temporary differences that requires deferred income tax recognition for the year ended December 31, as follows: Consolidated Financial Statements Asset: Inventories Trade and other receivables, net Property, plant and equipment, net Tax loss carryforwards Derivative ﬁnancial instruments Total Liability: Provisions Derivative ﬁnancial instruments Other temporary differences, net Total 2014 2013 Ps 25,308 Ps 175,090 4,767 5,790,754 ( 715,750 ) - 5,105,079 ( 817,352 ) ( 229,375 ) ( 59,743 ) ( 1,106,470 ) ( 3,695 ) 3,946,048 ( 552,325 ) ( 30,562 ) 3,534,556 687,890 - ( 94,775 ) 593,115 Net deferred tax liability Ps 3,998,609 Ps 4,127,671 At December 31, 2014, the subsidiaries have accumulated tax loss carryforwards for a total of Ps 2,385,834 expiring as shown below: Loss incurred in the year Tax loss carryforwards Year of maturity 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Ps 19,605 - 10,613 63,427 6,152 6,835 967,242 4,601 271,894 1,035,465 Ps 2,385,834 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 109 ALPEK 2014 ANNUAL REPORT Note 22 – Other current liabilities Taxes Accumulated expenses Accrued interest payable Short-term employee beneﬁts Employees’ proﬁt sharing Prepayments from costumers Other At December 31, 2014 2013 Ps 683,972 Ps 516,251 429,593 160,689 388,733 4,069 18,375 151,311 300,719 139,093 324,416 7,108 15,231 12,526 Total other current liabilities Ps 1,836,744 Ps 1,315,344 Note 23 - Stockholders’ equity At December 31, 2014 the capital stock is variable, with a ﬁxed minimum of Ps 6,051,880 represented by 2,118,163,635 ordinary, nominative shares, “Class I” Series “A”, with no par value, fully subscribed and paid in. The variable capital entitled to withdrawal will be represented, if issued, by registered “Class II” Series “A” shares without par value. The net income of the year is subject to decisions made by the General Stockholders’ Meeting, the Company’s by-laws and the General Law of Mercantile Corporations. In accordance with the General Law of Mercantile Corporations, the legal reserve should be increased annually by 5% of the net annual income until it reaches 20% of the fully paid in capital stock. At December 31, 2014 and 2013 the legal reserve amounts Ps 337,007 and Ps 182,032, respectively. The movements in other reserves for 2014 and 2013 are shown as follows: Effect from foreign currency translation Effect of cash ﬂow hedge derivative instruments Total At January 1, 2013 Ps 310,262 ( Ps 132,014 ) Ps 178,248 Gains on fair value Deferred tax asset on fair value gains Effect in translation of foreign entities - - 27,918 282,016 ( 85,085 ) - 282,016 ( 85,085 ) 27,918 At December 31, 2013 Ps 338,180 Ps 64,917 Ps 403,097 Gains on fair value Deferred tax asset on fair value gains - - Effect in translation of foreign entities 2,416,988 ( 1,025,280 ) ( 1,025,280 ) 350,773 - 350,773 2,416,988 At December 31, 2014 Ps 2,755,168 ( Ps 609,590 ) Ps 2,145,578 110 Consolidated Financial Statements During 2014 Alpek has not declared dividends. In the Ordinary General Meeting of Alpek, held on December 9, 2013, the stockholders agreed to declare dividends in cash for a total of Ps 1,487,603. In the Ordinary General Meeting of Alpek, held on February 28, 2013, the stockholders agreed to declare dividends in cash for a total of Ps 1,471,852. In October 2013 the Chambers of Senators and Deputies approved the issuance of a new Law on Income Tax (Income Tax Law) which is effective January 1, 2014. Among other things, this law establishes a tax rate of 10% to the dividends paid to foreign residents and Mexican individuals derived from the proﬁts generated since 2014, also provides that for the years 2001-2013, the net taxable proﬁt will be determined in terms of the Income Tax Law in force in the ﬁscal year concerned. Dividends paid are not subject to income tax if they derived from the Net Tax Proﬁt Account (CUFIN spanish acronym). Any dividends paid in excess of this account will cause a tax equivalent to 42.86% if they are paid in 2014. This tax is payable by the Company and may be credited against its income tax in the same year or the following two years. Dividends paid from proﬁts which have previously paid income tax are not subject to tax withholding or to any additional tax payment. At December 31, 2014, the tax value of the consolidated CUFIN and value of the Capital Contribution Account (CUCA spanish acronym) amounted to Ps 175,896 and Ps 17,088 respectively. Note 24 - Sharebased payments Alpek has a compensation scheme with reference to the value of shares of its holding company for executives of both, the Company and its subsidiaries. According to the terms of the plan, eligible executives will receive a cash payment subject to the achievement of certain quantitative and qualitative metrics based on the following ﬁnancial measures: • • • Improved share price Improvement in net income Permanence of the executives in the Company The program consists in determining a number of shares which the executives will have a right to, that will be paid in cash over the next ﬁve years; i.e., 20% every year at the average price of the share at the end of each year. The average price of the share in 2014 and 2013 was 33.83 and 38.86, respectively. The short-term and long-term liability was analyzed as follows: Short-term Long-term Total carrying amount December 31, 2014 2013 Ps Ps 21,257 38,249 59,506 Ps Ps 32,393 23,170 55,563 111 ALPEK 2014 ANNUAL REPORT Note 25 - Expenses classiﬁed by their nature The total cost of sales and selling and administrative expenses, classiﬁed by the nature of the expense, are comprised as follows: 2014 2013 Raw materials and others ( Ps 66,910,490 ) ( Ps 69,019,660 ) Employee beneﬁt expenses (Note 28) ( 2,845,866 ) ( 2,909,920 ) Human resource expenses Maintenance ( 22,543 ) ( 917,758 ) ( 17,796 ) ( 858,716 ) Depreciation and amortization ( 1,839,420 ) ( 2,024,584 ) Advertising expenses Freight charges Energy consumption and fuel (gas, electricity, etc.) Travel expenses Operating lease expenses Technical assistance, professional fees and administrative services Others Total ( 2,229 ) ( 3,380,333 ) ( 3,294,676 ) ( 113,923 ) ( 495,350 ) ( 794,478 ) ( 1,684,602 ) ( 2,037 ) ( 3,211,218 ) ( 3,115,816 ) ( 102,370 ) ( 371,723 ) ( 875,522 ) ( 2,096,935 ) ( Ps 82,301,668 ) ( Ps 84,606,297 ) Note 26 - Other expenses, net Other income and expenses for the years ended December 31, are comprised as follows: Gain (loss) on sale of wastes Ps 3,509 ( Ps 542 ) 2014 2013 Gain on sale of property, plant and equipment 286 ( 126,906 ) ( 4,948 ) ( 18,669 ) 114,921 2,505 - ( 170,276 ) 45,882 14,575 ( Ps 31,807 ) ( Ps 107,856 ) Impairment of investment in joint ventures (See Note 2 2014 c) Impairment of property, plant and equipment Valuation of derivative ﬁnancial instruments Other income, net Total 112 Note 27 - Financial cost, net Financial cost, net for the years ended December 31, are comprised as follows: Consolidated Financial Statements Financial income: Interest income on short-term bank deposits Ps 100,611 Ps 95,245 2014 2013 Interest income on loans from related parties Others Total ﬁnancial income Financial expenses: 32,498 2,328 37,313 4,245 Ps 135,437 Ps 136,803 Interest expense on bank loans ( Ps 134,642 ) ( Ps 212,820 ) Non-bank interest expense Interest cost on employees beneﬁt Other Foreign exchange loss Loss for changes in the fair value of ﬁnancial assets at fair value through proﬁt or loss Total ﬁnancial cost Financial cost, net ( 648,787 ) ( 19,964 ) ( 122,719 ) ( 629,298 ) ( 735,068 ) ( 40,086 ) ( 103,863 ) ( 145,898 ) ( 76,697 ) ( 71,002 ) ( 1,632,107 ) ( 1,308,737 ) ( Ps 1,496,670 ) ( Ps 1,171,934 ) Note 28 - Employee beneﬁt expenses Employee beneﬁts expenses for the years ended December 31, are integrated as follows: Salaries, wages and beneﬁts Social security contributions Employee beneﬁts (Note 20) Other contributions 2014 2013 ( Ps 2,101,118 ) ( Ps 2,122,757 ) ( 211,667 ) ( 30,580 ) ( 502,501 ) ( 197,794 ) ( 5,183 ) ( 584,186 ) Total ( Ps 2,845,866 ) ( Ps 2,909,920 ) Note 29 - Income tax expense New Income Tax Law On December 11, 2013 the decree for the new Income Tax Law was published (new LISR) becoming effective on January 1, 2014, repealing the LISR published as of January 1, 2002 (former LISR). The new LISR maintains the essence of the former LISR; however, it makes signiﬁcant amendments among which the most important are: 113 ALPEK 2014 ANNUAL REPORT i. Limiting deductions in contributions to pension and exempt salary funds, automobile leases, restaurant consumption and social security fees; it also eliminates the immediate deduction in ﬁxed assets. ii. Amending the mechanics to accumulate revenues derived from the term alienation and generalizing the procedure to determine the gain in alienation of shares. iii. Amending the procedure to determine the taxable basis for the Employees’ Proﬁt Sharing (PTU), establishing the mechanics to determine the initial balance of the capital contribution account (CUCA) and the CUFIN and establishing new mechanics for the recovery of Asset Tax (IA). iv. Establishing an income tax rate applicable for 2014 and the following years of 30%. In contrast to the LISR above that established a 30%, 29% and 28% rate for 2013, 2014 and 2015, respectively. The Company has reviewed and adjusted the deferred tax balance at December 31, 2013, considering in the determination of temporary differences, the application of these new provisions, the impacts of which are detailed in the reconciliation of the effective rate as follows. However, the effects in deduction limitations and others indicated previously will be applied as from 2014 and will mainly affect the tax incurred as of such year. Income tax for the years ended December 31, are integrated as follows: 2014 2013 Total current income tax ( Ps 974,546 ) ( Ps 1,136,767 ) Adjustment to the provision of income tax from prior years Total deferred tax Income tax expense ( 6,232 ) 97,746 ( 44,149 ) 363,586 ( Ps 883,032 ) ( Ps 817,330 ) 114 Consolidated Financial Statements The reconciliation between the statutory and effective income tax rates for the years ended December 31, is as follows: Proﬁt before income tax Statutory tax rate 2014 2013 Ps 2,197,134 Ps 1,723,460 30% 30% Income tax at statutory rate ( 659,140 ) ( 517,038 ) Add (deduct) effect of income tax on: Differences resulting from the ﬁnancial cost, net Non-deductible expenses Non-taxable income Tax losses for which no deferred income tax assets were recognized Effect of different tax rates of countries other than Mexico Adjustment to the income tax liability of prior years Effect in change of rate Effect in deferred taxes for the non-deductibility of labor obligations ( 137,375 ) ( 22,400 ) 1,574 ( 66,134 ) ( 18,643 ) 5,511 - ( 10,274 ) ( 46,024 ) ( 6,232 ) - - 84,814 ( 44,149 ) ( 231,854 ) ( 10,489 ) ( 9,074 ) Share of losses of associates ( 13,434 ) Total income tax Effective tax rate ( Ps 883,032 ) ( Ps 817,330 ) 40% 47% The charge (credit) to income tax related to other items of the comprehensive income for the years ending December 31, are as follows: Before taxes 2014 Tax charge (credit) After taxes Before taxes 2013 Tax charge (credit) After taxes Translation effect of foreign currency Ps 2,416,988 Ps - Ps 2,416,988 Ps 27,918 Ps - Ps 27,918 Remeasurement of obligations for employee beneﬁts Effect of derivative ﬁnancial instruments for hedging purposes of cash ﬂow Other comprehensive income items Ps 1,047,948 Deferred tax Note 30 - Segment reporting ( 343,760 ) 126,271 ( 217,489 ) 598,160 ( 220,226 ) 377,934 ( 1,025,280 ) 350,773 477,044 477,044 Ps Ps ( 674,507 ) 282,016 ( 85,085 ) 196,931 Ps 1,524,992 Ps 908,094 ( Ps ( Ps 305,311 ) Ps 602,783 305,311 ) Segment reporting is presented, consistently with the internal report provided to the Chief Operating Officer, who has been identiﬁed as the Company’s Executive Director, and represents the highest authority in operational decision making, allocation of resources and performance assessment of operating segments. 115 ALPEK 2014 ANNUAL REPORT An operating segment is deﬁned as a component of an entity on which separate ﬁnancial information is regularly being evaluated. Management assesses its operations through two business segments: the Polyester business chain and the Plastics and Chemicals business. These segments are managed separately since its products vary and targeted markets are different. Their activities are performed through various subsidiaries. The operations between operating segments are performed at market value and the accounting policies with which the ﬁnancial information by segments is prepared, are consistent with those described in Note 3. The Company evaluates the performance of each of the operating segments based on net income excluding income taxes, share in net income of associates, ﬁnancial cost net, depreciation, amortization and impairment of non-current assets (EBITDA), considering that this indicator is a good metric to evaluate operating performance and the ability to meet principal and interest obligations with respect to indebtedness, and the ability to fund capital expenditures and working capital requirements. Nevertheless, Adjusted 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 the Adjusted EBITDA as the result of adding to the operating proﬁt, the depreciation, amortization and the impairment of non-current assets. Following is the condensed ﬁnancial information of these operating segments (in millions of pesos): For the year ended December 31, 2014 Statement of income Revenue by segment Inter-segment revenue Revenue from external costumers Operating proﬁt Depreciation, amortization and impairment of non-current assets Adjusted EBITDA Capex Polyester Plastics and Chemicals Other Total Ps 63,316 Ps 23,071 ( Ps 315 ) Ps 86,072 ( 88 ) 63,228 2,006 1,535 3,541 3,803 Ps Ps Ps Ps ( 227 ) 22,844 1,674 436 2,110 388 Ps Ps Ps Ps Ps Ps Ps Ps 315 - 59 - 59 - Ps Ps Ps Ps - 86,072 3,739 1,971 5,710 4,191 116 For the year ended December 31, 2013: Consolidated Financial Statements Statement of income Revenue by segment Inter-segment revenue Revenue from external costumers Operating proﬁt Depreciation, amortization and impairment of non-current assets Adjusted EBITDA Capex Polyester Plastics and Chemicals Other Total Ps 68,704 Ps 21,600 ( Ps 243 ) Ps 90,061 ( 68 ) 68,636 977 3,997 (1) 4,974 1,845 Ps Ps Ps Ps Ps Ps Ps Ps ( 175 ) 21,425 1,882 422 2,304 431 Ps Ps Ps Ps 243 - 66 - 66 - Ps Ps Ps Ps - 90,061 2,925 4,419 7,344 2,276 (1) In 2013, within the polyester segment is integrated the impairment effect of ﬁxed assets related to the closing of the Cape Fear plant, see Notes 2 2013 c) and 18. The reconciliation between adjusted EBITDA and proﬁt before taxes for the years ended December 31 is as follows: 2014 2013 Adjusted EBITDA Ps 5,710 Ps 7,344 Depreciation, amortization and impairment of non-current assets Operating proﬁt Financial cost, net Share of losses in associates ( 1,971 ) 3,739 ( 1,497 ) ( 45 ) ( 4,419 ) 2,925 ( 1,172 ) ( 30 ) Income before taxes Ps 2,197 Ps 1,723 Following is a summary of revenues per country of origin for the years ended December 31: Mexico United States Argentina Revenues 2014 2013 Ps 48,056 Ps 33,836 4,180 49,276 36,331 4,454 Ps 86,072 Ps 90,061 The Company’s main costumer generated revenue amounting to Ps 8,488 and Ps 10,116 for the years ended December 31, 2014 and 2013, respectively. This revenue is obtained from the Polyester reporting segment and represent 11% for both years of consolidated revenue with external costumers. 117 ALPEK 2014 ANNUAL REPORT The following table shows the intangible assets and property, plant and equipment of the country of origin: Mexico United States Argentina At December 31, 2014 2013 Ps Ps 1,986 4,061 36 1,727 1,179 - Total intangible assets Ps 6,083 Ps 2,906 Mexico United States Argentina At December 31, 2014 2013 Ps Ps 20,981 6,045 366 18,818 5,703 185 Total property, plant and equipment Ps 27,392 Ps 24,706 Note 31 - Contingencies and commitments At December 31, 2014, the Company has the following commitments: • During 2013, the Company through its subsidiary Grupo Petrotemex, signed an agreement with M&G for the rights to supply the plant for 400 thousand tons of PET (manufactured with 336 thousand tons of PTA) a year, by which it is obliged to pay an amount of Ps 4,576,775 (US$350 million) during the construction of the plant subject to the fulﬁllment of predeﬁned milestones. At December 31, 2014 Grupo Petrotemex had made a payment of Ps 2,925,938 (US$198.8 million), presented within goodwill and intangible assets, net. See Note 12. • At December 31, 2014 and 2013, the subsidiaries had entered into various agreements with suppliers and customers for purchases of raw materials used for production and the sale of ﬁnished goods, respectively. The term of these agreements varies between one and ﬁve years and generally contain price adjustment clauses. • On February 1, 2005, the subsidiary Polioles and BASF Corporation (the other partner of the Affiliate) signed a licensing agreement in relation with the use of patents and technical information for the production of polystyrene pearl in the Altamira plant located in Tamaulipas. According to the aforementioned agreement, Polioles pays BASF Corporation the difference between the annual minimum of US$9 million and the gain before ﬁnancing and taxes plus depreciation and amortization generated by the polystyrene pearl line. This agreement will be effective until Polioles has paid a consideration of US$15 million over an accumulated basis. For the years ended December 31, 2014 and 2013 the agreed parameter was not reached and therefore, a payment obligation was not generated. • The Company leases equipment under non-cancellable operating lease agreements, related mainly to transportation equipment for the PTA and PET businesses, which normally include renewal options. These options are generally under the same conditions of the existing leases. 118 Future payments under these operating lease agreements with non-cancellable terms greater than a year are summarized below: Consolidated Financial Statements 2015 2016 2017 2018 Onwards Ps 169,766 138,219 109,971 93,159 401,234 At December 31, 2014, the Company has the following contingencies: • • Some of the subsidiaries use hazardous materials to manufacture polyester ﬁlaments and staple ﬁbers, polyethylene terephthalate (PET), terephthalatic acid (PTA), Caprolactam (CPL), polypropylene (PP), chemical specialties and they generate waste, such as catalysts and glycols. 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. According to such laws, the owner or lessor of real estate property 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 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 estimate 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 related to historic or current operations that will require investigation and/or remediation under environmental laws, or that future uses or conditions will not result in the imposition of an environmental liability or expose them to third-party or related parties 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 their operations. Note 32 – Subsequent events In preparing the ﬁnancial statements the Company has evaluated events and transactions for recognition or disclosure subsequent to December 31, 2014 and up to January 28, 2015 (date of issuance of the ﬁnancial statements), and has identiﬁed the next subsequent event: In the Ordinary General Meeting of Indelpro, held on January 28, 2015, the stockholders agreed to declare and pay dividends in cash for a total of US$ 9,800 to the non-controlling portion. José de Jesús Valdez Simancas José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Eduardo Alberto Escalante Castillo Chief Financial Officer Chief Financial Officer 119 2014 Annual Report Table of Contents Corporate Proﬁle Financial Highlights Footprint Petrochemical Chains Letter to Shareholders Polyester Plastics & Chemicals Sustainability Board of Directors Management Team Corporate Governance Glossary Consolidated Financial Statements Integration, Efficiency and Expansion 1 2 3 4 6 10 14 18 22 40 41 42 43 45 Throughout the report, the blue guidelines show the Global Reporting Initiative (GRI) indicators that are discussed in the paragraph. n o t s u o H l , r o o c h t r a E : g n i t n i r P | l a u s i V 3 3 : y h p a r g o t o h P & n g i s e D Investor Relations Hernán F. Lozano Sabino Parra Av. Gómez Morín 1111 Sur Col. Carrizalejo, San Pedro Garza García Nuevo León CP. 66254, Mexico IR@alpek.com www.alpek.com 2014 Annual Report 2 0 1 4 A n n u a l R e p o r t A l p e k Alpek, S.A B. de C.V. Av. Gómez Morín 1111 Sur Col. Carrizalejo, San Pedro Garza García Nuevo León, Mexico, 66254 www.alpek.com

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