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AmyrisA l p e k 2 0 1 5 A n n u a l R e p o r t Annual Report 2015 Table of contents Corporate profile Financial highlights Footprint Petrochemical chains Letter to shareholders Polyester Plastics & Chemicals Strategic investments Sustainability Board of Directors Management Team Corporate Governance Glossary Consolidated financial statements 1 2 3 6 8 12 16 20 22 40 41 42 43 45 Corporate profile G4-4, 9 » Alpek is the leading petrochemical company in the Americas. » Operating in two business segments: Polyester and Plastics & 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. » 90% of Alpek’s products are used for food, beverage and consumer goods packaging. » Listed on the Mexican Stock Exchange since April, 2012. 1 Annual Report 2015 | ALPEKFinancial highlights G4-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 2015 5,284 481 630 175 0.08 4,353 2,348 2,005 1,741 0.82 2014 6,471 286 434 65 0.03 4,442 2,414 2,028 1,763 0.83 % var. 2015 2014 % var. (18) 68 45 171 (2) (3) (1) (1) 83,590 86,072 7,590 9,974 2,748 1.30 74,894 40,395 34,499 29,954 14.14 3,739 5,710 801 0.38 65,371 35,527 29,845 25,949 12.25 (3) 103 75 243 15 14 16 15 EBITDA (1) Millions of dollars MAJORITY NET INCOME (2) Millions of dollars ASSETS Millions of dollars 11 12 13 14 15 771 728 11 12 13 14 15 572 434 630 21 65 175 332 277 11 12 13 14 15 4,446 4,742 4,445 4,442 4,353 NOTE: In this annual report, monetary figures are expressed in nominal Mexican pesos ($) and in nominal dollars (U.S. $) unless otherwise specified. The financial information for 2015 to 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 2015 and 2014 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 Annual Report 2015 | ALPEKPolyester Plastics & Chemicals 21 plants in 5 countries: Mexico, the United States, Brazil, Argentina and Chile A qualified team of over 5,000 employees operating a total capacity of 5.5 million tons per year. G4-6, 8 3 Annual Report 2015 | ALPEKOur products in daily life G4-4 P l a s t ics & Chemicals l y o P r e t s e 7:30 Juice for breakfast PET bottle 8:30 Safety first on the way to work Polyester filament seatbelt 6:30 Vitamins for the little ones PET bottle 6:00 A nice workout to start the day PET bottle and polyester fiber clothes 4 Annual Report 2015 | ALPEK P l a s t ics & Chemicals 17:30 Doctor’s appointment Polypropylene (PP) syringe 18:00 Soccer practice Expandable polystyrene (EPS) cooler 20:30 Teeth brushing Toothbrush with PP handle and Nylon bristles 10:30 Bottled water during a business meeting PET bottle DAK Americas (PET). Pearl River, United States 5 Annual Report 2015 | ALPEK G4-12 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 6 Annual Report 2015 | ALPEK Oil Refinery Naphtha Reformer Paraxylene PTA Cracker Benzene Propane Cracker H H C C H CH3 Propylene PP Methane H N H H Ammonia PET Fibers Ethane Cracker H H C C H H Ethylene Cracker Cyclohexane CH2 Styrene CPL Ammonium Sulfate EPS Alpek products are used by millions of people every day in a wide range of applications. Polyester Plastics & Chemicals Oil Refinery Naphtha Monoethylene Glycol O CH2 CH2 Ethylene Oxide 7 Annual Report 2015 | ALPEK Letter to shareholders Dear shareholders: G4-1, 2, 13 2015 marked a positive change in Alpek’s results despite the high volatility of crude oil and feedstock prices. A number of favorable industry events and internal initiatives enhanced the profitability of our two business segments, driving up consolidated EBITDA 45% year-over-year and 26% above our initial guidance. However, 2015 Polyester EBITDA was U.S. $344 million, 27% high- er than the previous year. This year’s decline in feedstock prices re- sulted in a U.S. $35 million non-cash inventory devaluation charge. Excluding this item, comparable 2015 Polyester EBITDA reached U.S. $378 million, up 11% versus 2014. It is important to note that these results were obtained amid an un- stable environment, with the price of reference Brent crude falling 36% compared to the previous year’s close and fluctuating from a minimum of U.S. $35 per barrel to a maximum of U.S. $66 per bar- rel during the year. Besides impacting feedstock prices, such high volatility typically causes temporary demand and margin distortions that affect our earnings. The events that benefited 2015 results and contribute to the recov- ery of our Polyester segment were: i) a U.S. $66 per ton increase to the North American PTA price formula; ii) full-year operations at the Cosoleacaque cogeneration plant; iii) favorable preliminary deter- minations in the U.S. PET antidumping case; and iv) the rationaliza- tion of PTA capacity in China, including permanent and temporary shutdowns. Alpek’s 2015 consolidated sales totaled U.S. $5.3 billion, down 18% year-over-year as a result of an 18% decrease in the average consol- idated price, reflecting lower oil and feedstock prices. EBITDA reached U.S. $630 million, 45% more than in 2014, growing annually for the first time since 2011. Two extraordinary items are included in this figure: a U.S. $50 million non-cash inventory deval- uation charge; and a U.S. $26 million one-time gain from the sale of our polyurethane business. Excluding these two items, comparable 2015 EBITDA was U.S. $654 million, up 30% year-over-year. 2015 Polyester segment sales were U.S. $3.8 billion, 19% below 2014. Sales were impacted by a 17% drop in average price and a 2% de- crease in volume. Alpek’s polyester product prices reflected lower petroleum-based feedstock prices. The Plastics & Chemicals segment posted sales of U.S. $1.4 billion in 2015, 16% less than the previous year. A 9% increase in volume, driven primarily by our polypropylene business, was more than offset by a 23% decline in the average price caused by falling feedstock prices. In contrast, Plastics & Chemicals EBITDA grew 79% year-over-year, to U.S. $284 million. Two extraordinary items included in this figure are: a U.S. $15 million non-cash inventory devaluation charge; and a one-time gain from the sale of our polyurethane business. Thus, comparable 2015 Plastics & Chemicals EBITDA was U.S. $273 mil- lion, up 72% versus 2014. Polypropylene margin expansion was a key driver behind the Plas- tics & Chemicals EBITDA growth. Favorable conditions combining increased demand, lower feedstock costs and reduced installed ca- pacity boosted margins during the year. This dynamic is expected to be sustainable beyond 2015. 8 Annual Report 2015 | ALPEKOur expandable polystyrene (EPS) business also posted better than expected EBITDA, driven by the successful integration of the businesses acquired from BASF in North and South America and a temporary upswing in margins caused by a multi-month disconnect with Asian feedstock prices. Following an in-depth analysis of our new Altamira cogeneration plant that resulted in a larger project scope with higher profitability, we began initial construction work in the fourth quarter. The new fa- cility, which is expected to come on line in 2018, will require an invest- ment of U.S. $350 million and have a 350 Megawatt capacity, making it 3.5 times the size of our existing Cosoleacaque cogeneration plant. Consolidated EBITDA growth and disciplined capital allocation fur- ther strengthened our financial position. Net debt increased 1% at the close of the year, with U.S. $160 million in dividends and U.S. $317 million in Capex offset by strong operating cash flow genera- tion. The net debt to EBITDA ratio decreased from 1.6 times in 2014 to 1.1 times in 2015, and the interest coverage ratio reached 10.7 times, up from 6.5 times in 2014. A solid financial structure is fundamental for us to continue the im- plementation of strategic projects that reinforce our competitive- ness and maximize shareholder value, particularly in today’s volatile environment. Hence, we moved forward with our investment pro- gram and rolled out new expansion initiatives in 2015. Progress with strategic projects Styropek, the company responsible of our EPS operations, success- fully integrated the businesses acquired from BASF in North and South America, achieving better than expected results. This inte- gration was the first step of a comprehensive process to transform our EPS business, which evolved during the year from being a joint venture, operating a 165 thousand ton per year plant in Mexico, to becoming the largest EPS producer in America, operating plants in Mexico, Brazil, Chile and Argentina with an aggregate capacity of 230 thousand tons per year. It has been more than two years since construction at the Corpus Christi PTA/PET plant began. We have invested U.S. $287 million out of the U.S. $350 million commitment under the original agree- ment. Furthermore, we increased our participation in the project with the acquisition of additional supply rights to 100 thousand tons per year of integrated PET. In total, we have acquired supply rights to 500 thousand tons per year of integrated PET from what will be the most modern and efficient plant in the region. Huntsman advanced with the construction of the capacity expan- sion required for our MEG supply contract. Startup is scheduled within the next few months, and savings are expected to be reflect- ed in 2016 EBITDA. New projects announced in 2015 In 2015, we announced three new initiatives that will be developed over the coming years: • The first is a 110 thousand ton per year polyester fiber expan- sion at our Pearl River plant, which will increase our capacity to 405 thousand tons per year. The incremental polyester fiber capacity will allow us to meet the growing demand from our customers. Investment in this project will amount to approxi- mately U.S. $30 million and operations are expected to begin at the end of 2016. 9 Annual Report 2015 | ALPEK• • The second is a 75 thousand tons per year EPS expansion at the Altamira facility, which will make it one of the world’s five largest EPS plants. After a U.S. $30 million investment, opera- tions will start in 2017, to satisfy our growing customer base in North America. The third is an agreement signed with BASF to acquire its 20 thousand ton per year EPS plant in Concón, Chile, thereby complementing recently acquired EPS assets in South Ameri- ca. This transaction should be closed in early 2016. Styropek’s aggregate installed capacity will grow 41%, reaching 325 thousand tons per year, once the Concón acquisition is integrated and the Altamira expansion begins operations. At Alpek, we understand that our actions impact society and the en- vironment either directly or indirectly. For this reason, we maintain a continuous improvement effort oriented towards sustainability. In 2015, we completed a materiality analysis of social, environmen- tal, economic and corporate governance topics, through which we identified thirteen aspects that are particularly important to our stakeholders. The materiality determination process included an exhaustive analysis of: i) our sector’s current situation in terms of sustain- ability, ii) issues deemed important by our internal and external stakeholders, and iii) the sustainability-related activities we un- dertake. The analysis will serve to guide our actions towards the issues that are most important and contribute the most to sus- tainable long-term value creation. This report includes a total of 99 indicators related to the thirteen material aspects identified, and 48 others related to our operations. 2015 was a year that exceeded our expectations; more important- ly, we believe that the majority of developments that favored our results will bring positive long-term effects. However, we maintain a conservative outlook in the short term due to the current oil and feedstock price volatility. We would like to take this opportunity to thank our employees, cus- tomers, suppliers and creditors, the community and, in particular, our shareholders, who put their trust once again in this Board of Directors. Sincerely, Armando Garza Sada Chairman of the Board of Directors José de Jesús Valdez Simancas Chief Executive Officer 10 Annual Report 2015 | ALPEKAnnual Report 2015 | ALPEK 11 DAK Americas (PET). Cedar Creek, United States 12 Annual Report 2015 | ALPEKPolyester PTA is a product of the polyester chain made from paraxylene and is the main raw material in the production of PET and polyester fiber. G4-4, 8 The Polyester segment, which accounted for 73% of our 2015 sales, manufactures PTA (purified terephthalic acid), PET (polyethylene terephthalate) and polyester fiber. PET is a recyclable plastic employed primarily to manufacture packaging for beverages, food and consumer products. Polyester fiber is commonly used to produce clothing, safety belts and many other everyday textile products. Alpek is the leading integrated PTA-PET producer in North Amer- ica and the only manufacturer of virgin PET and recycled PET (r-PET) in Argentina. The businesses that comprise our Polyester segment employ 3,570 workers and operate 12 plants in the United States, Mexico and Argentina with an aggregate installed capacity of 4.4 million tons. 13 Annual Report 2015 | ALPEKDAK Americas (PET). Cosoleacaque, Mexico 14 Annual Report 2015 | ALPEK73% of Alpek’s total 2015 revenues came from the Polyester segment 83% of Polyester sales came from Mexico, the United States and Canada 83% North America 73% Polyester 27% Plastics & Chemicals 17% Rest of the world G4- EC2, EC8 Alpek is committed to sustainability, operating PET recycling plants in the United States and Argentina with an installed capacity of 89 thousand tons per year, equivalent to more than 4 billion bottles. operation of our Cosoleacaque cogeneration plant contributed to EBITDA growth. A total of 83% of Polyester sales are made in the NAFTA region, a very sizable, consolidated market. Moreover, our focus on stable, consumer-oriented segments and leading position in the North American market contribute to stability in the demand for our poly- ester products. The Polyester segment posted 2015 sales of U.S. $3.8 billion and a volume of 3.0 million tons. Year-over-year, sales decreased 19% due to lower prices resulting from falling oil and feedstock prices. Polyester EBITDA was U.S. $344 million, 27% above 2015. This figure includes a U.S. $35 million non-cash charge for inventory devaluation. Comparable EBITDA (without taking into account the extraordinary item) reached U.S. $378 million. During the year, a series of favorable events combined to drive prof- itability, promote a gradual, sustainable recovery and improve the future prospects of our Polyester segment. The increase of ~U.S. $66/ton in the PTA price formula in North America, which came into effect in April 2015, and the Moreover, for the first time since 2012 when the new wave of PTA plants began operating in China, a large Chinese producer filed for bankruptcy and two major Chinese players announced a series of coordinated rationalization initiatives. In addition, during the year there was an explosion at the plant of another important Chinese producer that will keep the facility offline indefinitely. Lastly, the United States Department of Commerce and the Inter- national Trade Commission issued favorable preliminary determi- nations in the packaging-grade PET resin antidumping case in the United States. As a result, since October 2015 PET imports from China, India, Oman and Canada have been subject to cash deposits based on preliminary tariffs. Final rulings are expected in the first half of 2016. Thus, strategic projects, efficiency enhancing initiatives and favor- able industry developments combined to turn around the Polyes- ter segment’s earnings trend and point to a brighter future for our polyester business. 15 Annual Report 2015 | ALPEKIndelpro (PP). Altamira, Mexico 16 Annual Report 2015 | ALPEKPlastics & Chemicals The Plastics & Chemicals (P&C) segment, represented 27% of Alpek’s sales in 2015 The Plastics & Chemicals segment is made up of businesses that manufacture and market polypropylene (PP), expandable polysty- rene (EPS), caprolactam (CPL), specialized chemicals, industrial chemicals and ammonium sulfate (fertilizers). PP is P&C’s main product, commanding a 44% share of the seg- ment’s sales. It is a recyclable plastic made from propylene and used in a wide variety of applications, such as to make containers, food packaging, medical equipment and automobile parts. EPS accounts for 28% of P&C sales. It is a low-density material with insulation and impact-absorption characteristics that make it ideal for the packaging of appliances and electronics and for ther- mal insulation and lightening structural slabs in building works. The remaining P&C products represent 28% of the segment’s sales. These include: CPL, the main raw material for producing Ny- lon 6, which is used in such products as clothing, engineering plas- tics and tire cord, and ammonium sulfate, a by-product of the CPL 17 Annual Report 2015 | ALPEKStyropek (EPS). Altamira, Mexico 18 Annual Report 2015 | ALPEKG4-13 production process that is used as a fertilizer because of its high nitrogen content. In addition, the specialty and industrial chemicals that the segment produces have a wide range of applications in sectors such as the oil, automotive, pharmaceutical and consumer goods industries. The P&C segment posted 2015 sales of U.S. $1.4 billion, 16% below 2014. Volume increased 9% year-over-year, however, the average price was 23% less because of the decline in crude oil and feed- stock prices. All P&C products hold a leading position in their markets. In 2015, we became the leading EPS producer in the Americas with the in- tegration of our North and South American acquisitions, and we are the only PP and CPL manufacturer in Mexico. The creation of Styropek, a new, 100% Alpek-owned subsidiary, was a major event for our Company. Styropek integrates our EPS businesses and operates plants with an aggregate capacity of 230 thousand tons per year in Mexico, Brazil, Argentina and Chile. Plastics & Chemicals employs 1,530 workers and operates 9 plants in Latin America, with a total production capacity of 1.1 million tons. More than 80% of the segment’s sales come from the North American market, although we also serve customers in Central and South America, Asia and Europe. P&C EBITDA was U.S. $284 million, 79% increase over the previ- ous year, driven by higher PP and EPS margins. Our EPS business benefitted both from a temporary disconnect with Asian feedstock prices due to unscheduled shutdowns in China, and from the inte- gration of recently acquired plants, with which we increased our annual capacity from 165 thousand to 230 thousand tons. During 2015, the PP margin grew significantly due to the availabil- ity and competitiveness of its main feedstock, propylene, in North America. This new regional dynamic makes it likely that polypropyl- ene margins will remain near current levels beyond 2015. This combination of improved P&C product margins, the consoli- dation of the EPS business and favorable market dynamics leads us to expect good performance from this segment going forward. G4-9 27% of Alpek’s total 2015 revenues came from the Plastics & Chemicals segment 80% of Plastics & Chemicals sales came from Mexico, the United States and Canada 80% North America 27% Plastics & Chemicals 73% Polyester 20% Rest of the world 19 Annual Report 2015 | ALPEKGrupo Petrotemex (Cogeneration). Cosoleacaque, Mexico 20 Annual Report 2015 | ALPEKStrategic investments G4- EC2, 7, 8 Alpek’s growth strategy is based on our proactive search for new investment opportunities, capacity to select and implement strate- gic projects, and solid financial position. scope and higher profitability of this plant, which will have a 350 MW capacity, require an investment of U.S. $350 million over the next three years, and begin operations in 2018. The discipline with which we choose where to invest ensures that our resources are focused on the most profitable initiatives and that financial flexibility is maintained throughout their development. New projects announced in 2015 During 2015, we announced three new initiatives that will comple- ment those already in progress, one in the Polyester segment and two in Plastics & Chemicals. Our first cogeneration plant in Cosoleacaque, Veracruz, began to produce savings in 2015. In its first full year of operations, the fa- cility generated a total of 623 GW/h of electricity and produced 1.1 million tons of steam, resulting in benefits of U.S. $18.3 million. This project is particularly important because it was the first ma- jor investment we concluded since we started our strategic Capex program in 2012. As we moved forward with our established plan, we also announced new initiatives in our two business segments. Progress with strategic projects All our projects advanced as planned during 2015, with total Capex of U.S. $317 million. We maintain a firm commitment to implement- ing the initiatives included in our development plan. The integration to monoethylene glycol (MEG) through a supply contract signed with Huntsman will be the next project to come on line. It will result in savings as early as the first half of 2016. The Corpus Christi PTA/PET plant was our largest investment of 2015. In addition to our commitment under the original agreement, we increased our participation in the project through the acquisi- tion of additional supply rights to 100 thousand tons of PET per year. This integrated site, which will use our IntegRex® PTA technology, will have the most competitive cost structure in North America. In 2015, we began the construction of our second largest invest- ment after Corpus Christi: the cogeneration plant in Altamira, Tam- aulipas. A comprehensive analysis resulted in both a larger project In the Polyester segment, we approved a 110 thousand tons per year polyester fiber expansion at our Pearl River plant in the United States. With an investment of U.S. $30 million, this project will help to satisfy the growing market demand before the end of 2016. The two new investments announced for the Plastics & Chemicals segment complement the transformation process that recently made us the leading EPS producer in America. The first project announced was a U.S. $30 million investment in our EPS plant in Altamira, Tamaulipas, to increase its annual capac- ity by 75 thousand tons starting in 2017. The second was the signing of an agreement with BASF to acquire its 20 thousand ton per year EPS plant in Concón, Chile, thereby complementing our other EPS facilities in South America in 2016. These initiatives contribute to the ongoing transformation of our EPS business, which has evolved from being a joint venture op- erating a 165 thousand ton per year plant in a single country, to what Styropek is today: a wholly-owned Alpek company, with a 230 thousand ton per year aggregate capacity in Mexico, Brazil, Chile and Argentina. The projects in progress and those announced in 2015 are a crucial part of the growth strategy that involves more than U.S. $1 billion in investments to capture an annual incremental EBITDA of U.S. $250 million over the next 4 years. 21 Annual Report 2015 | ALPEKGrupo Petrotemex (PTA). Altamira, Mexico 22 Annual Report 2015 | ALPEKSchool maintenance in Cosoleacaque, Mexico Sustainability At Alpek we understand that every action we undertake, every product we offer and every decision we make has a direct or indirect impact on society and the environment. For this reason, we make a continuous effort to innovate, review and improve processes to be ever more responsible in the world in which we operate. G4-32 We present our fourth sustainability report with actions taken in this area in 2015, based on the standards of the Global Reporting Initiative, version G4. For its development we conducted a mate- riality process through which we clearly identified the aspects of greatest importance to our stakeholder groups. We report a total of 99 indicators that respond to the material aspects identified as well as 48 additional indicators relative to our operations, which are described in this section and throughout the document. The full list of GRI indicators and their location in the report can be found at: http://www.alpek.com/gri-report.html 23 Annual Report 2015 | ALPEKForestation in Altamira, Mexico 24 Annual Report 2015 | ALPEKMateriality study Material aspect: CSR management. G4-18-21 Based on the model and actions implemented in previous years, in 2015 we conducted a materiality analysis on social, environmen- tal, economic and corporate governance issues for our operation. This process included approaching our stakeholder groups and the thorough investigation of the information about our company. As a result, we identified thirteen material aspects: The process to determine materiality included an analysis of the sustainability situation specific to our sector, as well as what our internal and external stakeholder groups want to know about the company and the actions we undertake. In addition to using the results to organize this report in order to disclose the aspects that are most relevant to the public, the analysis will serve to guide our actions towards the most important areas that contribute to create sustainable long-term value. Material aspect Operation and risk strategy Investor relations CSR management Corporate governance Labor practices Distribution of wealth Health and safety Energy eco-efficiency Water management Climate change and emissions strategy Community engagement Relations with NGOs and regulatory agencies Customer and supplier relations Materiality results 100% 90 80 70 60 50 40 30 20 10 k e p l A o t t c a p m I 0 10 20 30 40 50 60 70 80 90 100% Relevance to stakeholders Operation and risk strategy Investor relations CSR management Corporate governance Labor practices Distribution of wealth Health and safety Energy eco-efficiency Water management Climate change and emissions strategy Community engagement Relations with NGOs and regulatory agencies Customer and supplier relations 25 Annual Report 2015 | ALPEK Our Sustainability Strategy Material aspect: Operation and risk strategy, CSR management. G4-1, 25, 46 The sustainability model we defined in 2014 has been of enormous value to the way in which Alpek adapts to the context of social re- sponsibility. This model allows us to align any business decision to the strictest sustainability standards. It exists thanks to the commu- nication with our stakeholder groups and to our participation in the ALFA Sustainability Committee, a body responsible for combining the efforts of the Group’s companies to achieve the sustainability goals we share. Our sustainability strategy is a reflection of the ongoing commitment of the company’s governance body to contribute to international ef- forts in terms of environmental care, employee fairness and equality, and active participation in community development. COMMUNICATION WITH STAKEHOLDERS In addition to the materiality analysis conducted this year, our com- munication channels were kept open permanently to hear and ad- dress any concerns expressed by our stakeholder groups. G4-24, 26, 27 Stakeholder Group Form of Communication Frequency Main Concerns Response to Concerns Intranet, suggestion box Ongoing Innovation and improvement ideas Review and approval of innovation ideas, putting the best suggestions into practice. Bulletins, e-mails, presentations and diverse events Ongoing Quarterly results Generation of reports, memos and agreements. Employees Work environment diagnostics Annual Work environment Informative talks Twice a year Business review Results are discussed in Board meetings and agreements are met. Encourage personnel participation and ideas. Customers Telephone calls, internet, plant visits , surveys and e-mail. Ongoing Product quality, business issues and their timely and proper delivery; technical services Improve time frames and procedures that enable quality assurance. Technical visits and information sharing. Shareholders Meetings, telephone calls, internet and e-mails. Ongoing Strategy, profitability, financial situation and operating performance Strict follow-up of indicators compliance. Concerns are addressed and agreements are made at Board meetings. Suppliers Meetings, telephone calls, internet, plant visits, surveys and e-mail Ongoing Business and quality aspects. Clarifications, quotes and deliveries. Implementation of suppliers’ development programs. Agreements and delivery of detailed .information of the company’s needs. Communities Meetings, perception surveys, alliances with NGOs and community groups like GIREL (Grupo Industrial de Respuesta a Emergencias Lerma) Monthly, quarterly, twice a year Industrial safety and contingency management. Company perception and support. Report on safety and emergency processes and mechanisms. Neighborhood evacuation brigade training. Support civil protection activities. Give support and training. 26 Annual Report 2015 | ALPEKG4-56 Both in this model and in our daily operations, our values and ethical behavior standards are aligned with the ALFA Group Code of Ethics, available at: http://www.alfa.com.mx/NC/filosofia.htm. Moreover, as part of ALFA we support its adhesion to the principles of the United Nations Global Compact. Our Sustainability Model 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 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 e t l l e r - n b o e i n g C o m V i s i o n munity Community: Be a responsible citizen in the community Focused on: Communities, customers and suppliers Sustainable Economic Value Creation Material aspect: CSR Management. G4-42 All our operations are carried out based on responsible practices towards society, the environment and the economy knowing that our long-term viability depends on it. This conviction begins with the Board of Directors and permeates throughout the company. Our Board is constantly driving initiatives towards sustainable op- erations, as well as becoming involved in the evaluation, develop- ment and approval of Alpek’s mission, vision, values and integrated business strategy. G4-35 GOVERNANCE OF THE ORGANIZATION The Board of Directors is supported in many ways by the governing body of the company to carry out activities related to the develop- ment and fulfillment of environmental, economic and social objec- tives. Each of these areas is dealt within specific departments, both in Alpek and in each of its companies, and the results are evaluated periodically in order to improve and / or continue specific strategies accordingly. 27 Annual Report 2015 | ALPEKWater treatment plant at Grupo Petrotemex in Altamira, Mexico 28 Annual Report 2015 | ALPEKEconomic Sustainability Material aspect: Investor relations, Distribution of wealth. G4-EC1 The company’s primary purpose is the responsible creation of eco- nomic value. At Alpek we do this in a sustainable way, generating benefits for our shareholders, employees, the environment in which we operate and the communities that welcome us. Aspect Quantity (millions of dollars) Consolidated Revenues Consolidated Net Income Majority Net Income Basic and diluted earnings per share (dollars) Income tax Dividends Capital Expenditures and Acquisitions Net Debt Net Debt/EBITDA (times) 5,284 233 175 0.08 54 160 317 722 1.1 Alpek has an Investor Relations area that is dedicated to commu- nicating the financial and operating performance of the company. Financial Opportunities and Risks due to Climate Change Material aspect: Distribution of wealth, Operations and risk strate- gy, Climate change and emissions strategy. G4- EC2 As a company with international presence, at Alpek we work hard to adapt to the highly dynamic world in which we operate. Through the constant analysis of events, trends and factors that affect our sector, we have identified the risks and competitive advantages that climate change represents for our operation. Ever stricter en- vironmental regulations, natural disasters and increasing sea levels and storm intensity that affect the transportation logistics of our product, and water and oil shortages not only represent huge chal- lenges for our industry, but for the entire planet. To confront these we invest in technology, the improvement of equipment and processes and strategic acquisitions to increase our competitiveness and optimize resources. Examples of these are the cogeneration plant in Veracruz, which went into full operation in 2015, and the start of the first stage of construction of the second plant, which will be located in Tamaulipas and have 3.5 times the capacity of the first. These facilities allow us to reduce CO2 emissions into the at- mosphere, significantly decrease our energy costs and assure a constant supply. The return on investment is tangible: in 2015 the Cosoleacaque plant generated a total of 623 GigaWatts/hr of electrical energy and produced 1.1 million tons of steam, deliver- ing U.S. $18.3 million in benefits. Internal well-being We work every day to ensure the full development of our employees since we believe that creating internal well-being is a basic con- dition for contributing to the construction of a better future for all. Our Employees Material aspect: Distribution of wealth, Labor practices. Alpek’s employees are our main strength and greatest wealth. Al- though due to the nature of our operations our workforce consists mainly of men, we are committed to gender equality in every sense. The wages we pay are based on the experience and skills of each employee and not their gender. Furthermore, growth and integrated development opportunities are provided to all employees equally. G4-EC5, LA12, 13 Gender equality and diversity in Alpek are guaranteed by the ALFA Code of Ethics and other established policies in each of our companies, such as DAK Americas’ Equal Employment Op- portunity Policy. Similarly, the ratio between the basic salary of men compared to women is 1:1, no difference whatsoever. Diversity and inclusion are key factors in the richness of our work culture. As a company that competes in various markets around the world, our vision as a global citizen aligns with international trends and allows us to strengthen our practices. This year we identified 29 Annual Report 2015 | ALPEK certain factors that characterize the new generations that will join the workforce in the short term, which are significantly different from the traditional. We have the opportunity to develop and drive a positive change in our operational approach and workforce de- velopment. Alpek’s workforce in 2015 was distributed as follows: G4-10,11 Group Under 30 years Between 30 and 50 years Over 50 years Men Women Total 995 178 1,173 Type of Employment Executives and employees Unionized Total 2,309 304 2,613 Men 2,031 2,468 4,499 1,195 115 1,310 Women 569 28 597 Total 4,499 597 5,096 Total 2,600 2,496 5,096 Each one of Alpek’s operations respect their employee’s freedom of association. 48% of our employees are unionized. We invested a total of U.S. $5.5 million in training during 2015, 3 times more than in 2014. The results are shown in the follow- ing table: Training and Development G4-LA9, 10 Training and talent retention are strategic priorities. In 2015, our companies continued to expand their initiatives in this area through the generation and strengthening of alliances with universities around the world; an example of this is the Masters in polymeriza- tion in Italy, where we send our process engineers to conduct stud- ies which help them develop professionally and Alpek to further increase the capacity of its human capital. In total, in 2015 Alpek granted 437 schoolarships to employees who expressed an interest in continuing to increase their level of training and education, in diverse disciplines. 2015 Training Average number of training hours per employee. Average number of training hours per male employee. Average number of training hours per female employee. Average number of training hours per unionized employee. Average number of training hours per non- unionized employee. 27 33 21 20 31 30 Annual Report 2015 | ALPEK Control room at Styropek in Altamira, Mexico Occupational Health and Safety Material aspect: Health and safety. G4- LA5-8 The health of our employees is a priority for Alpek. We address this issue on two fronts: the reduction of work accidents and the creation of safer work environments; and the promotion of non work-related health, through medical check-ups and awareness campaigns. In 2015 we invested nearly US $15 million in this area. Furhtermore, we have the support of our Health and Safety Com- mitees, where 100% of our personnel are represented. Loss Ratio Frequency Accidents Days Lost Fatalities 2014 58.7 1.3 12 555 0 2015 43.8 2.2 21 416 0 Through a total of 33 implemented programs and an investment of more than U.S. $4.8 million, we were able to achieve positive results such as reducing the accident rate in the Univex plant by 33%, and completing 12 years with zero accidents in the transportation logis- tics operations of Petrotemex. 31 Annual Report 2015 | ALPEK Talk during Sustainability Day at Grupo Petrotemex in Altamira, Mexico 32 32 Informe Anual 2015 | ALPEK Annual Report 2015 | ALPEKEnvironment G4- EN27, 31 Alpek’s operations require the intensive use of natural resources, and so we have the responsibility to use them sustainably so that future generations can also benefit from them. We have a strong commitment to the environment which extends from the constant revision of our processes in order to make them cleaner and more efficient, to the preservation of the natural habitats in the vicinity of our plants. Area of investment Amount (Thousands of dollars) Reduction of emissions Environmental management costs Waste disposal and reduction Prevention costs Other environmental actions Remediation costs Total 19,169 7,216 1,331 961 326 0 29,003 In 2015 our investment in actions to benefit the environment increased by 27% compared to the previous year. Energy Efficiency Material aspect: Energy eco-efficiency. G4-EN3, 4,6 Projects like our energy cogeneration plant in Cosoleacaque, Vera- cruz—which began operations at the end of 2014 and generated a total of 623 GigaWatts/hr—underline the commitment we have to eco-efficiency and a lesser dependence on non-renewable energy sources. In addition, 97% of our energy needs comes from natural gas, currently the cleanest fossil fuel. This represents 4% more in comparison to 2014. Energy source Direct consumption (GJ x 106) Indirect consumption (GJ x 106) 2014 2015 2014 2015 Natural gas 15.7 21.9 Alternative fuel Coal Fuel oil Diesel Electricity Totals 0.2 1.0 0.1 0.0 0.9 0.5 0.5 0.2 16.9 22.6 5.9 5.9 6.0 6.0 It is important to note that even though our energy-savings initiative yielded favorable results, the increase in direct energy consumption was due to the expansion of our operations in 2015. Other energy saving initiatives implemented in 2015, such as the refrigeration optimizations for Akra and the installation of new com- pressors for monomer processes for DAK Americas, resulted in a reduction in consumption of more than 261,000 GJ in the year. In addition, we were able to decrease energy use by 346 KW per ton of polymer produced. In our PTA and PET operations, initiatives such as the integration with cogeneration processes and the use of steam generated con- sumption savings of 571, 079 GJ. Water Care Material aspect: Water management Water is a crucial resource for our operation and looking after it is a priority. We are working on strategies that allow us to reduce the water footprint of our products through reduced consumption and the reuse and treatment of the water we use. We have 12 water treatment plants. G4-EN8, 10 33 Annual Report 2015 | ALPEK Grupo Petrotemex (PTA), Altamira, Mexico This year Grupo Petrotemex achieved savings of 1.6 million m3 of water by optimizing its reuse systems, and Polioles implemented broad-scope initiatives through its Water Committee that will re- port results in the next few years. Likewise, Indelpro continued with its inverse osmosis operation project through which it recovers blow-down water from the cooling towers. This allowed it to reduce water consumption by 23% compared to 2014. In addition, Akra reduced drinking water consumption in its installations and routine activities by 48 m3/day by optimizing its leak detection and repair process. Styropek Brazil has reduced its consumption by 76% since 2008. Source Water Consumption (millions of m3) Rivers, lakes and seas Underground water Municipal water supply Other Total 89.5 3.5 1.2 0.5 94.6 Due to these initiatives, our water consumption was reduced by 3%, even though our level of production increased. Moreover, we increased the volume of treated and reused water in our processes with respect to 2014. Treated and reused water (m3) 10.3 million 15.1 million 2014 2015 This amount represents 16% of our total consumption. Reduction of Emissions Material aspect: Climate change and emissions strategy. Climate change is a reality we have to face. Alpek joins the fight through emission reduction programs and our participation with carbon credis. At year-end 2014 the UNFCCC, a United Nations international body, certified the reduction of 900 thousand ton CO2 emissions in our operations. The 2015 results will be added by mid-2016. G4- EN15, 16, 19, 21 34 Annual Report 2015 | ALPEK Emissions of CO2 equivalent Direct (x 106 ton CO2e) Indirect (x 106 ton CO2e) Total 2014 2015 1.3 0.9 2.2 0.9 1.2 2.1 Emissions of other pollutants Pollutant Amount NOx SOx 431.3 tons 766.1 tons The increase in NOx emissions is due to the start up of the newly acquired installations. The actions carried out, such as an increased use of natural gas or the optimization in the use of combustion equipments among others, achieved reductions of over 209 thousand CO2 tons of emis- sions in our processes, equivalent to the yearly emissions of 43 thousand cars. It is important to note that even with the increase of our operations, these reductions allowed us to maintain our emis- sions on a similar level than those of 2014. Waste and Spills Besides being committed to the reduction of pollutants we send into the atmosphere, we are also working to eliminate our solid waste. DAK Americas is at the forefront of this effort with its Zero Waste program, which enabled its plants to stop emitting waste entirely in 2015. G4- EN23, 24 Waste Weight (tons) Treatment method Non-hazardous sludge Hazardous sludge 9,305 471 Landfill Reused as fuel 35 Annual Report 2015 | ALPEKForestation in Altamira, Mexico 36 36 Informe Anual 2015 | ALPEK Annual Report 2015 | ALPEKIn 2015, one of our external contractors had a substance spillage during transport operations in Veracruz, where a train used by Po- lioles and other companies in the region to transport chemicals derailed and ignited. Polioles, like all Alpek companies, has a strict protocol for action in such situations, which was implemented in a timely and proper manner. It must be said that the contractor and local government responded to the emergency by evacuating the nearby towns and controlling the fire and spillage. As part of our responsibility to the health of people and the environment, this incident has been reviewed in order to avoid similar occurrences in the future. • Univex grows produce like green beans, lettuce, onions and other vegetables to test its fertilizers, and donates them to the local community. It should be noted that these fertilizers, al- though often still in the testing stage, are completely safe for use in the production of food for human consumption. • Petrotemex helped the local communities through the mainte- nance of three schools, the construction of paved roads with an investment of almost U.S. $250,000, and ViveVerde, a se- ries of talks about the care of the environment in neighboring schools. Our Customers and Suppliers Material aspect: Customer and supplier relations: G4-12, EN33, LA14, LA15, HR4, HR10, HR11, SO9, SO10 Material aspect: Relations with NGOs and regulatory agencies: G4-15, 16, 24-26 In 2015 the ALFA Sustainability Committee rolled out a project aimed at the companies’ supply chain. The project envisages the creation of a frame of reference and methodology to understand the sustainability practices of the suppliers and their progress in that area. This will enable the companies to create sustainable development plans which are reflected in their performance and, hence, in their economic growth. Developing mutually beneficial relationships with our customers and suppliers is at the center of the way we operate. We also participated in a number of initiatives of the chambers and associations to which we subscribe, to benefit both the par- ticipating companies and the surrounding communities. In 2015 we played an active role in the following: G4- EN27 Raw Materials and Use of Resources Companies in the petrochemical industry are challenged with find- ing increasingly efficient and environmentally friendly ways to ob- tain the resources we need to manufacture the products our cus- tomers require. This becomes even more relevant since our raw materials derive from oil, which is non-renewable and whose ex- traction is associated with the emission of pollutants. Recycling is an important part of our sustainability strategy. We have PET bottle recycling plants in the United States and Argentina with a total annual capacity of 89 thousand tons. In 2015 our plants recycled 53.8 thousand tons of this material. Our Community Material aspect: Community engagement. G4-EC7 Our neighboring communities give us their license to operate. In exchange, Alpek contributes to the local and national economy, implements programs to improve the quality of life of the people around us and promotes the sustainable development of the places where it operates. Alpek companies conduct programs that meet the different needs of our communities in terms of health and safety, support for local schools and care of the natural environment, among others. Among the most important activities we carry out are the following: • All subsidiaries participate in Family Day, an event that in- cludes activities to promote family life among our employ- ees. In addition, all our companies contribute to the ALFA Foundation. 37 Annual Report 2015 | ALPEK Company Association Akra ANIQ (Asociación Nacional de la Industria Química) ACIA (Asociación de Crédito Industrial Argentina) AFMA (America Fiber Manufacturers Association) CAIRPLAS (Cámara Argentina de la Industria de Reciclados Plásticos) Chambers of commerce near our facilities Campana - Zarate Safety-Hygiene Committee CAPCA (Carolinas Air Pollution Control Association) Capital Associate Industries CCAM (Cámara de Comercio Argentina-Mexicana) CEMPRE (Compromiso Empresario para el Reciclado) CERA (Cámara de Exportadores de la República Argentina) CICAZ (Comité Interindustrial de Conservación del Ambiente Zárate Campana) CIPETAR (Cámara de la Industria del PET Argentina) CIQyP (Cámara de la Industria Química y Petroquímica) DAK Americas CIRA (Cámara de Importadores de la República Argentina) IAE (Instituto Argentino del Empaque) INDA (Association of the Nonwoven Fabrics Industry) IPA (Instituto Petroquímico Argentino) 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 (Unión Empresaria de Municipio Tigre) UIZ (Unión Industrial de Zárate) 38 Participation in steering committees or special projects Above minimum economic support Participation for reasons of strategy No No Yes Yes No No Yes No No No No Yes Yes No No No No No No Yes Yes Yes Yes No Yes Yes No Yes No No Yes No Yes No No No No No No No No No No No No No No No No Yes Yes No Yes Yes No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No Yes Yes Yes Yes Yes Yes Yes Annual Report 2015 | ALPEKCompany Association ANIQ (Asociación Nacional de la Industria Química) Petrotemex Asociación de Industriales del Sur de Tamaulipas, A.C. CRIS Indelpro ANIQ (Asociación Nacional de la Industria Química) Asociación de Industriales del Sur de Tamaulipas, A.C. Polioles ANIQ (Asociación Nacional de la Industria Química) ABIQUIM (Asociación Brasileña de la Industria Química) Styropek ANIQ (Asociación Nacional de la Industria Química) Univex ANIQ (Asociación Nacional de la Industria Química) Participation in steering committees or special projects Above minimum economic support Participation for reasons of strategy Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No No No No No No Yes Yes Yes No No Yes Yes Yes Yes Families during Sustainability Day at Grupo Petrotemex, Indelpro and Styropek 39 Annual Report 2015 | ALPEKBoard of Directors G4-34, 38 Armando Garza Sada (3) Chairman of the Board of Alpek, S.A.B. de C.V. • Chairman of the Board of ALFA and NEMAK. • Member of the Boards of CEMEX, FEMSA, Frisa Industrias, Grupo Financiero Banorte, Grupo Lamosa, Liverpool, Proeza, and ITESM. Andrés E. Garza Herrera (1A) Chief Executive Officer of Qualtia Alimentos, S.A. de C.V. • President of Mexican Consumer Products Industry Council / Consejo Mexicano de la Industria de Productos de Consumo, A.C. (ConMéxico). Member of the Boards of Xignux, Regional Board of Banorte, Universidad de Monterrey (UDEM), and Ciudad de los Niños. Álvaro Fernández Garza (3) President of ALFA, S.A.B. de C.V. Merici Garza Sada (4) Investor • Co-Chairman of the Board of Axtel. Member of the Boards of Alfa, Nemak, Cydsa, Grupo Aeropuertario del Pacífico, Vitro, Universidad de Monterrey (UDEM), Georgetown University (Latin American Board), and Museo de Arte Contemporáneo de Monterrey. • Chairman of the Advisory Board of the Centro Roberto Garza Sada of the UDEM. 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, and Universidad de Monterrey (UDEM), and as Alternate Member of the Boards of FEMSA, and Coca Cola FEMSA. Rodrigo Fernández Martínez (3) President of Sigma México • Previously Marketing and Finance Director of Sigma. Pierre Francis Haas García (1) Advisory Services Director of Hess Energy Trading Company (HETCO). Jaime Serra Puche (1A) Founding Partner and Chief Executive Officer for 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 for Grupo Proeza, S.A. de C.V. • Member of the Boards of Grupo Proeza, CFE, and ITESM. Carlos Jiménez Barrera Secretary of the Board Key 1. Independent Board Member 2. Independent Patrimonial Board Member 3. Related Patrimonial Board Member 4. Patrimonial Board Member A. Audit and Corporate Practices Committee 40 Annual Report 2015 | ALPEKManagement Team 7 3 2 4 1 5 6 8 G4-34, 39 1. José de Jesús Valdez Simancas Chief Executive Officer 2. Eduardo Escalante Castillo 3. Felipe Garza Medina 4. Jorge P. Young Cerecedo Chief Financial Officer President of the PTA President of the PET and Staple Business Unit Fibers Business Unit Chief Financial Officer of Alpek CEO of Alpek since 1988. Former CEO since 2013. Former President of the President of Alpek’s PTA Business Unit President of Alpek’s PET and Staple of Petrocel, Indelpro, and Polioles, Caprolactam Division of Alpek and since 2008. Joined Alfa in 1977 and is Fibers Business Unit since 2012. and former Chairman of the National President of AOL Mexico. Holds an former CEO of Indelpro and Galvacer. Former Executive Vice President Association of the Chemical Industry undergraduate degree from ITESM Holds an undergraduate degree from of PET Resins and Vice President (ANIQ). Holds an undergraduate and a Master’s in Engineering from Stanford University and an MBA from of Planning and Administration degree and MBA from ITESM and a Stanford University. Cornell University. Master’s in Industrial Engineering from Stanford University. of DAK Americas LLC. Holds an undergraduate degree from ITESM and 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 8. Gustavo Talancón Gómez President of the Caprolactam Business Unit Business Unit Chemical Business Unit and Fertilizers Business Unit President of Alpek’s Filaments Fibers President of Alpek’s Polypropylene President of Alpek’s EPS and Chemical Business Unit since 2005. Joined Alfa in Business Unit since 2008. Joined Business Unit since 1999. Joined Alpek 1974 and is a former Vice President of Alfa in 1985, is a former Director in 1986 and is former Vice President of Alpek’s Industrial Filaments Business of Human Resources at Alfa, held Planning, Finance and Administration, Unit. Holds an undergraduate degree several executive positions in Alpek’s and Sales in Grupo Petrotemex. Holds and an MBA from ITESM. Synthetic Fibers Business Unit and an undergraduate degree and Master’s was Chairman of ANIQ. Holds an in Chemical Sciences from UNAM and undergraduate degree and an MBA an MBA from ITESM. from ITESM. President of the Caprolactam and Fertilizer Business Unit since 2013. Joined Alfa in 1989, is former CEO of Terza, and held several executive positions in Alpek’s Polypropylene and Nylon and Polyester Filaments Business Units. Holds an undergraduate degree from ITESM and a graduate degree from IPADE. 41 Annual Report 2015 | ALPEKCorporate Governance G4-38, 42, 47, 49, 58 Once a year, all companies that are listed on the Mexican Stock Ex- change (BMV) must disclose the extent to which they adhere to the CMPC by answering a questionnaire. The responses of the different companies may be consulted on the BMV’s website. A summary of Alpek’s principles of corporate governance is present- ed below, reflecting the answers the company gave to the question- naire in June 2015 and updated where necessary: • The Board of Directors is made up of nine members, who have no alternates. Of the nine directors, four are independent board members, four are related proprietary board members and one is an independent proprietary board member. This annual report provides information on all the board members, identifying those who are independent and their participation in the Audit and Corporate Practices Committee. • The Board of Directors is advised by the Audit and Corporate Practices Committee, which is made up of independent board members. The Committee Chairman is an independent board member. • The Board of Directors meets every three months. Meetings of the Board may be called by the Chairman of the Board, the Chairman of the Audit and Corporate Practices Committee, the Secretary of the Board or at least 25% of its members. At least one such meeting every year is dedicated to defining the company’s medium and long-term strategies. • Members must inform the Chairman of the Board of any con- flicts of interest that may arise, and abstain from participating in any related deliberations. • The Audit and Corporate Practices Committee studies and is- sues recommendations to the Board of Directors on matters such as selecting and determining the fees to be paid to the external auditor, coordinating with the company’s internal au- dit area and studying accounting policies. 42 • Additionally, the Audit and Corporate Practices Committee is responsible for issuing recommendations to the Board of Directors on matters related to corporate practices, such as employment terms and severance payments for senior execu- tives, and compensation policies. • The company has internal control systems with general guide- lines that are submitted to the Audit and Corporate Practic- es Committee for its opinion. In addition, the external auditor validates the effectiveness of the internal control system and issues reports thereon. • The Board of Directors is advised by the planning and finance department when evaluating matters relating to the feasibility of investments, strategic positioning of the company, align- ment of investing and financing policies, and review of invest- ment projects. This is carried out in coordination with the plan- ning and finance department of the holding company, ALFA, S.A.B. de C.V. • Alpek has a department specifically dedicated to maintaining an open line of communication between the company and its shareholders and investors. This ensures that investors have the financial and general information they require to evaluate the company’s development and progress. Alpek uses press releases, notices of material events, quarterly results confer- ence calls, investor meetings, its website and other communi- cation channels. • 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 promoted within the organization. Annual Report 2015 | ALPEK Glossary Caprolactam (CPL) CPL is made by reacting cyclohexane, ammonia and sulfur and is the raw material for the production of Nylon 6 polymer. Nylon 6 is a synthetic resin that, because of its strength, flexibility and softness, has a range of end uses, including for sportswear, underclothes and engineering plastics. IntegRex® 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 environmental legislation. ISO 9001 Certification Certification issued by rating agencies to those companies that op- erate with proven procedures for assuring the quality of their prod- ucts, in accordance with the standard defined by the International Organization for Standardization (ISO). 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 (Na- tional Association of the Chemical Industry, ANIQ) Certification given to companies that comply with the six compre- hensive responsibility requirements established by the ANIQ, cov- ering Process safety, Health and safety in the workplace, Product safety, Transportation and distribution, Prevention and control of environmental pollution and Community protection. Cyclohexane Compound produced by the hydrogenation of benzene and used in caprolactam production. Ethylene Oxide Compound produced from ethylene and used as an intermediate in the production of MEG and other chemicals. Expandable Polystyrene (EPS) Light, rigid, cellular plastic, product of the polymerization of styrene monomer. EPS is a versatile material because of its properties as an impact reducer and thermal insulator, and customized molding capacity. These properties, combined with the ease with which it can be processed, make EPS a popular packaging for impact-sen- sitive items and for protecting perishables. It is also widely used in construction systems, to lighten floor and roof structures, and as an insulator. ISO 14001 Certification Internationally accepted standard for establishing an efficient Envi- ronmental Management System (EMS). The standard is designed to support companies’ profitability and at the same time minimize environmental impact. Megawatt Unit of power, equal to 1 million watts. Monoethylene Glycol (MEG) Raw material with diverse industrial uses, especially for producing polyester (PET and fiber), antifreeze, refrigerants and solvents. Paraxylene (pX) Hydrocarbon in the xylene family used to produce PTA. It is also a component of gasoline. Polyester Chain Alpek business that comprises all the companies involved in poly- ester production, from the raw material (PTA) to the production of PET and fibers. 43 Annual Report 2015 | ALPEKSelf-regulation of Health and Safety in the Workplace, Level 4 Certification Program implemented by the Mexican Ministry of Work and Social Welfare to verify that companies have implemented administrative systems that promote safe, hygienic work centers. Single Step® One-step technology for the production of EPS, where the EPS pearls are impregnated with a pre-expanded agent during the po- lymerization process. Spheripol® LyondellBasell-owned technology which is the world’s most com- mon way of producing polypropylene. Spherizone® LyondellBasell’s most recent technology, which offers great flexibil- ity in polypropylene production and is used to make a wide range of products. Styrene Monomer Unsaturated hydrocarbon used to make a variety of plastics, syn- thetic rubber, protective coatings and resins. It is the main raw ma- terial in EPS production and also used as a solvent and chemical intermediate. Watt Unit of power in the International System of Units (SI). Polyethylene Terephthalate (PET) Material widely used in the manufacture of bottles and other containers for liquids, food and personal hygiene, household and healthcare products. PET flakes and films are used to produce caps, trays and recipients. Because of its transparency, strength, durability and high protection barriers, PET presents no known health risks, is light and recyclable, and has a wide range of ap- plications 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 pro- pylene monomer. Its properties include a low specific gravity, great rigidity, resistance to relatively high temperatures and good resis- tance to chemicals and fatigue. PP has diverse applications, includ- ing for packaging, textiles, recyclable plastic parts and different kinds of containers, auto-parts and polymer (plastic) banknotes. Polyurethanes (PURs) Rigid, flexible or elastic, durable materials that are produced by the reaction of a polyol with an isocyanate. They are very versatile, offering the elasticity of rubber, combined with the hardness and durability of a metal. PURs may be hard like fiberglass, spongy like upholstery foam, protective like varnish, elastic like tire rubber or sticky like glue. Propylene Unsaturated, 3-carbon hydrocarbon, co-product of the cracking process at petrochemical complexes and a by-product at oil re- fineries. It is used in the petrochemical industry to produce PP, propylene oxide, cumene, isopropanol, acrylic acid and acrylnitrile. It is also converted into a gasoline component by alkylation with butanes or pentanes. Propylene Oxide Compound produced from propylene and used to manufacture commercial and industrial products, including polyols, glycols and glycoethers. Purified Terephthalic Acid (PTA) Aromatic dicarboxylic acid, the main raw material in polyester pro- duction. 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 appli- cations, as well as other consumer products. 44 Annual Report 2015 | ALPEKConsolidated Financial Statements Alpek, S. A. B. de C. V. and subsidiaries At December 31, 2015 and 2014 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 54 55 56 57 58 59 60 45 Annual Report 2015 | ALPEKManagement’s Analysis 17.0%(e) in 2015, compared to 12.5%(e) in 2014. In real terms, the av- erage annual overvaluation of the Mexican peso against the dollar was 11.8%(f) in 2015 and 15.6%(f) in 2014. With regard to interest rates in Mexico, the TIIE (Interbank Equilib- rium Interest Rate) was 3.3%(d) in 2015 in nominal terms, compared to 3.5% in 2014. In real terms, interest rates increased from -0.5% in 2014 to 1.9% in 2015. The annual average nominal 3-month dollar LIBOR rate was 0.3%(d) in 2015, above the 0.2%(d) seen of 2014. If the nominal depreciation of the peso is included in the figure, LIBOR in constant pesos rose from 8.4%(c) in 2014 to 14.9%(c) in 2015. Sources: (a) Bureau of Economic Analysis (BEA). (b) Bureau of Labor Statistics (BLS). (c) National Institute of Statistics and Geography (INEGI). (d) Banco de México (Banxico). (e) Banxico. exchange rate for liquidating liabilities denominated in foreign currency and payable in Mexico. (f) Own calculations with data from INEGI, bilateral with the United States, considering consumer prices. 2015 The following analysis complements the Letter to the shareholders and the Audited financial statements. Unless otherwise specified, figures are expressed in millions of nominal pesos, with some fig- ures being expressed in millions of dollars (U.S. $) due to the high dollarization of Alpek’s revenues. Percentage variations are stated in nominal terms and all information is presented in accordance with International Financial Reporting Standards (IFRS). Economic Environment 2015 was characterized by weakness in the global economy. Institu- tions such as the International Monetary Fund and the World Bank reduced their initial growth expectations in face of doubt about the strength of the economic recovery. Contrasting circumstanc- es were observed in different countries. The United States and the United Kingdom reported improved growth figures compared to previous years, while countries such as China and some countries in the Euro Zone disappointed. Financial markets were volatile in advance of the Fed’s decision on an interest-rate increase in the United States, prompting an important appreciation of the dollar vis-à-vis the majority of world currencies, including the Mexican peso. In fact, the Fed began its hike in benchmark rates as expect- ed, albeit gradually. China’s lower than expected growth and the potential entry of Iranian oil into the market increased pressure on oil prices, so that at year end, the price of Brent crude was 36% be- low December 2014. Oil prices have continued to fall and the dollar to appreciate into early 2016. The GDP and other economic variables in Mexico and the United States, which are part of the context for Alpek’s earnings, are de- scribed below: Gross Domestic Product (GDP) in the United States grew 2.4%(a) (estimated) in 2015, the same as the previous year. 2015 consumer inflation was 0.7%(b), below the 0.8%(b) reported in 2014. Mexico’s GDP grew 2.5% (estimated) in 2015, slightly more than in 2014. Consumer inflation was 2.1%(d) in 2015, lower than the 4.0%(d) reported in 2014. The Mexican peso depreciated nominally by 46 Annual Report 2015 | ALPEKVolume – (thousand tons) Polyester Plastics & Chemicals TOTAL VOLUME 2015 3,015 922 3,937 2014 3,082 849 3,931 2013 3,035 839 3,874 Revenue 2015 2014 2013 VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 (2) 9 0 2 1 1 VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 Polyester Million pesos Million dollars Plastics & Chemicals Million pesos Million dollars TOTAL REVENUE Million pesos Million dollars 60,769 3,840 22,821 1,444 83,590 5,284 63,228 4,752 22,844 1,719 86,072 6,471 68,636 5,356 21,425 1,671 90,061 7,028 (4) (19) 0 (16) (3) (18) (8) (11) 7 3 (4) (8) Price Index 2015 2014 2013 VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 Polyester Million pesos Million dollars Plastics & Chemicals Million pesos Million dollars TOTAL Million pesos Million dollars 89 72 97 79 91 74 91 87 105 102 94 91 100 100 100 100 100 100 (2) (17) (8) (23) (3) (18) (9) (13) 5 2 (6) (9) 47 Annual Report 2015 | ALPEKRevenue Net revenue in 2015 amounted to $83,590 million (U.S. $5.284 billion), 3% less than the $86,072 million (U.S. $6.471 billion) of 2014, reflect- ing a 3% drop in average prices, which were mainly affected by the decline in oil prices. The average dollar-denominated price fell by 18% but was offset by the depreciation of the peso against the dollar. Revenue by Business Segment In 2015, Polyester’s net revenue was $60,769 million (U.S. $3.840 billion), 4% less than the $63,228 million (U.S. $4.752 billion) of 2014. The Polyester segment posted a decline of 2% in both average sales prices and volume, which reduced revenue year-over-year. In dollar terms, the average price of Polyester fell 17% in 2015, driven by the downward trend in crude and feedstock prices. However, the depreciation of the peso against the dollar offset this effect. The Plastics & Chemicals segment had a revenue of $22,821 million (U.S. $1.444 billion) in 2015, compared to $22,844 million (U.S. $1.719 billion) the previous year. In 2015, a volume growth of 9%, driven primarily by the demand for polypropylene, offset the 8% decline in av- erage sales price. Excluding the foreign exchange rate effect, the average price of this segment’s products was 23% less than in 2014 due to the fall in crude and feedstock prices. Operating Profit and EBITDA 2015 operating profit was $7,590 million (U.S. $481 million), 103% more than the $3,739 million (U.S. $286 million) of 2014. Our two business segments posted year-over-year operating profit improvement. In 2015, EBITDA reached $9,974 million (U.S. $630 million), 75% above the $5,710 million (U.S. $434 million) of 2014. Polyester EBITDA grew by $1,878 million (U.S. $74 million) in 2015, mainly due to the increase in the North American PTA price formula and the benefits generated by the operation of the cogeneration plant in Cosoleacaque, Veracruz. Plastics & Chemicals EBITDA rose by $2,399 million (U.S. $125 million), reflecting enhanced margins for polypropylene and expandable polystyrene (EPS) compared to 2014. EBITDA growth in 2015 also reflected two extraordinary items: a gain of $394 million (U.S. $26 million) from the sale of our polyurethane business and an inventory devaluation of $181 million (U.S. $21 million) below 2014. 48 Annual Report 2015 | ALPEKOperating Income (EBITDA) – (million pesos) Polyester Plastics & Chemicals Others and eliminations TOTAL EBITDA Operating Income (EBITDA) – (million dollars) Polyester Plastics & Chemicals Others and eliminations TOTAL EBITDA 2015 5,420 4,508 46 9,974 2015 344 284 3 630 2014 3,541 2,110 59 5,710 2014 270 159 5 434 2013 4,974 2,304 66 7,344 2013 388 180 5 572 VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 53 114 (22) 75 (29) (8) (11) (22) VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 27 79 (35) 45 (30) (12) (11) (24) Finance cost, net The finance cost, net was -$1,862 million (-U.S. $116 million) in 2015, 24% more than in 2014. The finance expense increased from -$791 mil- lion (-U.S. $59 million) in 2014 to -$933 million (-U.S. $59 million) in 2015, due to the depreciation of the peso against the dollar. The higher exchange rate also resulted in the recognition of a non-cash exchange rate loss of -$1,114 million (-U.S. $68 million) in 2015, compared to an exchange rate loss of -$629 million (-U.S. $46 million) in 2014. Finance cost, Net (million pesos) Finance expense Finance income Net Finance Expense Foreign exchange gain (loss) Valuation of financial derivative instruments 2015 (1,177) 244 (933) (1,114) 184 2014 (956) 166 (791) (629) (77) 2013 (1,114) 159 (955) (146) (71) FINANCE COST, NET (1,862) (1,497) (1,172) VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 (23) 47 (18) (77) 340 (24) 14 4 17 (331) (8) (28) 49 Annual Report 2015 | ALPEKTaxes Income tax in 2015 totaled $2,040 million (U.S. $130 million), 131% more than the $883 million (U.S. $68 million) reported in 2014. The in- crease is due to a 160% growth in before-tax income. Taxes - (million pesos) 2015 2014 2013 VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 Income tax Profit before income taxes Statutory tax rate Income tax at statutory rate Taxes for permanent differences between accounting-taxable profit Total income tax Effective tax rate Made up as follows: Current Adjustment to the provision of income tax from prior years Deferred Total income tax 5,704 30% (1,711) (328) (2,040) 36% 2,197 30% (659) (224) (883) 40% 1,723 30% (517) (300) (817) 47% (2,252) (975) (1,137) 9 203 (7) 98 (2,040) (883) (44) 364 (817) 160 27 (160) (27) (47) (131) (131) 235 108 (131) 25 (8) 14 86 (73) (8) Net Income Attributable to the Controlling Interest The net income attributable to the controlling interest of $2,748 million (U.S. $175 million) in 2015 was 243% higher than the net income of $801 million (U.S. $65 million) posted in 2014. Increases in finance cost, net and taxes were more than offset by the growth in operating profit. Statement of income - (million pesos) Operating profit Finance cost, net Share in losses of associates Income tax Net consolidated profit Profit attributable to controlling interest 2015 7,590 (1,862) (23) (2,040) 3,665 2,748 2014 3,739 (1,497) (45) (883) 1,314 801 2013 2,926 (1,172) (30) (817) 906 262 VAR. % 2015 vs 2014 VAR. % 2014 vs 2013 103 (24) 49 (131) 179 243 28 (28) (48) (8) 45 206 50 Annual Report 2015 | ALPEKInvestment in Fixed and Intangible Assets In 2015, investments in fixed and intangible assets totaled $4,482 million (U.S. $275 million), 7% more than the $4,191 million (U.S. $307 million) reported in 2014. During the year, resources were used primarily for strategic projects such as the integrated PTA/PET plant in Corpus Christi, the MEG supply agreement signed with Huntsman, and the construction of two propylene spheres. In addition to its in- vestments in fixed and intangible assets, Alpek also invests in shares, as in the case of the acquisition of the EPS businesses in North and South America which is not included in these figures. Net Debt1 As of December 31, 2015, net debt was $12,420 million (U.S. $722 million), 18% higher than the $10,519 million (U.S. $715 million) as of De- cember 31, 2014. Excluding the effect of the depreciation of the peso against the dollar, the net debt balance increased 1% year-over-year. Alpek’s cash balance at the close of 2015 was $6,653 million (U.S. $387 million). million dollars % integrated Short and long-term debt 2015 2014 Short-term debt Long-term debt, 1 year 2 years 3 years 4 years 5 years or more TOTAL DEBT Avg. maturity long-term debt (years) Avg. maturity total debt (years) FINANCIAL INDICATORS - (Times) Net Debt / EBITDA (U.S.$) Interest Coverage (U.S.$) Total Liabilities / Stockholder’s equity 39 21 71 27 1 949 1,108 6.3 6.1 2015 1.1 10.7 1.2 Var. 86 2,000 196 23 (98) (3) 1 2015 2014 4 2 6 2 0 86 100 2 0 2 2 4 89 100 21 1 24 22 48 978 1,094 7.3 7.2 2014 2013 1.6 6.5 1.2 1.3 7.1 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. 51 Annual Report 2015 | ALPEK 2015 HIGHLIGHTS Acquisition of EPS business from BASF On April 2015, the expandable polystyrene (EPS) businesses acquired from BASF in North and South America were successfully integrat- ed. Styropek, S.A. de C.V., the new, wholly-owned Alpek subsidiary created for this purpose, is now the leading EPS producer in America, with an aggregate annual capacity of 230,000 tons in Mexico, Brazil, Argentina and Chile. Acquisition of additional PET supply rights from the integrated plant in Corpus Christi Alpek acquired additional rights to supply 100,000 tons of integrated PET per year from the M&G plant in Corpus Christi. As reference, on April 16, 2013, Alpek announced it had acquired contractual supply rights for 400,000 tons of integrated PET per year from this facility. Alpek’s contractual supply rights increased to 500,000 tons of integrated PET per year from the M&G plant in Corpus Christi, once con- struction is completed. Construction of the cogeneration plant in Altamira A comprehensive analysis of an alternative configuration for Alpek’s cogeneration plant in Altamira, Tamaulipas, resulted in enhanced prof- itability from lower investment and greater generation capacity. Construction began in December 2015. Approximately U.S. $350 million will be invested in the new plant, which will have a capacity of 350 MW and start operations during the first half of 2018. MEG supply agreement with Huntsman The contract signed with Huntsman consists of a U.S. $65 million investment for annual supply rights to approximately 150,000 tons of monoethylene glycol (MEG) from its site in Port Neches, Texas. The agreement assures a portion of our MEG needs at a cost based on ethylene prices. Acquisition of new EPS plant in Chile Alpek signed an agreement with BASF Chile, S.A. to acquire its EPS plant in Concón, Chile, which has an annual capacity of 20,000 tons. The transaction should be closed during the first half of 2016. 52 Annual Report 2015 | ALPEKExpansion Projects Pearl River A 110,000 tons per year polyester fiber expansion was initiated at Alpek’s Pearl River plant (in the United States) to meet growing customer demand. The project, which leverages existing on-site infrastructure, is expected to come on line before the end of 2016. EPS Altamira An expansion project of 75,000 tons of EPS per year was started at our Altamira plant (in Mexico). Through this investment, the Altamira EPS plant will become one of the world’s five largest. The plan envisages that the new capacity will begin operations before year-end 2017. Dividends On April 15, 2015, the Ordinary Shareholders’ Meeting approved the payment of a cash dividend of U.S. $95 million, which was paid as of April 24, 2015. 53 Annual Report 2015 | ALPEKReport of the Independent Auditors Monterrey, N. L., February 2, 2016 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, 2015 and 2014, 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 reason- able 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 ac- counting policies used and the reasonableness of accounting estimates made by Management, as well as evaluating the overall presentation of the con- solidated 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, 2015 and 2014, and its financial performance and its cash flows for the years then ended, in accordance with International Financial Reporting Standards. PricewaterhouseCoopers, S. C. Héctor Rábago Saldívar Audit Partner 54 Annual Report 2015 | ALPEK Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Financial Position At December 31, 2015 and 2014 In thousands of Mexican pesos At December 31, Note 2015 2014 Asset CURRENT ASSET: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables, net Inventories Derivative financial instruments Prepayments and others Total current asset NON-CURRENT ASSET: Property, plant and equipment, net Goodwill and intangible assets, net Deferred income taxes Other assets Total non-current asset Total asset Liability and Stockholders' equity 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 Provisions Deferred income taxes Employee benefits Deferred credits and others 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 6 7 8 10 16 11 12 21 13 19 17 16 18 22 19 16 18 21 20 23 23 23 23 14 Ps 6,649,904 2,753 13,383,935 12,086,117 203,356 337,943 32,664,008 31,321,771 8,812,066 361,187 1,734,562 42,229,586 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 74,893,594 Ps 65,371,210 Ps 678,331 9,800,552 848,301 1,370,491 338,411 1,891,472 14,927,558 18,275,740 711,342 184,748 4,707,030 1,108,066 480,353 25,467,279 40,394,837 6,051,880 9,071,074 10,009,224 4,822,051 29,954,229 4,544,528 34,498,757 Ps 487,604 10,564,770 757,011 78,100 761,652 1,676,054 14,325,191 15,665,652 287,925 28,243 4,255,606 963,983 - 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 Total liability and stockholders' equity Ps 74,893,594 Ps 65,371,210 The accompanying notes are an integral part of these consolidated financial statements. José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Chief Financial Officer 55 Annual Report 2015 | ALPEK Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Income For the years ended December 31, 2015 and 2014 In thousands of Mexican pesos Revenue Cost of sales Gross profit Selling expenses Administrative expenses Other income (expenses), net Operating profit Finance income Finance cost Finance cost, net Share of losses of investments accounted for the equity method Profit before income taxes Income taxes Net consolidated profit Profit attributable to: Controlling interest Non-controlling interest Note 3.u 25 25 25 26 27 27 29 2015 2014 Ps 83,590,460 ( 73,029,596 ) Ps 86,072,058 ( 79,757,100 ) 10,560,864 6,314,958 ( 1,377,196 ) ( 1,839,073 ) 244,993 7,589,588 2,795,360 ( 4,657,563 ) ( 1,218,824 ) ( 1,325,744 ) ( 31,807 ) 3,738,583 135,437 ( 1,632,107 ) ( 1,862,203 ) ( 1,496,670 ) ( 22,976 ) ( 44,779 ) 5,704,409 ( 2,039,745 ) 2,197,134 ( 883,032 ) Ps 3,664,664 Ps 1,314,102 Ps 2,748,400 916,264 Ps 800,901 513,201 Ps 3,664,664 Ps 1,314,102 Basic and diluted earnings per share in pesos Ps 1.30 Ps 0.38 Weighted average of outstanding shares (in thousands of shares) 2,118,164 2,118,164 The accompanying notes are an integral part of these consolidated financial statements. José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Chief Financial Officer 56 Annual Report 2015 | ALPEK Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Comprehensive Income For the years ended December 31, 2015 and 2014 In thousands of Mexican pesos Net consolidated profit Ps 3,664,664 Ps 1,314,102 Note 2015 2014 Other items of comprehensive income of the year: Items that will not be reclassified to the statement of income: Remeasurement of obligations for employee benefits, net of taxes 20, 29 ( 2,921 ) ( 217,489 ) Items that will be reclassified to the statement of income: Effect of derivative financial instruments designated as cash flow hedges, net of taxes Translation effect of foreing entities Share of other comprehensive results of associates 16, 29 23, 29 Total other comprehensive income for the year ( 399,710 ) 3,843,118 - ( 674,507 ) 2,416,988 1,694 3,440,487 1,526,686 Total comprehensive income for the year Ps 7,105,151 Ps 2,840,788 Attributable to: Controlling interest Non-controlling interest Ps 5,627,892 1,477,259 Ps 1,931,557 909,231 Total comprehensive income for the year Ps 7,105,151 Ps 2,840,788 The accompanying notes are an integral part of these consolidated financial statements. José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Chief Financial Officer 57 Annual Report 2015 | ALPEK Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Changes in Stockholders' Equity For the years ended December 31, 2015 and 2014 In thousands of Mexican pesos Note Capital stock Share premium Retained earnings Other reserves Total controlling interest Non-controlling interest Total stockholders' equity Balances at January 1, 2014 Ps 6,051,880 Ps 9,071,074 Ps 8,292,566 Ps 602,358 Ps 24,017,878 Ps 3,069,786 Ps 27,087,664 Net profit Total other comprehensive income for the year Total comprehensive income for the year Dividends from subsidiaries to the non-controlling interest Changes in the non-controlling interest 23 23 800,901 - 800,901 ( 212,703 ) 1,343,359 1,130,656 513,201 396,030 1,314,102 1,526,686 588,198 1,343,359 1,931,557 909,231 2,840,788 ( 96,129 ) ( 96,129 ) - 12,287 12,287 Balances at December 31, 2014 6,051,880 9,071,074 8,880,764 1,945,717 25,949,435 3,895,175 29,844,610 Net profit Total other comprehensive income for the year Total comprehensive income for the year Dividends declared Dividends from subsidiaries to the non-controlling interest 23 Effect of business transference under common control 2 b) 2,748,400 - 2,748,400 3,158 2,876,334 2,879,492 916,264 560,995 3,664,664 3,440,487 2,751,558 2,876,334 5,627,892 1,477,259 7,105,151 ( 1,472,825) ( 150,273 ) - - ( 1,472,825 ) - ( 1,472,825) ( 978,179 ) ( 978,179) ( 150,273 ) 150,273 - Balances at December 31, 2015 Ps 6,051,880 Ps 9,071,074 Ps 10,009,224 Ps 4,822,051 Ps 29,954,229 Ps 4,544,528 Ps 34,498,757 The accompanying notes are an integral part of these consolidated financial statements. José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Chief Financial Officer 58 Annual Report 2015 | ALPEK Alpek, S. A. B. de C. V. and subsidiaries Consolidated Statements of Cash Flows For the years ended December 31, 2015 and 2014 In thousands of Mexican pesos Note 2015 2014 Cash flows from operating activities Profit before income tax Depreciation and amortization Impairment of property, plant and equipment Impairment of investment in joint ventures Impairment of doubtful trade receivables Gain on sale of property, plant and equipment Share of losses of investments accounted for the equity method Finance cost, net (Gain) loss on changes in the fair value of derivative financial instruments Employees' profit sharing and provisions Ps 11, 12 26 2 b) 13 Subtotal Decrease in trade receivables Decrease in accounts receivable from related parties Decrease in other accounts receivable (Increase) decrease in inventories (Decrease) increase in accounts payable Decrease in accounts payable to related parties Employees' profit sharing paid Net liability for retirement obligation Prepayment of inventory Income tax paid 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 by Alpek, S. A. B. de C. V. 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 in cash and cash equivalents Foreign exchange fluctuations on cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The accompanying notes are an integral part of these consolidated financial statements. 2 a) y 2 c) 2 b) 23 9 5,704,409 2,253,783 130,166 - ( 272,552 ) ( 381,585 ) 22,976 1,907,772 ( 178,004 ) ( 384,272 ) 8,802,693 2,765,126 572,466 61,095 ( 102,678 ) ( 1,220,341 ) ( 697,656 ) ( 3,927 ) ( 22,032 ) ( 1,101,666 ) ( 874,804 ) 8,178,276 202,110 ( 1,523,217 ) ( 1,857,461 ) ( 605,230 ) ( 26,809 ) ( 167,137 ) - ( 21,072 ) ( 3,998,816 ) 1,912,804 ( 1,949,882 ) ( 1,016,769 ) ( 1,472,825 ) ( 978,179 ) - - ( 3,504,851 ) 674,609 231,479 5,743,816 Ps 2,197,134 1,839,420 4,948 126,906 48,575 ( 286 ) 44,779 1,293,363 95,366 ( 193,331 ) 5,456,874 930,188 724,793 106,652 695,120 171,404 ( 130,155 ) ( 6,528 ) ( 17,398 ) - ( 1,337,962 ) 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 6,649,904 Ps 5,743,816 José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Chief Financial Officer 59 Annual Report 2015 | ALPEK Alpek, S. A. B. de C. V. and subsidiaries Notes to the Consolidated Financial Statements At December 31, 2015 and 2014 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 & Chemicals business segment, comprising the production of polypropylene (PP), expandable polystyrene (EPS), caprolac- tam (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 others. Alpek is the most important petrochemical company in Mexico and the second largest in Latin America, is the main integrated producer of polyester in North America. Besides, it operates the largest EPS plant in the continent, and one of the largest PP plants in North America and is the only producer of Caprolactam in Mexico. The shares of Alpek, S. A. B. de C. V. are traded on the Mexican Stock Exchange, and has Alfa, S. A. B. de C. V. (“Alfa”) as its main holding company. Alpek, S. A. B. de C. V. 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, Argentina, Chile and Brazil. 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. 2 – Significant events Note 2015 a) IntegRex® technology license and signature of a supply agreement with M&G During 2015, 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, Grupo Petrotemex will pay US$ 435 million to M&G during the construction of the Plant according to an established calendar and in compliance with certain milestones, by which Grupo Petrotemex will obtain supply rights of the Plant for 500 thousand tons of PET (manufactured with 420,000 tons of PTA) per year for a period of five years starting from the first day of the month in which the plant is completed and ready to manufacture and sale their products. In accordance to the supply agreement, Grupo Petrotemex 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 at the beginning of 2017. At December 31, 2015, Grupo Petrotemex has made payments amounting to US$ 371 million, of which US$ 307 million are recorded in the intangible assets caption and correspond to the before mentioned supply rights and will be amortized once the PET supply begins, and US $ 64 million as a prepayment of inventory within the non-current asset caption. 60 Annual Report 2015 | ALPEK b) Agreements between Alpek and BASF for the expanded polystyrene (EPS) and polyurethane (PU) businesses During July 2014, Alpek (“Alpek”) and BASF (“BASF”) signed the agreements related to the expanded polystyrene (EPS) and polyurethane (PU) businesses previously held through 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, except for the Neopor ® (gray EPS) of BASF business. Alpek acquired all EPS business activities from Polioles, including an EPS plant in Altamira, Mexico. Likewise, BASF acquired all PU business activities from Polioles, including certain assets located in Lerma, Mexico´s facility, as well as all marketing and sales rights for the PU, isocyanate and polyol systems. Once the transaction was completed, Polioles continued operating as a joint venture between Alpek and BASF, with a product portfolio comprising of industrial chemicals and specialties. Alpek also acquired the EPS business of BASF in North and South America, including: • EPS sales and distribution channels of BASF in North and South America • The EPS plants of BASF in Guaratinguetá, Brazil and General Lagos, Argentina, and • The EPS transformation business of BASF in Chile (Aislapol, S. A.) The combined capacity of all EPS production units acquired by Alpek is approximately 230,000 tons a year. This figure includes 165,000 tons a year of Polioles plant in Altamira, Mexico. Approximately 440 employees work in the businesses subject to the agreements, 380 of them in the EPS businesses and 60 in the PU businesses. Most of them continue performing their roles under the new ownership framework. Transactions included in this agreement were as follows: PU business sale to BASF In March 2015, through its subsidiary Polioles, Alpek completed the sale to BASF MEXICANA of all the polyurethane (PU) business activities, including assets selected in the Lerma, Mexico plant, as well as all marketing and sales rights of PU, isocyanate and polyol systems. From Alpek’s standpoint, the PU business sold was not considered as a business line or segment; therefore, IFRS 5 “Non- current Assets Held for Sale and Discontinued Operations” dispositions respect to the presentation as a discontinued operation, are not applicable. Rather, the transaction was carried out through the sale of a group of assets at market terms, and the total consideration received was Ps 407,152, which it is outstanding at December 31, 2015, and the net book value transferred was Ps 26,428, this transaction resulted in a gain of Ps 380,724 and was recorded in the income statement as other income (expense), net. Mexico EPS business sale to Styropek On March 31, 2015, Alpek transferred all its EPS business activities of Polioles, including the EPS plant in Altamira, Mexico to its subsidiary Grupo Styropek, S. A. de C. V. (Styropek). Since BASF has 50% equity in Polioles, the transaction between stockholders for the EPS business resulted in a Ps 150,273 reduction in the controlling interest and an increase in the non-controlling interest for the same amount. This transaction had no accounting effects over the financial statements of Alpek, since they were transactions among entities under common control, except for the increase in non-controlling interest of Ps 150,273. EPS business acquisition from BASF On March 31, 2015, through Styropek, Alpek finalized the acquisition of BASF´s EPS business in Argentina, Brazil, USA, Canada, and Chile. This acquisition included the working capital. A total of 450 employees work in the EPS line of business. The consolidated financial statements include the financial information of BASF’s EPS business starting in March 31, 2015. This acquisition is included in the Plastics & Chemicals segment. See Note 30. 61 Annual Report 2015 | ALPEKAt December 31, 2015, provisional purchase price allocation to fair values of acquired assets and assumed liabilities is as follows: Current assets (1) Property, plant and equipment Current liabilities (2) Other current liabilities Deferred income tax Other liabilities Consideration paid Ps 622,520 424,940 ( 183,078 ) ( 140,002 ) ( 88,867 ) ( 30,283 ) Ps 605,230 (1) Current assets consist mainly of accounts receivable and inventories amounting to Ps 333,318 and Ps 289,202, respectively. (2) Current liabilities consist mainly of suppliers in the amount of Ps 100,643. Total purchase consideration was paid in cash. Value of accounts receivable acquired approximates fair value due to its short-term maturity. Accounts receivable acquired are estimated to be recovered in the short term. No contingent liability has resulted from this acquisition that requires recognition. Neither are there contingent consideration agreements. Costs related to the acquisition amounted to Ps 22,153 and were recorded in income as “other expense, net”. Revenues contributed by BASF assets included in the consolidated statement of income since the acquisition date through December 31 amounted to Ps 5,482,042 and net income to Ps 731,952. If the acquisition had taken place on January 1, 2015, revenues would have increased by Ps 1,600,000 and net income by Ps 185,000, approximately. At December 31, 2015, the Company is in the process of concluding the final purchase price allocation to fair values of acquired assets and assumed liabilities. This analysis will be concluded within a period not to exceed twelve months as of the acquisition date. c) Monoethylene Glycol (MEG) manufacturing agreement On December 15, 2014 the Company through its subsidiary DAK Americas LLC (“DAK”) entered into a Toll Manufacturing Agreement with Huntsman Petrochemical LLC (“Huntsman”) in which will obtain the supply rights of Monoethylene Glycol (MEG), which is used in the production of PET polyester, at a preferred toll rate. Huntsman will develop, own and operate the equipment for the production of MEG in its Port Neches, Texas plant and DAK will supply the raw materials for the production. The installation of equipment and beginning of production will take place in 2016. On the other hand, DAK will pay Ps 1,118,422 (US$ 65 million) to Huntsman during the installation of the equipment according to a established calendar and in compliance with certain milestones; therefore, DAK will obtain the supply rights up to 28.8 million of pounds of product per year for a 15 years period commencing on the first day of the month in which the equipment is installed. At December 31, 2015, DAK has made payments amounting to Ps 568,589 (US$ 39 million), which are recorded under the intangible assets caption and will be amortized within the cost of sales once the MEG supply begins. 62 Annual Report 2015 | ALPEK 2014 d) 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 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. e) 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") - 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. During 2014, 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. At December 31, 2015, this transaction was concluded with the sale of this investment. Note 3 - Summary of significant accounting policies The accompanying consolidated financial statements and notes were authorized for issuance on February 2, 2016, 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 prepara- tion 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”). 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. 63 Annual Report 2015 | ALPEKThe 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. The subsidiaries are consolidated from the date on which control is transferred to the Company and until 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. If the business combination is achieved in stages, the value in books at the acquisition date of the equity previously held by the Company in the acquired entity is remeasured at its fair value at the acquisition date. Any loss or gain resulting from such remeasurement is recorded in income of the year. 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. 64 Annual Report 2015 | ALPEKAt December 31, 2015 and 2014, the main companies that comprise the consolidated of the Company are as follows: Country (1) Percentage of Ownership (2) 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. Cogeneración de Energía Limpia de Cosoleacaque, S. A. de C. V. Indelpro, S. A. de C. V. (Indelpro) Polioles, S. A. de C. V. (Polioles) Grupo Styropek, S. A. de C. V. (Holding company) Styropek México, S. A. de C. V. Styropek, SA. (3) Aislapol, SA. (3) Styropek do Brasil, LTD (3) Unimor, S. A. de C. V. (Holding company) Univex, S. A. USA Spain Argentina Argentina Chile Brazil 100 100 100 100 100 91 93 100 51 50 100 100 100 100 100 100 100 Functional currency Mexican peso US dollar US dollar US dollar Euro Argentine peso US dollar US dollar Mexican peso US dollar US dollar Mexican peso US dollar Argentine peso Chilean peso Brazilian real Mexican peso Mexican peso (1) Companies incorporated in Mexico, except those indicated. (2) Ownership percentage that Alpek has in the holding companies which in turn has in other companies. Ownership percentages and the voting rights are the same. (3) Companies acquired in 2015, See Note 2 b). At December 2015 and 2014, there are no significant restrictions for the investment in shares of the subsidiaries companies above mentioned. ii. Absorption (dilution) of control in subsidiaries 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. 65 Annual Report 2015 | ALPEKiv. 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. 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. 66 Annual Report 2015 | ALPEKii. 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. Translation differences on monetary financial assets and liabilities classified as fair value through profit or loss are recognized in the consolidated income statement as part of the fair value gain or loss. Translation differences on non-monetary financial assets classified as available for sale are included in other comprehensive income. iii. 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 nonmonetary 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 in the period they arose. iv. 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 for each balance sheet presented are translated at the closing exchange rate at the balance sheet date; 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 rate (when the average exchange rate is not a reasonable approximation of the cumulative effect of the rates of the transaction, to the exchange rate at the date of the transaction is used); and 67 Annual Report 2015 | ALPEKd. 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. Listed below are the principal exchange rates in the various translation processes: Local currency to Mexican pesos Closing exchange rate at December 31, Average exchange rate at December 31, Country USA Argentina Brazil Chile Functional currency US dollar Argentine peso Brazilian real Chilean peso 2015 17.21 1.33 4.34 0.02 2014 14.71 1.74 5.55 0.02 2015 15.85 1.72 4.80 0.02 2014 13.30 1.64 5.66 0.02 (*) This data is informative, for purposes of conversion monthly average exchange rates are used. 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. 68 Annual Report 2015 | ALPEKi. 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. 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, 2015 and 2014 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. 69 Annual Report 2015 | ALPEKSuppliers 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. 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. Adverse changes in the payment status of borrowers in the group of assets ii. 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. 70 Annual Report 2015 | ALPEKb. 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. 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, 2015 and 2014, the Company has no derivative financial instruments classified as net investment hedges. 71 Annual Report 2015 | ALPEKDiscontinuation 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 Others 40 to 50 years 10 to 40 years 15 years 2 to 13 years 3 to 20 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. 72 Annual Report 2015 | ALPEKBorrowing 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. 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) Leases The classification of leases as finance or operating depends on the substance of the transaction rather than the form of the contract. Leases in which a significant portion of the risks and rewards relating to the leased property are retained by the lessor are classified as operating leases. Payments made under operating leases (net of incentives received by the lessor) are recognized in the income statement based on the straight-line method over the lease period. Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalized at the beginning of the lease, at the lower of the fair value of the leased property and the present value of the minimum lease payments. If its determination is practical, in order to discount the minimum lease payments to present value, the interest rate implicit in the lease is used; otherwise, the incremental borrowing rate of the lessee should be used. Any initial direct costs of the leases are added to the original amount recognized as an asset. Each lease payment is allocated between the liability and finance charges to achieve a constant rate on the outstanding balance. The corresponding rental obligations are included in non-current debt, net of finance charges. The interest element of the finance cost is charged to the income for the year during the period of the lease, so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset's useful life and the lease term. k) Goodwill and intangible assets Intangible assets are recognized in the balance sheet when they meet the following conditions: 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, 2015 and 2014, no factors have been identified limiting the 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. 73 Annual Report 2015 | ALPEKThe 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 Others (a) Goodwill 15.5 years 10 years 10 years 6 to 7 years 3 to 7 years 20 to 25 years 20 years Goodwill represents the excess of the acquisition cost of a subsidiary over the Company's equity in the fair value of the identifiable net assets acquired, determined at the date of acquisition, and is not subject to amortization. Goodwill is shown under goodwill and intangible assets 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. (b) Development costs 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 are obtained and the Company intends also 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. (c) Intangible assets acquired in a business combination When an intangible asset is acquired in a business combination it is recognized at fair value at the acquisition date. Subsequently, such assets are as follows: trademarks, customer relations, intellectual property rights, no-competition agreements, among others, are carried at cost less accumulated depreciation and accumulated impairment losses. l) 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. m) Income taxes The amount of income taxes in the income statement represents the sum of the current and deferred income taxes. 74 Annual Report 2015 | ALPEKThe 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. n) Employee benefits i. Pension plans Defined contribution plans: A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to their service in the current and past periods. The contributions are recognized as employee benefit expense when they are due. 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. 75 Annual Report 2015 | ALPEKii. 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. 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. o) 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. When there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions for legal claims are recognized when the Company has a present obligation (legal or assumed) as a result of past events, it is likely that an outflow of economic resources will be required to settle the obligation and the amount can be reasonably estimated. A restructuring provision is recorded when the Company has developed a formal detailed plan for the restructure, and a valid expectation for the restructure has been created between the people affected, possibly for having started the plan implementation or for having announced its main characteristics to them. 76 Annual Report 2015 | ALPEKp) Share-based payments The Company's compensation plans are based on the market value of shares of the holding until December 31, 2014, from 1 January 2015 compensation refers to 50% to the value of the shares of its holding and 50% to the value of the shares of Alpek, S. A. B. de C. V., 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. q) 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, 2015 and 2014, there aren’t shares in treasury. r) 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. s) 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. t) 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. u) 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. 77 Annual Report 2015 | ALPEKRevenue from the sale of goods and products are recognized when all and each of the following conditions are met: • • • • • 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 Revenues from services are recognized as follows: • • • • The amount of revenue can be reliably measured It is likely that future economic benefits will flow to the Company The stage of completion of the service, on the date of the statement of financial position can be measured reliably 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. v) 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, 2015 and 2014, there are no dilutive effects from financial instruments potentially convertible into shares. w) Changes in accounting policies and disclosures The following accounting policies were adopted by the Company beginning January 1, 2015 and did not have a material impact on the Company: • Annual improvements to the IFRS - cycle 2010-2012 and cycle 2011-2013 • Defined benefit plans: Contributions - Changes to IAS 19 The adoption of these changes had no impact in the current period or any previous periods and it is not likely to affect future periods. x) New accounting pronouncements not early adopted by the company Following are the new pronouncements and amendments issued and effective for years subsequent to 2015 that have not been early adopted by the Company. 78 Annual Report 2015 | ALPEKIFRS 9 - "Financial instruments ", addresses the classification, measurement and recognition of financial assets and liabilities and introduces new rules for hedge accounting. In July 2014, the IASB made additional changes to the classification and measurement rules and also introduced a new impairment model. These last changes now comprise the entire new financial instruments standard. Following the approved changes, the Company no longer expects any impact from the new rules of classification, measurement and decrease of its financial assets or liabilities. There will be no impact on the Company’s accounting from financial liabilities, since the new requirements only affect financial liabilities at fair value through income and the Company has no such liabilities. The new hedge rules pair up the Company’s hedge accounting and risk management. As a general rule, the hedge accounting will be much easier to apply since the standard introduces an approach based on principles. The new standard introduces extensive disclosure requirements and changes in presentation, which will continue to be assessed by the Company. The new impairment model is a model of expected credit losses; therefore, it would result in advance recognition of credit losses. The Company continues assessing how its hedge agreements and impairment provisions are affected by the new rules. The standard is effective for the periods beginning on or after January 1, 2018. Early adoption is allowed. IFRS 15 - "Revenue from contracts with customers”, is a new standard issued by the IASB for revenue recognition. This standard replaces IAS 18 “Revenues”, IAS 11 “Construction contracts”, as well as the interpretations to the aforementioned standards. The new standard is based on the fact that revenue should be recorded when the control over the good or different service is transferred to the customer, so that this control notion replaces the existing notion of risks and benefits. The standard allows for a complete retrospective approach and a modified retrospective approach for its adoption. The Company is assessing which of the two approaches it can use and to date, it considers that the modified retrospective approach might be used for adoption. Under this approach the entities will recognize adjustments from the effect of initial application (January 1, 2018) in retained earnings in the financial statements at December 2018 without restating comparative periods, by applying the new rules to contracts effective as of January 1, 2018 or those that even when held in prior years continue to be effective at the date of initial application. For disclosure purposes in the financial statements at 2018, the amounts of affected items must be disclosed, considering the application of the current revenue standard, as well as an explanation of the reason for the significant changes made. The main areas that are being reviewed are the transfer of control of the products and their obligations have with customers based on contracts and agreements made, and how they could impact revenue recognition based on the new guidelines of this rule. At this stage it is not possible for the Company to estimate the impact of this new standard on its financial statements. The Company will make a more detailed assessment of the impact in the next 12 months. The standard is effective for periods beginning on or after January 1, 2018. Early adoption is permitted. IFRS 16 - “Leases”. The IASB issued in January 2016 a new standard for lease accounting. This standard will replace current standard IAS 17, which classifies leases into financial and operating. IAS 17 identifies leases as financial in nature when the risks and benefits of an asset are transferred, and identifies the rest as operating leases. IFRS 16 eliminates the classification between financial and operating leases and requires the recognition of a liability showing future payments and assets for “right of use” in most leases. The IASB has included some exceptions in short-term leases and in low-value assets. The aforementioned amendments are applicable to the lease accounting of the lessee, while the lessor maintains similar conditions to those currently available. The most significant effect of the new requirements is shown in an increase in leasing assets and liabilities, also affecting the statement of income in depreciation expenses and financing of recorded assets and liabilities, respectively, and decreasing expenses relative to leases previously recognized as operating leases. At the date of issuance of these financial statements, the Company has not quantified the impact of the new requirements. The standard is effective for periods starting on or after January 1, 2019, allowing for the advance adoption if the IFRS 15 is also adopted. 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. 79 Annual Report 2015 | ALPEKNote 4 - 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 Cumulative annual 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. 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. 80 Annual Report 2015 | ALPEKFor this reason, in the past, when the Mexican peso has appreciated in real terms against other currencies such as the US dollar, the Com- pany'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 "dollar- ization" 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 con- stant, would result in an effect on the income statement by Ps 55,696 and Ps 31,465, 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. 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 2015 and 2014 was 2.6 and 4.32 US dollars, respectively. At December 31, 2015, 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, 2015 and 2014, 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 2015 and 2014. 81 Annual Report 2015 | ALPEK 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. At December 31, 2015 and 2014, if interest rates on variable rate loans were increased/decreased by 10%, interest expense, in the income statement, would increase/decrease by Ps 7,473 and Ps 3,920, 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 2015 and 2014, 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. 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. 82 Annual Report 2015 | ALPEKThe detail of maturities of existing financial liabilities at December 31, 2015 and 2014, 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, 2015 Current portion of long-term debt Ps 50,342 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) 439,713 6,273 1,053,742 279,116 9,521,436 1,885,523 848,301 - - Ps - - - Ps - - - - - - 867,207 2,491,911 1,857,704 - - - 204,674 367,628 - - - - 506,668 1,699,395 - - - - 5,267 - 16,322,035 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 Other accounts payable and accrued expenses Derivative financial instruments Debt (excluding issuance expenses) Senior notes (excluding issuance expenses) 290,388 25,360 905,388 683,196 9,881,575 1,676,055 796,283 - - Ps - - - - - - Ps - - - 746,381 2,118,897 2,159,428 - - - 100,271 360,147 - - - - 134,152 1,026,459 - - - 14,230 432,156 - 13,959,263 (1) Amounts included are undiscounted contractual cash flows; therefore, they differ from the amounts included in the consolidated financial statements and in Note 19. 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, 2015 and 2014, the Company has unused committed credit lines for a total of US$346 and US$345 million, respectively. 83 Annual Report 2015 | ALPEK 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 re- duce 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 share- holders, 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 1.17 and 1.19 at December 31, 2015 and 2014, respectively. 4.3 Fair value estimation The following is an analysis of financial instruments measured by the fair value valuation method. The three different levels used are pre- sented 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, 2015: Level 1 Level 2 Level 3 Total Assets Financial assets at fair value through profit or loss with trading accounting treatment Derivative with hedge accounting treatment Financial assets available for sale Total Liabilities Financial liabilities at fair value through profit or loss with trading accounting treatment Ps Ps Ps - - - - - Ps 203,236 Ps 120 - - - 143,407 Ps 203,236 120 143,407 Ps 203,356 Ps 143,407 Ps 346,763 Ps 17,166 Ps Employees' benefits based on shares Derivative with hedge accounting treatment 54,700 - - 1,542,477 Total Ps 54,700 Ps 1,559,643 Ps 84 - - - - Ps 17,166 54,700 1,542,477 Ps 1,614,343 Annual Report 2015 | ALPEK The following table presents the Company's assets and liabilities that are measured at fair value at December 31, 2014: Level 1 Level 2 Level 3 Total Assets Financial assets at fair value through profit or loss with trading accounting treatment Derivative with hedge accounting treatment Financial assets available for sale Total Liabilities Financial liabilities at fair value through profit or loss with trading accounting treatment Employees' benefits based on shares Financial assets available for sale Ps Ps Ps - - - - - Ps Ps - - - - Ps Ps - - - - 128,475 128,475 Ps 128,475 Ps 128,475 Total Ps 59,506 Ps 1,044,936 Ps Ps 85,113 Ps 59,506 - - 959,823 - - - - Ps 85,113 59,506 959,823 Ps 1,104,442 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. 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. 85 Annual Report 2015 | ALPEK 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, 2015 and 2014, there were no signs of impairment. b) Income taxes 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 101,987. 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 9,304 and the equity by Ps 77,118. 86 Annual Report 2015 | ALPEKd) 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 for 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, 2015 2014 Cash and bank accounts Short-term bank deposits Ps 3,225,765 Ps 1,792,869 3,424,139 3,950,947 Cash and cash equivalents Ps 6,649,904 Ps 5,743,816 87 Annual Report 2015 | ALPEK Note 7 - Restricted cash and cash equivalents The Company has restricted cash of approximately Ps 2,753 and Ps 3,185 at December 31, 2015 and 2014. 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, 2015 2014 Trade receivables Ps 8,351,069 Ps 10,169,506 Provision for impairment of trade receivables ( 155,365 ) ( 392,579 ) Trade receivables, net 8,195,704 9,776,927 Accounts receivable from related parties (Note 9) Recoverable taxes Interest receivable Other debtors Current portion 2,954,039 1,977,585 13 256,594 1,389,713 1,819,293 15 260,422 Ps 13,383,935 Ps 13,246,370 Trade receivables and other accounts receivable include past-due balances not impaired of Ps 1,433,439 and Ps 1,476,294 at December 31, 2015 and 2014, respectively. As of December 31 2015 and 2014, the balance of other debtors comprises primarily by travel expenses, customs expenses and reimbursements. The aging analysis of the balances due from customers and other receivables not impaired is as follows: 1 to 30 days 30 to 90 days 90 to 180 days More than 180 days At December 31, 2015 2014 Ps 586,939 Ps 688,165 183,297 56,810 606,393 154,115 24,421 609,593 Ps 1,433,439 Ps 1,476,294 At December 31, 2015 and 2014, trade and other accounts receivable of Ps 155,365 and Ps 392,579, 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. 88 Annual Report 2015 | ALPEK Movements in the provision for impairment of trade and other receivables are analyzed as follows: 2015 2014 Initial balance (January 1) ( Ps 392,579 ) ( Ps 332,601 ) Provision for impairment in trade receivables Receivables written-off during the year Provision for unused written-off impairment ( 22,714 ) 259,928 - ( 87,495 ) 23,928 3,589 Final balance (December 31) ( Ps 155,365 ) ( Ps 392,579 ) The maximum risk in accounts receivable is the carrying amount at December 31, 2015 and 2014. Increases in the provision for impair- ment of trade and other receivables are recognized in the income statement under the caption selling expenses. Note 9 - Related party transactions Related party transactions were carried out at market values. At December 31, 2015 Loans granted to related parties Accounts receivable(2) Amount Currency Maturity date DD/MM/YY Interest rate Accounts payable (2) Holding Affiliate Ps Partners with Significant influence over certain subsidiaries Ps 189,781 - 141,634 - - - - - - - 257,239 411,290 183,615 (1) 423,137 6,883 792 (1) 28,000 4,500 2,500 1,400 240 (1) 1,303,028 USD USD USD USD USD MXN MXN MXN MXN MXN USD Total Ps 588,654 Ps 2,365,385 22/12/2016 7.33% (3) Ps 23/05/2016 23/05/2016 1.79% (4) 1.79% (4) 23/05/2016 25/01/2016 27/05/2016 17/06/2016 4.76% (4) 4.61% (4) 4.76% (4) 4.86% (4) 269 - 59,587 - - - - - - - 31/03/2016 6.50% (4) 219,260 279,116 Ps At December 31, 2014 Loans granted to related parties Accounts receivable(2) Amount Currency Maturity date DD/MM/YY Interest rate Accounts payable (2) Holding Affiliate Partners with Significant influence over certain subsidiaries 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% (3) Ps 29/05/2015 29/05/2015 1.61% (4) 1.61% (4) Total Ps 539,148 Ps 850,565 Ps - - 40,028 - - 643,168 683,196 (1) Are the interests accrued corresponding to the loans included. (2) These balances correspond to the sale / purchase of products and / or services rendered that do not accrue interest. (3) Loans bearing fixed interest rate. (4) Loans bearing variable interest rate (libor). 89 Annual Report 2015 | ALPEK Revenue and other with related parties Year ended December 31, 2015 Finished goods Raw materials Interests Dividends Holding Affiliate Associated Shareholders with significant influence over subsidiaries Ps Ps - 69,996 - 1,225,025 Ps Ps - 5,090 - - 28,377 7,781 - 5,423 Total Ps 1,295,021 Ps 5,090 Ps 41,581 Ps - - - - - Administrative services Ps - 115,608 - - Energetics Leases Others Ps Ps - 194,948 - Ps - 132 - - 4,940 - - 12,433 676,241 (5) Ps 115,608 Ps 194,948 Ps 12,565 Ps 681,181 Finished goods Raw materials Interests Dividends Administrative services Energetics Leases Others Year ended December 31, 2014 Holding Affiliate Associated Shareholders with significant influence over subsidiaries Ps Ps - 267,274 - 1,981,823 Ps Ps - 4,860 - - 23,731 8,602 165 - Ps - - 927 - - 84,863 - - Ps 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 Cost of sales and expenses with related parties Finished goods Raw materials Administrative services Technical assistance Energetics Leases Commissions Others Year ended December 31, 2015 Affiliate Shareholders with significant influence over subsidiaries Ps - Ps 21,432 Ps 197,977 Ps - Ps 4,205 Ps 685,343 631,422 38,733 9,656 - Total Ps 685,343 Ps 652,854 Ps 236,710 Ps 9,656 Ps 4,205 Ps - - - Ps - Ps - 5,817 297,919 (5) Ps 5,817 Ps 297,919 Year ended December 31, 2014 Finished goods Raw materials Administrative services Technical assistance Energetics Leases Commissions Others Ps - Ps 17,446 Ps 174,206 Ps - Ps 167,667 Ps - Ps - Ps - 68,696 68,696 Affiliate Shareholders with significant influence over subsidiaries 1,580,553 685,610 106,947 69,087 - 2,433 25,905 Total Ps 1,580,553 Ps 703,056 Ps 281,153 Ps 69,087 Ps 167,667 Ps 2,433 Ps 25,905 Ps (5) Under the caption of others, the effects of the agreements between Alpek and BASF Polyurethane (PU businesses) are included. See Note 2 b). 90 Annual Report 2015 | ALPEK For the year ended December 31, 2015, wages and benefits received by top officials of the Company were Ps 266,014 (Ps 250,921 in 2014), comprising of base salary and law benefits and supplemented by a variable compensation program that is basically based on the perfor- mance 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, 2015 and 2014. The conditions of the above considerations are equivalent to those of similar transactions with independent parties and the entity. Note 10 - Inventories At December 31, 2015 2014 Finished goods Ps 5,794,742 Ps 5,937,774 Raw material and other consumables Materials and tools Work in process 5,081,622 792,721 417,032 4,175,773 877,025 495,336 Ps 12,086,117 Ps 11,485,908 For the years ended at December 31, 2015 and 2014, the cost of raw materials consumed and the changes in inventories of work in process and finished goods recognized in the cost of sales amounted to Ps 73,029,596 and Ps 79,757,100, respectively. For the years ended December 31, 2015 and 2014, it was recognized in the Consolidated Statement of income a provision amounting to Ps 27,841 and Ps 18,894, respectively, related to damaged, slow-moving and obsolete inventory. At December 31, 2015 and 2014, there were no inventories in guarantee. 91 Annual Report 2015 | ALPEK 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 Other fixed assets Total Year ended December 31, 2014 Beginning balance Additions Disposals Impairment Translation effect Depreciation charge recognized in the year Transfers 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 78,806 ( 1,907 ) - 159,770 - 1,153 21,767 - - 255,207 ( 217 ) ( 4,649 ) 338,058 1,900,474 ( 177,545 ) ( 1,375,170 ) 536,758 2,029,669 3,198 ( 3,301 ) ( 269 ) 6,629 ( 11,147 ) 12,014 7,246 ( 52 ) ( 30 ) 24,742 ( 62,202 ) 36,999 1,385,181 ( 4,905 ) - 84,957 - 24,746 ( 15,950 ) - 51,818 1,776,151 ( 26,332 ) ( 4,948 ) 2,566,448 - ( 1,626,064 ) ( 2,636,933 ) 21,471 1,131 Carrying value 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 At December 31, 2014 Cost Ps 2,988,204 Ps 9,965,060 Ps 47,019,030 Ps 243,598 Ps 1,131,484 Ps 918,761 Ps 494,380 Ps 62,760,517 Depreciation charge recognized in the year - ( 6,341,452 ) ( 27,958,491 ) ( 174,484 ) ( 893,815 ) - - ( 35,368,242 ) Carrying value 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 Year ended December 31, 2015 Beginning balance Additions Additions through business acquisitions Disposals Impairment Translation effect Depreciation charge recognized in the year Transfers 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 - 36,773 - - 236,463 - 2,740 7,077 103,746 - - 534,133 ( 221,908 ) 88,872 47,493 257,130 ( 27,911 ) ( 13,816 ) 2,856,459 ( 1,696,600 ) 661,134 3,157 2,671 ( 1,280 ) - 8,515 ( 11,958 ) 4,518 6,596 16,010 ( 303 ) ( 82 ) 37,228 ( 76,078 ) 67,082 1,477,320 8,610 ( 994 ) ( 27,449 ) 121,353 - 36,465 - ( 10,717 ) (1,291 ) 101,773 1,578,108 424,940 ( 41,205 ) ( 42,638 ) 3,895,924 - ( 2,006,544 ) ( 850,178 ) 146,743 120,911 Carrying value at December 31, 2015 Ps 3,264,180 Ps 4,135,528 Ps 21,144,428 Ps 74,737 Ps 288,122 Ps 1,647,423 Ps 767,353 Ps 31,321,771 At December 31, 2015 Cost Accumulated depreciation Ps 3,264,180 Ps 11,763,540 Ps 55,398,958 Ps 283,283 Ps 1,410,940 Ps 1,647,423 Ps 767,353 Ps 74,535,677 - ( 7,628,012 ) ( 34,254,530 ) ( 208,546 ) ( 1,122,818 ) - - ( 43,213,906) Carrying value at December 31, 2015 Ps 3,264,180 Ps 4,135,528 Ps 21,144,428 Ps 74,737 Ps 288,122 Ps 1,647,423 Ps 767,353 Ps 31,321,771 Depreciation expense of Ps 1,980,616 and Ps 1,608,083 were recorded in cost of sales, Ps 4,635 and Ps 1,811, in selling expenses and Ps 21,293 and Ps 16,170, in administrative expenses in 2015 and 2014, respectively. The Company has capitalized costs of loans in qualified assets for Ps 2,025 and Ps 90,064 for the years ended December 31, 2015 and 2014, respectively. Costs from loans were capitalized at the weighted average rate of loans that amount to approximately 2.40%. 92 Annual Report 2015 | ALPEK Note 12 - Goodwill and intangible assets, net Finite life Indefinite life Development costs Supply rights Non-complete agreements Customer relationships Software and licenses Intellectual property rights and others Goodwill Others Total Cost At January 1, 2014 Ps 583,486 Ps 540,735 Ps 61,460 Ps 475,853 Ps 62,416 Ps 1,566,964 Ps 221,868 Ps 5,904 Ps 3,518,686 Additions Translation effect Additions through business combination Transfers At December 31, 2014 Aditions Translation effect 5,710 73,599 - - 662,795 5,485 111,693 2,155,469 230,494 - - 2,926,698 1,741,330 619,968 94,387 10,324 31,709 - - 59,735 - - 197,880 535,588 - ( 1,940 ) - 90,557 21,316 6,422 - - 90,154 11,498 9,730 547,947 198,537 - 27,760 - 27,851 - - 2,341,208 249,719 99,148 391,975 4,702 42,222 310 777 - - 6,991 - 1,182 2,825,139 607,739 31,709 27,760 7,011,033 1,862,163 1,265,387 At December 31, 2015 Ps 779,973 Ps 5,287,996 Ps 195,940 Ps 626,145 Ps 111,382 Ps 2,832,331 Ps 296,643 Ps 8,173 Ps 10,138,583 Amortization At January 1, 2014 ( Ps 198,405 ) Ps Amortization Transfers Translation effect ( 39,544 ) - ( 28,663 ) At December 31, 2014 ( 266,522 ) Amortization Translation effect ( 47,923 ) ( 47,673 ) At December 31, 2015 ( Ps 362,118 ) Ps - - - - - - - - ( Ps 44,816 ) ( Ps 104,196 ) ( Ps 35,941 ) ( Ps 228,858 ) Ps ( 45,515 ) - ( 8,445) ( 38,363 ) ( 3,607 ) - - ( 17,180 ) ( 3,651 ) ( 86,417 ) ( 7,425 ) ( 37,187 ) ( 98,776 ) ( 159,739 ) ( 43,199 ) ( 359,887 ) ( 44,085 ) ( 54) ( 45,723 ) ( 30,926 ) ( 4,267 ) ( 5,985 ) ( 105,241 ) ( 66,517 ) ( Ps 142,915 ) ( Ps 236,388 ) ( Ps 53,451 ) ( Ps 531,645 ) Ps - - - - - - - - Ps Ps - - - - - - - - ( Ps 612,216 ) ( 213,356 ) ( 7,425 ) ( 95,126 ) ( 928,123 ) ( 247,239 ) ( 151,155 ) ( Ps 1,326,517 ) Net carrying amount Cost Amortization Ps 662,795 Ps 2,926,698 Ps 197,880 Ps 535,588 Ps 90,154 Ps 2,341,208 Ps 249,719 Ps 6,991 Ps 7,011,033 ( 266,522 ) - ( 98,776) ( 159,739 ) ( 43,199 ) ( 359,887 ) - - ( 928,123 ) At December 31, 2014 Ps 396,273 Ps 2,926,698 Ps 99,104 Ps 375,849 Ps 46,955 Ps 1,981,321 Ps 249,719 Ps 6,991 Ps 6,082,910 Cost Ps 779,973 Ps 5,287,996 Ps 195,940 Ps 626,145 Ps 111,382 Ps 2,832,331 Ps 296,643 Ps 8,173 Ps 10,138,583 Amortization ( 362,118 ) - ( 142,915 ) ( 236,388 ) ( 53,451 ) ( 531,645 ) - - ( 1,326,517 ) At December 31, 2015 Ps 417,855 Ps 5,287,996 Ps 53,025 Ps 389,757 Ps 57,931 Ps 2,300,686 Ps 296,643 Ps 8,173 Ps 8,812,066 Of the total amortization expense, Ps 247,097 and Ps 213,223 have been recorded in cost of sales, Ps 39 and Ps 97 in selling expenses and Ps 103 and Ps 36 in administrative expenses in 2015 and 2014, respectively. Incurred research and development expenses that have been recorded in the Consolidated Statement of Income were Ps 54,939 and Ps 40,994, respectively. 93 Annual Report 2015 | ALPEK 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 296,643 and Ps 249,719 at December 31, 2015 and 2014, 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 2015 and 2014 were as follows: Estimated gross margin Growth rate Discount rate 2015 6.8% 6.5% 10.05% 2014 4.0% 3.8% 9.8% 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, 2015 2014 Other receivables, net Ps 109,796 Ps 103,202 Financial assets available for sale (1) Investment in associates (2) Other non-current financial assets (3) 143,407 253,387 1,227,972 128,475 149,931 316,271 Total other non-current assets Ps 1,734,562 Ps 697,879 (1) Financial assets available for sale: These assets relate to investments in companies not listed on the market representing less than 1% of its share capital and equity investments in social clubs. We did not recognize any impairment loss at December 31, 2015. The movement of financial assets available for sale is as follows: Balance at January 1 Translation effect Additions Disposals 2015 2014 Ps 128,476 Ps 14,931 - - 92,581 10,089 25,912 ( 107 ) Balance at December 31 Ps 143,407 Ps 128,475 94 Annual Report 2015 | ALPEK Financial assets available for sale are denominated in the following currencies: USD MXN Total At December 31, 2015 2014 Ps 103,239 Ps 40,168 88,308 40,167 Ps 143,407 Ps 128,475 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: Net loss Other comprehensive income Comprehensive income Investment in associates at December 31 2015 2014 ( Ps 70,896 ) ( Ps 155,528 ) - ( 70,896 ) 253,387 - ( 155,528 ) 149,931 There are no contingent liabilities corresponding to the Company's equity in investment of associates. (3) Other non-current assets At December 31, 2015, this caption includes an amount of Ps 1,101,666 (US$ 64 million) related to a prepayment of inventory, which is explained in Note 2 a). Note 14 – Subsidiaries with significant non-controlling interest The significant non-controlling interest, is integrated as follows: Non-controlling ownership percentage Non-controlling interest income for the period Non-controlling interest at December 31, 2015 2014 2015 2014 Indelpro, S. A. de C. V. and subsidiary Polioles, S. A. de C. V. and subsidiary 49% 50% Ps 699,007 Ps 303,590 Ps 2,917,152 Ps 2,574,644 215,676 226,241 1,153,410 829,038 Non-controlling portion of non-significant subsidiaries 1,581 ( 16,630 ) 473,966 491,493 Ps 916,264 Ps 513,201 Ps 4,544,528 Ps 3,895,175 95 Annual Report 2015 | ALPEK The summarized financial information at December 31, 2015 and 2014 and for the year then ended, corresponding to each subsidiary with a significant non-controlling interest is shown below: Statements of financial position Current asset Non-current asset Current liability Non-current liability Stockholders' equity Statements of income Revenues Consolidated net profit Comprehensive income for the year Comprehensive income attributable to non-controlling interest Dividends paid to the non-controlling interest Indelpro, S. A. de C. V. and subsidiary Polioles, S. A. de C. V. and subsidiary 2015 2014 2015 2014 Ps 3,527,423 Ps 3,908,340 Ps 3,975,571 Ps 3,295,428 6,393,022 1,619,233 2,347,840 5,953,372 5,492,256 1,822,647 2,323,573 5,254,376 10,034,028 10,297,976 1,426,545 2,254,269 619,570 1,206,585 876,245 1,267,920 1,277,076 2,306,820 4,898,744 431,352 648,831 1,181,138 1,906,511 911,978 1,658,077 9,646,578 452,482 579,961 1,104,592 591,227 324,416 289,981 762,084 96,129 150,317 - Statements of cash flows Net cash flows generated in operating activities Net cash flows used in investing activities Net cash flows used in financing activities Net increase (decrease) in cash and cash equivalents 2,613,464 ( 440,539 ) ( 1,909,065 ) 645,248 ( 122,026 ) ( 543,624 ) ( 47,617 ) ( 80,989 ) ( 319,374 ) 447,201 ( 101,431 ) ( 255,926 ) 301,769 ( 14,488 ) ( 417,898 ) 142,357 96 Annual Report 2015 | ALPEK Note 15 - Financial instruments a) Financial instruments by category Trade receivables and liabilities at amortized cost Available for sale At December 31, 2015 Financial assets and liabilities fair value through profit and loss Derivative designated for hedging Total Financial assets: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivable Derivative financial instruments Assets available for sale Financial liabilities: Debt Suppliers and other accounts payable Shared-based payments Derivative financial instruments Ps 6,649,904 Ps 2,753 13,383,935 - - Ps 20,036,592 Ps Ps 678,331 Ps 9,800,552 - Ps 10,478,883 Ps - - - - 143,407 143,407 Ps Ps - - - 203,236 - Ps 203,236 Ps Ps - - - - - Ps Ps - - 54,700 17,166 71,866 - - - 120 - 120 - - - 1,542,477 Ps 6,649,904 2,753 13,383,935 203,356 143,407 Ps 20,383,355 Ps 678,331 9,800,552 54,700 1,559,643 Ps 1,542,477 Ps 12,093,226 Trade receivables and liabilities at amortized cost Available for sale At December 31, 2014 Financial assets and liabilities fair value through profit and loss Derivative designated for hedging Total Financial assets: Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivable Assets available for sale Financial liabilities: Debt Ps 5,743,816 Ps 3,185 13,246,370 - Ps 18,993,371 Ps Ps 487,604 Ps Suppliers and other accounts payable 10,564,770 Shared-based payments Derivative financial instruments - - Ps 11,052,374 Ps - - - 128,475 128,475 - - - - - Ps Ps Ps Ps Ps Ps - - - - - - - 59,506 85,113 Ps 144,619 Ps - - - - - - - - 959,823 959,823 Ps 5,743,816 3,185 13,246,370 128,475 Ps 19,121,846 Ps 487,604 10,564,770 59,506 1,044,936 Ps 12,156,816 97 Annual Report 2015 | ALPEK 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 avail- able) 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 customers X Type of customers Y Type of customers Z Ps At December 31, 2015 2014 22,666 26,245 50 32,367 42,628 60 8,394 18,848 34,044 509,813 111 2,989 7,748 913,720 235,040 1,854,723 7,774,909 95,916 - 7,870,825 Ps - 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 Total not impaired trade receivables Ps 9,725,548 Ps 12,492,078 98 Annual Report 2015 | ALPEK Cash and cash equivalents with or without restriction, not including petty cash "A+" "A-" "A" "BBB+" "BBB" "BBB-" "BB+" Other categories Not rated Derivative financial instruments “A-” “BBB+” “CCC” “CCC+” At December 31, 2015 2014 Ps 34,228 Ps 931,412 762,203 2,485,325 2,470,120 147,686 1,442 11,896 - 732,218 559,217 1,868,851 1,317,396 194,785 - 80,916 276,986 516,495 Ps 6,645,118 Ps 5,746,058 Ps Ps 1,713 6,279 162,792 32,572 Ps 203,356 Ps - - - - - 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 carry- ing amount of these accounts represents the expected cash flow at December 31, 2015 and 2015. The carrying amount and the estimated fair value of the rest of the financial assets and liabilities are presented as follows: At December 31, 2015 At December 31, 2014 Carrying amount Fair value Carrying amount Fair value Financial assets Non-current receivable Ps 109,796 Ps 99,712 Ps 103,202 Ps 91,612 Financial liabilities Non-current debt 18,394,325 17,964,918 15,778,025 16,107,121 99 Annual Report 2015 | ALPEK The estimated fair values as of December 31, 2015 and 2014 were determined based on discounted cash flows using rates that reflect a similar credit risk depending on the currency, maturity period and country where the debt was incurred. As part of the main rates used are the interbank equilibrium interest rate ("TIIE") for the instruments in pesos and Libor for instruments held in dollars. These fair values do not consider the current portion of financial assets and liabilities, as the current portion approximates their fair value. This is a measure of fair value of Level 3. Note 16 - Derivative financial instruments The effectiveness of derivative financial instruments designated as hedges is measured periodically. At December 31, 2015 and 2014 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 mar- ket 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, 2015 and 2014. 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. 100 Annual Report 2015 | ALPEKa) Exchange rate derivatives Derivative financial instruments related to exchange rate positions with trading accounting treatment are summarized as follows (figures in millions of pesos): At December 31, 2015 Underlying asset Notional amount Unit Reference Fair value 2016 Type of derivative, value or contract Maturity 2017 2018+ USD/MXN ( Ps ARS/USD 688 ) 800 Pesos / Dollar Ps Arg. / Dollar 17.21 12.94 ( Ps 13 ) ( Ps 13 ) Ps 202 189 Ps 202 189 Ps Ps - - - Ps Ps At December 31, 2014 Underlying asset Notional amount Unit Reference Fair value 2015 Type of derivative, value or contract Maturity 2016 2017+ USD/MXN ( Ps 986 ) Pesos / Dollar 14.72 ( Ps 73 ) ( Ps 73 ) Ps - Ps - - - - b) Interest rate swaps Positions of derivative financial instruments interest rate swaps are summarized as follows (figures in millions of pesos): At December 31, 2015 Underlying asset Notional amount Unit Reference Fair value 2016 Type of derivative, value or contract Maturity 2017 2018+ With hedge Accounting treatment In Libor rate 1 Ps - % per year 1.18 Ps - Ps - Ps - Ps - At December 31, 2014 Underlying asset Notional amount Unit Reference Fair value 2015 Type of derivative, value or contract Maturity 2016 2017+ With hedge Accounting treatment In Libor rate 1 Ps 589 % per year 0.90 ( Ps 10 ) ( Ps 8 ) ( Ps 2 ) Ps - 1 Cash flow hedges 101 Annual Report 2015 | ALPEK 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 or derivative, value or contract At December 31, 2015 Underlying asset Notional mount Unit Reference Fair value 2016 Maturity 2017 2018+ With hedge accounting treatment Ethylene 1 Natural gas 1 Ethane 1 Px 1 Gasoline 1 Ps 809 2,923 Cent Dollar/lb Ps Dollar / MBTU 46 Cent Dollar/Gallon 3,252 Dollar/MT 72 Dollar / Gallon With trade accounting treatment: Brent crude 5 Dollar / BBL 19.22 2.32 15.05 772 1.25 38.91 ( Ps 230 ) ( Ps 230 ) Ps - Ps ( 961 ) ( 5 ) ( 309 ) ( 38 ) ( 250 ) ( 5 ) ( 309 ) ( 38 ) ( 2 ) ( 2 ) ( 204 ) - - - - - ( 507 ) - - - - ( Ps 1,545 ) ( Ps 834 ) ( Ps 204 ) ( Ps 507 ) Type or derivative, value or contract At December 31, 2014 Underlying asset Notional mount Unit Reference Fair value 2015 Maturity 2016 2017+ With hedge accounting treatment Ethylene 1 Natural gas 1 Ethane 1 Px 1 Gasoline 1 Ps 7 Cent Dollar/lb Ps 2,600 Dollar / MBTU 2 Cent Dollar/Gallon 1,585 1,013 Dollar/MT Dollar / Gallon With trade accounting treatment: Brent crude 46 Dollar / BBL 45.38 3.08 17.59 884 1.62 63.27 1 Cash flow hedges ( Ps 1 ) ( Ps 1 ) Ps - Ps ( 260 ) ( 1 ) ( 308 ) ( 380 ) ( 12 ) 962 ) ( Ps ( Ps ( 13 ) ( 1 ) ( 308 ) ( 380 ) ( 12 ) 715 ) ( 98 ) - - - - - ( 149 ) - - - - ( Ps 98 ) ( Ps 149 ) At December 31, 2015 and 2014, the net fair value of derivative financial instruments, above mentioned amounts to Ps 1,356,287 and Ps 1,044,936, respectively, which is shown in the consolidated statements of financial position as follows: Current asset Current liability Non-current liability Net position Fair value at December 31, 2015 2014 Ps 203,356 Ps - ( 848,301 ) ( 711,342 ) ( 757,011 ) ( 287,925 ) ( Ps 1,356,287 ) ( Ps 1,044,936 ) At December 31, 2015 and 2014, there are no collaterals in derivative financial instruments. 102 Annual Report 2015 | ALPEK Note 17 – Suppliers and other accounts payable At December 31, 2015 2014 Suppliers Ps 9,521,436 Ps 9,881,574 Balances with related parties (Note 9) 279,116 683,196 Ps 9,800,552 Ps 10,564,770 Note 18 - Provisions Restructuring and demolition Environmental remediation Indemnities from dismissal and others Other Total At January 1, 2014 Ps 433,354 Ps 371,611 Ps Transfers Payments Translation effect At December 31, 2014 Additions Payments Translation effects ( 73,590 ) ( 76,799 ) 49,395 332,360 - ( 249,138 ) 30,171 - ( 17,383 ) 46,170 400,398 - ( 102,663 ) 59,724 Ps 79,349 73,590 ( 96,369 ) 567 57,137 - ( 29,077 ) 6,956 - - - - - 32,554 ( 10,659 ) ( 4,604 ) Ps 884,314 - ( 190,551 ) 96,132 789,895 32,554 ( 391,537 ) 92,247 At December 31, 2015 Ps 113,393 Ps 357,459 Ps 35,016 Ps 17,291 Ps 523,159 Short-term provisions Long-term provisions At December 31, 2015 2015 2014 Ps 338,411 Ps 761,652 184,748 28,243 Ps 523,159 Ps 789,895 The provisions shown in the above table are mainly related to the closure of the plant in Cape Fear located in Wilmington, North Carolina carried out in June 2013. The purpose of this closure was to improve cost competitivity, through distributing production to the most efficient plants in its productive network. During 2015, the Company continued the works of dismantling and demolition of the plant in Cape Fear, as was originally announced during 2013. At December 31, 2015, the balance of this provision amounts to Ps 505,868 (US$ 29.4 million) , which is in line with the initial estimate made by the Management will be disbursed over the next two years according to the plan of dismantling and demolition of the plant. 103 Annual Report 2015 | ALPEK Note 19 – Debt Current: Bank loans (1) Current portion of non-current debt Interest payable Notes payable (1) Current debt Non-current: Senior Notes (3) Unsecured Bank loans (3) Total (2) At December 31, 2015 2014 Ps 439,713 Ps 290,388 50,342 182,004 6,272 11,166 160,689 25,360 Ps 678,331 Ps 487,604 Ps 16,203,450 Ps 13,846,890 2,122,632 18,326,082 1,829,928 15,676,818 Less: current portion of non-current debt ( 50,342 ) ( 11,166 ) Non-current debt Ps 18,275,740 Ps 15,665,652 (1) The fair value of bank loans and notes payable approximates their current carrying amount, as the impact of discounting is not significant. (2) The total amounts are the amortized cost and include debt issuance costs of Ps 118,585 and Ps 112,373, for 2015 and 2014, respectively. 104 Annual Report 2015 | ALPEK Description Senior Notes 144A/Reg. S fixed rate Senior Notes 144A/Reg. S fixed rate Total Senior Notes 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%. Bank loan bearing annual interest of BADLAR +2.00%. Bank loan bearing annual interest of BADLAR + 1% Bank loan bearing annual interest of 19% Bank loan bearing annual interest of Libor + 1% Bank loan bearing annual interest of Libor + 1.50%. USD USD USD USD ARS ARS ARS USD USD (3) The carrying amounts, terms and conditions of non-current debt are as follows: Currency Outstanding credit balance Debt issuance costs Interest payable Balance at December 31, 2015 Balance at December 31, 2014 Maturity date DD/MM/YY Interest rate USD Ps 11,160,085 ( Ps 78,750 ) Ps 55,921 Ps 11,137,256 Ps 9,517,052 20-Nov-22 4.50% 5,161,950 ( 39,835 ) 109,441 5,231,556 4,471,284 8-Aug-23 5.38% 16,322,035 ( 118,585 ) 165,362 16,368,812 13,988,336 860,325 344,130 344,130 33,252 119,624 13,168 408,003 - - - - - - - - - - 630 1,630 1,556 796 2,384 208 1,732 - 860,955 736,416 19-Dec-19 2.40% 345,760 295,759 01-Apr-17 1.51% 345,686 296,561 02-Apr-18 1.43% 34,048 44,315 03-Oct-16 29.72% 122,008 170,109 01-Apr-20 22.45% 13,376 409,735 - - 02-Dec-22 19.00% 14-Aug-18 1.40% - 297,246 01-Apr-16 1.76% 8,936 2,131,568 1,840,406 Total unsecured bank loans 2,122,632 Total Ps 18,444,667 ( Ps 118,585 ) Ps 174,298 Ps 18,500,380 Ps 15,828,742 At December 31, 2015, the annual maturities of non-current debt are as follows: 2017 2018 2019 2020 onwards Total Bank loans Senior notes Ps 367,628 Ps 1,214,835 Ps 469,110 Ps 20,717 Ps 2,072,290 - - - 16,203,450 16,203,450 Ps 367,628 Ps 1,214,835 Ps 469,110 Ps 16,224,167 Ps 18,275,740 105 Annual Report 2015 | ALPEK 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 pay- ments 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 2015 and 2014, 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. During the years ended December 31 2015 and 2014, there were not significant debt transactions, the main increase is generated due to the exchange rate of the debt held in US dollars. The amounts shown in the Consolidated Statements of Cash Flows correspond to credit lines utilized and paid during the year. 106 Annual Report 2015 | ALPEKNote 20 - Employee benefits The valuation of retirement plan employee benefits includes formal plans 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 2015 amounted to Ps 62,454 (Ps 74,899 in 2014). Following is a summary of the main financial information of such employee benefits: Liability for employees’ benefits: Pension benefits Post-employment medical benefits Defined contribution liability At December 31, 2015 2014 Ps 857,942 Ps 764,780 168,283 1,026,225 81,841 154,349 919,129 44,854 Employees’ benefits in the statement of financial position Ps 1,108,066 Ps 963,983 Charge to the income statement for: Pension benefits Post-employment medical benefits ( Ps 61,385 ) ( Ps ( 6,706 ) ( 68,091 ) 42,629 ) ( 7,466 ) ( 50,095 ) Remeasurement of obligations for employees’ benefits recognized in the statement of comprehensive income for the year ( Ps 3,050 ) ( Ps 343,760 ) Remeasurement of accumulated obligations for employees benefits ( Ps 230,620 ) ( Ps 227,570 ) 107 Annual Report 2015 | ALPEK 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. The amounts recorded in the statement of financial position, are determined as shown below: At December 31, 2015 2014 Present value of defined benefit obligations Ps 3,545,493 Ps 3,288,794 Fair value of plan assets ( 2,687,551 ) ( 2,524,014 ) Employees’ benefits in the statement of financial position Ps 857,942 Ps 764,780 The movement in the defined benefit obligation during the year is as follows: At January 1 Service cost Interest cost Remeasurements: (Losses) gains from changes in financial assumptions (Losses) gains from change in demographic assumptions and experience adjustments Translation effect Benefits paid Plan reductions Settlements At December 31 2015 2014 Ps 3,288,794 Ps 2,700,267 40,397 138,029 34,622 128,846 ( 120,021 ) 183,286 ( 17,078 ) 482,191 ( 261,637 ) ( 1,415 ) ( 3,767 ) 221,456 286,754 ( 261,005 ) ( 1,280 ) ( 4,152 ) Ps 3,545,493 Ps 3,288,794 108 Annual Report 2015 | ALPEK 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 At December 31 2015 2014 ( Ps 2,524,015 ) ( Ps 2,318,980 ) ( 111,858 ) ( 115,407 ) 119,432 ( 344,998 ) ( 62,454 ) 236,342 ( 26,394 ) ( 228,358 ) ( 74,899 ) 240,023 ( Ps 2,687,551 ) ( Ps 2,524,015 ) 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 2015 2014 ( Ps 40,397 ) ( Ps 34,622 ) ( 26,171 ) 5,183 ( 13,439 ) 5,432 Total included in personal costs ( Ps 61,385 ) ( Ps 42,629 ) The principal actuarial assumptions are as follows: Discount rate Inflation rate Salary increase rate At December 31, 2015 MX 6.75% US 4.08% 4.25% 5.25% 2014 MX 6.75% US 3.75% 4.25% 5.25% The average life of defined benefit obligations is of 15.7 and 15.6 years at December 31, 2015 and 2014, respectively. The sensitivity analysis of the main assumptions for defined benefit obligations is as follows: Effect in defined benefit obligations Change in assumption Increase in assumption Decrease in assumption Discount rate Discount rate Mx 1% US 1% Decreases by Ps 30,826 Increases by Ps 35,717 Decreases by Ps 278,042 Increases by Ps 336,862 109 Annual Report 2015 | ALPEK 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 6.7% in 2015 and 7.5% in 2014. Amounts recognized in the statements of financial position are determined as follows: At December 31, 2015 2014 Ps 168,283 Ps 154,349 - - Ps 168,283 Ps 154,349 2015 2014 Ps 154,349 Ps 175,644 1,777 4,929 15,539 25,371 23,718 - ( 52,746 ) 1,391 6,075 8,926 4,084 ( 38,672 ) 20,629 - ( 23,728 ) Ps 168,283 Ps 154,349 Present value of defined benefit obligations Fair value of plan assets Employees’ benefits in the statement of financial position The movements of defined benefit obligations are as follows: At January 1 Service cost Interest cost Employee contributions Remeasurements: Gains from changes in demographic assumptions and experience adjustments Translation effect Plan reductions Benefits paid At December 31 110 Gain from changes in financial assumptions ( 4,654 ) Annual Report 2015 | ALPEK 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 2015 2014 ( Ps 1,777 ) ( Ps 1,391 ) ( 4,929 ) - ( 6,075 ) - Total included in personal costs ( Ps 6,706 ) ( Ps 7,466 ) At December 31, 2014, the effect of a 1% in the incremental of medical expenses, as follows: Effect in defined benefit obligation ( 8,627 ) 10,046 Increase Decrease Employee benefits Plan assets are comprised as follows: At December 31, 2015 2014 Investment funds (listed) Cash and cash equivalents Ps 1,738,467 Ps 1,633,198 949,084 890,816 Note 21 – Deferred income taxes The analysis of the deferred tax asset and deferred tax liability is as follows: At December 31, 2015 2014 Deferred tax asset: - To be recovered for more than 12 months Ps 243,581 Ps 178,117 - To be recovered within 12 months 117,606 361,187 78,880 256,997 Deferred tax liability: - To be payable in more than 12 months - To be payable within 12 months ( 4,579,487 ) ( 127,543 ) ( 4,707,030 ) ( 3,699,349 ) ( 556,257 ) ( 4,255,606 ) Deferred tax, net ( Ps 4,345,843 ) ( Ps 3,998,609 ) 111 Annual Report 2015 | ALPEK 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 to other items of comprehensive income 2015 2014 ( Ps 3,998,609 ) ( Ps 4,127,671 ) ( 596,323 ) - ( 83,550 ) 202,947 129,692 ( 421,032 ) ( 777 ) ( 23,919 ) 97,746 477,044 At December 31 ( Ps 4,345,843 ) ( Ps 3,998,609 ) The change of the temporary differences that requires deferred income tax recognition for the year ended December 31, as follows: 2015 2014 Provisions Ps 261,988 Ps 817,352 Derivative financial instruments Tax loss carryforwards Other temporary differences, net 3,958 1,499,783 - 229,375 715,750 59,743 Total deferred tax asset Ps 1,765,729 Ps 1,822,220 Inventories Trade receivables, net Property, plant and equipment, net Intangible assets, net Other temporary differences, net Total deferred tax liability Net deferred tax liability ( Ps 52,340 ) ( Ps - ( 5,464,127 ) ( 289,233 ) ( 305,872 ) ( 6,111,572 ) 25,308 ) ( 4,767 ) ( 5,790,754 ) - - ( 5,820,829 ) ( Ps 4,345,843 ) ( Ps 3,998,609 ) At December 31, 2015, the Company has accumulated tax loss carryforwards for a total of Ps 4,999,275 expiring as shown below: Loss incurred in the year Tax loss carryforwards Year of maturity 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Ps 115,345 83,250 83,250 83,250 83,363 875,121 80,002 85,899 969,597 2,540,198 Ps 4,999,275 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 112 Annual Report 2015 | ALPEK Note 22 - Other current liabilities At December 31, 2015 2014 Taxes different than income tax Ps 658,681 Ps 683,972 Accumulated expenses Short-term employee benefits Employees' profit sharing Prepayments from costumers Others 463,683 596,170 5,949 66,382 100,607 429,593 388,733 4,069 18,375 151,312 Total other current liabilities Ps 1,891,472 Ps 1,676,054 Note 23 - Stockholders' equity At December 31, 2015 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, 2015 and 2014 the legal reserve amounts Ps 377,052 and Ps 337,007, respectively. In the Ordinary General Meeting of Alpek, held on April 15, 2015, the stockholders agreed to declare dividends in cash for a total of Ps 1,472,825. During 2014, Alpek S. A. B. de C. V. did not declared dividends. 113 Annual Report 2015 | ALPEK 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 deter- mined in terms of the Income Tax Law in force in the fiscal year concerned. The movements in other reserves for 2015 and 2014 are shown as follows: At January 1, 2014 Losses on fair value Deferred tax asset on fair value gains Effect in translation of foreign entities At December 31, 2014 Losses on fair value Deferred tax asset on fair value gains Effect from foreign currency translation Effect of cash flow hedge derivative instruments Total Ps 338,180 Ps 64,917 Ps 403,097 - - 2,416,988 2,755,168 - - ( 1,025,280 ) ( 1,025,280 ) 350,773 - ( 609,590 ) ( 529,273 ) 129,563 - 350,773 2,416,988 2,145,578 ( 529,273 ) 129,563 3,843,118 Effect in translation of foreign entities 3,843,118 At December 31, 2015 Ps 6,598,286 ( Ps 1,009,300 ) Ps 5,588,986 Foreign currency translation In this caption the effect of foreign exchange differences arising from the translation of financial statements of foreign subsidiaries are recorded. Effect of derivative financial instruments The effect of derivative financial instruments contracted as cash flow hedges contains the effective portion of cash flow hedges at the reporting date. The Board of Directors and Executive Officers of the Company do not own more than 1% of its capital. Furthermore, none of the share- holders own more than 10% of its capital, or have significant influence or control or have power to govern the company. 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 2016. 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, 2015, 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. 114 Annual Report 2015 | ALPEK Note 24 – Share-based payments Until December 31, Alpek had a compensation scheme for executives referenced to the value of the shares of the holding. Beginning of Jan- uary 1, 2015, the compensation is referenced in 50% to the value of the shares of the holding and the other 50% to the value of the shares of Alpek, S. A. B. de C. V. According to the terms of the plan, eligible executives will receive a cash payment conditional on the achievment of certain quantitative and qualitative metrics based on the following financial mesures: • • • 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 and will be paid at the average price of the share at the end of each year. The average price of the shares in pesos used as reference is: Alfa, S. A. B. de C. V. Alpek, S. A. B. de C. V. 2015 2014 Ps 34.30 23.48 Ps 33.83 - The short-term and long-term liability are comprised as follows: Short-term Long-term At December 31, 2015 2014 Ps Ps 17,833 36,867 21,257 38,249 Total carrying amount Ps 54,700 Ps 59,506 115 Annual Report 2015 | ALPEK 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: Raw materials and others ( Ps 58,781,952 ) ( Ps 66,910,490 ) 2015 2014 Employee benefit expenses (Note 28) Human resource expenses Maintenance Depreciation and amortization Advertising expenses Freight charges Energy consumption and fuel (gas, electricity, etc.) Travel expenses Operating lease expenses ( 3,799,459 ) ( 75,985 ) ( 1,092,973 ) ( 2,253,783 ) ( 2,185 ) ( 3,864,535 ) ( 2,884,788 ) ( 131,647 ) ( 639,433 ) ( 2,845,866 ) ( 22,543 ) ( 917,758 ) ( 1,839,420 ) ( 2,229 ) ( 3,380,333 ) ( 3,294,676 ) ( 113,923 ) ( 495,350 ) Technical assistance, professional fees and administrative services Others (insurance and finance, water, containers and packaging, etc.) ( 1,042,131 ) ( 794,478 ) ( 1,676,994 ) ( 1,684,602 ) Total ( Ps 76,245,865 ) ( Ps 82,301,668 ) Note 26 - Other income (expenses), net Other income and expenses for the years ended December 31, are comprised as follows: 2015 2014 Gain on sale of wastes Ps 8,558 Ps Gain on sale of property, plant and equipment Impairment of investment in joint ventures Impairment of property, plant and equipment (1) Valuation of derivative financial instruments Other (expenses) income, net 381,585 - ( 130,166 ) ( 6,267 ) ( 8,717 ) 3,509 286 ( 126,906 ) ( 4,948 ) ( 18,669 ) 114,921 Total Ps 244,993 ( Ps 31,807 ) (1) This caption includes Ps 87,528 related to the assets disposal of the Cape Fear site. 116 Annual Report 2015 | ALPEK Note 27 - Finance income and cost Finance cost, net for the years ended December 31, are comprised as follows: Finance income: Interest income on short-term bank deposits Ps 187,639 Ps 100,611 2015 2014 Interest income on loans from related parties Others Foreign exchange gains Gains for changes in the fair value of financial assets at fair value through profit or loss Total finance income Finance expenses: Interest expense on bank loans Non-bank interest expense Interest cost on employees benefit Other finance expenses (factoring and others) Foreign exchange loss (1) Loss for changes in the fair value of financial assets at fair value through profit or loss Total finance cost Finance cost, net 41,581 14,977 2,366,892 184,271 32,498 2,328 - - Ps 2,795,360 Ps 135,437 ( Ps 128,023 ) ( Ps 134,642 ) ( 787,463 ) ( 31,155 ) ( 230,107 ) ( 3,480,815 ) ( 648,787 ) ( 19,964 ) ( 122,719 ) ( 629,298 ) - ( 76,697 ) ( Ps 4,657,563 ) ( Ps 1,632,107 ) ( Ps 1,862,203 ) ( Ps 1,496,670 ) (1) For the year ended 2014, includes a foreign exchange gain amounting to Ps 1,598,851 and a foreign exchange loss amounting to (Ps 2,228,149). 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 2015 2014 ( Ps 2,853,545 ) ( Ps 2,101,118 ) ( 262,450 ) ( 36,991 ) ( 646,473 ) ( 211,667 ) ( 30,580 ) ( 502,501 ) Total ( Ps 3,799,459 ) ( Ps 2,845,866 ) 117 Annual Report 2015 | ALPEK Note 29 - Income taxes Income tax for the years ended December 31, are integrated as follows: 2015 2014 Total current income tax ( Ps 2,251,532 ) ( Ps 974,546 ) Adjustment to the provision of income tax from prior years Total deferred tax Income taxes 8,840 202,947 ( 6,232 ) 97,746 ( Ps 2,039,745 ) ( Ps 883,032 ) 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 2015 2014 Ps 5,704,410 Ps 2,197,134 30% 30% Income tax at statutory rate ( 1,711,323 ) ( 659,140 ) Add (deduct) effect of income tax on: Differences resulting from the financial cost, net Non-deductible expenses Non-taxable income Effect of different tax rates of countries other than Mexico Adjustment to the income tax liability of prior years Share in losses of associates ( 235,313 ) ( 20,554 ) 4,739 ( 79,241 ) 8,840 ( 6,893 ) ( 137,375 ) ( 22,400 ) 1,574 ( 46,024 ) ( 6,232 ) ( 13,434 ) Total income tax Effective tax rate ( Ps 2,039,745 ) ( Ps 883,032 ) 36% 40% 118 Annual Report 2015 | ALPEK The charge (credit) to income tax related to other items of the comprehensive income for the years ending December 31, are as follows: 2015 Tax charge (credit) Before taxes After taxes Before taxes 2014 Tax charge (credit) After taxes Translation effect of foreign currency Ps 3,843,118 Ps - Ps 3,843,118 Ps 2,416,988 Ps - Ps 2,416,988 Remeasurement of obligations for employee benefits Effect of derivative financial instruments for hedging purposes of cash flow Other comprehensive income items Ps 3,310,795 Deferred tax Note 30 - Segment reporting ( 3,050 ) 129 ( 2,921 ) ( 343,760 ) ( 529,273 ) 129,563 129,692 129,692 Ps Ps ( 399,710 ) ( 1,025,280 ) Ps 3,440,487 Ps 1,047,948 126,271 350,773 477,044 477,044 Ps Ps ( 217,489 ) ( 674,507 ) Ps 1,524,992 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 per- formance assessment of operating segments. 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 & Chemicals busi- ness. 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 informa- tion 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. 119 Annual Report 2015 | ALPEK Following is the condensed financial information of these operating segments (in million pesos): For the year ended December 31, 2015: 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 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 Plastic and Chemicals Others Total 60,852 Ps 23,070 ( Ps 332 ) Ps 83,590 ( 83 ) 60,769 3,583 1,837 5,420 3,979 Ps Ps Ps Ps ( 249 ) 22,821 3,961 547 4,508 503 Ps Ps Ps Ps 332 - 46 - 46 - Ps Ps Ps Ps - 83,590 7,590 2,384 9,974 4,482 Polyester Plastic and Chemicals Others Total 63,316 Ps 23,071 ( Ps ( 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 315 ) 315 - 59 - 59 - Ps Ps Ps Ps Ps 86,072 - 86,072 3,739 1,971 5,710 4,191 Ps Ps Ps Ps Ps Ps Ps Ps Ps Ps The reconciliation between adjusted EBITDA and profit before taxes for the years ended December 31 is as follows: Adjusted EBITDA Ps 9,974 Ps 5,710 2015 2014 Depreciation, amortization and impairment of non-current assets Operating profit Financial cost, net Share of losses in associates ( 2,384 ) 7,590 ( 1,862 ) ( 23 ) ( 1,971 ) 3,739 ( 1,497 ) ( 45 ) Income before taxes Ps 5,705 Ps 2,197 120 Annual Report 2015 | ALPEK Following is a summary of revenues per country of origin for the years ended December 31: Mexico United States Argentina Brazil Chile Canada Revenues Ps 2015 2014 Ps 40,986 36,455 4,762 853 369 165 48,056 33,836 4,180 - - - Ps 83,590 Ps 86,072 The Company's main costumer generated revenue amounting to Ps 5,706 and Ps 8,488 for the years ended December 31, 2015 and 2014, respectively. This revenue is obtained from the Polyester reporting segment and represents 7% and 11% for both years of the consolidated revenue with external costumers. The following table shows the intangible assets and property, plant and equipment by country (in millions of pesos): Mexico United States Argentina Total intangible assets Mexico United States Argentina Chile Brazil Ps Ps Ps At December 31, 2015 2014 Ps 2,132 6,675 5 8,812 Ps 1,986 4,061 36 6,083 23,791 6,863 328 233 107 Ps 20,981 6,045 366 - - Total property, plant and equipment Ps 31,322 Ps 27,392 121 Annual Report 2015 | ALPEK Note 31 - Commitments and contingencies At December 31, 2015, the Company has the following commitments: a) The Company through its subsidiary Grupo Petrotemex signed an agreement with M&G (See Note 2) related to supply rights of the plant for 500 thousand tons of PET (manufactured with 360 thousand tons of PTA) per year, by which it is obligated to pay an amount of US$ 435 million during the construction of the plant and subject to the compliance of predefined milestones. At December 31, 2015 Grupo Petrotemex has made payments amounting to Ps 6,383,612 (US$371 million), which are presented in the goodwill and intangible assets caption, as well as inventory prepayment in other non-current assets. See Note 12 and 13.” b) On December 15, 2014 the Company through its subsidiary DAK Americas LLC (“DAK”) entered into a Toll Manufacturing Agreement with Huntsman Petrochemical LLC (“Huntsman”) in which will obtain the supply rights of Monoethylene Glycol (MEG). On the other hand, DAK will pay $1,118,422 (US$ 65 million) to Huntsman during the installation of the equipment according to a established calendar and in compliance with certain milestones; therefore, DAK will obtain the supply rights up to 28.8 million of pounds of product per year for a 15 years period commencing on the first day of the month in which the equipment is installed. At December 31, 2015, DAK has made payments amounting to $568,589 (US$ 39 million), which are recorded under the intangible assets caption and will be amortized within the cost of sales once the MEG supply begins (see Note 2). c) At December 31, 2015 and 2014, 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. d) In September 2007, Indelpro renewed an agreement it had held with PEMEX Refinación to cover the supply of propylene for the chemical and refining area maturing in 2018, such agreement establishes the obligation to purchase the maximum level of production available at a referenced market prices. Purchases of propylene during the years ended December 31, 2015 and 2014 amounted to Ps 2,895,870 and Ps 5,619,612, respectively. The purchase commitment for the year 2016 amounts to approximately Ps 3,000,000 and is based on the volume of purchases made during 2015. e) 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. Future payments under these operating lease agreements with non-cancellable terms greater than a year are summarized below: 2016 2017 2018 2019 Onwards Ps 203,809 166,356 145,894 125,038 543,338 122 Annual Report 2015 | ALPEK At December 31, 2014, the Company has the following contingencies: a) During the normal course of the business, the Company may be involved in disputes and litigations. While the results of these can’t be predicted, the Company does not believe that there are actions pending to apply, claims or legal proceedings against or affecting the Company which, if determined adversely to the Company, would significantly damage individually or in general the results of its operations or its financial position. b) 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 the events and transactions for their recognition or disclosure subse- quent to December 31, 2015 and through February 2, 2016 (date of issuance of the financial statements), and has concluded that there are no subsequent events affecting them. José de Jesús Valdez Simancas Chief Executive Officer Eduardo Alberto Escalante Castillo Chief Financial Officer 123 Annual Report 2015 | ALPEK 124 Annual Report 2015 | ALPEKInvestor Relations Hernán F. Lozano Sabino Parra Av. Gómez Morín 1111 Sur Col. Carrizalejo, San Pedro Garza García Nuevo León, Mexico, 66254 IR@alpek.com www.alpek.com P R I N T ED WIT H 1 0 0 % WIND E N E Y R G Supplied by Community Energy n o t s u o H , r o l o c h t r a E : r e 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 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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