ALPEK, S.A.B. de C.V. Annual Report 2016

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FY2016 Annual Report · ALPEK, S.A.B. de C.V.

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2016
Annual Report

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

TABLE OF CONTENTS

Corporate profile
Financial highlights
Footprint
Our products in daily life
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
4
6
9
12
17
20
24
44
45
46
47
49

Investor Relations

Hernán F. Lozano

Sabino Parra

Av. Gómez Morín 1111 Sur

Col. Carrizalejo, San Pedro Garza García

Nuevo León, CP. 66254, Mexico

IR@alpek.com

www.alpek.com

P R I N T ED WIT

% WIND E N E

R G

Supplied by Community Energy

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
+ Largest expandable polystyrene (EPS) producer 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

Cogeneration. Cosoleacaque, Mexico

2016 ANNUAL REPORT + ALPEKFINANCIAL
HIGHLIGHTS

EC1

INCOME STATEMENT

Net sales

Operating income

EBITDA(1)

Majority net income(2)

Net income per share(3) (5)

BALANCE SHEET

Assets

Liabilities

Stockholders’ equity

Majority interest(2)

Book value per share(4) (5)

2016

4,838

532

669

198

0.09

4,428

2,409

2,019

1,794

0.85

MILLIONS OF DOLLARS

MILLIONS OF PESOS

2015

% var.

2016

2015

% var.

5,284

481

630

175

0.08

4,353

2,348

2,005

1,741

0.82

(8)

90,192

9,863

12,425

3,625

1.71

91,500

49,778

41,722

37,073

17.51

83,590

7,590

9,974

2,748

1.30

74,894

40,395

34,499

29,954

14.14

EBITDA(1)
Millions of dollars

Majority Net Income(2)
Millions of dollars

Assets
Millions of dollars

728

572

434

630

669

277

175

198

NOTE: In this annual report, monetary figures are expressed in nominal Mexican pesos ($) and in nominal dollars (US $) unless otherwise

specified. The financial information for 2016 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 2016 and 2015 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 (2,117 million shares in 2016 and 2,118 million shares in 2015).

4) Based on the number of outstanding shares (2,117 million shares in 2016 and 2,118 million shares in 2015).

5) Dollars or pesos per share, accordingly.

4,742

4,445

4,442

4,353

4,428

2016 ANNUAL REPORT + ALPEKPolyester

Plastics & Chemicals

G4-6, 8

23 plants in 6 countries:
Mexico, the United States,
Canada, Brazil, Argentina
and Chile

A qualified team of over 5,280
employees operating a total capacity of
5.8 million tons per year

2016 ANNUAL REPORT + ALPEKOUR PRODUCTS
IN DAILY LIFE

G4-4

POLYESTER

6:00

6:30

13:30

18:30

A nice workout to

Vitamins for the

Lemonade for

Safety first in

start the day

little ones

lunch

the car

PET bottle and

PET bottle

Polyester filament

polyester fiber

clothes

seatbelt

Alpek Polyester (PET). Columbia, United States

2016 ANNUAL REPORT + ALPEKPLASTICS & CHEMICALS

12:30

Lunch time

15:30

Doctor’s

appointment

18:00

20:30

Soccer practice

Teeth brushing

Polypropylene

PP syringe

Expandable

Toothbrush with

(PP) container

polystyrene (EPS)

PP handle and

cooler

nylon bristles

2016 ANNUAL REPORT + ALPEKPETROCHEMICAL
CHAINS

G4-12

Oil

Reﬁnery

Naphtha

Reformer

Paraxylene

PTA

Cracker

Benzene

Propane

Cracker

CH3

Propylene

Polypropylene

Methane

Ammonia

PET

Fibers

Ethane

Cracker

H
Ethylene

Cracker

Cyclohexane

CH2

Styrene

Caprolactam

Ammonium

Sulfate

EPS

Oil

Reﬁnery

Naphtha

CH2

Ethylene
Oxide

Monoethylene

Glycol

2016 ANNUAL REPORT + ALPEK
Oil

Reﬁnery

Naphtha

Reformer

Paraxylene

PTA

Cracker

Benzene

Propane

Cracker

CH3

Propylene

Polypropylene

Methane

Ammonia

Ethane

Cracker

Ethylene

Cracker

Oil

Reﬁnery

Naphtha

CH2

Ethylene

Oxide

Cyclohexane

CH2

Styrene

Caprolactam

Ammonium
Sulfate

EPS

Monoethylene
Glycol

PET

Fibers

Alpek products are used by millions
of people every day in a wide range
of applications.

Polyester

Plastics & Chemicals

2016 ANNUAL REPORT + ALPEK
+

Alpek Polyester (PET). Cosoleacaque, Mexico

2016 ANNUAL REPORT + ALPEKLETTER TO
SHAREHOLDERS

Dear shareholders:

G4-1, 2, 13

2016 was a year of contrasts, with a significant

2016 Polyester EBITDA was US $349 million, 2% more than in 2015.

difference between the results of the first half of the year compared

However, this figure includes a benefit of US $18 million from non-

to the second, as well as between our two business segments. Crude

cash inventory gains and non-operating items. Adjusting for this

oil price volatility, combined with several extraordinary events such

benefit, comparable EBITDA was US $331 million, 13% lower than

as Hurricane Matthew, adversely affected Alpek’s Polyester seg-

the previous year.

ment. However, our polypropylene (PP) and expandable polystyrene

(EPS) businesses posted record results for the year, driving the per-

Crude oil price volatility, the force majeure declared at three US PET

formance of our Plastics & Chemicals (P&C) segment.

plants as a result of Hurricane Matthew and low demand for poly-

ester fiber in the United States were three external factors that were

The crude oil and feedstock price environment was challenging once

particularly negative for this segment.

again during 2016. The annual average Brent price was US $44 per

barrel, fluctuating between a minimum of US $31 per barrel in Janu-

Nevertheless, positive events for the Polyester segment during the

ary and a maximum of US $54 per barrel in December, following the

year included final affirmative determinations in the US PET anti-

agreement announced by the OPEC at the end of the year. This high

dumping and countervailing duty investigations and the startup of

volatility affected the price of our feedstocks, mainly paraxylene

the multiyear monoethylene glycol (MEG) supply agreement with

(Px) and propylene, causing temporary distortions in results.

Huntsman.

Alpek’s consolidated 2016 sales totaled US $4.838 billion, down 8%

Despite Asian reference polyester margins remaining at historical

year-over-year, reflecting lower average prices in both business seg-

lows, 2016 was the first year since 2010 in which PTA demand ex-

ments as a result of the decline in oil and feedstock prices. The an-

pansion exceeded installed capacity growth in China. This situation

nual sales volume was similar to the previous year, with a marginal

is necessary for the Chinese supply/demand balance to improve and

increase in P&C.

support a gradual recovery in global polyester margins.

Consolidated EBITDA was US $669 million in 2016, 6% more than

The P&C segment posted sales of US $1.394 billion in 2016, 3% less

in 2015 but 4% below the revised guidance of US $700 million, with

than the previous year, as a 1% increase in volume was more than

a significant difference between the results of Alpek’s two business

offset by a 5% decrease in average price.

segments.

Consolidated 2016 EBITDA includes benefits from inventory gains and

lion. This figure includes a US $14 million benefit from non-cash in-

non-operating items totaling US $32 million, such that comparable

ventory gains and non-operating items. Thus, comparable 2016 P&C

EBITDA was US $637 million, 3% below that of 2015.

EBITDA was US $308 million, up 13% versus 2015.

By contrast, P&C EBITDA grew 14% year-over-year, to US $322 mil-

Polyester segment sales were US $3.444 billion in 2016, 10% lower

P&C EBITDA growth was driven by record results from our PP and

than 2015 due to a 10% decrease in average price. Volume was flat

EPS businesses, which posted comparable annual increases of 14%

and below our growth expectations mainly as a result of low demand

and 27% respectively.

for polyester fiber in the United States and for PET in Argentina.

2016 ANNUAL REPORT + ALPEKThe PP business benefited from a margin expansion in North Ameri-

Fourthly, the construction of two propylene storage spheres pro-

ca, reflecting lower feedstock costs and a favorable balance between

gressed as planned during the year. This initiative will improve lo-

supply and demand in the region. However, reference margins reached

gistics and increase the capacity utilization of our PP facility. Startup

an unsustainably high level during the first half of the year and fell

during the first half of 2017 will make it the third of our six major

shortly thereafter to stabilize above historical levels by year-end.

projects to be concluded.

EPS results largely reflect the successful integration of the busi-

And finally, the investment in our 75-thousand-ton EPS capacity ex-

nesses acquired in North and South America in 2015, combined with

pansion in Altamira reached 40% of the total programmed amount

a favorable margin environment resulting from higher Asian refer-

at the close of 2016. When the expansion begins operating in 2018,

ence styrene prices.

Alpek’s Altamira facility will be the largest EPS plant outside China.

On a macro level, global financial markets were impacted by the re-

ACQUISITIONS

sult of the US elections. In the particular case of Mexico, this caused

In 2016, Alpek announced three acquisitions that complement its ex-

a significant depreciation of the Mexican peso vis-à-vis the US dollar.

isting operations, two in the Polyester segment and one in P&C.

Alpek’s solid financial position, supported by dollar-denominated

The first in the Polyester segment was the acquisition of a con-

cash flows, long-term, fixed-interest debt, low leverage and high in-

trolling interest in Selenis Canada Inc., which operates Canada’s

terest coverage ratios, allowed us to overcome this situation.

only PET plant with an annual capacity of 144 thousand tons. In

addition to expanding Alpek’s operations in North America, this

As of year-end 2016, net debt was US $1.042 billion, US $320 million

asset allows us to complement our portfolio with differentiated

more than 2015, as a result of the ongoing investment in strategic

PET products.

projects. However, our financial ratios remain at healthy levels: a

net debt to EBITDA of 1.6 times and interest coverage of 10.5 times.

The second one involves an agreement signed with Petrobras to ac-

quire its 100% interests in Companhia Petroquímica de Pernambuco

Alpek’s strategic Capex program continued throughout 2016. Annual

(Petroquímica Suape) and Companhia Integrada Têxtil de Pernam-

Capex reached US $345 million, making this the third consecutive

buco (Citepe). These two companies operate South America’s only

year in which we have invested more than US $300 million.

integrated polyester site, which has an annual capacity of 700 thou-

PROGRESS WITH STRATEGIC PROJECTS

texturized polyester filament. Subject to pending corporate and gov-

We made significant progress with five projects involving vertical in-

ernmental approvals, this acquisition will increase Alpek’s installed

tegration, operating efficiency and capacity expansion:

capacity by approximately 22%.

sand tons of PTA, 450 thousand tons of PET and 90 thousand tons of

Firstly, in June 2016 Alpek began supplying monoethylene glycol

These two transactions consolidate our presence in the Americas

(MEG) from Huntsman in accordance with the US $65 million, mul-

and provide synergies that reinforce the Company’s integrated poly-

tiannual agreement. This was the second of our six major strategic

ester platform.

projects to begin operating, following the startup of the Cosolea-

caque cogeneration plant in 2015.

Within the P&C segment, we acquired an EPS plant in Concón,

Chile. The facility’s installed capacity of 20 thousand tons per year

Secondly, Alpek completed its investment to obtain the supply rights

complements the EPS operations that we acquired in South Amer-

to 500 thousand tons of integrated PET per year from the plant that

ica during 2015.

M&G is building in Corpus Christi, Texas. The facility is expected to

begin operations in 2017, starting with PET production and then PTA.

At Alpek, we strive to operate in harmony with all our stakeholder

Thirdly, as of year-end 2016 we had invested 40% of the total amount

pliers, as well as with the environment. Our sustainability strategy is

required for the construction of our second cogeneration plant at

based on identifying and addressing concerns from them all.

groups: shareholders, customers, employees, communities and sup-

the Altamira site in the state of Tamaulipas. This facility will have

a capacity of 350 megawatts, 3.5 times that of our existing plant in

Cosoleacaque, Veracruz, and is expected to begin generating elec-

tricity in 2018.

2016 ANNUAL REPORT + ALPEKIn 2015, we concluded a materiality assessment of social, environ-

We expect downward pressure on our 2017 results, largely due to the

mental, economic and corporate governance matters through which

normalization of polypropylene margins following their peak during

we identified 13 issues that are particularly important to our stake-

the first half of 2016. We maintain a cautious view as we expect fur-

holders. This report presents information on a total of 108 indicators

ther volatility in global financial markets driven by the change of

that pertain to these issues, and 39 others related to our operations.

administration in the United States.

Results presented this year include: related to internal well-being,

Under these conditions, financial discipline becomes increasingly

31 average training hours per employee versus 27 hours in 2015; and

important together with a number of other factors such as: our long-

related to the community, the benefitting of more than 50 schools

term, fixed-interest debt that protects us against interest rate hikes;

and 7,380 students.

dollar-denominated cash flows that mitigate the risks from foreign

exchange rate fluctuations; low leverage and high interest coverage

We reaffirm our commitment to continuously improve across

that provide financial flexibility; and geographical diversification

the four pillars that make up our sustainability model: i) internal

that reduces our country risk.

well-being, ii) community, iii) environment and iv) sustainable eco-

nomic value creation.

In 2017, we will continue to implement our strategic projects. We are

also committed to consistently paying dividends to our sharehold-

In summary, 2016 was a year characterized by a volatile crude oil

ers, which in 2016 totaled approximately US $110 million.

price environment, as well as other external factors that adversely

affected our Polyester results. However, it was a record year for our

We would like to take this opportunity to thank our employees, cus-

PP and EPS businesses, we made significant progress with strategic

tomers, suppliers and creditors, the community and, in particular,

projects and we closed acquisitions that complement our operations

you, our shareholders, for putting your trust once again in this Board

in both business segments.

of Directors.

Sincerely,

Armando Garza Sada

Chairman of the Board

José de Jesús Valdez Simancas

Chief Executive Officer

2016 ANNUAL REPORT + ALPEK
POLYESTER

Polyester is Alpek’s main business segment,

representing 71% of its sales.

G4-4, 8, EC2, EC8

The products of the segment are:

+ PTA (purified terephthalic acid). Produced from paraxylene, PTA is the main raw material

for manufacturing PET and polyester fiber.

+ PET (polyethylene terephthalate). PET, a recyclable plastic used mainly for packaging

beverage, food and consumer products, is produced from PTA and monoethylene glycol

(MEG).

+ Polyester fiber. Synthetic fiber used to produce clothing, home furnishings and seat belts,

as well as in other applications.

The Polyester segment operates 13 plants with an aggregate annual installed capacity of 4.6

million tons in the United States, Mexico, Argentina and Canada, and employs 3,650 people.

Alpek is the leading integrated PTA-PET producer in North America, from where it receives

85% of its Polyester revenues, and Argentina’s only manufacturer of virgin PET and recycled

PET (r-PET).

The Company is committed to sustainability, operating PET recycling plants in the United

States and Argentina with a consolidated installed capacity of 89 thousand tons per year,

equivalent to more than four billion bottles.

Alpek’s leadership in North America’s large and consolidated markets and focus on

consumer-oriented segments contribute to stability in the demand for its polyester products.

85%

Mexico, the United

States and Canada

account for 85% of

Polyester sales

71%
total
revenues

71% of Alpek’s total

2016 revenues came

from the Polyester

segment

1212

2016 ANNUAL REPORT + ALPEK+

Alpek Polyester (PET). Cosoleacaque, Mexico

2016 ANNUAL REPORT + ALPEKRESULTS

Polyester segment sales totaled US $3.444 billion in 2016, with a volume of 3.0 million tons.

Sales declined 10% year-over-year, largely reflecting a 10% reduction in average price be-

cause of the decline in oil prices.

Polyester EBITDA was US $349 million, 2% above the previous year. This figure includes non-

cash benefits of US $11 million from inventory gains and of US $1 million related to the ac-

quisition of Selenis Canada Inc., as well as a cash benefit of US $6 million from an insurance

compensation. Thus, comparable EBITDA was US $331 million, 13% below 2015.

Crude oil price volatility and the force majeure declared at three US PET plants as a result of

Hurricane Matthew were particularly negative for Alpek’s Polyester segment.

By contrast, positive events for the segment during the year included the startup of the

US $65 million joint venture with Huntsman to supply monoethylene glycol (MEG).

Additionally, 2016 was the first year since 2010 in which PTA demand expansion exceeded

installed capacity growth in China. This situation is necessary for the Chinese supply/demand

balance to improve and support a gradual recovery of global margins.

Lastly, the United States International Trade Commission issued final affirmative determi-

nations on PET imports from China, India, Oman and Canada, applying antidumping and

compensatory duties ranging from 0% to 154% for a minimum period of five years. The ITC’s

stance is designed to prevent disloyal practices in the US PET market.

Alpek Polyester (PET). Columbia, United States

2016 ANNUAL REPORT + ALPEK+

PET container with PP cap

2016 ANNUAL REPORT + ALPEK2 0 1 6 A N N U A L R E P O R T + A L P E K

Indelpro (PP). Altamira, Mexico

PLASTICS
& CHEMICALS

The P&C segment accounts for 29% of Alpek’s sales.

G4-13, EC2, EC7, EC8

Its main products are:

+ Polypropylene (PP). PP is a recyclable plastic made from propylene and used to produce

containers, medical instruments and packaging for food and autoparts, among other ap-

plications. It is the segment’s main product, accounting for 46% of its sales.

+ Expandable polystyrene (EPS). EPS is a low-density, impact-absorbing polymer used for

packaging products such as domestic appliances and electronics, as well as for thermal

insulation and lightening the load of structural slabs in building works. It represents 30%

of the segment’s sales.

+ Caprolactam (CPL). CPL is the main feedstock for making Nylon 6, a synthetic fiber used in

clothing, tire cord and engineering plastics, as well as other applications.

+ Specialty and industrial chemicals. These products have a wide variety of applications

across diverse industries, including the oil, pharmaceutical, automotive and consumer

goods sectors.

+ Ammonium sulfate. Nitrogen rich derivative of the CPL production process that is used as

a fertilizer.

78%

Mexico, the United

States and Canada

account for 78%

of Plastics &

Chemicals sales

29%
total
revenues

Plastics & Chemicals

represented 29% of

Alpek’s total 2016

revenues

2016 ANNUAL REPORT + ALPEKAlpek leads the market for most of the products in this segment. In particular, it is Mexico’s

sole producer of PP and CPL, and the largest EPS manufacturer in the Americas.

RESULTS

The P&C segment posted sales of US $1.394 billion in 2016, with a volume of 934 thousand

tons. 2016 sales declined 3% year-over-year because a 1% increase in volume was more than

offset by a 5% reduction in average price.

2016 P&C EBITDA was US $322 million, 14% above the previous year. This figure includes

non-cash benefits of US $12 million from inventory gains and of US $2 million related to the

acquisition of EPS assets in South America. Thus, comparable P&C EBITDA was US $308 mil-

lion, up 13% versus 2015, driven by record results of the PP and EPS businesses.

Reference PP margins were unsustainably high during the first half of the year but began to

fall in the final six months, stabilizing above historical levels by year-end.

Alpek’s EPS results reflect the successful integration of the operations acquired in North

and South America in 2015 and higher margins because of the increase in Asian reference

styrene prices.

+ Styropek Mexico (EPS). Altamira, Mexico
+

Name reptas re lab ide il et omni odi a voles
dolorestrum netur sit asped quo est ipsande riatur.

2016 ANNUAL REPORT + ALPEK+

Polypropylene containers

2016 ANNUAL REPORT + ALPEKSTRATEGIC
INVESTMENTS

G4-13, EC2, EC7, EC8

Annual Capex, mainly for the projects in our strategic plan, reached

PROGRESS WITH STRATEGIC PROJECTS

US $345 million in 2016, making this the third consecutive year in

which we invested over US $300 million.

The third project, to be concluded during the first half of 2017, is the

construction of two polypropylene storage spheres. This will im-

We expect to have concluded the six most important initiatives of the

prove logistics and increase the capacity utilization of our PP facility,

plan by 2018. In its entirety, it involves an investment of more than

producing estimated savings of US $10 million annually.

US $1,000 million and will generate an incremental EBITDA estimat-

ed at US $250 million annually.

The fourth project involves supply from the integrated PET plant

that M&G is building in Corpus Christi, Texas. During the year, we

Two of the projects are already operating. The first is the cogene-

completed the investment of US $350 corresponding to the original

ration plant in Cosoleacaque, Veracruz, which came on line in 2015.

supply contract and acquired rights to an additional 100 thousand

In its second full year of operations, it produced savings of US $16

tons of PET. The PET capacity is expected to begin operating in 2017,

million through the production of 668 GigaWatts/h of electricity and

followed by PTA production.

1.37 tons of steam.

The second project started up in the second quarter of 2016,

ity expansion of our EPS site in Altamira, Tamaulipas, making it the

supplying monoethylene glycol (MEG) in accordance with the US $65

largest such facility outside China. This initiative is part of the trans-

million multiannual agreement with Huntsman. This initiative gives

formation process that has made us America’s largest EPS producer

Alpek contractual rights to the production of approximately 150

with a total capacity of 250 thousand tons per year.

The fifth project to come on line will be the 75-thousand-ton capac-

thousand tons of MEG per year and will generate estimated annual

savings of US $20 million.

Our strategic growth plan
includes investments of more
than one billion dollars to
provide an incremental EBITDA
of US $250 million per year.

Finally, Alpek’s second cogeneration plant, currently being built in

Altamira, will begin operations in 2018. It represents our largest in-

vestment after Corpus Christi and will have a capacity of 350 MW. As

of year-end 2016, we had invested approximately 40% of the US 350

million required.

Cogeneration. Cosoleacaque, Mexico

2016 ANNUAL REPORT + ALPEK21

2016 ANNUAL REPORT + ALPEKACQUISITIONS

In 2016, we also announced two acquisitions in the Polyester segment and one in P&C.

The Polyester segment acquired a controlling interest in Selenis Canada Inc., which operates

Canada’s only PET plant, with an annual capacity of 144 thousand tons. In addition to expand-

ing Alpek’s operations in North America, the asset positions us to complement our portfolio

with differentiated PET products.

This segment also signed an agreement with Petrobras to acquire Companhia Petroquími-

ca de Pernambuco (Petroquímica Suape) and Companhia Integrada Textil de Pernambuco

(Citepe), companies that operate Brazil’s only integrated polyester site. The agreement, which

is subject to pending corporate and governmental approval, will increase Alpek’s annual

capacity by approximately 22%, adding 700 thousand tons of PTA, 450 thousand tons of PET

and 90 thousand tons of texturized polyester filament.

The P&C segment also acquired an EPS plant in Concón, Chile. The facility’s annual installed

capacity of 20 thousand tons complements our South American operations.

Going forward, we will continue with our proactive search for new investment opportunities,

selecting them rigorously to ensure that our resources are invested in the most profitable

projects, implementing them efficiently, and administering them with financial discipline in

order to assure flexibility at all stages of their development.

+ Cogeneration. Cosoleacaque, Mexico
+

Name reptas re lab ide il et omni odi a voles
dolorestrum netur sit asped quo est ipsande riatur.

2016 ANNUAL REPORT + ALPEK
+ Alpek Polyester (PTA, PET and cogeneration).
Name reptas re lab ide il et omni odi a voles
+
Cosoleacaque, Mexico
dolorestrum netur sit asped quo est ipsande riatur.

2016 ANNUAL REPORT + ALPEKSUSTAINABILITY

G4-28 to 30, 32, 33

Fully aware of the impor-

tance of our legacy to future generations, we at Alpek endeavor to

work in harmony with the environment and society. The company’s

products are a result of our responsible use of resources and ongo-

ing cooperation with neighbors, business partners and employees

and their families. To achieve this, we focus on continuous improve-

ment, innovation and ethical, responsible conduct.

In this fifth edition of our annual sustainability report, we present

our progress in sustainable development over the period of January

1st to December 31st, 2016, using version G4 of the Global Reporting

Initiative (GRI) methodology for the second time. In accordance with

this standard, we selected the core option of compliance, focusing

our report on the issues that are of particular relevance to our stake-

holders. For more information on how we identified and responded

to these issues, please consult the section on our materiality study

on page 27.

The GRI G4 indicators shown in this report are denoted in each sec-

tion. The full list of GRI indicators to which we responded can be

found at: http://www.alpek.com/es/gri-report.html. The link also

includes the UN’s Sustainable Development Goals to 2030, to which

the actions we implemented in 2016 contribute.

In 2016, we invested more than
US $40 million in programs
and initiatives regarding social
responsibility in our operations.

Fauna at Alpek Polyester lagoon.
Altamira, Mexico

2016 ANNUAL REPORT + ALPEK25

2016 ANNUAL REPORT + ALPEK+ Talk about enviromental care.
+

Name reptas re lab ide il et omni odi a voles
Viva Verde project
dolorestrum netur sit asped quo est ipsande riatur.

2016 ANNUAL REPORT + ALPEKMATERIALITY STUDY

Material aspect: CRS management

G4-18 to 21

Our 2015 Annual Report presented the

results of our first materiality study, an exhaustive process of

100%

Materiality matrix

k
e
p
l
A
n
o
t
c
a
p
m

consultation and analysis involving all our stakeholders, which

helped us to understand their priorities, the areas where we

have been most effective, and those where we should continue

improving. The process led to the identification of 13 material

aspects of our activities in four key sustainability areas: society

and employees, the environment, sustainable value creation and

corporate governance.

MATERIAL ASPECTS

Operations 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

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

The materiality study also helped us to define the focus of some

of our programs, in order to better serve our stakeholders’ needs.

For example, after finding out that our stakeholders see climate

change as a priority area, in 2016 we presented our first emis-

The relevance of these aspects to our stakeholders was the de-

sions report to the Carbon Disclosure Project (CDP) and continue

termining factor in defining our sustainability priorities and the

to strengthen our emissions strategy, with the aim of aligning our

concrete actions we took in 2016.

activities to the international goal –established by the UN– of lim-

iting global warming to 2ºC or less by 2030.

2016 ANNUAL REPORT + ALPEK

OUR SUSTAINABILITY STRATEGY AND MODEL

Material aspects: Operations and risk strategy,

CSR management

G4-25, 46, 56

Our sustainability strategy is based on listening to, identifying and re-

sponding to the needs and concerns of the diverse groups who contribute to making Alpek

an industry leader.

The criteria we use to identify our stakeholders are based on the level of mutual involvement.

In this way, we can pay particular attention to each group in order to achieve our goals and

ensure mutual benefit.

Stakeholders

EMPLOYEES

COMMUNITIES

CUSTOMERS

SUPPLIERS

SHAREHOLDERS

ENVIRONMENT

* The participation of our employees has been indispensible for the preparation of this report, because it is they who provided the correct, revised information

required to comply with the methodology of the Global Reporting Initiative.

** A group of external consultants who are experts in Corporate Social Responsibility also help us with this initiative.

2016 ANNUAL REPORT + ALPEKOur sustainability model

The implementation of our strategy is based on a sustainability model aligned to that of

Alfa. It establishes a platform of action in social responsibility that contributes to the organic

growth of the company and its stakeholders.

Our model comprises four pillars that assure the alignment of our business and sustainabil-

ity strategies, a key factor for Alpek’s success.

SUSTAINABLE ECONOMIC
VALUE CREATION:

Obtain satisfactory returns on

business activities considering

the investment made and risks

undertaken

Focused on: Shareholders

tainable e c
alue cre a ti o

s
u
S

n
o
i
s
s

Envir

ENVIRONMENT:

Decrease the impact of

our operations, reducing

emissions and conserving

resources, soil and water

Focused on: Resources,

emissions, energy and

organic growth

INTERNAL WELL-BEING:

Provide healthy, safe working

conditions and opportunities

for employee development

Focused on: Employees

o m i c
n

Biene
Intern
sta
l
r
i

l
l

n
b

o
e

n
g

C
o
m

s
i

o
n

munity

COMMUNITY:

Be a responsible citizen in the

community

Focused on: Communities,

customers and suppliers

In addition, we comply with initiatives such as the United Nations Global Compact, through

Alfa, and use tools such as the reporting methodology of the Global Reporting Initiative

and that of the Sustainability Index of the Mexican Stock Exchange, among others.

2016 ANNUAL REPORT + ALPEKCommunication with stakeholders

Material aspect: CSR management

G4-24, 26, 27

We must respond to the concerns and suggestions of our stakeholder

groups in order to assure our permanence over time, so we are in continuous communication

with them through diverse media.

In 2016, we interacted with our stakeholders in the ways shown below:

EMPLOYEES

- Labor climate survey
- Transparency mailbox
- E-mail bulletins
- Communication screens

COMMUNITIES

- Community engagement
programs
- Focus groups at
neighborhood meetings
- Contingency plans
- Immediate attention

CUSTOMERS

- Toll-free telephone service
- E-mail contact
- One-on-one meetings
- Satisfaction survey

SUPPLIERS

- Direct communication
- Supplier development
program
- Program for identifying
SR in the value chain

SHAREHOLDERS

- Quarterly meetings and
annual results
- Investor relations
- Quarterly reports and
calls
- Annual Shareholders’
Meeting

MATERIALITY ANALYSIS

2016 ANNUAL REPORT + ALPEKOn the basis of this communication, we selected the key aspects for

2016 as: operating safety for our communities; product and service

quality for our customers and suppliers; and business strategy and

Corporate governance

G4-35, 42

Alpek’s economic well-being and the continuity

sustainability for our shareholders. Our employees also expressed

of its operations are based on acting with responsibility towards its

their ideas on innovation, business vision and labor relations.

stakeholders.

This conviction begins with the Board of Directors and permeates

throughout the entire organization. The Board continuously pro-

CREATION OF SUSTAINABLE ECONOMIC VALUE

motes initiatives to ensure the sustainability of our operations and

Material aspect: CSR management

is closely involved in the evaluation, development and approval of

Alpek’s mission, vision, values and comprehensive strategy.

G4-42, EC1

Creating economic value in a responsible way is

our highest priority. We know that doing this in a sustainable manner

Alpek’s management team supports the Board of Directors in imple-

is the only way to benefit our shareholders, communities and the

menting initiatives and monitoring compliance with environmental,

environment in which we operate.

economic and social goals. Each one of these areas is administered

from a specific department in Alpek and in each of its companies.

2016 was characterized by volatility in oil and feedstock prices,

Progress is monitored through specific measurable indicators and

which largely affected our Polyester segment, while our Plastics

evaluated periodically to assure the improvement and continuity of

and Chemicals segment posted record results for its PP and EPS

our strategies.

businesses.

Our 2016 financial performance is summarized below:

has been part of the Annual Report for Shareholders for the past

Investor Relations is responsible for the Sustainability section, which

Aspect
(millions of USD)

2015

2016

three years. The department has an open channel of communication

with the shareholders and financial markets. In this way, we ensure

that the information provided to these groups corresponds to exactly

what we have done and its scope, in accordance with the goals es-

Consolidated revenues

5,284

4,838

tablished in our sustainability strategy, which is directly related to

our business strategy.

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)

233

175

272

198

0.08

0.09

160

317

722

1.1

164

225

345

1,042

1.6

Cogeneration personnel. Cosoleacaque, Mexico

2016 ANNUAL REPORT + ALPEKFinancial opportunities and risks due
to climate change

During the year, we also changed standard light bulbs for LED ones

at a number of our facilities, and automated the process for collect-

Material aspects: Distribution of wealth, Operations and

ing and managing the company’s sustainability information using

risk strategy, Climate change and emissions strategy

a cloud-based system that helps us to follow the indicators better.

EC2

The Alpek team works with a dynamic and

at the same time, generating economic benefits.

These, and other initiatives, help us to protect the environment while,

highly innovative focus to adapt our actions to the continuous

progress and change in the world in which we operate. We under-

stand the great challenge our business faces because we work with

non-renewable resources, so every year we dedicate resources and

design strategies to optimize our processes and operate in an in-

creasingly sustainable manner.

INTERNAL WELL-BEING
Our employees
Material aspects: Distribution of wealth, Labor practices

By continuously analyzing the events, trends and factors that affect

EC5, LA12, LA13

Alpek’s employees are our main strength and

our industry, we identify the risks and opportunities that climate

greatest wealth so we are committed to providing them with the best

change represents for the efficiency of our operations. Ever-stricter

possible working conditions. Although, due to the nature of our op-

environmental laws and standards, natural disasters that affect the

erations, our workforce consists mainly of men, we operate with solid

logistics of product delivery, and water and oil shortages constitute

gender-equality policies, such as DAK Americas’ Equal Employment

great challenges not only for the sector but also for the entire planet.

Opportunity Policy, maternity and paternity benefits, and other

specific benefits, such as flextime and working from home. Wages

To face these challenges, we invest in technology, the improvement

and salaries are based on the profile of any given position and the

of our equipment and processes, and making strategic acquisitions

competencies of the person who will occupy it, not on the gender.

to enhance our competitiveness and optimize resources. Examples

Benefits are granted according to an employee’s category and the

of these actions include: the construction of a second cogeneration

activities he/she carries out.

plant in Altamira, Tamaulipas, that will come on line in 2018; and the

building of two storage spheres for propylene, a very-delicate basic

The ratio of the base salary of our male employees to that of our

feedstock for our operations, that progressed according to plan and

female employees is 1:1, in other words, there is no difference in

will be finished during the first half of 2017.

salary at all.

Type of employee

Men

Women

Total

Executives and employees

Union members

Total

1,489

3,121

4,610

87%

543

131

674

13%

2,032

3,252

5,284

100%

Type of contract

Total

Permanent

Part-time

External

5,108/ 86.85%

176/ 3.00%

597/ 10.15%

Laboratory personnel, Alpek Polyester.
Altamira, Mexico

2016 ANNUAL REPORT + ALPEK

Cogeneration personnel. Cosoleacaque, Mexico

Training and development

LA9, LA10

One of our goals is to work continuously to as-

sure the personal and professional growth of our people. Year after

year, we improve our training processes, adapting them to the cur-

Average number of training hours per
employee

2015

2016

rent needs of the labor environment and ensuring they have strategic

Employees as a whole

relevance. In 2016, two of the main focuses of our training program

were industrial safety and leadership in the workplace. For example,

DAK Americas implemented the Emerging Talent Program across all

its US facilities and held a training session for its management team

Women

Men

in the Center for Creative Leadership.

The table below summarizes our 2016 training initiatives in terms of

hours dedicated to each employee:

Union members

Non-unionized

In addition to the training we offer in the workplace, part of our bud-

get is used for scholarships for employees who wish to continue their

training outside our facilities. In 2016, we granted 723 scholarships

in diverse institutions.

2016 ANNUAL REPORT + ALPEK

Alpek Polyester, Indelpro and Styropek personnel
taking part in an AINSTAC simulation exercise

2016 ANNUAL REPORT + ALPEKWe supported our employees’ families in 2016, giving a total of

out activities with elevated risk, we reinforce the necessary safety

1,136 scholarships and educational grants to their children. We

measures and conditions.

also invested more than double the 2015 amount in 34 family

events for more than 5,300 participants. Additionally, at our US

We regret to report an accident at the DAK Americas Columbia plant

sites we offered financial education courses, such as SmartDollar,

in South Carolina in 2016, which resulted in the death of one of our

for family members.

workers and two more injured. We are deeply sorry for this loss

which drives us to redouble our efforts and continue working to avoid

In Mexico, we took part in the ANSPAC Woman program, the objec-

any further incidents.

tive of which is to promote universal values for the betterment of

women and their families.

The table below summarizes our results in the area of occupational

Occupational health and safety

Material aspect: Health and safety

LA5, LA8

The most essential requirement for our em-

ployees to be able to carry out their functions effectively is to do so

in a safe place of work. Consequently, we invest in the right safety

equipment, encourage personnel from all areas of the company to

safety in 2016:

Indicator

Loss ratio

Frequency

Accidents

join our health and hygiene committees, and create awareness of

Lost days

how to lead a healthy life.

Fatalities

In 2016, Alpek companies invested $18 million in 89 health and

safety programs, including courses on the use of items of per-

2015

43.8

2.2

416

2016

17.4

1.08

193

sonal protection, chemical risks and carcinogenic substances, as

Among our company’s most outstanding achievements are the fol-

well as in our brigade campaigns. More than 8,200 Alpek em-

lowing: i) 5.2 years without an accident with lost time at our Styropek

ployees were benefited.

plant in Argentina, ii) 75% reduction in loss ratio and 30% decrease

in frequency at Akra Polyester, iii) 10 years without an incapacitating

We also implemented programs for respiratory protection, vaccina-

accident at Styropek Mexico and iv) 19 years without an incapacitat-

tion campaigns and initiatives for practicing yoga in the office. We

ing accident in Petrotemex’s laboratory and engineering area.

keep a record of the health of our workers and, if any of them carry

Styropek personnel wearing pink shirts for breast
cancer awareness

2016 ANNUAL REPORT + ALPEK+
+

Name reptas re lab ide il et omni odi a voles
Vive Verde Project giving schoolchildren a
presentation on the environment
dolorestrum netur sit asped quo est ipsande riatur.

ENVIRONMENT

EN27, EN31

The sustainability of our operations depends to

We underpin this commitment with agreements with governments

a large extent on our maintaining and complying with strict environ-

and municipalities, participating in processes such as the Energy

mental standards. We recognize that the use of petroleum deriva-

Efficiency Certification System in several nations and the obtaining

tives implies a great commitment, which we make through actions

of ISO environmental certification.

that range from the continuous monitoring and review of the pro-

cesses in our facilities to the promoting of an environmental culture

For example, in 2016 Akra Polyester obtained certification under the

outside them. In 2016, Alpek invested US $21.7 million in this issue,

new version of ISO 14001, becoming the first Mexican company to

distributed as follows:

comply with this version of the standard.

Area of investment
(millions of dollars)

Reduction of emissions

Environmental
management costs

Waste disposal and
reduction

Prevention costs

Other environmental
actions

Remediation costs

Total

2015

19.2

7.2

1.3

1.0

0.3

29.0

2016

3.3

3.9

0.01

0.2

4.7

9.6

21.7

Energy efficiency

Material aspect: Energy eco-efficiency

EN3, EN4, EN6

Through projects such as our cogeneration

plants, one already functional in Cosoleacaque, Veracruz, and an-

other one being built in Altamira, Tamaulipas, we make our use of

non-renewable resources increasingly efficient. As well as gener-

ating electricity, these facilities produce steam that we use in the

production processes. As a result, in June 2016 Alpek’s PTA plant in

Cosoleacaque stopped using its last conventional furnace and to-

day obtains the steam used in its processes from the cogeneration

plant. This represents a reduction of 76,070 GJ in external electricity

use, equivalent to the annual consumption of 2,349 Mexican homes.

The cogeneration plant produced a total of 686 GWh of electricity in

2016, which was used to supply most of our Mexican PTA and PET

operations. The reduction of energy consumption per produced ton

was one of the main targets for all Alpek companies this year.

The aggregate effect of the initiatives the Alpek companies have implemented resulted in

savings of 345,536 GJ in 2016, equivalent to the annual electricity needs of 10,670 Mexican

homes.

Energy source

Direct consumption (GJ x 106)

Indirect consumption (GJ x 106)

Natural gas

Coal

Alternative fuels

Fuel oil

Electricity

Steam

Total

2015

2016

6.5

5.9

12.4

6.5

6.6

13.1

2015

20.7

0.5

0.1

0.0

2016

21.3

0.5

0.1

21.2

21.9

Water care

Material aspect: Water management

EN8, EN10

Water is a crucial resource for our operations. Working to reduce our

water footprint and using this resource in a more responsible way are core goals of all our

operating processes. We have 12 company-owned water treatment plants and also use third-

party support to reduce our water consumption and promote its reuse and recycling.

Water consumption by source
(millions of m3)

Rivers, lakes and seas

Underground water

Municipal water supply

Waste water from another organization

Other

Total

Treated water (millions of m3)

2015

89.5

3.5

1.2

0.5

2016

96.4

3.1

2.7

0.6

0.2

94.6

103.0

2015

15.1

2016

12.2

2016 ANNUAL REPORT + ALPEKIn 2016, Alpek’s companies reduced their water consumption through

Total 2016 CO2 emissions are broken down in the table below:

actions and programs such as those described below:

In Mexico, Petrotemex implemented a water recovery and treatment

CO2 Emissions

2015

2016

project, which resulted in a total of 1.2 million m3 of treated water by

Direct emissions (tons CO2e x 106)

the end of the third quarter, equivalent to the annual average con-

sumption of 40,823 Mexican families.

Indirect emissions (tons CO2e x 106)

1.21

1.08

1.25

1.14

2.29

2.39

Univex treated and reused 1.7 million m3 of water, 83% of the total

consumption of its operations, and reduced water use by 2.5 m3 per

ton of produced caprolactam.

Meanwhile, Akra Polyester obtained 96% of the water consumed in

its processes from another organization’s waste water.

Two of our plants are close to areas with significant water resources

and biodiversity. The Columbia plant in the United States is located

Total

NOx

SOx

Emissions of other pollutants

Tons emitted per
Pollutant

2015

431.3

766.1

24 kilometers from the Congaree National Park, while the Zárate

Volatile organic compounds

plant in Argentina is less than 25 kilometers from the Paraná Delta

(VOCs)

Biosphere Reserve. These two facilities contribute to the protection

Hazardous air pollutants

and preservation of their local habitats.

(HAPs)

Not quantified

Particulates (PM)

Not quantified

2016

596

277

536

362

106

Water discharge

We work to ensure that our wastewater discharge is continuously

lowed us to maintain a stable emissions level compared to 2015.

Even as our operations grew in 2016, the implemented initiatives al-

declining and cleaner, complying 100% with current national and

international standards. In 2016, 11.3 million m3 of water were dis-

charged into rivers and lakes once they had been treated in internal

and external water treatment plants.

REDUCTION OF EMISSIONS

Material aspect: Climate change and emissions strategy

EN15, EN16, EN19, EN21

Caring for the atmosphere and the quali-

ty of the air we breathe is of great importance to Alpek and consti-

tutes part of our international agenda. We work to this end through

emissions reduction programs at all our plants and through our

participation in the carbon credit system. Moreover, in 2016 the

company presented its first report to the Carbon Disclosure Proj-

ect, showing the results of our efforts to mitigate climate change

and contribute to the UN goal of limiting global warming to 2ºC or

less by 2030.

2016 ANNUAL REPORT + ALPEK
2 0 1 6 A N N U A L R E P O R T + A L P E K

Vive Verde Project talks

Raw materials and use of resources

We also reduced our production of hazardous and non-hazardous

waste by using our resources better. In 2016, Petrotemex set the goal

Alpek continuously looks for ways to make its operations more effi-

of lowering its hazardous waste by 300 tons, which it partially ful-

cient and environmentally friendly. In 2016, we began building two

filled by reducing hazardous waste generation by 205 tons.

spheres for storing propylene, a basic feedstock that requires very

careful handling and storage. This project will improve logistics and

Another outstanding program is DAK Americas’ Zero Waste pro-

increase the capacity utilization of our polypropylene plant.

gram, through which this company had reduced the waste its sends

to landfills by 98% as of year-end 2016.

Another initiative that we have implemented to optimize resources

is the operation of two PET recycling plants, with an aggregate pro-

Alpek’s efforts in this area vary greatly in scale, ranging from the re-

cessing capacity of 89,000 tons per year. In 2016, Alpek processed

cycling of office waste such as paper and cardboard to the recycling

69,400 tons, equivalent to planting 417,000 trees because the emis-

and reuse of raw materials. For example, in 2016 Styropek Mexico

sions that would have been generated in producing new PET were

recovered 60.64 tons of styrene and 1,230 tons of organic phase

not generated.

polymer which were used directly in the manufacturing process.

Vive Verde event

2016 ANNUAL REPORT + ALPEKOUR COMMUNITY

Material aspect:

Community engagement

OUR CUSTOMERS AND SUPPLIERS

Material aspects: Customer and supplier relations,

Relations with NGOs and regulatory agencies

EC7, SO1

Our neighboring communities grant us li-

G4-12, 15, 24 to 26, EN33, LA14, LA15, HR4, HR10, HR11, SO9, SO10

cense to operate. In exchange, Alpek implements programs to serve

Alpek builds long-term, win-win relationships of shared responsibil-

their needs and improve their quality of life.

ity with its value-chain partners. We assure the quality of the prod-

For example, in 2016 more than 50 schools and 7,380 students ben-

close relationship with our suppliers. Consequently, all Alpek com-

efited from Alpek’s support. DAK Americas alone repaired, painted

panies have an executive in charge of supervising the performance

ucts we offer by continuously reviewing our processes and building a

and supported civic activities at 30 schools close to its plants in the

of the value chain.

United States.

In 2016, we continued auditing our transport companies to ensure

Petrotemex held an event called Vive Verde (Live Green) in which

that they comply with the requirements to enter our facilities; made

employees visited schools, giving talks to students on how to live

monthly inspections of the contractors who supply our safety equip-

with an environmental culture and take care of the planet.

ment and tools; and evaluated the quality of the work, services and

During the year, Styropek Mexico partnered with the association

facilities in Mexico, every year we audit the management, quality,

CARITAS of Tampico to help communities affected by Hurricane Earl

environmental impact, vehicles, raw materials and policies of the

and sent support for those displaced by heavy rainfall in Tampico,

eighteen freight companies responsible for delivering our feedstock.

materials at the end of a given assignment. At our PET and PTA

Madero and Altamira.

Univex has a program for donating agricultural products, result-

to the more than 1,500 external contractors who work in its facilities,

ing from the testing of fertilizers in pilot programs, to neighboring

and Indelpro obtained the AISTAC* award for companies that give

communities and to the DIF (a family-focused government charity)

significant support to their suppliers in Mexico.

of Salamanca. In 2016, it donated 1.2 tons of beans and gave med-

ical orientation sessions and healthcare talks to the inhabitants of

In the case of our customers, all Alpek companies gave out satisfac-

It is important to note that in 2016 Petrotemex gave safety training

Godoy, a local community.

tion surveys, making sure that at least 50% of them were answered.

The overall rating for 2016 was 94% positive, compared to 91% in

A total of 309 employees gave an aggregate time of 2,463 man-hours

2015. Not only is this a good result, but it also encourages us to con-

to voluntary work in 2016.

tinue working in accordance with our sustainability strategy.

*AISTAC: Asociación de Industriales del Sur de Tamaulipas, A.C.

With regard to the safety of our operations, all Alpek facilities have

channels of communication open to the leaders and authorities of

PARTICIPATION IN CHAMBERS AND ASSOCIATIONS

their neighboring communities, as well as contingency and training

plans for emergencies. For example, Akra Polyester is part of a Local

One of the most effective ways of driving our industry, developing the

Committee for Mutual Support. This entity was legally constituted

value chain and complying with current rules and regulations is by

before the department of Civil Protection to assure mutual support

collaborating with other companies in our sector. This keeps us up to

between companies and the community in case of emergencies or

date on any changes in the industry and related legal rulings, as well

environmental contingencies.

as on industry requirements, and positively and proactively helps

us to support its sustainable growth. For example, in 2016 Indelpro

DAK Americas sites, with the exception of Pearl River, have Commu-

actively participated as a promoter of the setting up of the supplier

nity Advisory Panels, forums with local leaders to discuss the impact

committee of AISTAC, through which they boost their suppliers’ de-

of operations and any other concerns that the members of neighbor-

velopment by sharing best practices with other affiliated companies.

ing communities might have.

In 2016, we actively participated in the following organizations:

2016 ANNUAL REPORT + ALPEKParticipation in
steering committees
or special projects

Above minimum
financial support

Yes

Company

Association

Akra

ANIQ (Asociación Nacional de la Industria Química)

AFMA (American Fiber Manufacturers Association)

CAIRPLAS (Cámara Argentina de la Industria de Reciclados Plásticos)

CAPCA (Carolinas Air Pollution Control Association)

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)

CIRA (Cámara de Importadores de la República Argentina)

IAE (Instituto Argentino del Empaque)

DAK
Americas

INDA (Association of the Nonwoven Fabrics Industry)

IPA (Instituto Petroquímico Argentino)

MMA (Mississippi Manufacturers Association)

NAPCOR (National Association 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)

PETRA (The PET Resin Association)

UET (Unión Empresaria de Municipio Tigre)

UIZ (Unión Industrial de Zárate)

2016 ANNUAL REPORT + ALPEKCompany

Association

Petrotemex

Indelpro

ANIQ (Asociación Nacional de la Industria Química)

AISTAC (Asociación de Industriales del Sur de Tamaulipas, A.C.)

ANIQ (Asociación Nacional de la Industria Química)

AISTAC (Asociación de Industriales del Sur de Tamaulipas, A.C.)

Polioles

ANIQ (Asociación Nacional de la Industria Química)

ABIQUIM (Asociación Brasileña de la Industria Química)

AISTAC (Asociación de Industriales del Sur de Tamaulipas, A.C.)

Styropek

AAPE (Asociación Argentina del Poliestireno Expandido)

CAIP (Cámara Argentina de la Industria Plástica)

CIQyP (Cámara de la industria Química y Petroquímica)

Univex

ANIQ (Asociación Nacional de la Industria Química)

Participation in
steering committees
or special projects

Above minimum
financial support

Yes

2016 ANNUAL REPORT + ALPEKBOARD OF
DIRECTORS

G4-34, 38

Armando Garza Sada (3)

Chairman of the Board of
Alpek, S.A.B. de C.V.

+ Board member of Alpek since April 2011. Chairman of the Board
of ALFA and NEMAK. Member of the Boards of CEMEX, FEMSA, Frisa
Industrias, Grupo Lamosa, Liverpool, Proeza and ITESM. Member of
the Board of Consejo Mexicano de Negocios (CMN).

Álvaro Fernández Garza (3)

President of ALFA, S.A.B. de C.V.

+ Board member of Alpek since April 2011. 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.

Francisco José Calderón Rojas (2)

Chief Financial Officer of
Grupo Franca Industrias, S.A. de C.V.

+ Board member of Alpek since April 2012. Member of the Boards
of Franca Industrias, Franca Servicios, Franca Desarrollos and
Universidad de Monterrey (UDEM), and an Alternate Member of the
Boards of FEMSA and Coca Cola FEMSA.

Andrés E. Garza Herrera (1A)

Chief Executive Officer of Qualtia Alimentos, S.A. de C.V.

+ Board member of Alpek since April 2012. 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, Banorte Regional, Universidad de Monterrey
(UDEM) and Ciudad de los Niños.

Merici Garza Sada (4)

Investor

+ Board member of Alpek since April 2012.

Pierre Francis Haas García (1)

Advisory Services Director of Hartree Partners LP

+ Board member of Alpek since April 2012.

Jaime Serra Puche (1A)

Founding Partner and Chief Executive Officer of SAI Consultores, S.C.

+ Board member of Alpek since April 2012. Member of the Boards
of Fondo México, Tenaris, Vitro, Rotoplas, Fresnillo plc and Grupo
Financiero BBVA Bancomer.

Rodrigo Fernández Martínez (3)

President of Sigma Mexico and Latin America

Enrique Zambrano Benítez (1A)

Chairman of the Board and
Chief Executive Officer of Grupo Proeza, S.A. de C.V.

+ Board member of Alpek since April 2012. Previously Marketing
and Finance Director of Sigma.

+ Board member of Alpek since April 2012. 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

2016 ANNUAL REPORT + ALPEKMANAGEMENT TEAM

G4-34, 39

1. José de Jesús
Valdez Simancas

2. Eduardo
Escalante Castillo

3. Felipe
Garza Medina

4. Jorge
P. Young Cerecedo

Chief Executive Officer

Chief Financial Officer

Co-President of Alpek Polyester

CEO of Alpek since 1988. Former CEO of

Chief Financial Officer of Alpek

President of Alpek’s PTA Business

President of Alpek’s PET and Staple

Petrocel, Indelpro and Polioles, and former

since 2013. Former President of the

Chairman of the National Association

Caprolactam Division of Alpek and

of the Chemical Industry (ANIQ). Holds

President of AOL Mexico. Holds an

an undergraduate degree and MBA

undergraduate degree from ITESM and

from ITESM and a Master’s in Industrial

a Master’s in Engineering from Stanford

Engineering from Stanford University.

University.

Unit from 2008 to 2016. Joined Alfa

Fibers Business Unit from 2012 to 2016.

in 1977 and is former CEO of Indelpro

Former Executive Vice President of PET

and Galvacer. Holds an undergraduate

Resins and Vice President of Planning

degree from Stanford University and an

and Administration of DAK Americas

MBA from Cornell University.

LLC. Holds an undergraduate degree

from ITESM and an MBA from the

University of Pennsylvania.

5. Jorge
González Escobedo

President of the Filaments
Fibers Business Unit

6. Alejandro
Llovera Zambrano

7. José Luis
Zepeda Peña

8. Gustavo
Talancón Gómez

President of the Polypropylene
Business Unit

President of the EPS and Chemicals
Business Unit

President of the Caprolactam and
Fertilizers Business Unit

President of Alpek’s Filaments Fibers

President of Alpek’s Polypropylene

President of Alpek’s EPS and Chemicals

President of the Caprolactam and

Business Unit since 2005. Joined Alfa in

Business Unit since 2008. Joined Alfa

Business Unit since 1999. Joined Alpek

Fertilizer Business Unit since 2013.

1974 and is a former Vice President of

in 1985, is a former Director of Human

in 1986 and is former Vice President of

Joined Alfa in 1989, is former CEO

Alpek’s Industrial Filaments Business

Resources at Alfa, held several executive

Planning, Finance and Administration,

of Terza, and held several executive

Unit. Holds an undergraduate degree

positions in Alpek’s Synthetic Fibers

and Sales at Grupo Petrotemex. Holds

positions in Alpek’s Polypropylene

and an MBA from ITESM.

Business Unit and former Chairman of

an undergraduate degree and Master’s

and Nylon and Polyester Filaments

ANIQ. Holds an undergraduate degree

in Chemical Sciences from UNAM and an

Business Units. Holds an undergraduate

and an MBA from ITESM.

MBA from ITESM.

degree from ITESM and a graduate

degree from IPADE.

2016 ANNUAL REPORT + ALPEK
CORPORATE
GOVERNANCE

G4-38, 42, 47, 49, 58

Once a year, all companies that are listed on the Bolsa Mexicana de

+ Additionally, the Audit and Corporate Practices Committee is re-

Valores, S.A.B. de C.V. (BMV) must disclose the extent to which they

sponsible for issuing recommendations to the Board of Directors

adhere to the CMPC by answering a questionnaire. The responses of

on matters related to corporate practices, such as employment

the different companies may be consulted on the BMV’s website.

terms and severance payments for senior executives, and com-

A summary of Alpek’s principles of corporate governance is presented

below, reflecting the answers the company gave to the questionnaire

+ The company has internal control systems with general guide-

in June 2016 and updated where necessary:

lines that are submitted to the Audit and Corporate Practices

+ The Board of Directors is made up of nine members, who have

dates the effectiveness of the internal control system and issues

Committee for its opinion. In addition, the external auditor vali-

pensation policies

no alternates. Of the nine directors, four are independent board

reports thereon.

members, four are related proprietary board members and one

is an independent proprietary board member. This annual report

+ The Board of Directors is advised by the planning and finance de-

provides information on all the board members, identifying those

partment when evaluating matters relating to the feasibility of in-

who are independent and their participation in the Audit and Cor-

vestments, strategic positioning of the company, alignment of in-

porate Practices Committee.

vesting and financing policies, and review of investment projects.

This is carried out in coordination with the planning and finance

+ The Board of Directors is advised by the Audit and Corporate

department of the holding company, Alfa, S.A.B. de C.V.

Practices Committee. The Committee Chairman is an independent

board member.

+ Alpek has a department specifically dedicated to maintaining an

open line of communication between the company and its share-

+ The Board of Directors meets every three months. Meetings of the

holders and investors. This ensures that investors have the finan-

Board may be called by the Chairman of the Board, the Chairman

cial and general information they require to evaluate the compa-

of the Audit and Corporate Practices Committee, the Secretary of

ny’s development and progress. Alpek uses press releases, notices

the Board or at least 25% of its members. At least one such meet-

of material events, quarterly results conference calls, investor

ing every year is dedicated to defining the company’s medium and

meetings, its website and other communication channels.

long-term strategies.

+ Members must inform the Chairman of the Board of any conflicts

recommendations of its holding company, Alfa, S.A.B. de C.V. It

of interest that may arise, and abstain from participating in any

has a mission, vision and values, and code of ethics that are pro-

related deliberations. The average attendance at Board Meetings

moted within the organization.

+ Alpek promotes good corporate citizenship and adheres to the

in 2016 was 94.4%.

+ The Audit and Corporate Practices Committee studies and issues

recommendations to the Board of Directors on matters such as se-

lecting and determining the fees to be paid to the external auditor,

coordinating with the company’s internal audit area and studying

accounting policies.

2016 ANNUAL REPORT + ALPEK
GLOSSARY

Caprolactam (CPL)

Expandable Polystyrene (EPS)

CPL is made by reacting cyclohexane, ammonia and sulfur and

Light, rigid, cellular plastic, product of the polymerization of sty-

is the raw material for the production of Nylon 6 polymer. Nylon

rene monomer. EPS is a versatile material because of its proper-

6 is a synthetic resin that, because of its strength, flexibility and

ties as an impact reducer and thermal insulator, with customized

softness, has a range of end uses, including for sportswear, under-

molding capacity. These properties, combined with the ease with

clothes and engineering plastics.

which it can be processed, make EPS a popular packaging for im-

Clean Industry Certification

pact-sensitive items and for protecting perishables. It is also widely

used in construction systems, to lighten floor and roof structures,

Certification granted by the Mexican Environmental Protection

and as an insulator.

Agency (PROFEPA) to companies that comply with environmental

legislation.

Cogeneration

IntegRex®

Alpek-owned technology for producing PTA and PET from par-

axylene (pX) and monoethylene glycol (MEG), offering significant

Process that produces both electricity and steam.

cost savings and fewer intermediate steps in the production process.

Comprehensive Responsibility Administrative System (Mexican

Investment Grade

National Association of the Chemical Industry, ANIQ)

Rating given to a company as a result of an evaluation made by

Certification given to companies that comply with the six compre-

credit-risk rating agencies such as Fitch Ratings, Standard &

hensive responsibility requirements established by the ANIQ, cov-

Poor’s and Moody’s.

ering Process safety, Health and safety in the workplace, Product

safety, Transportation and distribution, Prevention and control of

ISO 9001 Certification

environmental pollution and Community protection.

Certification issued by rating agencies to those companies that

CO2 Emissions
Unit to measure the carbon dioxide produced by the burning of sol-

id, liquid and gaseous fuels, including natural gas.

operate with proven procedures for assuring the quality of their

products, in accordance with the standard defined by the Interna-

tional Organization for Standardization (ISO).

Cyclohexane

ISO 14001 Certification

Compound produced by the hydrogenation of benzene and used in

Internationally accepted standard for establishing an efficient En-

caprolactam production.

vironmental Management System (EMS). The standard is designed

to support companies’ profitability and at the same time minimize

Ethane

environmental impact.

Colorless, odorless hydrocarbon with a molecular formula of

C2H6 that is a component of natural gas.

Megawatt (MW)

Unit of power, equal to 1 million watts.

Ethylene Oxide

Compound produced from ethylene and used as an intermediate in

Monoethylene Glycol (MEG)

the production of MEG and other chemicals.

Raw material with diverse industrial uses, especially for producing

polyester (PET and fiber), antifreeze, refrigerants and solvents.

2016 ANNUAL REPORT + ALPEKParaxylene (pX)

Purified Terephthalic Acid (PTA)

Hydrocarbon in the xylene family used to produce PTA. It is also a

Aromatic dicarboxylic acid, the main raw material in polyester pro-

component of gasoline.

Polyethylene Terephthalate (PET)

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,

Material widely used in the manufacture of bottles and other

and polyester fiber for rugs, clothing, furniture and industrial ap-

containers for liquids, food and personal hygiene, household and

plications, as well as other consumer products.

healthcare products. PET flakes and films are used to produce

caps, trays and recipients. Because of its transparency, strength,

Single Step®

durability and high protection barriers, PET presents no known

One-step technology for the production of EPS, where the EPS

health risks, is light and recyclable, and has a wide range of ap-

pearls are impregnated with a pre-expanded agent during the po-

plications in reusable, temperature-sensitive packaging. PET has

lymerization process.

replaced glass and aluminum, as well as other plastics such as

PVC and polyethylene, for making containers.

Styrene Monomer

Polypropylene (PP)

Unsaturated hydrocarbon used to make a variety of plastics, syn-

thetic rubber, protective coatings and resins. It is the main raw ma-

Thermoplastic polymer, produced from the polymerization of

terial in EPS production and also used as a solvent and chemical

propylene monomer. Its properties include a low specific grav-

intermediate.

ity, great rigidity, resistance to relatively high temperatures and

good resistance to chemicals and fatigue. PP has diverse appli-

Watt

cations, including for packaging, textiles, recyclable plastic parts

Unit of power in the International System of Units (SI).

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 refin-

eries. It is used in the petrochemical industry to produce PP, pro-

pylene 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.

4848

2016 ANNUAL REPORT + ALPEKCONSOLIDATED
FINANCIAL STATEMENTS

Alpek, S. A. B. de C. V. and subsidiaries
At December 31, 2016 and 2015

Management’s analysis

Report of the independent auditors

Consolidated statements of financial position

Consolidated statements of income

Consolidated statements of comprehensive income

Consolidated statements of changes in stockholders’ equity

Consolidated statements of cash flows

Notes to the consolidated financial statements

2016 ANNUAL REPORT + ALPEKMANAGEMENT’S
ANALYSIS

2016
The following analysis complements the Letter to Shareholders,

Mexico’s GDP growth decreased from 2.5% in 2015 to 2.3% (esti-

Audited Financial Statements and Complementary Information. Un-

mated) in 2016. Consumer inflation was 3.4%(d) in 2016, higher than

less otherwise specified, figures are expressed in millions of nomi-

the 2.1%(d) recorded in 2015. The Mexican peso depreciated 19.5%(e)

nal pesos for information corresponding to 2014 through 2016, with

in nominal terms in 2016, compared to a depreciation of 17.0%(e) in

certain figures expressed in millions of dollars (US $) due to the high

2015. In real terms, the average annual overvaluation of the Mex-

dollarization of Alpek’s revenues. Percentage variations are stated

ican peso against the US dollar decreased from 11.8%(e) in 2015 to

in nominal terms and all information is presented in accordance

6.3%(e) in 2016.

with International Financial Reporting Standards (IFRS).

Economic Environment
In 2016, world economic growth continued to show weakness and fi-

nancial market volatility persisted, mostly as a result of events such

With regard to Mexican interest rates, the average TIIE (Interbank

Equilibrium Interest Rate) for the year was 4.5%(b) in 2016 in nominal

terms, as compared to 3.3% in 2015. In real terms, interest rates

decreased from an annual accumulated rate of 1.9% in 2015 to 0.5%

in 2016.

as Brexit, the US presidential elections and the standardization of

The annual average nominal 3-month dollar LIBOR rate was 0.7%(d)

monetary policy by the US Federal Reserve (Fed). During the year,

in 2016, above the 0.3%(d) of 2015. Incorporating the nominal depre-

the US dollar increased in value with respect to most currencies,

ciation of the peso against the dollar, the LIBOR rate in constant

including the Mexican peso, due mainly to expectations of enhanced

pesos rose from 14.9%(c) in 2015 to 16.5%(c) in 2016.

economic growth in the US and the Fed’s increase in interest rates.

Lastly, the reference price of crude oil increased significantly to-

Sources:

wards the end of the year after OPEC announced it had reached an

agreement to cut production. Thus, at the close of 2016 the price of

(a) Bureau of Economic Analysis (BEA)

Brent oil was 55% above that of December 31, 2015.

(b) Bureau of Labor Statistics (BLS)

The behavior of the Mexican GDP and other variables that are key to

(d) Banco de México (Banxico)

better understanding Alpek’s results are described in the following

(e) Banxico: foreign exchange rate for settling liabilities

paragraphs:

denominated in foreign currency payable in Mexico

US Gross Domestic Product (GDP) increased 1.6%(a) (estimated) in

2016, below the 2.6% growth of the previous year. Consumer infla-

tion was 2.1%(b), 0.6%(b) above 2015.

2016 ANNUAL REPORT + ALPEKVolume –
(thousands of tons)

Polyester

Plastics & Chemicals

TOTAL VOLUME

2016

3,004

934

3,938

2015

3,015

922

3,937

2014

3,082

849

3,931

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

(2)

Revenue

2016

2015

2014

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

Polyester

Millions of pesos

Millions of dollars

Plastics & Chemicals

Millions of pesos

Millions of dollars

TOTAL REVENUE

Millions of pesos

Millions of dollars

64,241

3,444

25,951

1,394

90,192

4,838

60,769

3,840

22,821

1,444

83,590

5,284

63,228

4,752

22,844

1,719

86,072

6,471

(10)

(3)

(8)

(4)

(19)

(16)

(3)

(18)

Price Index

2016

2015

2014

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

Polyester

Millions of pesos

Millions of dollars

Plastics & Chemicals

Millions of pesos

Millions of dollars

TOTAL

Millions of pesos

Millions of dollars

100

(10)

(5)

(8)

(2)

(17)

(8)

(23)

(3)

(18)

104

103

105

2016 ANNUAL REPORT + ALPEKRevenue

Alpek’s net revenue in 2016 amounted to $90,192 million (US $4.838 billion), 8% above the $83,590 million (US $5.284 billion) posted in 2015.

The increase was due to an 8% rise in average prices. However, average dollar-denominated prices fell 8% as a result of the decline in the

prices of crude oil and main feedstocks, but these effects were offset by the depreciation of the peso against the dollar.

Revenue by Business Segment

Polyester net revenue in 2016 was $64,241 million (US $3.444 billion), 6% more than the $60,769 million (US $3.840 billion) of 2015. The seg-

ment posted a 6% increase in average sales price, while volume remained flat. The average Polyester price fell 10% in 2016 in dollar terms,

pressured by lower prices of main feedstocks such as paraxylene. However, the depreciation of the peso against the dollar offset this effect.

In 2016, net revenue from Plastics & Chemicals reached $25,951 million (US $1.394 billion), compared to $22,821 million (US $1.444 billion)

in 2015. The 14% increase was due to a 1% growth in volume and 12% rise in average sales price. Excluding the foreign exchange effect, the

average price of this segment was 5% less than in 2015, also reflecting the decline in crude and feedstock prices.

Operating Profit and EBITDA

2016 operating profit was $9,863 million (US $532 million), 30% above the $7,590 million (US $481 million) of 2015. Alpek’s two business

segments posted year-over-year operating profit improvement.

EBITDA was $12,425 million (US $669 million) in 2016, an increase of 25% compared to the $9,974 million (US $630 million) posted in 2015.

Consolidated 2016 EBITDA includes non-cash benefits of $622 million (US $32 million) from inventory gains and other non-operating items,

such that comparable EBITDA was $11,803 million (US $637 million), 13% more than in 2015.

Polyester EBITDA grew $1,095 million (US $5 million) year-over-year. Excluding the effect of non-cash benefits from inventory gains and

other non-operating items, comparable EBITDA for the Polyester segment rose by $133 million because of the depreciation of the peso

against the dollar. Comparable dollar-denominated EBITDA for the Polyester segment fell 13% year-over-year due to the negative impact of

low crude prices, the force majeure declared on US PET resin products after Hurricane Matthew and the weak demand for polyester fiber.

Plastics & Chemicals EBITDA was $5,948 million (US $322 million) in 2016, driven by record results in the polypropylene and expandable

polystyrene businesses. Excluding the non-cash benefits from inventory gains and other non-operating items, comparable EBITDA for Plas-

tics & Chemicals reached a record $5,695 million (US $308 million), 31% more than the $4,344 million (US $273 million) of 2015.

2016 ANNUAL REPORT + ALPEKOperating income (EBITDA) –
(millions of pesos)

2016

2015

2014

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

Polyester

Plastics & Chemicals

Other and eliminations

TOTAL EBITDA

6,514

5,948

(37)

12,425

5,420

4,508

9,974

3,541

2,110

5,710

(180)

114

(22)

Operating Income (EBITDA) –
(millions of dollars)

2016

2015

2014

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

Polyester

Plastics & Chemicals

Other and eliminations

TOTAL EBITDA

349

322

(2)

669

344

284

630

270

159

434

(162)

(35)

Finance Cost, Net

The finance cost, net was -$2,509 million (-US $133 million) in 2016, 35% more than the previous year. The net financing expenses that

make up this item grew from -$931 million (-US $59 million) in 2015 to -$1,133 million (-US $61 million) in 2016, largely reflecting the

depreciation of the Mexican peso and the effect thereof on financial expenses related to dollar-denominated debt. The change in foreign

exchange rate also resulted in the recognition of a non-cash foreign exchange loss of -$1,380 million (-US $72 million) in 2016, compared

to a foreign exchange loss of -$1,114 million (-US $68 million) in 2015.

Finance cost, net
(millions of pesos)

2016

2015

2014

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

Finance cost

Finance income

Finance Cost, Net

Foreign exchange gain (loss)

(1,414)

(1,176)

281

(1,133)

(1,380)

245

(931)

(1,114)

183

(926)

135

(791)

(629)

(77)

(20)

(22)

(24)

(98)

(35)

(27)

(18)

(77)

339

(24)

Valuation of financial derivative instruments

FINANCE COST, NET

(2,509)

(1,862)

(1,497)

2016 ANNUAL REPORT + ALPEKTaxes

2016 income tax was $2,358 million (US $126 million), 16% above the $2,040 million (US $130 million) of 2015 as a result of the 29% rise in

income before taxes.

Taxes-
(millions of pesos)

2016

2015

2014

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

Income taxes

Income before taxes

Statutory tax rate

Income tax at the statutory rate

Taxes for permanent differences between
accounting-taxable profit

Total income tax

Effective tax rate

Made up as follows:

Current income tax

Adjustment to the provision of income tax
from prior years

Deferred tax

Total income tax

7,351

30%

(2,205)

5,705

30%

(1,711)

(153)

(329)

(2,358)

(2,040)

32%

36%

2,197

30%

(659)

(224)

(883)

40%

(2,470)

(2,252)

(975)

(33)

145

203

(6)

(2,358)

(2,040)

(883)

160

(29)

(160)

(16)

(10)

(473)

(16)

(47)

(131)

237

(108)

(131)

2016 ANNUAL REPORT + ALPEKNet Income Attributable to the Controlling Interest

Net income attributable to the controlling interest reached $3,625 million (US $198 million) in 2016, 32% above the income of $2,748 million

(US $175 million) posted in 2015. The 2016 growth in operating income was greater than the increases in finance cost, net and taxes.

Statement of income - (millions of pesos)

2016

2015

2014

VAR. % 2016
vs 2015

VAR. % 2015
vs 2014

Operating profit

Finance cost, net

Share in losses of associates

Income taxes

Net consolidated profit

Profit attributable to controlling interest

9,863

(2,509)

(3)

7,590

(1,862)

(23)

(2,358)

(2,040)

4,993

3,625

3,665

2,748

3,739

(1,497)

(45)

(883)

1,314

801

(35)

(16)

103

(24)

(131)

179

243

Investment in Fixed and Intangible Assets

In 2016, investments in fixed and intangible assets totaled $5,981 million (US $320 million), 33% above the $4,482 million (US $275 million)

of 2015. These resources were used for strategic projects, such as the PTA/PET plant in Corpus Christi, the electricity cogeneration plant that

is being built in Altamira and the MEG supply agreement with Huntsman. In addition to the investments in fixed and intangible assets, Alpek

also invests in shares, such as in the case of the acquisition of a controlling interest in Selenis Canada Inc. that is not included in these figures.

Net Debt 1

Net debt rose to $21,527 million (US $1.042 billion) as of December 31, 2016, 73% above the net debt of $12,420 million (US $722 million) as of

December 31, 2015. Excluding the impact of the depreciation of the peso against the dollar, the balance of net debt increased 44% year-over-

year, or the equivalent of US $320 million, largely reflecting investments made in strategic projects during 2016. Alpek’s cash balance at the

close of the year was $2,937 million (US $142 million).

(1) Net Debt = Current debt plus non-current debt, excluding debt issuance costs, plus accrued interest payable, less cash and cash equivalents, plus restricted cash

and cash equivalents.

2016 ANNUAL REPORT + ALPEKMillions of dollars

% integrated

Short- and long-term debt

2016

2015

Short-term debt

Long-term: 1 year

2 years

3 years

4 years

5 years or more

Total

Avg. maturity long-term debt (years)

Avg. maturity total debt (years)

135

950

1,184

5.3

5.2

949

1,108

6.3

6.1

Var.

242

237

(62)

(97)

(72)

2016

2015

100

Financial Indicators - (Times)

2016

2015

2014

Net debt / EBITDA (US$)

Interest coverage (US$)

Total liabilities / Stockholders’ equity

1.6

10.5

1.2

1.1

10.7

1.2

1.6

6.5

1.2

2016 ANNUAL REPORT + ALPEK
2016 HIGHLIGHTS

Acquisition of an EPS plant in Concón, Chile
On April 1, 2016, Alpek took control of a 20,000 ton per year EPS plant in Concón, Chile, acquired from BASF Chile, S.A. This facility increases

the Company’s EPS installed capacity in South America by more than 30% and complements the operations acquired in 2016.

Startup of MEG supply agreement with Huntsman
During the year, Alpek began supplying monoethylene glycol (MEG) in accordance with the US $65 million multi-annual agreement with

Huntsman for rights over approximately 150,000 tons of MEG per year from its plant in Port Neches, TX. The capacity expansion associated

with this agreement began operating in June 2016.

Acquisition of Selenis Canada Inc.
In 3Q16, Alpek acquired a controlling interest in Selenis Canada Inc., Canada’s only PET producer, which operates a plant in Quebec, Montreal,

with an annual capacity of 144,000 tons. In addition to expanding Alpek’s operations in North America, this transaction results in synergies

from PTA integration and provides the opportunity to complement the Company’s portfolio with differentiated PET products.

Completion of the investment in Corpus Christi integrated PTA/PET plant
In 2016, Alpek completed the investment to acquire the rights to 500,000 tons of integrated PET per year from the plant that M&G is building

in Corpus Christi, TX. The aggregate amount of the contractual supply rights comprises agreements signed in 2013 and 2015 for 400,000

and 100,000 tons per year, respectively. The new facility is expected to begin operating in 2017, starting with PET production and then PTA.

Agreement signed with Petrobras
On December 28, Alpek announced the signing of an agreement with Petróleo Brasileiro, S.A. (Petrobras) to acquire its 100% stakes in Com-

panhia Petroquímica de Pernambuco (Petroquímica Suape) and in Companhia Integrada Têxtil de Pernambuco (Citepe). These two compa-

nies operate South America’s only integrated polyester site, with an annual capacity of 700 thousand tons of PTA, 450 thousand tons of PET

and 90 thousand tons of texturized polyester filament. The price agreed upon for Petrobras’ 100% interest in Petroquímica Suape and Citepe

is US $385 million. The transaction is subject to additional corporate approval and several conditions precedent, including the approval of

the corresponding government entities.

Dividends
The Ordinary Shareholders’ Meeting approved the payment of a cash dividend of approximately US $110, which was paid as of March 4, 2016.

2016 ANNUAL REPORT + ALPEKREPORT OF
THE INDEPENDENT
AUDITORS

To the Shareholders and Directors of

Alpek, S. A. B. de C. V. and subsidiaries

Monterrey, N.L., February 17, 2017

Opinion

Basis for Opinion

We have audited the consolidated financial statements of Alpek,

We conducted our audit in accordance with International Standards

S. A. B. de C. V. and subsidiaries (The “Company”), which comprise

on Auditing (ISAs). Our responsibilities under those standards are

the consolidated statement of financial position as of December 31,

further described in the Auditor’s Responsibilities for the Audit of

2016 and 2015, and the related consolidated statements of income,

the Consolidated Financial Statements section of our report. We are

of comprehensive income, of changes in stockholders’ equity and

independent of the Company in accordance with the Ethics Stan-

of cash flows for the years then ended and the notes to the consol-

dards of Mexican Institute of Public Accountants, A. C. together with

idated financial statements, which include a summary of significant

other requirements applicable to our audits of consolidated finan-

accounting policies.

cial statements in Mexico, and we have fulfilled our other ethical re-

sponsibilities in accordance with those requirements and standards.

In our opinion, the accompanying consolidated financial statements

We believe that the audit evidence we have obtained is sufficient and

present fairly, in all material respects, the consolidated financial

appropriate to provide a basis for our opinion.

position of the Company as at December 31, 2016 and 2015, and its

financial performance and its consolidated cash flows for the years

Key Audit Matters

then ended in accordance with International Financial Reporting

Key audit matters are those matters that, in our professional judg-

Standards as issued by the International Accounting Standards

ment, were of most significance in our audit of the consolidated

Board (“IFRS”).

financial statements of the current period. These matters were

addressed in the context of our audit of the consolidated financial

statements as a whole, and in forming our opinion thereon, and we

do not provide a separate opinion on these matters.

2016 ANNUAL REPORT + ALPEKKey audit matter

How our audit addressed the key audit matter

Agreements for the production of PTA-PET
materials and Technology IntegRex® license
with M&G Resins USA, LLC.

As part of our audit, we obtained and read the contractual agree-

ments pertaining to the transaction.

Due to the significant judgments used in the valuation models for

the determination of fair values, and with the support of our valu-

As mentioned in Note 2 to the consolidated financial statements,

ation experts, we questioned the premises, assumptions and crite-

during 2015, the Company entered into agreements with M&G Res-

ria used by Management and the independent expert, following the

ins USA, LLC (M&G), through which the latter agrees to supply 500

procedures set down below, among others:

thousand tons of PET (manufactured with 420 thousand tons of PTA)

during the five years following the two plants’ (PTA/PET) startup

• We evaluated and considered the design and operating effec-

of operations, which is expected to occur in 2018. PTA is one of the

tiveness of the internal controls over identification, classifi-

main materials for the production of PET manufactured by the Com-

cation and valuation of these transactions. In particular, we

pany. As a result of this agreement, the Company paid M&G $8,989

considered the key controls related to interest rates, produc-

million (US$435 million), of which $7,439 million (US$360 million)

tion volumes and costs.

was recognized as intangible assets, amortizable on the basis of the

• We verified the capability and objectivity of the independent

production volumes and $1,550 million (US$75 million) was recog-

expert.

nized as prepayment for the purchase of inventories. The calcula-

• We compared that the methodologies applied to the deter-

tions required to determine the classification of these payments, of

mination of the fair values of these payments correspond to

the fair values and the assumptions used are complex, as a result

methodologies and recognized to value assets of similar char-

of which, the Company hired the services of an independent expert.

acteristics in the industry.

We focused on this area due to the importance of the amount of the

relevant assumptions, premises or variables, and we com-

payments made and due to the fact that classification of the payments,

pared the ranges of interest rates, estimated production vol-

either in intangible assets or prepayments, based on their fair value,

umes and costs with independent market sources commonly

required the application of significant judgments by Management.

used and accepted for assets with these characteristics for the

• We challenged the significant judgments related to the most

In particular, we concentrated our efforts on the significant judg-

• We reprocessed a sample of items to determine their fair val-

ments related to the following aspects: methodologies used, inter-

ue and classification, whether in intangible assets or short or

est rate range, estimated volumes of production and costs.

long-term prepayments.

industry to which the company pertains.

• We defied Management’s financial projections, including the

residual value, comparing it to the performance and historical

trends of the businesses, obtaining Management’s explana-

tions, if any, of the variations, as well as the supporting evi-

dence.

• We discussed with Management, the sensitivity calculations, as-

sessing the degree to which the assumptions would need to be

modified for an adjustment to be considered for its evaluation.

2016 ANNUAL REPORT + ALPEKOther Information

Management is responsible for the other information presented. The other information comprises the Annual Report presented to Comisión

Nacional Bancaria y de Valores (“CNBV”) and the Annual Information presented to shareholders (but does not include the financial state-

ments and our auditor’s report thereon), which is expected to be made available to us after the date of this auditor’s report.

Our opinion on the consolidated financial statements does not cover the other information and we will not express any form of assurance

conclusion thereon.

However, in connection with our audit of the financial statements of the Company, our responsibility is to read the other information identified

above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated

financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

When we read the other information not yet received, we will issue the report required by the CNBV and if we conclude that there is a material

misstatement therein, we are required to communicate the matter to those charged with governance and, if required, describe the issue in

our report.

Responsibilities of Management and Those Charged with Governance for the Consolidated Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with Internation-

al Financial Reporting Standards as issued by the International Accounting Standards Board 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.

In preparing the consolidated financial statements, Management is responsible for assessing the Group’s ability to continue as a going con-

cern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless Management either

intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material

misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level

of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it

exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be

expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit.

We also:

•

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design

and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis

for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as

fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

2016 ANNUAL REPORT + ALPEK• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circum-

stances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures

made by Management.

• Conclude on the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence ob-

tained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability

to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s

report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion.

Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions

may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and wheth-

er the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company

and subsidiaries to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and

performance of the Company and subsidiaries audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and signif-

icant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding inde-

pendence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence,

and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit

of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our au-

ditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine

that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to

outweigh the public interest benefits of such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Héctor Rábago Saldívar.

PricewaterhouseCoopers, S. C.

Héctor Rábago Saldívar

Audit Partner

2016 ANNUAL REPORT + ALPEKAlpek, S. A. B. de C. V. and subsidiaries CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

At December 31, 2016 and 2015
In millions of Mexican pesos

Note

2016

2015

At December 31,

Asset
CURRENT ASSET:
Cash and cash equivalents
Restricted cash and cash equivalents
Trade and other receivables, net
Inventories
Derivative financial instruments
Prepayments

Total current asset

NON-CURRENT ASSET:
Property, plant and equipment, net
Goodwill and intangible assets, net
Deferred income taxes
Prepayments
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

Total current liability

NON-CURRENT LIABILITY:
Debt
Derivative financial instruments
Provisions
Deferred income taxes
Income tax payable
Employee benefits
Other liabilities

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
6
7
9
16
10

11
12
21
10
13

19
17
16
22
18

19
16
18
21
22
20
23

24
24

Total liability and stockholders’ equity

The accompanying notes are an integral part of these consolidated financial statements.

2,935
2
15,918
14,853
56
457

34,221

40,699
11,875
433
1,570
2,702

57,279

91,500

2,787
15,492
71
694
363

19,407

21,551
646
7
5,883
553
1,227
504

30,371

49,778

6,048
9,071
11,292
10,662

37,073

4,649

41,722

91,500

6,650
3
13,384
12,086
203
338

32,664

31,322
8,812
361
1,228
507

42,230

74,894

678
11,693
848
1,371
338

14,928

18,276
711
185
4,707
28
1,108
452

25,467

40,395

6,052
9,071
10,009
4,822

29,954

4,545

34,499

74,894

José de Jesús Valdez Simancas
Chief Executive Officer

Eduardo Alberto Escalante Castillo
Chief Financial Officer

2016 ANNUAL REPORT + ALPEK

Alpek, S. A. B. de C. V. and subsidiaries

CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2016 and 2015
In millions of Mexican pesos

Revenue
Cost of sales

Gross profit

Selling expenses
Administrative expenses
Other income, net

Operating profit

Finance income
Finance cost

Finance cost, net

Share of losses of associates
accounted for by the equity method

Profit before income taxes

Income taxes

Net consolidated profit

Profit attributable to:
Controlling interest
Non-controlling interest

Note

3 u)
26

26
26
27

28
28

2016

2015

90,192
( 76,943 )

83,590
( 73,029 )

13,249

( 1,578 )
( 2,043 )
235

9,863

3,565
(6,074 )

( 2,509 )

( 3 )

7,351

( 2,358 )

10,561

( 1,377 )
( 1,839 )
245

7,590

2,795
( 4,657 )

( 1,862 )

( 23 )

5,705

( 2,040 )

4,993

3,665

3,625
1,368

2,748
917

4,993

3,665

Basic and diluted earnings per share in pesos

1.71

1.30

Weighted average of outstanding shares (in millions of shares)

2,117

2,118

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

2016 ANNUAL REPORT + ALPEK

Alpek, S. A. B. de C. V. and subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, 2016 and 2015
In millions of Mexican pesos

Net consolidated profit

4,993

3,665

Note

2016

2015

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, 30

( 3 )

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 foreign entities

Share of other comprehensive results of associates

Total other comprehensive income for the year

16, 30

24, 30

384

6,233

( 2 )

6,679

( 400 )

3,843

3,440

Total comprehensive income for the year

11,672

7,105

Attributable to:
Controlling interest
Non-controlling interest

9,527
2,145

5,628
1,477

Total comprehensive income for the year

11,672

7,105

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

2016 ANNUAL REPORT + ALPEK

Alpek, S. A. B. de C. V. and subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the years ended December 31, 2016 and 2015
In millions 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, 2015

6,052

9,071

8,881

1,945

25,949

3,896

29,845

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

Effect of business transference under
common control

3 b)

2 e)

Balances at December 31, 2015

6,052

9,071

Net profit

Total other comprehensive income
for the year

Total comprehensive income
for the year

Repurchase of own shares

Dividends declared

Dividends from subsidiaries to the
non-controlling interest

Changes in the non-controlling
interest

3 b)

Effect of business transference under
common control

( 4 )

2,748

2,751

( 1,473 )

( 150 )

10,009

3,625

3,687

( 42 )

( 1,959 )

( 403 )

2,877

4,822

5,840

2,748

2,880

5,628

( 1,473 )

917

560

1,477

3,665

3,440

7,105

( 1,473 )

( 978 )

( 150 )

29,954

3,625

5,902

9,527

( 46 )

( 1,959 )

( 403 )

150

4,545

1,368

777

2,145

34,499

4,993

6,679

11,672

( 46 )

( 1,959 )

( 2,049 )

( 32 )

( 435 )

Balances at December 31, 2016

6,048

9,071

11,292

10,662

37,073

4,649

41,722

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

2016 ANNUAL REPORT + ALPEK

Alpek, S. A. B. de C. V. and subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2016 and 2015
In millions of Mexican pesos

Note

2016

2015

Cash flows from operating activities

Profit before income taxes
Depreciation and amortization
Impairment of property, plant and equipment
Allowance for doubtful receivables
Loss (gain) on sale of property, plant and equipment
Share of losses of associates accounted for by the equity method
Finance cost, net
Gain on changes in the fair value of derivative financial instruments
Employees’ profit sharing and provisions

11, 12
27

2 e)
13

Subtotal

(Increase) decrease in trade receivables
Decrease in accounts receivable from related parties
(Increase) decrease in other accounts receivable
Increase in inventories
Increase (decrease) in accounts payable
Decrease in accounts payable to related parties
Employees’ profit sharing paid
Prepayments
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 associates
Derivative financial instruments
Proceeds from loans (paid) to related parties
Notes receivables

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
Repurchase of shares
Proceeds from related parties

Net cash flows used in financing activities

(Decrease) increase in cash and cash equivalents
Exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

2 a) and 2 b)
2 e) and 3 b)

24
8

7,351
2,560
2
6
1
3
2,265
( 4 )
( 365 )

11,819

( 1,313 )
1,051
( 953 )
( 1,439 )
772
( 695 )
( 6 )
( 225 )
( 2,992 )

6,019

230
( 4,543 )
( 1,438 )
( 390 )
( 82 )
108
1,123
( 1,220 )

( 6,212 )

3,534
( 2,549 )
( 1,213 )
( 1,959 )
( 2,049 )
( 46 )
73

( 4,209 )

( 4,402 )
687
6,650

5,705
2,254
130
( 273 )
( 381 )
23
1,908
( 178 )
( 385 )

8,803

2,765
572
61
( 103 )
( 1,242 )
( 698 )
( 4 )
( 1,102 )
( 874 )

8,178

202
( 1,523 )
( 1,857 )
( 605 )
( 27 )
( 167 )
( 30 )
8

( 3,999 )

1,913
( 1,950 )
( 1,017 )
( 1,473 )
( 978 )
-
-

( 3,505 )

674
232
5,744

6,650

2,935

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

2016 ANNUAL REPORT + ALPEK

Alpek, S. A. B. de C. V. and subsidiaries

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2016 and 2015
In millions 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, comprises the production of purified terephthalic acid (PTA), polyethylene tere-

phthalate (PET) and polyester fibers, which serves the food and beverage packaging, textile and industrial filament markets. The Plastics &

Chemicals business segment, comprises the production of polypropylene (PP), expandable polystyrene (EPS), caprolactam (CPL), fertilizers

and other chemicals, which serves a wide range of markets, including the consumer goods, food and beverage packaging, automotive, con-

struction, 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, Canada, Argentina, Chile and Brazil.

In the following notes to the financial statements when referring to pesos or “Ps”, it means millions of Mexican pesos. When referring to

dollars or “US$”, it means millions of dollars from the United States of America. When referring to euros or “€” it means millions of euros.

NOTE 2 – Significant events

2016

IntegRex® technology license and signature of a supply agreement with M&G

During 2015, Alpek through its subsidiary Grupo Petrotemex, S. A. de C. V. (“Grupo Petrotemex”), held a licensing agreement for IntegRex®

PTA technology and another PTA-PET supply agreement with M&G Resins USA, LLC (“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 of America

(the Plant).

On the other hand, Grupo Petrotemex will pay US$435 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 thousand 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 in 2018.

2016 ANNUAL REPORT + ALPEKAt December 31, 2016, Grupo Petrotemex has completed the payments amounting to Ps 8,989 (US$435), of which Ps 7,439 (US$360) 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 Ps 1,550 (US$75) as a prepayment of inventory within the prepayments caption.

b) 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 took place during June 2016.

On the other hand, DAK paid US$65 to Huntsman during the installation of the equipment according to an established calendar and in

compliance with certain milestones; therefore, DAK obtained 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 was installed and the production began. At December

31, 2016, payments are recorded under the intangible assets caption and are amortized within the cost of sales on a straight line basis

during the life of the contract since the month of June 2016, once the supply of MEG began.

c) Cogeneration plant construction project

During the last quarter of 2016, Alpek started the construction of a steam and electric cogeneration project through its subsidiary Grupo

Petromex, in which it is estimated that an investment will be made in an amount approximating US$350. This cogeneration plant will

generate approximately 350 megawatts of electricity, as well as all the steam necessary to meet the requirements of its PTA plant

located in Altamira, Tamaulipas, Mexico. The cogeneration plant will also supply energy to other ALFA entities outside of Altamira.

At December 31, 2016, the Cogeneration plant is in the construction stage, and payments have been made amounting to Ps 2,449

(US$126) as part of the startup of the construction of the plant. Payments will be made in accordance with the percentage of completion

and it is estimated that its construction will be completed in 2018.

d) Stock purchase contract of Petroquimica SUAPE and CITEPE

On December 28, 2016, Alpek, through its subsidiary Grupo Petrotemex, signed a stock purchase contract with Petróleo Brasileiro, S. A.

(“Petrobras”) to acquire its equity in Companhia Petroquimica de Pernambuco (“Petroquimica Suape”) and Companhia Integrada Textil

de Pernambuco (“Citepe”).

Petroquimica Suape and Citepe operate an integrated PTA-PET site in Ipojuca, Pernambuco, Brazil, with a capacity of 700,000 and

450,000 tons of PTA and PET per year, respectively. Citepe also operates a textured polyester filament plant with a capacity of 90,000

tons per year.

The price agreed upon for the 100% equity of Petrobras in Petroquimica Suape and Citepe amounts to US$385. This amount will be paid

in Brazilian reals at the date on which the transaction is closed, and it is subject to working capital and debt adjustments, among other

things.

Additional corporate approvals are required to close this transaction, in addition to the approval of government authorities with

competent jurisdiction. That contract sets forth a maximum fifteen month period to complete the transaction as of the date of the

contract. At the issue date of these financial statements, the approvals and conditions are in the process of being complied with.

2016 ANNUAL REPORT + ALPEK2015

e) 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.

A series of transactions can be carried out with the purpose of forming a business combination in the most effective manner from the

economic point of view. According to IFRS, an agreement to acquire a business through a series of related transactions is a business

combination, and the way to recognize it should be as if it was a single transaction. Therefore, the events previously mentioned were

considered as transactions that are related and were carried out in a combined way one only agreement with reference to the fair value

according to each business.

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, which it was outstanding at December 31, 2015 and the net book value transferred was Ps 26, this transaction

resulted in a gain of Ps 381 and was recorded in the consolidated income statement as other income (expense), net.

2016 ANNUAL REPORT + ALPEKMexico 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 holds the 50% of the equity in Polioles, the transaction between

stockholders for the EPS business had an effect of a Ps 150 reduction in the controlling interest and an increase in the non-controlling

interest for the same amount, as shown in the consolidated statements of changes in stockholders’ equity.

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.

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 on March 31, 2015. This acquisition is included in the

Plastics and Chemicals segment. See Note 31.

At December 31, 2015, Alpek concluded the purchase price allocation to fair values of acquired assets.

Final purchase price allocation to fair values of acquired assets assumed liabilities is as follows:

Current assets (1)

Property, plant and equipment

Current liabilities (2)

Other current liabilities

Deferred income tax

Other liabilities

622

424

( 183 )

( 140 )

( 88 )

( 30 )

Consideration paid

605

(1) Current assets consist mainly of accounts receivable and inventories amounting to Ps 333 and Ps 289, respectively.

(2) Current liabilities consist mainly of suppliers amounting to Ps 101.

Total purchase consideration was paid in cash.

The value of the accounts receivable acquired approximates to its fair value due to its short-term maturity. Acquired accounts receivable

are estimated to be recovered in the short term.

No contingent liability has resulted from this acquisition that requires recognition. There are neither contingent consideration agreements.

The costs related to the acquisition amounted to Ps 22 and were recorded in the consolidated statement of income as “other expenses, net”.

Revenues contributed by BASF assets included in the consolidated statement of income since the acquisition date through December

31, 2015 amounted to Ps 5,482 and net income to Ps 732. If the acquisition had taken place on January 1, 2015, revenues would have

increased by Ps 1,600 and net income by Ps 185, approximately.

2016 ANNUAL REPORT + ALPEK

NOTE 3 - Summary of significant accounting policies

The accompanying consolidated financial statements and notes were authorized for issuance on February 17, 2017, by officials with the legal

power to sign the basic financial statements and accompanying notes.

The following are the most significant accounting policies followed by the Company, which have been consistently applied in the preparation

of their financial information in the years presented, unless otherwise specified:

a) Basis for preparation

The consolidated financial statements of Alpek 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.

The preparation of the consolidated financial statements according to IFRS requires the use of certain critical accounting estimates.

Additionally, it requires Management to exercise judgment in the process of applying the Company’s accounting policies. The areas

involving a higher degree of judgment or complexity, or areas where judgments and estimates are significant to the consolidated

financial statements are disclosed in Note 5.

b) Consolidation

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.

2016 ANNUAL REPORT + ALPEKThe 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, as well as unrealized gains (losses) on transactions between Alpek’s companies are

eliminated in preparing the consolidated financial statements. In order to ensure consistency with the policies adopted by the

Company, the amounts reported by the subsidiaries have been changed where it was deemed necessary.

At December 31, 2016 and 2015, the main companies that comprise the consolidated of the Company are as follows:

Alpek, S. A. B. de C. V. (Holding company)

Grupo Petrotemex, S. A. de C. V. (Holding company)

DAK Americas, LLC

Dak Resinas Americas México, S. A. de C. V.

DAK Americas Exterior, S. L. (Holding company)

DAK Americas Argentina, S. A.
Selenis Canada Inc. (3)

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, S. A.
Aislapol, S. A.
Styropek do Brazil, LTD

Unimor, S. A. de C. V. (Holding company)

Univex, S. A.

Country (1)

Percentage of
Ownership (2)

Functional
currency

2016

2015

USA

Spain

Argentina

Canada

Argentina
Chile
Brazil

100

100
51
50
100
100
100
100
100
100
100

100

100
51
50
100
100
100
100
100
100
100

Mexican peso

US dollar

Euro

Argentine peso

US dollar

Mexican peso
US dollar
US dollar
Mexican peso
US dollar
Argentine peso
Chilean peso
Brazilean 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) On July 29, 2016, through its subsidiary DAK Americas Exterior, S. L., Alpek acquired a controlling interest in Selenis Canada, Inc. (Selenis), the only producer
of PET in Canada, which operates a plant located in Montreal, Quebec with capacity to produce 144 thousand tons annually. The acquisition of Selenis met the
criteria of a business acquisition, and the amount of the consideration paid amounted to US$17.2. The consolidated financial statements include the financial
information of Selenis beginning on August 1, 2016. This business acquisition is included in the Polyester segment.

2016 ANNUAL REPORT + ALPEKAt December 31, 2016 and 2015, there are no significant restrictions on 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 consolidated income statement. The fair value is the initial carrying amount for the

purposes of accounting for any subsequent retained interest in the associate, joint venture or financial asset. Any amount previously

recognized in comprehensive income in respect of that entity is accounted for as if the Company had directly disposed of the related

assets and liabilities. This implies that the amounts recognized in the comprehensive income are reclassified to income for the year.

iv. Associates

Associates are all entities over which the Company has significant influence but not control. Generally an investor must hold

between 20% and 50% of the voting rights in an investee for it to be an associate. Investments in associates are accounted for using

the equity method and are initially recognized at cost. The Company’s investment in associates includes goodwill identified at

acquisition, net of any accumulated impairment loss. The Company has an investment of which it owns 50% and it is consolidated.

See critical judgment in Note 5.2.

If the equity in an associate is reduced but significant influence is maintained, only a portion of the amounts recognized in the

comprehensive income are reclassified to income for the year, where appropriate.

The Company’s share in profits or losses of associates, post-acquisition, is recognized in the consolidated 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 consolidated 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 consolidated income statement.

2016 ANNUAL REPORT + ALPEKc) Foreign currency translation

Functional and presentation currency

The amounts included in the financial statements of each of the Company’s subsidiaries and associates should be measured using

the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated

financial statements are presented in Mexican pesos, which is the Company’s presentation currency.

ii. Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of

the transactions or valuation where items are re-measured. Foreign exchange gains and losses resulting from the settlement

of such transactions and from the translation at closing date exchange rates of monetary assets and liabilities denominated in

foreign currencies are recognized as foreign exchange gains and losses in the consolidated 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 consolidated 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 consolidated income statement in the period they arose.

2016 ANNUAL REPORT + ALPEKiv. 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 consolidated statement of financial position presented are translated at the closing exchange rate

at the statement of financial position date;

b. The stockholders’ equity of each consolidated statement of financial position presented is translated at historical exchanges rates.

Income and expenses for each consolidated 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

d. All resulting exchange differences are recognized in other comprehensive income.

The goodwill and adjustments to fair value arising at the date of acquisition of a foreign operation so as to measure them at fair value

are recognized as assets and liabilities of the foreign entity and translated at the exchange rate at the closing date. Exchange differences

arising are recognized in other comprehensive income.

Listed below are the most important exchange rates:

Local currency to Mexican pesos

Closing exchange rate at
December 31

Annual average
exchange rate (*)

Country

Functional currency

USA

Argentina

Brazil

Chile

US dollar

Argentine peso

Brazilean real

Chilean peso

2016

20.66

1.30

6.35

0.03

2015

17.21

1.33

4.34

0.02

2016

18.66

1.26

5.41

0.03

2015

15.85

1.72

4.80

0.02

(*) This data is informative. For translation purposes 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 consolidated statement of financial position and are excluded from cash and cash equivalents in

the statement cash flows.

2016 ANNUAL REPORT + ALPEKf) 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.

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

consolidated income statement. Gains or losses from changes in fair value of these assets are presented in the consolidated 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 consolidated statement 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. At December 31, 2016 and 2015, the Company

had no such investments.

iv. Financial assets available for sale

Financial assets available for sale are non-derivative financial instruments 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 consolidated 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).

2016 ANNUAL REPORT + ALPEKGains 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 consolidated income statement.

Financial liabilities

Financial liabilities that are not financial derivatives instruments are initially recognized at fair value and subsequently valued at

amortized cost using the effective interest method. Liabilities in this category are classified as current liabilities if is expected to be

settled within the next 12 months, otherwise they are classified as non-current.

Suppliers and other accounts payable 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

consolidated 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 consolidated statement 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, such as:

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.

2016 ANNUAL REPORT + ALPEKBased 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 consolidated 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 consolidated income statement.

Impairment amounts of accounts receivable are shown in Note 7.

b. Financial assets available for sale

In the case of debt financial instruments, the Company also uses the above-listed criteria to identify whether there is objective

evidence of impairment. In the case of equity financial instruments, a significant reduction of approximately to 30%of the cost of the

investment against its fair value or a reduction of the fair value against the cost for a period longer than 12 months is considered

objective evidence of impairment.

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 consolidated income statement. Impairment losses recognized in the consolidated income

statement related to equity financial instruments are not reversed through the consolidated income statement. Impairment losses

recognized in the consolidated 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 consolidated 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.

2016 ANNUAL REPORT + ALPEKFair value hedges

Changes in the fair value of derivative financial instruments are recorded in the consolidated 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 consolidated

income statement. At December 31, 2016 and 2015, 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 consolidated 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 consolidated statement of income. Accumulated gains and losses in equity are transferred to the consolidated statement of income

on the disposal or partial disposal of the foreign operation. At December 31, 2016 and 2015, the Company has no derivative financial

instruments classified as net investment hedges.

Discontinuation of hedge accounting

The Company discontinues the hedge accounting when the derivative has expired, has been sold, cancelled or exercised, or when the

hedge does not meet the criteria for hedge accounting, or when the Company decides to cancel the hedge designation.

On discontinuing hedge accounting, in the case of fair value hedges, the adjustment to the carrying amount of a hedged item for which

the effective interest rate method is used, is amortized to income over the period to maturity. In the case of cash flow hedges, the amounts

accumulated in equity as a part of comprehensive income remain in equity until the time when the effects of the forecasted transaction

affect income. In the event the forecasted transaction is not likely to occur, the income or loss accumulated in comprehensive income

are immediately recognized in the consolidated 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 consolidated 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 consolidated statement of financial position date.

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.

2016 ANNUAL REPORT + ALPEKi) 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 flow 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 consolidated 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

40 to 50 years

10 to 40 years

15 years

Furniture and laboratory equipment and information technology

2 to 13 years

Others

3 to 20 years

The spare parts or replacements to be used after one year and attributable to specific machinery are classified as property, plant and

equipment in other fixed assets.

Borrowing costs directly attributable to the acquisition related to property, plant and equipment whose acquisition or construction

requires a substantial period (minimum nine months), 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 consolidated 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 consolidated 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 consolidated

income statement based on the straight-line method over the lease period.

2016 ANNUAL REPORT + ALPEKLeases 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 consolidated statement of financial position 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:

Indefinite useful life - These intangible assets are not amortized and are subject to annual impairment assessments. As of December

31, 2016 and 2015, no factors have been identified limiting the useful life of these intangible assets.

ii.

Finite useful life - These assets are recognized at cost less the accumulated amortization and impairment losses recognized. They

are amortized on a straight, line basis according to their estimated useful life, determined based on the expectation of generating

future economic benefits, and are subject to impairment tests when triggering events of impairment are identified.

The estimated useful lives of intangible assets with finite useful lives are summarized as follows:

Development costs

Supply rights

No compete agreements

Customer relationships

Software and licenses

Intellectual property rights

Tolling rights

Others

a. Goodwill

15.5 years

15 years

5 to 10 years

6 to 7 years

3 to 7 years

20 to 25 years

15 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 reverted. Gains or losses on the disposal

of an entity include the carrying amount of goodwill relating to the entity sold.

2016 ANNUAL REPORT + ALPEKb. 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.

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

intangible assets acquired in a business combination such as: trademarks, customer relations, intellectual property rights, no-

competition agreements, among others, are carried at cost less accumulated amortization and accumulated impairment losses.

Impairment of non-financial assets

Assets that have an indefinite useful life, for example goodwill, are not 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 caption of income taxes in the consolidated income statement represents the sum of the current income taxes and the deferred

income taxes.

The amount of the income tax reflected in the consolidated income statement represents the current tax in the year, as well as the effects

of deferred income tax, which is determined in each subsidiary using the asset and liability method, applying the tax rate established

by the legislation enacted or substantially enacted at the date of the statement of consolidated financial position where the Company

operates and generates taxable income 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 foreseeable future.

2016 ANNUAL REPORT + ALPEKDeferred income tax assets and liabilities are offset when there is a legally enforceable right, and when taxes are levied by the same

tax authority, either the same taxable entity or entities that may be settled or recovered their liabilities and tax assets, on a net basis.

n) Employee benefits

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 compensation, years of services and age.

The liability recognized in the consolidated statement of financial position in respect of defined benefit plans is the present value of

the defined benefit obligation at the consolidated 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.

The remeasurements of defined benefit obligations and plan assets are recognized directly in stockholders’ equity within 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 liability (asset) for net defined

benefits.

Past-service costs are recognized immediately in the consolidated income statement.

ii. Other post-employment benefits

The Company provides medical benefits after termination of employment to its retired employees of certain subsidiaries. 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.

2016 ANNUAL REPORT + ALPEKiii. 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

consolidated statement 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.

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, legal or assumed obligation 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.

2016 ANNUAL REPORT + ALPEKp) Share-based payments

The Company’s compensation plans are referred in 50% to the value of the shares of Alfa and the other 50% to the value of the shares

of Alpek, in favor of certain senior executives of the Company 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, the permanence in

the Company up to 5 years, etc. The Board of Directors of Alfa has appointed a technical committee for the administration of the plan,

which reviews the estimated cash settlement of this compensation at the end of the year. Payment of the plan is always subject to the

sole discretion of ALFA’s top Management. Adjustments to such estimate are charged or credited to the consolidated 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 consolidated 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.

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 taxes.

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, remeasurements 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.

2016 ANNUAL REPORT + 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 consolidated 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, 2016 and 2015, there are no dilutive effects from

financial instruments potentially convertible into shares.

2016 ANNUAL REPORT + ALPEKw) Changes in accounting policies and disclosures

The following standards were adopted by the Company for the first time beginning on January 1, 2016, which did not have a material

impact on the Company:

•

Annual improvements to the IFRS - cycle 2012-2014.

Disclosure initiative - Changes to IAS 1.

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

A number of new standards, modifications, and interpretations of standards have been published, which are not effective for reporting

periods at December 31, 2016, and they have not been adopted early by the Company. The evaluation of the Company on the effects of

these new standards and interpretations are discussed below:

IFRS 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 has

assessed the two approaches and it considers that the modified retrospective approach will 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.

During 2016, Management performed a diagnosis to identify areas that require a major analysis to determine the possible impact of the

new standard IFRS 15. The matters considered most relevant and require a major analysis are: identify if there are additional obligations

to be met in contracts with customers, the transfer of control over products and at which it should be recognized as revenue, based on

the new guidelines on this standard.

2016 ANNUAL REPORT + ALPEKAt December 31, 2016, the Company is in process of assessing the impacts of this new standard in its financial statements. 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 issue date of these financial statements, the Company has non-cancelable operating lease agreements amounting to Ps 2,682.

However, it has still not been determined to what degree these commitments will have as a result of recognizing an asset and a liability

for future payments, and how this affects net income and classification of the Company’s cash flows.

The standard is effective for periods that begin on or after January 1, 2019. The Company does not have the intent to adopt the standard

early at this stage.

There are no additional standards, amendments or interpretations issued but not yet effective that could have a significant effect on the

Company.

NOTE 4 - Risks management

4.1 Financial risk factors

The Company’s activities expose it to various financial risks: market risk (including foreign exchange risk, price 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.

2016 ANNUAL REPORT + ALPEKALFA the ultimate controlling company of Alpek has a Risk Management Committee, constituted by the Chairman, the Chief Executive Officer,

the Chief Financial Officer of the holding Company and a financial executive from the holding Company who acts as technical secretary. The

Committee oversees derivative transactions proposed by the subsidiaries of ALFA in which the maximum possible loss exceeds (US$1). This

Committee supports both the Executive Director and the Chairman of the Board of Directors of ALFA. All new derivative transactions that the

Company proposes to make, and the renewal of existing derivatives, require to be approved by both the Company and the holding Company

in accordance with the following schedule of authorizations:

Company’s Chief Executive Officer

Risk Management Committee of ALFA

Finance Committee

Board of Directors of ALFA

Possible Maximum Loss US$

Individual
transactions

Cumulative annual
transactions

100

>100

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

Exchange rate risk

The Company operates internationally and is exposed to the exchange rate risk, mainly in relation to Mexican pesos and with currencies

different to the functional currency in which its subsidiaries operate. 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 U.S. 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 U.S. dollar.

For this reason, in the past, when the Mexican peso has appreciated in real terms against other currencies such as the U. S. dollar, the

Company’s profit margins have been reduced. On the other hand, when the Mexican peso has lost value, the Company’s profit margins

have been increased. However, although this factor correlation has appeared on several occasions in the recent past, there is no

assurance that it will be repeated if the exchange rates between the Mexican peso and other currencies fluctuate again.

The Company participates in operations with derivative financial instruments on exchange rates for the purpose of controlling the total

comprehensive cost of its financing and the volatility associated with exchange rates. Additionally, it is important to note the high

“dollarization” of the Company’s revenues, since a large proportion of its sales are made abroad, providing a natural hedge against its

obligations in dollars, while at the same time its income level is affected in the event exchange rate appreciation. Based on the overall

exchange rate exposure at December 31, 2016 and 2015, a hypothetical variation of 5% in the exchange rate MXN/USD, holding all other

variables constant, would result in an effect on the consolidated income statement by Ps 69 and Ps 56, respectively. See Note 16.

2016 ANNUAL REPORT + ALPEKii. 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 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 2016 and 2015 was 2.31 and 2.60 US dollars, respectively.

At December 31, 2016, the Company had hedges of natural gas, ethylene, ethane and paraxylene prices for a portion expected of

consumption needs in Mexico and the United States. Based on the general input exposure at December 31, 2016 and 2015, 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 consolidated income statement for 2016 and 2015.

iii.

Interest rate risk and cash flow

The interest rate risk of the Company arises from long-term loans entered into with banking institutions. 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, 2016 and 2015, if interest rates on variable rate loans were increased/decreased by 10%, interest expense, in the

consolidated income statement, would increase/decrease by Ps 7 and Ps 7, respectively.

2016 ANNUAL REPORT + ALPEKb) 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 2016 and 2015, 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 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 from 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

consolidated statement 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.

2016 ANNUAL REPORT + ALPEKThe detail of maturities of existing financial liabilities at December 31, 2016 and 2015, 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, 2016

Suppliers and other accounts payable

15,492

Derivative financial instruments

Current and non-current debt
(excluding issuance expenses)

At December 31, 2015

3,820

Suppliers and other accounts payable

11,693

Derivative financial instruments

Current and non-current debt
(excluding issuance expenses)

848

1,550

187

2,491

204

1,235

459

3,427

20,882

507

4,191

18,185

(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, 2016 and 2015, the Company has unused committed credit lines for a total of US$383 and US$346 million, respectively.

4.2 Capital management

The Company’s objectives when managing equity are to safeguard the Company’s ability to continue as a going concern, so that it can con-

tinue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure so as to reduce

the cost of equity.

To maintain or modify the equity structure, the Company may adjust the amount of dividends paid to shareholders, return equity to 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 stockholders’

equity.

The financial ratio of total liabilities/total stockholders’ equity was 1.19 and 1.17 at December 31, 2016 and 2015, respectively.

2016 ANNUAL REPORT + ALPEK

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, 2016:

Assets

Derivative with hedge accounting treatment

Financial assets available for sale

Total

Liabilities

Financial liabilities at fair value through profit or loss

-Negotiable derivative

Employees’ benefits based on shares

Derivative with hedge accounting treatment

Total

Level 1

Level 2

Level 3

Total

705

717

172

228

705

748

The following table presents the Company’s assets and liabilities that are measured at fair value at December 31, 2015:

Assets

Financial assets at fair value through profit or loss

-Negotiable derivative

Derivative with hedge accounting treatment

Financial assets available for sale

Total

Liabilities

Financial liabilities at fair value through profit or loss

-Negotiable derivative

Employees’ benefits based on shares

Derivative with hedge accounting treatment

Total

Level 1

Level 2

Level 3

Total

203

1,542

1,559

144

203

144

347

1,542

1,614

There are no transfers between levels 1 and 2, or between levels 2 and 3 in the reported periods.

2016 ANNUAL REPORT + ALPEK

Level 1

The fair value of financial instruments traded in active markets is based on quoted market prices at the consolidated 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 consolidated statement 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.

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 fu-

ture 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, sel-

dom 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:

2016 ANNUAL REPORT + ALPEKa) 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, 2016 and 2015, there

were no indicators of impairment.

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 118.

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 1 and the equity by Ps 32.

d) Pension benefits

The present value of pension obligations depends on a number of factors determined on an actuarial basis using different assumptions.

Assumptions used in the determination of the net cost (income) for pensions include the discount rate. Any change in the assumptions

will impact the carrying amounts of pension obligations.

The Company determines the adequate discount rate at year end. This interest rate should be used to determine the present value

of future cash outflows expected required to settle pension obligations. In the determination of the appropriate discount rate, the

Company considers the discount interest rate in conformity with IAS 19 (Revised) “Employee benefits” denominated in the currency used

to pay benefits with terms at maturity that approximate the obligations terms of related pension obligations. Other key assumptions for

pension obligations are based, in part, on the current market conditions. See analysis of sensibility in Note 20.

2016 ANNUAL REPORT + ALPEK5.2 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 consolidated 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

accounted for using the equity method.

NOTE 6 - Cash and cash equivalents

The cash and cash equivalents are comprised as follows:

At December 31,

2016

2015

Cash and bank accounts

Short-term bank deposits

1,886

1,049

3,226

3,424

Cash and cash equivalents

2,935

6,650

Restricted cash and cash equivalents

At December 31, 2016 and 2015, the Company has restricted cash of approximately Ps 2 and Ps 3, respectively. 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

consolidated statement of financial position based on the maturity date of the restriction.

2016 ANNUAL REPORT + ALPEK

NOTE 7 - Trade and other receivables, net

Trade and other accounts receivable are comprised as follows:

At December 31,

2016

2015

Trade receivables

11,377

Provision for impairment of trade receivables

( 186 )

Trade receivables, net

Accounts receivable from related parties
(Note 8)

Recoverable taxes

Interest receivable

Other debtors

11,191

1,101

3,384

240

8,351

( 155 )

8,196

2,954

1,978

256

Current portion

15,918

13,384

At December 31, 2016 and 2015, trade receivables and other accounts receivable include past-due balances not impaired of Ps 2,082 and

Ps 1,433, respectively.

As of December 31 2016 and 2015, the balance of other debtors is comprised primarily by travel expenses, customs expenses, among others.

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,

2016

2015

1,101

239

161

581

587

183

606

2,082

1,433

At December 31, 2016 and 2015, trade and other accounts receivable of Ps 186 and Ps 155, 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.

2016 ANNUAL REPORT + ALPEK

Movements in the provision for impairment of trade receivables are analyzed as follows:

Initial balance (January 1)

( Ps

Provision for impairment in trade receivables

Trade receivables written-off during the year

Cancellation of unused provision for impairment

Exchange rate fluctuations

2016

2015

155 )

( 60 )

( 10 )

( Ps

393 )

( 12 )

261

( 11 )

Final balance (December 31)

( Ps

186 )

( Ps

155 )

The maximum risk in accounts receivable is the carrying amount at December 31, 2016 and 2015. Increases in the provision for impairment

of trade and other receivables are recognized in the consolidated income statement under the caption selling expenses.

NOTE 8 - Related parties transactions

Transactions with related parties during the years ended December 31, 2016 and 2015, which were celebrated as if the conditions carried out

in terms similar to those of arm’s - length transactions with independent third parties were as follows:

2016

2015

Revenue

Revenue from finished goods sales:

Affiliates

Shareholders with significant influence over subsidiaries

Revenue from services:

Affiliates

Shareholders with significant influence over subsidiaries

Revenue from financial interest:

Holding company

Affiliates

Shareholders with significant influence over subsidiaries

Other revenue:

Affiliates

Shareholders with significant influence over subsidiaries (Note 2e)

1,343

350

180

1,225

311

676

2016 ANNUAL REPORT + ALPEK

Costs / expenses

Purchase of finished goods and raw materials:

Affiliates

( Ps

3 )

( Ps

21 )

Shareholders with significant influence over subsidiaries

( 915 )

( 1,317 )

2016

2015

Administrative services expenses:

Affiliates

Shareholders with significant influence over subsidiaries

Interest expenses:

Associates

Other expenses:

Affiliates

Shareholders with significant influence over subsidiaries (Note 2e)

Dividends declared:

Holding company

Other shareholders

Dividends from subsidiaries to the non – controlling interest:

Shareholders with significant influence over subsidiaries

Other shareholders

Effect of business transference under common control (1)

( 346 )

( 15 )

( 1 )

( 69 )

( 6 )

( 1,608 )

( 351 )

( 1,967 )

( 82 )

( 435 )

( 202 )

( 55 )

( 298 )

( 1,209 )

( 264 )

( 912 )

( 66 )

(1) During the month of November 2016, Alpek received from ALFA (Holding Company) the transfer of shares representative of 100% of the capital stock of Petrocel,
S. A. (company that has the operating rights of a maritime terminal in Altamira, Tamaulipas), thus since that date became a subsidiary of Alpek. The cost of this
transactions amounted to $1, and represented the acquisition of negative net assets amounting to Ps 434.

For the year ended December 31, 2016, wages and benefits received by top officials of the Company were

Ps 336 (Ps 266 in 2015), comprising of base salary and law benefits and supplemented by a variable compensation program that is

basically based on the performance of the Company and by the market value of its shares.

The Company and its subsidiaries report that they had no significant transactions with related parties or conflicts of interest to disclose

at December 31, 2016 and 2015.

2016 ANNUAL REPORT + ALPEK

At December 31, the balances with related parties are as follows:

Nature of the transaction

At December 31,

2016

2015

Short term account receivables:

Holding company

Alfa, S. A. B. de C. V. (1)

Alfa, S. A. B. de C. V.

Affiliates

Innovación y Desarrollo de Energía

Financing and interests

Administrative services

Alfa Sustentable, S. A. de C. V.

Administrative services

Newpek, LLC

Nemak, S. A. B. de C. V.

Terza, S. A. de C. V.

Petrocel, S. A.

Administrative services

Sale of goods

Operative and administrative services

Financing and interests

Shareholders with significant influence over
subsidiaries

BASF

Basell

Sale of goods

Sale of businesses

Leasing and administrative services

Sale of goods

Administrative services

190

115

112

635

595

190

115

468

102

1,443

Long-term account receivables:

Holding company

Alfa, S. A. B. de C. V. (1)

Short-term account payables:

Affiliates

Alliax, S. A. de C. V.

Nemak Exterior, LTD

1,101

2,954

Financing and interests

745

Administrative services

Alfa Corporativo, S. A. de C. V.

Administrative services

Newpek, S. A.

Administrative services

Servicios Empresariales del Norte,
S. A. de C. V.

Alestra, S. de R. L. de C. V.

Others

Administrative services

100

2016 ANNUAL REPORT + ALPEK

Nature of the transaction

At December 31,

2016

2015

Associates

Clear Path Recycling LLC

Financing and interests

Terminal Petroquímica Altamira,
S. A. de C. V.

Shareholders with significant
influence over subsidiaries

BASF

Basell

Long-term account payables:

Affiliates

Administrative services

Sale of goods

Sale of raw materials

Commissions and other

Others

164

161

337

279

Alfa Corporativo, S. A. de C. V.

Administrative services

(1) At December 31, 2016 and 2015, the loans granted bear an average fixed interest rate of 5.34% and 4.51%, respectively.

The Company and its subsidiaries declare that they neither had significant related party transactions nor conflicts of interest to disclose at

December 31, 2016 and 2015.

101

2016 ANNUAL REPORT + ALPEK

NOTE 9 - Inventories

Finished goods

Raw material and other consumables

Materials and tools

Work in process

At December 31,

2016

2015

8,419

4,924

1,002

508

5,795

5,082

793

416

14,853

12,086

For the years ended at December 31, 2016 and 2015, 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 76,943 and Ps 73,029, respectively.

For the years ended December 31, 2016 and 2015, it was recognized in the Consolidated Statement of Income a provision amounting to Ps 22

and Ps 28, respectively, related to damaged, slow-moving and obsolete inventory.

At December 31, 2016 and 2015, there were no inventories pledged as collateral.

NOTE 10 - Prepayments

The current portion and non-current portion of prepaid expenses is summarized as follows:

At December 31,

2016

2015

Current portion (1)

Noncurrent portion (2)

457

1,570

338

1,228

Total prepaid expenses

2,027

1,566

(1) This item mainly consists of advertising and prepaid insurance.

(2) This item mainly represents advances on inventories forthcoming years related to supply rights, as described in Note 2 a), in the amount of Ps 1,550 and Ps 1,102 at

December 31, 2016 and 2015, respectively.

102

2016 ANNUAL REPORT + 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, 2015

Beginning balance

Additions

Additions through business acquisitions

Disposals

Impairment

Translation effect

Depreciation charge recognized in the year

Transfers

2,988

3,624

19,061

238

919

494

27,393

236

104

534

( 222 )

257

( 28 )

( 14 )

2,857

( 1,697 )

661

( 1 )

( 12 )

( 76 )

1,477

( 1 )

( 27 )

121

( 850 )

( 11 )

( 1 )

102

147

1,577

426

( 41 )

( 42 )

3,895

( 2,007 )

121

Carrying value at December 31, 2015

3,264

4,136

21,144

288

1,648

767

31,322

At December 31, 2015

Cost

Accumulated depreciation

3,264

11,764

55,399

284

1,411

1,648

767

74,537

( 7,628 )

( 34,255 )

( 209 )

( 1,123 )

( 43,215 )

Carrying value at December 31, 2015

3,264

4,136

21,144

288

1,648

767

31,322

Year ended December 31, 2016

Beginning balance

Additions

Additions through business acquisitions

Disposals

Impairment

Translation effect

Depreciation charge recognized in the year

Transfers

3,264

4,136

21,144

288

1,648

767

31,322

( 8 )

367

100

752

( 241 )

137

875

( 3 )

( 1 )

4,061

( 1,904 )

1,068

( 13 )

( 1 )

( 87 )

4,574

( 1 )

525

( 1,197 )

( 14 )

150

( 34 )

4,665

935

( 27 )

( 2 )

5,926

( 2,245 )

125

Carrying value at December 31, 2016

3,724

4,849

25,271

327

5,554

904

40,699

At December 31, 2016

Cost

Accumulated depreciation

3,724

14,198

68,412

329

1,774

5,554

904

94,895

( 9,349 )

( 43,141 )

( 259 )

( 1,447)

( 54,196)

Carrying value at December 31, 2016

3,724

4,849

25,271

327

5,554

904

40,699

Depreciation expenses of Ps 2,217 and Ps 1,981 were recorded in cost of sales, Ps 4 and Ps 5, in selling expenses and Ps 24 and Ps 21, in ad-

ministrative expenses in 2016 and 2015, respectively.

The Company has capitalized costs of loans in qualified assets for Ps 51 and Ps 2 for the years ended December 31, 2016 and 2015, respective-

ly. Costs from loans were capitalized at the weighted average rate of loans that amounts to approximately 4.9%.

103

2016 ANNUAL REPORT + ALPEK

NOTE 12 - Goodwill and intangible assets, net

Finite life

Indefinite life

Development
costs

Supply rights

No-compete
agreements

Customers
relationships

Software and
licenses

Intellectual
property rights,
tolling rights and
others

Goodwill

Others

Total

Cost

At January 1, 2015

663

2,927

198

536

2,341

250

Additions

Translation effect

At December 31, 2015

Additions

Transfers

Translation effect

At December 31, 2016

112

780

158

945

1,741

620

5,288

947

1,204

7,439

( 2 )

196

211

627

125

753

111

392

2,832

484

( 7 )

628

297

( 1 )

Amortization

At January 1, 2015

( Ps

267 )

Amortization

Translation effect

At December 31, 2015

Amortization

Transfers

Translation effect

( 48 )

( 47 )

( 362 )

( 46 )

( 78 )

At December 31, 2016

( Ps

486 )

( Ps

99 )

( Ps

160 )

( Ps

43 )

( Ps

( 44 )

( 143 )

( 19 )

( 15 )

( 46 )

( 31 )

( 237 )

( 54 )

( 53 )

( 4 )

( 6 )

( 53 )

( 24 )

( 11 )

( Ps

177 )

( Ps

344 )

( Ps

88 )

( Ps

360 )

( 105 )

( 67 )

( 532 )

( 172 )

( 118 )

815 )

128

3,937

362

13,785

Net carrying value

Cost

Amortization

780

5,288

196

627

111

2,832

297

( 362 )

( 143 )

( 237 )

( 53 )

( 532 )

297

At December 31, 2015

418

5,288

390

2,300

Cost

945

7,439

211

753

128

3,937

362

13,785

Amortization

(486)

( 177 )

( 344 )

( 88 )

( 815 )

( 1,910 )

At December 31, 2016

459

7,439

409

3,122

362

11,875

Of the total amortization expense, Ps 295 and Ps 247 have been recorded in cost of sales and Ps 20 and Ps 0 in administrative expenses in

2016 and 2015, respectively.

Incurred research and development expenses that have been recorded in the 2016 and 2015 consolidated statements of income were Ps 62

and Ps 55, respectively.

104

7,012

1,861

1,266

10,139

1,445

( 6 )

2,207

( Ps

929 )

( 247 )

( 151 )

( 1,327 )

( 315 )

( 275 )

( Ps

1,910 )

10,139

( 1,327 )

8,812

2016 ANNUAL REPORT + 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 acquirer are assigned to those units or groups of units, goodwill arising from the Polyester segment

for a total of Ps 362 and Ps 297 at December 31, 2016 and 2015, 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 2016 and 2015 were as follows:

Estimated gross margin

Growth rate

Discount rate

2016

6.3%

0.0%

9.0%

2015

6.8%

6.5%

10.0%

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 that the carrying value of the operating segments exceeds materially its value in use.

NOTE 13 - Other assets

At December 31,

2016

2015

Notes receivable (1)

1,382

Accounts receivable from related parties (Note 8)

Financial assets available for sale (2)

Total other non-current financial assets

Investment in associates (3)

745

172

2,299

403

Total other assets

2,702

110

144

254

253

507

(1) This item mainly consists of a loan receivable that bears half-yearly interest at a 6.99% rate (Libor + 5.3%), and matures in December 2019.

(2) Financial assets available for sale

These assets are related to investments in companies not listed on the market and for investments in social clubs that represent less than 1% of the

capital stock. The Company has not recognized any impairment loss at December 31, 2016.

105

2016 ANNUAL REPORT + ALPEK

The movement of financial assets available for sale is as follows:

Balance at January 1

Translation effect

Additions

2016

2015

144

129

Balance at December 31

172

144

Financial assets available for sale are denominated in the following currencies:

USD

MXN

Total

At December 31,

2016

2015

124

172

104

144

None of the financial assets available for sale are expired or impaired.

(3) Investment by associates

Following is presented summarized financial information of associated companies of the group that are not significant, which are accounted for by

the equity method:

Net loss

Other comprehensive income

Comprehensive income

Investment in associates at December 31

2016

2015

( Ps

4 )

( 2 )

6 )

403

( Ps

71 )

253

There are neither commitments non contingencies liabilities regarding the Company’s investment in associates as of December 31, 2016.

106

2016 ANNUAL REPORT + ALPEK

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,

2016

2015

2016

2015

Indelpro, S. A. de C. V. and subsidiary

Polioles, S. A. de C. V. and subsidiary

49%

50%

Non-controlling portion
of non-significant subsidiaries

1,101

251

1,368

699

216

917

3,631

474

544

2,917

1,153

475

4,649

4,545

The summarized financial information at December 31, 2016 and 2015 and for the year then ended, corresponding to each subsidiary with a

significant non-controlling interest is shown below:

Indelpro, S. A. de C. V. and subsidiary

Polioles, S. A. de C. V. and subsidiary

2016

2015

2016

2015

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-controllinginterest

Statements of cash flows

Net cash flows generated (used) in operating activities

Net cash flows (used) generated in investing activities

Net cash flows used in financing activities

(Decrease) increase in cash and cash equivalents

3,527

6,393

1,619

2,348

5,953

10,034

1,427

2,254

1,105

762

2,613

( 441 )

( 1,909 )

302

2,248

3,976

1,150

909

1,540

949

3,517

502

596

298

945

( 460 )

1,967

( 1,702 )

( 227 )

876

1,268

1,277

2,307

4,899

431

649

324

150

( 48 )

( 81 )

( 320 )

( 418 )

3,739

7,737

1,489

2,577

7,410

11,991

2,246

3,542

1,735

1,022

2,328

( 444 )

( 2,356 )

( 394 )

107

2016 ANNUAL REPORT + ALPEK

NOTE 15 - Financial instruments

a) Financial instruments by category

Trade receivables
and liabilities at
amortized cost

Available
for sale

At December 31, 2016

Financial assets
and liabilities at
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

Other assets

Financial liabilities:

Debt

Suppliers and other accounts payable

Shared-based payments

Derivative financial instruments

Financial assets:

Cash and cash equivalents

Restricted cash and cash equivalents

Trade and other receivable

Derivative financial instruments

Other assets

Financial liabilities:

Debt

Suppliers and other accounts payable

Shared-based payments

Derivative financial instruments

172

144

705

2,935

15,918

2,299

21,210

24,338

15,492

717

40,578

At December 31, 2015

Financial assets
and liabilities at
fair value through
profit and loss

Derivative
designated for
hedging

Total

203

1,542

6,650

13,384

203

254

20,494

18,954

11,693

1,559

32,261

Trade receivables
and liabilities at
amortized cost

Available
for sale

2,935

15,918

2,127

20,982

24,338

15,492

39,830

6,650

13,384

110

20,147

18,954

11,693

30,647

108

2016 ANNUAL REPORT + 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”

“B”

“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

At December 31,

2016

2015

1,599

1,569

363

144

515

590

1,499

195

147

5,302

11,192

382

11,602

510

914

235

3,401

8,293

986

9,279

Total not impaired trade receivables

16,904

12,680

109

2016 ANNUAL REPORT + ALPEK

Cash and cash equivalents with or
without restriction, not including petty cash

"A+"

"A-"

"A"

"BBB+"

"BBB"

"BBB-"

"BB+"

Without external credit rating

Derivative financial instruments

“A-”

“BBB+”

“CCC”

“CCC+”

“BBB”

“A”

Without external credit rating

At December 31,

2016

2015

1,393

738

624

167

762

2,485

2,470

148

733

2,936

6,645

163

203

Group X – New customers/related parties (less than 6 months).

Group Y – Customers/related parties (more than 6 months) without default in the past.

Group Z – Customers/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 car-

rying amount of these accounts represents the expected cash flow at December 31, 2016 and 2015.

110

2016 ANNUAL REPORT + ALPEK

The carrying amount and the estimated fair value of the rest of the financial assets and liabilities are presented as follows:

At December 31, 2016

At December 31, 2015

Carrying
amount

Fair
value

Carrying
amount

Fair
value

Financial assets

Non-current receivable

2,127

2,131

110

Financial liabilities

Non-current debt

21,551

21,946

18,276

17,965

The estimated fair values as of December 31, 2016 and 2015, were determined based on discounted cash flows using rates that reflect a sim-

ilar 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, 2016 and 2015 the

Company’s Management assessed the effectiveness of its hedges for accounting purposes and has concluded that they are highly effective.

Notional amounts related to derivative financial instruments reflect the contracted reference volume; however they do not reflect the

amounts at risk with respect to future cash flows. The amounts at risk are generally limited to the unrealized profit or loss from the market

valuation of such instruments, which may vary according to changes in the market value of the underlying, its volatility and the credit quality

of the counterparties.

The principal obligations which the Company is subject to depends on the type of contract and the conditions stipulated in each one of the

derivative financial instruments in force at December 31, 2016 and 2015.

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.

111

2016 ANNUAL REPORT + ALPEK

a) Exchange rate derivatives

Derivative financial instruments related to exchange rate positions with trading accounting treatment are summarized as follows:

Type of derivative,
value or contract

Notional
amount

Underlying asset

Unit

Reference

Fair value

2017

Maturity

2018

2019+

At December 31, 2016

USD/MXN

( Ps

186 )

Pesos / Dollar

20.66

( Ps

12 )

( Ps

12 )

At December 31, 2015

Type of derivative,
value or contract

Notional
amount

Underlying asset

Unit

Reference

Fair value

2016

Maturity

2017

USD/MXN

( Ps

ARS/USD

688 )

800

Pesos / Dollar

Ps Arg / Dollar

17.21

12.94

( Ps

13 )

( Ps

13 )

202

189

202

189

2018+

b) Energy

Positions of derivative financial instruments natural gas, gasoline, ethylene, ethane, paraxylene and brent crude, are summarized as fol-

lows:

Type of derivative,
value or contract

Notional
amount

With hedge accounting treatment:

At December 31, 2016

Underlying asset

Unit

Reference

Fair value

2017

Maturity

2018

2019+

Ethylene 1

350

Cent Dollar/lb

25.33

Natural gas 1

2,106

Dollar / MBTU

Ethane 1

Px 1

Cent Dollar/Gallon

2,650

Dollar/MT

3.72

26.37

795

( 646 )

( 24 )

649 )

( Ps

At December 31, 2015

( 24 )

( 187 )

( 459 )

( Ps

3 )

( Ps

187 )

( Ps

459 )

Type of derivative,
value or contract

Notional
amount

With hedge accounting treatment:

Underlying asset

Unit

Reference

Fair value

2016

Maturity

2017

Ethylene 1

809

Cent Dollar/lb

19.22

( Ps

230 )

( Ps

230 )

Natural gas 1

2,923

Dollar / MBTU

Ethane 1

Px 1

Gasolina 1

Cent Dollar/Gallon

3,252

Dollar/MT

Dollar / Gallon

2.32

15.05

772

1.25

( 961 )

( 5 )

( 309 )

( 38 )

( 250 )

( 5 )

( 309 )

( 38 )

With trade accounting treatment:

Brent crude

Dollar / BBL

38.91

( 2 )

( 204 )

2018+

( 507 )

( Ps

1,545 )

( Ps

834 )

( Ps

204 )

( Ps

507 )

(1) Cash flow hedges.

112

2016 ANNUAL REPORT + ALPEK

The main obligations to which the subsidiaries are subject depend upon the contracting mechanism and conditions stipulated in each one of

the derivative financial instruments in effect at December 31, 2016 and 2015.

At December 31, 2016 and 2015, the net fair value of derivative financial instruments above mentioned amounts to Ps 661 and Ps 1,356, re-

spectively, which is shown in the consolidated statement of financial position as follows:

Current asset

Current liability

Non-current liability

Fair value
At December 31

2016

2015

( 71 )

( 646 )

203

( 848 )

( 711 )

Net position

( Ps

661 )

( Ps

1,356 )

At December 31, 2016 and 2015 there are no collaterals in derivative financial instruments.

NOTE 17 – Suppliers and other accounts payable

At December 31,

2016

2015

Suppliers

13,151

9,522

Short-term employee benefits

Payments in advance from customers

Taxes different than income tax

Accounts payable to related parties (Note 8)

Other accounts payable and accrued expenses

610

600

337

750

596

659

279

572

15,492

11,693

113

2016 ANNUAL REPORT + ALPEK

NOTE 18 - Provisions

Restructuring,
demolition and
environmental
remediation

Indemnities from
dismissal
and others

Others

Total

At January 1, 2015

733

Increases

Payments

Translation effect

At December 31, 2015

Increases

Payments

Translation effect

( 352 )

471

( 210 )

( 29 )

( 10 )

( 11 )

( 5 )

( 6 )

( 1 )

790

( 392 )

523

( 226 )

At December 31, 2016

330

370

Short-term provisions

Long-term provisions

At December 31

2016

2015

363

370

338

185

523

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 competitive, through distributing production to the most efficient

plants in its productive network.

During 2016, the Company continued the works of dismantling and demolition of the plant in Cape Fear, as was originally announced

during 2013. At December 31, 2016, the balance of this provision amounts to Ps 360 (US$17), which is in line with the initial estimate made

by the Management will be disbursed over 2017 according to the plan of dismantling and demolition of the plant.

114

2016 ANNUAL REPORT + ALPEK

NOTE 19 – Debt

Current:

Bank loans (1)

Current portion of non-current debt

Notes payable (1)

Interest payable

Current debt

Non-current:

Senior Notes

Unsecured Bank loans

Total

Less: current portion of non-current debt

At December 31,

2016

2015

2,375

230

178

440

224

2,787

678

19,677

16,369

2,104

21,781

( 230 )

2,131

18,500

( 224 )

Non-current debt (2)

21,551

18,276

(1) These items are represented by bank loans and current notes payable, and they bear interest at an average rate of 2.21% and 2.39% at

December 31, 2016 and 2015, respectively.

The fair value of bank loans and notes payable approximates their current carrying amount, as the impact of discounting is not sig-

nificant.

115

2016 ANNUAL REPORT + ALPEK

(2) The carrying amounts, terms and conditions of non-current debt are as follows:

Description

Senior Note 144A/Reg. S / fixed rate

Total Senior Notes

Bank loan, Libor +1.60%

Bank loan, Libor +1.10%

Bank loan, BADLAR + 1.00%

Bank loan, Fijo 19.00%

Bank loan, Libor + 1.00%

Bank loan, Libor + 1.60%

Bank loan, BADLAR +2.00%

Bank loan, Libor +1.18%

Total unsecured bank loans

Currency

Outstanding
credit balance

Debt issuance
costs

Interest
payable

Balance at
December 31
2016

Balance at
December 31
2015

Maturity date
DD/MM/YY

Interest
rate

USD

ARS

USD

ARS

USD

13,406

( Ps

84 )

6,199

19,605

1,033

413

100

355

169

2,096

( 43 )

( 127 )

132

199

13,389

11,137

20-Nov-22

6,288

5,232

08-Aug-23

19,677

16,369

1,034

415

102

358

169

-
-

861

346

122

409

346

19-Dec-19

02-Apr-18

01-Apr-20

02-Dec-22

14-Aug-18

31-Jan-18

03-Oct-16

01-Apr-17

2,104

2,131

4.50%

5.38%

2.59%

1.95%

21.13%

19.00%

1.77%

2.22%

29.72%

1.51%

Total

21,701

( Ps

127 )

207

21,781

18,500

At December 31, 2016, the annual maturities of non-current debt are as follows:

2018

2019

2020

1,488

557

1,488

557

2021
onwards

19,478

Total

2,073

19,478

19,488

21,551

Bank loans

Senior notes

Covenants:

Most of the existing debt agreements contain restrictions for the Company, primarily for the compliance with certain financial ratios which

mainly include:

a. Interest hedge ratio: it is calculated by dividing the profit before financial result, net, share of result of associates, income taxes,

depreciation and amortization (EBITDA) by the net interest charges for the last four quarters of the analyzed period. This factor

cannot be lesser than 3.0 times.

b. Leverage ratio: defined as the result of dividing the consolidated net debt (current and non-current debt, excluding debt issuance

costs less restricted and unrestricted cash and cash equivalents) by the EBITDA of the last four quarters of the period analyzed.

This factor cannot be greater than 3.5 times.

116

2016 ANNUAL REPORT + ALPEK

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 2016 and 2015, the financial ratios were calculated according to the formulas set

out in the loan agreements. At December 31, 2016 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 2016 and 2015, 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.

NOTE 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 2016 amounted to Ps 33 (Ps 62 in 2015).

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

Employees’ benefits in the consolidated statement
of financial position

Charge to the consolidated income statement for:

Pension benefits

Post-employment medical benefits

At December 31,

2016

2015

940

177

1,117

110

858

168

1,026

1,227

1,108

( Ps

56 )

( 8 )

( 64 )

61 )

( 7 )

( 68 )

Remeasurement of obligations for employees’ benefits recognized
in the statement of comprehensive income for the year

100

( Ps

3 )

Remeasurement of accumulated obligations for employees
benefits

( Ps

131 )

( Ps

231 )

117

2016 ANNUAL REPORT + 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 coun-

try, as is the nature of the relationship between the Company and the respective trustees (or equivalent) and their composition.

The amounts recorded in the consolidated statement of financial position, are determined as shown below:

At December 31,

2016

2015

Present value of defined benefit obligations

3,964

3,546

Fair value of plan assets

( 3,024 )

( 2,688 )

Employees’ benefits in the consolidated
statement of financial position

940

858

The movement in the defined benefit obligation during the year is as follows:

At January 1

Service cost

Interest cost

Remeasurements:

Gains (losses) from changes in financial
assumptions

(Losses) from change in demographic
assumptions and experience adjustments

Translation effect

Paid benefits

Plan reductions

Settlements

At December 31

2016

2015

3,546

3,290

161

( 121 )

618

( 309 )

( 18 )

( 6 )

138

( 120 )

( 17 )

482

( 262 )

( 1 )

( 4 )

3,964

3,546

118

2016 ANNUAL REPORT + 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

2016

2015

( Ps

2,688 )

( Ps

( 126 )

( 29 )

( 434 )

( 33 )

286

2,524 )

( 112 )

119

( 345 )

( 62 )

236

At December 31

( Ps

3,024 )

( Ps

2,688 )

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

2016

2015

( Ps

44 )

( Ps

( 35 )

Total included in personal costs

( Ps

56 )

( Ps

40 )

( 26 )

61 )

The principal actuarial assumptions are as follows:

Discount rate

Inflation rate

Salary increase rate

At December 31,

2016

MX 7.75%

US 3.89%

3.50%

4.50%

2015

MX 6.75%

US 4.08%

4.25%

5.25%

The average life of defined benefit obligations is of 12.8 and 14.5 years at December 31, 2016 and 2015, respectively.

119

2016 ANNUAL REPORT + ALPEK

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

Mx 1%

US 1%

Decreases by Ps 19

Increases by Ps 22

Decreases by Ps 366

Increases by Ps 441

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 consolidated statement 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 above mentioned, the main actuarial assumption it is a long-term increase in health costs by 8.0% in 2016

and 6.7% in 2015.

Amounts recognized in the statement of financial position are determined as follows:

Present value of defined benefit obligations

Fair value of plan assets

Employees’ benefits in the consolidated
statement of financial position

At December 31,

2016

2015

177

168

177

168

120

2016 ANNUAL REPORT + ALPEK

The movements of defined benefit obligations are as follows:

At January 1

Service cost

Interest cost

Employee contributions

Remeasurements:

Gain from changes in financial assumptions

Gains from changes in demographic assumptions

and experience adjustments

Translation effect

Plan reductions

Paid benefits

At December 31

2016

2015

168

154

( 50 )

( 5 )

( 53 )

177

168

The amounts recorded in the consolidated 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

Total included in personal costs

2016

2015

( Ps

2 )

( 6 )

8 )

( Ps

2 )

( 5 )

7 )

At December 31, 2016, the effect of a 1% fluctuation in the incremental rate of medical expenses is as follows:

Effect in defined benefit obligation

( 11 )

Rate

Increase

Decrease

Employee benefits

Plan assets are comprised as follows:

Investment funds (listed)

Cash and cash equivalents

1,962

1,062

1,738

949

At December 31,

2016

2015

121

2016 ANNUAL REPORT + ALPEK

NOTE 21 – Deferred income taxes

The analysis of the deferred tax asset and deferred tax liability is as follows:

Deferred tax asset:

- To be recovered for more than 12 months

- To be recovered within 12 months

Deferred tax liability:

- To be payable for more than 12 months

- To be payable within 12 months

At December 31,

2016

2015

364

433

243

118

361

( 5,902 )

( 5,883 )

( 4,579 )

( 128 )

( 4,707 )

Deferred tax, net

( Ps

5,450 )

( Ps

4,346 )

The gross movement in the deferred income tax account is as follows:

2016

2015

At January 1

Translation effect

Business acquisitions

Credit to consolidated income statement
(Note 30)

Tax related to other items of comprehensive
income (Note 30)

( Ps

4,346 )

( Ps

( 1,033 )

145

( 298 )

3,999 )

( 596 )

( 84 )

203

130

At December 31

( Ps

5,450 )

( Ps

4,346 )

122

2016 ANNUAL REPORT + ALPEK

The change of the temporary differences that requires deferred income tax recognition for the year ended December 31, as follows:

Provisions

Derivative financial instruments

Tax loss carryforwards

Total deferred tax asset

2016

2015

139

124

1,798

2,061

262

1,500

1,766

Inventories

( Ps

66 )

( Ps

53 )

Property, plant and equipment, net

Intangible assets, net

Other temporary differences, net

Total deferred tax liability

Net deferred tax liability

( 6,328 )

( 442 )

( 675 )

( 7,511 )

( 5,464 )

( 289 )

( 306 )

( 6,112 )

( Ps

5,450 )

( Ps

4,346 )

At December 31, 2016, the Company has accumulated tax loss carryforwards for a total of Ps 5,993 expiring as shown below:

Loss incurred
in the year

Amortizable tax loss
carryforwards

Maturity
date

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

187

138

162

595

194

838

2,773

892

5,993

2017

2018

2019

2020

2021

2022

2023

2024

2025

Subsequent

123

2016 ANNUAL REPORT + ALPEK

NOTE 22 - Income tax payable

Due to the elimination of the tax consolidation regime in Mexico, the Company decided to incorporate itself into the new optional Regime for

Groups of Companies beginning in 2014. This regime consists of grouping companies with specific characteristics, which have the possibility

of deferring part of the tax on earnings payable in three years. The deferment percentage is calculated by using a factor determined in ac-

cordance with the amount of taxable income and tax loss in the year.

Income tax payable is summarized as follows:

At December 31,

2016

2015

Current portion

Non-current portion

694

553

1,371

Total income tax payable

1,247

1,399

NOTE 23 - Other liabilities

At December 31,

2016

2015

Deferred income (1)

Other

500

Total other liabilities

504

452

(1) This item corresponds to revenues charged in advance and relates to the future delivery of goods.

NOTE 24 - Stockholders’ equity

At December 31, 2016, the capital stock is variable, with a fixed minimum of Ps 6,048 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.

During 2016, the Company repurchased 1,526,384 shares in the amount of Ps 46, in connection with a repurchase program that was approved

by the Company’s stockholders and exercised discretionally by Management. At December 31, 2016, the Company holds 1,526,384 treasury

shares, and the market value of the share was Ps 24.77 pesos.

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, 2016 and 2015, the legal reserve amounts

to Ps 514 and Ps 377, respectively.

124

2016 ANNUAL REPORT + ALPEK

At the General Ordinary Meeting of Alpek held on February 24, 2016, the Stockholders resolved to declare cash dividends on March 4, 2016

in a total amount of Ps 1,959.

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 1,473.

The Income Tax Law establishes a tax rate of 10% to the dividends paid to foreign residents and Mexican individuals derived from the profits

generated since 2014, also provides that for the years 2001-2013, the net taxable profit will be determined in terms of the Income Tax Law in

force in the fiscal year concerned.

The movements in other reserves for 2016 and 2015 are shown as follows:

At January 1, 2015

Losses on fair value

Deferred tax asset on fair value losses

Gain from translation of foreign entities

At December 31, 2015

Gains on fair value

Deferred tax asset on fair value gains

Gain from translation of foreign entities

Effect from foreign
currency translation

Effect of cash flow
hedge derivative
instruments

Total

2,755

( Ps

610 )

2,145

3,843

6,598

6,233

( 529 )

129

( 1,010 )

646

( 262 )

( 529 )

129

3,843

5,588

646

( 262 )

6,233

At December 31, 2016

12,831

( Ps

626 )

12,205

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 re-

porting date.

The Board of Directors and Executive Officers of the Company do not own more than 1% of its capital. Furthermore, none of the shareholders

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 2017. 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, 2016, the tax value of the consolidated CUFIN and value of the

Capital Contribution Account (CUCA Spanish acronym) amounted to Ps 1,879 and Ps 18,038, respectively.

125

2016 ANNUAL REPORT + ALPEK

NOTE 25 - Shared-based payments

Alpek has a stock based compensation scheme referred to at 50% of the value of stock of its holding company and the other 50% of the value

of shares of Alpek, S. A. B. de C. V. for directors of the Company and its subsidiaries. In accordance with the terms of the plan, the eligible

directors will obtain a cash payment contingent upon achieving both quantitative and qualitative metrics derived from the following financial

measures:

•

Improved share price

Improvement in net income

Permanence of the executives in the Company

The program consists in determining a number of shares which the executives will have a right to, that will be paid in cash over the next five

years; i.e., 20% every year 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.

2016

2015

26.73

26.10

34.30

23.48

The short-term and long-term liabilities are comprised as follows:

Short-term

Long-term

Total carrying amount

At December 31,

2016

2015

126

2016 ANNUAL REPORT + ALPEK

NOTE 26 - 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

60,305 )

( Ps

58,782 )

2016

2015

Employee benefit expenses (Note 29)

Human resource expenses

Maintenance

Depreciation and amortization

Advertising expenses

Freight charges

Energy consumption and fuel
(gas, electricity, etc.)

Travel expenses

Operating lease expenses

Technical assistance, professional fees
and administrative services

Others (insurance and finance, water,
containers and packaging, etc.)

( 4,227 )

( 54 )

( 1,411 )

( 2,560 )

( 3 )

( 4,325 )

( 3,514 )

( 170 )

( 775 )

( 937 )

( 2,283 )

( 3,799 )

( 76 )

( 1,093 )

( 2,254 )

( 2 )

( 3,865 )

( 2,885 )

( 132 )

( 639 )

( 1,042 )

( 1,676 )

Total

( Ps

80,564 )

( Ps

76,245 )

NOTE 27 - Other income (expenses), net

Other income (expenses) for the years ended December 31, are comprised as follows:

Gain on sale of wastes

Gain on sale of property, plant and equipment

Impairment of property, plant and equipment

Valuation of derivative financial instruments

Expenses related to acquisition projects

Gain on business acquisition

Income from a loss recovery (1)

Other income

Other expense

Total

2016

2015

( 2 )

( 5 )

112

382

( 130 )

( 6 )

( 10 )

245

235

(1) This item represents the recovery of a plant insurance of DAK Argentina.

127

2016 ANNUAL REPORT + ALPEK

NOTE 28 - Finance income and costs

Finance cost, net for the years ended December 31, are comprised as follows:

Finance income:

Interest income on short-term bank deposits

Interest income on loans from related parties

Other finance income

Foreign exchange gains

Gains for changes in the fair value of financial
assets at fair value through profit or loss

Total finance income

Finance costs:

Interest expense on bank loans

Non-bank interest expense

Interest cost on employees benefits, net

Other finance expenses (factoring and others)

Foreign exchange loss

Total finance costs

Finance cost, net

2016

2015

150

3,280

3,565

( 143 )

( 926 )

( 44 )

( 300 )

( 4,660 )

( 3,481 )

( Ps

6,074 )

( Ps

4,657 )

( Ps

2,509 )

( Ps

1,862 )

188

2,367

183

2,795

( 128 )

( 787 )

( 31 )

( 230 )

Interest expense on loans from related parties

( Ps

1 )

NOTE 29 - Employee benefit expenses

Employee benefits expenses for the years ended December 31, are integrated as follows:

2016

2015

Salaries, wages and benefits

( Ps

3,102 )

( Ps

Social security contributions

Employee benefits (Note 20)

Other contributions

( 304 )

( 22 )

( 799 )

2,854 )

( 262 )

( 37 )

( 646 )

Total

( Ps

4,227 )

( Ps

3,799 )

128

2016 ANNUAL REPORT + ALPEK

NOTE 30 - Income taxes

Income tax for the years ended December 31, is integrated as follows:

2016

2015

Total current income tax

( Ps

2,470 )

( Ps

2,252 )

Adjustment to the provision of income tax from
prior years

Total deferred tax

Income taxes

( 33 )

145

203

( Ps

2,358 )

( Ps

2,040 )

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

2016

2015

7,351

30%

5,705

30%

Income tax at statutory rate

( 2,205 )

( 1,711 )

Add (deduct) effect of income tax on:

Annual inflation adjustment

Non-deductible expenses

Non-taxable income

Effect of different tax rates of countries
other than Mexico

Adjustment to the income taxes liability of prior
years

Share of losses of associates

( 71 )

( 24 )

( 51 )

( 33 )

( 1 )

( 236 )

( 21 )

( 79 )

( 7 )

Total income taxes

( Ps

2,358 )

( Ps

2,040 )

Effective tax rate

32%

36%

129

2016 ANNUAL REPORT + ALPEK

The charge (credit) to income tax related to other items of the comprehensive income for the years ending December 31, are as follows:

Before taxes

2016

Tax charge
(credit)

After taxes

Before taxes

Translation effect of foreign currency

Remeasurement of obligations for employee benefits

Effect of derivative financial instruments
for hedging purposes of cash flow

Share of other comprehensive results of associates

6,233

100

646

( 2 )

Other comprehensive income items

6,977

Deferred tax

6,233

3,843

( 36 )

( 262 )

298 )

( Ps

384

( 2 )

6,679

( 3 )

( 530 )

3,310

2015

Tax charge
(credit)

130

After taxes

3,843

( 3 )

( 400 )

3,440

NOTE 31 - Segment reporting

Segment reporting is presented, consistently with the internal report provided to the Chief Operating Officer, who has been identified as the

Company’s Executive Director, and represents the highest authority in operational decision making, allocation of resources and performance

assessment of operating segments.

An operating segment is defined as a component of an entity on which separate financial information is regularly being evaluated.

Management controls and assesses its operations through two business segments: the Polyester business chain and the Plastics and Chem-

icals business. These segments are managed separately since its products vary and targeted markets are different. Their activities are

performed through various subsidiaries.

The operations between operating segments are performed at market value and the accounting policies with which the financial information

by segments is prepared, are consistent with those described in Note 3.

The Company has defined the Adjusted EBITDA as the calculation of adding operating income, depreciation, amortization, and noncurrent

asset impairment.

The Company evaluates the performance of each of the operating segments based on Adjusted 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 per-

formance 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.

130

2016 ANNUAL REPORT + ALPEK

Following is the condensed financial information of these operating segments:

For the year ended December 31, 2016:

Statement of income:

Revenue by segment

Inter-segment revenue

Revenue from external costumers

Operating profit

Depreciation, amortization and impairment of non-current assets

Adjusted EBITDA

Capex

Polyester

Plastics and
Chemicals

Others

Total

64,336

26,151

( Ps

295 )

90,192

( 95 )

64,241

4,487

2,027

6,514

5,234

( 200 )

25,951

5,413

535

5,948

747

( Ps

295

37 )

90,192

9,863

2,562

12,425

5,981

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

Polyester

Plastics and
Chemicals

Others

Total

60,852

23,070

( Ps

332 )

83,590

( 83 )

60,769

3,583

1,837

5,420

3,979

( 249 )

22,821

3,961

547

4,508

503

332

83,590

7,590

2,384

9,974

4,482

The reconciliation between adjusted EBITDA and profit before taxes for the years ended December 31 is as follows:

2016

2015

Adjusted EBITDA

12,425

9,974

Depreciation, amortization and impairment
of non-current assets

Operating profit

Financial cost, net

Share of losses in associates

( 2,562 )

9,863

( 2,509 )

( 3 )

( 2,384 )

7,590

( 1,862 )

( 23 )

Income before taxes

7,351

5,705

131

2016 ANNUAL REPORT + 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

2016

2015

43,657

39,271

4,405

1,301

766

792

40,986

36,455

4,762

853

369

165

90,192

83,590

The Company’s main costumer generated revenue amounting to Ps 8,654 and Ps 5,706 for the years ended December 31, 2016 and 2015,

respectively. This revenue is obtained from the Polyester reporting segment and represents 10% and 11% of the consolidated revenue with

external costumers for the years ended December 31, 2016 and 2015, respectively.

The following table shows the intangible assets and property, plant and equipment by country:

Mexico

United States

Chile

Canada

Argentina

At December 31,

2016

2015

2,344

9,524

2,132

6,675

Total intangible assets

11,875

8,812

Mexico

United States

Canada

Argentina

Chile

Brazil

30,511

8,425

968

349

318

128

23,791

6,863

328

233

107

Total property, plant and equipment

40,699

31,322

132

2016 ANNUAL REPORT + ALPEK

NOTE 32 - Commitments and contingencies

At December 31, 2016, the Company has the following commitments:

a. The Company through its subsidiary Grupo Petrotemex, signed a contract with M&G (see Note 2) related to supply rights of the

plant for 500 thousand tons of PET (manufactured with 420 thousand tons of PTA) per year. Grupo Petrotemex has completed the

payments amounting to Ps 8,989 (US$435), of which Ps 7,439 (US$360) are recognized in the intangible assets that correspond to

the before mentioned supply rights, and will be amortized once the supply of PET begins and Ps 1,550 (US$75) as a prepayment of

inventory within the prepayments caption. See Note 12.

b. On December 15, 2014, the Company through its subsidiary DAK (see Note 2) entered into a Toll Manufacturing Agreement with

Huntsman in which will obtain supply rights of Monoethylene Glycol (MEG). On the other hand, DAK paid US$65 to Huntsman during

the installation of the equipment according to an established calendar and in compliance with certain milestones. 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 took place during the month of June 2016,

thus, DAK obtained 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 was installed and the production began.

c. At December 31, 2016 and 2015, 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.

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, 2016 and 2015

amounted to Ps 2,317 and Ps 2,896, respectively. The purchase commitment for the year 2016 amounts to approximately Ps 3,193

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:

1 year

Between 1 and 5 years

More than 5 years

483

1,177

1,022

133

2016 ANNUAL REPORT + ALPEK

At December 31, 2016, 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 it will result in an adverse resolution to the Company, would negatively impact 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) and terephthalatic acid (PTA) resin, polypropylene (PP) resin, expandable polystyrene (EPS), caprolactam (CPL), chemical

specialties and they generate and dispose of 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 33 - Subsequent events

In preparing the financial statements the Company has evaluated the events and transactions for their recognition or disclosure subsequent

to December 31, 2016 and through February 17, 2017 (date of issuance of the financial statements), and has concluded that there are no sub-

sequent events affecting them.

José de Jesús Valdez Simancas

Chief Executive Officer

Eduardo Alberto Escalante Castillo

Chief Financial Officer

134

2016 ANNUAL REPORT + ALPEK

TABLE OF CONTENTS

Corporate profile

Financial highlights

Footprint

Our products in daily life

Petrochemical chains

Letter to shareholders

Polyester

Plastics & Chemicals

Strategic investments

Sustainability

Board of Directors

Management Team

Corporate Governance

Glossary

Consolidated financial statements

Investor Relations

Hernán F. Lozano
Sabino Parra

Av. Gómez Morín 1111 Sur

Col. Carrizalejo, San Pedro Garza García

Nuevo León, CP. 66254, Mexico

IR@alpek.com

www.alpek.com

P R I N T ED WIT

% WIND E N E

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Supplied by Community Energy

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2016

Annual Report

Alpek, S.A.B. de C.V.
Av. Gómez Morín 1111 Sur
Col. Carrizalejo, San Pedro Garza García
Nuevo León, Mexico, 66254