Alpek
Annual Report 2020

Plain-text annual report

2020 ANNUAL REPORT 2020 ALPEK ANNUAL REPORT 3 OVERVIEW 3 CORPORATE PROFILE 4 FINANCIAL HIGHLIGHTS 5 FOOTPRINT 6 LETTER TO SHAREHOLDERS 10 BUSINESS SEGMENTS 10 POLYESTER 13 PLASTICS & CHEMICALS 16 LONG-TERM GROWTH STRATEGY 17 ESG 44 GOVERNANCE 44 BOARD OF DIRECTORS 45 MANAGEMENT TEAM 46 CORPORATE GOVERNANCE 47 APPENDIX 47 GLOSSARY 48 PETROCHEMICAL VALUE CHAINS 49 MANAGEMENT’S ANALYSIS 54 CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 3 CORPORATE PROFILE Who we are Our Leadership Positions 2020 Highlights One of the largest petrochemical companies in The Americas Divided into two main segments: Polyester and Plastics & Chemicals Public company listed in the Mexican Stock Exchange PTA #1 The Americas PET #1 The Americas #2 Worldwide rPET #1 The Americas EPS #1 The Americas #3 Worldwide PP Sole producer in Mexico CPL Sole producer in Mexico Posted record annual volume (4.8 million tons) Resilient performance in spite of COVID-19 Strong free cash flow generation from solid business fundamentals Acquired 2nd largest EPS producer in The Americas 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 4 FINANCIAL HIGHLIGHTS Millions of dollars Millions of pesos 2019 % var. 2020 2019 % var. Income Statement Total Revenues Operating Income Reported EBITDA(1) Comparable EBITDA excl. RMCF(2) Net Income (Controlling Interest) Net Income per share(3)(5) Balance Sheet Assets Liabilities Stockholders’ equity Controlling interest Book value per share(4)(5) 2020 5,326 355 565 601 150 0.07 6,216 641 850 789 342 0.16 5,331 5,455 3,050 3,064 2,281 2,024 0.96 2,391 2,148 1.01 (14) (45) (34) (24) (56) (2) - (5) (6) 113,989 119,685 7,493 12,361 11,993 16,395 13,009 15,196 3,123 6,605 1.48 3.12 106,353 102,794 60,841 57,736 45,512 45,058 40,386 40,480 19.07 19.11 (5) (39) (27) (14) (53) 3 5 1 - (319) 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 2020 to 2016 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 2020 and 2019 are expressed in nominal terms. (1) EBITDA = Operating income plus depreciation, amortization and impairment of non-current assets. (2) Raw material carry-forward (3) Based on the weighted average number of outstanding shares (2,113 million shares in 2020; and 2,117 in 2019). (4) Based on the number of outstanding shares (2,118 million shares in 2020; and 2,118 in 2019). (5) Dollars or pesos per share, accordingly. EBITDA(1) Millions of dollars 669 384 1,063 850 565 Net Income (Controlling interest) Millions of dollars 198 697 342 150 Assets Millions of dollars 4,428 4,752 6,091 5,455 5,331 16 17 18 19 20 16 17 18 19 20 16 17 18 19 20 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 5 FOOTPRINT rPET Country Site PTA PET Flake Pellet SPT Fibers PP EPS ARCEL CPL Other Monterrey Altamira 1,000 Mexico (3,395 Kta) Salamanca Cosoleacaque 610 185 15 160 640 240 85 360 100 15 150 Lerma Fayetteville Charleston Columbia 640 Bay St. Louis Richmond Darlington Monaca Painesville Montreal Zárate Pacheco General Lagos Guaratinguetá 170 170 725 430 144 190 55 55 30 22 15 Ipojuca 640 450 90 Santiago Puerto Montt Punta Arenas Concon Wilton 350 USA (2,644 Kta) Canada (144 Kta) Argentina (246 Kta) Brazil (1,226 Kta) Chile (28 Kta) UK (350 Kta) 36 123 45 19 46 20 5 2 1 TOTAL CAPACITY: 8,033 Kta 2,890 2,814 132 45 30 400 640 493 36 85 468 Polyester Plastics & Chemicals 31 plants in 7 countries Mexico, United States, Canada, Brazil, Argentina, Chile, and United Kingdom 8.0 million tons of total capacity We produce PTA, PET, rPET, Fibers, PP, EPS, Arcel®, CPL and other products +6,200 employees A qualified team operating across the world 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 6 LETTER TO SHAREHOLDERS 1. OUR EMPLOYEES ARE OUR STRONGEST ASSET Alpek’s top priority is the safety and well-being of our employees. In 2020, we were able to operate without interruptions, thus supporting our cus- tomers in making products such as clothes; bottles for water, juice, and milk; and packaging for fruit, vegetables, and eggs. More importantly this year, our products were used for face masks and shields; antibacterial gel bottles, and COVID-19 test and vaccine transportation cases. We did this by relying on preventive actions such as health checkpoints and the use of protective gear at all our sites. Quickly adapting to the new con- ditions, we embraced different working measures such as home-office for many of our employees, the elimination of all work-related travel, and an increased use of technology for communication and collaboration, which, ironically, has brought us closer than ever before. For these reasons, every one of Alpek’s more than 6,200 employees deserves a special mention. They kept the same level of commitment, discipline and hard work during these trying times and we want to sincerely thank them for their unwavering dedi- cation, without which this year’s results would not have been possible. DEAR SHAREHOLDER In an unprecedented year such as 2020, Alpek and its employees encountered challenges and opportunities that they were able to not just overcome, but capitalize upon, thus culminating in a year that vastly exceeded expectations, both in results as well as in strategic growth opportunities. We would like to focus this year’s letter on four key takeaways we discovered or reaffirmed throughout the COVID-19 pandemic. Every one of Alpek’s more than 6,200 employees deserve a special mention 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 7 Record volume of 4.8 million tons 10% higher than in 2019 2. THE COMPANY’S OUTSTANDING PERFORMANCE IS UNDERPINNED BY ITS SOLID FUNDAMENTALS Alpek has always stated that demand for its prod- uct portfolio is highly resilient. Never has this been more evident than in 2020, as COVID-19 shut down entire industries globally. It also emphasized the importance of safety and hygiene, driving a rise in the use of PET and polypropylene in food and bev- erage packaging over alternatives involving more person-to-person contact, such as open-bever- age containers like soda fountains. Moreover, we also saw a significant increase in the penetration of e-commerce, which positively affected demand for expandable polystyrene (EPS) to protect high-val- ue or temperature-sensitive goods, such as TVs or computers, during transport. The result was a new annual record volume of 4.8 million tons, 10% higher than the previous year. We believe the factors driving this performance are based on favorable change in consumer behavior, with the potential to have a lasting impact on Al- pek’s demand. Margins for all our key products were also better than expected throughout the year. Integrated Asian PET margins of US $269 per ton exceeded our guidance figure as demand outpaced supply and significant PTA/PET production capacity in Asia was offline during the first half of the year. EPS margins contin- ued to be strong as demand increased while no new capacity was brought online. Finally, polypropylene margins were higher than expected, as the entry of new capacity in North America occurred much later than anticipated and was accompanied by produc- tion outages late in the year, due to natural disas- ters in the Gulf Coast that reduced market inventory levels. As a result of these sound business fundamentals, Alpek’s 2020 EBITDA was considerably stronger than guidance projections for the year. Compara- ble EBITDA excluding RMCF reached US $601 mil- lion, 16% stronger than expected EBITDA of US $517 million, largely due to better-than-projected vol- ume and margins. Alpek also executed forward-looking initiatives in full alignment with its long-term strategic growth plan. These include the acquisition of NOVA Chem- icals’ Styrenics business, which further consolidat- ed the Americas EPS industry, is expected to result in significant cost savings, and incorporates higher value-added products like ARCEL® to our port- folio; as well as investments to grow Alpek’s recy- cled PET (rPET) footprint, that move us closer to our goal of reaching 300,000 tons of rPET by 2025. These actions have further strengthened the Com- pany’s competitive position and set the stage for EBITDA growth in the years to come. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 8 Alpek generated free cash flow of US $350 million, paid out dividend of US $143 million, reduced debt to US $1.19 billion and finished year with net leverage ratio of 2.1x 3. OUR COMMITMENT TO FINANCIAL STABILITY IS A CORE STRENGTH 4. ESG IS HERE TO STAY AND WE ARE ON THE RIGHT TRACK At the onset of the COVID-19 pandemic and facing a high level of uncertainty at the time, the Com- pany decided to focus on its financial stability. As such, during 2020 Alpek drew upon committed credit lines to increase its cash position, improved its Net Working Capital in part by reducing its in- ventory levels, efficiently executed its strategy through lower-than-expected CAPEX, and revoked its planned dividend for the year. Additionally, as we anticipated, the Mexican bank- ruptcy court approved the financial restructuring agreement between M&G Mexico and most of its creditors in September. Under the agreement, Al- pek has begun recovering the US $160 million in guaranteed debt plus interest over the next five years, with US $40 million already being recovered in December. The Company will also continue pro- viding the PTA needed by M&G Mexico’s PET facil- ity, thus favoring stable operations at M&G while Alpek recovers its debt, as well as a steady offtake for our PTA site in Altamira. The combination of these actions with a strong EBITDA allowed Alpek to generate a free cash flow of US$350 million, pay out a dividend of US $143 million for shareholders, and reduce its debt to US $1.185 billion, finishing the year with a net leverage ratio of 2.1 times. During 2020, Alpek saw a marked increase in the number of investors who expressed that a compa- ny’s Environmental, Social and Governance-relat- ed performance mattered in their decision-making processes. Alpek has always taken its responsibility towards its stakeholders and key issues very seri- ously, achieving continuous improvement on CO2 emissions, water usage, and energy consumption, among other performance indicators over the past years. However, this year we launched a holistic ef- fort aimed at improving our ESG grades among the top rating agencies such as CDP, S&P Global CSA, MSCI and Sustainalytics across all their measured categories. As a result, we were able to better show- case our work to date and improvements through- out 2020, reaching levels as high as the 72nd per- centile with Sustainalytics. We plan to undertake further actions that would continue improving our results over the following years. In 2021 these will include joining global pacts, measuring additional indicators, setting demand- ing targets for ourselves, and reviewing our internal processes to identify opportunity areas across our ESG practices. This year we launched a holistic effort aimed at improving our ESG grades among the top rating agencies such as CDP, S&P Global CSA, MSCI, and Sustainalytics across all their measured categories 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 9 OUTLOOK Through the review of our key learnings for 2020, we hope to have provided some valuable insight into the aspects Alpek deems important and has cultivated over time, in order to deliver solid results every year. As we look forward to 2021, we continue to have a positive outlook, as we expect demand to be persistent, margins to remain at strong mid-cycle levels, and economic activity to further pick up globally as the COVID-19 crisis slows down and vaccination becomes more widely available worldwide. In addition to our employees, we would like to take the opportunity to thank our customers, suppliers, creditors, and the community in general for anoth- er year of outstanding performance. Moreover, we would like to thank you, our shareholders, for plac- ing your trust in this Board of Directors. Sincerely, José de Jesús Valdez Simancas Armando Garza Sada Chief Executive Officer Chairman of the Board 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 10 POLYESTER Favorable changes to consumer behavior worldwide as the COVID-19 pandemic emphasized the importance of safety and hygiene 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 11 Record annual volume of 3.92 million tons in 2020, 12% higher than previous year OVERVIEW Polyester is Alpek’s largest segment, with 18 plants across the United States, Mexico, Brazil, Argentina, Canada, and the United Kingdom, totaling 6,311 thou- sand tons in capacity and operated by 4,302 employ- ees. During 2020, the Polyester business accounted for 75% of the company’s Consolidated revenues. Through its various subsidiaries, Alpek is the lead- ing PTA, PET and PSF producer across the Amer- icas, as well as the second largest PET producer worldwide. Most recently, in line with its long-term strategy, it also became the largest recycled PET (rPET) producer in the Americas. RESULTS Alpek has historically served large, stable and ma- ture geographic markets like North America, as well as industries with resilient demand, like food, bev- erages, and consumer goods. Furthermore, during 2020 we witnessed a favor- able change in consumer behavior worldwide: as the COVID-19 pandemic emphasized the impor- tance of safety and hygiene, and the utilization of PET packaging for food and beverages increased, as it involves less person-to-person contact. These factors allowed the Polyester segment to reach a record annual volume of 3.92 million tons in 2020, 12% higher than the previous year. We be- lieve the mentioned shift in consumer habits rep- resents a long-term trend that will continue driving PET demand after the current health crisis is over. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 12 During 2020, Alpek moved closer to its stated goal of helping its clients reach 25% recycled PET content Integrated Asian PET margins for the year also ex- ceeded our expectations, as considerable produc- tion capacity was offline during the first semes- ter. Likewise, after early drops in feedstock prices, crude oil, paraxylene and propylene all closed the year at annual averages similar to those of 2019. Comparable EBITDA excluding RMCF for the seg- ment was US $372 million, higher than Guidance figures, a performance driven by record volumes, better-than-expected margins, and the successful integration of the recently acquired Wilton PET site. During 2020, Alpek moved closer to its stated goal of helping its clients reach 25% of recycled PET content by focusing not just on bottle-to-flake recycling, but pelletization, which increases the amount of rPET that is used in recyclable bottles and food containers. The growing availability of vaccination for Coro- navirus suggests the worst of the pandemic may already be behind us. Looking ahead, our expec- tations for the Polyester segment remain positive, as we anticipate global economic activity to fur- ther speed up, demand for our products to contin- ue being resilient, and margins to remain at strong mid-cycle levels. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 13 PLASTICS & CHEMICALS Increased PP demand for food & beverage packaging and medical applications like syringes and face masks. Rise of e-commerce underscored the need for EPS to protect valuable goods during transportation 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 14 P&C volume remained strong at 883 thousand tons, only 1% lower than 2019 OVERVIEW The Plastics & Chemicals (P&C) segment produces polypropylene (PP), expandable styrenics (EPS & ARCEL®), caprolactam (CPL), and specialty chem- icals in 13 plants across the United States, Mexico, Brazil, Argentina and Chile with a total annual ca- pacity of 1,722 thousand tons and a slate of 1,981 employees. The P&C segment accounted for 22% of Alpek’s consolidated revenues in 2020. Alpek is the leading EPS producer in the Americas, becoming the third largest worldwide in 2020, and is the sole PP and CPL producer in Mexico, where it holds strategic market positions. Moreover, its PP site is among the newest and largest in the continent, while its CPL plant is among the most cost-efficient in the world. RESULTS The aforementioned critical change in consum- er behavior brought about by COVID-19 also had a positive effect on this segment’s performance. Higher concern for health and safety issues in- creased PP demand for food and beverage pack- aging, as well as medical applications like syringes and face masks. Additionally, the rise of e-com- merce underscored the need for EPS to protect valuable goods during transportation. These ef- fects, in turn, maintained P&C segment’s volume strong at 883 thousand tons, only 1% lower than 2019, reaching record numbers in some quarters for several of our products. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 15 Acquisition of NOVA Chemicals’ Expandable Styrenics business, makes Alpek the 3rd largest EPS player worldwide In terms of profitability, EPS margins continued to be solid as demand grew stronger and global capacity remained at 2019 levels. Likewise, PP margins were better than original estimations, mainly due to two reasons: on the one hand, the entry of new capacity in North America took longer than anticipat- ed; on the other, natural disasters in the Gulf Coast late in the year resulted in production outages, which reduced PP inventory levels. In this context, Comparable EBITDA for the P&C business was US $218 million. Although the partial shutdown of the Construction and Automotive sectors caused a drop off in demand during the first half of the year, record annual volumes and a better-than-anticipated margin environment drove the seg- ment’s strong results. During the year, Alpek acquired NOVA Chemicals Corporation’s (“NOVA Chem- icals”) Styrenics business, which operates two facilities in the United States: one in Monaca, Pennsylvania, with an annual capacity of 123,000 tons of EPS, 36,000 tons of ARCEL®, and a world-class Research and Development (R&D) pilot plant; and the other in Painesville, Ohio, with a capacity of 45,000 tons of EPS per year. This transaction further solidified the Company’s position as the top EPS pro- ducer in the Americas and the third largest globally. Furthermore, it incorpo- rated a new product to our portfolio: ARCEL®, a PE-EPS copolymer that re- duces packaging volume while maintaining the protective properties of EPS, adding to our presence in higher value-added application markets. For 2021 we expect PP margins to decrease, as the newly added capacity is fully integrated into the market and the low inventory levels from year-end normalize. However, our long-term projections for the P&C segment remain optimistic, bolstered by a strong, resilient demand for both PP and EPS, as well as the full integration of our newly acquired expandable Styrenics operations in the United States. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 16 LONG-TERM GROWTH STRATEGY STRENGTHEN CORE BUSINESS GROWTH CATALYSTS Global Cost Improvement Zero-Based Budgeting & process innovation (Mainly Operations, Logistics & SG&A) Value-added Products Shift to products with higher margins & barriers to entry (Copolymers - PP & EPS) FCF Generation Reductions to CAPEX & NWC / Recover M&G Mexico debt Footprint Optimization Ensure global production is performed in optimal sites & logistic networks rPET Leadership Lead rPET supply in Americas through capital-effective investment Secure PET Bale & Flake supply / Equip vPET plants with Single-Pellet Technology TM Recycling Promotion Active lobbying for circular economy via associations & The Recycling Partnership Sustainable Product Portfolio Develop sustainable alternatives for all our products (Biodegradable EPS & PP, etc.) GROWTH CATALYSTS FOSTER CIRCULAR ECONOMY STRATEGIC & FOCUSED GROWTH GROWTH CATALYSTS Value Chain Integration Grow capacity selectively & integrate into value chain (Px, EPS) Product Innovation New products & business lines (Biovento, Natural Gas Commercialization, CO2 & PLA) Maximize CCP Value Optimize project timing & minimize CAPEX 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 17 ESG ENVIRONMENTAL, SOCIAL AND GOVERNANCE During 2020, Alpek made significant advances regarding its approach to ESG, as well as its performance among the top ESG rating agencies 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 18 At Alpek we strive to make people’s everyday lives better by producing the materials and chemicals needed by the food and beverage, construction, automotive, and health industries, among others, while making the necessary investments in infrastructure and research to safeguard the availability of the resources we use for future generations. We aim to do this in a way that supports sustainable business practices and strong governance. We know we cannot do this by ourselves nor do we have all the answers, so we listen, learn from experience, and work with our entire value chain to make a positive difference. OUR APPROACH TO REPORTING We are increasingly transparent about our way of managing environmental, social and governance issues across our business, and since 2015 we have provided information about our actions in sustain- ability through the Annual Report. In 2020 we re- fined this approach, appropriately renaming it ESG reporting, as it aims to inform all our stakeholders about our progress and impact regarding Environ- mental, Social and Governance issues. This report presents relevant management ap- proaches, measurements, indicators, and data about Alpek’s sustainable business practices, based on the GRI Standards(6) in its “Core” option, and for the first time, also the Chemicals SASB standards(7) for 2020. Furthermore, it outlines the ways in which we con- tribute to the United Nations’ Sustainable Devel- opment Goals (SDGs), and our performance within the framework laid out by the Task Force for Cli- mate-related Financial Disclosures (TCFD)(8) as it applies to every area of our report. For additional information, we developed an ESG Booklet avail- able on our website. The structure in which we will continue to report our ESG Strategy is an adapted version of the TCFD framework, including the following elements: ESG RISK IDENTIFICATION & ANALYSIS • Identify ESG Risks and Opportunities (R&O) • Implement a dynamic materiality analysis • Embed ESG R&O into our business risk management strategy STRATEGY & EXECUTION • Identify the level of change needed to establish best-in-class standards • Build/Improve internal capabilities to react • Implement the right initiatives to address R&O • Identify partnerships that support improvement TARGETS & METRICS • Define key performance indicators (KPIs) and set targets to measure success for each initiative • Measure the impact obtained • Establish proper incentives for targets to be achieved COMMITMENT & OVERSIGHT • Place the right people in charge • Set mechanisms to ensure the achievement of targets • Communicate and report progress at the right organizational level • Review and improve (6) Global Reporting Initiative Standards: https://www.globalreporting.org/standards (7) Chemicals Sustainability Accounting Standard: https://www.sasb.org/wp-content/uploads/2018/11/Chemicals_Standard_2018.pdf (8) TCFD Task Force for Climate-Related Financial Disclosure: https://www.tcfdhub.org/recommendations/ 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 19 REVISITING OUR PURPOSE IN ESG WHY IT MATTERS Overall risk identification and management is a fundamental enabler of innovation and thus, adaptation and growth. Regarding ESG, risks and opportunities identification and management are crucial, since this topic will lead the business conversation needed to achieve a sustainable future. WHAT WE WANT TO DO Identify ESG R&O in a constant manner so that our business model is a resilient one. STRATEGIC PRIORITIES TO WORK ON • Risks and Opportunities Governance • Identification and mitigation of externalities ESG RISK IDENTIFICATION & ANALYSIS While we have always embraced change and inno- vation and have made significant advances in our ESG Strategy, the unprecedented circumstances created by COVID-19 have been vital for us to review and appreciate what we do, and why it matters. We provide simple, innocuous, and lasting solu- tions that people need in their everyday lives. While this has always been our core purpose, it takes on a whole new meaning now that our ma- terials are used in products that safeguard our health and safety, such as face masks, face shields, antibacterial gel bottles, and COVID-19 vaccine and test transportation cases, among others. A key challenge remains doing it without compromising our planet’s resources. Priority Issue Addressed: 11. Active ESG Risk Management 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 20 OUR MATERIALITY PROCESS AND PRIORITY ISSUES GRI Standards: 102-11, 102-27, 102-29, 102-46, 102-47. With this in mind, we took 2020 as an opportuni- ty to revisit the topics that matter most to our key stakeholders. As such, we carried out a Dynam- ic Materiality Approach that allowed us to identify the most pressing issues that our industry, and as a consequence, our Company must address if we want to contribute towards positive change now and in the coming years. We structured our process this way since we understand that we live in a con- stantly evolving world, and as such ESG topics are fluid, moving across a materiality spectrum over time, and that our stakeholders have a say on it now more than ever. ALPEK’S DYNAMIC MATERIALITY APPROACH 1 MEASUREMENT CRITERIA We determined the company’s 3 DETERMINING RELEVANCE Through a prioritization matrix, we 5 OBTAINING RESULTS Through a qualitative and quantitative priority issues under two parameters: analyzed the responses provided analysis of the aforementioned, we Importance for stakeholders and from key stakeholders, including cross-checked the defined indicators Impact on Alpek. Each parameter our own Executive team, customers and research results, to extract the key included clearly defined criteria to and suppliers. We also did a focused subjects before consolidating them enhance the rigor and robustness of research of the media and social into our priority issues. the process. prescriptors previously defined. 2 DEFINITION OF INDICATORS We considered and identified a list of 4 DETERMINING DEVELOPMENT Additionally, we executed an extensive 6 REVIEW AND REPEAT We will continue to engage with issues and indicators for stakeholders benchmark of our industry practices all our stakeholders to gather to rank. We considered relevant ESG and defined materiality regarding frameworks such as the GRI Standards, sustainable practices. Then we feedback that will be integrated into our next materiality analysis. ISO 26000, S&P Global CSA, CDP, executed a gap analysis against our SASB, current relevant legislation, global, market and industry specific trends and topics addressed by the media. own performance. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 21 S R E D L O H E K A T S O T E C N A T R O P M I + T S E H G H I R E H G H I H H G G H H I I - 1 Focus on Circular Economy 4 Energy Eco-Efficiency 5 Water Management 2 Pollution 7 Cybersecurity 8 Employees’ Human Rights 3 Climate Change & Carbon Emissions 6 Innovation 10 Sustainable Corporate Governance 9 Relations with Customers & Suppliers HIGHER IMPACT ON ALPEK HIGHEST + Environment Social Governance 11 Active ESG Risk Management 12 Diversity 13 Community Engagement HIGH (9) To know more about our current and previous Priority Issues, please refer to page 4 of our ESG booklet. MATERIALITY MATRIX Our ESG risks and opportunities (R&O) identifica- tion process is coordinated by our ESG Champion who reports directly to the CFO and indirectly to the CEO. R&O management activities include iden- tifying risks, undertaking risk assessments, deter- mining mitigating actions and complying with ap- plicable laws. In exploring risks and opportunities, we prioritize the interests and safety of our cus- tomers and employees, and we seek to protect the long-term value and reputation of the Company, maximizing commercial benefits to support re- sponsible and sustainable global growth. As a result of the analysis, we defined Alpek’s 2020 Materiality Matrix(9). 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 22 OUR ESG MODEL GRI Standards: 102-26, 102-31, 102-32. STRATEGY & EXECUTION As part of our efforts to improve our in- ternal and external communication efforts regarding our key ESG priorities we also developed Alpek’s ESG Model, which sim- plifies and encompasses the 13 priority is- sues identified in our Dynamic Materiality Analysis into four strategic pillars that we will address and are committed to contin- ue improving on. We will ensure full sup- port for all of these initiatives through our strong Corporate Governance bodies. 1 2 3 Lead with Empathy Embrace Change Grow Responsibly 4 Maximize Resource Efficiency We empower our people to create value for our company and communities We actively monitor our changing environment and find new ways to tackle emerging problems We rely increasingly on sustainable business practices across our entire value chain to create value for our shareholders We strive to minimize any adverse effects from our products and processes SUSTAINABLE CORPORATE GOVERNANCE • Employees’ Human Rights • Community Engagement • Diversity • Active ESG Risk Management • Innovation • Circular Economy • Pollution • Rel. with Customers & Suppliers • Cybersecurity • Climate Change & Carbon Emissions • Water Management • Energy Eco- Efficiency Environmental Social Governance 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 23 TARGET METRIC PERFORMANCE YEAR BASIS GOAL YEAR SDG TARGET ADDRESSED PRIORITY ISSUE ADDRESSED TARGETS & METRICS For each of the pillars in Alpek’s ESG Model, we must carry out an identification of additional targets and metrics that are aggressive but achievable. As such, we are currently working with all our Business Units in order to get a better understanding of their indi- vidual ESG priorities and sustainable performance needs to set overall corporate targets. Develop the necessary policies • Identify the areas and departments that need policies (either improved or developed) • At least 70% of policies developed Identify the main risks in every ESG area Identify at least one risk and one opportunity for every ESG area Develop Targets and Metrics To have at least one target per ESG Strategy dimension We have identified the policies needed and developed a corporate template 2020 2021 SDG 17 Partnerships for the Goals, Target 17.14: Enhance policy coherence for sustainable development Active ESG Risk Management Sustainable Corporate Governance We identified two emerging risks in the environmental area, and will continue with the social and governance areas We are in the process of completing our gap analysis, in order to establish adequate targets 2020 2021 Active ESG Risk Management 2020 2021 SDG 17 Partnerships for the Goals, Target 17.14: Enhance policy coherence for sustainable development Active ESG Risk Management COMMITMENT & OVERSIGHT In 2020 we also strengthened our sustainable man- agement by appointing an ESG Champion at Alpek, who has the responsibility of overseeing the com- pany’s entire ESG strategy, as well as the achieve- ment of the Targets and Metrics described in this section, in order for said strategy to be successful. We are in the development of additional policies and structures to further strengthen the role. We are keen to develop multi-stakeholder and cross-border partnerships and to collaborate with downstream partners, communities, government and regulators towards sustainable development. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 24 2020 PERFORMANCE ACROSS OUR FOUR PILLARS 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 25 1. LEAD WITH EMPATHY We empower our people to create value for our company and communities WHY IT MATTERS Our people are our primary asset. Their well-being is our driving force, because having people who bring a diverse range of talents and perspectives, and who feel engaged in their roles is of paramount importance to our success. WHAT WE WANT TO DO To increase our efforts for respecting and advocating not only for their labor rights and offering fair labor practices, but for their fundamental human rights. Our employees have been instrumental in making Alpek a leader in its market. They will also be key to driving the Company forward and ensuring it remains relevant in the future. STRATEGIC PRIORITIES TO WORK ON • Sustainability in our Governance • Human rights advocacy • Attracting and retaining the right employees • Safety, Health and Well-being • Diversity and inclusion 8. EMPLOYEES’ HUMAN RIGHTS ESG RISK IDENTIFICATION & ANALYSIS GRI Standards: 103-1, 102-2, 103-3. SASB RT-CH-320a.2. A global pandemic was not included in our risk scenario. However, our employees’ well-being was. By the end of 2020, our most implement- ed risk assessment regarding our employees was that of health and safety which determines the criteria for the identification of hazards and risks, and the determination of the respective control measures to minimize or eliminate them. This procedure meets the requirements of OHSAS 18001 and NBR-ISO 45001 in the ma- jority of our plants. Priority Issues addressed in this pillar: 8. Employees’ Human Rights 12. Diversity 13. Community Engagement 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 26 STRATEGY & EXECUTION OUR PATH TO SAFETY GRI Standards: 403-1, 403-2, 403-3, 403-5, 403-6 to 10. SASB RT-CH-320a.1. As part of our human rights commitment, our priority is to keep our em- ployees safe and alert to potential hazards. Moreover, we were commit- ted to maintain the same head count even in the midst of the COVID-19 crisis. In 2020, our personnel operated both in our facilities and through home office schemes, thus minimizing the risk of contagion. Everyone working at Alpek has the responsibility and authority to stop unsafe activities or ask for more detail about things they find unclear. Our leaders are accountable for helping to build a safety-first culture in their teams, and all employees are responsible for keeping themselves and each other safe at work. The accidentality rates in 2020 were the following: Total recordable incident rate (TRIR) No. of Accidents Frequency Rate Days Lost Number of transport incidents 2020 15.99 37 0.56 1,058 12 2019 156.20 21 1.73 1,891 - 2018 32.07 74 8.83 1,544 - We make sure that health and safety services are of high quality through ongoing training, establishing objectives, scope, defini- tion of responsibilities, protection measures and clear and pre- cise behavior guidelines. We also implement different protocols to provide objective identification of situations and activities that pose a risk to employee health and safety in our facilities. Inter- nal and external audits, as well as customer-initiated audits, allow us to use the results from these processes to improve our related management systems. In addition to COVID-related actions, we continued providing health services such as annual check-ups, medical attention in- side the plant, nutritional consulting, chronic disease care and prevention campaigns. In Mexico, we started the NOM-035 im- plementation process, a standard that assures the proper man- agement systems are in place to aid our employees with mental health concerns or needs. More than US $15.3 million were invested in our employees’ health and safety. We became signatories of the United Nations Global Compact “Since 2021 Alpek has been committed to the UN Global Compact corporate responsibility initiative and its principles in the areas of human rights, labor, the environment and anti-corruption.” 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 27 HIRING THE RIGHT PEOPLE, AND RETAINING THE RIGHT PEOPLE GRI Standards: 404-1, 404-2, 404-3. We want to build a global workforce that represents the communities we serve and be recognized as a great company to work for: one where people feel valued and can succeed by contributing their skills towards their personal and professional develop- ment. We’re doing this by: • Recruiting and retaining talented people from diverse backgrounds • Investing in excellent training, development and competitive rewards for all our people In 2020, our main training and development pro- grams were aimed at safety, flexible hours and working schemes, and innovation. Providing the right balance between work and family is one of our core benefits, and never was it more evident than in 2020. We invested over US $1.1 million in profes- sional development and talent retention initiatives. Also, we granted 19 scholarships for our employees to continue improving their skills in external insti- tutions, and we invested more than US $1.2 million in recreation and family well-being programs and activities whenever possible throughout the year. The average training hours in 2020 were: 2020 2019 2018 All employees Women Men Unionized Non-unionized 13 16 15 9 18 55 37 90 40 55 38 35 50 32 40 We also carry out regular performance evaluations, as what you cannot measure, cannot be improved. In 2020, 79% of our employees were assessed in these evaluations. Regarding their personal development, in 2020 we had to minimize recreational activities, but we continued to implement some activities respecting all the safety restrictions. We granted 1,187 schol- arships and economic support for our employees’ children, as well as our Program of Employee As- sistance, through which we provide legal, health, psychological and other kind of support for free, was used by 1,961 employees and their families. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 28 12. DIVERSITY GRI Standards: 405-2, 406-1. TARGETS & METRICS TARGET METRIC PERFORMANCE YEAR BASIS GOAL YEAR SDG TARGET ADDRESSED PRIORITY ISSUE ADDRESSED Diversity is our strength, and we consider it a basic human right. We see it as an opportunity to consolidate our global positioning. Employees’ Human Rights and Diversity In 2020 we completed the acquisition of a new plant in the United Kingdom, that added to our staff in Argentina, Mexico, Brazil, Chile, Canada and the United States, which has improved the expertise and wide range of cultural backgrounds, ethnicities and profiles that compile our workforce. Create the ESG Committee Formal establishment of an ESG committee with our Business Units’ leaders We reached out to our BU leaders to inform the advances of the ESG Strategy 2020 2021 SDG 17 Partnerships for the Goals, Target 17.14: Enhance policy coherence for sustainable development Sustainable Corporate Governance Active ESG risk management In 2020, 9 employees with some form of disability worked in our opera- tions. We also confirmed that the salary gap between men and women is zero, because we hire people based on their competencies and abilities, not the gender they associate with. Ensure diversity in our workplace To perform a diversity R&O assessment in our operations Not applicable in 2020 2021 2022 SDG 8 Decent work and economic growth, Target 8.5: By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value Employees’ Human Rights Diversity COMMITMENT & OVERSIGHT GRI Standards: 102-20, 102-26, 102-29, 102-31, 102-32. As part of our commitment to safeguard our employees’ human rights, Diversity is one of our Priority Issues included in this effort We cannot talk about our ESG performance, human rights, and employees’ well-being commitment without including our Gov- ernance Bodies. 2020 was a pivotal year to show our leadership, discipline and commitment to lead with empathy. Our Top Man- agement team was the basis which held it all together. This sends the right signal to all our employees. We want our people to know we are working towards the enhancement of the benefits we pro- vide them, that we are ahead of international trends with regards to being a more responsible corporate citizen, and that all of this is spearheaded by our top governing bodies. Also, in 2020 we started the process of adhering to the UN Global Compact and the respect and fight for its Ten Principles. This is a huge step towards the advocacy for our employees and commu- nities’ Human Rights respect and protection. In early 2021 we were accepted as part of the UN Global Compact, which strengthens our commitment towards sustainable development. We also developed our Human Rights Policy, through which we firmly commit to con- tinue providing training efforts in the areas of Health and Safety, Ethics and Compliance to our employees globally, and to continue developing programs to keep them prepared. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 29 13. COMMUNITY ENGAGEMENT ESG RISK IDENTIFICATION & ANALYSIS STRATEGY & EXECUTION GRI Standards: 413-1, 413-2. GRI Standards: 203-1, 203-2. At Alpek we see ourselves as part of a society. Our goal is to be a good corporate citizen and promote sustainable development. We can make the most valuable contributions to issues that relate to our core business areas by connecting, understanding and boosting our communities’ wellbeing. We have always worked hand in hand with our com- munities and authorities, which has driven the im- plementation of our safety risk analysis. Our facili- ties are equipped with all necessary measures and comply with every safety regulation, so that our operations do not represent a risk in our neighbors’ daily lives. However, we know we can still do more. To start with, in 2021 we will work on performing a comprehensive risk assessment regarding our com- munities, and the opportunities that we can seize in order to boost their development, strengthening our position as a responsible Company. In 2020, our Business Units worked on aiding com- munities during the COVID-19 response effort. More than 370,000(10) people were benefitted with donations of N95 and PET masks, antibacterial gels, overalls, EPS coolers for the transportation of medicines, donation of medical equipment such as hospital beds, supplies, oxygen tanks and ven- tilators, as well as cash and food donations to as- sociations that provided supplies to unemployed people during the pandemic. Our typical activities within communities were suspended due to the safe distance and quaran- tine measures. Still, we held 8 agreements with universities that benefitted 78 total students. Oth- er 39 students carried out internships in our fa- cilities, and through the support to 3 schools, we were able to benefit a total of 404 students. The activities included giving lunch boxes and other support. But as schools were also closed, we fo- cused our efforts on helping the entire community and hospitals in such unprecedented situation. In the US, representatives of our sites actively par- ticipated in community advisory panels (CPAs) to discuss plant activities. The goal is to open lines of communication with leaders in the community and local neighbors, so should there be any con- cerns with plant operations, we can answer/ad- dress them effectively. These meetings were either suspended or held remotely. (10) The benefitted people were a lot more than the reported, since many of the equipment and donations were given to hospitals, families and communities and it is impossible to have the exact number. WHY IT MATTERS Our local communities grant us license to operate. It is our responsibility to give them something back. Should we fail to deliver economic and social benefits to the communities in which we operate and reach, could lead to operational costs and reputational crises. WHAT WE WANT TO DO We aim to maximize our social impact through an effective engagement with them, by combining Alpek employees’ expertise, access to education and philanthropic activities. STRATEGIC PRIORITIES TO WORK ON • Social engagement programs • Community investments • Educational support through ALFA Foundation • Communities’ safety 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 30 TARGETS & METRICS TARGET METRIC PERFORMANCE IN 2020 YEAR BASIS GOAL YEAR SDG TARGET ADDRESSED Develop our Community Engagement Policy and Framework Developing and deployment of the policy to all employees We defined the areas we will work on regarding our community engagement policy 2020 2021 SDG 17 Partnerships for the Goals, Target 17.14: Enhance policy coherence for sustainable development PRIORITY ISSUES ADDRESSED Community engagement COMMITMENT & OVERSIGHT As one of our Priority Issues, this will be part of the focus activities of our ESG Strategy. In 2020, we started the development of our Community En- gagement Policy, that contains the guidelines for proper and successful work with and within our communities. The key tenets of this policy are: • Mutual respect and cooperation • Non-discrimination and the pursuit of equity • Building educational platforms for the youth • Spreading environmental care awareness • Working on our communities’ safety 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 31 2. EMBRACE CHANGE We actively monitor our changing environment and find new ways to tackle emerging problems WHY IT MATTERS As part of the chemical industry, we know that everything is changing constantly, it is the basis for life. Inevitably, this must lead to innovation. And so, innovation is part of our core beliefs and business values. WHAT WE WANT TO DO Integrate ESG risks and opportunities into our business strategy so that innovation occurs with a focus on sustainability. STRATEGIC PRIORITIES TO WORK ON • Integration of ESG criteria into innovation schemes • Identification and mitigation of externalities • Conducting Life Cycle Assessments for our products 6. INNOVATION ESG RISK IDENTIFICATION & ANALYSIS SASB RT-CH-410b.2. Innovation risks and opportunities are one of the most important elements to consider in our busi- ness strategy. Investing in cutting-edge technol- ogy, as well as developing it, is a priority. For us, one of the greatest challenges is to reduce the im- pact that products made with our materials might generate when they are not disposed properly. This is why we conduct Life Cycle Assessments for all our products. Priority Issues addressed in this pillar: 6. Innovation 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 32 STRATEGY & EXECUTION By exploring, developing, and scaling up ideas, we aim to keep ourselves and our customers competitive long into the future by developing sus- tainable solutions for their needs. We started our “Open Innovation Program”, which aims to find ex- ternal technologies and possible collaboration opportunities which could help Alpek reach its objectives by accelerating the develop- ment of new ideas and bring value creation within the organization. TARGETS & METRICS We will continue to boost these programs in order to strengthen and better measure our efforts in ESG innovation. TYPE OF APPROACH DEFINITION OF APPROACH EFFICIENCY GAINS COST REDUCTION/ REVENUE GENERATION ACCESS TO HUMAN CAPITAL, TECHNOLOGIES, ETC OTHER IMPACTS R&D Collaboration with Externals Working in collaboration with a research center in Europe to develop a new biodegradable barrier polymer Time to market, better allocation of human resources Potential Sales Market of US $38 million per year Access to R&D capital and analytical equipment Faster development of new product Spin-off / Start-ups Suppliers Working in collaboration with a start-up in order to recycle PET for rBHET production (used in Virgin PET) Time to market, better allocation of economic resources Possible Pilot Plant construction Up to 15 thousand tons a year capacity Access to proven technology for PET recycling. Strengthening rPET portfolio Access to lower costs in PET waste streams Working with external rPET suppliers for a new more sustainable product (rPET yarns) Time to market, better allocation of economic resources Potential Sales Market of US $29 million per year Access to proven technology for PET recycling Access to lower certified rPET costs and access to the necessary volume COMMITMENT & OVERSIGHT Our growth as a Company partly depends on us taking an innovative approach to our business. Since 2018 we have been investing in our Innovation Department and worked on the creation of an Innovation Committee integrated by representatives from all the Business Units, with Alpek’s CEO and Business Unit Presidents as part of the Steer- ing Committee. Our approach to innovation is to permeate a culture which promotes and boosts initiatives throughout all of Alpek. We developed the “Vision” and “Innovation” roles within every BU, and created the “Innovation Platform”, in order to register and keep track of all initiatives and projects developed by said roles. We collaborate with local authorities, start-ups, the academy, research institutes, suppliers and other external actors to boost our innovation and ESG strategy 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 33 3. GROW RESPONSIBLY We rely increasingly on sustainable business practices across our entire value chain to create value for our shareholders WHY IT MATTERS Our planet’s resources are finite. The linear economy system must evolve. As a plastics and chemicals Company, it is our responsibility to fully understand the lifecycle of our products and develop ways to make it even more sustainable. WHAT WE WANT TO DO We are encouraged to aid in the transition from a linear economy to a circular one, as part of our business growth strategy. STRATEGIC PRIORITIES TO WORK ON • Design out waste and pollution • Keep products and materials in use • Recycle and reuse 1 , 2. FOCUS ON CIRCULAR ECONOMY AND FIGHTING POLLUTION ESG RISK IDENTIFICATION & ANALYSIS GRI Standards: 416-1. SASB RT-CH-150a.1. We are committed to deliver solutions that make people’s lives easier. This does not spare us from the responsibility of caring for the planet’s re- sources and future generations well-being while doing so. We are aware of the risks that manufac- turing non-biodegradable materials carry for the environment should the handling of their waste be poorly executed. Priority Issues addressed in this pillar: 1. Focus on Circular Economy 2. Pollution 9. Relationship with Customers and Suppliers 7. Cybersecurity 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 34 Spearheaded by our Innovation Department, we have enhanced our efforts in exploring process technologies to make better use of PET after consumers have finished using it, mainly from plastic bottles. Products like PET have been proved to have a lower carbon footprint than its packaging alternatives, like aluminum and glass. Our PET re- cycling infrastructure is growing at a rapid pace since we want to continue our leadership as the largest rPET producer of the Ameri- cas. These facilities highlight the business’ commitment to sustain- ability and recycling and the opportunity for our PET and rPET prod- ucts to participate and lead in true circular economies. Furthermore, these initiatives continue to remove millions of bottles a year from landfills and redirect them back into valued consumer products, re- ducing the carbon footprint of these consumer-based needs and re- ducing climate change impact. STRATEGY & EXECUTION By the end of 2020, important capital projects and investment in var- ious sites were approved and initiated. These investments expanded the capabilities of the sites with the installation of solid-state polym- erization and pelletization processes. This allows for these rPET pel- lets to enable the materials to be used in bottle-to-bottle recycling fostering a true circular economy. These projects are a key step in growing Alpek’s sustainability. Regarding our hazardous waste management, in 2020 we reduced our disposal by 53% vs 2019. This is a great highlight regarding our efforts to end pollution, not only from our products in their end-use phase, but in our operations. The percentage of non-hazardous waste recycled, reused or sold also increased by 39% vs 2019. Now, the challenge still relies on the correct disposal and recollection of PET and other products. One of our main goals in this matter is to work hand in hand with authorities, organizations and other stakeholders to make PET recycling a regulatory issue. So far, in the USA, DAK Americas participates as silver founder of The Recycling Partnership, a non-prof- it organization that seeks to promote changes in the recycling culture throughout the United States. It also belongs to the GAPC, a movement to spur the development of public policies to integrate the synergy of the circular economy. Indelpro joined the ANIPAC initiative to reduce pellet waste and made a voluntary commitment in favor of the circular economy in the plastic resins sector with the ANIQ. 5.5 billion PET bottles Recycled in 2020 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 35 TARGETS & METRICS TARGET METRIC PERFORMANCE IN 2020 YEAR BASIS GOAL YEAR SDG TARGET ADDRESSED To establish the guidelines for a circular business model To be identified We set Circular Economy as one of our Core Business Values 2021 2025 SDG 12 Responsible Production and Consumption, Target 12.5: By 2030, reduce waste generation substantially through prevention, reduction, recycling and reuse PRIORITY ISSUES ADDRESSED Circular Economy Pollution COMMITMENT & OVERSIGHT In 2020 we established the Fostering a Circular Economy pillar as one of our 3 long-term growth pillars. Our success as a Company depends on us following this initiative fully. Every facility has a person responsible for the correct handling and management of waste. We are committed to strictly comply with every regulation in the countries we operate, which has resulted in zero fines nor sanc- tions in the matter. Through our Environmental Policy, we are com- mitted to manage all of our waste in a responsible way, and to reduce it consistently. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 36 7. CYBERSECURITY ESG RISK IDENTIFICATION & ANALYSIS IT risk management is a priority of ours. At Alpek we categorize the level of severity should any of those might come to happen. The categories go from neg- ligible, marginal, critical or catastrophic. According to the resulting matrix, we assess the risks that our Company may or may not be exposed to, and act accordingly. In 2020, we performed a significant part of the Company’s activities remotely without incidents STRATEGY & EXECUTION COMMITMENT & OVERSIGHT Through our parent company’s Global IT Security Policy we make sure to comply with every regula- tion, and describe the guidelines that our employ- ees must follow and comply with in order to avoid any IT incident. We plan to continue improving our security measures in 2021. This issue has become a priority in our Materiality Analysis, since we know every system is suscepti- ble to failures. Our robust IT infrastructure allowed the majority of our employees to work from home in 2020 when applicable, without any contingen- cies. We provided continuous training to our em- ployees, designed and executed by our IT Security Committee with representatives from the Business Units. We also gave training on phishing or social engineering tests, the results of which we provide as feedback to users and managers to reinforce the program. Additionally, hacking tests are carried out at least annually, and there are business con- tinuity / contingency plans and incident response procedures in place. WHY IT MATTERS Increasing cybersecurity efforts is critical to protecting against theft, data loss, economic & political incidents, and public health risks. For us at Alpek it is all about protecting our customers and suppliers’ data, as well as sensitive information related to our operations. WHAT WE WANT TO DO Now more than ever, we must test our systems vulnerability and strengthen them so we can keep abreast of the technological advances, and the threats these might represent. STRATEGIC PRIORITIES TO WORK ON • Have a robust governance on IT • Continuously test and ensure the security of our IT infrastructure 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 37 9. RELATIONS WITH CUSTOMERS AND SUPPLIERS ESG RISK IDENTIFICATION & ANALYSIS GRI Standards: 407-1, 408-1, 409-1 STRATEGY & EXECUTION We are working towards implementing an R&O framework that allows us to properly identify the ESG risks we have within our supply chain. For now, we understand and act on consequence, knowing that one of the main risks we have is that our raw materials are derived from fossil fuels. However, we aim to have a broader perspective on their sustain- ability practices in order to establish a relationship that boosts their and our responsible development. In line with the increased expectations of our stakeholders, we are providing more transparency in our corporate reporting, as well as disclosing a number of Environmental, Social and Governance (ESG) investor indices. This is a major commitment we made since 2015. This, in addition to helping us strengthen our work on our ESG Strategy, allowed us to enhance our transparency towards our customers as well as reaching out to our suppliers, by responding in a more thorough way to diverse platforms and thus, improving our ESG ratings. In 2020 we established the goal to improve our re- porting process by engaging in a deeper way with our Business Units in order to gather more of the information possible regarding their Companies’ sustainability performance. CDP Climate Change (Carbon Disclosure Project) CDP Water Security S&P Global CSA MCSI 2020 2019 2018 C B- 44 BB D - 30 BB D - 28 - In 2020, 58% of our suppliers were from the same countries we operate in WHY IT MATTERS To transition to a more circular economy, we’ll need new business models and effective collaboration across the value chain. Collaborating in strategic partnerships with our suppliers and customers can help us all find solutions to these challenges faster. WHAT WE WANT TO DO We want to engage with our value chain in ways that boost, develop, and strengthen sustainable development strategies. STRATEGIC PRIORITIES TO WORK ON • Enhance transparency of our processes • Boost joint efforts with our value chain 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 38 TARGETS & METRICS TARGET METRIC PERFORMANCE IN 2020 YEAR BASIS GOAL YEAR SDG TARGET ADDRESSED To develop the Sustainable Procurement Policy To be identified We defined the target for 2021 2021 2021 SDG 9 Industry, Innovation and Infrastructure, Target 9.4: By 2030, upgrade our infrastructure to make it sustainable, with increased resource- efficiency and greater adoption of clean and environmentally sound technologies and infrastructure processes PRIORITY ISSUES ADDRESSED Relations with Customers and Suppliers COMMITMENT & OVERSIGHT We commit to continue increasing our transparency processes, as well as the quality of information provided. Also, we will work on an integral engagement strategy with our Value Chain, including sustainability assessments to our suppliers and working with customers to enhance our strategy in responsible growth. Our customer satisfaction rate during 2020 was 95%. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 39 4. MAXIMIZE RESOURCE EFFICIENCY We strive to minimize any adverse effects from our products and processes This entire pillar is based on our environmental care performance. The three priority issues ad- dressed here, matter because the success of our business over the long term depends on the en- vironmental sustainability of our operations, the resources we acquire from nature, and the overall wellbeing of the planet. We aim to establish ambitious science-based tar- gets to reduce our usage and consumption of en- ergy and water and reduce our carbon footprint in order to contribute to the Sustainable Develop- ment Goals. Priority Issues addressed in this pillar: 3. Climate Change and Carbon Emissions 4. Energy Eco-Efficiency 5. Water Management In 2020, our environmental investments were dis- tributed like this: Millions of dollars 2020 2019 2018 Waste reduction Waste disposal 3.07 3.19 Emissions reduction 12.33 Prevention costs Remediation costs Environmental management costs Other Total 2.20 2.40 16.00 0.60 - 11.20 0.30 2.90 13.70 0.21 9.27 1.50 0.50 - 3.20 - 41.76 23.50 17.30 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 40 ESG RISK IDENTIFICATION & ANALYSIS We are fully aware of the risks climate change pos- es to our operations and also the opportunities of growth this represents. In 2020 we identified climate-related risks based on the TCFD recommendations: TYPE CLIMATE-RELATED RISKS RISK DESCRIPTION Current regulation Environmental institutions require disclosure of our annual water and energy consumption, and emissions generation, failure to disclose could result in the imposition of sanctions, third party actions and investigation by authorities. The Health, Safety and Environmental department in each facility monitors and reports its water and energy consumption, emissions and waste generation. Transition Emerging regulation Implementation of economic instruments such as CO2 taxation in countries where the company operates, ban of single-use plastics, among others. Market Some consumers perceive PET as another plastic, though increasingly the mindset is changing. This could have adverse effect on demand. Reputation Acute Chronic In recent years, society has placed greater concern over the impact that products have on the environment from their production process until they are discarded. One of the key solutions to reducing their impact is to ensure a circular economy by recycling them and making them infinitely recyclable. Alpek’s operations are highly dependent on the availability and costs of its main raw materials, as well as its energy sources. The availability and prices of raw materials and energy can be negatively affected by various factors, including interruptions in production by suppliers; natural disasters (such as hurricanes in the Gulf of Mexico) or other climate events. The chronic physical risks identified are very similar to the acute physical risks, as well as the regulatory changes in our industry. Further analysis is being made in order to prepare our facilities to better withstand climate related events. Physical 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 41 3. CLIMATE CHANGE AND CARBON EMISSIONS STRATEGY & EXECUTION GRI Standards: 305-1 to 7. SASB RT-CH-110a.1., RT-CH-110a.2. In 2020 we worked on complying with our ISO 14001 certification programs, as well as with oth- er initiatives, such as the Clean Industry in Mexico. Our facilities carried out several activities such as equipment maintenance for optimal performance, to installing new CO2 sequestering system. We also minimized the emissions for processes vents to flare to produce polypropylene, and the installa- tion of new furnaces to reduce NOx emissions. With an investment of more than US $12.3 million, we avoided the launching of 228,007 ton CO2eq into the atmosphere, which represents the emis- sions of approximately 50,000 passenger vehicles driven for one year. Our emissions in 2020 were: TON CO2 EQ x 106 Direct emissions Indirect emissions Total 2020 0.81 1.40 2.21 2019 0.80 1.62 2.42 2018 1.29 1.13 2.42 We also work increasingly in the development of more sustainable solutions, such as our low-car- bon products that bring the following benefits to third-parties: TYPE DESCRIPTION OF PRODUCTS LEVEL OF AGGREGATION ESTIMATED TOTAL AVOIDED EMISSIONS PER YEAR (THOUSAND TONS CO2) 2020 COMMENT Avoided emissions for third parties  rPET Product 173.3 Each ton of Recycled PET avoids ~2.72 thousand tons of CO2 emissions WHY IT MATTERS This is one of our Priority Issues as we align with the international effort to maintain the planet’s temperature rising no more than 1.5 °C by 2030. We are fully aware that running our operations inevitably generates emissions, but we also know that we can always be more process efficient. WHAT WE WANT TO DO We commit to use cutting-edge technologies in order to make our operations more environmentally friendly, as well as acquiring equipment that reduces the emissions sent to the atmosphere. Avoided emissions for third parties Construction EPS Product 1,417.6 Each ton of EPS used in construction to isolate avoided ~11.11 tons of CO2 emissions STRATEGIC PRIORITIES TO WORK ON • Development of low carbon products • Investing in state-of-the-art technologies 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 42 4. ENERGY ECO-EFFICIENCY STRATEGY & EXECUTION GRI Standards: 302-1 to 4. SASB RT-CH-130a.1. In 2020 our facilities implemented initiatives and programs such as the replacing of power cooling tower, refrigeration system con- trols optimization, cooling towers pump upgrade, reducing of steam temperature, reducing acid wash, tuning vaporizer burners and fans, among others. This led to the reduction of 131,572 GJ in the year, equivalent to the energy used by 2,982 homes for one year. Our energy consumption in 2020 was: ENERGY CONSUMPTION (GJ X 106) Indirect consumption Direct consumption Total Energy produced with natural gas Steam and electricity 2020 27.44 7.80 35.24 13.65 21.45 2019 26.47 7.44 33.91 11.86 18.92 2018 22.80 8.04 30.84 9.89 17.93 CONSUMPTION BY FUEL TYPE (GJ X 106) 2020 2019 2018 Natural gas LP gas Gasoline Diesel Wind Coal Fuel oil Ethanol Others Total 27.310 26.110 20.620 - 0.000 0.020 0.000 0.010 0.000 0.100 0.000 - 0.003 0.003 0.000 0.000 0.001 0.105 0.248 - - 0.020 0.000 0.070 0.070 - 2.020 27.440 26.470 22.800 COMMITMENT & OVERSIGHT Every facility works constantly in reducing their energy usage, and strives to make processes more efficient so that our operations run on less energy. WHY IT MATTERS The world is not on a sustainable path and needs a rapid transition to lower carbon energy, use of renewable energies and maximize the usage of resources if we want to ensure our permanence over time. WHAT WE WANT TO DO We want to implement corporate targets of energy consumption reduction and increase the use of renewable energy in the long term. STRATEGIC PRIORITIES TO WORK ON • Reducing energy intensity • Energy efficiency strategy 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 43 5. WATER MANAGEMENT ESG RISK IDENTIFICATION & ANALYSIS GRI Standards: 303-1 to 5. SASB RT-CH-140a.1., RT-CH-140a.3. Water scarcity and availability is one of the great- est risks for our industry and the society in general. Since 2018 we begun the identification of our water withdrawal, discharges and consumption, as well as if it came from water-stressed areas, in order to understand our impacts better. To identify our water risks, since 2018 we have used the WRI Aqueduct Tool, a non-profit organi- zation that provides tools to map water risks such as floods, droughts, and stress, using open-source, peer-reviewed data. We found that 2 of our facilities are located in wa- ter-stressed areas, that represent 1.4% of our total withdrawals. STRATEGY & EXECUTION COMMITMENT & OVERSIGHT In 2020 we developed our Environmental Policy, which will be available to all our employees and suppliers, as well as the consequential Water Poli- cy. In this last one, which will be developed in early 2021, we will outline the guidelines to establish a successful water strategy that allows us to move forward on our path to sustainable and responsi- ble development. In 2020 there were several initiatives that we im- plemented in order to be more efficient in the con- sumption of water. Some of them included the water recovery by biofilter, reuse of pre-treated wastewater to feed the cooling tower and decrease the amount of well water fed, recovery of water from the demin- eralization plant for use in the cooling tower, as well as established targets of reduction. This led to a re- duction in our withdrawals of 1,139 megaliters, equiv- alent to what approximately 2,000 homes consume in a year. In 2020 our water withdrawal by source was dis- tributed as follows: WATER WITHDRAWALS (ML) (11) Fresh surface water, including rainwater, rivers, and lakes Wells Others Total 2020 2019 2018 100,686 107,812 88,300 1,371 3,525 3,700 2,402 3,248 950 104,459 114,585 92,950 WHY IT MATTERS Water is crucial for the successful execution of our operations. Also, it is a universal right to have access to it, and our commitment is to safeguard as much as possible the planet resources for the present and future generations. WHAT WE WANT TO DO We want to develop a strategy that allows us to reuse as much water as we can in our processes, as well as making them more efficient. STRATEGIC PRIORITIES TO WORK ON • Reduce the water intensity • Invest in water treatment processes • Water risks analysis (11)The reported numbers for 2019 vary from the reported in previous reports, given that, in our constant effort to be more transparent and more accurate regarding our information, in 2020 we dug deeper in our processes and recalculated our discharges, which affects our consumption results. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 44 BOARD OF DIRECTORS ARMANDO GARZA SADA 3 Chairman of the Board of Alpek, S.A.B. de C.V. Alpek Board Member since April 2011. Chairman of the Board of ALFA, S.A.B. de C.V. and Nemak. Member of the Boards of Axtel, BBVA México, CEMEX, Grupo Lamosa and Liverpool. ANDRÉS E. GARZA HERRERA 1A Chief Executive Officer of Qualtia Alimentos Operaciones, S. de R.L. de C.V. JOSÉ ANTONIO RIVERO LARREA 1 Chairman of the Board of Compañía Minera Autlán, S.A.B. de C.V. Alpek Board Member since April 2012. Alpek Board Member since April 2018. Board Member of Xignux, ConMéxico, Universidad de Member of the Executive Board of Cámara Minera de Monterrey (UDEM) and Ciudad de los Niños. México (Camimex) and Cámara Nacional de la Industria del RODRIGO FERNÁNDEZ MARTÍNEZ 4 President of Sigma Alimentos, S.A. de C.V. Alpek Board Member since April 2012. Hierro y del Acero (Canacero). Member of the Boards of Museo del Acero en Monterrey, Fundación de Empresarios por la Educación Básica, Universidad de Monterrey (UDEM) and Instituto Tecnológico y de Estudios Superiores de Previously served as Chief Operations Officer and Chief Monterrey (ITESM). Executive Officer of Sigma Americas. Member of the Board ÁLVARO FERNÁNDEZ GARZA 3 President of ALFA, S.A.B. de C.V. Alpek Board Member since April 2011. Chairman of the Board of Universidad de Monterrey (UDEM). Member of the Board of Grupo Citibanamex, Cydsa, Grupo Aeroportuario del Pacífico, and Vitro. FRANCISCO JOSÉ CALDERÓN ROJAS 2A Chief Financial Officer of Grupo Franca Industrias, S.A. de C.V. of Cámara de la Industria de Transformación de Nuevo León (CAINTRA). MERICI GARZA SADA 4 Investor Alpek Board Member since April 2012. Alpek Board Member since April 2012. Board Member of Franca Industrias, Universidad de Monterrey (UDEM) and Regional Advisor of BBVA México and Citibanamex. Alternate member of the Board of FEMSA. FRANCISCO GARZA EGLOFF 1 President of Proval Consultores Alpek Board Member since February 2019. ENRIQUE ZAMBRANO BENÍTEZ 1A Chairman of the Board of Grupo Proeza, S.A. de C.V. Alpek Board Member since April 2012. Member of the Boards of Areya, Grupo Coppel, BBVA México and Instituto Tecnológico y de Estudios Superiores de Monterrey (ITESM). JAIME ZABLUDOVSKY KUPER 1 Executive President of Consejo Mexicano de la Industria de Productos de Consumo, A.C. (ConMéxico) PIERRE FRANCIS HAAS GARCÍA 1 Advisory Services Director of Hartree Partners LP Former CEO of Arca Continental. Member of the Boards of Alpek Board Member since February 2019. Arca Continental, Alen, Axtel, Banregio, Ovniver, Ragasa, Vice President of IQOM Inteligencia Comercial, S.A. de Alpek Board Member since April 2012. Grupo Industrial Saltillo and Proeza. C.V. Member of the Technical Committee of FibraHotel and member of the Boards of Baja Ferries, Xignux, and Ex-president of the Consejo Mexicano de Asuntos Internacionales (COMEXI). CARLOS JIMÉNEZ BARRERA Secretary of the Board 1. Independent board member | 2. Independent proprietary board member | 3. Related proprietary board member | 4. Patrimonial | A. Audit and Corporate Practices Committee 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 45 MANAGEMENT TEAM JOSÉ LUIS ZEPEDA PEÑA 1 President of the EPS and Chemicals Business Unit President of Alpek’s EPS and Chemicals Business Unit since 1999. He joined Alpek in 1986 and served as Vice President of Planning, Finance, Administration and Sales at Grupo Petrotemex. Holds an undergraduate and a master’s degree from UNAM and a master’s degree from ITESM. ALEJANDRO LLOVERA ZAMBRANO 2 President of the Polypropylene Business Unit President of Polypropylene Business Unit of Alpek since 2008. He joined ALFA in 1985 and served as Director of Human Resources at ALFA. He held various management positions in the Synthetic Fibers Business Unit at Alpek and is a former Chairman of ANIQ. Holds an undergraduate and master’s degree from ITESM. He also completed the Executive Management Program (D-1) at IPADE. JORGE P. YOUNG CERECEDO 3 Co-President, Alpek Polyester President of the PET and Staple Fibers Business Unit of Alpek from 2012 to 2016. Former Executive Vice President of PET Resins and Vice President of Planning and Administration of DAK Americas LLC. Holds an undergraduate degree from ITESM and a master’s degree from the University of Pennsylvania. JOSÉ DE JESÚS VALDEZ SIMANCAS 4 Chief Executive Officer CEO of Alpek since 1988. Former CEO of Petrocel, Indelpro and Polioles, and former Chairman of the Asociación Nacional de la Industria Química (ANIQ). Holds an undergraduate and MBA from ITESM and a master’s degree from Stanford University. 1 2 3 4 5 6 7 8 FELIPE GARZA MEDINA 5 Co-President, Alpek Polyester President of Alpek’s PTA Business Unit from 2008 to 2016. He joined ALFA in 1977 and served as CEO of Indelpro and of Galvacer. Holds an undergraduate degree from Stanford University and a master’s degree from Cornell University. JOSÉ CARLOS PONS DE LA GARZA 6 Chief Financial Officer CFO of Alpek since 2018. Former Vice President of Business Development of Nemak, where he also held several executive positions. Holds an undergraduate and an MBA from ITESM, and completed the Executive Management Program (D-1) at IPADE. GUSTAVO TALANCÓN GÓMEZ 7 President of the Caprolactam, Fertilizer and Polyester Filament Business Unit President of the Caprolactam and Fertilizer Business Unit since 2013 and as of in 2018, also of Polyester Filaments. Joined ALFA in 1989, served as CEO of Terza, and held management positions in various Business Units of Alpek. Holds an undergraduate degree from ITESM and completed the Executive Management Program (D-1) at IPADE. ARMANDO RAMOS CANTÚ 8 Senior Vice President, Human Capital Human Capital Senior VP of Alpek since 2017. Previously, was the Compensations Vice President at ALFA. During his 20 years tenure with ALFA, he held other Human Resources positions. Holds a bachelor’s degree from UDEM and an MBA from ITESM, and completed the Executive Management Program (D-1) at IPADE. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 46 CORPORATE GOVERNANCE Once a year, all companies that are listed on the Bol- sa Mexicana de Valores, S.A.B. de C.V. (BMV) must disclose the extent to which they adhere to the Corporate Governance Code of Principles and Best Practices (CMPC) by answering a questionnaire. The Code has been in effect in Mexico since 2000, and companies respond to a questionnaire that is avail- able to the investing public on the BMV website. We have presented a summary of Alpek’s corporate governance principles below, reflecting the answers the company gave to the questionnaire in May 2020 and updated where necessary: • The Board of Directors is comprised of elev- en proprietary members, with no alternates. Of these, six are independent board members, two are proprietary board members, two are related proprietary board members and one is an inde- pendent proprietary board member. This annual report provides information about each member of the Board, identifying those who are indepen- dent and their participation in the Audit and Cor- porate Practices Committee. • In carrying out their duties, the Board of Directors receives support from the Audit and Corporate Practices Committee. The Committee Chairman is an independent board member. • The Board of Directors meets four times per year. Meetings of the Board may be called by the Chair- man of the Board, by the President of the Audit and Corporate Practices Committee, by the Sec- retary, or by at least 25% of its members. At least one meeting per year is dedicated to defining the Company ’s medium- and long-term strategies. • Members must inform the Chairman of the Board regarding any conflict of interest that may arise and abstain from participating in any related de- liberations. There was an 100% attendance rate at the Board and Committee meetings in 2020. • During the majority of 2020, the meetings of the Board of Directors and the Audit and Corporate Practices Committee were held through videocon- ferences, as consequence of the pandemic caused by the COVID-19 pandemic. Video conferencing al- lowed the Board of Directors to interact effectively given the availability of audio and video features. • The Audit and Corporate Practices Commit- tee studies and issues recommendations to the Board on audit-related matters such as: select- ing and determining the fees to be paid to the ex- ternal auditor, coordinating with the Company’s internal audit committee and studying account- ing policies, among others. • In addition, the Audit and Corporate Practices Committee issues recommendations to the Board on matters related to corporate practices, such as employment terms and severance payments for senior executives, and compensation policies. • The company has internal control systems with general guidelines that are submitted to the Audit and Corporate Practices Committee for its opin- ion. In addition, the external auditor validates the effectiveness of the internal control system and issues the corresponding reports. • The Board of Directors is advised by the planning and finance department when evaluating matters related to the feasibility of investments, strategic positioning of the company, alignment of invest- ing and financing policies, and reviewing invest- ment projects. This is carried out in coordination with the finance and planning department of the holding company, Alfa, S.A.B. de C.V. • Alpek has a department that is specifically re- sponsible for maintaining open communication with its shareholders and investors. This ensures that they have the financial and general informa- tion required to assess the Company’s progress in developing its activities. This function makes use of press releases, notifications of relevant events, conference calls for quarterly reports, investor meetings, its website, and other communication channels. • Alpek promotes good corporate citizenship and adheres to the recommendations issued by its holding company, Alfa, S.A.B. de C.V. It has a mis- sion, vision, values and a code of ethics that are promoted within the organization. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 47 GLOSSARY ADMINISTRATIVE COUNCIL FOR ECONOMIC DEFENSE Brazilian agency responsible for investigating and deciding on issues of competence. ARCEL® A Polystyrene (EPS) & Polyethylene (PE) copolymer used in pro- tective packaging for high-end products like electronics. Due to its resistance to tearing, puncturing, cracking and flaking, it ab- sorbs shocks without decreasing its protection. CAPROLACTAM (CPL) CPL is made by reacting cyclohexane, ammonia and sulfur and is the raw material used to produce Nylon 6 polymer. Nylon 6 is a synthetic resin that, because of its strength, flexibility and soft- ness, has a range of end uses, including sportswear, underclothes and engineering plastics. CLEAN INDUSTRY CERTIFICATION Certification granted by the Mexican Environmental Protection Agency (PROFEPA) to companies that comply with environmen- tal legislation. COGENERATION Process that produces both electricity and steam. COMPREHENSIVE RESPONSIBILITY ADMINISTRATIVE SYSTEM (NATIONAL ASSOCIATION OF THE CHEMICAL INDUSTRY, ANIQ) Certification given to companies that comply with the six com- prehensive responsibility requirements established by the ANIQ, covering Process safety, Health and safety in the workplace, Product safety, Transportation and distribution, Prevention and control of environmental pollution and Community protection. CO2 EMISSIONS Unit to measure the carbon dioxide produced by the burning of solid, liquid and gaseous fuels, including natural gas. CYCLOHEXANE Compound produced by the hydrogenation of benzene and used in caprolactam production. ETHANE Hydrocarbon part of the natural gas liquids, which at room tem- perature is colorless and odorless. It is used as a raw material to produce ethylene. ISO 14001 CERTIFICATION Internationally accepted standard for establishing an efficient Environmental Management System (EMS). The standard is de- signed to support companies’ profitability and at the same time minimize environmental impact. ETHYLENE Compound produced from ethane. It is the raw material used to produce vinyl acetate, ethyl chloride, styrene, ethylene oxide and polyethylenes. MEGAWATT (MW) Unit of power, equal to 1 million watts. ETHYLENE OXIDE Compound produced from ethylene and used as an intermedi- ate in the production of MEG and other chemicals. MONOETHYLENE GLYCOL (MEG) Raw material with diverse industrial uses, especially for produc- ing polyester (PET and fiber), antifreeze, refrigerants and sol- vents. EXPANDABLE POLYSTYRENE (EPS) Light, rigid, cellular plastic, product of the polymerization of sty- rene monomer. EPS is a versatile material because of its prop- erties as an impact reducer and thermal insulator, with custom- ized molding capacity. These properties, combined with the ease with which it can be processed, make EPS a popular packaging for impact-sensitive items and for protecting perishables. It is also widely used in construction systems, to lighten floor and roof structures, and as an insulator. GREENHOUSE GASES (GHG) Components of the atmosphere that absorb and emit radiation within the infrared range, causing the Earth’s surface tempera- ture to increase. PARAXYLENE (PX) Hydrocarbon in the xylene family used to produce PTA. It is also a component of gasoline. POLYETHYLENE TEREPHTHALATE (PET/vPET) Material widely used to manufacture bottles and other con- tainers for liquids, food and personal hygiene, household and healthcare products. PET flakes and films are used to produce caps, trays and recipients. Because of its transparency, strength, durability and high protection barriers, PET presents no known health risks, is light and recyclable, and has a wide range of ap- plications in reusable, temperature-sensitive packaging. PET has replaced glass and aluminum, as well as other plastics such as PVC and polyethylene, for making containers. INTEGREX® Alpek-owned technology for producing PTA and PET from par- axylene (pX) and monoethylene glycol (MEG), offering significant cost savings and fewer intermediate steps in the production process. RECYCLED POLYETHYLENE TEREPHTHALATE (rPET) PET bottles are cleaned and crushed to produce new PET prod- ucts. Other rPET uses include carpets, fabrics for the clothing in- dustry, and fibers. ISO 9001 CERTIFICATION Certification issued by rating agencies to those companies that operate with proven procedures for assuring the quality of their products, in accordance with the standard defined by the Inter- national Organization for Standardization (ISO). POLYPROPYLENE (PP) Thermoplastic polymer, produced from the polymerization of pro- pylene monomer. Its properties include a low specific gravity, great rigidity, resistance to relatively high temperatures and good re- sistance to chemicals and fatigue. PP has diverse applications, in- cluding for packaging, textiles, recyclable plastic parts and different kinds of containers, autoparts and polymer (plastic) banknotes. PROPYLENE Unsaturated, 3-carbon hydrocarbon, coproduct of the cracking process at petrochemical complexes and a by-product at oil re- fineries. It is used in the petrochemical industry to produce PP, propylene oxide, cumene, isopropanol, acrylic acid and acryloni- trile. 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 glycol-ethers. PURIFIED TEREPHTHALIC ACID (PTA) Aromatic dicarboxylic acid, the main raw material in polyester production. PTA is produced by the oxidation of paraxylene. It is used to manufacture PET, which is then used to make bottles for water, soft drinks and other beverages, containers and other packaging, and polyester fiber for rugs, clothing, furniture and in- dustrial applications, as well as other consumer products. STYRENE MONOMER Unsaturated hydrocarbon used to make a variety of plastics, synthetic rubber, protective coatings and resins. It is the main raw material in EPS production and used as a solvent and chem- ical intermediate. SINGLE-PELLET TECHNOLOGY TM Single Pellet Technology™(SPT) creates a pellet where mechani- cally Recycled PET (rPET) flake is used as a raw material feedstock in the virgin PET production process. Once injected into the PET manufacturing process, the rPET flake melts and the polymer is chemically integrated allowing the rebuilding of polymer chains to create a new PET resin pellet with an integrated recycle content of up to 25% with performance equal to that of virgin PET. WATT Unit of power in the International System of Units (SI). 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 48 PETROCHEMICAL VALUE CHAINS Alpek’s products are used by millions of people daily, in a wide variety of applications. OIL REFINERY NAPHTHA REFORMER PARAXYLENE PTA ETHANE CRACKER ETHYLENE BENZENE METHANE AMMONIA CRACKER CYCLOHEXANE CAPROLACTAM PENTANE AMMONIUM SULFATE OIL REFINERY NAPHTHA CRACKER STYRENE POLYETHYLENE EPS ARCEL PROPANE PDH PROPYLENE POLYPROPYLENE ETHYLENE OXIDE MONOETHYLENE GLYCOL PET rPET FLAKE rPET PELLET FIBERS Polyester Plastics & Chemicals 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 49 MANAGEMENT’S ANALYSIS The following analysis complements the Letter to Shareholders, Audited Finan- cial Statements, and Complementary Information. Unless otherwise specified, figures are expressed in millions of nominal pesos, while certain figures are ex- pressed as millions of dollars (US $) due to the high dollarization of Alpek’s rev- enues. Percentage variations are stated in nominal terms. All information is pre- sented in accordance with International Financial Reporting Standards (IFRS). The behavior of the GDP and other variables in Mexico and the United States, which is essential to understanding the context of Alpek’s results, is described below: In the United States, Gross Domestic Product (GDP) decreased 3.5%(b) in 2020, com- pared with an increase of 2.2%(b) reported in 2019. Consumer inflation was 1.4%(b) in 2020, lower than the 1.5%(b) recorded in 2019. The global economic environment was pressured by the COVID-19 health crisis, during the year risks persisted for financial markets coupled with pandemic con- trol, advanced countries’ economic policy decisions, geopolitical environment and trade tensions. During the first half of the year, the world faced an overall standstill of economic activity and in the second half showed a gradual recovery. Countries such as the U.S. implemented fiscal stimulus to support economic ac- tivity during the crisis. According to the IMF, the countries most affected by this crisis were Argentina, Peru, Spain, Mexico and South Africa. In Mexico, GDP suf- fered historic contractions in April and May, and as of June started to present a gradual recovery. The Mexican currency showed strong volatility throughout the year, to end with depreciation from the previous year, however, it is one of the currencies that presented the greatest recovery against COVID-19. Mexico’s Gross Domestic Product (GDP) decreased 8.5%(a) in 2020, compared to the decrease of 0.1%(a) in 2019. Consumer inflation was 3.2%(c) in 2020, higher than the 2.8%(c) recorded in 2019. The Mexican peso experienced an annual nominal depreciation of 5.5%(d) in 2020, compared with an appreciation of 4.0%(d) in 2019. Additionally, in real terms the annual average valuation of the Mexican peso against the dollar decreased from -0.5%(e) in 2019 to -2.7%(e) at the close of 2020. In Mexico, the average Interbank Equilibrium Interest Rate (TIIE) was 5.7%(c) in nom- inal terms, as compared to 8.3%(c) in 2019. In real terms, there was a decrease in the annual aggregate from 4.8%(c) in 2019 to 2.4%(c) in 2020. Regarding interest rates, the annual average nominal 3-month US dollar LIBOR rate, was 0.7%(c) in 2020, com- pared to 2.3%(c) in 2019. If the peso’s nominal appreciation against the dollar is in- cluded, the LIBOR rate in constant pesos went from -1.2%(c) in 2019 to 8.7% (c) in 2020. Sources: (a) National Institute of Statistics and Geography (INEGI). (b) Bureau of Economic Analysis (BEA) (c) Bank of Mexico (Banxico) (d) Banxico: Exchange rate for settling liabilities denominated in foreign currency payable in Mexico (e) Internal calculation based on INEGI, Bureau of Economic Analysis (BEA), and Bureau of Labor Statistics (BLS) 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 50 Volume (thousands of tons) Polyester Plastics and Chemicals Total Volume Revenues Polyester 2020 2019 2018 3,918 883 4,802 3,490 895 4,384 3,490 912 4,402 2020 2019 2018 ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) 12 (1) 10 - (2) - ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) Millions of Pesos 85,280 90,857 99,559 Millions of Dollars 3,976 4,718 5,174 Plastics and Chemicals Millions of Pesos 25,349 27,097 32,925 Millions of Dollars 1,192 1,407 1,713 Total Revenues Millions of Pesos 113,989 119,685 134,523 Millions of Dollars 5,326 6,216 6,991 (6) (16) (6) (15) (5) (14) (9) (9) (18) (18) (11) (11) Price Index Polyester Millions of Pesos Millions of Dollars Plastics and Chemicals Millions of Pesos Millions of Dollars Total Revenues Millions of Pesos Millions of Dollars 2020 2019 2018 ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) 76 68 80 73 78 70 91 91 85 85 89 89 100 100 100 100 100 100 (16) (25) (5) (14) (13) (22) (9) (9) (15) (15) (11) (11) Revenues Alpek’s revenue in 2020 was $113,989 million (US $5.326 billion), 5% lower than the $119,685 million (US $6.216 billion) in 2019. This decrease was caused by a drop in average prices of 13% and 22% in pesos and dollars, respectively, driven by lower feedstock prices. Revenues by Business Segment Polyester’s net revenues in 2020 were $85,280 million (US $3.976 billion), 6% less than the $90,857 million (US $4.718 billion) in 2019. This segment posted a decrease of 16% and 25% in average sale prices in pesos and dollars, respec- tively. Volume increased 12% when compared to 2019, setting a new record. This increase was largely due to favorable changes to consumer behavior, which placed a heightened importance on safety and hygiene, thus strengthening de- mand for PET. Plastics and Chemicals posted revenues of $25,349 million (US $1.192 billion) in 2020, in comparison to the $27,097 million (US $1.407 billion) in 2019. The 6% decrease in revenues was mainly due to the 5% and 14% drop in the average sale price in pesos and in dollars, respectively, reflecting lower feedstock prices. The segment’s volume posted a drop of 1% compared to 2019, mainly due to lower sales of caprolactam and industrial chemical products. Operating Income and EBITDA In 2020, the operating income was $7,493 million (US $355 million), 39% lower than the $12,361 million (US $641 million) in 2019. In 2020, operating profit includes an extraordinary gain of $657 million (US $35 million) from the business combination on the acquisition of the Wilton PET site.The operating income in 2019 includes an extraordinary gain of $3,634 million (US $188 million) from the finalization of the cogeneration plants’ sale. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 51 As of December 31, 2020, consolidated EBITDA was $11,993 million (US $565 mil- lion), a decrease of 27% compared to the $16,395 million (US $850 million) of 2019. The consolidated EBITDA includes a net charge from extraordinary items of $1,016 million (US $36 million), resulting in a Comparable EBITDA excluding raw material carry-forward of $13,009 million (US $601 million), 14% lower than in 2019. In 2020, the EBITDA for the Polyester segment decreased by 17% to $6,842 mil- lion (US $324 million), including a net charge from extraordinary items of $1,258 million (US $48 million). Adjusting for these items, the Comparable EBITDA ex- cluding raw material carry-forward for the Polyester segment was $8,100 million (US $372 million), a decrease of 22% year-over-year, resulting from lower margins compared to the previous year. The EBITDA for the Plastics and Chemicals segment increased 17% to $4,920 mil- lion (US $229 million), compared to $4,198 million (US $218 million) in 2019. Ex- cluding non-cash inventory losses and other extraordinary items, the Compara- ble EBITDA for Plastics and Chemicals increased 5% in comparison to the $4,447 million (US $231 million) in 2019, due to better than expected PP margins. EBITDA (Millions of pesos) Polyester Plastics and Chemicals Others Total EBITDA 2020 2019 2018 6,842 4,920 231 11,993 8,236 4,198 3,961 15,318 5,292 (3) 16,395 20,607 ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) (17) 17 (94) (27) (46) (21) N/A (20) EBITDA (Millions of dollars) Polyester Plastics and Chemicals Others Total EBITDA 2020 2019 2018 ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) 324 229 12 565 428 218 205 850 788 276 (1) 1,063 (24) 5 (95) (34) (46) (21) N/A (20) Net Financial Result In 2020, the net financial cost was -$2,085 million (US -$98 million), 21% lower than in 2019. The net financing expenses that comprise this item decreased from -$2,048 million (US -$106 million) in 2019, to -$1,972 million (US -$92 million) in 2020, mainly reflecting the reduction in average debt during the year. In addition, variations in exchange rates resulted in the recognition of a non-cash foreign exchange loss of -$113 million (US -$7 million) in 2020, versus -$587 million (US -$30 million) in 2019. Financial result, net (Millions of pesos) 2020 2019 2018 ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) Financial expense (2,497) (2,822) Financial income 525 774 Financial expenses, net (1,972) (2,048) (2,183) 442 (1,741) Loss due to exchange fluctuation, net (113) (587) (1,042) Financial expenses, net (2,085) (2,635) (2,783) 11 (32) 4 81 21 (29) 75 (18) 44 5 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 52 Taxes In 2020, an income tax was posted for -$1,202 million (US -$57 million) as a result of the decreased pre-tax income, while 2019 posted an income tax of -$1,889 million (US -$98 million). Taxes (Millions of pesos) Income before taxes Income tax rate Statutory income tax rate expenses Taxes for permanent differences between accounting-taxable income Total income tax Effective tax rate Comprised as follows: 2020 2019 2018 5,323 30% 9,413 30% 18,389 30% ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) (43) (49) (1,597) (2,824) (5,517) 43 49 395 935 2,062 (58) (55) (1,202) (1,889) (3,455) 36 45 23% 20% 19% Current income tax (1,933) (2,463) Deferred income tax 731 574 Total income tax (1,202) (1,889) (2,075) (1,380) (3,455) 22 27 36 (19) 142 45 Net Income Attributable to the Controlling Interest In 2020, consolidated net income attributable to the controlling interest was $3,123 million (US $150 million) including a net benefit of $657 million (US $35 million) from the gain in the business combination (Wilton PET site). In 2019, the consolidated net income attributable to the controlling interest was $6,605 mil- lion (US $342 million), including an extraordinary gain related to the sale of the cogeneration plants. Statement of income (Millions of pesos) Operating income 2020 7,493 Financial result, net (2,085) 2019 2018 12,361 (2,635) 21,202 (2,783) Equity in loss of associates and joint ventures (85) (313) (30) Income taxes (1,202) Consolidated net income 4,121 (1,889) 7,524 (3,455) 14,934 Income attributable to Controlling interest 3,123 6,605 13,633 ‘20 vs ‘19 (%) ‘19 vs ‘18 (%) (39) 21 73 36 (45) (53) (42) 5 (945) 45 (50) (52) Investments in Fixed and Intangible Assets In 2020, investments in fixed and intangible assets totaled $3,477 million (US $162 million), 33% lower than the $5,182 million (US $270 million) posted in 2019. The resources were used for the acquisition of NOVA Chemicals’ Styrenics busi- ness, strategic projects and maintenance and minor asset replacements. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 53 Net debt1 Net debt was $23,645 million (US $1.185 billion) as of December 31, 2020, 6% below the $25,057 million (US $1.330 billion) as of December 31, 2019. The cash balance and cash equivalents totaled $10,156 million (US $509 million) at year-end 2020. Short and long-term debt2 (Millions of dollars) 2020 2019 ‘20 vs ‘19 (%) Integrated ‘20 (%) Integrated ‘19 (%) 23 649 300 65 - - 506 1,543 4.5 4.5 38 19 674 300 - - 506 1,537 5.5 5.4 Short-term debt Long-term 1 year 2 years 3 years 4 years 5 years 9+ years Total Avg. Maturity long-term debt (years) Avg. Maturity total debt (years) Financial Indicators (Times) Net Debt / EBITDA Interest Coverage Total liabilities / Stockholders’ equity (40) N/A (55) (78) - - - - 1 42 19 4 - - 33 100 2 1 44 20 - - 33 100 2020 2019 2018 2.1 6.0 1.3 1.6 7.2 1.3 1.7 9.9 1.8 (1) Net Debt = Current debt plus non-current debt (excluding debt issuance costs), plus accrued interest pay- able, less cash and cash equivalents, less restricted cash and cash equivalents. (2) Excludes leases and lease interests OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 54 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018, AND INDEPENDENT AUDITORS’ REPORT DATED JANUARY 31, 2021 55 INDEPENDENT AUDITORS’ REPORT 59 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION 60 CONSOLIDATED STATEMENTS OF INCOME 61 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 62 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 63 CONSOLIDATED STATEMENTS OF CASH FLOWS 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 55 INDEPENDENT AUDITORS’ REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES Opinion We have audited the consolidated financial statements of Alpek, S. A. B. de C. V. and Subsidiaries (the “Company”), which com- prise the consolidated statements of financial position as of December 31, 2020, 2019 and 2018, and the consolidated state- ments of income, the consolidated statements of comprehensive income, the consolidated statements of changes in equity and the consolidated statements of cash flows for the years then ended, and the notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of Alpek, S. A. B. de C. V. and Subsidiaries as of December 31, 2020, 2019 and 2018, and their consolidated financial performance and their consolidated cash flows for the years then ended, in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board. Basis for Opinion We conducted our audits in accordance with International Standards on Auditing (ISA). Our responsibilities under those stan- dards are further described in the Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the Code of Ethics issued by the Mexican Institute of Public Accountants (IMCP Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and with the IMCP Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consoli- dated financial statements of the 2020 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. Business combination- Lotte Chemical UK Limited (Lotte UK) As mentioned in Note 2a. to the consolidated financial statements, on January 1, 2020, a subsidiary of Alpek, S. A. B. de C. V. (“Al- pek”) acquired all of the shares representing the capital stock of Lotte Chemical UK Limited, which operates a PET production plant located in Wilton, United Kingdom with a capacity of 350,000 tons per year. The total consideration amounted to US$68 million. The fair value of the net assets acquired amounted to US$103 and the Company recognized a gain on the acquisition of US$35 million. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 56 Due to the significant judgments used by management in the valuation models for the determination of the consideration transferred, the fair values of the assets acquired and liabilities assumed, we believe that this transaction represents a key audit matter for our audit. Therefore, in order to perform the audit procedures to reasonably mitigate the identified risk, we involved a team of valuation experts to evaluate the premises and criteria used by management and its independent expert, which include the following procedures: • We evaluated the capacity and independence of the independent expert. • We verified that the models and assumptions used by management to determine fair values were those used and recog- nized for valuing assets of similar characteristics in the industry. • We challenged management’s financial projections and compared them to historical business and industry performance and trends. • We reviewed the most relevant valuation assumptions and compared them with independent market sources. The results of our procedures were satisfactory, and we agree with the amount of the fair value of the assets acquired and li- abilities assumed recognized by the Company. Emphasis of matter paragraph – Significant event As mentioned in Note 2b. to the accompanying consolidated financial statements, on March 11, 2020, the World Health Organization declared the SARS-COV2 virus (COVID-19) a global pandemic. The spread of the disease had a differentiated impact on companies and industries, in addition to generating significant volatility in money and capital markets. The Company’s financial position and results of operations as of December 31, 2020 were not materially affected by the pandemic; however, our audit planning and pro- cedures were adapted to the circumstances for the verification of the above and the assertions included by the Company in Note 2b. to the consolidated financial statements. Information Other Than the Consolidated Financial Statements and Auditor’s Report Thereon Management is responsible for the other information presented. Additional information includes; (i) the Annual Report, (ii) the information to be incorporated into the Annual Report that the Company is required to prepare in accordance with Article 33, fraction I, paragraph b) of Title Four, Chapter One of the Provisions of a General Nature Applicable to the Issuers of Securities and to Participants in the Securities Market and with the Instructions accompanying those provisions (the “Provisions”).Is expected the Annual Report to be available for our reading after the date of this audit report; and (iii) other additional information, which is a measure that is not required by IFRS, and has been incorporated for the purpose of providing additional explanation to its inves- tors and principal readers of its consolidated financial statements to assess the performance of each of the operating segments and other indicators on the ability to meet obligations with respect to the Company’s earnings before income, taxes, depreciation, amortization and assets impairment (“adjusted EBITDA”) of the Company; this information is presented in Notes 16 and 29. Our opinion of the consolidated financial statements does not cover the other information and we do not express any form of as- surance over it. In connection with our audit of the consolidated financial statements, our responsibility will be to read the other information, when available, and in doing so, consider whether the other information contained therein is materially inconsistent with the consoli- dated financial statements or with our knowledge obtained in the audit, or otherwise appears to contain a material error. When we read the Annual Report, we will issue the legend on the reading of the annual report required in Article 33, Fraction I, paragraph b) numeral 1.2 of the Provisions. Also, and in connection with our audit of the consolidated financial statements, it is our responsibility to read and recalculate the additional information, which in this case is the annual report and the measure not required by IFRS, and in reading it, consider whether the other information therein is materially inconsistent with the consolidated financial state- ments or our knowledge obtained during the audit, or appearing to contain a material misstatement. If based on the work we have performed, we conclude that there is a material misstatement therein; we are required to communicate this matter. As of the date of this report, we have nothing to report in this regard. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 57 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 IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated fi- nancial 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 Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s consolidated 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 auditors’ report that includes our opinion. Reasonable as- surance 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, misrepresenta- tions, or the override of internal control. - Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the 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 obtained, 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 auditors’ 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 auditors’ 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 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 of the consolidated financial statements. We remain solely responsible for our audit opinion. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 58 We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant 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 independence, 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 signifi- cance 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 auditors’ 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. Galaz, Yamazaki, Ruiz Urquiza, S.C. Member of Deloitte Touche Tohmatsu Limited C. P. C. César Adrián Garza Tamez Monterrey, Nuevo León, México January 31, 2021 OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 59 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As of December 31, 2020, 2019 and 2018 In millions of Mexican pesos Note 2020 2019 2018 Assets Current assets: Cash and cash equivalents Restricted cash Trade and other accounts receivable, net Inventories Derivative financial instruments Prepayments Total current assets Non-current assets: Property, plant and equipment, net Right of use asset, net Goodwill and intangible assets, net Deferred income taxes Derivative financial instruments Prepayments Other non-current assets Total non-current assets Total assets Liabilities and Stockholders’ Equity Current liabilities: Debt Lease liability Trade and other accounts payable Income taxes payable Derivative financial instruments Provisions Total current liabilities Non-current liabilities: Debt Lease liability Derivative financial instruments Provisions Deferred income taxes Income taxes payable Employee benefits Other non-current liabilities Total non-current liabilities Total liabilities Stockholders’ equity Controlling interest: Capital stock Share premium Retained earnings Other reserves Total controlling interest Non-controlling interest Total stockholders’ equity Total liabilities and stockholders’ equity 6 6 7 8 4 9 10 11 12 20 4 9 13 16 17 15 20 4 18 16 17 4 18 20 20 19 21 22 14 $ 10,144 $ 12 17,050 17,447 454 442 45,549 38,579 2,991 3,637 1,506 70 15 14,006 60,804 $ 7,059 216 16,508 17,966 41 1,785 43,575 37,082 3,437 3,783 1,104 36 16 13,761 59,219 $ 106,353 $ 102,794 $ $ $ 456 $ 704 19,545 531 66 50 21,352 30,196 2,306 - 1,120 4,092 170 1,316 289 39,489 60,841 6,035 9,025 21,035 4,291 40,386 5,126 45,512 $ 106,353 $ 707 912 16,455 1,143 528 576 20,321 28,103 2,456 4 1,078 3,926 400 1,092 356 37,415 57,736 6,045 9,059 20,625 4,751 40,480 4,578 45,058 102,794 4,168 3 21,934 24,511 30 469 51,115 47,033 - 4,368 1,384 - 38 15,959 68,782 119,897 10,118 - 26,051 1,279 1,047 81 38,576 30,012 - 283 1,107 4,752 469 1,099 436 38,158 76,734 6,052 9,106 17,235 5,734 38,127 5,036 43,163 $ 119,897 The accompanying notes are an integral part of these consolidated financial statements. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 60 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 2020, 2019 and 2018 In millions of Mexican pesos, except for earnings per share amounts Note 2020 2019 2018 $ 113,989 $ 119,685 $ 134,523 29 24 24 24 25 2j 26 26 26 20 Revenues Cost of sales Gross profit Selling expenses Administrative expenses Other income, net Income before reversal of impairment of intangible assets Reversal of impairment of intangible assets Operating income Financial income Financial expenses Loss due to exchange fluctuation, net Financial result, net Equity in loss of associates and joint ventures recognized using the equity method Income before taxes Income taxes Net consolidated income Income attributable to: Controlling interest Non-controlling interest Earnings per basic and diluted share, in Mexican pesos (102,283) (106,669) 11,706 (2,136) (3,260) 1,183 7,493 - 7,493 525 (2,497) (113) (2,085) (85) 5,323 (1,202) 13,016 (2,088) (2,831) 4,264 12,361 - 12,361 774 (2,822) (587) (2,635) (313) 9,413 (1,889) $ 4,121 $ 7,524 $ 3,123 $ 6,605 998 $ $ 4,121 $ 1.48 $ 919 7,524 3.12 2,117 (116,519) 18,004 (2,136) (3,166) 4,564 17,266 3,936 21,202 442 (2,183) (1,042) (2,783) (30) 18,389 (3,455) 14,934 13,633 1,301 14,934 6.44 2,118 $ $ $ $ Weighted average outstanding shares (millions of shares) 2,113 The accompanying notes are an integral part of these consolidated financial statements. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 61 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, 2020, 2019 and 2018 In millions of Mexican pesos Net consolidated income Other comprehensive loss for the year: Note 2020 2019 2018 $ 4,121 $ 7,524 $ 14,934 Equity in other comprehensive income of associates and joint ventures recognized through the equity method 3 Items that will not be reclassified to the statement of income: Remeasurement of employee benefit obligations, net of taxes 19, 20 (30) 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 Total other comprehensive loss for the year 4, 20 4, 20 614 (767) (180) - 22 765 (1,954) (1,167) - (55) (560) (1,814) (2,429) Consolidated comprehensive income $ 3,941 $ 6,357 $ 12,505 Attributable to: Controlling interest Non-controlling interest $ 2,663 $ 5,622 $ 1,278 735 11,241 1,264 Comprehensive income for the year $ 3,941 $ 6,357 $ 12,505 The accompanying notes are an integral part of these consolidated financial statements. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 62 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the years ended December 31, 2020, 2019 and 2018 In millions of Mexican pesos Capital stock Share premium Retained earnings Other reserves controlling controlling interest interest Total Non- Total stockholders’ equity Balance as of January 1, 2018 $ 6,048 $ 9,071 $ 3,671 $ 8,126 $ 26,916 $ 4,748 $ 31,664 Net income Total other comprehensive loss for the year Comprehensive income Dividends declared Reissuance of shares Effect of initial adoption of IFRS Other - - - - 4 - - - - - - 35 - - 13,633 - 13,633 - - (14) (55) - (2,392) (2,392) - - - - 13,633 (2,392) 11,241 - 39 (14) (55) 1,301 (37) 1,264 (981) - - 5 14,934 (2,429) 12,505 (981) 39 (14) (50) Balance as of January 1, 2019 6,052 9,106 17,235 5,734 38,127 5,036 43,163 Net income Total other comprehensive loss for the year Comprehensive income Dividends declared Reissuance of shares Repurchase of shares Acquisition of non-controlling interest in subsidiary Other - - - - 51 (58) - - - - - - 338 (385) - 6,605 (2,778) - - - - (190) (247) 6,605 - 6,605 (983) (983) (983) 5,622 919 (184) 735 7,524 (1,167) 6,357 - - - - - (2,778) (1,182) (3,960) 389 (443) (190) (247) - - (4) (7) 389 (443) (194) (254) Balance as of December 31, 2019 6,045 9,059 20,625 4,751 40,480 4,578 45,058 Net income Total other comprehensive loss for the year Comprehensive income Dividends declared Reissuance of shares Repurchase of shares - - - - 1 - - - - 1 (11) (35) 3,123 - 3,123 (2,713) - - - (460) (460) - - - 3,123 (460) 2,663 (2,713) 2 (46) 998 280 1,278 (730) - - 4,121 (180) 3,941 (3,443) 2 (46) Balance as of December 31, 2020 $ 6,035 $ 9,025 $ 21,035 $ 4,291 $ 40,386 $ 5,126 $ 45,512 The accompanying notes are an integral part of these consolidated financial statements. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 63 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2020, 2019 and 2018 In millions of Mexican pesos Cash flows from operating activities Income before income taxes Depreciation and amortization Impairment (reversal of impairment) of long-lived assets $ Allowance for doubtful accounts Financial result, net Gain on business combination Gain on business sale Statutory employee profit sharing, provisions and other items Subtotal Movements in working capital Decrease (increase) in trade receivables and other assets Decrease (increase) in inventories Increase (decrease) in trade and other accounts payable Income taxes paid Net cash flows generated from operating activities Cash flows from investing activities Interest collected Cash flows in acquisition of property, plant and equipment Cash flows in sale of property, plant and equipment Cash flows in acquisition of intangible assets Cash flows in business acquisition, net of cash acquired Prepayment for business acquisition Cash flows in business sale, net of cash transferred Cash flows collected (paid) in investment in associates and joint ventures Loans collected from related parties Notes receivable Collection of notes Restricted cash 2020 5,323 4,486 14 77 1,772 (657) (89) (426) 10,500 894 2,522 659 (2,641) 11,934 197 (2,543) 18 (45) (921) - 108 15 10 - 845 228 2019 2018 $ 9,413 4,005 29 40 2,220 - (3,634) 228 12,301 4,465 5,523 (9,523) (2,765) 10,001 231 (3,123) 96 (35) (661) (1,312) 15,400 (147) 188 (1) 531 (219) $ 18,389 2,885 (3,480) 102 2,359 (4,597) - (60) 15,598 (4,373) (6,977) 5,772 (1,759) 8,261 353 (2,249) 270 (26) (7,120) - - (5,805) 195 (1,124) 17 - Net cash flows (used in) generated from investing activities (2,088) 10,948 (15,489) Cash flows from financing activities Proceeds from debt Payments of debt Lease payments Interest paid Derivative financial instruments Dividends paid by Alpek, S. A. B. de C. V. Dividends paid from subsidiaries to non-controlling interest Acquisition of non-controlling interest in subsidiary Repurchase of shares Reissuance of shares Loan payments to related parties Net cash flows (used in) generated from financing activities Net increase (decrease) in cash and cash equivalents Effect of changes in exchange rates Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year The accompanying notes are an integral part of these consolidated financial statements. 13,044 (12,550) (1,083) (1,954) - (2,713) (730) - (46) 2 - (6,030) 3,816 (731) 7,059 $ 10,144 $ 22,000 (32,005) (1,108) (2,379) - (2,778) (1,182) (194) (443) 389 (1) (17,701) 3,248 (357) 4,168 7,059 9,137 (3,153) - (2,038) (12) - (981) - - 39 (2) 2,990 (4,238) (389) 8,795 4,168 $ OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 64 64 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of and for the years ended December 31, 2020, 2019 and 2018 Millions of Mexican pesos, except where otherwise indicated 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 terephthalate (PET), recycled PET (rPET) 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, construction, agriculture, oil industry, pharmaceutical markets and others. Alpek is one of the largest petrochemical companies in Mexico and the second largest in Latin America. Additionally, it is the main integrated producer of polyester and one of the main produces of rPET in America. 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. When reference is made to the controlling entity Alpek, S. A. B. de C. V. as an individual legal entity, it will be referred to as “Alpek SAB”. The shares of Alpek SAB are traded on the Mexican Stock Exchange (“MSE”) and has Alfa, S. A. B. de C. V. (“Alfa”) as its main holding company. As of December 31, 2020, 2019 and 2018, the percentage of shares that traded on the MSE was 17.63%, 17.79% and 17.91%, respectively (Note 22). Alpek SAB is located at Avenida Gomez Morin Sur No. 1111, Col. Carrizalejo, San Pedro Garza Garcia, Nuevo Leon, Mexico and operates productive plants located in Mexico, the United States of America, Canada, Argentina, Chile, Brazil and United Kingdom. In the following notes to the financial statements when referring to pesos or “$”, it means millions of Mexican pesos. When referring to dollars or “US$”, it means millions of dollars from the United States of America. When referring to Euros or “€” it means millions of Euros. 2. SIGNIFICANT EVENTS 2020 a. Acquisition of Lotte Chemical PET business in UK On October 29, 2019, the Company announced an agreement with Lotte Chemical Corporation (“Lotte”) for the purchase of all the shares of Lotte Chemical UK Limited (“Lotte UK”), which is the owner of a PET production plant located in Wilton, United Kingdom. The acquisition is aligned with Alpek’s growth strategy, expanding its reach outside the Americas and better integrating its PTA and PET capabilities. During the month of December 2019, the Company made advance payments for the acquisition of Lotte UK for a total amount of US$69 (Note 9); however, the final acquisition of the business occurred on January 1, 2020, considered as the moment from which Alpek gained control of Lotte UK, now called Alpek Polyester UK LTD (“Alpek Polyester UK”). During May 2020, the final adjustments to the purchase price were made resulting in a recovery of US$1 from the advance payments for a final purchase price of US$68. Such recovery is presented as a cash inflow in the consolidated statement of cash flows in the business acquisition line, together with the incorporation of Alpek Polyester UK’s cash held at the time of the acquisition. OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 65 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company’s consolidated financial statements include the financial information of the entity from the acquisition date. The business acquired is included in the Polyester segment. The acquisition of Alpek Polyester UK met the criteria of a business combination in accordance with the requirements of IFRS 3, Business Combinations; therefore, the Company applied the acquisition method to measure the assets acquired and the liabilities assumed in the transaction. The purchase price allocation was determined in 2020, and the adjustments derived from acquisition method accounting were recognized from the date of acquisition. The fair values of the assets acquired and liabilities assumed as a result of this acquisition are as follows: Inventories Other current assets(1) Property, plant and equipment Current liabilities(2) Net identifiable assets Bargain purchase gain Consideration paid US$ 48 63 43 (51) 103 (35) 68 $ (1) Current assets consist of cash and cash equivalents for US$6, accounts receivable for US$55 and others for US$2. (2) Current liabilities consist of suppliers and other accounts payable of US$47 and provisions of US$4. As a result of this transaction, a gain associated with the business combination was recognized for an amount of $657 (US$35), recorded in 2020 (Note 25). Under the terms of IFRS 3, the gain associated with the business combination was mainly generated because the disposition took place due to strategic plans of the seller. b. Impacts of COVID-19 As a result of the outbreak of coronavirus (COVID-19) and its global outreach, on March 11, 2020, the World Health Organization declared the infectious disease a pandemic. Health actions have been taken in Mexico and other countries, including those where Alpek operates, to limit the spread of this virus, including, but not limited to, social distancing and closure of educational facilities (schools and universities), commercial establishments and non-essential businesses. The following is a breakdown of the main implications for the Company: • At the ordinary stockholders’ meeting of the Company on February 27, 2020, the stockholders agreed to declare dividends in cash of approximately US$81.6. On May 21, 2020, the stockholders of the Company approved the revocation of the dividend payment as one of the decisions taken in order to prioritize its financial stability due to the emergence of COVID-19. It also approved delegating authority to the Board of Directors to monitor how the situation evolves, and at its sole discretion, set a date and an amount for a dividend payment, for an amount equal to or less than the one previously authorized. • On March 18, 2020, the Company announced that its joint venture investment Corpus Christi Polymers extended the pre-construction period of its plant through the end of 2020 to help optimize project costs and maximize returns to the three joint venture shareholders. Alpek will not need to make any additional capital contributions during the extended pre-construction period and the expected timeline to finalize construction will likely be extended by a similar time frame. As of the date of issuance of the consolidated financial statements, management of the Company continues to take actions to face the economic conditions of the market, as part of its risk-management strategy. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 66 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS c. Approval of the restructuring plan for the recovery of financing to M&G México On September 4, 2020, the Company announced the final approval of the financial restructuring agreement between M&G Polímeros México S.A. de C.V. (“M&G México”) and the majority of its creditors, including certain subsidiaries of Alpek. In accordance with the agreement, as of the end of 2020, the Company started the recovery of US$160 of debt guaranteed by a first and second degree lien on M&G México’s PET plant in Altamira by receiving a payment of US$40 in December. The Company expects to recover all of its guaranteed debt with its respective interests in the next 5 years. d. Agreement to acquire NOVA Chemicals’ styrenics business On October 19, 2020, the Company announced that one of its subsidiaries has signed an agreement with NOVA Chemicals Corporation (“NOVA Chemicals”) to acquire their expandable styrenics business by purchasing a 100% stake in BVPV Styrenics LLC, which owns and operates two facilities in the United States. The first facility, located in Monaca, Pennsylvania, has an annual capacity of 123,000 tons of EPS and 36,000 tons of ARCEL®, and a world-class research and development (R&D) pilot plant; and a second facility located in Painesville, Ohio, with an annual capacity of 45,000 tons of EPS. The value of the consideration amounted to US$50, which was paid in cash by transfer on the closing date of the transaction, which occurred on October 30, 2020, and corresponds to the date the Company acquired control of the business. The Company is in the process of determining the fair value of the net identifiable assets, which is expected to be completed within 12 months from the acquisition date. The consolidated statement of cash flows in 2020 presents the incorporation of BVPV Styrenics LLC’s operations into a single line within the investment activity, net of cash acquired. 2019 e. Acquisition of a PET recycling plant with Perpetual Recycling Solutions On January 9, 2019, the Company announced that one of its subsidiaries signed an agreement with Perpetual Recycling Solutions, LLC (“Perpetual”), to acquire a PET recycling plant in Richmond, Indiana, USA. The Perpetual PET recycling plant has an installed capacity to produce approximately 45,000 tons per year of high quality recycled PET flakes. The acquisition was completed on January 31, 2019. This acquisition complements the Company’s existing food-grade PET recycling operations in Argentina and its fiber-grade PET recycling facility in North Carolina. The operation was closed for the amount of US$34 on January 31, 2019. The Company’s consolidated financial statements include Perpetual’s financial information from the acquisition date. The business purchased is included in the Polyester segment. The acquisition of Perpetual met the criteria of a business combination in accordance with the requirements of IFRS 3, Business Combinations; therefore, the Company applied the acquisition method to measure the assets acquired and the liabilities assumed in the transaction. The Company recognized goodwill in the amount of US$3. The purchase price allocation was determined in 2019, and the adjustments derived from the acquisition method accounting were recognized from the acquisition date. The 2019 consolidated statement of cash flows presents the incorporation of Perpetual’s transactions into a single line within the investing activity. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 67 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS f. Sale of two electric power cogeneration plants On January 6, 2019, the Company signed an agreement with Contour Global Terra 3, S.a.r.l. (“CG Terra 3”) for the sale of its cogeneration power plants, located in Cosoleacaque and Altamira, Mexico. Subsequently, CG Terra 3 transferred its rights to ContourGlobal Holding de Generación de Energía de México, S.A. de C.V. (“CG México”), a subsidiary of Contour Global, PLC. The agreement includes the sale of all the shares representing the capital stock of Cogeneración Altamira, S.A. de C.V. (“CGA”), held by Alpek SAB; CGA, in turn, holds 99.99% of the shares of the capital stock of Cogeneración de Energía Limpia de Cosoleacaque, S.A. de C.V. (“CELCSA”). Additionally, as part of the transaction, Alpek SAB signed with CG México, among others, a call option agreement whereby Alpek SAB and its subsidiaries undertake the obligation to sell all of its shares of the capital stock of Tereftalatos Mexicanos Gas, S. A. de C. V. (whose assets, among others, include gas pipelines that transport natural gas from the point of interconnection of the integrated national transport system to the point of consumption), to CG México, in the case that the later exercises the call option within a period of 5 years from the date of the signing of the call option agreement. The option will be subject to compliance with certain precedent conditions established in the contract, and its price will be subject to working capital adjustments. On November 25, 2019, the Company announced that it had concluded the sale process of its cogeneration power plants for US$801; however, the transaction price is subject to non-significant working capital adjustments, which are expected to be in favor of the Company. The resources of the transaction were mainly used to reduce the Company’s debt obligations and pay an extraordinary dividend (Note 22). g. Debt issuance On September 11, 2019, Alpek SAB issued Senior Notes, listed on the Irish Stock Exchange, to qualified institutional investors under Rule 144A and other investors outside the United States of America under Regulation S in the amount of US$500, including issuance costs of US$4 and discounts of US$1. The Senior Notes mature in ten years at a coupon of 4.25% payable semiannually. The transaction proceeds were mainly used to prepay short-term debt and for general corporate purposes. h. Credit Agreement with Export Development Canada (“EDC”) On May 10, 2019, Alpek and certain of its subsidiaries entered into a credit agreement to obtain an unsecured credit for up to US$250 with Export Development Canada. This facility has a maturity of 6 years and an availability period that expires in May 2021. The loan accrues interest at a variable rate of LIBOR plus a spread that depends on leverage levels and can be prepaid at any time, in whole or in part, without penalty. As of December 31, 2020, the total amount of the credit facility was available. 2018 i. Secured financing to M&G México On December 29, 2017, the Company signed an agreement to provide secured financing to M&G Polímeros México, S. A. de C. V. (“M&G México”) to help support its PET operation during its debt restructuring process. The US$60 credit facility is secured by a second lien on M&G México’s PET production plant in Altamira, Mexico, and has a two-year term. During the year ended December 31, 2018, M&G México disposed of the total amount of the credit facility. This amount was disbursed in several intervals subject to certain conditions, including a restructuring plan that was presented by M&G México and approved by its creditors. Additionally, Alpek holds the credit rights over a US$100 loan made to M&G México, which is secured by a first lien on this same PET production facility in Altamira. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 68 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS j. Acquisition of Corpus Christi Project from Mossi & Ghisolfi Group (“M&G”) On March 21, 2018, Alpek announced that it had entered into a joint venture with Indorama Ventures Holdings LP (“Indorama”) and Far Eastern Investment (Holding) Limited (“Far Eastern”), to create Corpus Christi Polymers LLC (“CCP”), which signed an asset purchase agreement with M&G USA Corp. and its affiliated debtors (“M&G Corp.”) for the acquisition of the integrated PTA- PET site under construction located in Corpus Christi, Texas, and certain intellectual property and a desalination/boiler plant that supplies water and steam to the place (the “Corpus Christi Project”). On December 28, 2018, the Company announced that CCP completed the acquisition of the Corpus Christi Project, for an aggregate amount of US$1,199 in cash and other capital contributions. For this purchase, Alpek contributed US$266 in cash and US$133 in other non-cash capital contributions, associated with a portion of its secured claim with M&G with respect to the Capacity Reservation Agreement with Corpus Christi (the “Capacity Reservation Agreement”); furthermore, as of December 31, 2018, Alpek had contributed US$16 in cash that remain in CCP’s cash account. In addition, the Company agreed to sell the rest of the Capacity Reservation Agreement to Indorama and Far Eastern (the “buyers”) for which it will obtain US$67 in cash, which will be payable in 3 years in equal parts from each of the buyers, subject to certain conditions. Alpek recognized its investment in CCP as a joint venture through the equity method. In accordance with the terms of CCP, the partners will provide resources to complete the Corpus Christi Project in the most efficient way. As of December 31, 2019 and 2018, Alpek has invested US$423 and US$416, respectively. Once the facility is finished, Alpek, Indorama and Far Eastern will each have the right to receive one third of the PTA and PET produced by the Corpus Christi Project, which will have a nominal production capacity of 1.1 million and 1.3 million metric tons per year of PET and PTA, respectively. Moreover, each one is responsible for acquiring their raw materials independently, as well as carrying out the sale and distribution of their corresponding PTA and PET. In line with the foregoing, Alpek recognized the reversal of a portion of the impairment recorded in 2017 on intangible assets for US$195, which correspond to the amount that the Company expects to recover from the Capacity Reservation Agreement, which is recognized as part of its investment in CCP for US$133, and as an account receivable from its joint venture partners for US$62 (recognized at present value). k. Acquisition of Petroquímica SUAPE and CITEPE On April 30, 2018, Alpek completed the acquisition of 100% of Companhia Petroquímica de Pernambuco (“Petroquímica Suape”) and Companhia Integrada Têxtil de Pernambuco (“Citepe”), owned by Petróleo Brasileiro, S.A. (“Petrobras”), through DAK Americas Exterior, S.L. and Grupo Petrotemex, S. A. de C. V., with stakes of 99.99% and 0.01%, respectively. The total consideration paid by the Company was US$435, free of debt, which was paid in Brazilian reals at the closing date of the transaction. As a result of this transaction, Alpek acquired an integrated PTA-PET site in Ipojuca, Pernambuco, Brazil, with a capacity of 640,000 and 450,000 tons per year of PTA and PET, respectively. Citepe also operates a textured polyester filament plant with a capacity of 90,000 tons per year. The operation was carried out due to Alpek’s strategy of making continuous and selected investments in integration, efficiency and expansion projects, in order to achieve a sustainable growth. The consolidated financial statements of the Company include the financial information of Petroquímica Suape and Citepe as of the date of acquisition. The acquisition of the business is included in the Polyester segment. The acquisition of Petroquímica Suape and Citepe met the criteria of a business combination in accordance with the requirements of IFRS 3, Business Combinations, for which the Company applied the acquisition method to measure the assets acquired and liabilities assumed in the transaction. The purchase price allocation was determined in 2018, and the adjustments derived from acquisition method accounting were recognized from the date of acquisition. The fair values of the assets acquired and liabilities assumed as a result of this acquisition are as follows: 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 69 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Inventories Other current assets(1) Recoverable taxes Property, plant and equipment, net Intangible assets(2) Other non-current assets(3) Current liabilities(4) Provisions (5) Net acquired assets Bargain purchase gain Consideration paid US$ 101 162 115 353 21 40 (87) (50) 655 (220) 435 $ $ (1) Current assets consist of cash and cash equivalents for US$18, accounts receivable for US$98, recoverable taxes for US$45 and others for US$1. (2) Intangible assets consist of customer relationships, which guarantee the existence and continuity of the business from the moment of acquisition. (3) Other non-current assets consist of an indemnification asset for US$23 and others for US$17. The indemnification asset corresponds to the right of reimbursement in case of any disbursement that is made corresponding to labor and civil contingencies.  (4) Current liabilities consist of suppliers and accounts payable for US$77 and others for US$10. (5) Provisions consist of provisions for labor contingencies for US$6, provisions for civil contingencies for US$18, provisions for tax contingencies for US$11 and provisions for reimbursement of taxes recovered for Petrobras for US$15. As a result of this transaction, a gain associated with the business combination was recognized for an amount of US$220, recorded in 2018 (Note 25). Under the terms of IFRS 3, the gain associated with the business combination is mainly the result of Petrobras divesting of these operations as part of its Strategic Plan, in order to optimize its business portfolio and cease its participation in the petrochemical industry; the aforementioned portfolio included the plan to sell Petroquímica Suape and Citepe. The consolidated statement of cash flows in 2018 presents the incorporation of the operations of Petroquímica Suape and Citepe into a single line within the investment activity, net of cash acquired. l. Credit Agreement with JP Morgan On March 28, 2018, Alpek signed a contract to obtain an unsecured loan, for an amount of up to US$710, with MUFG Bank, Ltd. (formerly, The Bank of Tokyo-Mitsubishi UFJ, Ltd.), Citigroup Global Markets Inc., HSBC México S.A., Grupo Financiero HSBC and JPMorgan Chase Bank, N.A., which was later syndicated. The maturity of the loan is 3 years and has a period of availability of 18 months. The loan accrues interest at a variable rate of Libor plus a spread that depends on leverage levels, and is subject to be prepaid at any time, totally or partially, without penalty. This credit agreement was prepaid in full during 2019. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following are the most significant accounting policies followed by the Company and its subsidiaries, which have been consistently applied in the preparation of their financial information in the years presented, unless otherwise specified: 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 70 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS a) Basis of preparation The consolidated financial statements of Alpek have been prepared in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). IFRS include all International Accounting Standards (“IAS”) in force and all related interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”), 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 cash flow 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 the consolidated statement of income and for financial assets available for sale. The preparation of the consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates. Additionally, it requires management to exercise judgment in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where judgments and estimates are significant to the consolidated financial statements are disclosed in Note 5. b) Consolidation i. Subsidiaries The subsidiaries are all the entities over which the Company has control. 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. When the Company’s participation in subsidiaries is less than 100%, the share attributed to outside stockholders is reflected as non-controlling interest. Subsidiaries are consolidated in full from the date on which control is transferred to the Company and up to the date it loses such control. The accounting method used by the Company for business combinations is the acquisition method. The Company defines a business combination as a transaction through which it obtains control over a business, whereby it has the power to steer and manage the relevant operations of all assets and liabilities of the business with the purpose of providing a return in the form of dividends, lower 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 and the equity interests issued by the Company. The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable acquired assets and liabilities and contingent liabilities assumed in a business combination are initially measured at their fair values at the acquisition date. The Company recognizes any non-controlling interest in the acquiree based on the share of the non-controlling interest in the net identifiable assets of the acquired entity. The Company accounts for business combinations of entities using the predecessor method in a jointly controlled entity. 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 carrying value of the net assets acquired at the level of the subsidiary and its carrying amount at the level of the Company is recognized in stockholders’ equity. The acquisition-related costs are recognized as expenses when 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 and liabilities assured. 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. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 71 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS If the business combination is achieved in stages, the value in books at the acquisition date of the equity previously held by the Company in the acquired entity is remeasured at its fair value at the acquisition date. Any loss or gain resulting from such remeasurement is recorded in income of the year. Transactions and intercompany balances and unrealized gains on transactions between Alpek’s companies are eliminated in preparing the consolidated financial statements. Alpek’s subsidiaries apply the same accounting policies as those disclosed in these consolidated financial statements. As of December 31, 2020, 2019 and 2018, the main companies that comprise the consolidated financial statements of the Company are as follows: Country (1) USA Spain Argentina Canada Brazil Brazil Argentina Chile Brazil Alpek, S. A. B. de C. V. (Holding Company) Grupo Petrotemex, S. A. de C. V. (Holding Company) DAK Americas, LLC Dak Resinas Américas México, S. A. de C. V. DAK Américas Exterior, S. L. (Holding Company) DAK Americas Argentina, S. A. Compagnie Selenis Canada (Selenis) (3) Tereftalatos Mexicanos, S. A. de C. V. (Temex) Akra Polyester, S. A. de C. V. Companhia Petroquímica de Pernambuco (7) Companhia Integrada Textil de Pernambuco (7) 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 Brasil, LTD Unimor, S. A. de C. V. (Holding Company) Univex, S. A. Alpek Polyester UK LTD (4) BVPV Styrenics LLC (5) Cogeneración de Energía Limpia de Cosoleacaque, S. A. de C. V. (6) Cogeneración de Altamira, S. A. de C. V. (6) United Kingdom USA Shareholding (%) (2) 2019 2018 2020 100 100 100 100 100 50 91 93 100 100 51 50 100 100 100 100 100 100 100 100 100 - - 100 100 100 100 100 50 91 93 100 100 51 50 100 100 100 100 100 100 100 - - - - 100 100 100 100 100 50 91 93 100 100 51 50 100 100 100 100 100 100 100 - - 100 100 Functional currency Mexican peso US dollar US dollar US dollar US dollar Argentine peso US dollar US dollar US dollar Brazilian real Brazilian real US dollar US dollar Mexican peso US dollar Argentine peso Chilean peso Brazilian real Mexican peso Mexican peso Pound sterling US dollar Mexican peso Mexican peso (1) Companies incorporated in Mexico, except those indicated. (2) Ownership percentage that Alpek has in the holding companies and ownership percentage that such holding companies have in the companies integrating the groups. Ownership percentages and the voting rights are the same. (3) The purchase agreement of this entity, included an earn-out clause related to the production of PETG, which was initiated by Selenis. Under this clause, the seller holds in escrow the shares not acquired by the Company, which may be released as long as the Company completes the first PETG production run. (4) Previously known as Lotte Chemical UK Limited (“Lotte UK”). (5) Entity acquired in 2020. See Note 2d. (6) Entities sold in 2019. See Note 2f. (7) Entities acquired in 2018. See Note 2k. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 72 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020, 2019 and 2018, there are no significant restrictions for investment in shares of subsidiary companies mentioned above. ii. Absorption (dilution) of control in subsidiaries The effect of absorption (dilution) of control in subsidiaries, in example, 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 book value of the investment before the event of dilution or absorption against the book value after the relevant event. In the case of loss of control, the dilution effect is recognized in income. When the Company issues purchase obligations on certain non-controlling interests in a consolidated subsidiary and non-controlling stockholders retain the risks and awards on these shares in the consolidated subsidiary, these are recognized as financial liabilities for the present value of the refundable amount of the options, initially recorded with a corresponding reduction in the stockholders’ equity, and subsequently accruing through financial charges to income during the contractual period. iii. Sale or disposal of subsidiaries When the Company ceases to have control any retained interest in the entity is re-measured at fair value, and the change in the carrying amount is recognized in the consolidated statement of income. The fair value is the initial carrying value 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 results in the amounts previously recognized in comprehensive income being 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. 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 of profits or losses of associates, post-acquisition, is recognized in the consolidated statement of income and its share in the other comprehensive income of associates is recognized as other comprehensive income. 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 value and recognizes it in “equity in results of associates recognized using the equity method” in the consolidated statement of income. Unrealized gains on transactions between the Company and its associates are eliminated to the extent of the Company’s equity 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 the remaining investment, including any consideration received from the partial disposal of the investment and the book value of the investment is recognized in the consolidated statement of income. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 73 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS v. Joint ventures Joint arrangements are those where there is joint control since the decisions over relevant activities require the unanimous consent of each one of the parties sharing control. Investments in joint arrangements are classified in accordance with the contractual rights and obligations of each investor such as: joint operations or joint ventures. When the Company holds the right over assets and obligations for related assets under a joint arrangement, this is classified as a joint operation. When the company holds rights over net assets of the joint arrangement, this is classified as a joint venture. The Company has assessed the nature of its joint arrangements and classified them as joint ventures. Joint ventures are accounted for by using the equity method applied to an investment in associates. c) Foreign currency translation i. Functional and presentation currency The amounts included in the financial statements of each of the Company’s subsidiaries, associates and joint ventures 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. When there is a change in the functional currency of one of the subsidiaries, according to International Accounting Standard 21, Effects of Changes in Foreign Exchange Rates (“IAS 21”), this change is accounted for prospectively, translating at the date of the functional currency change, all assets, liabilities, equity, and income items at the exchange rate of that date. ii. Transactions and balances Transactions in foreign currencies are translated into the functional currency using the foreign exchange rates prevailing at the transaction date or valuation date when the amounts are re-measured. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at the closing exchange rates are recognized as foreign exchange gain or loss in the consolidated statement of income, except for those which are deferred in comprehensive income and qualify as cash flow hedges. Changes in the fair value of securities or monetary financial assets denominated in foreign currency classified as available for sale are divided between fluctuations resulting from changes in the amortized cost of such securities and other changes in value. Subsequently, currency fluctuations are recognized in income and changes in the carrying amount arising from any other circumstances are recognized as part of comprehensive income. iii. Translation of subsidiaries with recording currency other than the functional currency The financial statements of foreign 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 rate. b) To the historical balances of monetary assets and liabilities and stockholders’ equity translated into the functional currency the movements that occurred during the period were added, which 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 income, costs and expenses of the periods, expressed in the recording currency, were translated at the historical exchange rate of the date they were accrued and recognized in the consolidated statement of income, except when they arose from non-monetary items, in which case the historical exchange rate of the non-monetary items was used. d) The exchange differences arising in the translation from the recording currency to the functional currency were recognized as income or expense in the consolidated statement of income in the period they arose. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 74 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS iv. Translation of subsidiaries with functional currency other than the presentation currency The results and financial position of all Company entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows, depending on whether the functional currency comes from a non-hyperinflationary or hyperinflationary environment: Non-hyperinflationary environment a) Assets and liabilities for each statement of financial position presented are translated at the closing exchange rate at the date of the statement of financial position; b) Stockholders’ equity of each statement of financial position presented is translated at historical exchange rate; c) Income and expenses for each statement of income 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) The resulting exchange differences are recognized in the consolidated statement of other comprehensive income as translation effect. Hyperinflationary environment a) Assets, liabilities and equity in the statement of financial position, as well as income and expenses in the income statement, are translated at the closing exchange rate of the statement of financial position, after being restated in its functional currency (Note 3d); and b) Assets, liabilities, equity, income and expenses of the comparative period, are maintained according to the amount obtained in the translation of the year in question, that is, the financial statements of the preceding period. These amounts are not adjusted to subsequent exchange rates because the Company presents its financial information in Mexican pesos, which correspond to a currency of a non-hyperinflationary environment. The primary exchange rates in the various translation processes are listed below: Local currency to Mexican pesos Country United States Argentina Brazil Chile United Kingdom Local Currency U.S. dollar Argentine peso Brazilian real Chilean peso Pound sterling Closing exchange rate at December 31, 2019 18.85 0.31 4.69 0.03 24.95 2018 19.68 0.52 5.07 0.03 25.09 2020 19.95 0.24 3.84 0.03 27.26 Average annual exchange rate 2019 19.30 0.40 4.90 0.03 24.68 2018 20.15 0.53 5.18 0.03 25.53 2020 21.59 0.30 4.12 0.03 27.87 d) Hyperinflationary effects As of July 1, 2018, the cumulative inflation from the prior 3 years in Argentina exceeded 100%; consequently, the Argentine peso was classified as a currency of a hyperinflationary economic environment. As a result, the financial statements of the subsidiaries located in that country, whose functional currency is the Argentine peso, have been restated and adjusted for inflation in accordance with the requirements of the International Accounting Standard 29, Financial Information in Hyperinflationary Economies (“IAS 29”), and have been consolidated in compliance with the requirements of IAS 21. The purpose of applying these requirements is to consider changes in the general purchasing power of the Argentine peso in order to present the financial statements in the measuring unit current at the date of the statement of financial position. The financial statements before including any inflation adjustments were prepared using the historical cost method. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 75 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The Company determined the inflation adjustments in its consolidated financial statements in the following manner: a. The amounts corresponding to non-monetary items of each statement of financial position, which are not measured at the date of the statement of financial position at their fair value or net realizable value, as the case may be, are restated by applying to their historical cost the change of a general price index from the date of acquisition or the date of its last measurement at fair value, to the date of the statement of financial position; b. The amounts corresponding to monetary items of the statement of financial position are not restated; c. The components of stockholders’ equity of each statement of financial position are restated: 1) At the beginning of the first period of application of IAS 29, except for retained earnings, by applying the change of a general price index from the dates the components were originated to the date of restatement. Restated retained earnings are derived from all the other balances in the statement of financial position; 2) At the end of the first period and in subsequent periods, all components of stockholders’ equity are restated by applying a general price index from the beginning of the period or the date of contribution, if later. d. Revenues and expenses are restated by applying the change in the general price index, from the date on which the expenses and revenues were recognized, up to the reporting date. e. Gains or losses arising from the net monetary position are recognized in the consolidated statement of income. The Company reflects the effects of hyperinflation on the financial information of its subsidiaries in Argentina using price indexes that are considered appropriate in accordance with Resolution 539/19 JG (the “Resolution”) of the Argentine Federation of Professional Councils of Economic Sciences. This resolution establishes that a combination of price indices should be used in the calculation of the effects of restatement of financial statements. Therefore, the Company has decided to use the Consumer Price Index (“CPI”) to restate balances and transactions that have been generated from January 2017; and the IPIM (domestic wholesale price index) for balances and transactions generated for all months prior to 2017, except for the months of November and December 2015, due to the fact that such index was not available. For these months, the Company used the IPCBA (consumer price index of the city of Buenos Aires). The effects of the restatement of the financial statements of the subsidiaries located in Argentina were not material; therefore, they were included in the “Financial result, net” line item of the year ended December 31, 2020. e) 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 and high credit quality 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 loans as part of the current liabilities. f) Restricted cash 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 consolidated statement cash flows. g) Financial instruments Financial assets The Company subsequently classifies and measures its financial assets based on the Company’s business model to manage financial assets, and on the characteristics of the contractual cash flows of such assets. This way financial assets can be classified at amortized cost, at fair value through other comprehensive income, and at fair value through profit or loss. Management determines the classification of its financial assets upon initial recognition. Purchases and sales of financial assets are recognized at settlement date. Financial assets are entirely written off when the right to receive the related cash flows expires or is transferred, and the Company also has substantially transferred all the risks and rewards of its ownership, as well as the control of the financial asset. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 76 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Classes of financial assets i. Financial assets at amortized cost Financial assets at amortized cost are those that i) are held within a business model whose objective is to hold said assets in order to collect contractual cash flows; and ii) the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the amount of outstanding principal. ii. Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income are those whose business model is based on both collecting contractual cash flows and selling the financial assets; and their contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the amount of outstanding principal. As of December 31, 2020, 2019 and 2018, the Company does not hold financial assets to be measured at fair value through other comprehensive income. iii. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss, in addition to those described in point i in this section, are those that do not meet the characteristics to be measured at amortized cost or fair value through other comprehensive income, since: i) they have a business model different to those that seek to collect contractual cash flows, or collect contractual cash flows and sell the financial assets, or otherwise ii) the generated cash flows are not solely payments of principal and interest on the amount of outstanding principal. Despite the previously mentioned classifications, the Company may make the following irrevocable elections in the initial recognition of a financial asset: a. Disclose the subsequent changes in the fair value of an equity instrument in other comprehensive income, only if such investment (in which no significant influence, joint control or control is maintained) is not held for trading purposes, or is a contingent consideration recognized as a result of a business combination. b. Assign a debt instrument to be measured at fair value in profit or loss, if such election eliminates or significantly reduces an accounting mismatch that would arise from the measurement of assets or liabilities or the recognition of profits and losses on them in different basis. As of December 31, 2020, 2019 and 2018, the Company has not made any of the irrevocable designations described above. Impairment of financial assets The Company uses an impairment model based on expected credit losses rather than losses incurred, applicable to financial assets subject to such assessment (i.e. financial assets measured at amortized cost and at fair value through other comprehensive income), as well as lease receivables, contract assets, certain written loan commitments, and financial guarantee contracts. The expected credit losses on these financial assets are estimated from the initial recognition of the asset at each reporting date, using as a reference the past experience of the Company’s credit losses, adjusted for factors that are specific to the debtors or groups of debtors, general economic conditions, and an assessment of both the current direction and the forecast of future conditions. a. Trade receivables The Company adopted the simplified expected loss calculation model, through which expected credit losses during the account receivable’s lifetime are recognized. The Company performs an analysis of its portfolio of customer receivables, in order to determine if there are significant customers for whom it requires an individual assessment; meanwhile, customers with similar characteristics that share credit risks (participation in the portfolio of accounts receivable, type of market, sector, geographic area, etc.), are grouped to be evaluated collectively. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 77 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS In its impairment assessment, the Company may include indications that the debtors or a group of debtors are experiencing significant financial difficulties, and also observable data indicating that there is a significant decrease in the estimated cash flows to be received, including arrears. For purposes of the historical estimate, the Company considers that the following constitutes an event of default, since historical experience indicates that financial assets are not recoverable when they meet any of the following criteria: • The debtor does not fulfill its financial agreements; or • Information obtained internally or from external sources indicates that it is unlikely that the debtor will pay its creditors, including the Company, in its entirety (without considering any guarantee held by the Company). The Company defined the breach threshold as the period from which the recovery of the account receivable subjected to analysis is marginal, considering the internal risk management customers with similar characteristics sharing credit risks (participation in trade receivables portfolio, type of market, sector, geographic area, etc.), are grouped to be evaluated collectively. Other financial instruments b. The Company recognizes credit losses expected during the asset’s lifetime of all financial instruments for which credit risk has significantly increased since its initial recognition (assessed on a collective or individual basis), considering all the reasonable and sustainable information, including the one referring to the future. If at the presentation date, the credit risk a financial instrument has not significantly increased since its initial recognition, the Company calculates the loss allowance for that financial instrument as the amount of expected credit losses in the following 12 months. In both cases, the Company recognizes in profit or loss of the period the decrease or increase in the expected credit loss allowance at the end of the period. Management assesses the impairment model and the inputs used therein at least once every 3 months, in order to ensure that they remain in effect based on the current situation of the portfolio. Financial liabilities Non-derivative financial liabilities are initially recognized at fair value and are subsequently valued at amortized cost using the effective interest method. Liabilities in this category are classified as current liabilities if expected to be settled within the next 12 months, otherwise they are classified as non-current. Trade payables are obligations to pay for goods or services that have been acquired or received from suppliers in the ordinary course of business. Loans are initially recognized at fair value, net of transaction costs incurred. Loans are subsequently carried at amortized cost; any difference between the funds received (net of transaction costs) and the settlement value is recognized in the consolidated statement of income over the term of the loan using the effective interest method. Derecognition of financial liabilities The Company derecognizes financial liabilities if, and only if, the obligations of the Company are fulfilled, cancelled or have expired. The difference between the carrying amount of the derecognized financial liability and the consideration paid and payable is recognized in profit or loss. Additionally, when the Company carries out a refinancing transaction and the previous liability qualifies to be derecognized, the costs incurred in the refinancing are recognized immediately in profit or loss at the date of termination of the previous financial liability. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 78 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Offsetting financial assets and liabilities Assets and liabilities are offset and the net amount is presented in the consolidated statement of financial position when the right to offset the recognized amounts is legally enforceable and there is an intention to settle on a net basis or to realize the asset and settle the liability simultaneously. h) Derivative financial instruments and hedging activities All derivative financial instruments are identified and classified as fair value hedges or cash flow hedges, for trading or the hedging of market risks 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 fair value of hedging derivatives is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and as a current asset or liability if the remaining maturity of the hedged item is less than 12 months. 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, primary position, risks to be hedged and the effectiveness of the hedging relationship, characteristics, accounting recognition and how the effectiveness is to be measured. Fair value hedges Changes in the fair value of derivative financial instruments are recorded in the consolidated statement of income. The change in fair value hedges and the change in the primary position attributable to the hedged risk are recorded in the consolidated statement of income in the same line item as the hedged position. As of December 31, 2020, 2019 and 2018, the Company does not hold 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 profit or loss when the hedged position affects these. The ineffective portion is immediately recorded in income. Net investment hedge in a foreign transaction Beginning March 1, 2018, the Company applies the hedge accounting to currency risk arising from its investments in foreign transactions for variations in exchange rates arising between the functional currency of such transaction and the functional currency of the holding entity, regardless of whether the investment is maintained directly or through a sub-holding entity. Variation in exchange rates is recognized in the other items of comprehensive income as part of the translation effect, when the foreign transaction is consolidated. To this end, the Company designates the debt denominated in a foreign currency as a hedging instrument; therefore, the exchange rate effects caused by the debt are recognized in other components of comprehensive income, on the translation effects line item, to the extent that the hedge is effective. When the hedge is not effective, exchange differences are recognized in profit or loss. Suspension of hedge accounting The Company suspends hedge accounting when the derivative financial instrument or the non-derivative financial instrument has expired, is cancelled or exercised, when the derivative or non-derivative financial instrument is not highly effective to offset the changes in the fair value or cash flows of the hedged item. The replacement or successive renewal of a hedging instrument for another one is not an expiration or resolution if such replacement or renewal is part of the Company’s documented risk management objective and it is consistent with this. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 79 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS On suspending hedge accounting, in the case of fair value hedges, the adjustment to the carrying amount of a hedged amount 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 statement of income. 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 statement of income, to the extent the forecasted transaction impacts it. The fair value of derivative financial instruments reflected in the consolidated 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 closing date. i) Inventories Inventories are stated at the lower of cost or 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 borrowing 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 other comprehensive income corresponding to raw material purchases that qualify as cash flow hedges. j) 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 statement of income during the year they are incurred. Major improvements are depreciated over the remaining useful life of the related asset. When the Company carries out major repairs or maintenance of its property, plant and equipment assets, and the cost is recognized in the book value of the corresponding asset as a replacement, provided that the recognition criteria are met. The remaining portion of any major repair or maintenance is derecognized. The Company subsequently depreciates the recognized cost in the useful life assigned to it, based on its best estimate of useful life. 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 estimated useful lives of the classes of assets are as follows: Buildings and constructions Machinery and equipment Vehicles Furniture and lab and IT equipment Other 40 to 50 years 10 to 40 years 15 years 2 to 13 years 3 to 20 years The spare parts to be used after one year and attributable to specific machinery are classified as property, plant and equipment in other fixed assets. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 80 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Borrowing costs related to financing of property, plant and equipment whose acquisition or construction requires a substantial period (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 statement of income 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 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 statement of income. k) Leases The Company as lessee The Company evaluates whether a contract is or contains a lease agreement at inception of a contract. A lease is defined as an agreement or part of an agreement that conveys the right to control the use of an identified asset for a period of time in exchange for a consideration. The Company recognizes an asset for right-of-use and the corresponding lease liability, for all lease agreements in which it acts as lessee, except in the following cases: short-term leases (defined as leases with a lease term of less than 12 months); leases of low-value assets (defined as leases of assets with an individual market value of less than US$5,000 (five thousand dollars)); and, lease agreements whose payments are variable (without any contractually defined fixed payment). For these agreements, which exempt the recognition of an asset for right-of-use and a lease liability, the Company recognizes the rent payments as an operating expense in a straight-line method over the lease period. The right-of-use asset comprises all lease payments discounted at present value; the direct costs to obtain a lease; the advance lease payments; and the obligations of dismantling or removal of assets. The Company depreciates the right-of- use asset over the shorter of the lease term or the useful life of the underlying asset; therefore, when the lessee will exercise a purchase option, the lessee shall depreciate the right-of-use asset from the commencement date to the end of the useful life of the underlying asset. Depreciation begins on the lease commencement date. The lease liability is initially measured at the present value of the future minimum lease payments that have not been paid at that date, using a discount rate that reflects the cost of obtaining funds for an amount similar to the value of the lease payments, for the acquisition of the underlying asset, in the same currency and for a similar period to the corresponding contract (incremental borrowing rate). When lease payments contain non-lease components (services), the Company has chosen, for some class of assets, not to separate them and measure all payments as a single lease component; however, for the rest of the class of assets, the Company measures the lease liability only considering lease payments, while all of the services implicit in the payments, are recognized directly in the consolidated statement of income as operating expenses. To determine the lease term, the Company considers the non-cancellable period, including the probability to exercise any right to extend and/or terminate the lease term. Subsequently, the lease liability is measured increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and reducing the carrying amount to reflect the lease payments made. When there is a modification in future lease payments resulting from changes in an index or a rate used to determine those payments, the Company remeasures the lease liability when the adjustment to the lease payments takes effect, without reassessing the discount rate. However, if the modifications are related to the lease term or exercising a purchase option, the Company reassesses the discount rate during the liability’s remeasurement. Any increase or decrease in the value of the lease liability subsequent to this remeasurement is recognized as an adjustment to the right-of-use asset to the same extent. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 81 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Finally, the lease liability is derecognized when the Company fulfills all lease payments. When the Company determines that it is probable that it will exercise an early termination of the contract that leads to a cash disbursement, such disbursement is accounted as part of the liability’s remeasurement mentioned in the previous paragraph; however, in cases in which the early termination does not involve a cash disbursement, the Company cancels the lease liability and the corresponding right-of-use asset, recognizing the difference immediately in the consolidated statement of income. The Company as lessor Leases, determined based on the definition of IFRS 16, for which the Company acts as lessor, are classified as financial or operating. As long as the terms of the lease transfer substantially all the risks and rewards of the property to the lessee, the contract is classified as a finance lease. The other leases are classified as operating leases. Income from operating leases is recognized in straight line during the corresponding lease term. Initial direct costs incurred in negotiating and arranging and operating lease are added to the carrying amount of the leased asset and are recognized straight- line over the term of the lease. The amounts for finance leases are recognized as accounts receivable for the amount of the Company’s net investment in the leases. l) 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: i. Indefinite useful life These intangible assets are not amortized and are subject to annual impairment assessment. As of December 31, 2020, 2019 and 2018, no factors have been identified limiting the 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 over their estimated useful life, determined based on the expectation of generating future economic benefits, and are subject to impairment tests when triggering events of impairment are identified. The estimated useful lives of intangible assets with finite useful lives are summarized as follows: Development costs Supply rights Non-competition agreements Customer relationships Software and licenses Intellectual property rights Maquila rights Other 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 Development costs Research costs are recognized in income as incurred. Expenditures for 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. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 82 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Licenses Licenses acquired in a separate transaction, are recorded at acquisition cost, while those acquired in a business combination are recognized at fair value at acquisition date. Licenses that have a defined useful life are presented at cost less accumulated amortization. Amortization is recorded by the straight-line method over its estimated useful life. The acquisition of software licenses is capitalized based on the costs incurred to acquire and use the specific software. Software development Costs associated with the maintenance of software are recorded as expenses as incurred. Development costs directly related with the design and tests of unique and identifiable software products controlled by the Company are recorded as intangible assets when they fulfill the following criteria: - Technically, it is possible to complete the intangible asset so that it may be available for its use or sale; - The intangible asset is to be completed for use or sale; - The ability to use or sell the intangible asset; - The way in which the intangible asset is to generate probable future economic benefits; - The availability of adequate technical, financial or other type of resources, to complete the development and use or sell the intangible asset; and - The ability to reliably calculate the disbursement attributable to the intangible asset during its development. The amount initially recognized for an intangible asset generated internally will be the sum of disbursements incurred from the moment the element fulfills the conditions for recording, as established above. When no intangible asset internally generated may be recognized, the disbursements for development are charged to income in the period they are incurred. m) Goodwill Goodwill represents the excess of the acquisition cost of a subsidiary over the Company’s equity in the fair value of the identifiable net assets acquired, determined at the date of acquisition, and is not subject to amortization. Goodwill is shown under goodwill and intangible assets and is recognized at cost less accumulated impairment losses, which are not reversed. Gains or losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. n) Impairment of non-financial assets Assets that have an indefinite useful life, for example, goodwill, are not depreciable 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 long-term assets other than goodwill that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date. When an impairment loss is reversed, the carrying amount of the asset or cash generating unit, is increased to the revised estimated value of its recoverable amount, in such a way that the adjusted carrying amount does not exceed the carrying amount that would have been determined if an impairment loss had not been recognized for that asset or cash generating unit in previous years. The reversal of an impairment loss is recognized immediately in the consolidated statement of income. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 83 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS o) Income tax The amount of income taxes in the consolidated statement of income represents the sum of the current and deferred income taxes. The amount of income taxes included in the consolidated statement of income represents the current tax and the effects of deferred income tax assets determined in each subsidiary by the asset and liability method, applying the rate established by the legislation enacted or substantially enacted at the consolidated statement of financial position date, wherever the Company operates and generates taxable income. The applicable rates are applied to the total temporary differences resulting from comparing the accounting and tax bases of assets and liabilities, and that are expected to be applied when the deferred tax asset is realized or the deferred tax liability is expected to be settled, considering, when applicable, any tax- loss carryforwards, prior to the recovery analysis. The effect of the change in current tax rates is recognized in current income of the period in which the rate change is determined. 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 appropriate, based on the amounts expected to be paid to the tax authorities. Deferred tax assets are recognized only when it is probable that future taxable profits will exist against which the deductions for temporary differences can be taken. 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 near future. Deferred tax assets and liabilities are offset when a legal right exists, and when the taxes are levied by the same tax authority. p) Employee benefits i. Pension plans Defined contribution plans: A defined contribution plan is a pension plan under which the Company pays fixed contributions into a separate entity. The Company has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to their service in the current and past periods. The contributions are recognized as employee benefit expense on the date that is required the contribution. Defined benefit plans: A defined benefit plan is a plan, which specifies the amount of the pension an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability recognized in the 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 in conformity with IAS 19, Employee Benefits, that are denominated in the currency in which the benefits will be paid, and have maturities that approximate the terms of the pension liability. Actuarial gains and losses from adjustments and changes in actuarial assumptions are recognized directly in other items of the comprehensive income in the year they occur and will not be reclassified to the results of the period. The Company determines the net finance expense (income) by applying the discount rate to the liabilities (assets) from net defined benefits. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 84 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Past-service costs are recognized immediately in the consolidated statement of income. ii. Post-employment medical benefits The Company provides medical benefits to retired employees after termination of employment. The right to access these benefits usually depends on the employee’s having worked until retirement age and completing a minimum of years of service. The expected costs of these benefits are accrued over the period of employment using the same criteria as those described for defined benefit pension plans. iii. Termination benefits Termination benefits are payable when employment is terminated by the Company before the normal retirement date or when an employee accepts voluntary termination of employment in exchange for these benefits. The Company recognizes termination benefits in the first of the following dates: (a) when the Company can no longer withdraw the offer of these benefits, and (b) when the Company recognizes the costs from restructuring within the scope of the IAS 37 and it involves the payment of termination benefits. If there is an offer that promotes the termination of the employment relationship voluntarily by employees, termination benefits are valued based on the number of employees expected to accept the offer. The benefits that will be paid in the long term are discounted at their present value. iv. Short-term benefits The Company grants benefits to employees in the short term, which may include wages, salaries, annual compensation and bonuses payable within 12 months. The Company recognizes an undiscounted provision when it is contractually obligated or when past practice has created an obligation. v. Employee participation in profit and bonuses The Company recognizes a liability and an expense for bonuses and employee participation in profits when it has a legal or assumed obligation to pay these benefits and determines the amount to be recognized based on the profit for the year after certain adjustments. q) Provisions Provisions represent a present legal obligation or a constructive obligation as a result of past events where an outflow of resources to meet the obligation is likely and where the amount has been reliably estimated. Provisions are not recognized for future operating losses. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the value of money over time and the risks specific to the obligation. The increase in the provision due to the passage 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. 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. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 85 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS r) Share based payment The Company’s compensation plans are based 50% on the market value of the shares of its holding entity and the other 50% on the market value of the shares of Alpek SAB, granted to certain senior executives of the Company and its subsidiaries. The conditions for granting such compensation to the eligible executives include compliance with certain financial metrics such as the level of profit achieved, and remaining in the Company for up to 5 years, among other requirements. The Board of Directors of Alfa has appointed a technical committee to manage the plan, and it reviews the estimated cash settlement of this compensation at the end of the year. The payment plan is subject to the discretion of Alfa’s senior Management. Adjustments to this estimate are charged or credited to the consolidated statement of income. 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 within 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 statement of income. s) Treasury shares The Company’s stockholders periodically authorize 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 presented as a reduction to stockholders’ equity at the purchase price. These amounts are stated at their historical value. t) Capital stock The Company’s common shares are classified as capital stock within stockholders’ equity. Incremental costs directly attributable to the issuance of new shares are included in equity as a reduction from the consideration received, net of tax. u) Comprehensive income Comprehensive income is composed of net income plus the annual effects of their capital reserves, net of taxes, which are comprised of the translation of foreign subsidiaries, the effects of derivative cash flow hedges, actuarial gains or losses, the effects of the change in the fair value of financial instruments available for sale, the equity in other items of comprehensive income of associates and joint ventures as well as other items specifically required to be reflected in stockholders’ equity, and which do not constitute capital contributions, reductions and distributions. v) Segment reporting Segment information is presented consistently with the internal reporting provided to the chief operating decision maker who is the highest authority in operational decision-making, resource allocation and assessment of operating segment performance. w) Revenue recognition Revenues comprise the fair value of the consideration received or to receive for the sale of goods and services in the ordinary course of the transactions, and are presented in the consolidated statement of income, net of the amount of variable considerations, which comprise the estimated amount of returns from customers, rebates and similar discounts and payments made to customers with the objective that goods are accommodated in attractive and favorable spaces at their facilities. To recognize revenues from contracts with customers, the comprehensive model for revenue recognition is used, which is based on a five-step approach consisting of the following: (1) identify the contract; (2) identify performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when the Company satisfies a performance obligation. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 86 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS i. Revenue from the sale of goods and products Contracts with customers are formalized by commercial agreements complemented by purchase orders, whose costs comprise the promises to produce, distribute and deliver goods based on the contractual terms and conditions set forth, which do not imply a significant judgment to be determined. When there are payments related to obtaining contracts, they are capitalized and amortized over the term of the contract. Performance obligations held by the Company are not separable, and are not partially satisfied, since they are satisfied at a point in time, when the customer accepts the products. Moreover, the payment terms identified in most sources of revenue are short-term, with variable considerations including discounts given to customers, without financing components or guarantees. These discounts are recognized as a reduction in revenue; therefore, the allocation of the price is directly on the performance obligations of production, distribution and delivery, including the effects of variable consideration. The Company recognizes revenue at a point in time, when control of sold goods has been transferred to the customer, which is given upon delivery of the goods promised to the customer according to the negotiated contractual terms. The Company recognizes an account receivable when the performance obligations have been met, recognizing the corresponding revenue; moreover, the considerations received before completing the performance obligations of production and distribution are recognized as customer advances. Dividend income from investments is recognized once the rights of stockholders to receive this payment have been established (when it is probable that the economic benefits will flow to the Company and the revenue can be reliably determined). x) Earnings per share Earnings per share are calculated by dividing the profit attributable to the stockholders of the controlling interest by the weighted average number of common shares outstanding during the year. As of December 31, 2020, 2019 and 2018, there are no dilutive effects from financial instruments potentially convertible into shares. y) Changes in accounting policies and disclosures i. New standards and changes adopted by the Company. In the current year, the Company has applied a number of new and amended IFRS and interpretations issued by the International Accounting Standards Board (“IASB”) that are mandatorily effective for an accounting period that begins on or after January 1, 2020. The conclusions related to their adoption are described as follows: Amendments to IFRS 16, Rent Concessions Related to COVID-19 The amendments introduce a practical expedient that provides lessees the option not to assess whether a rent concession that meets certain conditions is a lease modification. The practical expedient is applicable to rent concessions occurring as a direct consequence of the COVID-19 pandemic and only if all of the following conditions are met: a) The change in the lease payments results in revised consideration for the lease that is substantially the same as, or less than, the consideration for the lease immediately preceding the change; b) Any reduction in lease payments affects only payments originally due on or before June 30, 2021; and c) There is no substantive change to other terms and conditions of the lease. The Company determined that the impacts due to the implementation of these amendments in its consolidated financial statements were not significant, as only one of its subsidiaries received rental concessions related to COVID-19. Its accounting treatment was aligned with the practical expedient previously described. Additionally, the Company adopted the following amendments, which did not have any effects on the consolidated financial statements in the current year: 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 87 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS • Amendments to IAS 1 and IAS 8, Definition of Materiality • Amendments to IFRS 3, Definition of a Business • Amendments to IFRS 4, Insurance Contracts in the application of IFRS 9, Financial Instruments • Amendments to IFRS 9, IAS 39 and IFRS 7, Interest Rate Benchmark Reform • Amendments to the IFRS’s conceptual framework ii. New and revised IFRS in use but not yet effective At the date of authorization of these financial statements, the Company has not applied the following new and revised IFRS that have been issued but are not yet effective. The Company does not expect that the adoption of the following standards will have a material impact on the consolidated financial statements in future periods, considering that have no significant applicability: • • • • • Amendments to IAS 1, Classification of Liabilities as Current or Non-current (2) Amendments to IAS 16, Property, Plant and Equipment Proceeds before Intended Use (1) Amendments to IAS 37, Cost of Fulfilling an Onerous Contract (1) Amendments to IFRS 9, Financial Instruments (1) IFRS 17, Insurance Contracts (2) (1) Effective for annual reporting periods beginning on January 1, 2022 (2) Effective for annual reporting periods beginning on January 1, 2023 Additionally, the Company is continuously monitoring the progress of the reference interest rate reform project that modifies the regulations as mentioned below: • Phase 2 of the benchmark interest rate reform (IBOR- Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16) Interbank benchmark rates such as LIBOR, EURIBOR and TIBOR, which represent the cost of obtaining unsecured funds, have been questioned about their viability as long-term financing benchmarks. The changes in the reform to the reference interest rates in its phase 2 refer to the modifications of financial assets, financial liabilities and lease liabilities, requirements for accounting coverage and disclosure of financial instruments. These improvements are effective as of January 1, 2021 with retrospective application, without the need to redo the comparative periods. Regarding the modification of financial assets, financial liabilities and lease liabilities, the IASB introduced a practical expedient that involves updating the effective interest rate. On the other hand, regarding hedge accounting, the hedge relationships and documentation must reflect the modifications to the hedged item, the hedging instrument and the risk to be hedged. Hedging relationships must meet all criteria for applying hedge accounting, including effectiveness requirements. Finally, regarding disclosures, entities should disclose how they are managing the transition to alternative reference rates and the risks that may arise from the transition; in addition, they must include quantitative information on financial assets and non-derivative financial liabilities, as well as non-derivative financial instruments, that continue under the reference rates subject to the reform and the changes that have arisen to the risk management strategy. The Company is in the process of evaluating the impacts arising from the application of these amendments. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 88 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company’s activities expose it to various financial risks: market risk (including exchange rate risk, price risk and interest rate variation risk), credit risk and liquidity risk. The Company has a general risk management program focused on the unpredictability of financial markets, and seeks to minimize the potential adverse effects on its financial performance. The objective of the risk management program is to protect the financial health of its business, taking into account the volatility associated with foreign exchange and interest rates. Sometimes, the Company uses derivative financial instruments to hedge certain exposures to risks. In addition, due to the nature of the industries in which it participates, the Company has performed hedges of input prices with derivative financial instruments. Alfa has a Risk Management Committee (RMC), comprised of the Board’s Chairman, the Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”) and a Risk Management Officer (“RMO”) acting as technical secretary. The RMC reviews derivative transactions proposed by the subsidiaries of Alfa, including Alpek, in which a potential loss analysis surpasses US$1. This Committee supports both the CEO and the President of Board of Alfa. All new derivative transactions which the Company proposes to enter into, as well as the renewal or cancellation of derivative arrangements, must be approved by both Alpek’s and Alfa’s CEO, according to the following schedule of authorizations: Maximum possible loss US$1 Individual transaction Annual cumulative transactions Chief Executive Officer of the Company Risk Management Committee of Alfa Finance Committee Board of Directors of Alfa 1 30 100 >100 5 100 300 >300 The proposed transactions must meet certain criteria, including that the hedges are lower than established risk parameters, and that they are the result of a detailed analysis and properly documented. Sensitivity analysis and other risk analyses should be performed before the operation is entered into. Alfa’s risk management policy indicates that hedging positions should always be less than the projected exposure to allow an acceptable margin of uncertainty. Exposed transactions are expressly prohibited. The Company’s policy indicates that the further the exposure is, the lower the coverage, based on the following table: Maximum coverage (as a percentage of the projected exposure) Commodities Energy costs Exchange rate for operating transactions Exchange rate for financial transactions Interest rates Current year 100 75 80 100 100 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 89 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Capital management The Company’s objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can continue to provide returns to stockholders and benefits to other stakeholders, as well as maintaining an optimal capital structure to reduce the cost of capital. To maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to stockholders, return equity to stockholders, issue new shares or sell assets to reduce debt. Alpek reviews capital based on a leverage ratio. This percentage is calculated by dividing total liabilities by total stockholders’ equity. The financial ratio of total liabilities/total equity was 1.34, 1.28 and 1.77 as of December 31, 2020, 2019 and 2018, respectively, resulting in a leverage ratio that meets the Company’s management and risk policies. Financial instruments by category The following are the Company’s financial instruments by category. As of December 31, 2020, 2019 and 2018, financial assets and liabilities consist of the following: Cash and cash equivalents Restricted cash Financial assets measured at amortized cost: Trade and other accounts receivable Other non-current assets Financial assets measured at fair value through profit or loss Derivate financial instruments(1) Financial liabilities measured at amortized cost: Debt Trade and other accounts payable Lease liability Financial liabilities measured at fair value: Derivative financial instruments(1) $ $ $ $ 2020 10,144 12 12,726 4,518 524 27,924 30,652 17,991 3,010 As of December 31, 2019 7,059 216 $ $ 12,046 4,806 77 24,204 28,810 14,955 3,368 $ $ $ $ 2018 4,168 3 17,287 5,372 30 26,860 40,130 24,217 - 66 51,719 532 47,665 $ 1,330 65,677 $ (1) The Company designated the derivative financial instruments that comprise this balance, as accounting hedges, according to what is described in Note 4. Fair value of financial assets and liabilities valued at amortized cost The amount of cash and cash equivalents, restricted cash, trade and other accounts receivable, other current assets, trade and other accounts payable, current debt and other current liabilities approximate their fair value, due to their short maturity. The net carrying amount of these accounts represents the expected cash flows to be received as of December 31, 2020, 2019 and 2018. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 90 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The carrying amount and estimated fair value of assets and liabilities valued at amortized cost is presented below: As of December 31, 2020 As of December 31, 2019 As of December 31, 2018 Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value Financial assets: Non-current accounts receivable $ 3,942 $ 3,941 $ 4,127 $ 4,121 $ 4,756 $ 4,745 Financial liabilities: Non-current debt 30,335 32,701 28,261 29,529 30,317 30,211 The carrying amount of the debt, for purposes of computing its fair value, is presented gross of interest payable and issuance costs. The estimated fair values as of December 31, 2020, 2019 and 2018 were determined based on discounted cash flows and with reference to the yields at the closing of the debt securities, using rates reflecting a similar credit risk, depending on the currency, maturity period and country where the debt was acquired. The primary rates used are the Interbank Equilibrium Interest Rate (“TIIE” for its acronym in Spanish) for instruments in Mexican pesos and London Interbank Offer Rate (“LIBOR”) for instruments in U.S. dollars. Measurement at fair value for non-current accounts receivable is deemed within Level 3 of the fair value hierarchy, while, for the financial debt, the measurement at fair value is deemed within Levels 1 and 2 of the hierarchy, as described herein below. Market risks (i) Exchange rate risk The Company is exposed to foreign exchange risk, primarily derived from the transactions and balances that the subsidiaries conduct and have in foreign currency, respectively. A foreign currency is that which is different from the functional currency of an entity. In addition, the Company is exposed to changes in the value of foreign investments (subsidiary entities that have a functional currency different from that of the ultimate holding company), which arise from changes in the exchange rates between the functional currency of the foreign operation and the functional currency of the holding company (pesos); therefore, the Company applies hedge accounting to mitigate this risk, designating financial liabilities as hedging instruments, regardless of whether the foreign investment is directly or indirectly maintained through a subholding. The behavior of the exchange rates fluctuations between the Mexican peso, U.S. dollar and the euro represents an important factor for the Company due to the effect that such currencies have on its consolidated results, and because, in addition, Alpek has no interference in its determination. Historically, in certain times when the Mexican peso has appreciated 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, Alpek’s profit margins have been increased. However, there is no assurance that this correlation will be repeated in case the exchange rate between the Mexican peso and any other currency fluctuates again, because these effects also depend on the balances in foreign currency that the entities of the Company hold. Accordingly, the Company sometimes enters into derivative financial instruments in order to keep under control the integrated total cost of its financing and the volatility associated with exchange rates. Additionally, as most of the Company’ revenues are in U.S. dollars, there is a natural hedge against its obligations in U.S. dollars. The Company has the following assets and liabilities in foreign currency in relation to the functional currency of the subsidiary entities, translated to millions of Mexican pesos at the closing exchange rate as of December 31, 2020: Financial assets Financial liabilities Foreign exchange financial position MXN $ 13,045 13,197 $ (152) USD EUR $ 26,960 34,840 $ (7,880) $ $ 906 260 646 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 91 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The exchange rates used to translate the foreign currency financial positions to Mexican pesos are those described in Note 3. Based on the financial positions in foreign currency maintained by the Company, a hypothetical variation of 10% in the MXN/USD and MXN/EUR exchange rate and keeping all other variables constant, would result in an effect of $739 on the consolidated statement of income and stockholders’ equity. Financial instruments to hedge net investments in foreign transactions Beginning March 1, 2018, the Company designated certain non-current debt instruments as hedging instruments to net investments in foreign transactions, in order to mitigate the variations in exchange rates arising between the functional currency for such transactions and the functional currency of the holding or sub-holding company that maintains these investments. The Company formally designated and documented each hedging relationship establishing objectives, strategy to hedge the risk, the identification of the hedging instrument, the hedged item, the nature of the risk to be hedged, and the methodology to assess the effectiveness. Given that the exchange rate hedging relationship is clear, the method that the Company used to assess the effectiveness consisted of a qualitative effectiveness test by comparing the critical terms between the hedging instruments and the hedged items. The hedging effectiveness results confirm that the hedging relationships are highly effective due to the economic relationship between the hedging instrument and the hedged items. The hedge will be effective as long as the notional debt designated as a hedging instrument is equal to or less than the value of the net assets of the covered foreign operation. On the other hand, when the value of the net assets of the foreign operation is less than the notional value of the designated debt, the Company rebalances the hedging relationship and recognizes the ineffectiveness in the income statement. As of December 31, 2020, 2019 and 2018, Alpek maintains the following hedging relationships: Holding Alpek SAB Functional Currency MXN As of December 31, 2020 Hedging Instrument Senior Notes 144A fixed rate Senior Notes 144A fixed rate Senior Notes 144A fixed rate Notional Value US$ 72 267 22 Holding Alpek SAB Functional Currency MXN US$ 361 As of December 31, 2019 Hedging Instrument Senior Notes 144A fixed rate Senior Notes 144A fixed rate Senior Notes 144A fixed rate Notional Value US$ 72 210 22 US$ 304 Hedged Item Indelpro Temex Dak Americas Ms Dak Resinas Americas Akra Polyester Net assets of the hedged item US$ US$ 232 69 223 98 159 781 Hedged Item Indelpro Temex Dak Americas Ms Dak Resinas Americas Akra Polyester Net assets of the hedged item US$ US$ 215 78 196 129 203 821 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 92 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Holding Alpek SAB Functional Currency MXN As of December 31, 2018 Hedging Instrument Senior Notes 144A fixed rate Senior Notes 144A fixed rate Bank loan, LIBOR +1.10(1) Bank loan, LIBOR +1.25 Bank loan, LIBOR +1.25 Notional Value US$ 2 60 150 180 110 US$ 502 Hedged Item Indelpro Temex Dak Americas Ms Dak Resinas Americas Akra Polyester Net assets of the hedged item US$ US$ 219 124 179 91 261 874 For the years ended December 31, 2020 and 2019, and from the date of designation until December 31, 2018, the Company’s average hedging ratio amounted to 49.5%, 59.3% and 55.2%, respectively. Therefore, the exchange rate fluctuation generated by the hedging instruments for the years ended December 31, 2020 and 2019 and from the date of designation until December 31, 2018 amounted to a net (loss) income of $(403), $264, and $(324), respectively, which was recognized in other comprehensive income, offsetting the translation effect generated by each foreign investment. The hedging effectiveness results confirm that the hedging relationships are highly effective due to the economic relationship between the hedging instrument and the hedged items. Derivative financial instruments to hedge exchange rate risks As of December 31, 2020, 2019 and 2018, the Company holds forwards (EUR/USD) to hedge different needs. For 2018, the Company also held forwards (USD/MXN). In the case of the USD/MXN ratio, the Company sought to cover short-term needs, which correspond to the sale of U.S. dollars for the purchase of raw materials in Mexican pesos. In 2019, the EUR/USD forwards were used to hedge revenues received in Euros in an entity with a functional currency of USD, for which a highly probable transaction related to income received in foreign currency (euros) was documented. For 2020, a similar strategy was carried out with these instruments, but now these forwards are mirrored to an entity with the functional currency of pound sterling (GBP), because part of its revenue is received in euros and part of its purchases are made in US dollars. Therefore, a highly probable forecasted transaction related to budgeted sales and purchases in each corresponding currency has been documented as a hedged item. For accounting purposes, the Company has designated such forwards as cash flow hedging relationships to hedge the aforementioned items, and has formally documented these relationships, setting the objectives, management’s strategy to hedge the risk, identification of hedging instruments, hedged items, the nature of the risk to be hedged and the methodology of the effectiveness assessment. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 93 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The conditions of the derivative financial instruments and the considerations of their valuation as hedging instruments are mentioned below: As of December 31, 2020 Characteristics Currency Notional amount Strike (average) Maturity Carrying amount Change in the fair value to measure ineffectiveness Reclassification from OCI to profit or loss Recognized in OCI, net of reclassifications Change in the fair value of the hedged item to measure ineffectiveness Change in the fair value of the forward As of December 31, 2019 Characteristics Currency Notional amount Strike (average) Maturity Carrying amount Change in the fair value to measure ineffectiveness Reclassification from OCI to profit or loss Recognized in OCI, net of reclassifications Change in the fair value of the hedged item to measure ineffectiveness Change in the fair value of the forward As of December 31, 2018 Characteristics Notional amount Currency Strike (average) Maturity Carrying amount Change in the fair value to measure ineffectiveness Recognized in OCI, net of reclassifications Effectiveness test results Forwards EUR/USD 6 EUR 1.1756 EUR/USD Monthly through March 31, 2020 $ 1 1 - 100% Forwards EUR/USD EUR 39.9 1.2169 EUR/USD Monthly through December 30, 2022 $ (11.9) (11.9) - (11.9) 11.9 (13.3) Forwards EUR/USD EUR 1.5 1.1756 EUR/USD Monthly through March 31, 2020 1.4 1.4 (0.2) 1.6 (1.4) 0.4 $ Forwards USD/MXN 16 USD 20.79 MXN/USD Weekly through February 27, 2019 17 17 (8) 100% $ As of December 31, 2020, the Company held EUR/USD forwards that were contracted with the objective of reducing transaction costs; therefore, for accounting purposes and for hedge evaluation, derivatives are divided into synthetic derivatives to hedge each hedged item individually (revenue in euros and purchases in dollars). The Company determined that they are highly effective according to the characteristics and modeling of both hedged items, resulting in 100% effectiveness. Furthermore, both the credit profile of the Company and the counterparty are adequate and are not expected to change in the medium term, so the credit risk component is not considered to dominate the hedging relationship. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 94 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2019, the prospective effectiveness test for the EUR/USD exchange rate resulted in 100%, confirming that there is an economic relationship between the hedging instruments and the hedged items. The effectiveness result for the USD/MXN exchange rate in 2018 was 100%. The method used by the Company to evaluate effectiveness is a qualitative evaluation comparing the key terms of the hedging instrument and the hedged item. In accordance with the reference amounts described and the way in which the flows of the derivatives are exchanged, the average coverage ratio for the EUR/USD exchange rate for 2020, 2019 and 2018 is 100%, 86% and 86%, respectively. If necessary, a rebalancing will be done to maintain this relationship for the strategy. As of December 31, 2018, the average coverage ratio was 77% for the USD/MXN exchange ratio. The source of ineffectiveness may be caused by the difference in the settlement date of the derivative and the hedged item, and that the expected amount becomes a lower amount than the hedging instruments, as well as the credit risk. For the years ended December 31, 2020, 2019 and 2018, no ineffectiveness was recognized in profit or loss. (ii) Price risk In carrying out its activities, the Company depends on the supply of raw materials provided by its suppliers, both in Mexico and abroad, among which are intermediate petrochemicals, principally. In recent years, the price of certain inputs has shown volatility, especially those related to oil and natural gas. In order to fix the selling prices of certain of its products, the Company has entered into agreements with certain customers. At the same time, it has entered into transactions involving derivatives on natural gas that seek to reduce price volatility of the prices of this input. Additionally, the Company 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 Appendix” and “Confirmation”. Regarding natural gas, Pemex is the only supplier in Mexico. The selling price of natural gas is determined based by the price of that product on the “spot” market in South Texas, USA, which has experienced volatility. For its part, the Mexican Electric Commission 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 2020, 2019 and 2018 was $2.0, $2.6 and $3.2 US dollars, respectively. As of December 31, 2020, 2019 and 2018, the Company had hedges of natural gas prices for a portion expected of consumption needs in Mexico and the United States. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 95 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Derivative contracts to hedge adverse changes in commodity prices The Company uses natural gas to operate, and some of its main raw materials are paraxylene, ethylene and monoethylene glycol (MEG), ethane and terephthalic acid (PTA). Therefore, an increase in the price of natural gas, paraxylene, ethylene, monoethylene glycol (MEG), ethane or terephthalic acid (PTA), would have a negative impact on the operating cash flows. The objective of the hedge designated by the Company is to mitigate against the exposure in the price increase of the aforementioned commodities, for future purchases by contracting swaps where a variable price is received and a fixed price is paid. In the case of PET, the Company uses these derivatives to hedge against sales related to this commodity. The Company has implemented strategies called roll-over, through which it analyzes on a monthly basis if more derivatives are contracted to expand the time or the amount of coverage; currently, the Company has contracted hedges until January 2023. Raw material derivatives are mirrored to DAK Americas and DAK Resinas Américas México and Alpek Polyester UK, as the risk lies in such entities, and derivative financial instruments are contracted by Grupo Petrotemex; this process is carried out through the formalization of internal derivatives to be able to apply hedging accounting. These derivative financial instruments have been classified as cash flow hedges for accounting purposes. In this sense, management has documented, as a hedged item, a highly probable transaction in relation to the budget for purchases of these commodities. The conditions of the derivative financial instruments and the considerations of their valuation as hedging instruments are mentioned below: Characteristics Total notional Units Price received As of December 31, 2020 Natural Gas Paraxylene Swaps 3,474,000 MMBtu Swaps 338,750 MT PTA Swaps 2,000 MT Ethylene Swaps 37,500,000 Lb PET Swaps 220 MT MEG Swaps Ethane Swaps 184,500 600,000 MT gal Fair value Fair value Fair value Fair value Fair value Fair value Fair value Price paid (average) $2.73/MMBtu $635/MT $627/MT $0.1567/lb $910/Lbs $501/MT $0.21/gal Maturity (monthly) February 2022 January 2023 January 2021 January 2022 January 2021 January 2023 January 2021 Net position of the swap (1) $(5.4) $121.5 $(6.1) $98.3 $0.8 $260.5 $(0.2) Ineffectiveness recognized in the statement of income - - Change in the fair value to measure ineffectiveness (4.2) 132.7 Reclassification from OCI to profit or loss Balance recognized in OCI, - (109.5) net of reclassifications (5.4) 231 - (6.1) (6.1) - - 103.9 39.9 58.4 - 0.8 0.8 - - 273.3 2.1 - (0.2) (0.2) 258.4 - Change in the fair value to measure ineffectiveness of hedge item Effectiveness test results 4.2 99.91% (132.8) 99.95% 6.1 99.96% (103.9) 99.95% (0.8) 99.96% (273.4) 99.94% 0.4 99.96% (1) Due to the high volume of operations, the net position of derivative financial instruments is presented; however, since these instruments do not meet the criteria for the offsetting of financial instruments, they are presented in their gross amounts in the consolidated statement of financial position. Additionally, as of December 31, 2020, the Company maintains an additional balance in other comprehensive income for an amount of $31.2, due to the fact that derivatives contracted for hedging gasoline were settled in advance. Given that the forecasted transaction that was being hedged, future purchases, is still expected to occur, such balance will be recognized in the income statement as the transaction occurs. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 96 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Characteristics Total notional Units Price received As of December 31, 2019 Natural Gas Paraxylene Swaps 7,800,000 MMBtu Swaps 327,250 MT PTA Swaps 22,500 MT Ethylene Swaps MEG Swaps Ethane Swaps 110,000,000 58,000 9,400,000 Lb MT gal Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value Price paid (average) $4.35/MMBtu $856/MT $627/MT $0.17/lb $564/MT $0.22/gal Maturity (monthly) Net position of the swap (1) Ineffectiveness recognized in the statement of income Change in the fair value to measure ineffectiveness Reclassification from OCI to profit or loss Balance recognized in OCI, net of reclassifications Effectiveness test results December December December December December December 2020 2020 $(302.2) $(154.6) 2020 $8.3 2020 $(4.1) 2020 $4.5 2020 $(9.0) - - (302) (181) - (120) (302) 99.98% (34) 99.97% - 38 - 8 - (14) (6) (2) - 2 (3) 8 - (8) (2) (7) 99.97% 99.93% 99.96% 99.95% (1) Due to the high volume of operations, the net position of derivative financial instruments is presented; however, since these instruments do not meet the criteria for the offsetting of financial instruments, they are presented in their gross amounts in the consolidated statement of financial position. Characteristics Total notional Units Price received Price paid (average) Maturity (monthly) Net position of the swap (1) Ineffectiveness recognized in the statement of income Change in the fair value to measure ineffectiveness Balance recognized in OCI, net of reclassifications Effectiveness test results As of December 31, 2018 Natural Gas Paraxylene Naphtha Ethylene Swaps Swaps 17,288,760 297,200 MMBtu MT Swaps 10,500 MT Swaps MEG Swaps Ethane Swaps 118,000,000 33,500 10,200,000 Lb MT gal Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value $4.35 USD/MMBtu $1,057/MT $459/MT $0.21/lb $741/MT $0.32/gal December December September December December December 2024 $ (478) 2019 $ (710) 2019 $ (3) - - 200 (803) (478) 99.00% (710) 99.82% - (3) (3) 2019 $ (12) - (28) (12) 2019 $ (70) - (70) (70) 2019 $ (2) - (2) (2) 99.82% 99.60% 99.59% 99.59% (1) Due to the high volume of operations, the net position of derivative financial instruments is presented; however, since these instruments do not meet the criteria for the offsetting of financial instruments, they are presented in their gross amounts in the consolidated statement of financial position. The change in the fair value of the derivative financial instruments recognized in OCI for the year ended December 31, 2020, 2019 and 2018 is $885, $998 and $(721), respectively. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 97 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The fair value of the derivate financial instruments according to their classification in the consolidated statement of financial position is as follows: As of December 31, 2020 Natural Gas Paraxylene Ethanol Ethylene MEG PTA PET Forward Total As of December 31, 2019  Natural Gas Paraxylene Ethanol Ethylene MEG PTA Forward Total Asset $ Liability $ Total $ - 164 - 98 261 - 1 - 524 $ $ $ Asset 29 29 - 4 5 9 1 77 (5) (42) (1) - - (6) - (12) (66) (331) (184) (9) (8) - - - (532) Liability $ $ $ (5) 122 (1) 98 261 (6) 1 (12) 458 $ $ $ Total (302) (155) (9) (4) 5 9 1 (455) With the reference amounts of these derivative financial instruments, the Company offsets the fluctuation of the prices of these commodities that are used as raw material in the production processes of the entities. For commodity hedging relationships, management is designating as a hedged item a specific risk, which is defined by the underlying assets that are clearly determined that the risk component is separable, it can be reliably measured and is also highly correlated. On the other hand, in the measurement of the effectiveness of these hedges, the Company determined that they are highly effective because the changes in the fair value and cash flows of each hedged item are compensated within the range of effectiveness established by management. Due to the results shown on the effectiveness tests, it is confirmed that there is an economic relationship between the hedging instruments and the hedged item. The method used by the Company is to offset cash flows using a hypothetical derivative, which consists of comparing the changes in the fair value of the hedging instrument with the changes in the fair value of the hypothetical derivative that would result in a perfect hedge. As of December 31, 2020, according to the reference amounts described and the way in which the flows of the derivatives are exchanged, the average coverage ratio for the natural gas, paraxylene, ethylene and ethane, pta and pet for 2020, 2019 and 2018 are shown below and, if necessary, a rebalancing will be done to maintain this relationship for the strategy. Average coverage ratio Natural gas Paraxylene Ethylene Ethane Terephthalic acid (PTA) PET 2020 6% 54% 58% 2% 5% 0.2% 2019 40% 79% 54% 2% 5% - 2018 30% 72% 44% 33% - - 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 98 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The source of ineffectiveness can be caused mainly by the difference in the settlement date of the hedging instruments and the hedged items, and that the budget becomes less than the hedging instruments. For the years ended December 31, 2020, 2019 and 2018, there was no ineffectiveness recognized in profit or loss. (iii) Interest rate risk The Company is exposed to interest rate risk mainly for long-term loans bearing interest at variable rates. Fixed-interest loans expose the Company to interest rate risk at fair value, which reflects that Alpek might be paying interest at rates significantly different from those of an observable market. As of December 31, 2020, 95% of the financing is denominated at a fixed rate, and 5% at a variable rate. As of December 31, 2020, if interest rates on variable rate loans are increased or decreased by 100 basis points in relation to the rate in effect, the income and stockholders’ equity of the Company would change by $14. Derivative financial instruments to hedge interest rate risks In order to mitigate the risk of the volatility associated with the reference interest rates (Libor) of the long-term liabilities described above, the Company contracted interest rate swaps (“IRS”) and designated the interest payments derived from the debts it maintains as a covered item. However, on December 26, 2019, the Company settled the swap, as it paid in advance the debt it was hedging. The conditions of the derivative financial instrument and the considerations of its valuation as a hedging instrument are mentioned below: As of December 31, 2018 Interest rate swap Characteristics of the swap Currency Notional Interest rate received Interest rate paid Maturity Carrying amount of the swap Change in the fair value of the swap to measure ineffectiveness Recognized in OCI, net of reclassifications Reclassification from OCI to profit or loss Change in the fair value of the hedged item to measure ineffectiveness USD 290 LIBOR 3m 2.897% 26/03/2021 $ (42) (42) 39 (3) 42 As of December 31, 2018, this hedge is highly effective, given that the critical terms of the derivative and the loan are perfectly matched, so it is confirmed that there is an economic relationship. In addition, both the credit profile of the Company and the counterparty are good and are not expected to change in the medium term; therefore, the credit risk component is not considered to be significant to the hedging relationship. The method used to evaluate effectiveness is through a qualitative evaluation comparing the critical terms between the hedging instrument and the hedged instrument. In accordance with the reference amounts described and the way in which the flows of derivative financial instruments are exchanged, the average hedging ratio for the interest rate relationship was 100% during 2018. In this hedge relationship, the source of ineffectiveness was mainly credit risk; for the year ended December 31, 2018, there was no ineffectiveness recognized in profit or loss. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 99 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Credit risk Credit risk represents the potential loss due to non-compliance of counterparts in their payment obligations. 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. The Company determines, from a business standpoint and credit risk profile, the significant customers with whom it maintains an account receivable, distinguishing those that require an individual credit risk assessment. For the rest of the customers, the company carries out its classification according to the type of market in which they operate (domestic or foreign), according with the business and internal risk administration. Each subsidiary is responsible for managing and analyzing credit risk for each of its new customers before setting the terms and conditions of payment. If wholesale customers are rated independent, 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. The maximum exposure to credit risk is given by the balances of these items as presented in the consolidated state of financial position. Individual risk limits are determined based on internal and external ratings in accordance with limits set by the Board of Directors. The use of credit risk is monitored regularly. Sales to retail customers are in cash or by credit card. During the years ended December 31, 2020, 2019 and 2018, credit limits were not exceeded. In addition, the Company performs a qualitative evaluation of economic projections, with the purpose of determining the possible impact on probabilities of default and the rate of recovery that it assigns to its clients. During the year ended December 31, 2020, there have been no changes in the techniques of estimation or assumption. Liquidity risk Projected cash flows are determined at each operating entity of the Company and subsequently the finance department consolidates this information. The finance department of the Company continuously monitors the cash flow projections and liquidity requirements of the Company ensuring that sufficient cash and highly liquid investments are maintained to meet operating needs, and it’s that some flexibility is maintained through open and committed credit lines. The Company regularly monitors and makes decisions ensuring that the limits or covenants set forth in debt contracts are not violated. The projections consider the financing plans of the Company, compliance with covenants, compliance with minimum liquidity ratios and internal legal or regulatory requirements. The Company’s treasury department invests those funds in time deposits and marketable securities whose maturities or liquidity allow flexibility to meet the cash needs of the Company. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 100 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table analyzes the derivative and non-derivative, grouped according to their maturity, from the date of the consolidated statement of financial position to the contractual maturity date. Derivative financial liabilities are included in the analysis if their contractual maturities are required to understand the timing of the Company’s cash flows. The amounts disclosed in the table are contractual undiscounted cash flows. Less than a year From 1 to 5 years More than 5 years As of December 31, 2020 Suppliers and other accounts payable Current and non-current debt (excluding debt issuance costs) Derivative financial instruments As of December 31, 2019 Suppliers and other accounts payable Current and non-current debt (excluding debt issuance costs) Derivative financial instruments As of December 31, 2018 Suppliers and other accounts payable Current and non-current debt (excluding debt issuance costs) Derivative financial instruments $ $ $ 17,991 1,508 66 14,955 1,700 528 24,217 11,333 1,047 $ - $ - 23,252 - $ - 22,370 4 $ - 34,082 283 11,796 - - 11,541 - $ $ - - - Fair value hierarchy The following is an analysis of financial instruments measured in accordance with the fair value hierarchy. The 3 different levels used are presented below: - Level 1: Quoted prices for identical instruments in active markets. - Level 2: Other valuations including quoted prices for similar instruments in active markets that are directly or indirectly observable. Level 3: Valuations made through techniques where one or more of their significant data inputs are unobservable. - The derivative financial instruments of the Company that are measured at fair value as of December 31, 2020, 2019 and 2018, are located within level 2 of the fair value hierarchy. There were no transfers between Level 1 and 2 or between Level 2 and 3. The specific valuation techniques used to value financial instruments include: - Market quotations or trader quotations for similar instruments. - The fair value of interest rate swaps is calculated as the present value of estimated future cash flows based on observable yield curves. - The fair value of forward exchange agreements is determined using exchange rates at the closing balance date, with the resulting value discounted at present value. - Other techniques such as the analysis of discounted cash flows, which are used to determine fair value of the remaining financial instruments. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 101 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. 5.1 Critical accounting estimates and assumptions. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will be, by definition, seldom equal to the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are addressed below: a) Estimated impairment of goodwill and intangible assets with indefinite useful lives The Company performs annual tests to determine whether goodwill and intangible assets with indefinite useful lives have suffered any impairment (see Note 12). For impairment testing, goodwill and intangible assets with indefinite lives are allocated to those groups of cash-generating units (“CGUs”) from which the Company has considered that economic and operational synergies of business combinations are generated. The recoverable amounts of the CGUs have been determined based on the calculations of their value in use, which require the use of estimates. The most significant of these estimates are as follows: - Estimates of future gross and operating margins, according to the historical performance and industry expectations for each CGU group. - Discount rate based on the weighted average cost of capital (WACC) of each CGU or group of CGUs. - Long-term growth rates. b) Recoverability of deferred tax assets Alpek has tax loss carryforwards, which can be used in the following years until maturity expires. Based on the projections of taxable income that Alpek will generate in the subsequent years through a structured and robust business plan, management has determined that current tax losses will be used before they expire and, therefore, it was considered probable that the deferred tax assets for such losses will be recovered. c) Long-lived assets The Company estimates the useful lives of long-lived assets in order to determine the depreciation and amortization expenses to be recorded during the reporting period. The useful life of an asset is calculated when the asset is acquired and is based on past experience with similar assets, considering anticipated technological changes or any other type of changes; or in the case of the right-of-use assets, based on the term of the lease agreement. Were technological changes to occur faster than estimated, or differently than anticipated, the useful lives assigned to these assets could have to be reduced. This would lead to the recognition of a greater depreciation and amortization expense in future periods. Alternatively, these types of technological changes could result in the recognition of a charge for impairment to reflect the reduction in the expected future economic benefits associated with the assets. The Company reviews depreciable and amortizable assets on an annual basis for signs of impairment, or when certain events or circumstances indicate that the book value may not be recovered during the remaining useful life of the assets. For intangible assets with an indefinite useful life, the Company performs impairment tests annually and at any time that there is an indication that the asset may be impaired. To test for impairment, the Company uses projected cash flows, which consider the estimates of future transactions, including estimates of revenues, costs, operating expenses, capital expenses and debt service. In accordance with IFRS, discounted future cash flows associated with an asset or CGU are compared to the book value of the asset or CGU being tested to determine if impairment or a reversal of impairment exist. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 102 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS d) Estimation of default probabilities and recovery rate to apply the model of expected losses in the calculation of impairment of financial assets The Company assigns to customers with whom it maintains an account receivable at each reporting date, either individually or as a group, an estimate of the probability of default on the payment of accounts receivable and the estimated recovery rate, with the purpose of reflecting the cash flows expected to be received from the outstanding balances on such reporting date. e) Business combinations When business combinations are concluded, the acquisition method is required to recognize the identifiable net assets acquired at fair value, at the date of acquisition; any excess of the consideration paid on the identified net assets is recognized as goodwill, which is subject to impairment tests at least once a year. On the other hand, any excess of the net assets acquired over the consideration paid is recognized as a gain in profit or loss. To estimate the fair value of the assets acquired and liabilities assumed, the Company uses observable market data to the extent it is available. When the input data of Level 1 is not available, the Company hires an independent qualified appraiser to perform the valuation. Management works closely with the independent qualified appraiser to establish the valuation techniques, the premises, the appropriate input data and the criteria to be used in the valuation models. f) Estimation of the discount rate to calculate the present value of future minimum lease payments The Company estimates the discount rate to be used in determining the lease liability, based on the incremental borrowing rate (“IBR”). The Company uses a three-tier model, with which it determines the three elements that make up the discount rate: (i) reference rate, (ii) credit risk component and (iii) adjustment for characteristics of the underlying asset. In this model, management also considers its policies and practices to obtain financing, distinguishing between that obtained at the corporate level (that is, by the parent), or at the level of each subsidiary. Finally, for real estate leases, or, in which there is significant and observable evidence of the residual value, the Company estimates and evaluates an adjustment for characteristics of the underlying asset, taking into account the possibility that said asset is granted as collateral or guarantee against the risk of default. g) Estimation of the lease term The Company defines the lease term as the period for which there is a contractual payment commitment, considering the non-cancelable period of the contract, as well as the renewal and early termination options that are likely to be exercised. The Company participates in lease agreements that do not have a defined non-cancellable term, a defined renewal period (if it contains a renewal clause), or automatic annual renewals, so, to measure the lease liability, it estimates the term of the contracts considering their contractual rights and limitations, their business plan, as well as management’s intentions for the use of the underlying asset. Additionally, the Company considers the early termination clauses of its contracts and the probability of exercising them, as part of its estimate of the lease term. 5.2 Critical judgments in applying the entity’s accounting policies a) Determination of exercise of control over certain investments in shares The Company has evaluated critical control factors and has concluded that it should consolidate the financial statements of its subsidiaries Polioles and Indelpro. The analysis performed by the Company included the assessment of the substantive decision making rights of the respective shareholders set forth in their bylaws, resulting in management’s conclusion that it has the power to govern their relevant activities. b) Acquisitions of assets and business combinations Management uses its professional judgment to determine whether the acquisition of a group of assets represents a business combination or an acquisition of assets. Such determination could have a significant impact on how acquired assets and assumed liabilities are accounted for, both in their initial recognition and in subsequent years. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 103 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH The cash and cash equivalents are comprised as follows: Cash on hand and in banks Short-term bank deposits Total cash and cash equivalents 2020 7,016 3,128 10,144 $ $ As of December 31, 2019 5,413 1,646 7,059 $ $ $ 2018 1,559 2,609 $ 4,168 Restricted cash At December 31, 2020, 2019 and 2018, the Company has restricted cash of approximately $12, $216 and $3, respectively. As of December 31, 2020, the decrease in the balance as compared to the prior year is due to the fact that during 2019, the Company entered into an agreement in which it committed to hold restricted cash for the acquisition of machinery and equipment; during 2020 such machinery and equipment were acquired and the majority of the funds subject of this agreement were released. The restricted cash balance is classified as a current asset in the consolidated statement of financial position based on the maturity date of the restriction. 7. TRADE AND OTHER RECEIVABLES, NET Trade and other accounts receivable are comprised as follows: Trade accounts receivable Trade and other accounts receivable from related parties (Note 28) Recoverable taxes Notes receivable Interest receivable Sundry debtors Allowance for impairment of trade and other accounts receivable Current portion 2020 13,985 $ 588 4,324 532 1 334 As of December 31, 2019 12,751 $ $ 585 4,462 485 200 511 2018 18,139 712 4,647 506 16 473 (2,714) 17,050 $ (2,486) 16,508 $ (2,559) $ 21,934 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 104 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The changes in the impairment allowance for trade and other receivables in 2020, 2019 and 2018, with the new expected losses model used by the Company, are as follows: For the year ended December 31, 2020 Customers or Default Loss given balance – Cancellations Opening Ending balance – customer groups probability default Impairment Increases in in the Translation Impairment range range allowance the allowance allowance effect allowance Grupo Petrotemex (1) 0% - 80% 0% - 34% $ (2,320) $ (122) $ 39 $ (118) $ (2,521) Grupo Unimor Grupo Styropek (1) Polioles Indelpro and other Total 5.43% 0% 0% 1.92% 50% 0%- 10% 0% - 10% 0.47% - (71) (28) (67) - (26) (1) - - - 1 1 - (2) - - - (99) (28) (66) $ (2,486) $ (149) $ 41 $ (120) $ (2,714) (1) The default probability range does not consider customers and groups of customers for which the probability is 100%. For the year ended December 31, 2019 Customers or Default Loss given balance – Cancellations Opening Ending balance – customer groups probability default Impairment Increases in in the Translation Impairment range range allowance the allowance allowance effect allowance Grupo Petrotemex (1) 0.03% - 2.36% 10% - 45% $ (2,423) $ (114) $ 109 $ 108 $ (2,320) Grupo Unimor Grupo Styropek (1) Polioles Indelpro and other Total 5.43% 50% 0.01% - 0.82% 10% - 35% 0% 1.75% 0% - 10% 1.20% - (37) (25) (74) - (37) - (1) - 2 4 8 - 1 (7) - - (71) (28) (67) $ (2,559) $ (152) $ 123 $ 102 $ (2,486) (1) The default probability range does not consider customers and groups of customers for which the probability is 100%. For the year ended December 31, 2018 Customers or Default Loss given balance – Cancellations Opening Ending balance – customer groups probability default Impairment Increases in in the Translation Impairment range range allowance(1) the allowance allowance effect allowance Grupo Petrotemex (1) 0% - 0.24% 10.30% - 35.00% $ (2,352) $ (107) $ 39 $ Grupo Unimor Grupo Styropek (1) Polioles 3.15% 50.00% 0% - 100% 0% - 92.05% 0.01% - 0.14% 0% - 10.00% Indelpro and other 1.68% 1.92% - - (24) (61) - (36) (1) (14) - - - 1 (3) - (1) - - $ (2,423) - (37) (25) (74) Total $ (2,437) $ (158) $ 40 $ (4) $ (2,559) (1) The opening balance of the estimate of impairment of receivables includes $30 of the current portion of long-term notes receivables, which was considered in the balance of the estimate of impairment of trade and other accounts receivable as of January 1, 2018. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 105 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020, 2019 and 2018, the Company has guaranteed accounts receivable of $2,184, $1,635 and $2,158, respectively. The net change in the allowance for impairment of trade and other receivables for $228 for the year ended December 31, 2020, was mainly due to the increase in the default probability in some customer groups, as well as the translation effect. For its part, the variation in the allowance for impairment of trade and other receivables of $(73) for the year ended December 31, 2019, was mainly due to the decrease in the probability of default allocated to certain customers with respect to the beginning of the year. The variation in the allowance for impairment of trade and other receivables of $102 for the year ended December 31, 2018, was mainly due to the increase in the probability of default allocated to certain customers with respect to the beginning of the year in which the new methodology for impairment of financial assets was applied. The Company has long-term receivables that are guaranteed with the properties of M&G México’s PET production plant in Altamira, Mexico, which have been used by management to mitigate the exposure to credit risk of such financial assets, and therefore has not recognized an impairment in their carrying amount. 8. INVENTORIES Finished good Raw material and other consumables Materials and tools Production in progress 2020 8,189 6,896 1,912 450 17,447 $ $ $ As of December 31, 2019 10,203 5,606 1,637 520 17,966 $ $ $ 2018 13,632 8,916 1,423 540 24,511 For the years ended December 31, 2020, 2019 and 2018, a provision amounting to $72, $17 and $15, respectively, related to damaged, slow-moving and obsolete inventory was recognized in the consolidated statement of income. At December 31, 2020, 2019 and 2018, there were no inventories pledged as collateral. 9. PREPAYMENTS The current portion and non-current portion of prepaid expenses is summarized as follows: Current portion (1) Non-current portion Total prepayments 2020 $ 442 15 $ 457 As of December 31, 2019 1,785 16 1,801 $ $ 2018 $ 469 38 $ 507 (1) This item mainly consists of advance payments for raw materials and prepaid insurance. Additionally, as of December 31, 2019, it includes $1,300 related to the advance payment for the acquisition of Alpek Polyester UK, as described in Note 2a. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 106 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. PROPERTY, PLANT AND EQUIPMENT, NET Land Buildings and constructions Machinery and equipment Vehicles $ $ 3,494 - 369 (11) - (14) - - $ 4,616 2 2,592 - (1) (203) (390) 268 $ 23,998 71 3,249 (35) (16) (160) (2,052) 1,177 3,838 6,884 26,232 62 2 - (3) - (3) (15) 16 59 Furniture, lab and information technology equipment $ 273 4 64 - - 1 (85) 93 Construction Other fixed assets in progress Total $ 8,114 2,584 386 (339) (318) (50) 26 $ 978 $ 41,535 2,689 6,660 (392) (335) (428) - (4) - 1 - (1,708) - - (2,542) (154) 350 8,669 1,001 47,033 3,838 - 18,003 (11,119) 73,914 (47,682) 328 (269) 1,914 (1,564) 8,669 - 1,001 107,667 - (60,634) $ 3,838 $ 6,884 $ 26,232 $ 59 $ 350 $ 8,669 $ 1,001 $ 47,033 $ 3,838 - 3 - (18) - (91) - - $ 6,884 - 122 (1) (1,083) (23) (318) (279) 508 $ 26,232 9 444 (59) (7,736) (6) (1,105) (2,440) 7,752 $ 59 - 1 - - - (4) (13) 15 $ 350 1 4 (1) (3) - (23) $ 8,669 3,234 6 (4) (250) - (148) $ 1,001 $ 47,033 3,365 580 (71) (9,090) (29) (1,740) 121 - (6) - - (51) (84) 87 - (8,670) - 158 (2,816) (150) $ 3,732 $ 5,810 $ 23,091 $ 58 $ 331 $ 2,837 $ 1,223 $ 37,082 3,732 - 16,724 (10,914) 70,632 (47,541) 323 (265) 1,881 (1,550) 2,837 - 1,223 - 97,352 (60,270) $ 3,732 $ 5,810 $ 23,091 $ 58 $ 331 $ 2,837 $ 1,223 $ 37,082 $ 3,732 4 159 - - 61 - - $ 5,810 1 5 (1) (11) (138) (315) 93 $ 23,091 8 1,039 (52) (2) 897 (2,710) 1,617 $ 58 1 - (1) - 7 (17) 64 $ 331 2 3 (1) - 32 (92) 118 $ 2,837 2,506 158 (29) (2) (123) $ 1,223 $ 37,082 2,665 1,364 (107) (15) 760 143 - (23) - 24 - (1,933) - 5 (3,134) (36) $ 3,956 $ 5,444 $ 23,888 $ 112 $ 393 $ 3,414 $ 1,372 $ 38,579 3,956 - 16,854 (11,410) 78,944 (55,056) 379 (267) 2,103 (1,710) 3,414 - 1,372 - 107,022 (68,443) For the year ended December 31, 2018 Opening balance Additions Additions for business acquisitions Disposals Impairment Restatement and translation effect Depreciation charges recognized in the year Transfers Ending balance as of December 31, 2018 As of December 31, 2018 Cost Accumulated depreciation Net carrying amount as of December 31, 2018 For the year ended December 31, 2019 Opening balance Additions Additions for business acquisitions Disposals Disposals for sale of subsidiary Impairment Restatement and translation effect Depreciation charges recognized in the year Transfers Ending balance as of December 31, 2019 As of December 31, 2019 Cost Accumulated depreciation Net carrying amount as of December 31, 2019 For the year ended December 31, 2020 Opening balance Additions Additions for business acquisitions Disposals Impairment Restatement and translation effect Depreciation charges recognized in the year Transfers Ending balance as of December 31, 2020 As of December 31, 2020 Cost Accumulated depreciation Net carrying amount as of December 31, 2020 $ 3,956 $ 5,444 $ 23,888 $ 112 $ 393 $ 3,414 $ 1,372 $ 38,579 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 107 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Depreciation expenses of $3,075, $2,742 and $2,483 were recorded in cost of sales, $16, $31 and $13, in selling expenses and $43, $43 and $46, in administrative expenses in 2020, 2019 and 2018, respectively. The Company has capitalized costs of loans on qualified assets for $182 and $314 for the years ended December 31, 2019 and 2018, respectively. Costs from loans were capitalized at the weighted average borrowing rate of approximately 4.8% and 5.4%, respectively. 11. RIGHT-OF-USE ASSET, NET The Company has leases of fixed assets including buildings, machinery and equipment, transportation equipment, and computer equipment. The average term of the lease contracts is 8 years. a) The right of use recognized in the consolidated statement of financial position as of December 31, 2020 and 2019, is integrated as follows: Land Buildings Machinery and equipment Net book value: Balance as of December 31, 2019 $ Balance as of December 31, 2020 $ Depreciation for the year 2019 Depreciation for the year 2020 $ $ 104 110 (6) (8) $ $ $ $ 176 124 (46) (46) 1,011 $ $ 790 $ (260) $ (303) Ships and other leased assets 171 $ $ 43 $ (113) $ (151) Rail cars $ $ $ $ 1,975 1,924 (409) (470) Total 3,437 $ $ 2,991 $ (834) $ (978) During the years ended December 31, 2020 and 2019, the Company recognized a lease expense of $810 and $644, respectively, related to low value and short-term lease agreements. Additions derived from new contracts and modifications to the lease liability, reflected in the net book value of the right of use asset as of December 31, 2020 and 2019 amounted to $486 (of which $39 are related to business acquisitions) and $1,226, respectively. As of December 31, 2020 and 2019, the Company does not have any commitments related to short-term lease agreements. The Company has not signed lease contracts, which at the date of the consolidated financial statements have not started. During the year, the Company did not execute significant extensions to the term of its lease contracts. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 108 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 12. GOODWILL AND INTANGIBLE ASSETS, NET Definite life Indefinite life Non- Software Trademarks Intellectual Development competence Customer and with property, Cost costs agreements relationships licenses definite life and others Goodwill Other Total As of January 1, 2018 $ 910 $ 106 $ 751 $ 263 $ Additions Additions for business acquisitions Translation effect 11 - (3) - (18) - 384 (15) 19 289 (16) As of December 31, 2018 $ 918 $ 88 $ 1,120 $ 555 $ Additions Additions for business acquisitions Disposals for sale of subsidiary Transfers Translation effect 8 - - - - - - - - - - - 69 - - 7 (39) (7) (61) (27) - - - - - - 69 - - (1) $ 3,765 $ 339 $ 14 $ 6,148 239 - (8) - - (1) 14 - 2 283 673 (59) $ 3,996 $ 338 $ 30 $ 7,045 4 - (296) 22 (158) - 53 - - (14) 3 - - (22) (2) 84 122 (296) 7 (309) As of December 31, 2019 $ 887 $ 81 $ 1,059 $ 604 $ 68 $ 3,568 $ 377 $ 9 $ 6,653 Additions Additions for business acquisitions Disposals Transfers Translation effect 12 - - 1 50 - - - - - - - - (2) (27) 70 6 - (157) (22) - - - 160 (13) 4 - (1) - 188 - - - - 22 - - - - 1 86 6 (1) 4 197 As of December 31, 2020 $ 950 $ 79 $ 1,032 $ 501 $ 215 $ 3,759 $ 399 $ 10 $ 6,945 Amortization As of January 1, 2019 $ (531) $ (82) $ (444) $ (418) $ - $ (1,202) $ Amortization Disposals for sale of subsidiary Translation effect (23) - 23 (6) - 7 (62) - 22 (42) - 25 As of December 31, 2019 $ (531) $ (81) $ (484) $ (435) $ Amortization Additions for business acquisitions Transfers Translation effect (26) - - (29) - - - 2 (63) - - (14) (49) (6) 160 25 (4) - - (4) (5) - (160) 17 (218) 31 54 $ (1,335) $ (231) - - (59) As of December 31, 2020 $ (586) $ (79) $ (561) $ (305) $ (152) $ (1,625) $ - - - - - - - - - - $ - $ (2,677) - - - - - - - - - $ $ (355) 31 131 $ (2,870) (374) (6) - (58) $ (3,308) Net carrying amount Cost Amortization As of December 31, 2018 Cost Amortization As of December 31, 2019 Cost Amortization $ 918 $ 88 $ 1,120 $ 555 $ (82) (444) (418) $ 6 $ 676 $ 137 $ - - - $ 3,996 $ 338 $ 30 $ 7,045 (1,202) - - (2,677) $ 2,794 $ 338 $ 30 $ 4,368 $ 81 $ 1,059 $ 604 $ 68 $ 3,568 $ 377 $ (81) (484) (435) (4) (1,335) - $ - $ 575 $ 169 $ 64 $ 2,233 $ 377 $ 79 (79) 1,032 (561) 501 (305) 215 (152) 3,759 (1,625) 399 - 9 - 9 10 - $ 6,653 (2,870) $ 3,783 6,945 (3,308) (531) $ 387 $ 887 (531) $ 356 950 (586) As of December 31, 2020 $ 364 $ - $ 471 $ 196 $ 63 $ 2,134 $ 399 $ 10 $ 3,637 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 109 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Of the total amortization expense, $363, $345 and $326 have been recorded in cost of sales and $11, $9 and $17 in administrative expenses in 2020, 2019 and 2018, respectively. Incurred research and development expenses that have been recorded in the 2020, 2019 and 2018 consolidated statements of income were $74, $40 and $53, respectively. Impairment testing of goodwill and indefinite lived intangible assets As mentioned in note 5, 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. As of December 31, 2020, 2019 and 2018, goodwill of $399, $377 and $338, respectively, arises primarily from the Polyester segment. The recoverable amount from each group of CGU has been determined based on calculations of values in use, which are formed by after-tax cash flow projections based on financial budgets approved by Management covering a period of 5 years. The gross and operating margins included in the estimates of value in use have been estimated based on the historical performance and the growth expectations of the market in which each group of CGUs operates. The long-term growth rate used in estimating the value in use is consistent with the projections included in industry reports. The present value of the cash flows was discounted using a specific discount rate after taxes for each group of CGU and reflects the specific risks associated with each of them. The Company performed a sensitivity analysis considering a possible increase of 100 basis points in the discount rate and a possible decrease in the long-term growth rate at a similar level. As a result of this analysis, the Company concluded that there are no significant variations compared to the impairment calculation prepared as of December 31, 2020. The key assumptions used in calculating the value in use in 2020, 2019 and 2018, were as follows: Estimated gross margin Growth rate Discount rate 2020 5.0% 2.0% 8.4% 2019 5.2% 1.8% 8.9% 2018 5.7% 1.0% 8.9% 13. OTHER NON-CURRENT ASSETS Notes receivable (1) Due from related parties (Note 28) Trade receivables related with business acquisitions Total other non-current financial assets Investment in associates and joint ventures (2) Recoverable taxes Other Total other assets 2020 3,119 823 576 4,518 8,586 724 178 14,006 $ $ $ $ As of December 31, 2019 3,365 762 679 4,806 8,197 582 176 13,761 $ $ 2018 3,995 761 616 5,372 8,746 1,736 105 15,959 $ $ $ (1) As of December 31, 2020, 2019 and 2018, this item mainly consisted of the financing provided to M&G Polímeros México, S.A. de C.V. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 110 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (2) Investment in associates and joint ventures The Company’s account of investments in associates and joint ventures consists of the following: Clear Path Recycling, LLC Terminal Petroquímica Altamira, S.A. de C.V. Agua Industrial del Poniente, S.A. de C.V. Corpus Christi Polymers LLC Investment in associates and joint ventures as of December 31 Shareholding % 49.90% 42.04% 47.59% 33.33% 2020 246 42 76 8,222 8,586 $ $ $ 2019 257 40 71 7,774 $ 8,142 $ 2018 305 35 66 8,104 $ 8,510 Additionally, as of December 31, 2019 and 2018, the Company held a 50% interest in Galpek, LDA with a book value of $55 and $236, respectively. Below is summarized the net income of investments in associates and joint ventures, which are accounted for by the equity method: Net comprehensive loss $ (12) $ 2020 2019 (740) 2018 $ (61) There are neither commitments nor contingencies liabilities regarding the Company’s investment in associates and joint ventures as of December 31, 2020, 2019 or 2018. 14. SUBSIDIARIES WITH SIGNIFICANT NON-CONTROLLING INTEREST The significant non-controlling interest is integrated as follows: Indelpro, S. A. de C. V. and subsidiary Polioles, S. A. de C. V. and subsidiary Other 49% 50% Non-controlling ownership percentage 2020 Non-controlling interest income for the period 2019 981 $ 890 49 30 (20) (13) $ 998 $ 919 $ 2018 2020 $ 1,138 $ 4,453 319 354 5,126 38 125 $ 1,301 $ Non-controlling interest as of December 31, 2019 $ 3,902 279 397 $ 4,578 2018 $ 4,135 294 607 $ 5,036 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 111 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The summarized consolidated financial information as of December 31, 2020, 2019 and 2018, and for the years then ended, corresponding to each subsidiary with a significant non-controlling interest is shown below: Statement of financial position Current assets Non-current assets Current liabilities Non-current liabilities Stockholders’ equity Statements of income Indelpro, S. A. de C. V. and subsidiary 2020 2019 2018 $ 5,238 $ 4,114 7,536 8,055 1,723 2,223 1,965 1,982 7,962 9,088 $ 5,076 7,458 2,230 1,865 8,439 Polioles, S. A. de C. V. and subsidiary 2019 2018 2020 $ 1,325 $ 1,317 $ 1,775 1,005 824 1,369 587 974 538 1,195 558 959 521 1,124 639 Revenues Consolidated net income Total comprehensive income of the year Comprehensive income attributable to non-controlling interest Dividends paid to non-controlling interest Statements of cash flows Net cash flows generated by operating activities Net cash flows (used in) generated by investing activities Net cash flows used in financing activities Net increase (decrease) in cash and cash equivalents 11,841 2,003 2,493 12,019 1,817 1,472 14,494 2,323 2,239 2,409 59 81 3,087 97 46 3,736 76 63 1,222 670 721 955 1,097 902 40 - 23 38 32 79 2,423 2,100 3,232 196 74 129 (572) (1,645) 365 (259) (2,187) (351) (286) (2,273) 611 (26) (123) 28 200 (268) 1 363 (418) 89 15. TRADE AND OTHER ACCOUNTS PAYABLE Trade accounts payable Short-term employee benefits Advances from customers Taxes other than income taxes Due to related parties (Note 28) Other accrued accounts and expenses payable 2020 16,173 984 117 453 286 1,532 19,545 $ $ As of December 31, 2019 $ 13,064 554 17 929 247 1,644 $ 16,455 2018 $ 22,330 889 18 927 392 1,495 $ 26,051 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 112 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 16. DEBT Current: Bank loans (1) Current portion of non-current debt Notes payable (1) Interest payable Current debt (2) Non-current: Senior Notes Unsecured bank loans Other loans Total Less: current portion of non-current debt Less: interest generated by non-current debt Non-current debt (2) 2020 As of December 31, 2019 2018 $ 98 - 42 316 $ 456 $ 29,061 1,300 150 30,511 - (315) $ 30,196 $ 375 5 27 300 $ 707 $ 27,426 836 142 28,404 (5) (296) $ 28,103 $ 9,588 213 43 274 10,118 $ $ 18,777 11,707 - 30,484 (213) (259) $ 30,012 (1) As of December 31, 2020, 2019 and 2018, short-term bank loans and notes payable incurred interest at an average rate of 1.87%, 4.19% and 3.55%, respectively. (2) The fair value of bank loans and notes payable approximates their current carrying amount because of their short maturity. The carrying amounts, terms and conditions of non-current debt are as follows: Description Senior Notes 144A/Reg. S / fixed rate Senior Notes 144A/Reg. S / fixed rate Senior Notes 144A/Reg. S / fixed rate Total Senior Notes Bank loan, BADLAR + 1.00% Bank loan, fixed 25.00% Bank loan, LIBOR +1.45% Bank loan, LIBOR +2.60% Bank loan, LIBOR +2.05% Bank loan, LIBOR +1.10% (2) Bank loan, LIBOR +1.10% (2) Bank loan, LIBOR +3.25% (2) Bank loan, LIBOR +1.25% (2) Bank loan, LIBOR +1.25% (2) Total unsecured bank loans Other loans Total Less: current portion and interest of non-current debt Non-current debt Currency Value in MXN Debt issuance costs Balance as Balance as Balance as Interest of December of December of December Maturity Interest payable 31, de 2019(1) 31, de 2018(1) 31, 2020 date rate USD $ 12,953 $ (41) $ 65 $ 12,977 $ 12,247 $ 12,778 20-nov-22 4.50% USD 5,985 (22) 127 6,090 5,748 5,999 08-aug-23 5.38% USD ARS ARS USD USD USD USD USD USD USD USD USD 9,950 28,888 (76) (139) 120 312 9,994 29,061 9,431 27,426 - - - 798 499 - - - - - 1,297 - - - - - - - - - - - - - - 2 1 - - - - - 3 - - - 800 500 - - - - - 1,300 2 3 831 - - - - - - - 836 18-sep-29 4.25% 01-apr-20 45.69% 08-dec-20 25.00% 3.34% 15-dec-22 2.83% 3-dec-24 11-dec-24 2.27% 30-nov-20 3.62% 30-nov-20 3.55% 5.75% 25-oct-22 28-mar-21 4.03% 3.76% 28-mar-21 - 18,777 20 5 986 - - 1,982 989 1,989 2,169 3,567 11,707 150 $ 30,335 - $ (139) - $ 315 150 $ 30,511 142 $ 28,404 - $ 30,484 Various Various - $ 30,335 - $ (139) (315) $ - (315) $ 30,196 (301) $ 28,103 (472) $ 30,012 (1) As of December 31, 2019 and 2018, issuance costs of the debt pending amortization were $153 and $92, respectively. (2) These loans were paid in advance during the year ended December 31, 2019, using the resources obtained from the debt issuance (Note 2g), and the sale transaction described in Note 2f. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 113 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020, the annual maturities of non-current debt, gross from issuance costs are as follows: Senior Notes Bank loans Other loans 2021(1) $ 312 3 - $ $ 315 $ 2022 12,953 - - 12,953 (1) This amount corresponds to interest payable generated by non-current debt. 2024 $ - 1,297 2025 and thereafter $ 9,950 - 2023 $ 5,985 - - $ 5,985 $ - $ 1,297 150 10,100 Total $ 29,200 1,300 150 $ 30,650 As of December 31, 2020, 2019 and 2018, the Company has committed unused lines of credit totaling US$680, US$740 and US$728, respectively. Covenants: Loan contracts and debt agreements contain restrictions, primarily relating to compliance with financial ratios, which include the following: a) Interest hedge ratio: it is calculated by dividing the profit before financial result, net, share of result of associates and joint ventures, income taxes, depreciation and amortization (EBITDA) by the net interest charges for the last four quarters of the analyzed period. This factor cannot be less 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. Additionally, there are other restrictions in regards of incurring additional debt or making loans that require mortgaging assets, dividend payments and submission of financial information, which if not met or remedied within a specified period to the satisfaction of creditors may cause the debt to become payable immediately. During 2020 and 2019, the financial ratios were calculated according to the formulas set forth in the loan agreements. As of December 31, 2020 and the date of issuance of these consolidated financial statements, the Company complied satisfactorily with such covenants and restrictions. 17. LEASE LIABILITY Current portion: USD MXN Other currencies Current lease liability Non-current portion: USD MXN Other currencies Less: Current portion of lease liability Non-current lease liability 2020 ALPEK ANNUAL REPORT As of December 31, 2020 2019 $ $ $ $ 454 123 127 704 2,280 288 442 3,010 (704) 2,306 $ $ 531 214 167 912 $ 2,387 405 576 3,368 (912) 2,456 $ OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 114 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2020 and 2019, respectively, changes in the lease lability related to finance activities in accordance with the consolidated statement of cash flow are integrated as follows: Beginning balance New contracts Write-offs Adjustment to liability balance Interest expense from lease liability Lease payments Exchange (loss) gain Ending balance 2020 3,368 420 (45) 40 193 (1,083) 117 3,010 $ $ $ 2019 3,242 1,226 (165) 74 205 (1,108) (106) $ 3,368 The total of future minimum payments of leases that include non-accrued interest is analyzed as follows: Less than a year Over 1 year and less than 5 years Over 5 years Total December 31, 2020 704 1,701 605 3,010 $ $ $ 2019 912 1,885 571 $ 3,368 18. PROVISIONS As of January 1, 2018 Increases Payments Write-offs Translation effect As of December 31, 2018 Increases Payments Write-offs Translation effect As of December 31, 2019 Increases Payments Write-offs Translation effect As of December 31, 2020 Dismantling, demolition and environmental remediation Legal contingencies Warranties Other Total $ $ 167 485 (56) - (37) 559 12 (28) (27) (74) 442 15 (2) (39) (45) $ 371 $ $ $ $ $ 180 1,124 (60) (18) (38) 1,188 661 (31) (40) (124) 1,654 210 (568) (106) (20) 1,170 $ $ - - - - - - 544 - - - 544 - (563) (67) 124 $ 38 $ $ $ $ $ 13 - (4) - - 9 - (3) - - 6 183 (3) - 1 187 $ $ $ $ - 639 - (18) (1) 620 105 - (13) (50) 662 12 - - (100) 574 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 115 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Short-term provisions Long-term provisions As of December 31 2020 $ 50 1,120 1,170 $ 2019 576 1,078 1,654 $ $ 2018 $ 81 1,107 1,188 $ As of December 31, 2020 and 2019, the provisions shown in the table above mainly include $206 (US $10) and $251 (US$13), respectively, related to the obligation to give back to Petrobras certain tax credits, in case they are recovered by Petroquímica Suape and Citepe, as well as $574 (US$29) and $662 (US$35) for labor, civil and tax contingencies also derived from the acquisition of Petroquímica Suape and Citepe, for which the Company holds an account receivable, included in other non-current assets, for $576 (US$29) and $679 ($US$36) as of December 31, 2020 and 2019, respectively. In addition, as of December 31, 2019, they also include a provision of warranties related to the sales transaction described in Note 2f. Additionally, as of December 31, 2020 and 2019, $149 (US$7.5) and $140 (US$7.5), respectively, were related to for the contingent liability for the earn-out payment related to the acquisition of Selenis. 19. 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 subsidiaries of the Company have established irrevocable trust funds for payment of pensions and seniority premiums and health-care expenses. Below is a summary of the main financial data of such employee benefits: Employee benefit obligations: Pension benefits Post-employment medical benefits Defined contribution plans Employee benefits in the consolidated statement of financial position Charge to the consolidated statement of income for: Pension benefits Post-employment medical benefits As of December 31, 2019 2020 2018 $ 956 $ 766 106 872 220 105 1,061 255 $ 797 120 917 182 $ 1,316 $ 1,092 $ 1,099 $ (62) (5) $ (67) $ (59) (6) (65) $ $ $ (64) (6) (70) Remeasurements of employee benefit obligations recognized in other comprehensive income of the year Remeasurements of accrued employee benefit obligations recognized in other comprehensive income $ (39) $ 19 $ (73) $ (124) $ (85) $ (104) 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 116 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Pension and post-employment medical benefits The Company operates defined benefit pension plans based on employees’ pensionable remuneration and length of service. Most plans are externally funded. Plan assets are held in trusts, foundations or similar entities, governed by local regulations and practice in each country, as is the nature of the relationship between the Company and the respective trustees (or equivalent) and their composition. The Company operates post-employment medical benefit schemes mainly in its subsidiary 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. Amounts recognized in the consolidated statement of financial position are determined as follows: Present value of defined benefit obligations Fair value of plan assets Liability in the statement of financial position $ $ 2020 4,455 (3,394) 1,061 The movements of defined benefit obligations are as follows: As of December 31, 2019 $ 3,813 (2,941) $ 872 2018 $ 3,672 (2,755) $ 917 2020 3,813 50 107 6 $ 2019 3,672 45 127 10 2018 $ 3,998 45 145 11 329 310 (191) As of January 1, Service cost Interest cost Contributions from plan participants Remeasurements: Losses (gains) from changes in financial assumptions Losses (gains) from changes in demographic assumptions and experience adjustments Translation effect Benefits paid Liability acquired in business combination Plan curtailments As of December 31, $ $ 42 198 (284) 195 (1) 4,455 (89) 12 (265) - (9) 3,813 (7) - (328) - (1) $ 3,672 2019 (2,755) (146) $ 2018 (3,097) (119) (239) (1) (46) 247 (2,940) 261 7 (47) 240 (2,755) $ $ $ $ The movement in the fair value of plan assets for the year is as follows: As of January 1 Interest income Remeasurements – return on plan assets, excluding interest income Translation effect Contributions Benefits paid As of December 31 2020 (2,940) (89) (332) (153) (96) 216 (3,394) $ $ 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 117 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The amounts recorded in the consolidated statement of income for the years ended December 31 are the following: Service cost Interest cost, net Effect of plan curtailments and/or settlements Total included in personnel cost 2020 (50) (18) 1 (67) $ $ 2019 2018 $ $ (45) (29) 9 (65) $ (45) (26) 1 $ (70) The principal actuarial assumptions are as follows: Discount rate Mexico Discount rate United States Inflation rate Wage increase rate Medical inflation rate Mexico 2020 6.75% 1.99%-2.30% 3.50% 4.50% 6.50% As of December 31, 2019 7.00% 2.92%-3.12% 4.50% 4.50% 6.50% 2018 9.50% 3.89%-4.03% 3.50% 4.50% 6.50% The sensitivity analysis of the discount rate for defined benefit obligations is as follows: Effect in defined benefit obligations Discount rate Change in assumption MX 1% Increase in assumption Decrease by $132 Decrease in assumption Increase by $141 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. Defined benefit plan assets Plan assets are comprised as follows: As of December 31, 2019 1,932 1,008 2,940 2018 1,797 958 2,755 $ $ Equity instruments Fixed income Fair value of plan assets 2020 2,290 1,104 3,394 $ $ $ $ 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 118 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 20. INCOME TAXES The Company is subject to income tax, whose rate is 30% in Mexico. The statutory income tax rates applicable to the main foreign subsidiaries were as follows: United States Brazil Argentina Chile Canada Spain United Kingdom 2020 21% 34% 30% 27% 25% 25% 17% 2019 21% 34% 30% 27% 25% 25% 19% 2018 21% 34% 30% 27% 25% 25% 19% a. Income taxes recognized in the consolidated statement of income are as follows: Current income tax Deferred income taxes Income taxes 2020 (1,933) 731 (1,202) $ $ 2019 (2,463) 574 (1,889) $ $ 2018 (2,075) (1,380) (3,455) $ $ b. The reconciliation between the statutory and effective income tax rates is as follows: Income before income taxes Income tax rate Statutory income tax rate expense (Less) add income tax effect on: Annual adjustment for inflation Non-deductible expenses Non-taxable income Effect of different tax rates of other countries other than Mexico True up with respect to prior years’ current income tax Translation effect from the functional currency Investments in associates and joint ventures Total income taxes Effective tax rate $ $ 2020 5,323 30% (1,597) (186) (13) 642 (33) (35) 45 (25) (1,202) 23% $ $ 2019 9,413 30% (2,824) (268) (24) 1,095 94 94 38 (94) (1,889) 20% $ $ 2018 18,389 30% (5,517) (388) (12) 1,362 504 474 131 (9) (3,455) 19% 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 119 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS c. The breakdown of the deferred tax asset and deferred tax liability is as follows: Property, plant and equipment Intangible assets Debt issuance costs Provisions Derivative financial instruments Tax loss carryforwards Tax credits, impairment allowance and other Effect of tax rates of other countries and changes in tax rates Deferred tax asset Inventories Property, plant and equipment, net Intangible assets Tax loss carryforwards Other items Effect of tax rates of other countries and changes in tax rates Deferred tax liability $ Asset (liability) December 31, 2019 (118) (163) (15) 212 - 558 633 2018 $ (1,221) (246) (17) 123 334 1,019 1,489 $ 2020 (155) (137) (16) 275 2 889 669 (21) 1,506 $ (3) 1,104 (97) 1,384 $ $ (121) (5,999) (280) 752 1,414 (126) (5,766) (304) 582 1,634 $ (106) (5,757) (48) 177 981 142 (4,092) $ 54 (3,926) $ 1 (4,752) $ Deferred income tax assets are recognized on tax loss carryforwards to the extent the realization of the related tax benefit through future tax income is probable. Tax losses amount to $29,312, $32,320 and $9,328 in 2020, 2019 and 2018, respectively. Tax losses as of December 31, 2020 expire in the following years: Loss for the year incurred 2011 2013 2014 2015 2016 2017 2018 2019 2020 Other Tax-loss carryforwards $ 15 57 292 193 234 30 321 2,665 1,663 23,842 $ 29,312 Expiration year 2021 2023 2024 2025 2026 2027 2028 2029 2030 and thereafter No maturity As of December 31, 2020, the Company holds tax losses to be amortized in Brazil, through Petroquímica Suape and Citepe, for an amount of $23,842, which have no expiration date. The Company has decided to reserve the total amount of the tax losses, according to management’s estimate of future reversals of temporary differences; thus, as of December 31, 2020, they do not generate deferred tax assets. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 120 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS d. Income tax related to other comprehensive income is as follows: Before taxes 2020 Tax charged After taxes Before taxes 2019 Tax charged After taxes Before taxes 2018 Tax charged After taxes Equity in other comprehensive income of associates and joint ventures recognized through the equity method Foreign currency translation effect Remeasurement of employee benefit obligations Effect of derivative financial instruments designated as cash flow hedges Other comprehensive loss $ 3 (767) $ (39) $ - - 9 3 $ - (1,954) (767) $ - $ - - $ - $ - $ (1,954) (1,814) - - (1,814) (30) 18 4 22 (73) 18 (55) 885 82 $ (271) $ (262) (560) 614 $ (180) $ (938) $ (229) $ (1,167) $ (2,608) $ 179 $ (2,429) (233) (721) 998 765 161 e. Income tax payable consists of the following: Current portion Non-current portion Total income tax payable 21. OTHER NON-CURRENT LIABILITIES Advances from customers (1) Other Total other liabilities 2020 531 170 701 $ $ 2020 $ 249 40 $ 289 As of December 31, 2019 1,143 400 1,543 $ $ $ $ 2018 1,279 469 1,748 2018 361 75 As of December 31, 2019 290 66 $ 356 $ $ $ 436 (1) This item corresponds to revenues charged in advance and relates to the future delivery of goods. 22. STOCKHOLDERS’ EQUITY As of December 31, 2020, capital stock is variable, with a fixed minimum of $6,052 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. As of December 31, 2020, Alpek SAB had 5,866,763 treasury shares. As of such date, the market value per share was $17.42 Mexican pesos. From January to March 2020, the Company purchased 3,544,763 shares in the amount of $46 and sold 175,000 shares in the amount of $2 in connection to a repurchase program that approved by the Company’s stockholders and exercised discretionally by Management. From May to December 2019, the Company purchased 20,190,080 shares in the amount of $443, and sold 17,693,539 shares in the amount of $389, in relation to the same program. During 2018, the Company sold 1,485,884 shares in the amount of $39, in connection with the abovementioned repurchase program. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 121 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. As of December 31, 2020, 2019 and 2018, the legal reserve amounts to $1,200, $854 and $804, respectively. At the ordinary stockholders’ meeting of Alpek on January 20, 2020, the stockholders agreed to declare dividends in cash in the aggregate amount of $2,713 (US$143), which were paid on January 29 in the same year. At the ordinary stockholders’ meeting of Alpek on February 27, 2019, the stockholders agreed to declare dividends in cash in the aggregate amount of $2,778 (US$143), which were paid on March 8 in the same year. 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. 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 an income tax charge based on the tax rate valid in the period in which they are paid. 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. As of December 31, 2020, the tax value of the consolidated CUFIN and value of the Capital Contribution Account (CUCA Spanish acronym) amounted to $3,415 and $21,479, respectively. 23. SHARED-BASED PAYMENTS Alpek has a stock based compensation scheme referred to at 50% of the value of stock of Alfa and the other 50% of the value of the shares of Alpek SAB 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 with reference at the average price of the shares during the year. These payments are measured at the fair value of the consideration, therefore, because they are based on the price of Alfa and Alpek shares, the measurement is considered to be within level 1 of the fair value hierarchy. The average price of the shares in pesos considered for the measurement of the executive incentive is: Alfa, S. A. B. de C. V. Alpek, S. A. B. de C. V. 2020 15.39 17.60 2019 15.72 20.94 2018 22.11 24.13 The short-term and long-term liabilities are comprised as follows: Short term Long term Total carrying amount 2020 $ 8 20 28 $ As of December 31, 2019 $ 8 18 $ 2018 8 20 $ 26 $ 28 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 122 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 24. 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 material and other Employee benefit expenses (Note 27) Human resource expenses Maintenance Depreciation and amortization Advertising expenses Freight expenses Consumption of energy and fuel (gas, electricity, etc.) Travel expenses Lease expenses (1) Technical assistance, professional fees and administrative services Other (insurance and bonds, water, containers and packing, etc.) Total $ 2020 (79,743) (6,319) (40) (1,991) (4,486) (2) (5,949) (4,544) (71) (810) 2019 $ (85,823) (5,365) (86) (2,003) (4,005) (2) (4,987) 2018 $ (95,750) (5,128) (48) (1,746) (2,887) (3) (5,305) (4,637) (203) (664) (5,380) (171) (966) (1,694) (1,599) (1,481) (2,030) (107,679) $ (2,214) (111,588) $ (2,956) (121,821) $ (1) Beginning January 1, 2019, this concept includes the expense for those short-term leases and low-value assets, which according to the Company’s accounting policy, do not result in the recognition of a right-of-use asset and a lease liability. 25. OTHER INCOME, NET Other income for the years ended December 31, are comprised as follows: Gain on business acquisition Gain on business sale Other income Impairment of property, plant and equipment and others Total 2020 $ 657 89 451 2019 $ - 3,634 659 $ 2018 4,597 - 423 (14) 1,183 $ (29) $ 4,264 (456) 4,564 $ 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 123 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 26. FINANCE INCOME AND COSTS Financial result, net for the years ended December 31, are comprised as follows: 2020 2019 2018 Financial income: Interest income on short-term bank deposits $ Interest income on loans from related parties Other financial income Total financial income $ 105 28 392 525 $ $ 152 26 596 774 $ $ 98 27 317 442 Financial expenses: Interest expense on loans to related parties $ Interest expense on bank loans Non-bank interest expense Lease interest expense Interest cost on employee benefits, net Other financial expenses (1) (183) (1,588) (193) (44) (488) (2,497) $ (3) (1,035) (1,075) (205) (42) (462) (2,822) Total financial expense $ $ Loss in exchange fluctuation, net Foreign exchange gain Foreign exchange loss Loss in exchange fluctuation, net Financial result, net 4,653 (4,766) (113) (2,085) $ $ 4,637 (5,224) (587) (2,635) $ $ 27. EMPLOYEE BENEFIT EXPENSES Employee benefits expenses for the years ended December 31, are as follows: $ (2) (893) (966) - (21) (301) (2,183) 3,302 (4,344) (1,042) (2,783) $ $ $ Salaries, wages and benefits Social security fees Employee benefits Other fees Total 2020 (4,780) (380) (49) (1,110) (6,319) $ $ 2019 (3,896) (419) (36) (1,014) (5,365) $ $ 2018 (3,869) (351) (44) (864) (5,128) $ $ 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 124 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 28. RELATED PARTY TRANSACTIONS Transactions with related parties during the years ended December 31, 2020, 2019 and 2018 were as follows: 2020 2019 2018 $ - $ 3 1,445 $ - 1,486 Income Income from sale of goods: Associates and joint ventures Stockholders with significant influence over subsidiaries Income from services: Affiliates Stockholders with significant influence over subsidiaries Income from financial interest: Alfa Affiliates Stockholders with significant influence over subsidiaries Income from leases: Stockholders with significant influence over subsidiaries Income from sale of energetic: Affiliates Stockholders with significant influence over subsidiaries Affiliates outside Alfa (Nemak) Income from technical assistance: Stockholders with significant influence over subsidiaries Other income: Affiliates Associates and joint ventures Costs / expenses Purchase of finished goods and raw materials: Stockholders with significant influence over subsidiaries (1,454) Expenses from services: Affiliates Associates and joint ventures Stockholders with significant influence over subsidiaries Affiliates outside Alfa (Nemak) Financial interest expenses: Associates and joint ventures Commission expenses: Stockholders with significant influence over subsidiaries Other expenses: Affiliates Associates and joint ventures Stockholders with significant influence over subsidiaries Affiliates outside Alfa Dividends paid to Alfa Dividends of subsidiaries to shareholders with significant influence (315) - (13) (1) (1) (1) (22) (38) (6) (36) (2,230) (670) 2020 ALPEK ANNUAL REPORT 1,155 60 197 28 - - 28 408 28 36 - 3 - 78 181 25 1 - 25 354 29 - 3 1 - (824) (344) (18) (22) - (2) (1) (16) (63) (3) - (2,280) (993) 263 220 25 - 2 - - - - - - 3 (992) (394) - (24) - (2) - (18) (38) - - - (981) OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 125 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2020, the remunerations and benefits received by the top officers of the Company amounted to $347 ($413 in 2019 and $281 in 2018), comprising of base salary and social security benefits, and supplemented by a variable consideration program based on the Company’s results and the market value of the shares thereof and of its holding company. As of December 31, balances with related parties are as follows: Short-term accounts receivable: Holding company Alfa, S. A. B. de C. V. Affiliates Innovación y Desarrollo de Energía Alfa Sustentable, S. A. de C. V. Newpek, LLC Newpek, S.A. de C.V. Terza, S. A. de C. V. Sigma Alimentos Lácteos, S.A. de C.V. Sigma Alimentos Centro, S.A. de C.V. Alimentos Finos Occidente, S.A. de C.V Affiliates outside Alfa Nemak México, S. A. de C. V. Stockholders with significant influence on subsidiaries BASF BASF Basell Basell Long-term accounts receivable: Holding company Alfa, S. A. B. de C. V. (1) Affiliates Nature of the transaction As of December 31, 2019 2018 2020 Administrative services $ 190 $ 190 $ 190 Administrative services Administrative services Administrative services Sale of goods Energetic Energetic Energetic Energetic Sale of goods Sale of business Sale of goods Energetic 115 - 1 1 2 3 1 35 115 14 - 1 - 2 - 31 193 - 44 3 $ 588 196 - 30 6 $ 585 $ 115 4 - 1 4 - - 9 132 203 54 - 712 Financing and interest $ 823 $ 753 $ 761 Colombin Bel, S.A. de C.V. Financing and interest - $ 823 9 $ 762 - $ 761 Short-term accounts payable: Affiliates Alliax, S. A. de C. V. Alfa Corporativo, S. A. de C. V. Axtel S.A.B. de C.V. Proyectos Ejecutivos Profesionales, S.A. de C.V. Servicios Eficientes de R.H., S.A. de C.V. Servicios Empresariales del Norte, S.A. de C.V. Affiliates outside Alfa Nemak Exterior, LTD Associates Clear Path Recycling, LLC Stockholders with significant influence over subsidiaries BASF BASF Basell Terminal Petroquímica Altamira, S.A. de C.V. Long-term accounts payable: Affiliates Alfa Corporativo, S. A. de C. V. Administrative services Administrative services Administrative services Administrative services Administrative services $ 3 10 3 12 2 Administrative services Financing and interest Purchase of raw material Purchase of goods Other 4 50 202 - - - $ 286 $ 13 25 4 - - 3 48 140 14 - - $ 247 $ 21 23 3 - - 2 2 69 - 259 12 1 $ 392 Administrative services $ $ - $ - $ - $ 4 - $ 4 (1) As of December 31, 2020, 2019 and 2018, the loans granted bore interest at average fixed interest rate of 5.34%, 5.32% and 5.34%, respectively. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 126 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 29. SEGMENT REPORTING Segment reporting is presented consistently with the financial information provided to the Chief Executive Officer, who is 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 evaluated. Management controls and assesses its operations through two business segments: the Polyester business and the Plastics and Chemicals business. These segments are managed separately since its products vary and targeted markets are different. Their activities are performed through various subsidiaries. The operations between operating segments are performed at market value and the accounting policies with which the financial information by segments is prepared, are consistent with those described in Note 3. The Company has defined Adjusted EBITDA as the calculation of adding operating income, depreciation, amortization, and impairment of long lived assets. 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 performance under IFRS and should not be considered as an alternative to net income as a measure of operating performance or cash flows as a measure of liquidity. Following is the condensed financial information of the Company’s operating segments: For the year ended December 31, 2020: Statement of income: Income by segment Inter-segment income Income from external customers Operating income Depreciation and amortization Impairment of long-lived assets Adjusted EBITDA Investments in fixed and intangible assets For the year ended December 31, 2019: Statement of income: Income by segment Inter-segment income Income from external customers Operating income Depreciation and amortization Impairment of long-lived assets Adjusted EBITDA Investments in fixed and intangible assets Polyester $ 85,350 (70) $ 85,280 3,401 $ 3,426 14 6,841 1,855 $ $ Polyester $ 91,247 (390) $ 90,857 $ 5,029 3,179 28 $ 8,236 $ 2,578 Plastics and Chemicals $ 25,403 (54) $ 25,349 $ 3,860 1,060 - $ 4,920 $ 715 Plastics and Chemicals $ 27,217 (120) $ 27,097 $ 3,368 829 1 $ 4,198 $ 475 2020 ALPEK ANNUAL REPORT Other Total $ $ $ $ $ 3,236 124 3,360 232 - - 232 - $ 113,989 - $ 113,989 $ 7,493 4,486 14 $ 11,993 $ 2,570 Other Total $ 1,221 510 $ 1,731 $ 3,964 (3) - $ 3,961 $ 9 $ 119,685 - $ 119,685 $ 12,361 4,005 29 $ 16,395 $ 3,062 OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 127 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2018: Statement of income: Income by segment Inter-segment income Income from external customers Operating income Depreciation and amortization Impairment of long-lived assets Adjusted EBITDA Investments in fixed and intangible assets Polyester $ 99,664 (105) $ 99,559 16,470 $ 2,329 (3,481) 15,318 1,509 $ $ Plastics and Chemicals Other Total $ 33,204 (279) $ 32,925 $ 4,735 $ $ $ 556 1 $ 5,292 $ 491 $ $ 1,655 384 2,039 (3) - - (3) 5 $ 134,523 - $ 134,523 $ 21,202 2,885 (3,480) $ 20,607 $ 2,005 The reconciliation between adjusted EBITDA and income before taxes for the years ended December 31, is as follows: Adjusted EBITDA Depreciation and amortization (Impairment) reversal of impairment of long-lived assets Operating income Financial result, net Equity in loss of associates and joint ventures Income before income taxes 2020 11,993 (4,486) (14) 7,493 (2,085) (85) 5,323 $ $ $ 2019 16,395 (4,005) $ 2018 20,607 (2,885) (29) 12,361 (2,635) (313) 9,413 $ 3,480 21,202 (2,783) (30) 18,389 $ The Company’s main customer generated revenue amounting to $10,426 and $11,455 for the years ended December 31, 2020 and 2019. This revenue is obtained from the polyester reporting segment and represents 9.1% and 9.6% of the consolidated revenue with external costumers for the years ended December 31, 2020 and 2019. Following is a summary of revenues per country of origin for the years ended December 31: Mexico United States Argentina Brazil Chile Canada United Kingdom Total revenues 2020 $ 44,189 45,113 4,303 12,649 936 1,966 4,833 113,989 $ 2019 $ 47,702 47,563 5,545 15,413 947 2,515 - 119,685 $ 2018 $ 54,282 57,894 6,784 11,291 1,094 3,178 - 134,523 $ 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 128 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The following table shows the intangible assets and property, plant and equipment by country: Mexico United States Canada Brazil Total intangible assets Mexico United States Canada Argentina Chile Brazil United Kingdom Total property, plant and equipment $ 2020 1,741 1,616 22 258 $ 3,637 $ 23,737 8,090 865 111 316 4,538 922 $ 38,579 $ $ As of December 31, 2019 1,789 1,638 24 332 $ 3,783 2018 2,243 1,712 29 384 $ 4,368 $ 23,040 7,077 932 110 240 5,683 - $ 37,082 $ 32,520 6,773 1,068 140 273 6,259 - $ 47,033 30. COMMITMENTS AND CONTINGENCIES At December 31, 2020, the Company has the following commitments: a. At December 31, 2020, 2019 and 2018, the Company’s 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. b. A subsidiary of the Company entered into agreements to cover the supply of propylene, which establish the obligation to purchase the product at a priced referenced to market values for a determinate period. As of December 31, 2020, 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 Company’s subsidiaries use hazardous materials to manufacture polyester filaments and staple fibers, polyethylene terephthalate (PET) and terephthalic 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. 2020 ALPEK ANNUAL REPORT OVERVIEW | LETTER TO SHAREHOLDERS | SEGMENTS | STRATEGY | ESG | GOVERNANCE | APPENDIX | MD&A | FINANCIAL STATEMENTS 129 ALPEK, S. A. B. DE C. V. AND SUBSIDIARIES (SUBSIDIARY OF ALFA, S. A. B. DE C. V.) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. c. As of December 31, 2020, the Company is in a process of fiscal litigation in one of its subsidiaries in Brazil, in relation to the demand for payment of the Tax on the Circulation of Goods and Services (“ICMS”) that the Ministry of Finance of the State of Sao Paulo (“SFSP”, for its initials in Portuguese) has raised against the Company, due to differences in the criteria for the calculation and crediting of said tax. Considering all the circumstances and precedents of jurisprudence available at that date, management and its advisors have determined that it is probable that the Superior Court of Justice of Brazil will issue a judgment in favor of the Company for the amount related to differences in the calculation, which would exempt it from paying $364 in taxes, fines and interest that the SFSP demands; therefore, as of December 31, 2020, the Company has not recognized any provision related to this concept. On the other hand, for the concept of ICMS crediting, the amount demanded amounts to $73, and management and its advisors consider that it is not probable that the authorities will issue an unfavorable resolution for the Company; thus, it has not recognized any provision related to this concept as of December 31, 2020. 31. SUBSEQUENT EVENTS In preparing the financial statements the Company has evaluated the events and transactions for their recognition or disclosure subsequent to December 31, 2020 and through January 31, 2021 (date of issuance of the consolidated financial statements), and has not identified subsequent events. 32. AUTHORIZATION TO ISSUE THE CONSOLIDATED FINANCIAL STATEMENTS On January 31, 2021, the issuance of the accompanying consolidated financial statements was authorized by José de Jesús Valdez Simancas, General Director and José Carlos Pons de la Garza, Administration and Finance Director. These consolidated financial statements are subject to the approval of the Company’s ordinary shareholders’ meeting. 2020 ALPEK ANNUAL REPORT ALPEK INVESTOR RELATIONS Alejandro Elizondo Alejandra Bustamante IR@alpek.com Alpek, S.A.B. de C.V. Av. Gómez Morín 1111 Sur Col. Carrizalejo, San Pedro Garza García Nuevo León, CP. 66254, Mexico www.alpek.com L A U S V 3 3 I : I N G S E D 

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