VANCOUVER, BRITISH COLUMBIA (NASDAQ: MEOH)(SANTIAGO: Methanex)
-
For the second quarter of 2008, Methanex reported Adjusted
EBITDA(1) of $78.9 million, net income of $38.9 million and
earnings per share of $0.41 (on a diluted basis).
Bruce Aitken, President and CEO of Methanex commented, "The
strong methanol price environment resulted in another good quarter
of earnings. In the second quarter, we achieved an average realized
price of $412 per tonne on sales volumes which were up about 10%
over last quarter."
"Entering the third quarter, the pricing environment remains
strong. Overall methanol demand is healthy, despite softness in
some derivatives due to general weakness in the economy in some
regions. In China, low operating rates coupled with strong demand,
including growth into DME and gasoline blending supported by high
energy prices, have resulted in China significantly increasing its
imports over the quarter. Plant outages across the global industry
have also continued, adding further tightness to the market."
"With the shift to our larger plant in New Zealand in Q3, we
will be in a better position to benefit from strong industry
conditions. Longer term, we also expect production improvements
from Chile, resulting from the gas exploration activities ongoing
in southern Chile, and from our Egypt project which is on schedule
to be producing methanol by early 2010."
Mr. Aitken concluded, "Strong cash generation in the second
quarter continues to leave us in an excellent financial position.
With US$345 million cash on hand at the end of the quarter, a
strong balance sheet and a US$250 million undrawn credit facility,
we are well positioned to meet our financial commitments related to
the Egypt methanol project, pursue opportunities to accelerate
natural gas development in southern Chile, pursue opportunities to
sponsor methanol demand in new energy applications, pursue other
strategic growth initiatives, and continue to deliver on our
commitment to return excess cash to shareholders."
A conference call is scheduled for Wednesday, July 23, 2008 at
11:00 am EST (8:00 am PST) to review these second quarter results.
To access the call, dial the Telus Conferencing operator ten
minutes prior to the start of the call at (416) 883-0139, or toll
free at (888) 458-1598. The passcode for the call is 45654. A
playback version of the conference call will be available for
fourteen days at (877) 653-0545. The reservation number for the
playback version is 518973. There will be a simultaneous audio-only
webcast of the conference call, which can be accessed from our
website at www.methanex.com. In addition, an audio recording of the
conference call can be downloaded from our website for three weeks
after the call.
Methanex is a Vancouver based, publicly traded company engaged
in the worldwide production, distribution and marketing of
methanol. Methanex shares are listed for trading on the Toronto
Stock Exchange in Canada under the trading symbol "MX", on the
NASDAQ Global Market in the United States under the trading symbol
"MEOH", and on the foreign securities market of the Santiago Stock
Exchange in Chile under the trading symbol "Methanex". Methanex can
be visited online at www.methanex.com.
FORWARD-LOOKING STATEMENTS
Information contained in this press release and the attached
Second Quarter 2008 Management's Discussion and Analysis contains
forward-looking statements. Certain material factors or assumptions
were applied in drawing the conclusions or making the forecasts or
projections that are included in these forward-looking statements.
Methanex believes that it has a reasonable basis for making such
forward-looking statements. However, forward-looking statements, by
their nature, involve risks and uncertainties that could cause
actual results to differ materially from those contemplated by the
forward-looking statements. The risks and uncertainties include
those attendant with producing and marketing methanol and
successfully carrying out major capital expenditure projects in
various jurisdictions, the ability to successfully carry out
corporate initiatives and strategies, conditions in the methanol
and other industries including the supply and demand balance for
methanol, the success of natural gas exploration and development
activities in southern Chile and our ability to obtain any
additional gas in that region on commercially acceptable terms,
actions of competitors and suppliers, actions of governments and
governmental authorities, changes in laws or regulations in foreign
jurisdictions, world-wide economic conditions and other risks
described in our 2007 Management's Discussion & Analysis and
the attached Second Quarter 2008 Management's Discussion and
Analysis. Undue reliance should not be placed on forward-looking
statements. They are not a substitute for the exercise of one's own
due diligence and judgment. The outcomes anticipated in
forward-looking statements may not occur and we do not undertake to
update forward-looking statements. These materials also contain
certain non-GAAP financial measures. Non-GAAP financial measures do
not have any standardized meaning and therefore are unlikely to be
comparable to similar measures used by other companies. For more
information regarding these non-GAAP measures, please see our 2007
Management's Discussion & Analysis and the attached Second
Quarter 2008 Management's Discussion and Analysis.
(1) Adjusted EBITDA is a non-GAAP measure that does not have any
standardized meaning prescribed by Canadian generally accepted
accounting principles (GAAP) and therefore is unlikely to be
comparable to similar measures presented by other companies. Refer
to Supplemental Non-GAAP Measures in the attached Second Quarter
2008 Management's Discussion and Analysis for a description of each
Supplemental Non-GAAP Measure and a reconciliation to the most
comparable GAAP measure.
Interim Report
For the Three Months Ended June 30, 2008
At July 22, 2008 the Company had 93,962,342 common shares issued
and outstanding and stock options exercisable for 1,607,893
additional common shares.
Share Information
Methanex Corporation's common shares are listed for trading on
the Toronto Stock Exchange under the symbol MX, on the Nasdaq
Global Market under the symbol MEOH and on the foreign securities
market of the Santiago Stock Exchange in Chile under the trading
symbol Methanex.
Transfer Agents & Registrars
CIBC Mellon Trust Company
320 Bay Street
Toronto, Ontario, Canada M5H 4A6
Toll free in North America:
1-800-387-0825
Investor Information
All financial reports, news releases and corporate information
can be accessed on our website at www.methanex.com.
Contact Information
Methanex Investor Relations
1800 - 200 Burrard Street
Vancouver, BC Canada V6C 3M1
E-mail: invest@methanex.com
Methanex Toll-Free:
1-800-661-8851
SECOND QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS
Except where otherwise noted, all currency amounts are stated in
United States dollars.
This second quarter 2008 Management's Discussion and Analysis
should be read in conjunction with the 2007 Annual Consolidated
Financial Statements and the Management's Discussion and Analysis
included in the Methanex 2007 Annual Report. The Methanex 2007
Annual Report and additional information relating to Methanex is
available on SEDAR at www.sedar.com and on EDGAR at
www.sec.gov.
Six
Three Months Ended Months Ended
---------------------- --------------
($ millions, except Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
where noted) 2008 2008 2007 2008 2007
--------------------------------------------------------- --------------
Sales volumes (thousands
of tonnes)
Produced methanol 910 678 1,360 1,588 2,500
Purchased methanol 541 669 269 1,210 644
Commission sales(1) 168 143 89 311 228
--------------------------------------------------------------------------
Total sales volumes 1,619 1,490 1,718 3,109 3,372
Methanex average
non-discounted posted
price ($ per tonne)(2) 489 703 330 595 433
Average realized price
($ per tonne)(3) 412 545 286 476 362
Adjusted EBITDA(4) 78.9 127.1 76.5 206.0 313.4
Cash flows from operating
activities(4,5) 68.5 102.3 67.2 170.8 246.2
Operating income(4) 52.5 104.0 48.1 156.4 261.3
Net income 38.9 65.5 35.7 104.4 180.4
Basic net income per
common share 0.41 0.67 0.35 1.09 1.74
Diluted net income per
common share 0.41 0.67 0.35 1.08 1.73
Common share information
(millions of shares):
Weighted average number of
common shares 94.5 97.2 102.7 95.8 103.9
Diluted weighted average
number of common shares 95.1 97.5 103.0 96.3 104.3
Number of common shares
outstanding, end of period 94.0 95.6 101.1 94.0 101.1
--------------------------------------------------------------------------
(1) Commission sales represent volumes marketed on a commission basis.
Commission income is included in revenue when earned.
(2) Methanex average non-discounted posted price represents the average of
our non-discounted posted prices in North America, Europe and Asia
Pacific weighted by sales volume. Current and historical pricing
information is available at www.methanex.com.
(3) Average realized price is calculated as revenue, net of commissions
earned, divided by the total sales volumes of produced and purchased
methanol.
(4) These items are non-GAAP measures that do not have any standardized
meaning prescribed by Canadian generally accepted accounting
principles (GAAP) and therefore are unlikely to be comparable to
similar measures presented by other companies. Refer to Supplemental
Non-GAAP Measures for a description of each non-GAAP measure and a
reconciliation to the most comparable GAAP measure.
(5) Cash flows from operating activities in the above table represents
cash flows from operating activities before changes in non-cash
working capital.
PRODUCTION SUMMARY
Q1 Q2 YTD Q2 YTD Q2
Q2 2008 2008 2007 2008 2007
(thousands Capa- Produc- Produc- Produc- Produc- Produc-
of tonnes) city tion tion tion tion tion
--------------------------------------------------------------------------
Chile I, II, III
and IV 960 261 309 569 570 1,320
Titan 213 229 217 225 446 450
Atlas (63.1% interest) 268 288 293 234 581 414
New Zealand 132 124 120 120 244 238
--------------------------------------------------------------------------
1,573 902 939 1,148 1,841 2,422
--------------------------------------------------------------------------
Chile
Our methanol facilities in Chile produced 261,000 tonnes during
the second quarter of 2008 compared with 309,000 tonnes during the
first quarter of 2008. We have natural gas supply contracts for
approximately 60% of our natural gas requirements for our
production facilities in Chile with natural gas suppliers in
Argentina with the remaining natural gas supply coming from natural
gas suppliers in Chile. Since June 2007, the government of
Argentina has curtailed all natural gas exports to our plants and
we do not expect to receive natural gas supply from Argentina. We
currently source natural gas for our methanol facilities in Chile
primarily from Empresa Nacional del Petroleo (ENAP), the Chilean
state-owned energy company, and from GeoPark Chile Limited
(GeoPark). Methanol production at our facilities in Chile was lower
during the second quarter of 2008 compared with the first quarter
of 2008 primarily as a result of lower natural gas supply from ENAP
due to higher demand for natural gas general use in southern Chile
during the winter months as well as some deliverability issues.
To secure natural gas to supply our plants in Chile we continue
to invest to accelerate natural gas development and to purchase
more natural gas from suppliers in Chile. On May 5, 2008, we
announced that we signed an agreement with ENAP to accelerate
natural gas exploration and development in the Dorado Riquelme
exploration block and supply natural gas to our production
facilities in Chile. Under the arrangement, we expect to contribute
approximately $100 million in capital over the next three years and
will have a 50 percent participation in the block. The arrangement
is subject to approval by the Government of Chile. We began
receiving some small quantities of natural gas deliveries from the
Dorado Riquelme block in May 2008. Also, in late 2007, we signed a
natural gas prepayment agreement with GeoPark under which we will
provide US$40 million in financing to support and accelerate
GeoPark's natural gas exploration and development activities in the
Fell block in southern Chile. Under the arrangement, GeoPark will
also provide us with natural gas supply sourced from the Fell block
under a 10-year exclusive supply agreement. GeoPark continues
increasing its deliveries of natural gas to our plants from the
Fell block to a level that currently represents approximately 5
percent of our total natural gas requirements to operate at
capacity in Chile.
We continue to pursue other opportunities to invest to help
accelerate natural gas exploration and development in areas of
southern Chile. In late 2007, the government of Chile completed an
international bidding round to assign natural gas exploration areas
that lie close to our production facilities and announced the
participation of five international oil and gas companies.
Exploration and development activities in these areas in southern
Chile have commenced. On July 16, 2008, we announced that under the
international bidding round, the government of Chile awarded the
Otway hydrocarbon exploration block to a consortium that includes
Wintershall Holding AG, GeoPark, and ourselves. Wintershall and
GeoPark each own a 42% interest in the consortium and we own a 16%
interest. Exploration work is expected to commence by the end of
this year. The minimum exploration investment committed in the
block by the consortium is US$30 million.
We cannot provide assurance that ENAP, GeoPark or others would
be successful in the exploration and development of natural gas or
that we would obtain any additional natural gas from suppliers in
Chile on commercially acceptable terms.
Trinidad
Our methanol facilities in Trinidad operated well during the
second quarter of 2008 and produced a total of 517,000 tonnes
compared with 510,000 tonnes during the first quarter of 2008.
New Zealand
Our Waitara Valley facility in New Zealand produced 124,000
tonnes during the second quarter of 2008 compared with 120,000
tonnes during first quarter of 2008.
In addition to our 530,000 tonne Waitara Valley facility which
we have operated over the past few years, we have up to 1.9 million
tonnes of additional flexible annual operating capacity from our
idled Motunui facilities in New Zealand. In May 2008, we agreed to
terms on a natural gas supply arrangement which will allow us to
restart one idled 900,000 tonne per year Motunui methanol plant. We
plan to restart this facility during the third quarter of 2008 and
operate this plant until at least the end of 2009. We will continue
to operate the Waitara Valley facility until the Motunui plant
restarts. We have become more optimistic about the longer term
future of our New Zealand operations and we believe there is
potential to operate our Motunui plant longer and potentially
restart our Waitara Valley plant again. The continued operations of
the flexible New Zealand facilities are dependant upon industry
supply and demand and the availability of natural gas on
commercially acceptable terms.
EARNINGS ANALYSIS
We analyze the results of produced methanol sales separately
from purchased methanol sales as the margin characteristics of each
are very different. We discuss changes in average realized price,
sales volumes and total cash costs related to our produced methanol
sales whereas we discuss purchased methanol on a net margin
basis.
For a further discussion of the definitions and calculations
used in our Adjusted EBITDA analysis, refer to How We Analyze Our
Business.
For the second quarter of 2008 we recorded Adjusted EBITDA of
$78.9 million and net income of $38.9 million ($0.41 per share on a
diluted basis). This compares with Adjusted EBITDA of $127.1
million and net income of $65.5 million ($0.67 per share on a
diluted basis) for the first quarter of 2008 and Adjusted EBITDA of
$76.5 million and net income of $35.7 million ($0.35 per share on a
diluted basis) for the second quarter of 2007.
For the six months ended June 30, 2008, we recorded Adjusted
EBITDA of $206.0 million and net income of $104.4 million ($1.08
per share on a diluted basis). This compares with Adjusted EBITDA
of $313.4 million and net income of $180.4 million ($1.73 per share
on a diluted basis) during the same period in 2007.
Adjusted EBITDA
The increase (decrease) in Adjusted EBITDA resulted from changes
in the following:
Q2 2008 Q2 2008 YTD Q2 2008
compared with compared with compared with
($ millions) Q1 2008 Q2 2007 YTD Q2 2007
--------------------------------------------------------------------------
Average realized price $ (103) $ 96 $ 147
Sales volumes 51 (34) (140)
Total cash costs(1) 16 (39) (59)
Purchased methanol (12) (20) (55)
--------------------------------------------------------------------------
$ (48) $ 3 $(107)
--------------------------------------------------------------------------
(1) Includes cash costs related to methanol produced at our Chile,
Trinidad and New Zealand facilities as well as consolidated selling,
general and administrative expenses and fixed storage and handling
costs.
Average realized price
Three Months Ended Six Months Ended
---------------------- ----------------
($ per tonne, except Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
where noted) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Methanex average
non-discounted posted
price(1) 489 703 330 595 433
Methanex average realized
price(2) 412 545 286 476 362
Average discount 16% 22% 13% 20% 16%
---------------------- ----------------
(1) Methanex average non-discounted posted price represents the average of
our non-discounted posted prices in North America, Europe and Asia
Pacific weighted by sales volume. Current and historical pricing
information is available at www.methanex.com.
(2) Methanex average realized price disclosed above is calculated as
revenue, net of commissions earned, divided by the total sales volumes
of produced and purchased methanol.
We commenced 2008 in a tight methanol market environment as a
result of planned and unplanned supplier outages, including outages
at our Chile facilities, which began in the second half of 2007.
Our average non-discounted posted price for the second quarter of
2008 was $489 per tonne compared with $703 per tonne for the first
quarter of 2008 and $330 per tonne for the second quarter of 2007.
Our average realized price for the second quarter of 2008 was $412
per tonne compared with $545 per tonne for the first quarter of
2008 and $286 per tonne for the second quarter of 2007. The change
in our average realized price for produced methanol for the second
quarter of 2008 decreased our Adjusted EBITDA by $103 million
compared with the first quarter of 2008 and increased our Adjusted
EBITDA by $96 million compared with the second quarter of 2007.
For the second quarter of 2008 our average realized price was
approximately 16% lower than our average non-discounted posted
price. This compares with approximately 22% lower for the first
quarter of 2008 and 13% lower for the second quarter of 2007. We
have entered into long-term contracts for a portion of our
production volume with certain global customers where prices are
either fixed or linked to our costs plus a margin and accordingly,
we expect the discount from our average non-discounted posted
prices to widen during periods of higher methanol pricing. The
discount from our average non-discounted posted price narrowed
during the second quarter of 2008 compared with the first quarter
of 2008 primarily as a result of lower methanol pricing.
Sales volumes of produced methanol
Sales volumes of produced methanol for the second quarter of
2008 were higher by 232,000 tonnes compared with the first quarter
of 2008. Sales volumes of produced methanol for the first quarter
of 2008 were lower than production volumes primarily as a result of
a rebuilding of produced inventories during the first quarter.
Sales volumes of produced methanol for the second quarter of
2008 and six months ended June 30, 2008 were lower by 450,000
tonnes and 912,000 tonnes, respectively, compared with the same
periods in 2007 primarily as a result of lower production at our
Chile facilities during 2008. Lower sales volumes for these periods
decreased Adjusted EBITDA by $34 million and $140 million,
respectively.
Total cash costs
Our production facilities are underpinned by natural gas
purchase agreements with pricing terms that include base and
variable price components. The variable component is adjusted in
relation to increases in methanol prices above predetermined
prices.
Total cash costs for the second quarter of 2008 were lower than
in the first quarter of 2008 by $16 million. Natural gas costs for
produced methanol were lower by $19 million during the second
quarter of 2008 compared with the first quarter of 2008 primarily
due to the impact of lower methanol pricing during the second
quarter of 2008. Ocean freight costs were higher by $3 million
during the second quarter of 2008 compared with the first quarter
of 2008 primarily as a result of changes in our shipping routes and
higher fuel costs.
Total cash costs for the second quarter of 2008 and the six
months ended June 30, 2008 were higher than the same periods in
2007 by $39 million and $59 million, respectively. Natural gas
costs for produced methanol for the second quarter of 2008 and the
six months ended June 30, 2008 were higher compared to the same
periods in 2007 by $24 million and $29 million, respectively,
primarily as a result of higher methanol pricing in 2008. Ocean
freights costs for the second quarter of 2008 and the six months
ended June 30, 2008 were higher compared to the same periods in
2007 by $9 million and $13 million, respectively, primarily as a
result of higher fuel costs and lower backhaul profits. The
remaining increase in cash costs for the second quarter of 2008 and
six months ended June 30, 2008 relates to higher unabsorbed fixed
production costs in Chile and higher selling, general and
administrative expenses primarily as a result of changes in foreign
exchange rates and timing of expenditures.
Margin on sale of purchased methanol
We purchase additional methanol produced by others through
long-term and short-term offtake contracts or on the spot market to
meet customer needs and support our marketing efforts.
Consequently, we realize holding gains or losses on the resale of
this product depending on the methanol price at the time of resale.
During the fourth quarter of 2007, as a result of reduced
production rates at our Chile facilities, we increased our
purchasing levels to continue to meet commitments to our customers.
As these purchases were made in a period of significantly
increasing methanol pricing, we recorded cash margin on sale of
purchased methanol of $35 million during the fourth quarter of
2007. In 2008, methanol pricing moderated from these high levels
and we recorded negative cash margin of $19 million for the first
quarter of 2008 and negative cash margin of $31 million on the
resale of purchased methanol for the second quarter of 2008.
Depreciation and Amortization
Depreciation and amortization was $26 million for the second
quarter of 2008 compared with $23 million for the first quarter of
2008. The increase in depreciation and amortization for the second
quarter of 2008 compared with the first quarter of 2008 was
primarily due to higher sales volume of produced methanol in the
second quarter.
Depreciation and amortization for the second quarter of 2008 and
six months ended June 30, 2008 was $26 million and $50 million,
respectively, compared with $28 million and $52 million,
respectively, for the same periods in 2007.
Interest Expense
Three Months Ended Six Months Ended
---------------------- ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Interest expense before
capitalized interest $ 13 $ 14 $ 11 $ 26 $ 22
Less capitalized interest (3) (3) - (6) -
------------------------------------------------------- ----------------
Interest expense $ 10 $ 11 $ 11 $ 20 $ 22
------------------------------------------------------- ----------------
Interest expense before capitalized interest for the second
quarter of 2008 was $13 million compared with $14 million for the
first quarter of 2008 and $11 million for the second quarter of
2007. In May 2007, we reached financial close and secured limited
recourse debt of $530 million for our joint venture project to
construct a 1.3 million tonne per year methanol facility in Egypt.
Interest costs related to this project have been capitalized since
that date.
Interest and Other Income
Three Months Ended Six Months Ended
---------------------- ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Interest and other income
(expense) $ 13 $ (1) $ 13 $ 12 $ 18
------------------------------------------------------- ----------------
Interest and other income (expense) for the second quarter of
2008 was $13 million compared with an expense of $1 million for the
first quarter of 2008. The increase in income and other income
during the second quarter of 2008 compared with the first quarter
of 2008 was primarily due to the impact of changes in foreign
exchange rates as well as a $5 million gain on sale of ammonia
production assets during the second quarter of 2008. The assets
sold are located at our Kitimat site which was permanently closed
in 2005.
Interest and other income for the second quarter of 2008 and six
months ended June 30, 2008 compared to the same periods in 2007
remained the same and decreased by $6 million, respectively.
Interest and other income during 2008 was lower than 2007 due to
the impact of lower interest rates and lower cash balances during
2008 compared with the same periods in 2007. This decrease in
interest and other income during 2008 was offset by the gain of $5
million on sale of ammonia production assets during the second
quarter of 2008.
Income Taxes
The effective tax rate for the second quarter of 2008 was 30%
compared with 29% for the first quarter of 2008 and 28% for the
second quarter of 2007. The statutory tax rate in Chile and
Trinidad, where we earn a substantial portion of our pre-tax
earnings, is 35%. Our Atlas facility in Trinidad has partial relief
from corporation income tax until 2014.
In Chile the tax rate consists of a first tier tax that is
payable when income is earned and a second tier tax that is due
when earnings are distributed from Chile. The second tier tax is
initially recorded as future income tax expense and is subsequently
reclassified to current income tax expense when earnings are
distributed. Accordingly, the ratio of current income tax expense
to total income tax expense is highly dependent on the level of
cash distributed from Chile.
SUPPLY/DEMAND FUNDAMENTALS
We commenced 2008 in a tight methanol market environment as a
result of planned and unplanned supplier outages in the second half
of 2007. This resulted in high methanol prices during the first
quarter which are unsustainable in a normal supply and demand
environment. As we entered the second quarter of 2008, methanol
prices had moderated and pricing has remained relatively stable
during the quarter. There have been significant planned and
unplanned outages across the global industry recently, including in
Trinidad and Tobago, Saudi Arabia, Western Europe and most recently
Equatorial Guinea. Consequently, we have recently seen tightening
market conditions and this has resulted in increasing spot prices.
Methanex non-discounted posted prices for July average
approximately $500 per tonne across the major regions.
Excluding the 1.7 million tonne per year plant in Saudi Arabia,
which commenced operations last quarter, the next increments of
world scale capacity additions outside of China are two 1.7 million
tonne per year plants under construction in Malaysia and Iran, and
we expect product from both of these plants to be available to the
market later this year or in the first half of 2009. We also
believe that global methanol demand growth combined with the
potential shutdown of high cost capacity as a result of high
feedstock prices could offset this new industry supply.
Methanex Non-Discounted Regional Posted Prices(1)
July Jun May Apr
(US$ per tonne) 2008 2008 2008 2008
------------------------------------------------
United States 526 526 499 532
Europe(2) 465 465 465 465
Asia 500 500 450 450
------------------------------------------------
(1) Discounts from our posted prices are offered to customers based on
various factors.
(2) EUR295 at July 2008 (Apr 2008 - EUR295) converted to United States
dollars at the date of settlement.
Overall, while demand growth for some derivatives, such as
formaldehyde and biodiesel, has weakened in some regions, we
believe that global demand remains healthy in both traditional
chemical derivatives and in energy applications as high energy
prices continue to drive strong demand for fuel blending and
di-methyl ether (DME) in China. In addition, high energy prices are
continuing to support strong demand for MTBE outside of North
America.
We believe methanol demand in China will continue to grow at
high rates as a result of strong traditional demand driven by high
industrial production growth rates and strong demand related to
alternative fuel uses such as gasoline blending and DME. We also
believe that there is increasing pressure on the cost structure of
the Chinese methanol industry and the cost to export as a result of
escalating feedstock costs for both coal and natural gas based
producers in China, the continued appreciation of the Chinese
currency and reduced fiscal incentives for exports of methanol
introduced during 2007. During the first quarter of 2008, China was
a net exporter of methanol as a result of the very high methanol
price environment, which gave producers in China the incentive to
export methanol. As we entered the second quarter of 2008, methanol
prices had moderated and China reverted back to a net importer of
methanol and we believe this has supported strong methanol prices
in China and other global markets. Due to the high cost position of
many of the Chinese producers, we believe that substantially all
domestic methanol production in China will be consumed within the
local market and that imports of methanol into China will grow over
time.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities before changes in non-cash
working capital in the second quarter of 2008 were $69 million
compared with $67 million for the same period in 2007. The cash
flows from operating activities before non-cash working capital are
consistent with the level of earnings in each period. During the
second quarter of 2008, the change in non-cash working capital
decreased our cash flows from operating activities by $34 million.
This was primarily due to a decrease in our trade payables which
was partially offset by lower inventory levels. These changes were
primarily as a result of the impact of lower purchased methanol and
timing of natural gas payments during the second quarter of 2008
compared with the first quarter of 2008.
During the second quarter of 2008, we repurchased for
cancellation a total of 1.6 million common shares at an average
price of US$26.55 per share, totaling $43 million. During the
second quarter of 2008, we completed the normal course issuer bid
that expired at May 16, 2008. Upon completion of this bid, we had
repurchased a total of 8.7 million common shares at an average
price of US$26.01 per share, totaling $226 million. On May 6, 2008,
a new normal course issuer bid was approved. This bid commenced May
20, 2008 and expires May 19, 2009 and allows us to repurchase for
cancellation up to 7.9 million common shares.
Also during the second quarter of 2008, our Board of Directors
approved an 11% increase in our regular quarterly dividend to
shareholders, from US$0.14 per share to US$0.155 per share. During
the second quarter of 2008 we paid quarterly dividends of
approximately $15 million.
We are constructing a 1.3 million tonne per year methanol
facility at Damietta on the Mediterranean Sea in Egypt. We expect
commercial operations of the methanol facility to begin in early
2010 and we will purchase and sell 100% of the methanol from the
facility. We own 60% of Egyptian Methanex Methanol Company S.A.E.
("EMethanex") which is the company that is developing the project.
We account for our investment in EMethanex using consolidation
accounting. This results in 100% of the assets and liabilities of
EMethanex being included in our financial statements. The other
investors' interest in the project is presented as "non-controlling
interest". During the second quarter of 2008, total plant and
equipment construction costs related to our project in Egypt were
$84 million. EMethanex has limited recourse debt of $530 million.
During the second quarter of 2008, a total of $49 million of this
limited recourse debt was drawn. The total estimated future costs
to complete the project over the next two years, excluding
financing costs and working capital, are expected to be
approximately $505 million. Our 60% share of future equity
contributions, excluding financing costs and working capital, over
the next two years is estimated to be approximately $145 million
and we expect to fund these expenditures from cash generated from
operations and cash on hand.
We have excellent financial capacity and flexibility. Our cash
balance at June 30, 2008 was $345 million and we have a strong
balance sheet with an undrawn $250 million credit facility. We
invest our cash only in highly rated instruments that have
maturities of three months or less to ensure preservation of
capital and appropriate liquidity. Our planned capital maintenance
expenditure program directed towards major maintenance, turnarounds
and catalyst changes, including costs to complete the restart of
the Motunui facility, is currently estimated to total approximately
$100 million for the period to the end of 2010.
We believe we are well positioned to meet financial requirements
related to the methanol project in Egypt, complete our capital
maintenance spending program, complete the restart of the Motunui
facility, pursue new opportunities to enhance our leadership
position in the methanol industry, pursue investment opportunities
to accelerate the development of natural gas in southern Chile,
investigate opportunities related to new methanol demand for energy
applications, pursue other strategic initiatives and continue to
deliver on our commitment to return excess cash to
shareholders.
The credit ratings for our unsecured notes at June 30, 2008 were
as follows:
--------------------------------------------------------------------------
Standard & Poor's Rating Services BBB- (stable)
Moody's Investor Services Ba1 (stable)
Fitch Ratings BBB (negative)
Credit ratings are not recommendations to purchase, hold or sell
securities and do not comment on market price or suitability for a
particular investor. There is no assurance that any rating will remain in
effect for any given period of time or that any rating will not be revised
or withdrawn entirely by a rating agency in the future.
--------------------------------------------------------------------------
SHORT-TERM OUTLOOK
Over the next year, we believe that traditional and
non-traditional demand growth, along with closures of high cost
capacity, will substantially offset the new supply that is
scheduled to start up over the coming year and that supply/demand
fundamentals will be in reasonable balance. We also believe that
methanol prices will be underpinned by strong demand in China and
global energy prices.
The methanol price will ultimately depend on industry operating
rates, global energy prices, the rate of industry restructuring and
the strength of global demand. We believe that our excellent
financial position and financial flexibility, outstanding global
supply network and low cost position will provide a sound basis for
Methanex continuing to be the leader in the methanol industry.
CONTROLS AND PROCEDURES
For the three months ended June 30, 2008, no changes were made
in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ADDITIONAL INFORMATION - SUPPLEMENTAL NON-GAAP MEASURES
In addition to providing measures prepared in accordance with
Canadian generally accepted accounting principles (Canadian GAAP),
we present certain supplemental non-GAAP measures. These are
Adjusted EBITDA, operating income and cash flows from operating
activities before changes in non-cash working capital. These
measures do not have any standardized meaning prescribed by
Canadian GAAP and therefore are unlikely to be comparable to
similar measures presented by other companies. We believe these
measures are useful in evaluating the operating performance and
liquidity of the Company's ongoing business. These measures should
be considered in addition to, and not as a substitute for, net
income, cash flows and other measures of financial performance and
liquidity reported in accordance with Canadian GAAP.
Adjusted EBITDA
This supplemental non-GAAP measure is provided to assist readers
in determining our ability to generate cash from operations. We
believe this measure is useful in assessing performance and
highlighting trends on an overall basis. We also believe Adjusted
EBITDA is frequently used by securities analysts and investors when
comparing our results with those of other companies. Adjusted
EBITDA differs from the most comparable GAAP measure, cash flows
from operating activities, primarily because it does not include
changes in non-cash working capital, other cash payments related to
operating activities, stock-based compensation expense, other
non-cash items, interest expense, interest and other income
(expense), and current income taxes.
The following table shows a reconciliation of cash flows from
operating activities to Adjusted EBITDA:
Three Months Ended Six Months Ended
------------------------ ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ thousands) 2008 2008 2007 2008 2007
------------------------------------------------------- ----------------
Cash flows from
operating activities $ 34,220 $110,586 $123,825 $144,807 $314,927
Add (deduct):
Changes in non-cash
working capital 34,294 (8,267) (56,601) 26,027 (68,710)
Other cash payments 1,801 320 3,547 2,121 4,287
Stock-based
compensation expense (5,207) (4,628) (6,747) (9,835) (10,269)
Other non-cash items 1,378 (6,427) (3,540) (5,049) (6,187)
Interest expense 9,630 10,690 11,159 20,320 22,226
Interest and other
income (expense) (12,671) 837 (12,606) (11,834) (17,678)
Current income taxes 15,441 23,960 17,478 39,401 74,804
------------------------------------------------------- ----------------
Adjusted EBITDA $ 78,886 $127,071 $ 76,515 $205,958 $313,400
------------------------------------------------------- ----------------
Operating Income and Cash Flows from Operating Activities before
Non-Cash Working Capital
Operating income and cash flows from operating activities before
changes in non-cash working capital are reconciled to Canadian GAAP
measures in our consolidated statements of income and consolidated
statements of cash flows, respectively.
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected financial information for the prior eight
quarters is as follows:
Three Months Ended
--------------------------------------
($ thousands, except Jun 30 Mar 31 Dec 31 Sep 30
per share amounts) 2008 2008 2007 2007
--------------------------------------------------------------------------
Revenue $600,025 $735,934 $731,057 $395,118
Net income 38,945 65,484 171,697 23,610
Basic net income per common share 0.41 0.67 1.74 0.24
Diluted net income per common share 0.41 0.67 1.72 0.24
--------------------------------------------------------------------------
Three Months Ended
--------------------------------------
($ thousands, except Jun 30 Mar 31 Dec 31 Sep 30
per share amounts) 2007 2007 2006 2006
--------------------------------------------------------------------------
Revenue $466,414 $673,932 $668,159 $519,586
Net income 35,654 144,706 172,445 113,230
Basic net income per common share 0.35 1.38 1.62 1.05
Diluted net income per common share 0.35 1.37 1.61 1.05
--------------------------------------------------------------------------
NORMAL COURSE ISSUER BID
On May 6, 2008 the Company filed a Notice of Intention to Make a
Normal Course Issuer Bid with Toronto Stock Exchange ("TSX")
pursuant to which the Company may repurchase up to 7,909,393 common
shares of the Company, representing 10 percent of the public float
of the issued and outstanding common shares of the Company as at
May 2, 2008. This normal course issuer bid repurchase program,
which is carried out through the facilities of the TSX, commenced
on May 20, 2008 and will expire on the earlier of May 19, 2009 and
the date upon which the Company has acquired the maximum number of
common shares permitted under the purchase program or otherwise
decided not to make further purchases. The Company has entered into
an automatic securities purchase plan with its broker in connection
with purchases to be made under this program. Shareholders may
obtain a copy of the Notice of Intention without charge by
contacting the Corporate Secretary at 604-661-2600.
FORWARD-LOOKING STATEMENTS
Information contained in this Second Quarter 2008 Management's
Discussion and Analysis contains forward-looking statements.
Certain material factors or assumptions were applied in drawing the
conclusions or making the forecasts or projections that are
included in these forward-looking statements. Methanex believes
that it has a reasonable basis for making such forward-looking
statements. However, forward-looking statements, by their nature,
involve risks and uncertainties that could cause actual results to
differ materially from those contemplated by the forward-looking
statements. The risks and uncertainties include those attendant
with producing and marketing methanol and successfully carrying out
major capital expenditure projects in various jurisdictions, the
ability to successfully carry out corporate initiatives and
strategies, conditions in the methanol and other industries
including the supply and demand balance for methanol, the success
of natural gas exploration and development activities in southern
Chile and our ability to obtain any additional gas in that region
on commercially acceptable terms, actions of competitors and
suppliers, actions of governments and governmental authorities,
changes in laws or regulations in foreign jurisdictions, world-wide
economic conditions and other risks described in our 2007
Management's Discussion & Analysis and this Second Quarter 2008
Management's Discussion and Analysis. Undue reliance should not be
placed on forward-looking statements. They are not a substitute for
the exercise of one's own due diligence and judgment. The outcomes
anticipated in forward-looking statements may not occur and we do
not undertake to update forward-looking statements.
HOW WE ANALYZE OUR BUSINESS
We review our results of operations by analyzing changes in the
components of our Adjusted EBITDA (refer to Supplemental Non-GAAP
Measures for a reconciliation to the most comparable GAAP measure),
depreciation and amortization, interest expense, interest and other
income, unusual items and income taxes. In addition to the methanol
that we produce at our facilities, we also purchase and re-sell
methanol produced by others. We analyze the results of produced
methanol sales separately from purchased methanol sales as the
margin characteristics of each are very different.
Methanex-Produced Methanol
Our production facilities generate the substantial portion of
our Adjusted EBITDA, and accordingly, the key drivers of changes in
our Adjusted EBITDA for produced methanol are analyzed separately.
The key drivers of changes in our Adjusted EBITDA for produced
methanol are average realized price, sales volume and cash costs.
Changes in Adjusted EBITDA related to our produced methanol include
sales of methanol from our facilities in Chile, Trinidad and New
Zealand.
The price, cash cost and volume variances included in our
Adjusted EBITDA analysis for produced methanol are defined and
calculated as follows:
PRICE
The change in Adjusted EBITDA as a result of changes in average
realized price is calculated as the difference from period to
period in the selling price of produced methanol multiplied by the
current period sales volume of produced methanol. Sales under
long-term contracts where the prices are either fixed or linked to
our costs plus a margin are included as sales of produced methanol.
Accordingly, the selling price of produced methanol will differ
from the selling price of purchased methanol.
COST
The change in our Adjusted EBITDA as a result of changes in cash
costs is calculated as the difference from period to period in cash
costs per tonne multiplied by the sales volume of produced methanol
in the current period plus the change in unabsorbed fixed cash
costs. The change in consolidated selling, general and
administrative expenses and fixed storage and handling costs are
included in the analysis of produced methanol.
VOLUME
The change in Adjusted EBITDA as a result of changes in sales
volumes is calculated as the difference from period to period in
the sales volumes of produced methanol multiplied by the margin per
tonne for the prior period. The margin per tonne is calculated as
the selling price per tonne of produced methanol less absorbed
fixed cash costs per tonne and variable cash costs per tonne
(excluding Argentina natural gas export duties per tonne).
Purchased Methanol
The cost of sales of purchased methanol consists principally of
the cost of the methanol itself, which is directly related to the
price of methanol at the time of purchase. Accordingly, the
analysis of purchased methanol and its impact on our Adjusted
EBITDA is discussed on a net margin basis.
Methanex Corporation
Consolidated Statements of Income (unaudited)
(thousands of U.S. dollars, except number of common shares and per share
amounts)
Three Months Ended Six Months Ended
--------------------- ---------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------------------------------
Revenue $600,025 $466,414 $1,335,960 $1,140,346
Cost of sales and
operating expenses 521,139 389,899 1,130,002 826,946
Depreciation and
amortization 26,396 28,373 49,509 52,112
--------------------------------------------------------------------------
Operating income before
undernoted items 52,490 48,142 156,449 261,288
Interest expense (note 7) (9,630) (11,159) (20,320) (22,226)
Interest and other income 12,671 12,606 11,834 17,678
--------------------------------------------------------------------------
Income before income taxes 55,531 49,589 147,963 256,740
Income taxes:
Current (15,441) (17,478) (39,401) (74,804)
Future (1,145) 3,543 (4,133) (1,576)
--------------------------------------------------------------------------
(16,586) (13,935) (43,534) (76,380)
--------------------------------------------------------------------------
Net income $ 38,945 $ 35,654 $ 104,429 $ 180,360
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income per common share:
Basic $ 0.41 $ 0.35 $ 1.09 $ 1.74
Diluted $ 0.41 $ 0.35 $ 1.08 $ 1.73
Weighted average number of
common shares outstanding:
Basic 94,520,011 102,697,808 95,837,568 103,894,611
Diluted 95,149,888 102,973,271 96,341,992 104,278,109
Number of common shares
outstanding at period
end 94,037,242 101,120,704 94,037,242 101,120,704
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Balance Sheets (unaudited)
(thousands of U.S. dollars)
Jun 30 Dec 31
2008 2007
--------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 344,525 $ 488,224
Receivables 302,545 401,843
Inventories 246,767 312,143
Prepaid expenses 35,358 20,889
--------------------------------------------------------------------------
929,195 1,223,099
Property, plant and equipment (note 4) 1,710,287 1,542,100
Other assets 145,615 104,700
--------------------------------------------------------------------------
$ 2,785,097 $ 2,869,899
--------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 295,072 $ 466,020
Current maturities on long-term debt (note 6) 15,282 15,282
Current maturities on other long-term liabilities 19,436 16,965
--------------------------------------------------------------------------
329,790 498,267
Long-term debt (note 6) 663,015 581,987
Other long-term liabilities 75,997 74,431
Future income tax liabilities 342,735 338,602
Non-controlling interest 70,755 41,258
Shareholders' equity:
Capital stock 436,289 451,640
Contributed surplus 19,221 16,021
Retained earnings 855,814 876,348
Accumulated other comprehensive loss (8,519) (8,655)
--------------------------------------------------------------------------
1,302,805 1,335,354
--------------------------------------------------------------------------
$ 2,785,097 $ 2,869,899
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Statements of Shareholders' Equity (unaudited)
(thousands of U.S. dollars, except number of common shares)
Accumu-
lated
Number Other Total
of Contrib- Compre- Share-
Common Capital uted Retained hensive holders'
Shares Stock Surplus Earnings Loss Equity
--------------------------------------------------------------------------
Balance,
December 31,
2006 105,800,942 $474,739 $10,346 $724,166 $ - $1,209,251
Net income - - - 375,667 - 375,667
Compensation
expense
recorded
for stock
options - - 9,343 - - 9,343
Issue of
shares on
exercise of
stock
options 552,175 9,520 - - - 9,520
Reclasification
of grant
date fair
value on
exercise
of stock
options - 3,668 (3,668) - - -
Payments for
shares
repurchased (8,042,863) (36,287) - (168,440) - (204,727)
Dividend
payments - - - (55,045) - (55,045)
Other
comprehensive
loss - - - - (8,655) (8,655)
--------------------------------------------------------------------------
Balance,
December 31,
2007 98,310,254 451,640 16,021 876,348 (8,655) 1,335,354
Net
income - - - 65,484 - 65,484
Compensation
expense
recorded
for stock
options - - 2,893 - - 2,893
Issue of
shares on
exercise
of stock
options 128,513 2,392 - - - 2,392
Reclassification
of grant
date fair
value on
exercise
of stock
options - 776 (776) - - -
Payments
for shares
repurchased (2,850,000) (13,081) - (60,995) - (74,076)
Dividend
payments - - - (13,464) - (13,464)
Other
comprehensive
loss - - - - (12,161) (12,161)
--------------------------------------------------------------------------
Balance,
March 31,
2008 95,588,767 441,727 18,138 867,373 (20,816) 1,306,422
Net
income - - - 38,945 - 38,945
Compensation
expense
recorded
for stock
options - - 1,705 - - 1,705
Issue of
shares on
exercise
of stock
options 86,353 1,508 - - - 1,508
Reclassification
of grant
date fair
value on
exercise
of stock
options - 622 (622) - - -
Payments
for shares
repurchased (1,637,878) (7,568) - (35,921) - (43,489)
Dividend
payments - - - (14,583) - (14,583)
Other
comprehensive
income - - - - 12,297 12,297
--------------------------------------------------------------------------
Balance,
June 30,
2008 94,037,242 $436,289 $19,221 $855,814 $(8,519) $1,302,805
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (unaudited)
(thousands of U.S. dollars)
Three months ended Six months ended
------------------------------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------------------------------
Net income $ 38,945 $ 35,654 $ 104,429 $ 180,360
Other comprehensive income
(loss), net of tax:
Change in fair value of
forward exchange contracts
(note 13) 325 227 60 (153)
Change in fair value of
interest rate swap contracts
(note 13) 11,972 - 76 -
--------------------------------------------------------------------------
12,297 227 136 (153)
--------------------------------------------------------------------------
Comprehensive income $ 51,242 $ 35,881 $ 104,565 $ 180,207
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars)
Three months ended Six months ended
------------------------------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 38,945 $ 35,654 $ 104,429 $ 180,360
Add (deduct) non-cash items:
Depreciation and amortization 26,396 28,373 49,509 52,112
Future income taxes 1,145 (3,543) 4,133 1,576
Stock-based compensation
expense 5,207 6,747 9,835 10,269
Other (1,378) 3,540 5,049 6,187
Other cash payments (1,801) (3,547) (2,121) (4,287)
--------------------------------------------------------------------------
Cash flows from operating
activities before undernoted 68,514 67,224 170,834 246,217
Changes in non-cash working
capital (note 11) (34,294) 56,601 (26,027) 68,710
--------------------------------------------------------------------------
34,220 123,825 144,807 314,927
--------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Payments for shares
repurchased (43,489) (78,614) (117,565) (123,886)
Dividend payments (14,583) (14,230) (28,047) (27,302)
Proceeds from limited
recourse debt (note 6) 49,000 35,574 88,000 35,574
Financing costs - (8,725) - (8,725)
Equity contribution by
non-controlling interest 15,897 7,445 29,497 18,295
Repayment of limited
recourse debt (7,328) (7,016) (7,640) (7,016)
Proceeds on issue of shares
on exercise of stock options 1,508 1,674 3,900 3,813
Changes in debt service
reserve accounts (1,995) (1,560) (1,995) 916
Repayment of other long-term
liabilities (1,089) (1,539) (6,087) (2,549)
--------------------------------------------------------------------------
(2,079) (66,991) (39,937) (110,880)
--------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Property, plant and equipment (30,103) (12,091) (38,254) (25,767)
Egypt plant construction costs (84,140) (37,550) (180,351) (46,136)
Dorado Riquelme investment
(note 15) (32,850) - (32,850) -
GeoPark financing - - (11,390) -
Other assets (163) 48 142 93
Changes in non-cash working
capital (note 11) (5,524) (3,471) 14,134 (3,124)
--------------------------------------------------------------------------
(152,780) (53,064) (248,569) (74,934)
--------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (120,639) 3,770 (143,699) 129,113
Cash and cash equivalents,
beginning of period 465,164 480,397 488,224 355,054
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period $344,525 $484,167 $344,525 $484,167
--------------------------------------------------------------------------
SUPPLEMENTARY CASH FLOW
INFORMATION
Interest paid $ 6,913 $ 5,638 $ 23,902 $ 19,061
Income taxes paid, net of
amounts refunded $ 31,969 $ 52,985 $ 63,083 $ 82,105
See accompanying notes to consolidated financial statements.
Methanex Corporation
Notes to Consolidated Financial Statements (unaudited)
Except where otherwise noted, tabular dollar amounts are stated
in thousands of U.S. dollars.
1. Basis of presentation:
These interim consolidated financial statements are prepared in
accordance with generally accepted accounting principles in Canada
on a basis consistent with those followed in the most recent annual
consolidated financial statements, except as described in Note 2
below. These accounting principles are different in some respects
from those generally accepted in the United States and the
significant differences are described and reconciled in Note 16.
These interim consolidated financial statements do not include all
note disclosures required by Canadian generally accepted accounting
principles for annual financial statements, and therefore should be
read in conjunction with the annual consolidated financial
statements included in the Methanex Corporation 2007 Annual
Report.
2. Changes in accounting policies:
On January 1, 2008, the Company adopted the Canadian Institute
of Chartered Accountants ("CICA") Handbook Section 3031
Inventories, Section 1535 Capital Disclosures, Section 3862
Financial Instruments - Disclosure and Section 3863 Financial
Instruments - Presentation. Section 3031 provides more extensive
guidance on the measurement and disclosure of inventory. The
adoption of this standard has had no impact on the Company's
measurement of inventory. Section 1535 establishes standards for
disclosing information about an entity's capital and how it is
managed. Sections 3862 and 3863 revise and enhance disclosure and
presentation of financial instruments and place increased emphasis
on disclosures about the nature and extent of risks arising from
financial instruments and how those risks are managed.
3. Inventories:
Inventories are valued at the lower of cost, determined on a
first-in first-out basis, and estimated net realizable value. The
amount of inventories included in cost of sales and operating
expense and depreciation and amortization during the three and six
month periods ended June 30, 2008 was $491 million (2007 - $372
million) and $1,067 million (2007 - $780 million),
respectively.
4. Property, plant and equipment:
Accumulated Net Book
Cost Depreciation Value
--------------------------------------------------------------------------
June 30, 2008
Plant and equipment $ 2,487,228 $ 1,251,836 $ 1,235,392
Egypt plant under construction 408,134 - 408,134
Other 125,918 59,157 66,761
--------------------------------------------------------------------------
$ 3,021,280 $ 1,310,993 $ 1,710,287
--------------------------------------------------------------------------
December 31, 2007
Plant and equipment $ 2,450,175 $ 1,206,730 $ 1,243,445
Egypt plant under construction 227,783 - 227,783
Other 124,779 53,907 70,872
--------------------------------------------------------------------------
$ 2,802,737 $ 1,260,637 $ 1,542,100
--------------------------------------------------------------------------
5. Interest in Atlas joint venture:
The Company has a 63.1% joint venture interest in Atlas Methanol
Company (Atlas). Atlas owns a 1.7 million tonne per year methanol
production facility in Trinidad. Included in the consolidated
financial statements are the following amounts representing the
Company's proportionate interest in Atlas:
Jun 30 Dec 31
Consolidated Balance Sheets 2008 2007
--------------------------------------------------------------------------
Cash and cash equivalents $ 14,158 $ 20,128
Other current assets 99,770 107,993
Property, plant and equipment 256,319 263,942
Other assets 18,323 16,329
Accounts payable and accrued liabilities 43,912 56,495
Long-term debt, including current
maturities (note 6) 113,258 119,891
Future income tax liabilities 17,086 16,099
--------------------------------------------------------------------------
Three months ended Six months ended
------------------- --------------------
Consolidated Statements of Jun 30 Jun 30 Jun 30 Jun 30
Income 2008 2007 2008 2007
--------------------------------------------------- --------------------
Revenue $ 76,455 $ 22,436 $ 158,532 $ 88,770
Expenses (72,401) (31,607) (146,735) (89,896)
--------------------------------------------------- --------------------
Income before income taxes 4,354 (9,171) 11,797 (1,126)
Income tax (expense) recovery (1,049) 1,419 (2,951) (254)
--------------------------------------------------- --------------------
Net income $ 3,305 $ (7,752) $ 8,846 $ (1,380)
--------------------------------------------------- --------------------
Three months ended Six months ended
------------------- --------------------
Consolidated Statements of Jun 30 Jun 30 Jun 30 Jun 30
Cash Flows 2008 2007 2008 2007
--------------------------------------------------- --------------------
Cash inflows (outflows) from
operating activities $(10,466) $ 10,306 $ 14,088 $ 37,344
Cash outflows from financing
activities (9,010) (8,576) (9,010) (6,100)
Cash outflows from
investing activities (444) (3,730) (610) (13,688)
--------------------------------------------------- --------------------
6. Long-term debt:
Jun 30 Dec 31
2008 2007
--------------------------------------------------------------------------
Unsecured notes
8.75% due August 15, 2012 $ 197,974 $ 197,776
6.00% due August 15, 2015 148,428 148,340
--------------------------------------------------------------------------
346,402 346,116
Atlas limited recourse debt facilities 113,258 119,891
Egypt limited recourse debt facilities 204,574 116,574
Other limited recourse debt facilities 14,063 14,688
--------------------------------------------------------------------------
678,297 597,269
Less current maturities (15,282) (15,282)
--------------------------------------------------------------------------
$ 663,015 $ 581,987
--------------------------------------------------------------------------
7. Interest expense:
Three months ended Six months ended
------------------- --------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------- --------------------
Interest expense before
capitalized interest $ 12,447 $ 11,159 $ 26,302 $ 22,226
Less: capitalized interest
related to Egypt project (2,817) - (5,982) -
--------------------------------------------------- --------------------
Interest expense $ 9,630 $ 11,159 $ 20,320 $ 22,226
--------------------------------------------------- --------------------
In 2007, the Company reached financial close and secured limited
recourse debt of $530 million for its joint venture project to
construct a 1.3 million tonne per year methanol facility in Egypt.
For the three and six month periods ended June 30, 2008, interest
costs related to this project of $2.8 million and $6.0 million were
capitalized, respectively.
8. Net income per common share:
A reconciliation of the weighted average number of common shares
outstanding is as follows:
Three months ended Six months ended
------------------- ---------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
------------------------------------------------- -----------------------
Denominator for basic
net income per common
share 94,520,011 102,697,808 95,837,568 103,894,611
Effect of dilutive
stock options 629,877 275,463 504,424 383,498
------------------------------------------------- -----------------------
Denominator for diluted
net income per common
share 95,149,888 102,973,271 96,341,992 104,278,109
------------------------------------------------- -----------------------
9. Stock-based compensation:
a) Stock options:
(i) Incentive stock options:
Common shares reserved for outstanding incentive stock options
at June 30, 2008:
Options Denominated Options Denominated
in CAD in USD
------------------- --------------------
Number Weighted Number Weighted
of Average of Average
Stock Exercise Stock Exercise
Options Price Options Price
---------------------------------------------------- --------------------
Outstanding at December 31, 2007 104,450 $ 7.79 2,920,981 $ 21.17
Granted - - 1,078,068 28.43
Exercised (19,750) 9.99 (103,763) 19.95
Cancelled (7,000) 11.60 (3,666) 23.36
--------------------------------------------------------------------------
Outstanding at March 31, 2008 77,700 $ 6.89 3,891,620 $ 23.21
Granted - - - -
Exercised (1,250) 3.29 (75,103) 19.43
Cancelled - - (33,450) 24.24
--------------------------------------------------------------------------
Outstanding at June 30, 2008 76,450 $ 6.95 3,783,067 $ 23.28
--------------------------------------------------------------------------
Information regarding the incentive stock options outstanding at
June 30, 2008 is as follows:
Options Outstanding at Options Exercisable at
June 30, 2008 June 30, 2008
--------------------------------- ----------------------
Weighted
Average
Remaining
Contrac- Number of Weighted Number of Weighted
tual Stock Average Stock Average
Range of Life Options Exercise Options Exercise
Exercise Prices (Years) Outstanding Price Exercisable Price
------------------------------------------------- ----------------------
Options
denominated
in CAD
$ 3.29 to 9.56 2.1 76,450 $ 6.95 76,450 $ 6.95
--------------------------------------------------------------------------
Options
denominated
in USD
$ 6.45 to 11.56 4.5 188,550 $ 8.58 188,550 $ 8.58
$ 17.85 to 22.52 4.5 1,484,900 20.26 997,433 20.01
$ 23.92 to 28.43 6.2 2,109,617 26.72 329,460 24.95
--------------------------------------------------------------------------
5.4 3,783,067 $ 23.28 1,515,443 $ 19.66
--------------------------------------------------------------------------
(ii) Performance stock options:
As at June 30, 2008, there were 35,000 shares (December 31, 2007
- 50,000 shares) reserved for performance stock options with an
exercise price of CAD $4.47. All outstanding performance stock
options have vested and are exercisable.
(iii) Compensation expense related to stock options:
For the three and six month periods ended June 30, 2008,
compensation expense related to stock options included in cost of
sales and operating expenses was $1.7 million (2007 - $2.3 million)
and $4.6 million (2007 - $4.9 million), respectively. The fair
value of each stock option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions:
2008 2007
--------------------------------------------------------------------------
Risk-free interest rate 2.5% 4.5%
Expected dividend yield 2% 2%
Expected life 5 years 5 years
Expected volatility 32% 31%
Expected forfeitures 5% 5%
Weighted average fair value of options granted
(USD per share) $ 7.52 $ 7.06
--------------------------------------------------------------------------
b) Deferred, restricted and performance share units:
Deferred, restricted and performance share units outstanding at
June 30, 2008 are as follows:
Number of Number of Number of
Deferred Restricted Performance
Share Share Share
Units Units Units
--------------------------------------------------------------------------
Outstanding at December 31, 2007 359,684 14,482 725,262
Granted 28,942 6,000 330,993
Granted in-lieu of dividends 2,462 106 5,481
Redeemed - - -
Cancelled - - (8,908)
--------------------------------------------------------------------------
Outstanding at March 31, 2008 391,088 20,588 1,052,828
Granted 2,456 - -
Granted in-lieu of dividends 2,126 109 5,493
Redeemed (3,083) - -
Cancelled - - (10,575)
--------------------------------------------------------------------------
Outstanding at June 30, 2008 392,587 20,697 1,047,746
--------------------------------------------------------------------------
Compensation expense for deferred, restricted and performance
share units is initially measured at fair value based on the market
value of the Company's common shares and is recognized over the
related service period. Changes in fair value are recognized in
earnings for the proportion of the service that has been rendered
at each reporting date. The fair value of deferred, restricted and
performance share units at June 30, 2008 was $35.0 million compared
with the recorded liability of $26.8 million. The difference
between the fair value and the recorded liability of $8.2 million
will be recognized over the weighted average remaining service
period of approximately 1.6 years.
For the three and six month periods ended June 30, 2008,
compensation expense related to deferred, restricted and
performance share units included in cost of sales and operating
expenses was $3.5 million (2007 - $4.4 million) and $5.2 million
(2007 - $5.2 million), respectively. This included an expense of
$0.9 million (2007 - $2.1 million) and a recovery of $0.8 million
(2007 - expense of $0.3 million), respectively, related to the
effect of the change in the Company's share price. As at June 30,
2008, the Company's share price was US$28.02 per share.
10. Retirement plans:
Total net pension expense for the Company's defined benefit and
defined contribution pension plans during the three and six month
periods ended June 30, 2008 was $2.0 million (2007 - $1.6 million)
and $3.9 million (2007 - $3.5 million), respectively.
11. Changes in non-cash working capital:
The change in cash flows related to changes in non-cash working
capital for the three and six month periods ended June 30, 2008
were as follows:
Three Months Ended Six Months Ended
------------------ ---------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
-------------------------------------------------- ---------------------
Decrease (increase) in non-cash
working capital:
Receivables $ (3,033) $ 65,037 $ 99,298 $ 108,315
Inventories 101,565 95,892 65,376 65,237
Prepaid expenses 2,148 (8,644) (14,469) (5,712)
Accounts payable and accrued
liabilities (143,565) (97,363) (170,948) (102,997)
-------------------------------------------------- ---------------------
(42,885) 54,922 (20,743) 64,843
Adjustments for items not
having a cash effect 3,067 (1,792) 8,850 743
-------------------------------------------------- ---------------------
Changes in non-cash working
capital having a cash effect $ (39,818) $ 53,130 $ (11,893) $ 65,586
-------------------------------------------------- ---------------------
These changes relate to the
following activities:
Operating $ (34,294) $ 56,601 $ (26,027) $ 68,710
Investing (5,524) (3,471) 14,134 (3,124)
-------------------------------------------------- ---------------------
Changes in non-cash working
capital $ (39,818) $ 53,130 $ (11,893) $ 65,586
-------------------------------------------------- ---------------------
12. Capital Disclosures:
The Company's objectives in managing its liquidity and capital
are to safeguard the Company's ability to continue as a going
concern, to provide financial capacity and flexibility to meet its
strategic objectives, to provide an adequate return to shareholders
commensurate with the level of risk, and to return excess cash
through a combination of dividends and share repurchases.
Jun 30 Dec 31
2008 2007
--------------------------------------------------------------------------
Liquidity:
Cash and cash equivalents $ 344,525 $ 488,224
Undrawn Egypt limited recourse debt facilities 325,426 413,426
Undrawn credit facilities 250,000 250,000
--------------------------------------------------------------------------
Total Liquidity 919,951 1,151,650
Capitalization:
Unsecured notes $ 346,402 $ 346,116
Limited recourse debt facilities, including
current portion 331,895 251,153
--------------------------------------------------------------------------
Total debt 678,297 597,269
Non-controlling interest 70,755 41,258
Shareholders' equity 1,302,805 1,335,354
--------------------------------------------------------------------------
Total capitalization $ 2,051,857 $ 1,973,881
Total debt to capitalization(1) 33% 30%
Net debt to capitalization(2) 20% 7%
--------------------------------------------------------------------------
(1) Total debt divided by total capitalization.
(2) Total debt less cash and cash equivalents divided by total
capitalization less cash and cash equivalents.
The Company manages its liquidity and capital structure and
makes adjustments to it in light of changes to economic conditions,
the underlying risks inherent in its operations and capital
requirements to maintain and grow its operations. The strategies
employed by the Company include the issue or repayment of general
corporate debt, the issue of project debt, the payment of dividends
and the repurchase of shares.
The Company is not subject to any statutory capital requirements
and has no commitments to sell or otherwise issue common
shares.
The undrawn credit facility in the amount of $250 million is
subject to certain financial covenants including a debt to
capitalization ratio as defined.
The credit ratings for our unsecured notes are as follows:
Standard & Poor's Rating Services BBB- (stable)
Moody's Investor Services Ba1 (stable)
Fitch Ratings BBB (negative)
13. Financial Instruments:
Under CICA Section 3862 Financial Instruments - Disclosures, the
Company is required to provide disclosures regarding its financial
instruments. Financial instruments are either measured at amortized
cost or fair value. Held-to-maturity investments, loans and
receivables and other financial liabilities are measured at
amortized cost. Held for trading financial assets and liabilities
and available-for-sale financial assets are measured on the balance
sheet at fair value. Derivative financial instruments are
classified as held for trading and are recorded on the balance
sheet at fair value unless exempted as a normal purchase and sale
arrangement. Changes in fair value of derivative financial
instruments are recorded in earnings unless the instruments are
designated as cash flow hedges.
The following table provides the carrying value of each category
of financial assets and liabilities and the related balance sheet
item:
Jun 30 Dec 31
2008 2007
--------------------------------------------------------------------------
Financial assets:
Held for trading financial assets:
Cash and cash equivalents $ 344,525 $ 488,224
Derivative instruments designated as cash
flow hedges 1,859 -
Derivative instruments 136 -
Debt service reserve accounts included in other
assets 18,323 16,329
Loans and receivables:
Receivables 302,545 401,843
Dorado Riquelme investment included in other
assets (note 15) 32,850 -
GeoPark financing included in other assets 21,417 13,738
--------------------------------------------------------------------------
$ 721,655 $ 920,134
--------------------------------------------------------------------------
Financial liabilities:
Other financial liabilities:
Accounts payable and accrued liabilities $ 295,072 $ 466,020
Long-term debt, including current portion 678,297 597,269
Capital lease obligation included in other
long-term liabilities 23,053 24,676
Held for trading financial liabilities:
Derivative instruments designated as cash
flow hedges 10,362 8,749
Derivative instruments 834 955
--------------------------------------------------------------------------
$ 1,007,618 $ 1,097,669
--------------------------------------------------------------------------
At June 30, 2008, all of the Company's financial instruments are
recorded on the balance sheet at amortized cost with the exception
of cash and cash equivalents, derivative financial instruments and
debt service reserve accounts included in other assets which are
recorded at fair value.
The Egypt limited recourse debt facilities bear interest at
LIBOR plus a spread. The Company has entered into interest rate
swap contracts to swap the LIBOR-based interest payments for an
aggregated fixed rate of 4.8% on approximately 75% of the Egypt
limited recourse debt facilities for the period September 28, 2007
to March 31, 2015.
These interest rate swaps had outstanding notional amounts of
$150 million as at June 30, 2008. Under the interest rate swap
contracts the maximum notional amount during the term is $367
million. The notional amount increases over the period of expected
draw-downs on the Egypt limited recourse debt and decreases over
the expected repayment period. At June 30, 2008, these interest
rate swap contracts had a net negative fair value of $8.5 million
(December 31, 2007 - negative $8.6 million), of which $10.4 million
is recorded in other long-term liabilities and $1.9 million is
recorded in other assets. The mark to market value of these
interest rate swap contracts will fluctuate until maturity. The
Company also designates as cash flow hedges forward exchange
contracts to sell euro at a fixed USD exchange rate. At June 30,
2008, the Company had outstanding forward exchange contracts
designated as cash flow hedges to sell euro at a fixed USD exchange
rate with a fair value of nil (December 31, 2007 - $0.1 million)
recorded in accounts payable and accrued liabilities. For the three
months ended June 30, 2008, the total unrealized amount of the
change in fair value of these derivative financial instruments with
a hedging relationship was positive $12.0 million. Additionally,
the Company reclassified $0.3 million from other comprehensive loss
to net income related to the fair value of forward exchange
contracts designated as cash flow hedges at March 31, 2008 which
settled during the three months ended June 30, 2008.
At June 30, 2008, the Company's derivative financial instruments
that have not been designated as cash flow hedges included forward
exchange contracts to purchase $21.4 million New Zealand dollars at
an exchange rate of $0.7409 with a positive fair value of $0.1
million (December 31, 2007 - nil) which is recorded in receivables
and a floating-for-fixed interest rate swap contract with a
negative fair value of $0.8 million (December 31, 2007 - $1.0
million) recorded in other long-term liabilities. For the three
months ended June 30, 2008, the total change in fair value of these
derivative financial instruments was nil.
14. Financial Risk Management:
a) Market risks
The Company's operations consist of the production and sale of
methanol. Market fluctuations may result in significant cash flow
and profit volatility risk for the Company. Its worldwide operating
business as well as its investment and financing activities are
affected by changes in methanol and natural gas prices and interest
and foreign exchange rates. The Company seeks to manage and control
these risks primarily through its regular operating and financing
activities and uses derivative instruments to hedge these risks
when deemed appropriate. This is not an exhaustive list of all
risks, nor will the risk management strategies eliminate these
risks.
Methanol price risk
The methanol industry is a highly competitive commodity industry
and methanol prices fluctuate based on supply and demand
fundamentals and other factors. Accordingly it is important to
maintain financial flexibility and we have adopted a prudent
approach to financial management by maintaining a strong balance
sheet including back-up liquidity. We have also entered into
long-term contracts with certain customers where prices are either
fixed or linked to our costs plus a margin.
Natural gas price risk
Natural gas is the primary feedstock for the production of
methanol and the Company has entered into long-term natural gas
supply contracts for its production facilities in Chile, Trinidad
and Egypt and shorter term natural gas supply contracts for its New
Zealand operations. These natural gas supply contracts include base
and variable price components to reduce the commodity price risk
exposure. The variable price component is adjusted by formulas
related to methanol prices above a certain level.
Interest rate risk
Interest rate risk is the risk that the Company suffers
financial loss due to changes in the value of an asset or liability
or in the value of future cash flows due to movements in interest
rates.
The Company's interest rate risk exposure is mainly related to
long term debt obligations. Approximately two thirds of its debt
obligations are subject to interest at fixed rates. We also seek to
limit this risk through the use of interest rate swaps which allows
us to hedge cash flow changes by swapping variable rates of
interest into fixed rates of interest.
Jun 30
Long-Term Debt 2008
--------------------------------------------------------------------------
Fixed interest rate debt:
Unsecured notes $ 346,402
Atlas limited recourse debt facilities (63.1%
proportionate share) 76,318
--------------------------------------------------------------------------
$ 422,720
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Variable interest rate debt:
Atlas limited recourse debt facilities (63.1%
proportionate share) $ 36,940
Egypt limited recourse debt facilities 204,574
Other limited recourse debt facilities 14,063
--------------------------------------------------------------------------
$ 255,577
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The Company has entered into interest rate swap contracts to
hedge the variability in LIBOR-based interest payments on its Egypt
limited recourse debt facilities described in note 13. The notional
amount increases over the period of expected drawdowns on the Egypt
limited recourse debt and decreases over the expected repayment
period. The aggregate impact of these contracts is to swap the
LIBOR-based interest payments for a fixed rate of 4.8% on
approximately 75% of the Egypt limited recourse debt facilities for
the period September 28, 2007 to March 31, 2015. The net fair value
of cash flow interest rate swaps was negative $8.5 million as at
June 30, 2008. The change in fair value of the interest rate swaps
assuming a 1% decrease in the interest rates along the yield curve
would be negative $20.6 million as of June 30, 2008.
For fixed interest rate debt, a 1% decrease in interest rates
would result in negative fair value of the debt of $19.3 million.
For the variable interest rate debt that is unhedged, a 1% increase
in interest rates would result in an increase in annual interest
payments of $1.1 million.
Foreign currency exchange rate risk
The Company's international operations expose the Company to
foreign currency exchange risks in the ordinary course of business.
Accordingly, the Company has established a policy which provides a
framework for foreign currency management, hedging strategies and
defines the approved hedging instruments. The Company reviews all
significant exposures to foreign currencies arising from operating
and investing activities and hedges exposures if deemed
appropriate.
The dominant currency in which we conduct business is the United
States dollar, which is also our reporting currency.
Methanol is a global commodity chemical which is priced in
United States dollars. In certain jurisdictions, however, the
transaction price is set either quarterly or monthly in local
currency. Accordingly, a portion of our revenue is transacted in
Canadian dollars, euros and to a lesser extent other currencies.
For the period from when the price is set in local currency to when
the amount due is collected, we are exposed to declines in the
value of these currencies compared to the United States dollar,
which could have the effect of decreasing the United States dollar
equivalent of our revenue. We also purchase varying quantities of
methanol for which the transaction currency is the euro and to a
lesser extent other currencies. In addition, some of our underlying
operating costs and capital expenditures are incurred in other
currencies. We are exposed to increases in the value of these
currencies that could have the effect of increasing the United
States dollar equivalent of cost of sales and operating expenses
and capital expenditures.
We have elected not to actively manage these exposures at this
time except for our net exposure to euro revenues which we hedge
through forward exchange contracts each quarter when the euro price
for methanol is established.
As of June 30, 2008, we had a net working capital asset of $12.0
million in non-US dollar currencies. Each 1% strengthening
(weakening) of the US dollar against these currencies would
decrease (increase) the value of net working capital and pre-tax
cash flow by $0.1 million.
b) Liquidity risk
Liquidity risk is the risk that the Company will not have
sufficient funds to meet its liabilities such as the settlement of
financial debt and lease obligations and payment to its suppliers.
The Company maintains liquidity and makes adjustments to it in
light of changes to economic conditions, underlying risks inherent
in its operations and capital requirements to maintain and grow its
operations. At June 30, 2008 the Company holds $344.5 million of
cash and cash equivalents. In addition, the Company has an undrawn
$250 million credit facility that expires in 2010 provided by
highly rated financial institutions.
In addition to the above mentioned sources of liquidity, the
Company constantly monitors funding options available in the
capital markets, as well as trends in the availability and costs of
such funding, with a view to maintaining financial flexibility and
limiting refinancing risks.
c) Credit risk
Counterparty credit risk is the risk that the financial benefits
of contracts with a specific counterparty will be lost if a
counterparty defaults on its obligations under the contract. This
includes any cash amounts owed to the Company by those
counterparties, less any amounts owed to the counterparty by the
Company where a legal right of set-off exists and also includes the
fair values of contracts with individual counterparties which are
recorded in the financial statements.
Trade credit risk
Trade credit risk is defined as an unexpected loss in cash and
earnings if the customer is unable to pay its obligations in due
time or if the value of security provided declines. The Company has
implemented a credit policy which includes approvals for new
customers, annual credit evaluations of all customers and specific
approval for any exposures beyond approved limits. We employ a
variety of risk mitigation alternatives including certain
contractual rights in the event of deterioration in customer credit
quality and various forms of bank and parent company guarantees and
letters of credit to upgrade the credit risk to a credit rating
equivalent better than the stand-alone rating of the counterparty.
Historically trade credit losses have been minimal.
Cash and cash equivalents
In order to manage credit and liquidity risk we invest only in
highly rated investment grade instruments that have maturities of
three months or less. Limits are also established based on the type
of investment, the counterparty and the credit rating.
Derivative financial instruments
In order to manage credit risk, we only enter into derivative
financial instruments with highly rated investment grade
counterparties.
15. Dorado Riquelme Investment:
On May 5, 2008, the Company signed an agreement with Empresa
Nacional del Petroleo (ENAP), the Chilean state-owned oil and gas
company to accelerate gas exploration and development in the Dorado
Riquelme exploration block and supply new Chilean-sourced natural
gas to the Company's production facilities in Chile. Under the
arrangement, the Company expects to contribute approximately $100
million in capital over the next three years and will have a 50%
participation in the block. As of June 30, 2008, the amount
contributed under the agreement was approximately $32.9 million,
which has been recorded in other assets. The arrangement is subject
to approval by the government of Chile and $31.2 million of the
amount contributed has been placed in escrow until final approval
is received.
16. United States Generally Accepted Accounting Principles:
The Company follows generally accepted accounting principles in
Canada ("Canadian GAAP") which are different in some respects from
those applicable in the United States and from practices prescribed
by the United States Securities and Exchange Commission ("U.S.
GAAP").
The significant differences between Canadian GAAP and U.S. GAAP
with respect to the Company's consolidated statements of income for
the three and six month periods ended June 30, 2008 and 2007 are as
follows:
Three Months Ended Six Months Ended
------------------ --------------------
Jun 30 Jun 30 Jun 30 Jun 30
2008 2007 2008 2007
--------------------------------------------------- --------------------
Net income in accordance with
Canadian GAAP $ 38,945 $ 35,654 $ 104,429 $ 180,360
Add (deduct) adjustments for:
Depreciation and amortization(a) (478) (478) (956) (956)
Stock-based compensation(b) (41) (14) (28) 151
Uncertainty in income taxes(c) 1,046 (1,020) 631 (2,809)
Income tax effect of above
adjustments(d) 167 167 334 335
--------------------------------------------------- --------------------
Net income in accordance with
U.S. GAAP $ 39,639 $ 34,309 $ 104,410 $ 177,081
--------------------------------------------------- --------------------
Per share information in
accordance with U.S. GAAP:
Basic net income per share $ 0.42 $ 0.33 $ 1.09 $ 1.70
Diluted net income per share $ 0.42 $ 0.33 $ 1.08 $ 1.70
--------------------------------------------------- --------------------
The significant differences between Canadian GAAP and U.S. GAAP
with respect to the Company's consolidated statements of
comprehensive income for the three and six month periods ended June
30, 2008 and 2007 are as follows:
Three Months Ended
------------------------------------------------------
June 30, 2008 June 30, 2007
-------------------------------------- -------------
Canadian GAAP Adjustments U.S. GAAP U.S. GAAP
---------------------------------------------------------- -------------
Net income $ 38,945 $ 694 $ 39,639 $ 34,309
Change in fair
value of
forward exchange
contracts,
net of tax 325 - 325 227
Change in fair
value of
interest rate
swap, net
of tax 11,972 - 11,972 -
Change related to
pension, net
of tax(e) - 236 236 224
---------------------------------------------------------- -------------
Comprehensive income $ 51,242 $ 930 $ 52,172 $ 34,760
---------------------------------------------------------- -------------
Six Months Ended
------------------------------------------------------
June 30, 2008 June 30, 2007
-------------------------------------- -------------
Canadian GAAP Adjustments U.S. GAAP U.S. GAAP
---------------------------------------------------------- -------------
Net income $ 104,429 $ (19) $ 104,410 $ 177,081
Change in fair
value of
forward exchange
contracts,
net of tax 60 - 60 (153)
Change in fair
value of
interest rate
swap, net
of tax 76 - 76 -
Change related to
pension, net
of tax(e) - 477 477 449
---------------------------------------------------------- -------------
Comprehensive income $ 104,565 $ 458 $ 105,023 $ 177,377
---------------------------------------------------------- -------------
a) Business combination:
Effective January 1, 1993, the Company combined its business
with a methanol business located in New Zealand and Chile. Under
Canadian GAAP, the business combination was accounted for using the
pooling-of-interest method. Under U.S. GAAP, the business
combination would have been accounted for as a purchase with the
Company identified as the acquirer. In accordance with U.S. GAAP,
an increase to depreciation expense by $0.5 million (2007 - $0.5
million) and $1.0 million (2007 - $1.0 million) was recorded for
the three and six month periods ended June 30, 2008,
respectively.
b) Stock-based compensation:
The Company has 22,350 stock options that are accounted for as
variable plan options under U.S. GAAP because the exercise price of
the stock options is denominated in a currency other than the
Company's functional currency or the currency in which the optionee
is normally compensated. For Canadian GAAP purposes, no
compensation expense has been recorded as these options were
granted in 2001 which is prior to the effective implementation date
for fair value accounting under Canadian GAAP. In accordance with
U.S. GAAP, no adjustment to operating expense was recorded for the
three and six month periods ended June 30, 2008 and an adjustment
of nil and $0.2 million was recorded for the same periods ended
June 30, 2007, respectively.
c) Accounting for uncertainty in income taxes:
Effective January 1, 2007, the Company adopted Financial
Accounting Standards Board (FASB) Interpretation No. 48, Accounting
for Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109 (FIN48). FIN 48 clarifies the accounting for
income taxes recognized in a Company's financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes
(SFAS 109). FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. In accordance with FIN 48, a recovery to income tax
expense of $1.0 million (2007 - expense of $1.0 million) and $0.6
million (2007 - expense of $2.8 million) was recorded for the three
and six month periods ended June 30, 2008, respectively.
d) Income tax accounting:
The income tax differences include the income tax effect of the
adjustments related to accounting differences between Canadian and
U.S. GAAP. In accordance with U.S. GAAP, an increase to net income
of $0.2 million (2007 - $0.2 million) and $0.3 million (2007 - $0.3
million) was recorded for the three and six month periods ended
June 30, 2008, respectively.
e) Defined benefit pension plans:
Effective January 1, 2006, U.S. GAAP requires the Company to
measure the funded status of a defined benefit pension plan at its
balance sheet reporting date and recognize the unrecorded
overfunded or underfunded status as an asset or liability with the
change in that unrecorded funded status recorded to other
comprehensive income. Under U.S. GAAP, all deferred pension amounts
from Canadian GAAP are reclassified to accumulated other
comprehensive income. In accordance with U.S. GAAP, an increase to
other comprehensive income of $0.2 million (2007 - $0.2 million)
and $0.5 million (2007 - $0.4 million) was recorded for the three
and six month periods ended June 30, 2008, respectively.
f) Interest in Atlas joint venture:
U.S. GAAP requires interests in joint ventures to be accounted
for using the equity method. Canadian GAAP requires proportionate
consolidation of interests in joint ventures. The Company has not
made an adjustment in this reconciliation for this difference in
accounting principles because the impact of applying the equity
method of accounting does not result in any change to net income or
shareholders' equity. This departure from U.S. GAAP is acceptable
for foreign private issuers under the practices prescribed by the
United States Securities and Exchange Commission.
Methanex Corporation
Quarterly History (unaudited)
YTD
2008 Q2 Q1 2007 Q4 Q3 Q2 Q1 2006
------------------- ------------------- ---------------------------------
METHANOL SALES
VOLUMES
(thousands
of tonnes)
Company
produced 1,588 910 678 4,569 997 1,073 1,360 1,139 5,310
Purchased
methanol 1,210 541 669 1,453 421 387 269 376 1,101
Commission
sales (1) 311 168 143 590 195 168 89 138 584
------------------- ------------------- ---------------------------------
3,109 1,619 1,490 6,612 1,613 1,628 1,718 1,653 6,995
------------------- ------------------- ---------------------------------
METHANOL
PRODUCTION
(thousands
of tonnes)
Chile 570 261 309 1,841 288 233 569 751 3,186
Titan,
Trinidad 446 229 217 861 220 191 225 225 864
Atlas,
Trinidad
(63.1%) 581 288 293 982 278 290 234 180 1,057
New Zealand 244 124 120 435 75 122 120 118 404
------------------- ------------------- ---------------------------------
1,841 902 939 4,119 861 836 1,148 1,274 5,511
------------------- ------------------- ---------------------------------
AVERAGE REALIZED
METHANOL
PRICE (2)
($/tonne) 476 412 545 375 514 270 286 444 328
($/gallon) 1.43 1.24 1.64 1.13 1.55 0.81 0.86 1.34 0.99
PER SHARE
INFORMATION
($ per share)
Basic net
income $1.09 0.41 0.71 3.69 1.74 0.24 0.35 1.38 4.43
Diluted net
income $1.08 0.41 0.70 3.68 1.72 0.24 0.35 1.37 4.41
Q4 Q3 Q2 Q1
---------------------------------------------------------------------------
METHANOL SALES
VOLUMES
(thousands
of tonnes)
Company
produced 1,160 1,478 1,351 1,321
Purchased
methanol 288 222 294 297
Commission
sales (1) 134 176 133 141
---------------------------------------------------------------------------
1,582 1,876 1,778 1,759
---------------------------------------------------------------------------
METHANOL
PRODUCTION
(thousands
of tonnes)
Chile 766 666 872 882
Titan,
Trinidad 229 206 214 215
Atlas,
Trinidad
(63.1%) 267 264 273 253
New Zealand 111 71 118 104
---------------------------------------------------------------------------
1,373 1,207 1,477 1,454
---------------------------------------------------------------------------
AVERAGE REALIZED
METHANOL
PRICE (2)
($/tonne) 460 305 279 283
($/gallon) 1.38 0.92 0.84 0.85
PER SHARE
INFORMATION
($ per share)
Basic net
income 1.62 1.05 0.75 1.02
Diluted net
income 1.61 1.05 0.75 1.02
(1) Commission sales represent volumes marketed on a commission basis.
Commission income is included in revenue when earned.
(2) Average realized price is calculated as revenue, net of commissions
earned, divided by the total sales volumes of produced and purchased
methanol.
Contacts: Jason Chesko Director, Investor Relations Methanex
Corporation 604 661 2600 or Toll Free: 1 800 661 8851 Website:
www.methanex.com
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