Methanex Corporation (TSX: MX)(NASDAQ: MEOH)(SANTIAGO: Methanex) -
For the third quarter of 2008, Methanex reported Adjusted
EBITDA(1) of $140.4 million and net income of $70.9 million ($0.75
per share on a diluted basis). This compares with Adjusted
EBITDA(1) of $78.9 million and net income of $38.9 million ($0.41
per share on a diluted basis) for the second quarter of 2008.
Bruce Aitken, President and CEO of Methanex commented, "Methanol
prices remained strong in the third quarter and we achieved an
average realized price of $413 per tonne. The stable price
environment led to a significant improvement to our purchased
methanol margins which contributed to significantly higher
earnings."
"Entering the fourth quarter, methanol prices have moderated.
However, with the recent decline in prices, we have seen some
tightening on the supply side of the industry with high cost
capacity in China either shutting in or switching to fertilizer
production. In addition, a major unplanned outage at a competitor
plant has impacted global industry supply."
"We have seen softness in demand for methanol for some
derivatives and the global financial crisis poses uncertainty for
our business. However, to date overall global methanol demand has
been relatively stable. Demand into new energy applications in
China has been healthy, and with the onset of winter, we expect
demand into these uses to continue to be steady."
"We completed the restart of our larger plant in New Zealand at
the end of the third quarter, which added 450,000 tonnes of
annualized production to our asset base. Longer term, with our
Egypt Project, gas exploration and development activities in
southern Chile, and upside potential in New Zealand, we are well
positioned to significantly increase our production and cash
generation capability in the future."
Mr. Aitken concluded, "With US$358 million of cash on hand at
the end of the quarter, a strong balance sheet and a US$250 million
undrawn credit facility, we believe we are well positioned to meet
our financial commitments related to the Egypt methanol project,
invest to accelerate natural gas development in southern Chile,
pursue other strategic initiatives, and continue to deliver on our
commitment to return excess cash to shareholders."
A conference call is scheduled for Thursday, October 23, 2008 at
10:30 am EST (7:30 am PST) to review these third 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 518974. 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
Third 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 New Zealand 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, our ability to access credit on
commercially reasonable terms, 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 Third 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 Third
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 Third 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 September 30, 2008
At October 22, 2008 the Company had 92,940,892 common shares
issued and outstanding and stock options exercisable for 1,606,743
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
THIRD QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS
Except where otherwise noted, all currency amounts are stated in
United States dollars.
This third quarter 2008 Management's Discussion and Analysis
dated October 22, 2008 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.
Three Months Ended Nine Months Ended
---------------------- -----------------
Sep 30 Jun 30 Sep 30 Sep 30 Sep 30
($ millions, except where noted) 2008 2008 2007 2008 2007
------------------------------------------------------- -----------------
Sales volumes (thousands of
tonnes)
Produced methanol 946 910 1,073 2,534 3,572
Purchased methanol 429 541 387 1,639 1,031
Commission sales(1) 172 168 168 483 396
--------------------------------------------------------------------------
Total sales volumes 1,547 1,619 1,628 4,656 4,999
Methanex average non-discounted
posted price ($ per tonne)(2) 499 489 303 564 390
Average realized price
($ per tonne)(3) 413 412 270 455 334
Adjusted EBITDA(4) 140.4 78.9 68.6 346.4 382.0
Cash flows from operating
activities(4,5) 104.9 68.5 59.9 275.8 306.1
Operating income(4) 109.2 52.5 37.4 265.6 298.6
Net income 70.9 38.9 23.6 175.4 204.0
Basic net income per common
share 0.76 0.41 0.24 1.84 1.99
Diluted net income per common
share 0.75 0.41 0.24 1.83 1.98
Common share information
(millions of shares):
Weighted average number of
common shares 93.9 94.5 100.2 95.2 102.7
Diluted weighted average
number of common shares 94.3 95.1 100.4 95.7 103.0
Number of common shares
outstanding, end of period 93.4 94.0 99.4 93.4 99.4
--------------------------------------------------------------------------
(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
(thousands YTD YTD
of Q3 2008 Q2 2008 Q3 2007 Q3 2008 Q3 2007
tonnes) Capacity Production Production Production Production Production
--------------------------------------------------------------------------
Chile I, II,
III and IV 960 246 261 233 816 1,553
Titan 213 200 229 191 646 641
Atlas (63.1%
interest) 268 284 288 290 865 704
New
Zealand 132 126 124 122 370 360
--------------------------------------------------------------------------
1,573 856 902 836 2,697 3,258
--------------------------------------------------------------------------
Chile
Our methanol facilities in Chile produced 246,000 tonnes during
the third quarter of 2008 compared with 261,000 tonnes during the
second 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 third quarter of 2008 compared with the second quarter
of 2008 primarily as a result of lower natural gas supply from ENAP
due to production and deliverability issues as well as higher
demand for natural gas general use in southern Chile during the
winter months.
We believe the solution to the issue of natural gas supply from
Argentina is to continue to source 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 a two to
three year period to fund a 50% participation in the block. The
arrangement is subject to approval by the government of Chile. We
have invested $38 million in the Dorado Riquelme block to date, of
which approximately $33 million has been placed in escrow until
final approval is received and approximately $5 million has been
paid to fund development and exploration activities. We have been
receiving some natural gas deliveries from the Dorado Riquelme
block since May 2008. Also, in late 2007, we signed a natural gas
prepayment agreement with GeoPark under which we agreed to 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 and during
the third quarter of 2008 approximately 20% of total production at
our Chile facilities was produced with natural gas from the Fell
block.
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. Planning
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 in southern Chile to a consortium that includes Wintershall,
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 for
the first phase is US$11 million over the next three years.
We cannot provide assurance that ENAP, GeoPark or others will 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 produced a total of 484,000
tonnes during the third quarter of 2008 compared with 517,000
tonnes during the second quarter of 2008. In July 2008, we
performed unplanned repair work at our Titan facility resulting in
approximately 30,000 tonnes of lost production.
New Zealand
Our Waitara Valley facility in New Zealand produced 126,000
tonnes during the third quarter of 2008 compared with 124,000
tonnes during second quarter of 2008.
In early October, we restarted one of our two idled 900,000
tonne per year facilities at our Motunui site in New Zealand and we
shutdown our smaller scale 500,000 tonne Waitara Valley facility.
We plan to operate the larger scale Motunui facility until at least
the middle of 2010. We have become more optimistic about the longer
term future of our New Zealand operations and believe there is
potential to operate the Motunui plant longer and potentially
restart the Waitara Valley plant. The continued operations of the
New Zealand facilities are dependant upon the methanol industry
supply and demand dynamics 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 third quarter of 2008 we recorded Adjusted EBITDA of
$140.4 million and net income of $70.9 million ($0.75 per share on
a diluted basis). This compares with Adjusted EBITDA of $78.9
million and net income of $38.9 million ($0.41 per share on a
diluted basis) for the second quarter of 2008 and Adjusted EBITDA
of $68.6 million and net income of $23.6 million ($0.24 per share
on a diluted basis) for the third quarter of 2007.
For the nine months ended September 30, 2008, we recorded
Adjusted EBITDA of $346.4 million and net income of $175.4 million
($1.83 per share on a diluted basis). This compares with Adjusted
EBITDA of $382.0 million and net income of $204.0 million ($1.98
per share on a diluted basis) during the same period in 2007.
Adjusted EBITDA
The increase (decrease) in Adjusted EBITDA resulted from changes
in the following:
Q3 2008 Q3 2008 YTD Q3 2008
compared with compared with compared with
($ millions) Q2 2008 Q3 2007 YTD Q3 2007
--------------------------------------------------------------------------
Average realized price $ 16 $ 131 $ 262
Sales volumes 7 (14) (139)
Total cash costs(1) 12 (42) (101)
Purchased methanol 27 (3) (58)
--------------------------------------------------------------------------
$ 62 $ 72 $ (36)
--------------------------------------------------------------------------
(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 Nine Months Ended
---------------------- -----------------
($ per tonne, Sep 30 Jun 30 Sep 30 Sep 30 Sep 30
except where noted) 2008 2008 2007 2008 2007
------------------------------------------------------- -----------------
Methanex average non-discounted
posted price(1) 499 489 303 564 390
Methanex average realized
price(2) 413 412 270 455 334
Average discount 17% 16% 11% 19% 14%
------------------------------------------------------- -----------------
(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 in the second half
of 2007 and strong demand. At the beginning of 2008, our average
non-discounted posted pricing was approximately $775 per tonne.
Into the second quarter of 2008, the methanol market rebalanced and
methanol prices remained stable through the third quarter of 2008.
Our average non-discounted posted price for the third quarter of
2008 was $499 per tonne compared with $489 per tonne for the second
quarter of 2008 and $303 per tonne for the third quarter of 2007.
Our average realized price for the third quarter of 2008 was $413
per tonne compared with $412 per tonne for the second quarter of
2008 and $270 per tonne for the third quarter of 2007. For the
third quarter of 2008 our average realized price was approximately
17% lower than our average non-discounted posted price. This
compares with approximately 16% lower for the second quarter of
2008 and 11% lower for the third 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.
For the purposes of our Adjusted EBITDA analysis, we analyze
changes in our average realized price for sales of our produced
methanol. The average realized price for sales of our produced
methanol will differ from the Methanex average realized price
disclosed above as 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. The change in our average
realized price for produced methanol for the third quarter of 2008
increased our Adjusted EBITDA by $16 million compared with the
second quarter of 2008. Sales under long-term contracts represented
a lower proportion of our produced methanol sales volumes during
the third quarter of 2008 compared with the second quarter of 2008
and this resulted in a higher average realized price for produced
methanol during the third quarter of 2008.
The change in our average realized price for produced methanol
for the third quarter of 2008 and nine months ended September 30,
2008 compared with the same periods in 2007 increased our Adjusted
EBITDA by $131 million and $262 million, respectively. This was
primarily a result of higher methanol pricing in 2008 compared with
2007.
Sales volumes of produced methanol
Sales volumes of produced methanol for the third quarter of 2008
were higher by 36,000 tonnes compared with the second quarter of
2008 and this increased Adjusted EBITDA by $7 million.
Sales volumes of produced methanol for the third quarter of 2008
and nine months ended September 30, 2008 were lower by 127,000
tonnes and 1,038,000 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 $14 million and $139 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 changes in methanol prices above predetermined
prices.
Total cash costs for the third quarter of 2008 were lower than
in the second quarter of 2008 by $12 million. The decrease in our
cash costs was primarily due to lower stock-based compensation as
result of the impact of a decrease in our share price on our
stock-based compensation in the third quarter of 2008.
Total cash costs for the third quarter of 2008 were higher than
the third quarter of 2007 by $42 million. Natural gas costs and
other costs for produced methanol for the third quarter of 2008
were higher compared with the third quarter of 2007 by $52 million
primarily as a result of higher methanol pricing in 2008. Ocean
freight costs were higher for the third quarter of 2008 compared
with the third quarter of 2007 by $5 million primarily as a result
of higher fuel costs. Fixed manufacturing costs were lower for the
third quarter of 2008 compared with the third quarter of 2007 by $4
million primarily as a result of lower fixed costs at our Chile
facilities in 2008. Stock-based compensation expense was lower for
the third quarter 2008 compared with the third quarter of 2007 by
$11 million primarily as result of the impact of a decrease in our
share price in the third quarter of 2008 on our stock-based
compensation.
Total cash costs for the nine months ended September 30, 2008
were higher than the same period in 2007 by $101 million. Natural
gas costs and other costs for produced methanol for the nine months
ended September 30, 2008 were higher compared with the same period
in 2007 by $83 million primarily as a result of higher methanol
pricing in 2008. Ocean freight costs were higher for the nine
months ended September 30, 2008 compared with the same period in
2007 by $13 million primarily as a result of higher fuel costs.
Total cash costs for the nine months ended September 30, 2008 were
also higher by $10 million compared with the same period in 2007 as
a result of higher unabsorbed fixed costs at our Chile facilities
by $6 million and higher selling, general and administrative
expenses by $4 million as a result of changes in foreign exchange
rates and timing of expenditures. In-market logistics costs were
higher by $5 million for the nine months ended September 30, 2008
compared with the same period in 2007. These higher in-market
distribution costs have been substantially recovered from customers
and this recovery has been included in revenue. Stock-based
compensation expense was lower for nine months ended September 30,
2008 compared with the same period in 2007 by $10 million primarily
as result of the impact of a decrease in our share price in the
third quarter of 2008 on our stock-based compensation.
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, a negative cash margin of $31 million for the
second quarter, and a negative cash margin of $4 million on the
resale of purchased methanol for the third quarter of 2008.
Depreciation and Amortization
Depreciation and amortization was $31 million for the third
quarter of 2008 compared with $26 million for the second quarter of
2008. The increase in depreciation and amortization for the third
quarter of 2008 compared with the second quarter of 2008 was
primarily due to higher sales volume of produced methanol and
higher unabsorbed depreciation costs.
Depreciation and amortization for the third quarter of 2008 and
nine months ended September 30, 2008 was $31 million and $81
million, respectively, compared with $31 million and $83 million,
respectively, for the same periods in 2007.
Interest Expense
Three Months Ended Nine Months Ended
---------------------- -----------------
Sep 30 Jun 30 Sep 30 Sep 30 Sep 30
($ millions) 2008 2008 2007 2008 2007
------------------------------------------------------- -----------------
Interest expense before
capitalized interest $ 13 $ 13 $ 13 $ 40 $ 35
Less capitalized interest (4) (3) (2) (10) (2)
--------------------------------------------------------------------------
Interest expense $ 9 $ 10 $ 11 $ 30 $ 33
------------------------------------------------------- -----------------
Interest expense before capitalized interest for the third
quarter of 2008 was $13 million compared with $13 million for the
second quarter of 2008 and $13 million for the third quarter of
2007. Interest expense before capitalized interest for the nine
months ended September 30, 2008 was $40 million compared with $35
million for the same period in 2007. In May 2007, we reached
financial close and secured limited recourse debt of $530 million
for our joint venture project to construct a 1.3 million tonne per
year methanol facility in Egypt. Interest costs related to this
project have been capitalized since that date.
Interest and Other Income
Three Months Ended Nine Months Ended
---------------------- -----------------
Sep 30 Jun 30 Sep 30 Sep 30 Sep 30
($ millions) 2008 2008 2007 2008 2007
------------------------------------------------------- -----------------
Interest and other income $ 1 $ 13 $ 7 $ 12 $ 24
------------------------------------------------------- -----------------
Interest and other income for the third quarter of 2008 was $1
million compared with $13 million for the second quarter of 2008.
The decrease in interest and other income during the third quarter
of 2008 compared with the second quarter of 2008 was primarily due
to the impact of changes in foreign exchange gains and losses as
well as a $5 million gain on sale of ammonia production assets
during the second quarter of 2008.
Interest and other income for the third quarter of 2008 and nine
months ended September 30, 2008 decreased by $6 million and $12
million, respectively, compared with the same periods in 2007.
Interest and other income during 2008 was lower than 2007 due to
the impact of lower interest rates and lower cash balances during
2008 and the impact of changes in foreign exchange gains and
losses.
Income Taxes
The effective tax rate for the third quarter of 2008 was 29%
compared with 30% for the second quarter of 2008 and 29% for the
third 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 and into the second quarter which are unsustainable in a
normal supply and demand environment. During the second quarter of
2008, the methanol market rebalanced and methanol prices have
remained stable through the third quarter. As we entered the fourth
quarter of 2008, methanol prices have declined from the third
quarter. In October, our average non-discounted price across all of
the major regions is approximately $450 per tonne.
The next increments of world scale capacity additions outside of
China are two 1.7 million tonne per year plants under construction
in Malaysia and Iran, and we expect product from both of these
plants to be available to the market later this year or in the
first half of 2009. We also believe that global methanol demand
growth combined with the potential shutdown of high cost capacity
(mainly in China) could offset this new industry supply.
Methanex Non-Discounted Regional Posted Prices(1)
Oct Sep Aug Jul
(US$ per tonne) 2008 2008 2008 2008
------------------------------------------------------------
United States 499 526 526 526
Europe(2) 426 465 465 465
Asia 450 500 500 500
------------------------------------------------------------
(1) Discounts from our posted prices are offered to customers based on
various factors.
(2) EUR295 at October 2008 (July 2008 - EUR295) converted to United States
dollars at the date of settlement.
Overall, global methanol demand has been relatively stable,
however demand for some derivatives has weakened and the global
financial crisis and weak economic environment poses uncertainty
for our business.
Demand for methanol in energy applications has been healthy as
relatively high energy prices have driven steady demand for fuel
blending and di-methyl ether (DME) in China. If industrial
production growth rates in China and world oil prices are above
historical averages, we believe methanol demand in China will
continue to grow at high rates as a result of strong traditional
demand 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 as
a result of high 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. In recent weeks, some high cost Chinese
producers have shut down or switched to fertilizer production in
response to moderating methanol prices in China. 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. In the second and third
quarters of 2008 as methanol prices moderated China reverted back
to being a net importer of methanol. 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 third quarter of 2008 were $105 million
compared with $60 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 third quarter of 2008, we repurchased for
cancellation a total of 0.6 million common shares at an average
price of US$23.74 per share, totaling $15 million. 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. For
the nine months ended September 30, 2008, we repurchased a total of
5.1 million common shares at an average price of US$25.89 per
share, totaling $133 million, inclusive of 4.3 million common
shares repurchased in 2008 under a normal course issuer bid that
expired May 16, 2008.
During the third quarter of 2008 we paid a quarterly dividend of
US$0.155 per share, or $15 million. For the nine months ended
September 30, 2008 we paid total dividends of US$0.45 per share or
$43 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. We own 60% of Egyptian Methanex Methanol Company S.A.E.
("EMethanex") which is the company that is developing the project
and we will sell 100% of the methanol from the facility. 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 third quarter of 2008, total plant and equipment
construction costs related to our project in Egypt were $99
million. EMethanex has limited recourse debt of $530 million.
During the third quarter of 2008, a total of $48 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 $420 million. Our 60% share of future equity
contributions, excluding financing costs and working capital, over
the next two years is estimated to be approximately $115 million
and we expect to fund these expenditures from cash generated from
operations and cash on hand.
As previously mentioned, we have an agreement with ENAP to
accelerate natural gas exploration and development in the Dorado
Riquelme hydrocarbon exploration block in southern Chile. Under the
arrangement, we expect to contribute approximately $100 million in
capital, including the $38 million we have invested to date, over
the next two to three years and will have a 50% participation in
the block. The arrangement is subject to approval by the government
of Chile.
We operate in a highly competitive commodity industry and
believe it is appropriate to maintain a conservative balance sheet
and to retain financial flexibility. This is particularly important
in the current uncertain economic environment. We have excellent
financial capacity and flexibility. Our cash balance at September
30, 2008 was $358 million and we have a strong balance sheet with
an undrawn $250 million credit facility provided by highly rated
financial institutions that expires in mid-2010. 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, 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, other strategic initiatives including
continuing to pursue investment opportunities to accelerate the
development of natural gas in southern Chile and continue to
deliver on our commitment to return excess cash to
shareholders.
The credit ratings for our unsecured notes at September 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
In the short term there is uncertainty caused by the global
financial crisis and its impact on the economy and our business.
Assuming some reasonable return of confidence, 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.
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 September 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.
NEW ACCOUNTING STANDARDS
In February 2008, the Canadian Accounting Standards Board
confirmed January 1, 2011 as the changeover date for Canadian
publicly accountable enterprises to start using International
Financial Reporting Standards (IFRS) as issued by the International
Accounting Standards Board. IFRS uses a conceptual framework
similar to Canadian generally accepted accounting standards (GAAP),
but there are significant differences in recognition, measurement
and disclosures. As a result, we are developing a plan to convert
our consolidated financial statements to IFRS at the changeover
date of January 1, 2011 with comparative financial results for
2010. We are currently in the process of assessing the differences
between IFRS and Canadian GAAP, as well as the alternatives
available on adoption. This assessment includes the impact of
conversion on our financial reporting and disclosure controls,
information technology systems and other business activities. We
will continue to provide status updates in the Management's
Discussion & Analysis over the course of the project.
Changes in accounting policies are likely and may materially
impact our consolidated financial statements.
ADDITIONAL INFORMATION - SUPPLEMENTAL NON-GAAP MEASURES
In addition to providing measures prepared in accordance with
Canadian generally accepted accounting principles (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, and
current income taxes.
The following table shows a reconciliation of cash flows from
operating activities to Adjusted EBITDA:
Three Months Ended Nine Months Ended
------------------------ -----------------
Sep 30 Jun 30 Sep 30 Sep 30 Sep 30
($ thousands) 2008 2008 2007 2008 2007
------------------------------------------------------- -----------------
Cash flows from
operating activities $129,099 $34,220 $132,497 $273,906 $447,424
Add (deduct):
Changes in non-cash
working capital (24,183) 34,294 (72,609) 1,844 (141,319)
Other cash payments 435 1,801 598 2,556 4,886
Stock-based compensation
recovery (expense) 5,870 (5,207) (5,386) (3,965) (15,655)
Other non-cash items (685) 1,378 (4,282) (5,734) (10,469)
Interest expense 9,444 9,630 10,807 29,764 33,033
Interest and other income (615) (12,671) (6,601) (12,449) (24,279)
Current income taxes 21,050 15,441 13,571 60,451 88,375
------------------------------------------------------- -----------------
Adjusted EBITDA $140,415 $78,886 $ 68,595 $346,373 $381,996
------------------------------------------------------- -----------------
Operating Income and Cash Flows from Operating Activities before
Non-Cash Working Capital
Operating income and cash flows from operating activities before
changes in non-cash working capital are reconciled to Canadian GAAP
measures in our consolidated statements of income and consolidated
statements of cash flows, respectively.
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected financial information for the prior eight
quarters is as follows:
Three Months Ended
------------------------------------
($ thousands, except per Sep 30 Jun 30 Mar 31 Dec 31
share amounts) 2008 2008 2008 2007
--------------------------------------------------------------------------
Revenue $569,876 $600,025 $735,934 $731,057
Net income 70,931 38,945 65,484 171,697
Basic net income per common share 0.76 0.41 0.67 1.74
Diluted net income per common share 0.75 0.41 0.67 1.72
--------------------------------------------------------------------------
Three Months Ended
------------------------------------
($ thousands, except per Sep 30 Jun 30 Mar 31 Dec 31
share amounts) 2007 2007 2007 2006
--------------------------------------------------------------------------
Revenue $395,118 $466,414 $673,932 $668,159
Net income 23,610 35,654 144,706 172,445
Basic net income per common share 0.24 0.35 1.38 1.62
Diluted net income per common share 0.24 0.35 1.37 1.61
--------------------------------------------------------------------------
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% 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 Third 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 New Zealand 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, our ability to access credit on commercially
reasonable terms, 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 Third 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 Nine Months Ended
------------------- -----------------------
Sep 30 Sep 30 Sep 30 Sep 30
2008 2007 2008 2007
--------------------------------------------------------------------------
Revenue $569,876 $395,118 $1,905,836 $1,535,464
Cost of sales and
operating expenses 429,461 326,523 1,559,463 1,153,468
Depreciation and
amortization 31,251 31,245 80,760 83,358
--------------------------------------------------------------------------
Operating income before
undernoted items 109,164 37,350 265,613 298,638
Interest expense (note 7) (9,444) (10,807) (29,764) (33,033)
Interest and other income 615 6,601 12,449 24,279
--------------------------------------------------------------------------
Income before income taxes 100,335 33,144 248,298 289,884
Income taxes:
Current (21,050) (13,571) (60,451) (88,375)
Future (8,354) 4,037 (12,487) 2,461
--------------------------------------------------------------------------
(29,404) (9,534) (72,938) (85,914)
--------------------------------------------------------------------------
Net income $ 70,931 $ 23,610 $ 175,360 $ 203,970
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income per common
share:
Basic $ 0.76 $ 0.24 $ 1.84 $ 1.99
Diluted $ 0.75 $ 0.24 $ 1.83 $ 1.98
Weighted average number
of common shares
outstanding:
Basic 93,870,876 100,215,472 95,177,219 102,654,755
Diluted 94,328,208 100,417,273 95,665,831 102,977,021
Number of common shares
outstanding at period
end 93,396,142 99,442,254 93,396,142 99,442,254
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Balance Sheets (unaudited)
(thousands of U.S. dollars)
Sep 30 Dec 31
2008 2007
--------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 358,001 $ 488,224
Receivables 291,317 401,843
Inventories 246,262 312,143
Prepaid expenses 33,100 20,889
--------------------------------------------------------------------------
928,680 1,223,099
Property, plant and equipment (note 4) 1,821,479 1,542,100
Other assets 151,094 104,700
--------------------------------------------------------------------------
$2,901,253 $2,869,899
--------------------------------------------------------------------------
--------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 305,559 $ 466,020
Current maturities on long-term debt (note 6) 15,282 15,282
Current maturities on other long-term liabilities 12,098 16,965
--------------------------------------------------------------------------
332,939 498,267
Long-term debt (note 6) 711,025 581,987
Other long-term liabilities 75,527 74,431
Future income tax liabilities 351,089 338,602
Non-controlling interest 90,124 41,258
Shareholders' equity:
Capital stock 433,373 451,640
Contributed surplus 21,040 16,021
Retained earnings 899,902 876,348
Accumulated other comprehensive loss (13,766) (8,655)
--------------------------------------------------------------------------
1,340,549 1,335,354
--------------------------------------------------------------------------
$2,901,253 $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
Other
Compre- Total
Number of Contri- hensive Share-
Common Capital buted Retained Income 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
Reclassi-
fication
of grant
date fair
value on
exercise
of stock
options - 3,668 (3,668) - - -
Payments
for shares
re-
purchased (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 - - - 104,429 - 104,429
Compensation
expense
recorded
for
stock
options - - 4,598 - - 4,598
Issue of
shares on
exercise
of stock
options 214,866 3,900 - - - 3,900
Reclassi-
fication
of grant
date fair
value on
exercise
of stock
options - 1,398 (1,398) - - -
Payments
for shares
re-
purchased (4,487,878) (20,649) - (96,916) - (117,565)
Dividend
payments - - - (28,047) - (28,047)
Other
comprehensive
income - - - 136 136
--------------------------------------------------------------------------
Balance,
June
30,
2008 94,037,242 436,289 19,221 855,814 (8,519) 1,302,805
Net
income - - - 70,931 - 70,931
Compensation
expense
recorded
for
stock
options - - 1,813 - - 1,813
Issue of
shares on
exercise
of stock
options 3,900 82 - - - 82
Reclassi-
fication
of grant
date fair
value on
exercise
of stock
options - (6) 6 - - -
Payments
for shares
re-
purchased (645,000) (2,992) - (12,322) - (15,314)
Dividend
payments - - - (14,521) - (14,521)
Other
comprehensive
loss - - - - (5,247) (5,247)
--------------------------------------------------------------------------
Balance,
September
30,
2008 93,396,142 $433,373 $ 21,040 $ 899,902 $(13,766) $1,340,549
---------------------- -------------------------------------- ----------
---------------------- -------------------------------------- ----------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (unaudited)
(thousands of U.S. dollars)
Three Months Ended Nine Months Ended
------------------- -----------------------
Sep 30 Sep 30 Sep 30 Sep 30
2008 2007 2008 2007
--------------------------------------------------------------------------
Net income $ 70,931 $ 23,610 $ 175,360 $ 203,970
Other comprehensive
income (loss), net of
tax:
Change in fair value
of forward exchange
contracts (note 13) (16) 29 44 (124)
Change in fair value
of interest rate swap
contracts (note 13) (5,231) (2,076) (5,155) (2,076)
--------------------------------------------------------------------------
(5,247) (2,047) (5,111) (2,200)
--------------------------------------------------------------------------
Comprehensive income $ 65,684 $ 21,563 $ 170,249 $ 201,770
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars)
Three Months Ended Nine Months Ended
------------------- -----------------------
Sep 30 Sep 30 Sep 30 Sep 30
2008 2007 2008 2007
--------------------------------------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 70,931 $ 23,610 $ 175,360 $ 203,970
Add (deduct) non-cash
items:
Depreciation and
amortization 31,251 31,245 80,760 83,358
Future income taxes 8,354 (4,037) 12,487 (2,461)
Stock-based compensation
expense (recovery) (5,870) 5,386 3,965 15,655
Other 685 4,282 5,734 10,469
Other cash payments (435) (598) (2,556) (4,886)
--------------------------------------------------------------------------
Cash flows from operating
activities before
undernoted 104,916 59,888 275,750 306,105
Changes in non-cash
working capital
(note 11) 24,183 72,609 (1,844) 141,319
--------------------------------------------------------------------------
129,099 132,497 273,906 447,424
--------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Payments for shares
repurchased (15,314) (40,886) (132,879) (164,772)
Dividend payments (14,521) (13,975) (42,568) (41,277)
Proceeds from limited
recourse debt (note 6) 48,000 61,000 136,000 96,574
Financing costs - - - (8,725)
Equity contribution by
non-controlling interest 19,369 2,213 48,866 20,508
Repayment of limited
recourse debt (312) - (7,952) (7,016)
Proceeds on issue of
shares on exercise of
stock options 82 350 3,982 4,163
Changes in debt service
reserve accounts - (16) (1,995) 900
Repayment of other
long-term liabilities (3,028) (1,220) (9,115) (3,769)
--------------------------------------------------------------------------
34,276 7,466 (5,661) (103,414)
--------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Property, plant and
equipment (40,048) (26,307) (78,302) (52,074)
Egypt plant under
construction (98,643) (67,982) (278,994) (114,118)
Dorado Riquelme
investment (5,478) - (38,328) -
GeoPark financing (8,000) - (19,390) -
Other assets (13) (5,271) 129 (5,178)
Changes in non-cash
working capital
(note 11) 2,283 8,637 16,417 5,513
--------------------------------------------------------------------------
(149,899) (90,923) (398,468) (165,857)
--------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents 13,476 49,040 (130,223) 178,153
Cash and cash equivalents,
beginning of period 344,525 484,167 488,224 355,054
--------------------------------------------------------------------------
Cash and cash equivalents,
end of period $ 358,001 $ 533,207 $ 358,001 $ 533,207
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SUPPLEMENTARY CASH
FLOW INFORMATION
Interest paid $ 16,665 $ 13,752 $ 40,567 $ 32,813
Income taxes paid, net
of amounts refunded $ 9,309 $ 20,889 $ 72,392 $ 102,994
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 and new accounting
developments:
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.
In February 2008, the CICA issued Handbook Section 3064,
Goodwill and Intangible Assets. This new accounting standard, which
applies to fiscal years beginning on or after October 1, 2008,
replaces Section 3062 Goodwill and Other Intangible Assets. Section
3064 expands on the standards for recognition, measurement and
disclosure of intangible assets. The Company is currently
evaluating the impact of this new standard on the consolidated
financial statements.
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 nine
month periods ended September 30, 2008 was $421 million (2007 -
$300 million) and $1,488 million (2007 - $1,080 million),
respectively.
4. Property, plant and equipment:
Accumulated Net Book
Cost Depreciation Value
--------------------------------------------------------------------------
September 30, 2008
Plant and equipment $ 2,526,316 $ 1,276,708 $ 1,249,608
Egypt plant under construction 506,777 - 506,777
Other 126,831 61,737 65,094
--------------------------------------------------------------------------
$ 3,159,924 $ 1,338,445 $ 1,821,479
--------------------------------------------------------------------------
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:
Sep 30 Dec 31
Consolidated Balance Sheets 2008 2007
--------------------------------------------------------------------------
Cash and cash equivalents $ 22,263 $ 20,128
Other current assets 100,559 107,993
Property, plant and equipment 252,143 263,942
Other assets 18,324 16,329
Accounts payable and accrued liabilities 44,474 56,495
Long-term debt, including current maturities (note 6) 113,433 119,891
Future income tax liabilities 17,164 16,099
--------------------------------------------------------------------------
Three Months Ended Nine Months Ended
--------------------- -----------------------
Consolidated Statements Sep 30 Sep 30 Sep 30 Sep 30
of Income 2008 2007 2008 2007
------------------------------------------------ -----------------------
Revenue $ 75,017 $ 55,324 $ 233,549 $ 144,094
Expenses (69,958) (44,835) (216,693) (134,731)
------------------------------------------------ -----------------------
Income before income taxes 5,059 10,489 16,856 9,363
Income tax expense (1,183) (3,302) (4,134) (3,556)
------------------------------------------------ -----------------------
Net income $ 3,876 $ 7,187 $ 12,722 $ 5,807
------------------------------------------------ -----------------------
Three Months Ended Nine Months Ended
--------------------- -----------------------
Consolidated Statements Sep 30 Sep 30 Sep 30 Sep 30
of Cash Flows 2008 2007 2008 2007
------------------------------------------------ -----------------------
Cash inflows from
operating activities $ 8,524 $ 3,791 $ 22,612 $ 41,135
Cash outflows from
financing activities - (16) (9,010) (6,116)
Cash outflows from
investing activities (446) (171) (1,056) (13,859)
------------------------------------------------ -----------------------
6. Long-term debt:
Sep 30 Dec 31
2008 2007
--------------------------------------------------------------------------
Unsecured notes
8.75% due August 15, 2012 $ 198,077 $ 197,776
6.00% due August 15, 2015 148,473 148,340
--------------------------------------------------------------------------
346,550 346,116
Atlas limited recourse debt facilities 113,433 119,891
Egypt limited recourse debt facilities 252,574 116,574
Other limited recourse debt facilities 13,750 14,688
--------------------------------------------------------------------------
726,307 597,269
Less current maturities (15,282) (15,282)
--------------------------------------------------------------------------
$ 711,025 $ 581,987
--------------------------------------------------------------------------
7. Interest expense:
Three Months Ended Nine Months Ended
-------------------- ---------------------
Sep 30 Sep 30 Sep 30 Sep 30
2008 2007 2008 2007
------------------------------------------------ ---------------------
Interest expense before
capitalized interest $ 13,393 $ 12,636 $ 39,695 $ 34,862
Less: capitalized interest
related to Egypt project (3,949) (1,829) (9,931) (1,829)
------------------------------------------------ ---------------------
Interest expense $ 9,444 $ 10,807 $ 29,764 $ 33,033
------------------------------------------------ ---------------------
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 nine month periods ended September 30, 2008,
interest costs related to this project of $3.9 million and $9.9
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 Nine Months Ended
----------------------- -----------------------
Sep 30 Sep 30 Sep 30 Sep 30
2008 2007 2008 2007
------------------------------------------------ -----------------------
Denominator for basic
net income
per common share 93,870,876 100,215,472 95,177,219 102,654,755
Effect of dilutive
stock options 457,332 201,801 488,612 322,266
------------------------------------------------ -----------------------
Denominator for diluted
net income
per common share 94,328,208 100,417,273 95,665,831 102,977,021
--------------------------------------------------------------------------
9. Stock-based compensation:
a) Stock options:
(i) Incentive stock options:
Common shares reserved for outstanding incentive stock options
at September 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 (21,000) 9.59 (178,866) 19.73
Cancelled (7,000) 11.60 (37,116) 24.15
--------------------------------------------------------------------------
Outstanding at June 30, 2008 76,450 $ 6.95 3,783,067 $ 23.28
Granted - - 10,000 25.39
Exercised - - (3,900) 21.05
Cancelled - - (40,800) 25.26
--------------------------------------------------------------------------
Outstanding at September 30, 2008 76,450 $ 6.95 3,748,367 $ 23.27
--------------------------------------------------------------------------
Information regarding the incentive stock options outstanding at
September 30, 2008 is as follows:
Options Outstanding at Options Exercisable at
September 30, 2008 September 30, 2008
---------------------------------- ----------------------
Weighted
Average
Remaining Number of Weighted Number of Weighted
Contractual 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 1.8 76,450 $ 6.95 76,450 $ 6.95
--------------------------------------------------------------------------
Options
denominated
in USD
$6.45 to 11.56 4.2 187,550 $ 8.57 187,550 $ 8.57
$17.85 to 22.52 4.2 1,472,900 20.26 989,433 20.00
$23.92 to 28.43 5.9 2,087,917 26.71 323,560 24.95
--------------------------------------------------------------------------
5.2 3,748,367 $ 23.27 1,500,543 $ 19.64
--------------------------------------------------------------------------
(ii) Performance stock options:
As at September 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 nine month periods ended September 30, 2008,
compensation expense related to stock options included in cost of
sales and operating expenses was $1.8 million (2007 - $2.2 million)
and $6.4 million (2007 - $7.1 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
September 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 31,398 6,000 330,993
Granted in-lieu of dividends 4,588 215 10,974
Redeemed (3,083) - -
Cancelled - - (19,483)
--------------------------------------------------------------------------
Outstanding at June 30, 2008 392,587 20,697 1,047,746
Granted 4,243 - -
Granted in-lieu of dividends 3,093 143 7,162
Redeemed - - -
Cancelled - - (11,017)
--------------------------------------------------------------------------
Outstanding at September 30, 2008 399,923 20,840 1,043,891
--------------------------------------------------------------------------
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 September 30, 2008 was $22.7 million
compared with the recorded liability of $19.2 million. The
difference between the fair value and the recorded liability of
$3.5 million will be recognized over the weighted average remaining
service period of approximately 1.7 years.
For the three and nine month periods ended September 30, 2008,
compensation recovery related to deferred, restricted and
performance share units included in cost of sales and operating
expenses was $7.7 million (2007 - expense of $3.2 million) and
recovery of $2.5 million (2007 - expense of $8.5 million),
respectively. This included a recovery of $10.4 million (2007 -
expense of $0.6 million) and a recovery of $11.2 million (2007 -
expense of $0.9 million), respectively, related to the effect of
the change in the Company's share price.
10. Retirement plans:
Total net pension expense for the Company's defined benefit and
defined contribution pension plans during the three and nine month
periods ended September 30, 2008 was $1.7 million (2007 - $1.8
million) and $5.5 million (2007 - $5.3 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 nine month periods ended September 30,
2008 were as follows:
Three Months Ended Nine Months Ended
-------------------- ----------------------
Sep 30 Sep 30 Sep 30 Sep 30
2008 2007 2008 2007
------------------------------------------------ ----------------------
Decrease (increase) in
non-cash working capital:
Receivables $ 11,228 $ 46,295 $ 110,526 $ 154,610
Inventories 505 30,725 65,881 95,962
Prepaid expenses 2,258 5,537 (12,211) (175)
Accounts payable and
accrued liabilities 10,487 3,566 (160,461) (99,431)
------------------------------------------------ ----------------------
24,478 86,123 3,735 150,966
Adjustments for
items not having a
cash effect 1,988 (4,877) 10,838 (4,134)
------------------------------------------------ ----------------------
Changes in non-cash
working capital
having a cash effect $ 26,466 $ 81,246 $ 14,573 $ 146,832
------------------------------------------------ ----------------------
These changes relate
to the following
activities:
Operating $ 24,183 $ 72,609 $ (1,844) $ 141,319
Investing 2,283 8,637 16,417 5,513
------------------------------------------------ ----------------------
Changes in non-cash
working capital $ 26,466 $ 81,246 $ 14,573 $ 146,832
------------------------------------------------ ----------------------
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.
Sep 30 Dec 31
2008 2007
--------------------------------------------------------------------------
Liquidity:
Cash and cash equivalents $ 358,001 $ 488,224
Undrawn Egypt limited recourse debt
facilities 277,426 413,426
Undrawn credit facilities 250,000 250,000
--------------------------------------------------------------------------
Total Liquidity $ 885,427 $ 1,151,650
Capitalization:
Unsecured notes $ 346,550 $ 346,116
Limited recourse debt facilities,
including current portion 379,757 251,153
--------------------------------------------------------------------------
Total debt 726,307 597,269
Non-controlling interest 90,124 41,258
Shareholders' equity 1,340,549 1,335,354
--------------------------------------------------------------------------
Total capitalization $ 2,156,980 $ 1,973,881
Total debt to capitalization(1) 34% 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
provided by highly rated financial institutions and expires in
mid-2010 and is subject to certain financial covenants including an
interest coverage ratio and 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:
Sep 30 Dec 31
2008 2007
--------------------------------------------------------------------------
Financial assets:
Held for trading financial assets:
Cash and cash equivalents $ 358,001 $ 488,224
Debt service reserve accounts included
in other assets 18,324 16,329
Loans and receivables:
Receivables 291,317 401,843
Dorado Riquelme investment included
in other assets (note 15) 38,328 -
GeoPark financing included in other assets 26,010 13,738
--------------------------------------------------------------------------
$ 731,980 $ 920,134
--------------------------------------------------------------------------
Financial liabilities:
Other financial liabilities:
Accounts payable and accrued liabilities $ 305,559 $ 466,020
Long-term debt, including current portion 726,307 597,269
Capital lease obligation included in
other long-term liabilities 21,907 24,676
Held for trading financial liabilities:
Derivative instruments designated as
cash flow hedges 11,884 8,749
Derivative instruments 1,795 955
--------------------------------------------------------------------------
$ 1,067,452 $ 1,097,669
--------------------------------------------------------------------------
At September 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
$231 million as at September 30, 2008. Under the interest rate swap
contracts the maximum notional amount during the term is $368
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 September 30, 2008, these
interest rate swap contracts had a negative fair value of $11.9
million (December 31, 2007 - negative $8.6 million) recorded in
other long-term liabilities. The fair 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 September 30, 2008, the
Company had no outstanding forward exchange contracts designated as
cash flow hedges to sell euro (December 31, 2007 - fair value of
$0.1 million). Changes in fair value of derivative financial
instruments designated as cash flow hedges have been recorded in
other comprehensive income.
At September 30, 2008, the Company's derivative financial
instruments that have not been designated as cash flow hedges
includes forward exchange contracts to purchase $14.3 million New
Zealand dollars at an exchange rate of $0.7324 with a negative fair
value of $1.0 million (December 31, 2007 - nil) which is recorded
in payables 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 September 30, 2008, the total change in fair
value of these derivative financial instruments was a decrease of
$1.1 million, which has been recorded in earnings during the
period.
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. The Company has adopted a prudent
approach to financial management by maintaining a strong balance
sheet including back-up liquidity. The Company has 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.
Sep 30
Long-Term Debt 2008
--------------------------------------------------------------------------
Fixed interest rate debt:
Unsecured notes $ 346,550
Atlas limited recourse debt facilities
(63.1% proportionate share) 76,399
--------------------------------------------------------------------------
$ 422,949
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Variable interest rate debt:
Atlas limited recourse debt facilities
(63.1% proportionate share) $ 37,034
Egypt limited recourse debt facilities 252,574
Other limited recourse debt facilities 13,750
--------------------------------------------------------------------------
$ 303,358
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 $11.9 million as at
September 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 $16.9 million as of September 30, 2008.
For fixed interest rate debt, a 1% decrease in interest rates
would result in negative fair value of the debt of $17.2 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 $0.7 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 September 30, 2008, we had a net working capital asset of
$42.4 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 $0.4 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 September 30, 2008 the Company holds $358.1 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 two or three years and will have a
50% participation in the block. As of September 30, 2008, the
amount contributed under the agreement was approximately $33.2
million, which has been recorded in other assets. The arrangement
is subject to approval by the government of Chile and $33.2 million
of the amount contributed has been placed in escrow until final
approval is received. Additionally, during the third quarter of
2008, the Company invested $5.1 million related to developmental
and exploratory wells in the Dorado Riquelme block, which has been
recorded in other assets.
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 nine month periods ended September 30, 2008 and 2007
are as follows:
Three Months Ended Nine Months Ended
------------------ --------------------
Sep 30 Sep 30 Sep 30 Sep 30
2008 2007 2008 2007
---------------------------------------------------- --------------------
Net income in accordance with
Canadian GAAP $ 70,931 $ 23,610 $ 175,360 $ 203,970
Add (deduct) adjustments for:
Depreciation and amortization(a) (478) (478) (1,433) (1,433)
Stock-based compensation(b) 175 170 147 321
Uncertainty in income taxes(c) (2,582) (998) (3,346) (3,807)
Income tax effect of above
adjustments(d) 167 167 501 501
---------------------------------------------------- --------------------
Net income in accordance
with U.S. GAAP $ 68,213 $ 22,471 $ 171,229 $ 199,552
---------------------------------------------------- --------------------
Per share information in
accordance with U.S. GAAP:
Basic net income per share $ 0.73 $ 0.22 $ 1.80 $ 1.94
Diluted net income per share $ 0.72 $ 0.22 $ 1.79 $ 1.94
---------------------------------------------------- --------------------
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 nine month periods ended
September 30, 2008 and 2007 are as follows:
Three Months Ended
--------------------------------------------------
September 30, 2008 Sep 30, 2007
------------------------------------ ------------
Canadian GAAP Adjustments U.S. GAAP U.S. GAAP
------------------------------------------------------------ ------------
Net income $ 70,931 $ (2,718) $ 68,213 $ 22,471
Change in fair value of
forward exchange
contracts, net of tax (16) - (16) 29
Change in fair value of
interest rate swap,
net of tax (5,231) - (5,231) (2,076)
Change related to
pension, net of tax(e) - 236 236 224
------------------------------------------------------------ ------------
Comprehensive income $ 65,684 $ (2,482) $ 63,202 $ 20,648
------------------------------------------------------------ ------------
Nine Months Ended
--------------------------------------------------
September 30, 2008 Sep 30, 2007
------------------------------------ ------------
Canadian GAAP Adjustments U.S. GAAP U.S. GAAP
------------------------------------------------------------ ------------
Net income $ 175,360 $ (4,131) $ 171,229 $ 199,552
Change in fair value of
forward exchange
contracts, net of tax 44 - 44 (124)
Change in fair value of
interest rate swap,
net of tax (5,155) - (5,155) (2,076)
Change related to
pension, net of tax(e) - 477 477 672
------------------------------------------------------------ ------------
Comprehensive income $ 170,249 $ (3,654) $ 166,595 $ 198,024
------------------------------------------------------------ ------------
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 $1.4 million (2007 - $1.4 million) was recorded for
the three and nine month periods ended September 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, an adjustment to stock-based compensation expense by
$0.2 million (2007 - $0.2 million) and $0.1 million (2007 - $0.3
million) was recorded for the three and nine month periods ended
September 30, 2008, 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, an increase to income tax
expense of $2.6 million (2007 - $1.0 million) and $3.3 million
(2007 - $3.8 million) was recorded for the three and nine month
periods ended September 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 $0.5 million (2007 - $0.5
million) was recorded for the three and nine month periods ended
September 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 - $0.7 million) was recorded for the three
and nine month periods ended September 30, 2008, respectively.
f) Interest in Atlas joint venture:
U.S. GAAP requires interests in joint ventures to be accounted
for using the equity method. Canadian GAAP requires proportionate
consolidation of interests in joint ventures. The Company has not
made an adjustment in this reconciliation for this difference in
accounting principles because the impact of applying the equity
method of accounting does not result in any change to net income or
shareholders' equity. This departure from U.S. GAAP is acceptable
for foreign private issuers under the practices prescribed by the
United States Securities and Exchange Commission.
Methanex Corporation
Quarterly History (unaudited)
YTD
2008 Q3 Q2 Q1 2007 Q4 Q3 Q2 Q1
---------------------------------------------------------------------------
METHANOL
SALES VOLUMES
(thousands
of tonnes)
Company produced 2,534 946 910 678 4,569 997 1,073 1,360 1,139
Purchased methanol 1,639 429 541 669 1,453 421 387 269 376
Commission sales(1) 483 172 168 143 590 195 168 89 138
---------------------------------------------------------------------------
4,656 1,547 1,619 1,490 6,612 1,613 1,628 1,718 1,653
---------------------------------------------------------------------------
METHANOL
PRODUCTION
(thousands
of tonnes)
Chile 816 246 261 309 1,841 288 233 569 751
Titan, Trinidad 646 200 229 217 861 220 191 225 225
Atlas, Trinidad
(63.1%) 865 284 288 293 982 278 290 234 180
New Zealand 370 126 124 120 435 75 122 120 118
---------------------------------------------------------------------------
2,697 856 902 939 4,119 861 836 1,148 1,274
---------------------------------------------------------------------------
AVERAGE REALIZED
METHANOL PRICE(2)
($/tonne) 455 413 412 545 375 514 270 286 444
($/gallon) 1.37 1.24 1.24 1.64 1.13 1.55 0.81 0.86 1.34
PER SHARE
INFORMATION
($ per share)
Basic net income $ 1.84 0.76 0.41 0.67 3.69 1.74 0.24 0.35 1.38
Diluted net income $ 1.83 0.75 0.41 0.67 3.68 1.72 0.24 0.35 1.37
2006 Q4 Q3 Q2 Q1
---------------------------------------------------------------------------
METHANOL
SALES VOLUMES
(thousands
of tonnes)
Company produced 5,310 1,160 1,478 1,351 1,321
Purchased methanol 1,101 288 222 294 297
Commission sales(1) 584 134 176 133 141
---------------------------------------------------------------------------
6,995 1,582 1,876 1,778 1,759
---------------------------------------------------------------------------
METHANOL
PRODUCTION
(thousands
of tonnes)
Chile 3,186 766 666 872 882
Titan, Trinidad 864 229 206 214 215
Atlas, Trinidad
(63.1%) 1,057 267 264 273 253
New Zealand 404 111 71 118 104
---------------------------------------------------------------------------
5,511 1,373 1,207 1,477 1,454
---------------------------------------------------------------------------
AVERAGE REALIZED
METHANOL PRICE(2)
($/tonne) 328 460 305 279 283
($/gallon) 0.99 1.38 0.92 0.84 0.85
PER SHARE
INFORMATION
($ per share)
Basic net income 4.43 1.62 1.05 0.75 1.02
Diluted net income 4.41 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
Methanex (NASDAQ:MEOH)
Historical Stock Chart
From Jun 2024 to Jul 2024
Methanex (NASDAQ:MEOH)
Historical Stock Chart
From Jul 2023 to Jul 2024
