For the fourth quarter of 2008, Methanex (TSX: MX)(NASDAQ:
MEOH)(SANTIAGO: Methanex) reported Adjusted EBITDA(1) of negative
$12.4 million after recording a $33 million pre-tax charge to
write-down inventories to net realizable value and a net loss of
$3.1 million ($0.03 per share on a diluted basis). Also included in
earnings in the fourth quarter is the benefit of a reduction of $27
million to future tax liabilities related to a resolution of a tax
position. For the year ended December 31, 2008, Methanex reported
Adjusted EBITDA(1) of $334.0 million and net income of $172.3
million ($1.82 per share on a diluted basis).
Bruce Aitken, President and CEO of Methanex, commented, "The
slowdown in the global economy led to a significant decline in
methanol demand in the fourth quarter. This resulted in lower sales
volumes and a sharp drop in methanol prices which triggered a
write-down in the value of our inventories. These factors
contributed to significantly lower earnings in the fourth
quarter."
Mr. Aitken added, "However, with the slowdown in demand, supply
has also reacted quickly. Many plants, particularly in China, are
either operating at lower rates or have shut down and this has
provided some stability to pricing. Overall demand remains
constrained and we expect that any recovery in demand is dependant
on a more positive global economic outlook."
Mr. Aitken concluded, "Despite reporting losses in the fourth
quarter, we generated $51 million in cash flow from operations
during the quarter and we continue to be in a strong financial
position to endure the current weak economic environment. With
US$328 million of cash on hand at the end of the quarter, a strong
balance sheet, no near term refinancing requirements and a US$250
million undrawn credit facility, we believe we are well positioned
to meet our financial commitments through this period of
uncertainty and continue to invest to grow the Company."
A conference call is scheduled for Thursday, January 29, 2009 at
10:30 am EST (7:30 am PST) to review these fourth quarter results.
To access the call, dial the Telus Conferencing operator ten
minutes prior to the start of the call at (416) 883-7132, or toll
free at (888) 205-4499. 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 668310. 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
This Fourth Quarter 2008 Management's Discussion and Analysis
contains forward-looking statements with respect to us and the
chemical industry. Statements that include the words "believes",
"expects", "may", "will", "should", "seeks", "intends", "plans",
"estimates", "anticipates", or the negative version of those words
or other comparable terminology and similar statements of a future
or forward-looking nature identify forward-looking statements.
We believe that we have a reasonable basis for making such
forward-looking statements. The forward-looking statements in this
document are based on our experience, our perception of trends,
current conditions and expected future developments as well as
other factors. 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.
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,
including the on-time and on-budget completion of our new methanol
joint venture project in Egypt, the ability to successfully carry
out corporate initiatives and strategies, conditions in the
methanol and other industries, fluctuations in supply, demand and
price for methanol and its derivatives, including demand for
methanol for energy uses, the price of oil, the success of natural
gas exploration and development activities in southern Chile and
New Zealand and our ability to obtain any additional gas in those
regions on commercially acceptable terms, actions of competitors
and suppliers, actions of governments and governmental authorities,
changes in laws or regulations in foreign jurisdictions, world-wide
economic conditions and other risks described in our 2007
Management's Discussion & Analysis and this Fourth Quarter 2008
Management's Discussion and Analysis. In addition to the foregoing
risk factors, the current global financial crisis and its impact on
global economies has added additional risks and uncertainties
including changes in capital markets and corresponding effects on
the company's investments, our ability to access existing or future
credit and defaults by customers, suppliers or insurers.
Having in mind these and other factors, investors and other
readers are cautioned not to place undue reliance 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.
(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 Additional Information - Supplemental Non-GAAP Measures in the
attached Fourth 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 December 31, 2008
At January 28, 2009 the Company had 92,031,392 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
FOURTH QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS
Except where otherwise noted, all currency amounts are stated in
United States dollars.
This Fourth Quarter 2008 Management's Discussion and Analysis
dated January 28, 2009 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 Years Ended
----------------------------- -------------------
($ millions, except Dec 31 Sep 30 Dec 31 Dec 31 Dec 31
where noted) 2008 2008 2007 2008 2007
---------------------------------------------------- -------------------
Sales volumes
(thousands of tonnes)
Produced methanol 829 946 997 3,363 4,569
Purchased methanol 435 429 421 2,074 1,453
Commission sales (1) 134 172 195 617 590
--------------------------------------------------------------------------
Total sales volumes 1,398 1,547 1,613 6,054 6,612
Methanex average
non-discounted
posted price
($ per tonne) (2) 388 499 637 526 451
Average realized price
($ per tonne) (3) 321 413 514 424 375
Adjusted EBITDA (4) (12.4) 140.4 270.3 334.0 652.3
Cash flows from
operating activities 51.1 129.1 79.9 325.1 527.3
Cash flows from
operating activities
before working
capital (4)(5) (33.2) 104.9 187.8 242.5 493.9
Operating income
(loss) (4) (38.8) 109.2 241.3 226.8 539.9
Net income (loss) (3.1) 70.9 171.7 172.3 375.7
Basic net income
(loss) per common
share (0.03) 0.76 1.74 1.82 3.69
Diluted net income
(loss) per common
share (0.03) 0.75 1.72 1.82 3.68
Common share
information (millions
of shares):
Weighted average
number of common
shares 92.6 93.9 98.9 94.5 101.7
Diluted weighted
average number of
common shares 92.7 94.3 99.6 94.9 102.1
Number of common
shares outstanding,
end of period 92.0 93.4 98.3 92.0 98.3
--------------------------------------------------------------------------
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 Additional Information -
Supplemental Non-GAAP Measures for a description of each non-GAAP
measure and a reconciliation to the most comparable GAAP measure.
Included in Adjusted EBITDA for the fourth quarter of 2008 is a pre-tax
charge of $33 million to write-down inventory to estimated net
realizable value at December 31, 2008.
5 Represents cash flows from operating activities before changes in
non-cash working capital.
PRODUCTION SUMMARY
(thousands Annual 2008 2007 Q4 2008 Q3 2008 Q4 2007
of tonnes) Capacity Production Production Production Production Production
------------------------------------------ --------------------------------
Chile I,
II, III
and IV 3,840 1,088 1,841 272 246 288
Titan 850 871 861 225 200 220
Atlas
(63.1%
interest) 1,073 1,134 982 269 284 278
New
Zealand(1) 1,430 570 435 200 126 75
------------------------------------------ --------------------------------
7,193 3,663 4,119 966 856 861
------------------------------------------ --------------------------------
1 In early October 2008, we restarted one of our two idled 900,000 tonne
per year facilities at our Motunui site in New Zealand and we shutdown
our 530,000 tonne Waitara Valley facility.
Chile
Our methanol facilities in Chile produced 272,000 tonnes during
the fourth quarter of 2008 compared with 246,000 tonnes during the
third quarter of 2008. We have natural gas supply contracts for
approximately 60% of our requirements for our production facilities
in Chile with suppliers in Argentina with the remaining natural gas
supply coming from 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).
We believe the solution to the issue of natural gas supply for
our Chile operations is 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 in southern Chile 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 which is expected in the first half of
2009. We have invested $42 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 $9 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 to
increase its deliveries of natural gas to our plants and during the
fourth quarter of 2008 approximately 25% of total production at our
Chile facilities was produced with natural gas from the Fell
block.
We continue to pursue other investment opportunities 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. Under
the terms of the agreements from the bidding round there are
minimum investment commitments. Planning and exploration activities
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 represent over 2.0 million
tonnes of low cost annual capacity. These methanol facilities
continue to operate well and operated at or above design capacity
during the fourth quarter of 2008. Our methanol facilities in
Trinidad produced a total of 494,000 tonnes during the fourth
quarter of 2008 compared with 484,000 tonnes during the third
quarter of 2008.
New Zealand
Our New Zealand facilities produced 200,000 tonnes during the
fourth quarter of 2008 compared with 126,000 tonnes during third
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
shut down our smaller scale 530,000 tonne Waitara Valley facility.
We have the flexibility to operate the Motunui plant or the Waitara
Valley plant or both depending on methanol 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 fourth quarter of 2008, we recorded Adjusted EBITDA of
negative $12.4 million after recording a $33 million pre-tax charge
to write-down inventories to net realizable value and a net loss of
$3.1 million ($0.03 per share on a diluted basis). Also included in
earnings for the fourth quarter of 2008 is the benefit of a
reduction of $27 million to future tax liabilities related to a
resolution of a tax position. This compares with Adjusted EBITDA of
$140.4 million and net income of $70.9 million ($0.75 per share on
a diluted basis) for the third quarter of 2008 and Adjusted EBITDA
of $270.3 million and net income of $171.7 million ($1.72 per share
on a diluted basis) for the fourth quarter of 2007. For the year
ended December 31, 2008, we recorded Adjusted EBITDA of $334.0
million and net income of $172.3 million ($1.82 per share on a
diluted basis). This compares with Adjusted EBITDA of $652.3
million and net income of $375.7 million ($3.68 per share on a
diluted basis) during the same period in 2007.
During the fourth quarter of 2008, as a result of the major
slowdown in the global economy there was a significant reduction in
global demand for methanol and an increase in global inventories.
This impacted our business through lower sales volumes and lower
methanol pricing during the fourth quarter of 2008 and into early
2009. In addition, these factors resulted in a pre-tax charge to
earnings of $33 million related to a write-down of our inventory
value to estimated net realizable value at December 31, 2008. Refer
to our discussion of changes in Adjusted EBITDA below for more
details.
Adjusted EBITDA
The increase (decrease) in Adjusted EBITDA resulted from changes
in the following:
Q4 2008 Q4 2008 YTD Q4 2008
compared with compared with compared with
($ millions) Q3 2008 Q4 2007 YTD Q4 2007
--------------------------------------------------------------------------
Average realized price $ (74) $ (150) $ 118
Sales volumes (27) (51) (210)
Total cash costs (1) 3 12 (73)
Inventory write-down charge (33) (33) (33)
Purchased methanol margin (22) (61) (120)
--------------------------------------------------------------------------
$ (153) $ (283) $ (318)
--------------------------------------------------------------------------
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 Years Ended
($ per tonne, ----------------------------------- --------------------
except where Dec 31 Sep 30 Dec 31 Dec 31 Dec 31
noted) 2008 2008 2007 2008 2007
--------------------------------------------------- --------------------
Methanex average
non-discounted
posted price (1) 388 499 637 526 451
Methanex
average realized
price (2) 321 413 514 424 375
Average discount 17% 17% 19% 19% 17%
--------------------------------------------------- --------------------
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. For the purposes of our Adjusted
EBITDA analysis, we analyze changes in our average realized price for
sales of our produced methanol and this price 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.
We entered the fourth quarter of 2008 in a balanced methanol
market environment and our average non-discounted posted price for
October was approximately $450 per tonne. During the fourth quarter
of 2008, there was a major slowdown in the global economy which
resulted in a sudden and significant reduction in global methanol
demand and an increase in global inventories. As a result, there
was a decrease in contract methanol pricing during the fourth
quarter of 2008 and our average realized price for the fourth
quarter of 2008 was $321 per tonne compared with $413 per tonne for
the third quarter of 2008 and $514 per tonne for the fourth quarter
of 2007. The change in our average realized price for produced
methanol for the fourth quarter of 2008 decreased our Adjusted
EBITDA by $74 million compared with the third quarter of 2008 and
by $150 million compared with the fourth quarter of 2007.
For the year ended December 31, 2008, our average realized price
was $424 per tonne compared with $375 per tonne in 2007. The change
in our average realized price for produced methanol for the year
ended December 31, 2008 compared with 2007 increased our Adjusted
EBITDA by $118 million. For the year ended December 31, 2008, sales
under contracts where pricing is fixed or linked to our costs plus
a margin represented a higher proportion of our produced methanol
sales volumes compared with 2007. As a result, the increase in
Adjusted EBITDA as a result of the change in our average realized
price for produced methanol is lower than would be determined using
the change in the Methanex average realized price disclosed
above.
Sales volumes of produced methanol
Sales volumes of produced methanol for the fourth quarter of
2008 were lower by 117,000 tonnes compared with the third quarter
of 2008 and this decreased Adjusted EBITDA by $27 million.
Sales volumes of produced methanol for the fourth quarter of
2008 and year ended December 31, 2008 were lower by 168,000 tonnes
and 1,206,000 tonnes, respectively, compared with the same periods
in 2007 primarily as a result of lower production at our Chile
facilities and timing of inventory flows during 2008. Lower sales
volumes for these periods decreased Adjusted EBITDA by $51 million
and $210 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 pre-determined prices
at the time of production. Accordingly, the changes in Adjusted
EBITDA as a result of changes in natural gas costs will depend
heavily on the timing of inventory flows.
Total cash costs for the fourth quarter of 2008 were lower than
in the third quarter of 2008 by $3 million. The change in cash
costs was a result of lower natural gas costs for produced
methanol, lower ocean freight costs as a result of lower fuel
costs, and a decrease to our global site restoration provision
which we review on an annual basis. As a result of decreases in our
share price, we recorded a recovery of stock-based compensation
expense during the third quarter of 2008 and fourth quarter of
2008. The recovery of stock-based compensation was higher in the
third quarter of 2008 compared with the fourth quarter of 2008.
This change partially offset the lower cash costs described
above.
Total cash costs for the fourth quarter of 2008 were lower than
in the fourth quarter of 2007 by $12 million. The change in cash
costs was a result of lower stock-based compensation expense as a
result of changes in our share price, lower ocean freight as a
result of lower fuel costs, lower insurance and other fixed costs
at our Chile facilities, and the decrease to our global site
restoration provision. Partially offsetting these lower cash costs
during the fourth quarter of 2008 compared with the fourth quarter
of 2007 were higher natural gas costs as a result of timing of
inventory flows and increased sales of New Zealand production.
Total cash costs for the year ended December 31, 2008 were
higher than the same period in 2007 by $73 million. The change in
cash costs was primarily a result of higher natural gas costs and
other costs for produced methanol as a result of higher methanol
pricing in 2008. Other changes in cash costs for the year ended
December 31, 2008 compared with 2007 were higher ocean freight and
other logistics costs primarily as a result of higher fuel costs
which were offset by lower selling, general and administrative
expenses as a result of the impact of changes in our share price on
stock-based compensation expense.
Inventory write-down charge
We record inventory at lower of cost and estimated net
realizable value. The carrying value of our inventory, for both
produced methanol as well as methanol we purchase from others, will
reflect methanol pricing at the time of production or purchase and
this will differ from methanol pricing at period end. Methanol
prices fell sharply in late 2008 and early 2009 and we recorded a
pre-tax charge to earnings of $33 million to write-down the
carrying value of inventory to estimated net realizable value at
December 31, 2008.
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.
This provides us with flexibility and certainty in managing our
supply chain while continuing 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 and recorded a total cash margin of $39 million for
the year ended December 31, 2007. We commenced 2008 in this very
high methanol price environment and methanol pricing moderated
during first half of 2008 and then sharply decreased at the end of
the fourth quarter of 2008 as a result of the slowdown in the
global economy. During the fourth quarter of 2008 and year ended
December 31, 2008, we recorded negative cash margin on sale of
purchased methanol of $26 million and $81 million,
respectively.
Depreciation and Amortization
Depreciation and amortization was $26 million for the fourth
quarter of 2008 compared with $31 million for the third quarter of
2008. For the fourth quarter of 2008 and the year ended December
31, 2008, depreciation and amortization was $26 million and $107
million, respectively, compared with $29 million and $112 million,
respectively, for the same periods in 2007. The decrease in
depreciation and amortization for the fourth quarter of 2008 and
the year ended December 31, 2008 compared with all periods is
primarily due to lower sales volumes of produced methanol which
includes depreciation charges.
Interest Expense
Three Months Ended Years Ended
----------------------------------- --------------------
Dec 31 Sep 30 Dec 31 Dec 31 Dec 31
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------- --------------------
Interest
expense before
capitalized
interest $ 14 $ 13 $ 13 $ 53 $ 48
Less
capitalized
interest (5) (4) (2) (15) (4)
-------------------------------------------------- --------------------
Interest
expense $ 9 $ 9 $ 11 $ 38 $ 44
-------------------------------------------------- --------------------
Interest expense before capitalized interest for the fourth
quarter of 2008 was $14 million compared with $13 million for the
third quarter of 2008 and $13 million for the fourth quarter of
2007. Interest expense before capitalized interest for the year
ended December 31, 2008 was $53 million compared with $48 million
for the same period in 2007. In May 2007, we reached financial
close and secured limited recourse debt of $530 million for our
joint venture project to construct a 1.3 million tonne per year
methanol facility in Egypt. Interest costs related to this project
have been capitalized since that date.
Interest and Other Income
Three Months Ended Years Ended
---------------------------------- --------------------
Dec 31 Sep 30 Dec 31 Dec 31 Dec 31
($ millions) 2008 2008 2007 2008 2007
-------------------------------------------------- --------------------
Interest and
other income
(expense) $ (2) $ 1 $ 3 $ 11 $ 27
-------------------------------------------------- --------------------
Interest and other income for the fourth quarter of 2008 was an
expense of $2 million compared with income of $1 million for the
third quarter of 2008. The decrease in interest and other income
during the fourth quarter of 2008 compared with the third quarter
of 2008 was primarily due to the impact of changes in foreign
exchange gains and losses.
Interest and other income for the fourth quarter of 2008 and
year ended December 31, 2008 decreased by $5 million and $16
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 earned on cash balances during 2008
and the impact of changes in foreign exchange gains and losses.
Income Taxes
For the year ended December 31, 2008, the effective tax rate was
13% compared with 28% for 2007. The decrease in the effective tax
rate for 2008 compared with 2007 is primarily attributed to the
resolution of a tax position during the fourth quarter of 2008 that
resulted in a reduction of $27 million to future income tax
liabilities.
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 entered the fourth quarter with healthy methanol demand and a
balanced methanol market environment and our average non-discounted
posted price across the major regions was approximately $450 per
tonne. During the fourth quarter of 2008, the global financial
crisis and weak economic environment led to a major reduction in
global demand for most traditional methanol derivatives (which make
up approximately three quarters of global methanol demand). While
there has been some softness in methanol demand into DME, overall
demand into energy related derivatives, including MTBE, have
remained relatively stable. Overall, we estimate global methanol
demand declined by about 15% in the fourth quarter compared to the
third quarter and we estimate total global demand is currently
approximately 35 million tonnes measured on an annualized basis. In
reaction to this decrease in demand, many high cost methanol plants
have been operating at lower rates or have shut down, particularly
in China, where we estimate approximately 6 million tonnes of
annualized methanol production shut down during the fourth quarter.
Net imports into China have increased to displace some of the high
cost domestic production that has been shut down. In reaction to
this decrease in demand, there was a significant decrease in spot
and contract methanol pricing during the fourth quarter and at the
beginning of the first quarter of 2009. In January, our average
non-discounted price across all of the major regions is
approximately $220 per tonne.
Methanex Non-Discounted Regional Posted Prices (1)
Jan Dec Nov Oct
(US$ per tonne) 2009 2008 2008 2008
---------------------------------------------------------------
United States 233 333 466 499
Europe (2) 220 426 426 426
Asia 200 285 385 450
---------------------------------------------------------------
1 Discounts from our posted prices are offered to customers
based on various factors.
2 EUR 159 for Q1 2009 (Q4 2008 - EUR 295) converted to United
States dollars.
---------------------------------------------------------------
The next increments of world scale capacity additions outside of
China are two 1.7 million tonne per year plants in Malaysia and
Iran. The Malaysian plant is in the process of starting up and we
expect product from this plant to be available during the first
quarter of 2009. We expect product from the Iranian plant to be
available to the market in the first half of 2009.
The global financial crisis and weak economic environment poses
significant uncertainty for our business and the future demand for
methanol. Methanol demand into traditional derivatives is
correlated to industrial production and we believe that methanol
demand into traditional derivatives should improve when the macro
economic environment improves. Over the past two years, high energy
prices have driven demand for methanol into emerging energy
applications such as gasoline blending and DME, primarily in China.
While demand into these derivatives in China has remained steady
during the recent decline in energy prices, we believe demand
potential into these emerging energy derivatives will be stronger
in a higher energy price environment.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities in the fourth quarter of
2008 were $51 million compared with $80 million for the same period
in 2007. The change in cash flows for the fourth quarter of 2008
compared with the fourth quarter of 2007 is primarily a result of
lower earnings and the changes in net working capital position. For
the fourth quarter of 2008 we had a net working capital inflow of
$84 million compared with a net working capital outflow of $108
millon for the fourth quarter of 2007. These changes in net working
capital were primarily driven by the impact of changes in methanol
pricing and its impact on payables, receivables, and inventory
during the period.
For the fourth quarter of 2008, we repurchased 1.4 million
common shares at an average price of US$12.39, totaling $17
million, under a normal course issuer bid that expires May 19, 2009
and allows us to repurchase for cancellation up to 7.9 million
common shares. For the year ended December 31, 2008, we repurchased
a total of 6.5 million common shares at an average price of
US$23.04 per share, totaling $150 million, inclusive of 4.3 million
common shares repurchased in 2008 under a normal course issuer bid
that expired May 16, 2008.
During the fourth quarter of 2008 we paid a quarterly dividend
of US$0.155 per share, or $14 million. For the year ended December
31, 2008 we paid total dividends of US$0.605 per share, or $57
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 fourth quarter of 2008, total plant and equipment
construction costs related to our project in Egypt were $109
million. EMethanex has limited recourse debt of $530 million. As at
December 31, 2008, a total of $321 million of this limited recourse
debt was drawn with $68 million being drawn during the fourth
quarter of 2008. 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 $320 million. Our
60% share of future equity contributions, excluding financing costs
and working capital, over the next two years is estimated to be
approximately $90 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 $42 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 which is expected during the first half of 2009.
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 December
31, 2008 was $328 million and we have a strong balance sheet, no
near term re-financing requirements, and 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 for current
operations, is currently estimated to total approximately $100
million for the period to the end of 2011. Of this amount,
approximately $40 million relates to costs for major maintenance
and turnarounds for our Atlas and Titan facilities in Trinidad
scheduled for 2009.
We believe we are well positioned to meet our financial
commitments in this time of economic uncertainty and continue to
invest to grow the Company.
The credit ratings for our unsecured notes at December 31, 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 significant uncertainty caused by the
global economic slowdown and its impact on our business. The
significant slowdown in the global economy that was seen in the
fourth quarter of 2008 has persisted into the first quarter of 2009
and it is uncertain how long the current weak economic environment
will last or how severe it may become. These global economic
conditions materially affect both the supply and demand for
methanol and the price at which methanol is sold. The degree to
which our business is impacted is dependent upon the duration and
severity of these economic conditions.
We do not expect these conditions to materially improve in the
first quarter of 2009 and we expect global demand for methanol in
the first quarter of 2009 to be similar to levels seen in the
fourth quarter of 2008.
We have recently embarked upon a broad corporate cost saving
plan. This plan includes reviewing our operating costs and
cancelling or postponing almost all discretionary capital
spending.
In January 2009, our average non-discounted price across all of
the major regions is approximately $220 per tonne. We currently
believe that methanol prices should remain relatively stable during
the first quarter. However, 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 and investing to grow the
Company.
CONTROLS AND PROCEDURES
For the three months ended December 31, 2008, no changes were
made in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
ADDITIONAL INFORMATION - SUPPLEMENTAL NON-GAAP MEASURES
In addition to providing measures prepared in accordance with
Canadian generally accepted accounting principles (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 Years Ended
---------------------------------- ---------------------
Dec 31 Sep 30 Dec 31 Dec 31 Dec 31
($ thousands) 2008 2008 2007 2008 2007
-------------------------------------------------- ---------------------
Cash flows from
operating
activities $ 51,147 $ 129,099 $ 79,911 $ 325,053 $ 527,335
Add (deduct):
Changes in
non-cash
working capital (84,377) (24,183) 107,923 (82,532) (33,396)
Other cash
payments 545 435 11,938 3,101 16,824
Stock-based
compensation
recovery
(expense) 1,155 5,870 (6,755) (2,811) (22,410)
Other non-cash
items 2,937 (685) (3,105) (2,797) (13,574)
Interest expense 8,675 9,444 10,878 38,439 43,911
Interest and
other income 1,823 (615) (2,583) (10,626) (26,862)
Current income
taxes 5,697 21,050 72,139 66,148 160,514
-------------------------------------------------- ---------------------
Adjusted EBITDA $ (12,398) $ 140,415 $ 270,346 $ 333,975 $ 652,342
-------------------------------------------------- ---------------------
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 Dec 31 Sep 30 Jun 30 Mar 31
per share amounts) 2008 2008 2008 2008
---------------------------------------------------------------------------
Revenue $ 408,384 $ 569,876 $ 600,025 $ 735,934
Net income (loss) (3,063) 70,931 38,945 65,484
Basic net income (loss)
per common share (0.03) 0.76 0.41 0.67
Diluted net income (loss)
per common share (0.03) 0.75 0.41 0.67
---------------------------------------------------------------------------
Three Months Ended
----------------------------------------------
($ thousands, except Dec 31 Sep 30 Jun 30 Mar 31
per share amounts) 2007 2007 2007 2007
---------------------------------------------------------------------------
Revenue $ 731,057 $ 395,118 $ 466,414 $ 673,932
Net income 171,697 23,610 35,654 144,706
Basic net income per
common share 1.74 0.24 0.35 1.38
Diluted net income per
common share 1.72 0.24 0.35 1.37
---------------------------------------------------------------------------
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
This Fourth Quarter 2008 Management's Discussion and Analysis
contains forward-looking statements with respect to us and the
chemical industry. Statements that include the words "believes",
"expects", "may", "will", "should", "seeks", "intends", "plans",
"estimates", "anticipates", or the negative version of those words
or other comparable terminology and similar statements of a future
or forward-looking nature identify forward-looking statements.
We believe that we have a reasonable basis for making such
forward-looking statements. The forward-looking statements in this
document are based on our experience, our perception of trends,
current conditions and expected future developments as well as
other factors. 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.
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,
including the on-time and on-budget completion of our new methanol
joint venture project in Egypt, the ability to successfully carry
out corporate initiatives and strategies, conditions in the
methanol and other industries, fluctuations in supply, demand and
price for methanol and its derivatives, including demand for
methanol for energy uses, the price of oil, the success of natural
gas exploration and development activities in southern Chile and
New Zealand and our ability to obtain any additional gas in those
regions on commercially acceptable terms, actions of competitors
and suppliers, actions of governments and governmental authorities,
changes in laws or regulations in foreign jurisdictions, world-wide
economic conditions and other risks described in our 2007
Management's Discussion & Analysis and this Fourth Quarter 2008
Management's Discussion and Analysis. In addition to the foregoing
risk factors, the current global financial crisis and its impact on
global economies has added additional risks and uncertainties
including changes in capital markets and corresponding effects on
the company's investments, our ability to access existing or future
credit and defaults by customers, suppliers or insurers.
Having in mind these and other factors, investors and other
readers are cautioned not to place undue reliance 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
In addition to the methanol we produce, we purchase methanol
produced by others under methanol offtake contracts and on the spot
market to meet customer requirements and support our marketing
efforts (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 Years Ended
-------------------------- ---------------------------
Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
--------------------------------------------------------------------------
Revenue $ 408,384 $ 731,057 $ 2,314,219 $ 2,266,521
Cost of sales and
operating expenses 387,409 460,711 1,946,871 1,614,179
Inventory
write-down (note 3) 33,373 - 33,373 -
Depreciation and
amortization 26,366 29,070 107,126 112,428
--------------------------------------------------------------------------
Operating income
(loss) before
undernoted items (38,764) 241,276 226,849 539,914
Interest expense
(note 7) (8,675) (10,878) (38,439) (43,911)
Interest and other
income (expense) (1,823) 2,583 10,626 26,862
--------------------------------------------------------------------------
Income (loss) before
income taxes (49,262) 232,981 199,036 522,865
Income tax
(expense) recovery:
Current (5,697) (72,139) (66,148) (160,514)
Future 51,896 10,855 39,410 13,316
--------------------------------------------------------------------------
46,199 (61,284) (26,738) (147,198)
--------------------------------------------------------------------------
Net income (loss) $ (3,063) $ 171,697 $ 172,298 $ 375,667
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net income (loss)
per common share:
Basic $ (0.03) $ 1.74 $ 1.82 $ 3.69
Diluted $ (0.03) $ 1.72 $ 1.82 $ 3.68
Weighted average
number of common
shares outstanding:
Basic 92,566,393 98,935,669 94,520,945 101,717,341
Diluted 92,682,793 99,616,275 94,913,956 102,129,929
Number of common
shares outstanding
at period end 92,031,392 98,310,254 92,031,392 98,310,254
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Balance Sheets (unaudited)
(thousands of U.S. dollars)
Dec 31 Dec 31
2008 2007
---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 328,430 $ 488,224
Receivables 213,419 401,843
Inventories 177,637 312,143
Prepaid expenses 16,840 20,889
---------------------------------------------------------------------
736,326 1,223,099
Property, plant and equipment (note 4) 1,924,258 1,542,100
Other assets 157,397 104,700
---------------------------------------------------------------------
$ 2,817,981 $ 2,869,899
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 235,369 $ 466,020
Current maturities on long-term debt
(note 6) 15,282 15,282
Current maturities on other long-term
liabilities 8,048 16,965
---------------------------------------------------------------------
258,699 498,267
Long-term debt (note 6) 772,021 581,987
Other long-term liabilities 97,441 74,431
Future income tax liabilities 299,192 338,602
Non-controlling interest 108,728 41,258
Shareholders' equity:
Capital stock 427,265 451,640
Contributed surplus 22,669 16,021
Retained earnings 871,984 876,348
Accumulated other comprehensive loss (40,018) (8,655)
---------------------------------------------------------------------
1,281,900 1,335,354
---------------------------------------------------------------------
$ 2,817,981 $ 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)
Number of
Common Capital Contributed
Shares Stock Surplus
--------------------------------------------------------------------------
Balance, December 31, 2006 105,800,942 $ 474,739 $ 10,346
Net income - - -
Compensation expense recorded
for stock options - - 9,343
Issue of shares on exercise of
stock options 552,175 9,520 -
Reclassification of grant date
fair value on exercise of
stock options - 3,668 (3,668)
Payments for shares repurchased (8,042,863) (36,287) -
Dividend payments - - -
Other comprehensive loss - - -
--------------------------------------------------------------------------
Balance, December 31, 2007 98,310,254 451,640 16,021
Net income - - -
Compensation expense recorded
for stock options - - 6,411
Issue of shares on exercise of
stock options 218,766 3,982 -
Reclassification of grant date
fair value on exercise of
stock options - 1,392 (1,392)
Payments for shares repurchased (5,132,878) (23,641) -
Dividend payments - - -
Other comprehensive loss - - -
--------------------------------------------------------------------------
Balance, September 30, 2008 93,396,142 433,373 21,040
Net loss - - -
Compensation expense recorded
for stock options - - 1,814
Issue of shares on exercise of
stock options 5,250 93 -
Reclassification of grant date
fair value on exercise of
stock options - 185 (185)
Payments for shares repurchased (1,370,000) (6,386) -
Dividend payments - - -
Other comprehensive loss - - -
--------------------------------------------------------------------------
Balance, December 31, 2008 92,031,392 $ 427,265 $ 22,669
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Accumulated
Other Total
Retained Comprehensive Shareholders'
Earnings Loss Equity
--------------------------------------------------------------------------
Balance, December 31, 2006 $ 724,166 $ - $ 1,209,251
Net income 375,667 - 375,667
Compensation expense recorded
for stock options - - 9,343
Issue of shares on exercise of
stock options - - 9,520
Reclassification of grant date
fair value on exercise of
stock options - - -
Payments for shares repurchased (168,440) - (204,727)
Dividend payments (55,045) - (55,045)
Other comprehensive loss - (8,655) (8,655)
--------------------------------------------------------------------------
Balance, December 31, 2007 876,348 (8,655) 1,335,354
Net income 175,361 - 175,361
Compensation expense recorded
for stock options - - 6,411
Issue of shares on exercise of
stock options - - 3,982
Reclassification of grant date
fair value on exercise of
stock options - - -
Payments for shares repurchased (109,239) - (132,880)
Dividend payments (42,568) - (42,568)
Other comprehensive loss - (5,111) (5,111)
--------------------------------------------------------------------------
Balance, September 30, 2008 899,902 (13,766) 1,340,549
Net loss (3,063) - (3,063)
Compensation expense recorded
for stock options - - 1,814
Issue of shares on exercise of
stock options - - 93
Reclassification of grant date
fair value on exercise of
stock options - - -
Payments for shares repurchased (10,590) - (16,976)
Dividend payments (14,265) - (14,265)
Other comprehensive loss - (26,252) (26,252)
--------------------------------------------------------------------------
Balance, December 31, 2008 $ 871,984 $ (40,018) $ 1,281,900
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (unaudited)
(thousands of U.S. dollars)
Three months ended Years ended
------------------------ ---------------------------
Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
--------------------------------------------------------------------------
Net income (loss) $ (3,063) $ 171,697 $ 172,298 $ 375,667
Other comprehensive
income (loss),
net of tax:
Change in fair
value of forward
exchange contracts
(note 13) (35) 79 9 (45)
Change in fair
value of interest
rate swap contracts
(note 13) (26,217) (6,534) (31,372) (8,610)
--------------------------------------------------------------------------
(26,252) (6,455) (31,363) (8,655)
--------------------------------------------------------------------------
Comprehensive
income (loss) $ (29,315) $ 165,242 $ 140,935 $ 367,012
--------------------------------------------------------------------------
--------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
Methanex Corporation
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars)
Three months ended Years ended
------------------------ ---------------------------
Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
--------------------------------------------------------------------------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss) $ (3,063) $ 171,697 $ 172,298 $ 375,667
Add (deduct)
non-cash items:
Depreciation and
amortization 26,366 29,070 107,126 112,428
Future income taxes (51,896) (10,855) (39,410) (13,316)
Stock-based
compensation
expense (1,155) 6,755 2,811 22,410
Other (2,937) 3,105 2,797 13,574
Other cash payments,
including stock-based
compensation (545) (11,938) (3,101) (16,824)
--------------------------------------------------------------------------
Cash flows from
operating activities
before undernoted (33,230) 187,834 242,521 493,939
Changes in non-cash
working capital
(note 11) 84,377 (107,923) 82,532 33,396
--------------------------------------------------------------------------
51,147 79,911 325,053 527,335
--------------------------------------------------------------------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Payments for shares
repurchased (16,976) (39,955) (149,856) (204,727)
Dividend payments (14,265) (13,768) (56,833) (55,045)
Proceeds from
limited recourse
debt (note 6) 68,000 35,000 204,000 131,574
Financing costs - - - (8,725)
Equity contribution
by non-controlling
interest 18,604 11,601 67,470 32,109
Repayment of limited
recourse debt (7,330) (7,328) (15,282) (14,344)
Proceeds on issue of
shares on exercise
of stock options 93 5,357 4,075 9,520
Changes in debt
service reserve
accounts 175 135 (1,820) 1,035
Repayment of other
long-term liabilities (1,340) (1,384) (10,454) (5,153)
--------------------------------------------------------------------------
46,961 (10,342) 41,300 (113,756)
--------------------------------------------------------------------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Property, plant
and equipment (18,654) (24,165) (96,956) (76,239)
Egypt plant under
construction (109,007) (87,804) (388,001) (201,922)
Dorado Riquelme
investment (note 15) (3,453) - (41,781) -
Other assets (7,045) (14,610) (26,307) (19,788)
Changes in non-cash
working capital
(note 11) 10,480 12,027 26,898 17,540
--------------------------------------------------------------------------
(127,679) (114,552) (526,147) (280,409)
--------------------------------------------------------------------------
Increase (decrease)
in cash and cash
equivalents (29,571) (44,983) (159,794) 133,170
Cash and cash
equivalents,
beginning of period 358,001 533,207 488,224 355,054
--------------------------------------------------------------------------
Cash and cash
equivalents,
end of period $ 328,430 $ 488,224 $ 328,430 $ 488,224
--------------------------------------------------------------------------
--------------------------------------------------------------------------
SUPPLEMENTARY CASH
FLOW INFORMATION
Interest paid $ 4,834 $ 5,641 $ 45,401 $ 38,454
Income taxes paid,
net of amounts
refunded $ 6,198 $ 41,176 $ 78,591 $ 144,169
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 at January 1, 2008. 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 months
and year ended December 31, 2008 was $375 million (2007 - $417
million) and $1,860 million (2007 - $1,497 million), respectively.
At December 31, 2008, the Company recorded a pre-tax charge to
earnings of $33.4 million to write-down inventories to the lower of
cost and estimated net realizable value.
4. Property, plant and equipment:
Accumulated Net Book
Cost Depreciation Value
--------------------------------------------------------------------------
December 31, 2008
Plant and equipment $ 2,544,163 $ 1,299,296 $ 1,244,867
Egypt plant under construction 615,784 - 615,784
Other 127,731 64,124 63,607
--------------------------------------------------------------------------
$ 3,287,678 $ 1,363,420 $ 1,924,258
--------------------------------------------------------------------------
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:
Dec 31 Dec 31
Consolidated Balance Sheets 2008 2007
--------------------------------------------------------------------------
Cash and cash equivalents $ 35,749 $ 20,128
Other current assets 59,435 107,993
Property, plant and equipment 249,609 263,942
Other assets 18,149 16,329
Accounts payable and accrued liabilities 19,927 56,495
Long-term debt, including
current maturities (note 6) 106,592 119,891
Future income tax liabilities 17,942 16,099
--------------------------------------------------------------------------
Three Months Ended Years Ended
------------------- --------------------
Consolidated Statements Dec 31 Dec 31 Dec 31 Dec 31
of Income 2008 2007 2008 2007
---------------------------------------------------- --------------------
Revenue $ 53,357 $ 114,324 $ 286,906 $ 258,418
Expenses 54,799 80,242 271,493 214,981
---------------------------------------------------- --------------------
Income (loss) before
income taxes (1,442) 34,082 15,413 43,437
Income tax expense (354) (5,902) (4,488) (9,458)
---------------------------------------------------- --------------------
Net income (loss) $ (1,796) $ 28,180 $ 10,925 $ 33,979
---------------------------------------------------- --------------------
Three Months Ended Years Ended
------------------- --------------------
Consolidated Statements Dec 31 Dec 31 Dec 31 Dec 31
of Cash Flows 2008 2007 2008 2007
---------------------------------------------------- --------------------
Cash inflows (outflows)
from operating activities $ 22,249 $ (818) $ 44,681 $ 40,317
Cash outflows from
financing activities (6,842) (6,881) (15,852) (12,997)
Cash outflows from
investing activities (1,921) (2,521) (2,977) (16,380)
---------------------------------------------------- --------------------
6. Long-term debt:
Dec 31 Dec 31
2008 2007
--------------------------------------------------------------------------
Unsecured notes
8.75% due August 15, 2012 $ 198,182 $ 197,776
6.00% due August 15, 2015 148,518 148,340
--------------------------------------------------------------------------
346,700 346,116
Atlas limited recourse debt facilities 106,592 119,891
Egypt limited recourse debt facilities 320,574 116,574
Other limited recourse debt facilities 13,437 14,688
--------------------------------------------------------------------------
787,303 597,269
Less current maturities (15,282) (15,282)
--------------------------------------------------------------------------
$ 772,021 $ 581,987
--------------------------------------------------------------------------
7. Interest expense:
Three Months Ended Years Ended
------------------- -------------------
Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
---------------------------------------------------- -------------------
Interest expense
before capitalized interest $ 14,083 $ 13,242 $ 53,778 $ 48,104
Less: capitalized interest
related to Egypt project (5,408) (2,364) (15,339) (4,193)
---------------------------------------------------- -------------------
Interest expense $ 8,675 $ 10,878 $ 38,439 $ 43,911
---------------------------------------------------- -------------------
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 months and year ended December 31, 2008, interest
costs related to this project of $5.4 million and $15.3 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 Years Ended
---------------------- -----------------------
Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
------------------------------------------------- -----------------------
Denominator for
basic net income
per common share 92,566,393 98,935,669 94,520,945 101,717,341
Effect of dilutive
stock options 116,400 680,606 393,011 412,588
------------------------------------------------- -----------------------
Denominator for
diluted net income
per common share 92,682,793 99,616,275 94,913,956 102,129,929
------------------------------------------------- -----------------------
9. Stock-based compensation:
a) Stock options:
(i) Incentive stock options:
Common shares reserved for outstanding incentive stock options
at December 31, 2008:
Options Denominated Options Denominated
in CAD in USD
------------------- -------------------
Weighted Weighted
Number Average Number Average
of Stock Exercise of Stock Exercise
Options Price Options Price
----------------------------------------------------- -------------------
Outstanding at December 31, 2007 104,450 $ 7.79 2,920,981 $ 21.17
Granted - - 1,088,068 28.40
Exercised (21,000) 9.59 (182,766) 19.76
Cancelled (7,000) 11.60 (77,916) 24.73
----------------------------------------------------- -------------------
Outstanding at September 30, 2008 76,450 $ 6.95 3,748,367 $ 23.27
Granted - - - -
Exercised - - (5,250) 17.85
Cancelled - - - -
----------------------------------------------------- -------------------
Outstanding at December 31, 2008 76,450 $ 6.95 3,743,117 $ 23.27
----------------------------------------------------- -------------------
Information regarding the incentive stock options outstanding at
December 31, 2008 is as follows:
Options Outstanding at Options Exercisable at
December 31, 2008 December 31, 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 1.6 76,450 $ 6.95 76,450 $ 6.95
--------------------------------------------------------------------------
Options
denominated
in USD
$6.45 to 11.56 4.0 187,550 $ 8.57 187,550 $ 8.57
$17.85 to 22.52 4.0 1,467,650 20.27 984,183 20.01
$23.92 to 28.43 5.7 2,087,917 26.71 323,560 24.95
--------------------------------------------------------------------------
4.9 3,743,117 $ 23.27 1,495,293 $ 19.65
--------------------------------------------------------------------------
(ii) Performance stock options:
As at December 31, 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 months and year ended December 31, 2008,
compensation expense related to stock options included in cost of
sales and operating expenses was $1.8 million (2007 - $2.2 million)
and $8.2 million (2007 - $9.3 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
December 31, 2008 are as follows:
Number of Number of Number of
Deferred Restricted Performance
Share Units Share Units Share Units
--------------------------------------------------------------------------
Outstanding at December 31, 2007 359,684 14,482 725,262
Granted 35,641 6,000 330,993
Granted in-lieu of dividends 7,681 358 18,136
Redeemed (3,083) - -
Cancelled - - (30,500)
--------------------------------------------------------------------------
Outstanding at September 30, 2008 399,923 20,840 1,043,891
Granted 5,931 - -
Granted in-lieu of dividends 5,541 179 15,156
Redeemed - (8,496) -
Cancelled - - (1,399)
--------------------------------------------------------------------------
Outstanding at December 31, 2008 411,395 12,523 1,057,648
--------------------------------------------------------------------------
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 December 31, 2008 was $17.6 million
compared with the recorded liability of $16.2 million. The
difference between the fair value and the recorded liability of
$1.4 million will be recognized over the weighted average remaining
service period of approximately 1.6 years.
For the three months and year ended December 31, 2008,
compensation expense related to deferred, restricted and
performance share units included a recovery in cost of sales and
operating expenses of $3.0 million (2007 - expense of $4.5 million)
and $5.4 million (2007 - expense of $13.1 million), respectively.
This included a recovery of $6.2 million (2007 - expense of $2.5
million) and a recovery of $17.4 million (2007 - expense of $3.5
million) for the three months and year ended December 31, 2008,
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 months and year
ended December 31, 2008 was $2.5 million (2007 - $1.6 million) and
$8.1 million (2007 - $6.9 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 months and year ended December 31, 2008 were
as follows:
Three Months Ended Years Ended
------------------------ ------------------------
Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
------------------------------------------------ ------------------------
Decrease (increase) in
non-cash working
capital:
Receivables $ 77,898 $ (190,066) $ 188,424 $ (35,456)
Inventories 68,625 (163,339) 134,506 (67,377)
Prepaid expenses 16,260 3,333 4,049 3,158
Accounts payable and
accrued liabilities (70,190) 255,472 (230,651) 156,041
------------------------------------------------ ------------------------
92,593 (94,600) 96,328 56,366
Adjustments for items
not having a cash
effect 2,264 (1,296) 13,102 (5,430)
------------------------------------------------ ------------------------
Changes in non-cash
working capital
having a cash
effect $ 94,857 $ (95,896) $ 109,430 $ 50,936
------------------------------------------------ ------------------------
These changes relate
to the following
activities:
Operating $ 84,377 $ (107,923) $ 82,532 $ 33,396
Investing 10,480 12,027 26,898 17,540
------------------------------------------------ ------------------------
Changes in non-cash
working capital $ 94,857 $ (95,896) $ 109,430 $ 50,936
------------------------------------------------ ------------------------
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.
Dec 31 Dec 31
2008 2007
--------------------------------------------------------------------------
Liquidity:
Cash and cash equivalents $ 328,430 $ 488,224
Undrawn Egypt limited recourse debt facilities 209,426 413,426
Undrawn credit facilities 250,000 250,000
--------------------------------------------------------------------------
Total Liquidity $ 787,856 $ 1,151,650
Capitalization:
Unsecured notes $ 346,700 $ 346,116
Limited recourse debt facilities, including
current portion 440,603 251,153
--------------------------------------------------------------------------
Total debt 787,303 597,269
Non-controlling interest 108,728 41,258
Shareholders' equity 1,281,900 1,335,354
--------------------------------------------------------------------------
Total capitalization $ 2,177,931 $ 1,973,881
Total debt to capitalization (1) 36% 30%
Net debt to capitalization (2) 25% 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, expires in
mid-2010 and is subject to certain financial covenants including an
EBITDA to 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:
Dec 31 Dec 31
2008 2007
--------------------------------------------------------------------------
Financial assets:
Held for trading financial assets:
Cash and cash equivalents $ 328,430 $ 488,224
Debt service reserve accounts included in
other assets 18,149 16,329
Loans and receivables:
Receivables 207,419 401,843
Dorado Riquelme investment included in other
assets (note 15) 42,123 -
GeoPark financing, including current portion 36,616 13,738
--------------------------------------------------------------------------
$ 632,737 $ 920,134
--------------------------------------------------------------------------
Financial liabilities:
Other financial liabilities:
Accounts payable and accrued liabilities $ 235,369 $ 466,020
Long-term debt, including current portion 787,303 597,269
Capital lease obligation included in other
long-term liabilities, including current
portion 20,742 24,676
Held for trading financial liabilities:
Derivative instruments designated as
cash flow hedges 38,100 8,749
Derivative instruments 1,771 955
--------------------------------------------------------------------------
$ 1,083,285 $ 1,097,669
--------------------------------------------------------------------------
At December 31, 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
average aggregated fixed rate of 4.8% plus a spread 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 December 31, 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 December 31, 2008, these interest
rate swap contracts had a negative fair value of $38.1 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 December 31, 2008, the
Company had outstanding forward exchange contracts designated as
cash flow hedges to sell a notional amount of 6.3 million euro in
exchange for US dollars. These euro contracts have a nil fair value
(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 December 31, 2008, the Company's derivative financial
instruments that have not been designated as cash flow hedges
include forward exchange contracts to purchase $8.9 million New
Zealand dollars at an average exchange rate of $0.7022 with a
negative fair value of $1.1 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 $0.6 million (December 31,
2007 - $1.0 million) recorded in other long-term liabilities. For
the three months ended December 31, 2008, the total change in fair
value of these derivative financial instruments was an increase of
$0.1 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.
Dec 31
Long-Term Debt 2008
--------------------------------------------------------------------------
Fixed interest rate debt:
Unsecured notes $ 346,700
Atlas limited recourse debt facilities (63.1%
proportionate share) 76,483
--------------------------------------------------------------------------
$ 423,183
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Variable interest rate debt:
Atlas limited recourse debt facilities (63.1%
proportionate share) $ 30,109
Egypt limited recourse debt facilities 320,574
Other limited recourse debt facilities 13,437
--------------------------------------------------------------------------
$ 364,120
--------------------------------------------------------------------------
--------------------------------------------------------------------------
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 an average fixed rate of 4.8%
plus a spread 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 $38.1 million as at December 31, 2008. The change in fair
value of the interest rate swaps assuming a 1% change in the
interest rates along the yield curve would result in a change of
approximately $15.5 million as of December 31, 2008.
For fixed interest rate debt, a 1% change in interest rates
would result in a change in fair value of the debt of approximately
$15.5 million. The fair value of variable interest rate debt
fluctuates primarily with changes in credit spreads. For variable
interest rate debt, a 1% change in credit spreads would result in a
change in fair value of the debt of approximately $13.5
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 December 31, 2008, we had a net working capital asset of
$41.8 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 December 31, 2008 the Company holds $328 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 or better than the stand-alone rating of the
counterparty. Historically trade credit losses have been minimal.
However, in the current economic environment the risk of trade
credit losses has increased.
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 December 31, 2008, the amount
contributed under the agreement was approximately $42 million,
which has been recorded in other assets. The arrangement is subject
to approval by the government of Chile and $33.5 million of the
amount contributed has been placed in escrow until final approval
is received. Additionally, the Company invested $8.6 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 months and years ended December 31, 2008 and 2007 are as
follows:
Three Months Ended Years Ended
------------------------ ------------------------
Dec 31 Dec 31 Dec 31 Dec 31
2008 2007 2008 2007
------------------------------------------------ ------------------------
Net income (loss) in
accordance with
Canadian GAAP $ (3,063) $ 171,697 $ 172,298 $ 375,667
Add (deduct)
adjustments for:
Depreciation and
amortization (a) (478) (478) (1,911) (1,911)
Stock-based
compensation (b) 200 (44) 347 277
Uncertainty in
income taxes (c) 1,154 (1,648) (2,892) (5,455)
Income tax effect
of above
adjustments (d) 167 167 669 669
------------------------------------------------ ------------------------
Net income (loss) in
accordance with U.S.
GAAP $ (2,020) $ 169,694 $ 168,511 $ 369,247
------------------------------------------------ ------------------------
Per share information
in accordance with
U.S. GAAP:
Basic net income
(loss) per share $ (0.02) $ 1.72 $ 1.78 $ 3.63
Diluted net income
(loss) per share $ (0.02) $ 1.70 $ 1.78 $ 3.62
------------------------------------------------ ------------------------
The significant differences between Canadian GAAP and U.S. GAAP
with respect to the Company's consolidated statements of
comprehensive income for the three months and years ended December
31, 2008 and 2007 are as follows:
Three Months Ended
---------------------------------------------------
December 31, 2008 Dec 31, 2007
------------------------------------- ------------
Canadian Adjust-
GAAP ments U.S. GAAP U.S. GAAP
------------------------------------------------------------ ------------
Net income (loss) $ (3,063) $ 1,043 $ (2,020) $ 169,694
Change in fair value
of forward exchange
contracts, net of tax (35) - (35) 79
Change in fair value
of interest rate swap,
net of tax (26,217) - (26,217) (6,534)
Change related to
pension, net of tax (e) - (3,858) (3,858) (1,018)
------------------------------------------------------------ ------------
Comprehensive income
(loss) $ (29,315) $ (2,815) $ (32,130) $ 162,221
------------------------------------------------------------ ------------
Years Ended
---------------------------------------------------
December 31, 2008 Dec 31, 2007
------------------------------------- ------------
Canadian Adjust-
GAAP ments U.S. GAAP U.S. GAAP
------------------------------------------------------------ ------------
Net income $ 172,298 $ (3,787) $ 168,511 $ 369,247
Change in fair value
of forward exchange
contracts, net of tax 9 - 9 (45)
Change in fair value
of interest rate swap,
net of tax (31,372) - (31,372) (8,610)
Change related to
pension, net of tax (e) - (3,381) (3,381) (346)
------------------------------------------------------------ ------------
Comprehensive income $ 140,935 $ (7,168) $ 133,767 $ 360,246
------------------------------------------------------------ ------------
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 $1.9 million (2007 - $1.9 million) was recorded for
the three months and year ended December 31, 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, a recovery to stock-based compensation of $0.2 million
(2007 - $0.04 million expense) and $0.3 million (2007 - $0.3
million recovery) was recorded for the three months and year ended
December 31, 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 income tax recovery of
$1.2 million (2007 - $1.6 million expense) and an income tax
expense of $2.9 million (2007 - $5.5 million expense) was recorded
for the three months and year ended December 31, 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 $0.7 million (2007 - $0.7
million) was recorded for the three months and year ended December
31, 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, a decrease to
other comprehensive income of $3.9 million (2007 - a reduction of
$1.0 million) and $3.4 million (2007 - a reduction of $0.3 million)
was recorded for the three months and year ended December 31, 2008,
respectively.
f) Interest in Atlas joint venture:
U.S. GAAP requires interests in joint ventures to be accounted
for using the equity method. Canadian GAAP requires proportionate
consolidation of interests in joint ventures. The Company has not
made an adjustment in this reconciliation for this difference in
accounting principles because the impact of applying the equity
method of accounting does not result in any change to net income or
shareholders' equity. This departure from U.S. GAAP is acceptable
for foreign private issuers under the practices prescribed by the
United States Securities and Exchange Commission.
Methanex Corporation
Quarterly History (unaudited)
2008 Q4 Q3 Q2 Q1 2007 Q4 Q3 Q2 Q1
-------------------- ------------------------------ -----------------------
METHANOL
SALES VOLUMES
(thousands
of tonnes)
Company
produced 3,363 829 946 910 678 4,569 997 1,073 1,360 1,139
Purchased
methanol 2,074 435 429 541 669 1,453 421 387 269 376
Commission
sales (1) 617 134 172 168 143 590 195 168 89 138
-------------------- ------------------------------ -----------------------
6,054 1,398 1,547 1,619 1,490 6,612 1,613 1,628 1,718 1,653
-------------------- ------------------------------ -----------------------
METHANOL
PRODUCTION
(thousands
of tonnes)
Chile 1,088 272 246 261 309 1,841 288 233 569 751
Titan,
Trinidad 871 225 200 229 217 861 220 191 225 225
Atlas,
Trinidad
(63.1%) 1,134 269 284 288 293 982 278 290 234 180
New
Zealand 570 200 126 124 120 435 75 122 120 118
-------------------- ------------------------------ -----------------------
3,663 966 856 902 939 4,119 861 836 1,148 1,274
-------------------- ------------------------------ -----------------------
AVERAGE
REALIZED
METHANOL
PRICE (2)
($/tonne) 424 321 413 412 545 375 514 270 286 444
($/gallon) 1.28 0.97 1.24 1.24 1.64 1.13 1.55 0.81 0.86 1.34
PER SHARE
INFORMATION
($ per share)
Basic net
income
(loss) $ 1.82 (0.03) 0.76 0.41 0.67 3.69 1.74 0.24 0.35 1.38
Diluted net
income
(loss) $ 1.82 (0.03) 0.75 0.41 0.67 3.68 1.72 0.24 0.35 1.37
1 Commission sales represent volumes marketed on a commission basis.
Commission income is included in revenue when earned.
2 Average realized price is calculated as revenue, net of commissions
earned, divided by the total sales volumes of produced and purchased
methanol.
Contacts: Jason Chesko Director, Investor Relations Methanex
Corporation 604 661 2600 or Toll Free: 1 800 661 8851 Website:
www.methanex.com
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