Income Taxes
A summary of our income taxes for the third quarter of 2022 compared to the second quarter of 2022 and the nine months ended September 30, 2022 compared to the same period in 2021 is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Three Months Ended June 30, 2022 |
| ($ millions except where noted) | Per consolidated statement of income | Adjusted 1, 2, 3, 4 | | Per consolidated statement of income | Adjusted 1, 2, 3, 4 |
| Net income before income tax | $ | 162 | | $ | 71 | | | $ | 176 | | $ | 124 | |
| Income tax expense | (34) | | (22) | | | (37) | | (40) | |
| Net income after income tax | $ | 128 | | $ | 49 | | | $ | 139 | | $ | 84 | |
| Effective tax rate | 21 | % | 31 | % | | 21 | % | 32 | % |
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
| ($ millions, except where noted) | Per consolidated statement of income | Adjusted 1, 2, 3, 4 | | Per consolidated statement of income | Adjusted 1, 2, 3, 4 |
| Net income before income tax | $ | 517 | | $ | 415 | | | $ | 423 | | $ | 391 | |
| Income tax expense | (113) | | (123) | | | (88) | | (116) | |
| Net income after income tax | $ | 404 | | $ | 292 | | | $ | 335 | | $ | 275 | |
| Effective tax rate | 22 | % | 30 | % | | 21 | % | 30 | % |
1 Adjusted net income before income tax reflects amounts required for the inclusion of 63.1% of Atlas income and 50% of Egypt, as well as amounts required to exclude the mark-to-market impact of share-based compensation expense or recovery and the mark-to-market impact of the Egypt gas contract revaluation. Beginning Q1 2022, Adjusted net income before tax also reflects MOL's 40% NCI interest in Waterfront Shipping, which did not apply to the comparative periods. The most directly comparable measure in the financial statements is net income before tax.
2 Adjusted income tax expense reflects amounts required for the inclusion of 63.1% of Atlas income and 50% of Egypt, as well as amounts required to exclude the tax impact of mark-to-market impact of share-based compensation expense or recovery and the mark-to-market impact of the Egypt gas contract revaluation, calculated at the appropriate applicable tax rate for their respective jurisdictions. Beginning Q1 2022, Adjusted net income before tax also reflects MOL's 40% NCI interest in Waterfront Shipping, which did not apply to the comparative periods. The most directly comparable measure in the financial statements is income tax expense.
3 Adjusted effective tax rate is a non-GAAP ratio and is calculated as adjusted income tax expense or recovery, divided by adjusted net income before tax.
4 Adjusted net income before income tax and Adjusted income tax expense are non-GAAP measures. Adjusted effective tax rate is a non-GAAP ratio. These do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. Management uses these to assess the effective tax rate. These measures and ratios are useful as they are a better measure of our underlying tax rate across the jurisdictions in which we operate.
We earn the majority of our income in Chile, Egypt, Trinidad, New Zealand, Canada, and the United States. Including applicable withholding taxes, the statutory tax rate applicable to Methanex in Chile is 35%, Egypt is 30%, Trinidad is 38%, New Zealand is 28%, Canada is 24.5% and the United States is 23%. We accrue for withholding taxes that will be incurred upon distributions from our subsidiaries when it is probable that the earnings will be repatriated. As the Atlas entity is accounted for using the equity method, any income taxes related to Atlas are included in earnings of associate and therefore excluded from total income taxes but included in the calculation of Adjusted net income.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 10
The effective tax rate based on Adjusted net income was 31% for the third quarter of 2022 and 32% for the second quarter of 2022. For the nine month periods ended September 30, 2022 and 2021, the effective tax rate based on Adjusted net income was 30%. Adjusted net income represents the amount that is attributable to Methanex shareholders and excludes the mark-to-market impact of share-based compensation and the impact of certain items associated with specific identified events. The effective tax rate differs from period to period depending on the source of earnings and the impact of foreign exchange fluctuations against the United States dollar.
The following table shows a reconciliation of Net income to Adjusted net income before tax, and of Income tax expense to Adjusted income tax expense:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| ($ millions except per share amounts and where noted) | Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Net income | $ | 128 | | $ | 87 | | | $ | 404 | | $ | 335 | |
| Adjusted for: | | | | | |
| Income tax expense | 34 | | 28 | | | 113 | | 88 | |
| Earnings from associate | (17) | | (21) | | | (58) | | (63) | |
| Share of earnings of associate's income before tax | 27 | | 34 | | | 93 | | 99 | |
| Net income before tax of non-controlling interests | (76) | | (21) | | | (113) | | (64) | |
| Mark-to-market impact of share-based compensation | (20) | | 33 | | | (19) | | (4) | |
| Mark-to-market impact of Egypt gas contract revaluation | (5) | | — | | | (5) | | — | |
| Adjusted net income before tax | $ | 71 | | $ | 140 | | | $ | 415 | | $ | 391 | |
| | | | | |
| Income tax expense | $ | (34) | | $ | (28) | | | $ | (113) | | $ | (88) | |
| Adjusted for: | | | | | |
| Inclusion of tax expense of associate | (10) | | (12) | | | (35) | | (35) | |
| Removal of tax expense of non-controlling interest | 17 | | 3 | | | 22 | | 9 | |
| Tax on mark-to-market impact of share-based compensation | 4 | | (4) | | | 2 | | (2) | |
| Tax on mark-to-market impact of Egypt gas contract revaluation | 1 | | — | | | 1 | | — | |
| Adjusted income tax expense | $ | (22) | | $ | (41) | | | $ | (123) | | $ | (116) | |
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 11
SUPPLY/DEMAND FUNDAMENTALS
Demand
Global methanol demand remained flat in the third quarter of 2022 compared to the second quarter of 2022. Demand from traditional chemical applications was slightly lower in the third quarter. Increased demand attributable to acetic acid plant restarts in North America was offset by other plant outages and logistics constraints across various downstream sectors, as well as a slowdown in demand growth primarily in Europe and China. Demand from the methanol-to-olefins ("MTO") sector was stable in the third quarter with the ramp up of the new Bohai Chemical MTO plant offsetting lower MTO operating rates in the quarter. Demand from other energy-related applications increased compared to the second quarter due to easing of COVID-19 restrictions in China.
Over the long term, we believe that traditional chemical demand for methanol, which represents over 50% of global methanol demand, is influenced by the strength of global and regional economies and industrial production levels. We believe that demand for energy-related applications will be influenced by energy prices, pricing of end products, and government policies that are playing an increasing role in encouraging new applications for methanol due to its emissions benefits as a fuel. Demand for methanol as marine fuel continues to grow with over ninety methanol dual-fuel vessels operating or on order representing a potential 2.0 million tonnes of annual methanol demand. The future operating rates and methanol consumption from MTO producers will depend on a number of factors, including the pricing for their various final products, the degree of downstream integration of these units with other products, the impact of olefin industry feedstock costs, including naphtha, on relative competitiveness and plant maintenance schedules.
Supply
Global methanol operating rates decreased in the third quarter of 2022 due to extended turnarounds and planned and unplanned outages.
We expect most large-scale capacity additions to be in North America, the Middle East and Asia over the next few years. In North America, we are building a 1.8 million tonne plant, the Geismar 3 project, which will be our third plant in Louisiana, with first methanol production expected in the fourth quarter of 2023. In Iran, the 1.8 million tonne Dena plant is under construction which is scheduled to be completed in the next few years. The completion of major projects as well as ongoing plant operating rates in Iran continue to be challenged due to the impact of ongoing sanctions, plant technical issues as well as ongoing natural gas constraints (particularly in the winter months). In Malaysia, a 1.8 million tonne plant is under construction with a scheduled start up in 2024. In China, there are planned capacity additions over the near-to-medium term which we expect will be somewhat offset by the closure of some small-scale, inefficient and older plants. New capacity built in China will likely be consumed in that country.
Methanol Price
Methanol prices decreased in the third quarter. Our average realized price in the third quarter of 2022 was $377 per tonne compared to $422 per tonne in the second quarter of 2022.
Future methanol prices will depend on the strength of the global economy, industry operating rates, global energy prices, new supply additions and the strength of global demand.
The following table outlines our recent regional non-discounted posted prices. Methanol is a global commodity and future methanol prices are directly impacted by changes in methanol supply and demand. Based on the diversity of end products in which methanol is used, demand for methanol is driven by a number of factors including: strength of global and regional economies, industrial production levels, energy prices, pricing of end products and government regulations and policies. Methanol industry supply is impacted by the cost of production, methanol industry operating rates and new methanol industry capacity additions.
| | | | | | | | | | | | | | | | | | | | |
Methanex Non-Discounted Regional Posted Prices 1 |
| (US$ per tonne) | Nov 2022 | Oct 2022 | Sep 2022 | Aug 2022 | Jul
2022 | | | |
| North America | 585 | | 585 | | 585 | | 595 | | 605 | | | | |
Europe 2 | 505 | | 505 | | 570 | | 570 | | 570 | | | | |
| Asia Pacific | 410 | | 410 | | 410 | | 420 | | 450 | | | | |
| China | 395 | | 395 | | 375 | | 375 | | 410 | | | | |
1 Discounts from our posted prices are offered to customers based on various factors.
2 €510 for Q4 2022 (Q3 2022 – €555) converted to United States dollars.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 12
LIQUIDITY AND CAPITAL RESOURCES
We operate in a highly competitive commodity industry and therefore are committed to maintaining a strong balance sheet and financial flexibility. At September 30, 2022, our cash balance was $962 million including non-controlling interest portion of $82 million but excluding our share of cash held by the Atlas joint venture of $11 million. 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. We also have two undrawn credit facilities, a $300 million construction credit facility specifically related to the Geismar 3 project and a $300 million revolving credit facility providing financial flexibility.
A summary of our sources and uses of cash for the three and nine month periods ended September 30, 2022, compared to the same period in 2021, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| ($ millions, except as otherwise noted) | Sep 30
2022 | Sep 30
2021 | Variance | | Sep 30
2022 | Sep 30
2021 | Variance |
| Cash provided by operating activities | $ | 326 | | $ | 301 | | $ | 25 | | | $ | 757 | | $ | 711 | | $ | 46 | |
| Cash used in financing activities | (91) | | (74) | | (17) | | | (316) | | (423) | | 107 | |
| Cash used in investing activities | (151) | | (58) | | (93) | | | (411) | | (189) | | (222) | |
| Increase in cash and cash equivalents | $ | 84 | | $ | 169 | | $ | (85) | | | $ | 30 | | $ | 99 | | $ | (69) | |
Cash flows from operating activities in the third quarter of 2022 were $326 million compared to $301 million for the third quarter of 2021. Cash flows from operating activities were higher in the third quarter of 2022 compared to the third quarter of 2021 due to changes in working capital including the timing of tax payments. Cash flows from operating activities in the nine months ended September 30, 2022 were $757 million compared with $711 million for the same period in 2021, and were higher primarily as a result of higher methanol pricing and higher earnings.
Cash used in financing activities in the third quarter of 2022 was $91 million, which, in addition to regular lease and interest payments, included higher amounts paid to repurchase shares under our normal course issuer bid and a higher dividend to shareholders compared to the third quarter of 2021. Cash used in financing activities in the third quarter of 2021 was $74 million, primarily relating to regular lease and interest payments as well as long-term debt repayments and issuances. Cash used in financing activities for the nine months ended September 30, 2022 was $316 million compared to $423 million for the same period in 2021, and were lower as 2021 included the repayment of the G3 construction credit facility.
In July 2022, we increased the quarterly dividend by 20% to $0.175 per common share for a total of $12.3 million paid during the third quarter of 2022.
On July 26, 2022 we completed the normal course issuer bid initiated on September 24, 2021, repurchasing 6,094,171 common shares for a total cost of $282 million. On September 21, 2022 we announced a new normal course issuer bid to repurchase up to 3,506,405 common shares through September 25, 2023. To September 30, 2022, we have repurchased 58,443 common shares for $2 million under the current bid.
Cash used in investing activities relates to capital spend on maintenance and major projects including our Geismar 3 plant currently under construction. For more information on our capital projects, please see Capital Projects and Growth Opportunities below.
Capital Projects and Growth Opportunities
The highly advantaged Geismar 3 project is progressing well and on budget with first methanol production expected in the fourth quarter of 2023 with an expected total capital cost of $1.25 - 1.3 billion. The remaining capital of approximately $450 to $500 million is fully funded with cash on hand. Geismar 3 has one of the lowest CO2 emissions intensity profiles in the industry and will enhance our current asset portfolio and help us meet our commitment to reduce our greenhouse gas emissions intensity.
Our planned operational capital expenditures directed towards maintenance, turnarounds, and catalyst changes, including our 63.1% share of Atlas and 50% of Egypt, is currently estimated to be approximately $40 million for the remainder of 2022 including procurement of long-lead items for turnarounds planned in 2023.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 13
CONTROLS AND PROCEDURES
During the third quarter of 2022, no changes were made in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ADDITIONAL INFORMATION – NON-GAAP MEASURES
In addition to providing measures prepared in accordance with IFRS, we present certain additional non-GAAP measures and ratios throughout this document. These are Adjusted EBITDA, Adjusted net income, Adjusted net income per common share, Average realized price, Adjusted net income before income tax, Adjusted income tax expense, and Adjusted effective tax rate. These non-GAAP financial measures and ratios reflect our 63.1% economic interest in the Atlas Facility, our 50% economic interest in the Egypt Facility and our 60% economic interest in Waterfront Shipping, and are useful as they are a better measure of our underlying performance, and assist in assessing the operating performance of the Company's business. These measures, at our share of our facilities, are a better measure of our underlying performance, as we fully run the operations on our partners' behalf, despite having less than full share of the economic interest. Adjusted EBITDA is also frequently used by securities analysts and investors when comparing our results with those of other companies. These measures do not have any standardized meaning prescribed by generally accepted accounting principles ("GAAP") and therefore are unlikely to be comparable to similar measures presented by other companies. These supplemental non-GAAP measures and ratios are provided to assist readers in determining our ability to generate cash from operations and improve the comparability of our results from one period to another.
These measures should be considered in addition to, and not as a substitute for, net income and revenue reported in accordance with IFRS.
Adjusted EBITDA (attributable to Methanex shareholders)
Adjusted EBITDA differs from the most comparable GAAP measure, net income attributable to Methanex shareholders, because it excludes the mark-to-market impact of share-based compensation, depreciation and amortization, finance costs, finance income (loss) and other expenses and income taxes. Adjusted EBITDA includes an amount representing our 63.1% share of the Atlas facility and excludes the non-controlling shareholders' interests in entities which we control but do not fully own.
Adjusted EBITDA and Adjusted net income exclude the mark-to-market impact of share-based compensation related to the impact of changes in our share price on SARs, TSARs, deferred share units, restricted share units and performance share units. The mark-to-market impact related to share-based compensation that is excluded from Adjusted EBITDA and Adjusted net income is calculated as the difference between the grant-date value and the fair value recorded at each period-end. As share-based awards will be settled in future periods, the ultimate value of the units is unknown at the date of grant and therefore the grant-date value recognized in Adjusted EBITDA and Adjusted net income may differ from the total settlement cost.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 14
The following table shows a reconciliation from net income attributable to Methanex shareholders to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| ($ millions) | Sep 30
2022 | Jun 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Net income attributable to Methanex shareholders | $ | 69 | | $ | 125 | | $ | 71 | | | $ | 313 | | $ | 282 | |
| Mark-to-market impact of share-based compensation | (20) | | (47) | | 33 | | | (19) | | (4) | |
| Depreciation and amortization | 100 | | 94 | | 91 | | | 286 | | 276 | |
| Finance costs | 33 | | 33 | | 37 | | | 99 | | 110 | |
| Finance loss (income) and other expenses | (10) | | 3 | | (2) | | | (7) | | (5) | |
| Income tax expense | 34 | | 37 | | 28 | | | 113 | | 88 | |
Earnings of associate adjustment 1 | 17 | | 18 | | 19 | | | 57 | | 58 | |
Non-controlling interests adjustment 1 | (31) | | (20) | | (13) | | | (70) | | (37) | |
| Adjusted EBITDA attributable to Methanex shareholders | $ | 192 | | $ | 243 | | $ | 264 | | | $ | 772 | | $ | 768 | |
1 These adjustments represent depreciation and amortization, finance costs, finance income (loss) and other expenses and income taxes associated with our 63.1% interest in the Atlas methanol facility and the non-controlling interests. Beginning Q2 2022, the NCI adjustment also reflects MOL's 40% NCI interest in Waterfront Shipping, which did not apply to the comparative periods.
Adjusted Net Income and Adjusted Net Income per Common Share
Adjusted net income and Adjusted net income per common share are a non-GAAP measure and a non-GAAP ratio, respectively, because they exclude the mark-to-market impact of share-based compensation, the mark-to-market impact of the Egypt gas contract revaluation included in finance income (loss) and other expenses and the impact of certain items associated with specific identified events. The following table shows a reconciliation of net income attributable to Methanex shareholders to Adjusted net income and the calculation of Adjusted net income per common share:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| ($ millions except number of shares and per share amounts) | Sep 30
2022 | Jun 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Net income attributable to Methanex shareholders | $ | 69 | | $ | 125 | | $ | 71 | | | $ | 313 | | $ | 282 | |
| Mark-to-market impact of share-based compensation, net of tax | (16) | | (41) | | 28 | | | (17) | | (7) | |
| Mark-to-market impact of Egypt gas contract revaluation, net of tax | (4) | | — | | — | | | (4) | | — | |
| Adjusted net income | $ | 49 | | $ | 84 | | $ | 99 | | | $ | 292 | | $ | 275 | |
| Diluted weighted average shares outstanding (millions) | 70 | | 72 | | 76 | | | 72 | | 76 | |
| Adjusted net income per common share | $ | 0.69 | | $ | 1.16 | | $ | 1.29 | | | $ | 4.04 | | $ | 3.60 | |
Management uses these measures to analyze net income and net income per common share after adjusting for our economic interest in the Atlas and Egypt facilities and Waterfront Shipping, for reasons as described above. The exclusion of the mark-to-market portion of the impact of share-based compensation is due to these amounts not being seen as indicative of operational performance and can fluctuate in the intervening periods until settlement, at which time they are included appropriately as the cost of employee compensation. The exclusion of the mark-to-market impact of the Egypt gas contract revaluation is due to the mark-to-market change in the derivative being unrealized with the fair value of the derivative expected to fluctuate in the intervening periods until settlement. The exclusion of the mark-to-market impact of the Egypt gas contract revaluation commencing for the third quarter of 2022 has no impact on comparative periods as the contract amendment leading to fair value measurement of the contract was initiated in the third quarter of 2022.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 15
QUARTERLY FINANCIAL DATA (UNAUDITED)
Our operations consist of a single operating segment - the production and sale of methanol. Quarterly results vary due to the average realized price of methanol, sales volume and total cash costs. A summary of selected financial information is as follows:
| | | | | | | | | | | | | | |
| Three Months Ended |
| ($ millions except per share amounts) | Sep 30
2022 | Jun 30
2022 | Mar 31
2022 | Dec 31 2021 |
| Revenue | $ | 1,012 | | $ | 1,137 | | $ | 1,176 | | $ | 1,253 | |
| Net income attributable to Methanex shareholders | 69 | | 125 | | 119 | | 201 | |
| Basic net income per common share | 0.99 | | 1.74 | | 1.60 | | 2.66 | |
| Diluted net income per common share | 0.87 | | 1.41 | | 1.60 | | 2.51 | |
| Adjusted EBITDA | 192 | | 243 | | 337 | | 340 | |
| Adjusted net income | 49 | | 84 | | 159 | | 185 | |
Adjusted net income per common share | 0.69 | | 1.16 | | 2.16 | | 2.43 | |
| | | | | | | | | | | | | | |
| Three Months Ended |
| ($ millions except per share amounts) | Sep 30
2021 | Jun 30
2021 | Mar 31
2021 | Dec 31
2020 |
| Revenue | $ | 1,078 | | $ | 1,068 | | $ | 1,016 | | $ | 811 | |
| Net income (loss) attributable to Methanex shareholders | 71 | | 107 | | 105 | | (27) | |
| Basic net income (loss) per common share | 0.93 | | 1.40 | | 1.37 | | (0.35) | |
| Diluted net income (loss) per common share | 0.93 | | 1.31 | | 1.19 | | (0.35) | |
| Adjusted EBITDA | 264 | | 262 | | 242 | | 136 | |
| Adjusted net income | 99 | | 95 | | 82 | | 12 | |
| Adjusted net income per common share | 1.29 | | 1.24 | | 1.07 | | 0.15 | |
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 16
Methanex Corporation
Quarterly History (unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | Q3 | Q2 | Q1 | 2021 | Q4 | Q3 | Q2 | Q1 | | | | | |
| | | | | | | | | | | | | | |
| METHANOL SALES VOLUME | | | | | | | | | | | | | | |
| (thousands of tonnes) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Methanex-produced 1 | 4,781 | | 1,350 | | 1,634 | | 1,797 | | 6,207 | | 1,672 | | 1,435 | | 1,582 | | 1,518 | | | | | | |
| Purchased methanol | 2,593 | | 1,113 | | 798 | | 682 | 3,750 | | 810 | | 1,023 | | 903 | | 1,014 | | | | | | |
Commission sales 1 | 753 | | 214 | | 260 | | 279 | 1,227 | | 322 | | 299 | | 345 | | 261 | | | | | | |
| 8,127 | | 2,677 | | 2,692 | | 2,758 | | 11,184 | | 2,804 | | 2,757 | | 2,830 | | 2,793 | | | | | | |
| METHANOL PRODUCTION | | | | | | | | | | | | | | |
| (thousands of tonnes) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| New Zealand | 835 | | 205 | | 244 | | 386 | | 1,348 | | 405 | | 268 | | 306 | | 369 | | | | | | |
| USA (Geismar) | 1,604 | | 492 | | 556 | | 556 | | 1,989 | | 605 | | 478 | | 484 | | 422 | | | | | | |
| Trinidad (Methanex interest) | 756 | | 249 | | 249 | | 258 | | 1,161 | | 296 | | 296 | | 294 | | 275 | | | | | | |
| Egypt (50% interest) | 289 | | 35 | | 150 | | 104 | | 581 | | 144 | | 155 | | 134 | | 148 | | | | | | |
| Canada (Medicine Hat) | 446 | | 130 | | 155 | | 161 | | 628 | | 149 | | 159 | | 159 | | 161 | | | | | | |
| Chile | 662 | | 141 | | 197 | | 324 | | 807 | | 334 | | 124 | | 128 | | 221 | | | | | | |
| 4,592 | | 1,252 | | 1,551 | | 1,789 | | 6,514 | | 1,933 | | 1,480 | | 1,505 | | 1,596 | | | | | | |
AVERAGE REALIZED METHANOL PRICE 2 | | | | | | | | | | | | | | |
| ($/tonne) | 408 | | 377 | | 422 | | 425 | | 393 | | 445 | | 390 | | 376 | | 363 | | | | | | |
| ($/gallon) | 1.23 | | 1.13 | | 1.27 | | 1.28 | | 1.18 | | 1.34 | | 1.17 | | 1.13 | | 1.09 | | | | | | |
| | | | | | | | | | | | | | |
| ADJUSTED EBITDA | 772 | | 192 | | 243 | | 337 | | 1,108 | | 340 | | 264 | | 262 | | 242 | | | | | | |
| | | | | | | | | | | | | | |
PER SHARE INFORMATION
($ per common share attributable to Methanex shareholders) | | | | | | | | | | | | | | |
| Basic net income | 4.34 | | 0.99 | | 1.74 | | 1.60 | 6.34 | | 2.66 | | 0.93 | | 1.40 | | 1.37 | | | | | | |
| Diluted net income | 4.17 | | 0.87 | | 1.41 | | 1.60 | 6.13 | | 2.51 | | 0.93 | | 1.31 | | 1.19 | | | | | | |
| Adjusted net income | 4.04 | | 0.69 | | 1.16 | | 2.16 | 6.03 | | 2.43 | | 1.29 | | 1.24 | | 1.07 | | | | | | |
1 Methanex-produced methanol represents our equity share of volume produced at our facilities and excludes volume marketed on a commission basis related to the 36.9% of the Atlas facility and 50% of the Egypt facility that we do not own.
2 Average realized price is calculated as revenue, excluding commissions earned and the Egypt non-controlling interest share of revenue, but including an amount representing our share of Atlas revenue, divided by the total sales volume of Methanex-produced and purchased methanol.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 17
HOW WE ANALYZE OUR BUSINESS
Our operations consist of a single operating segment - the production and sale of methanol. We review our financial results by analyzing changes in the components of Adjusted EBITDA, mark-to-market impact of share-based compensation, depreciation and amortization, finance costs, finance income (loss) and other expenses and income taxes.
The Company has used the terms Adjusted EBITDA, Adjusted net income and Adjusted net income per common share throughout this document. These items are non-GAAP measures that do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. Refer to Additional Information - Non-GAAP Measures section on page 14 for a description of each non-GAAP measure and reconciliations to the most comparable GAAP measures.
In addition to the methanol that we produce at our facilities, we also purchase and re-sell methanol produced by others and we sell methanol on a commission basis. We analyze the results of all methanol sales together, excluding commission sales volume. The key drivers of changes in Adjusted EBITDA are average realized price, cash costs and sales volume, which 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 methanol multiplied by the current period total methanol sales volume, excluding commission sales volume, plus the difference from period to period in commission revenue. |
CASH
COSTS | The change in 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 current period total methanol sales volume, excluding commission sales volume in the current period. The cash costs per tonne is the weighted average of the cash cost per tonne of Methanex-produced methanol and the cash cost per tonne of purchased methanol. The cash cost per tonne of Methanex-produced methanol includes absorbed fixed cash costs per tonne and variable cash costs per tonne. The cash cost per tonne of purchased methanol consists principally of the cost of methanol itself. In addition, the change in Adjusted EBITDA as a result of changes in cash costs includes the changes from period to period in unabsorbed fixed production costs, consolidated selling, general and administrative expenses and fixed storage and handling costs. |
| SALES VOLUME | The change in Adjusted EBITDA as a result of changes in sales volume is calculated as the difference from period to period in total methanol sales volume, excluding commission sales volume, multiplied by the margin per tonne for the prior period. The margin per tonne for the prior period is the weighted average margin per tonne of Methanex-produced methanol and margin per tonne of purchased methanol. The margin per tonne for Methanex-produced methanol is calculated as the selling price per tonne of methanol less absorbed fixed cash costs per tonne and variable cash costs per tonne. The margin per tonne for purchased methanol is calculated as the selling price per tonne of methanol less the cost of purchased methanol per tonne. |
We own 63.1% of the Atlas methanol facility and market the remaining 36.9% of its production through a commission offtake agreement. A contractual agreement between us and our partners establishes joint control over Atlas. As a result, we account for this investment using the equity method of accounting, which results in 63.1% of the net assets and net earnings of Atlas being presented separately in the consolidated statements of financial position and consolidated statements of income, respectively. For purposes of analyzing our business, Adjusted EBITDA, Adjusted net income and Adjusted net income per common share include an amount representing our 63.1% equity share in Atlas. Our analysis of depreciation and amortization, finance costs, finance income (loss) and other expenses and income taxes is consistent with the presentation of our consolidated statements of income and excludes amounts related to Atlas.
We own 50% of the 1.26 million tonne per year Egypt methanol facility and market the remaining 50% of its production through a commission offtake agreement. We own 60% of Waterfront Shipping, which provides service to Methanex for the ocean freight component of our distribution and logistics costs. We consolidate both Egypt and Waterfront Shipping, which results in 100% of the financial results being included in our financial statements. Non-controlling interests are included in the Company’s consolidated financial statements and represent the non-controlling shareholders’ interests in the Egypt methanol facility and Waterfront Shipping. For purposes of analyzing our business, Adjusted EBITDA, Adjusted net income and Adjusted net income per common share exclude the amounts associated with non-controlling interests.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 18
FORWARD-LOOKING INFORMATION WARNING
This Third Quarter 2022 Management’s Discussion and Analysis ("MD&A") as well as comments made during the Third Quarter 2022 investor conference call contain forward-looking statements with respect to us and our industry. These statements relate to future events or our future performance. All statements other than statements of historical fact are forward-looking statements. Statements that include the words "believes," "expects," "may," "will," "should," "potential," "estimates," "anticipates," "aim," "goal," "targets," "plan," "predict" or other comparable terminology and similar statements of a future or forward-looking nature identify forward-looking statements.
More particularly and without limitation, any statements regarding the following are forward-looking statements:
•expected demand for methanol and its derivatives,
•expected new methanol supply or restart of idled capacity and timing for start up of the same,
•expected shutdowns (either temporary or permanent) or restarts of existing methanol supply (including our own facilities), including, without limitation, the timing and length of planned maintenance outages,
•expected methanol and energy prices,
•expected levels of methanol purchases from traders or other third parties,
•expected levels, timing and availability of economically priced natural gas supply to each of our plants,
•capital committed by third parties towards future natural gas exploration and development in the vicinity of our plants,
•our expected capital expenditures and anticipated timing and rate of return of such capital expenditures,
•anticipated operating rates of our plants,
•expected operating costs, including natural gas feedstock costs and logistics costs,
•expected tax rates or resolutions to tax disputes,
•expected cash flows, cash balances, earnings capability, debt levels and share price,
•availability of committed credit facilities and other financing,
•our ability to meet covenants associated with our long-term debt obligations,
•our shareholder distribution strategy and anticipated distributions to shareholders,
•commercial viability and timing of, or our ability to execute future projects, plant restarts, capacity expansions, plant relocations or other business initiatives or opportunities, including our Geismar 3 project,
•our financial strength and ability to meet future financial commitments,
•expected global or regional economic activity (including industrial production levels) and GDP growth,
•expected outcomes of litigation or other disputes, claims and assessments,
•expected actions of governments, governmental agencies, gas suppliers, courts, tribunals or other third parties, and
•the potential future impact of the COVID-19 pandemic.
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, including, without limitation, future expectations and assumptions concerning the following:
•the supply of, demand for and price of methanol, methanol derivatives, natural gas, coal, oil and oil derivatives,
•our ability to procure natural gas feedstock on commercially acceptable terms,
•operating rates of our facilities,
•receipt or issuance of third-party consents or approvals or governmental approvals related to rights to purchase natural gas,
•the establishment of new fuel standards,
•operating costs, including natural gas feedstock and logistics costs, capital costs, tax rates, cash flows, foreign exchange rates and interest rates,
•the availability of committed credit facilities and other financing,
•the expected timing and capital cost of our Geismar 3 project,
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 19
•global and regional economic activity (including industrial production levels) and GDP growth,
•absence of a material negative impact from major natural disasters,
•absence of a material negative impact from changes in laws or regulations,
•absence of a material negative impact from political instability in the countries in which we operate, and
•enforcement of contractual arrangements and ability to perform contractual obligations by customers, natural gas and other suppliers and other third parties.
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 primarily include those attendant with producing and marketing methanol and successfully carrying out major capital expenditure projects in various jurisdictions, including, without limitation:
•conditions in the methanol and other industries, including fluctuations in the supply, demand and price for methanol and its derivatives, including demand for methanol for energy uses,
•the price of natural gas, coal, oil and oil derivatives,
•our ability to obtain natural gas feedstock on commercially acceptable terms to underpin current operations and future production growth opportunities,
•the ability to carry out corporate initiatives and strategies,
•actions of competitors, suppliers and financial institutions,
•conditions within the natural gas delivery systems that may prevent delivery of our natural gas supply requirements,
•our ability to meet timeline and budget targets for the Geismar 3 project, including the impact of any cost pressures arising from labour costs,
•competing demand for natural gas, especially with respect to any domestic needs for gas and electricity,
•actions of governments and governmental authorities, including, without limitation, implementation of policies or other measures that could impact the supply of or demand for methanol or its derivatives,
•changes in laws or regulations,
•import or export restrictions, anti-dumping measures, increases in duties, taxes and government royalties and other actions by governments that may adversely affect our operations or existing contractual arrangements,
•world-wide economic conditions,
•the impacts of the COVID-19 pandemic, and
•other risks described in our 2021 Annual Management’s Discussion and Analysis and this Third Quarter 2022 Management’s Discussion and Analysis.
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 implied by forward-looking statements may not occur and we do not undertake to update forward-looking statements except as required by applicable securities laws.
METHANEX CORPORATION 2022 THIRD QUARTER
MANAGEMENT’S DISCUSSION AND ANALYSIS PAGE 20
Methanex Corporation
Consolidated Statements of Income (unaudited)
(thousands of U.S. dollars, except number of common shares and per share amounts)
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| | | | | |
| Revenue | $ | 1,012,031 | | $ | 1,078,040 | | | $ | 3,325,071 | | $ | 3,161,876 | |
| Cost of sales and operating expenses | (861,381) | | (857,865) | | | (2,605,272) | | (2,420,552) | |
| Depreciation and amortization | (100,018) | | (90,933) | | | (286,057) | | (276,039) | |
| | | | | |
| Egypt gas redirection and sale proceeds (note 11) | 116,314 | | — | | | 116,314 | | — | |
| Operating income | 166,946 | | 129,242 | | | 550,056 | | 465,285 | |
| Earnings of associate (note 4) | 17,492 | | 21,463 | | | 58,345 | | 63,116 | |
| Finance costs (note 5) | (32,640) | | (36,975) | | | (99,185) | | (110,344) | |
| Finance income (loss) and other expenses | 9,974 | | 1,971 | | | 7,371 | | 5,398 | |
| Income before income taxes | 161,772 | | 115,701 | | | 516,587 | | 423,455 | |
| Income tax expense: | | | | | |
| Current | (37,571) | | (33,362) | | | (91,008) | | (79,700) | |
| Deferred | 3,815 | | 4,865 | | | (21,658) | | (8,775) | |
| (33,756) | | (28,497) | | | (112,666) | | (88,475) | |
| Net income | $ | 128,016 | | $ | 87,204 | | | $ | 403,921 | | $ | 334,980 | |
| Attributable to: | | | | | |
| Methanex Corporation shareholders | $ | 69,198 | | $ | 70,531 | | | $ | 312,798 | | $ | 281,772 | |
| Non-controlling interests | 58,818 | | 16,673 | | | 91,123 | | 53,208 | |
| $ | 128,016 | | $ | 87,204 | | | $ | 403,921 | | $ | 334,980 | |
| | | | | |
| Income per common share for the period attributable to Methanex Corporation shareholders | | | | | |
| Basic net income per common share | $ | 0.99 | | $ | 0.93 | | | $ | 4.34 | | $ | 3.70 | |
| Diluted net income per common share (note 7) | $ | 0.87 | | $ | 0.93 | | | $ | 4.17 | | $ | 3.62 | |
| | | | | |
| Weighted average number of common shares outstanding (note 7) | 70,234,460 | | 76,206,066 | | | 72,011,677 | | 76,207,104 | |
| Diluted weighted average number of common shares outstanding (note 7) | 70,372,523 | | 76,210,009 | | | 72,320,922 | | 76,381,001 | |
See accompanying notes to condensed consolidated interim financial statements.
METHANEX CORPORATION 2022 THIRD QUARTER
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 1
Methanex Corporation
Consolidated Statements of Comprehensive Income (unaudited)
(thousands of U.S. dollars)
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Net income | $ | 128,016 | | $ | 87,204 | | | $ | 403,921 | | $ | 334,980 | |
| Other comprehensive income: | | | | | |
| Items that may be reclassified to income: | | | | | |
| Change in fair value of cash flow hedges (note 10) | (50,079) | | 472,983 | | | 686,165 | | 803,070 | |
| Forward element excluded from hedging relationships (note 10) | 129,829 | | (352,140) | | | (272,965) | | (610,206) | |
| Realized losses (gains) on foreign exchange hedges reclassified to revenue | (3,787) | | (204) | | | (8,503) | | 1,060 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Taxes on above items | (13,222) | | (27,056) | | | (83,182) | | (45,080) | |
| 62,741 | | 93,583 | | | 321,515 | | 148,844 | |
| Comprehensive income | $ | 190,757 | | $ | 180,787 | | | $ | 725,436 | | $ | 483,824 | |
| Attributable to: | | | | | |
| Methanex Corporation shareholders | $ | 131,939 | | $ | 164,114 | | | $ | 634,313 | | $ | 430,616 | |
| Non-controlling interests | 58,818 | | 16,673 | | | 91,123 | | 53,208 | |
| $ | 190,757 | | $ | 180,787 | | | $ | 725,436 | | $ | 483,824 | |
See accompanying notes to condensed consolidated interim financial statements.
METHANEX CORPORATION 2022 THIRD QUARTER
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 2
Methanex Corporation
Consolidated Statements of Financial Position (unaudited)
(thousands of U.S. dollars)
| | | | | | | | |
| AS AT | Sep 30
2022 | Dec 31
2021 |
| ASSETS | | |
| Current assets: | | |
| Cash and cash equivalents | $ | 961,794 | | $ | 932,069 | |
| Trade and other receivables | 560,393 | | 551,367 | |
| Inventories (note 2) | 417,513 | | 459,556 | |
| Prepaid expenses | 43,646 | | 35,963 | |
| Other assets | 72,857 | | 9,842 | |
| 2,056,203 | | 1,988,797 | |
| Non-current assets: | | |
| Property, plant and equipment (note 3) | 4,045,119 | | 3,686,149 | |
| Investment in associate (note 4) | 208,777 | | 217,319 | |
| Deferred income tax assets | 29,102 | | 98,169 | |
| Other assets | 351,579 | | 99,186 | |
| 4,634,577 | | 4,100,823 | |
| $ | 6,690,780 | | $ | 6,089,620 | |
| LIABILITIES AND EQUITY | | |
| Current liabilities: | | |
| Trade, other payables and accrued liabilities | $ | 817,296 | | $ | 835,951 | |
| Current maturities on long-term debt (note 6) | 12,324 | | 11,775 | |
| Current maturities on lease obligations | 106,919 | | 98,301 | |
| Current maturities on other long-term liabilities | 21,272 | | 17,191 | |
| 957,811 | | 963,218 | |
| Non-current liabilities: | | |
| Long-term debt (note 6) | 2,138,898 | | 2,146,417 | |
| Lease obligations | 747,722 | | 618,800 | |
| Other long-term liabilities | 116,438 | | 193,749 | |
| Deferred income tax liabilities | 249,954 | | 212,705 | |
| 3,253,012 | | 3,171,671 | |
| Equity: | | |
| Capital stock | 405,967 | | 432,728 | |
| Contributed surplus | 1,907 | | 1,928 | |
| Retained earnings | 1,464,234 | | 1,251,640 | |
| Accumulated other comprehensive income (loss) | 275,837 | | (2,720) | |
| Shareholders' equity | 2,147,945 | | 1,683,576 | |
| Non-controlling interests | 332,012 | | 271,155 | |
| Total equity | 2,479,957 | | 1,954,731 | |
| $ | 6,690,780 | | $ | 6,089,620 | |
| | |
See accompanying notes to condensed consolidated interim financial statements.
METHANEX CORPORATION 2022 THIRD QUARTER
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 3
Methanex Corporation
Consolidated Statements of Changes in Equity (unaudited)
(thousands of U.S. dollars, except number of common shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Common
Shares | Capital
Stock | Contributed
Surplus | Retained
Earnings | Accumulated
Other
Comprehensive
Income (Loss) | Shareholders'
Equity | Non-
Controlling
Interests | Total
Equity |
| Balance, December 31, 2020 | 76,201,980 | | $440,723 | $1,873 | $843,606 | $(137,102) | $1,149,100 | $292,357 | $1,441,457 |
| Net income | — | | — | | — | | 281,772 | | — | | 281,772 | | 53,208 | | 334,980 | |
| Other comprehensive income | — | | — | | — | | — | | 148,844 | 148,844 | | — | | 148,844 | |
| Compensation expense recorded for stock options | — | | — | | 85 | | — | | — | | 85 | | — | | 85 | |
| Issue of shares on exercise of stock options | 7,300 | | 252 | | — | | — | | — | | 252 | | — | | 252 | |
| Reclassification of grant date fair value on exercise of stock options | — | | 58 | | (58) | | — | | — | | — | | — | | — | |
| Payments for repurchase of shares | (85,607) | | (495) | | — | | (3,504) | | — | | (3,999) | | — | | (3,999) | |
| Dividend payments to Methanex Corporation shareholders | — | | — | | — | | (15,242) | | — | | (15,242) | | — | | (15,242) | |
| Distributions made and accrued to non-controlling interests | — | | — | | — | | — | | — | | — | | (38,678) | | (38,678) | |
| | | | | | | | |
| | | | | | | | |
| Realized hedge losses recognized in cash flow hedges | — | | — | | — | | — | | 266 | | 266 | | — | | 266 | |
| Balance, September 30, 2021 | 76,123,673 | | $440,538 | $1,900 | $1,106,632 | $12,008 | $1,561,078 | $306,887 | $1,867,965 |
| Net income | — | | — | | — | | 200,586 | | — | | 200,586 | | 20,345 | | 220,931 | |
| Other comprehensive income | — | | — | | — | | 4,903 | | (1,808) | 3,095 | | — | | 3,095 | |
| Compensation expense recorded for stock options | — | | — | | 28 | | — | | — | | 28 | | — | | 28 | |
| | | | | | | | |
| | | | | | | | |
| Payments for repurchase of shares | (1,349,586) | | (7,810) | | — | | (51,089) | | — | | (58,899) | | — | | (58,899) | |
| Dividend payments to Methanex Corporation shareholders | — | | — | | — | | (9,392) | | — | | (9,392) | | — | | (9,392) | |
| Distributions made and accrued to non-controlling interests | — | | — | | — | | — | | — | | — | | (56,727) | | (56,727) | |
| Equity contributions by non-controlling interest | — | | — | | — | | — | | — | | — | | 650 | | 650 | |
| Realized hedge gains recognized in cash flow hedges | — | | — | | — | | — | | (12,920) | | (12,920) | | — | | (12,920) | |
| | | | | | | | |
| Balance, December 31, 2021 | 74,774,087 | | $432,728 | $1,928 | $1,251,640 | $(2,720) | $1,683,576 | $271,155 | $1,954,731 |
| Net income | — | | — | | — | | 312,798 | | — | | 312,798 | | 91,123 | | 403,921 | |
| Other comprehensive income | — | | — | | — | | — | | 321,515 | 321,515 | | — | | 321,515 | |
| Compensation expense recorded for stock options | — | | — | | 83 | | — | | — | | 83 | | — | | 83 | |
| Issue of shares on exercise of stock options | 13,000 | | 450 | | — | | — | | — | | 450 | | — | | 450 | |
| Reclassification of grant date fair value on exercise of stock options | — | | 104 | | (104) | | — | | — | | — | | — | | — | |
| Sale of partial interest in subsidiary | — | | — | | — | | 126,445 | | — | | 126,445 | | 22,545 | | 148,990 | |
| Payments for repurchase of shares | (4,717,421) | | (27,315) | | — | | (194,839) | | — | | (222,154) | | — | | (222,154) | |
| Dividend payments to Methanex Corporation shareholders | — | | — | | — | | (31,810) | | — | | (31,810) | | — | | (31,810) | |
| Distributions made and accrued to non-controlling interests | — | | — | | — | | — | | — | | — | | (52,811) | | (52,811) | |
| | | | | | | | |
| | | | | | | | |
| Realized hedge gains recognized in cash flow hedges | — | | — | | — | | — | | (42,958) | | (42,958) | | — | | (42,958) | |
| Balance, September 30, 2022 | 70,069,666 | | $405,967 | $1,907 | $1,464,234 | $275,837 | $2,147,945 | $332,012 | $2,479,957 |
See accompanying notes to condensed consolidated interim financial statements.
METHANEX CORPORATION 2022 THIRD QUARTER
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 4
Methanex Corporation
Consolidated Statements of Cash Flows (unaudited)
(thousands of U.S. dollars) | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES | | | | | |
| Net income | $ | 128,016 | | $ | 87,204 | | | $ | 403,921 | | $ | 334,980 | |
| Deduct earnings of associate | (17,492) | | (21,463) | | | (58,345) | | (63,116) | |
| Dividends received from associate | 19,561 | | 35,967 | | | 66,886 | | 74,458 | |
| Add (deduct) non-cash items: | | | | | |
| Depreciation and amortization | 100,018 | | 90,933 | | | 286,057 | | 276,039 | |
| Income tax expense | 33,756 | | 28,497 | | | 112,666 | | 88,475 | |
| Share-based compensation expense (recovery) | (17,346) | | 35,359 | | | 685 | | 14,354 | |
| Finance costs | 32,640 | | 36,975 | | | 99,185 | | 110,344 | |
| Other | (8,866) | | (3,922) | | | (10,358) | | (3,087) | |
| Income taxes paid | (10,977) | | (28,115) | | | (76,250) | | (45,488) | |
| Other cash payments, including share-based compensation | (477) | | 428 | | | (14,004) | | (8,820) | |
| Cash flows from operating activities before undernoted | 258,833 | | 261,863 | | | 810,443 | | 778,139 | |
| Changes in non-cash working capital (note 9) | 66,964 | | 38,755 | | | (53,864) | | (67,135) | |
| 325,797 | | 300,618 | | | 756,579 | | 711,004 | |
| | | | | |
| CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES | | | | | |
| Payments for repurchase of shares | (31,751) | | (3,999) | | | (222,154) | | (3,999) | |
| Dividend payments to Methanex Corporation shareholders | (12,272) | | (9,526) | | | (31,810) | | (15,242) | |
| Interest paid | (14,058) | | (14,140) | | | (94,449) | | (99,122) | |
| | | | | |
| Repayment on Geismar 3 construction facility | — | | — | | | — | | (173,000) | |
| Repayment of long-term debt and financing fees (note 6) | (3,036) | | (34,703) | | | (8,737) | | (58,487) | |
| | | | | |
| | | | | |
| | | | | |
| Repayment of lease obligations | (23,853) | | (24,574) | | | (76,115) | | (75,968) | |
| Release of restricted cash relating to limited recourse debt facilities | — | | 29,774 | | | — | | 29,275 | |
| | | | | |
| Distributions to non-controlling interests | (29,902) | | (27,003) | | | (52,811) | | (53,679) | |
| Proceeds on issue of shares on exercise of stock options | — | | — | | | 450 | | 252 | |
| | | | | |
| Proceeds from other limited recourse debt | — | | 8,463 | | | — | | 24,954 | |
| Restricted cash for distribution to non-controlling interests | (161) | | — | | | (1,175) | | — | |
| Sale of partial interest in subsidiary | 3,990 | | — | | | 148,990 | | — | |
| Changes in non-cash working capital related to financing activities (note 9) | 19,666 | | 1,599 | | | 21,492 | | 1,599 | |
| (91,377) | | (74,109) | | | (316,319) | | (423,417) | |
| | | | | |
| CASH FLOWS USED IN INVESTING ACTIVITIES | | | | | |
| Property, plant and equipment | (56,106) | | (19,322) | | | (102,409) | | (91,059) | |
| Geismar plant under construction | (91,763) | | (47,500) | | | (318,050) | | (88,872) | |
| | | | | |
| Restricted cash for capital projects | — | | 351 | | | — | | — | |
| | | | | |
| | | | | |
| Changes in non-cash working capital related to investing activities (note 9) | (2,821) | | 8,534 | | | 9,924 | | (9,103) | |
| (150,690) | | (57,937) | | | (410,535) | | (189,034) | |
| Increase in cash and cash equivalents | 83,730 | | 168,572 | | | 29,725 | | 98,553 | |
| Cash and cash equivalents, beginning of period | 878,064 | | 763,822 | | | 932,069 | | 833,841 | |
| Cash and cash equivalents, end of period | $ | 961,794 | | $ | 932,394 | | | $ | 961,794 | | $ | 932,394 | |
See accompanying notes to condensed consolidated interim financial statements.
METHANEX CORPORATION 2022 THIRD QUARTER
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 5
Methanex Corporation
Notes to Condensed Consolidated Interim Financial Statements (unaudited)
Except where otherwise noted, tabular dollar amounts are stated in thousands of U.S. dollars.
1. Basis of presentation:
Methanex Corporation ("the Company") is an incorporated entity with corporate offices in Vancouver, Canada. The Company’s operations consist of the production and sale of methanol, a commodity chemical. The Company is the world’s largest producer and supplier of methanol to the major international markets of Asia Pacific, North America, Europe and South America.
These condensed consolidated interim financial statements are prepared in accordance with International Accounting Standards ("IAS") 34, Interim Financial Reporting, as issued by the International Accounting Standards Board ("IASB") on a basis consistent with those followed in the most recent annual consolidated financial statements.
These condensed consolidated interim financial statements do not include all of the information required for full annual financial statements and were approved and authorized for issue by the Audit, Finance & Risk Committee of the Board of Directors on October 26, 2022.
These condensed consolidated interim financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2021.
2. 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 recognized as an expense in cost of sales and operating expenses and depreciation and amortization for the three and nine month periods ended September 30, 2022 is $758 million (2021 - $747 million) and $2,373 million (2021 - $2,183 million).
3. Property, plant and equipment:
| | | | | | | | | | | |
| Owned Assets
(a) | Right-of-use assets
(b) | Total |
| Net book value at September 30, 2022 | $ | 3,300,886 | | $ | 744,233 | | $ | 4,045,119 | |
| Net book value at December 31, 2021 | $ | 3,075,198 | | $ | 610,951 | | $ | 3,686,149 | |
a)Owned assets:
| | | | | | | | | | | | | | | | | |
| Buildings, Plant
Installations &
Machinery | Plants Under Construction 1 | Ocean Going Vessels | Other | Total |
| Cost at September 30, 2022 | $ | 4,970,226 | | $ | 887,701 | | $ | 240,707 | | $ | 139,923 | | $ | 6,238,557 | |
| Accumulated depreciation at September 30, 2022 | 2,784,103 | | — | | 46,278 | | 107,290 | | 2,937,671 | |
| Net book value at September 30, 2022 | $ | 2,186,123 | | $ | 887,701 | | $ | 194,429 | | $ | 32,633 | | $ | 3,300,886 | |
| Cost at December 31, 2021 | $ | 4,908,492 | | $ | 561,860 | | $ | 240,525 | | $ | 138,378 | | $ | 5,849,255 | |
| Accumulated depreciation at December 31, 2021 | 2,628,532 | | — | | 37,271 | | 108,254 | | 2,774,057 | |
| Net book value at December 31, 2021 | $ | 2,279,960 | | $ | 561,860 | | $ | 203,254 | | $ | 30,124 | | $ | 3,075,198 | |
1 The Company is constructing a 1.8 million tonne methanol plant in Geismar, Louisiana adjacent to its Geismar 1 and Geismar 2 facilities. Included in cost of Plants Under Construction are $80 million of capitalized interest and finance charges.
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 6
b)Right-of-use assets:
| | | | | | | | | | | | | | | | | |
| Ocean Going Vessels 1 | Terminals and Tanks | Plant Installations and Machinery | Other | Total |
| Cost at September 30, 2022 | $ | 833,033 | | $ | 274,086 | | $ | 23,797 | | $ | 44,886 | | $ | 1,175,802 | |
| Accumulated depreciation at September 30, 2022 | 243,008 | | 151,464 | | 14,698 | | 22,399 | | 431,569 | |
| Net book value at September 30, 2022 | $ | 590,025 | | $ | 122,622 | | $ | 9,099 | | $ | 22,487 | | $ | 744,233 | |
| Cost at December 31, 2021 | $ | 657,774 | | $ | 258,743 | | $ | 23,797 | | $ | 40,903 | | $ | 981,217 | |
| Accumulated depreciation at December 31, 2021 | 214,004 | | 125,494 | | 12,850 | | 17,918 | | 370,266 | |
| Net book value at December 31, 2021 | $ | 443,770 | | $ | 133,249 | | $ | 10,947 | | $ | 22,985 | | $ | 610,951 | |
1 Waterfront Shipping entered into four long-term charter hire arrangements for ocean going vessels in 2022.
4. Interest in Atlas joint venture:
a)The Company has a 63.1% equity interest in Atlas Methanol Company Unlimited ("Atlas"). Atlas owns a 1.8 million tonne per year methanol production facility in Trinidad. The Company accounts for its interest in Atlas using the equity method. Summarized financial information of Atlas (100% basis) is as follows:
| | | | | | | | |
| Statements of financial position | Sep 30
2022 | Dec 31
2021 |
| Cash and cash equivalents | $ | 17,268 | | $ | 12,619 | |
| Other current assets | 197,473 | | 190,594 | |
| Non-current assets | 191,998 | | 219,812 | |
| Current liabilities | (84,085) | | (79,124) | |
| Other long-term liabilities, including current maturities | (112,749) | | (120,461) | |
| Net assets at 100% | $ | 209,905 | | $ | 223,440 | |
| Net assets at 63.1% | $ | 132,449 | | $ | 140,991 | |
| Long-term receivable from Atlas | 76,328 | | 76,328 | |
| Investment in associate | $ | 208,777 | | $ | 217,319 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Statements of income | Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Revenue | $ | 132,072 | | $ | 143,050 | | | $ | 422,878 | | $ | 432,048 | |
| Cost of sales and depreciation and amortization | (85,516) | | (87,695) | | | (267,953) | | (267,981) | |
| Operating income | 46,556 | | 55,355 | | | 154,925 | | 164,067 | |
| Finance costs, finance income (loss) and other expenses | (3,494) | | (2,253) | | | (7,583) | | (7,909) | |
| Income tax expense | (15,341) | | (19,088) | | | (54,878) | | (56,133) | |
| Net earnings at 100% | $ | 27,721 | | $ | 34,014 | | | $ | 92,464 | | $ | 100,025 | |
| Earnings of associate at 63.1% | $ | 17,492 | | $ | 21,463 | | | $ | 58,345 | | $ | 63,116 | |
| | | | | |
| Dividends received from associate | $ | 19,561 | | $ | 35,967 | | | $ | 66,886 | | $ | 74,458 | |
b)Atlas tax assessments:
The Board of Inland Revenue of Trinidad and Tobago ("the BIR") has audited and issued assessments against Atlas in respect of the 2005 to 2016 financial years. All subsequent tax years remain open to assessment. The assessments relate to the pricing arrangements of certain long-term fixed-price sales contracts that commenced in 2005 and continued with affiliates through 2014 and with an unrelated third party through 2019.
The long-term fixed-price sales contracts with affiliates were established as part of the formation of Atlas and management believes these were reflective of market considerations at that time.
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 7
During the periods under assessment and continuing through 2014, approximately 50% of Atlas-produced methanol was sold under these fixed-price contracts. From late 2014 through 2019 fixed-price sales to an unrelated third party represented approximately 10% of Atlas-produced methanol. Atlas had partial relief from corporation income tax until late July 2014.
The Company believes it is impractical to disclose a reasonable estimate of the potential contingent liability due to the wide range of assumptions and interpretations implicit in the assessments.
The Company has lodged objections to the assessments. No deposits have been required to lodge objections. Based on the merits of the cases and advice from legal counsel, the Company believes its position should be sustained, that Atlas has filed its tax returns and paid applicable taxes in compliance with Trinidadian tax law, and as such has not accrued for any amounts relating to these assessments. Contingencies inherently involve the exercise of significant judgment, and as such the outcomes of these assessments and the financial impact to the Company could be material.
The Company anticipates the resolution of this matter through the court systems to be lengthy and, at this time, cannot predict a date as to when this matter is expected to be ultimately resolved.
5. Finance costs:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Finance costs | $ | 42,381 | | $ | 42,265 | | | $ | 124,481 | | $ | 125,289 | |
| Less capitalized interest related to Geismar plant under construction | (9,741) | | (5,290) | | | (25,296) | | (14,945) | |
| $ | 32,640 | | $ | 36,975 | | | $ | 99,185 | | $ | 110,344 | |
Finance costs are primarily comprised of interest on the unsecured notes, credit and construction facilities, limited recourse debt facilities, finance lease obligations, amortization of deferred financing fees, and accretion expense associated with site restoration costs. Interest during construction projects is capitalized until the plant is substantially completed and ready for productive use.
6. Long-term debt:
| | | | | | | | |
| As at | Sep 30
2022 | Dec 31
2021 |
| Unsecured notes | | |
| $300 million at 4.25% due December 1, 2024 | $ | 298,727 | | $ | 298,408 | |
| $700 million at 5.125% due October 15, 2027 | 693,360 | | 692,516 | |
| $700 million at 5.25% due December 15, 2029 | 695,085 | | 694,770 | |
| $300 million at 5.65% due December 1, 2044 | 295,578 | | 295,505 | |
| 1,982,750 | | 1,981,199 | |
| | |
| | |
| Other limited recourse debt facilities | | |
| 5.58% due through June 30, 2031 | 61,948 | | 65,745 | |
| 5.35% due through September 30, 2033 | 70,273 | | 73,836 | |
| 5.08% due through September 15, 2036 | 36,251 | | 37,412 | |
| | |
Total long-term debt 1 | 2,151,222 | | 2,158,192 | |
Less current maturities 1 | (12,324) | | (11,775) | |
| $ | 2,138,898 | | $ | 2,146,417 | |
1 Long-term debt and current maturities are presented net of deferred financing fees.
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 8
The Company has access to a $300 million committed revolving credit facility and a $300 million non-revolving construction facility for the Geismar 3 project, both of which are with a syndicate of highly rated financial institutions. The facilities were entered into with the following significant covenants and default provisions:
a)the obligation to maintain a minimum EBITDA to interest coverage ratio of greater than or equal to 2:1 calculated on a four-quarter trailing basis, where for only one quarter during the term of the credit facility the ratio can be as low as, but not less than 1.25:1, and a debt to capitalization ratio of less than or equal to 60%, both calculated in accordance with definitions in the credit agreement that include adjustments to limited recourse subsidiaries,
b)a default if payment is accelerated by a creditor on any indebtedness of $50 million or more of the Company and its subsidiaries, except for the limited recourse subsidiaries, and
c)a default if a default occurs that permits a creditor to demand repayment on any other indebtedness of $50 million or more of the Company and its subsidiaries, except for the limited recourse subsidiaries.
The credit facilities are secured by certain assets of the Company, and also include other customary covenants including restrictions on the incurrence of additional indebtedness, restrictions against the sale or abandonment of the Geismar 3 project, as well as requirements associated with completion of plant construction and commissioning.
Other limited recourse debt facilities relate to financing for certain of our ocean going vessels which we own through less than wholly-owned entities under the Company's control. The limited recourse debt facilities are described as limited recourse as they are secured only by the assets of the entity that carries the debt. Accordingly, the lenders to the limited recourse debt facilities have no recourse to the Company or its other subsidiaries.
Failure to comply with any of the covenants or default provisions of the long-term debt facilities described above could result in a default under the applicable credit agreement that would allow the lenders to not fund future loan requests, accelerate the due date of the principal and accrued interest on any outstanding loans, or restrict the payment of cash or other distributions.
As at September 30, 2022, management believes the Company was in compliance with all significant terms and default provisions related to long-term debt obligations.
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 9
7. Net income per common share:
Diluted net income per common share is calculated by considering the potential dilution that would occur if outstanding stock options and, under certain circumstances, tandem share appreciation rights ("TSARs") were exercised or converted to common shares.
Outstanding TSARs may be settled in cash or common shares at the holder’s option and for purposes of calculating diluted net income per common share, the more dilutive of the cash-settled and equity-settled method is used, regardless of how the plan is accounted for. Accordingly, TSARs that are accounted for using the cash-settled method will require adjustments to the numerator and denominator if the equity-settled method is determined to have a dilutive effect on diluted net income per common share as compared to the cash-settled method. The equity-settled method was more dilutive for the three and nine months ended September 30, 2022 and for the nine months ended September 30, 2021, and an adjustment was required for the numerator. The cash-settled method was more dilutive for the three months ended September 30, 2021, and no adjustment was required for the numerator. TSARs, if calculated using the equity-settled method, are considered dilutive when the average market price of the Company's common shares during the period disclosed exceeds the exercise price of the TSAR. For the three and nine months ended September 30, 2022 and for the nine months ended September 30, 2021, TSARs were dilutive, resulting in an adjustment to the denominator.
Stock options are considered dilutive when the average market price of the Company’s common shares during the period disclosed exceeds the exercise price of the stock option. For the three and nine month periods ended September 30, 2022 and 2021 stock options were dilutive, resulting in an adjustment to the denominator.
A reconciliation of the numerator used for the purposes of calculating diluted net income per common share is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Numerator for basic net income per common share | $ | 69,198 | | $ | 70,531 | | | $ | 312,798 | | $ | 281,772 | |
| Adjustment for the effect of TSARs: | | | | | |
| Cash-settled expense (recovery) included in net income | (7,489) | | — | | | (5,798) | | 20 | |
| Equity-settled expense | (440) | | — | | | (5,067) | | (5,306) | |
| Numerator for diluted net income per common share | $ | 61,269 | | $ | 70,531 | | | $ | 301,933 | | $ | 276,486 | |
A reconciliation of the denominator used for the purposes of calculating diluted net income per common share is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Denominator for basic net income per common share | 70,234,460 | | 76,206,066 | | | 72,011,677 | | 76,207,104 | |
| Effect of dilutive stock options | 4,069 | | 3,943 | | | 12,224 | | 5,261 | |
| Effect of dilutive TSARs | 133,994 | | — | | | 297,021 | | 168,636 | |
| Denominator for diluted net income per common share | 70,372,523 | | 76,210,009 | | | 72,320,922 | | 76,381,001 | |
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 10
8. Share-based compensation:
a.Share appreciation rights ("SARs"), TSARs and stock options:
(i)Outstanding units:
Information regarding units outstanding at September 30, 2022 is as follows:
| | | | | | | | | | | | | | | | | |
| SARs | | TSARs |
| (per share amounts in USD) | Number of Units | Weighted Average Exercise Price | | Number of Units | Weighted Average Exercise Price |
| Outstanding at December 31, 2021 | 666,256 | | $ | 45.70 | | | 2,380,237 | | $ | 42.05 | |
| Granted | 32,730 | | 48.49 | | | 266,090 | | 48.49 | |
| Exercised | (126,661) | | 37.22 | | | (225,243) | | 36.33 | |
| Cancelled | (2,000) | | 52.86 | | | (6,657) | | 45.37 | |
| Expired | (149,237) | | 55.66 | | | (145,469) | | 55.82 | |
| Outstanding at June 30, 2022 | 421,088 | | $ | 44.91 | | | 2,268,958 | | $ | 42.48 | |
| | | | | |
| Exercised | (834) | | 34.59 | | | — | | — | |
| Cancelled | (6,200) | | 59.22 | | | (12,765) | | 45.77 | |
| | | | | |
| Outstanding at September 30, 2022 | 414,054 | | $ | 44.72 | | | 2,256,193 | | $ | 42.46 | |
| | | | | | | | |
| Stock Options |
| (per share amounts in USD) | Number of Units | Weighted Average Exercise Price |
| Outstanding at December 31, 2021 | 145,621 | | $ | 45.25 | |
| Granted | 5,300 | | 48.49 | |
| Exercised | (13,000) | | 34.59 | |
| Expired | (31,590) | | 55.66 | |
| Outstanding at June 30, 2022 | 106,331 | | $ | 43.62 | |
| | |
| Granted, exercised, cancelled or expired | — | | — | |
| | |
| | |
| | |
| Outstanding at September 30, 2022 | 106,331 | | $ | 43.62 | |
| | | | | | | | | | | | | | | | | | | | |
| Units Outstanding at September 30, 2022 | | Units Exercisable at September 30, 2022 |
Range of Exercise Prices
(per share amounts in USD) | Weighted Average
Remaining
Contractual Life
(Years) | Number
of Units
Outstanding | Weighted
Average
Exercise Price | | Number of Units
Exercisable | Weighted
Average
Exercise Price |
| SARs: | | | | | | |
| $29.27 to $35.51 | 3.07 | | 125,054 | | $ | 31.07 | | | 92,994 | | $ | 31.68 | |
| $38.79 to $50.17 | 3.39 | | 163,840 | | 47.08 | | | 104,784 | | 48.72 | |
| $54.65 to $78.59 | 2.63 | | 125,160 | | 55.27 | | | 125,160 | | 55.27 | |
| 3.06 | | 414,054 | | $ | 44.72 | | | 322,938 | | $ | 46.35 | |
| TSARs: | | | | | | |
| $29.27 to $35.51 | 3.55 | | 850,220 | | $ | 30.43 | | | 601,210 | | $ | 30.92 | |
| $38.79 to $50.17 | 4.58 | | 839,663 | | 45.19 | | | 352,245 | | 46.73 | |
| $54.65 to $78.59 | 2.91 | | 566,310 | | 56.47 | | | 566,310 | | 56.47 | |
| 3.77 | | 2,256,193 | | $ | 42.46 | | | 1,519,765 | | $ | 44.10 | |
| Stock options: | | | | | | |
| $29.27 to $35.51 | 1.86 | | 43,007 | | $ | 32.68 | | | 37,859 | | $ | 33.14 | |
| $38.79 to $50.17 | 2.92 | | 36,214 | | 47.76 | | | 26,328 | | 49.18 | |
| $54.65 to $78.59 | 2.70 | | 27,110 | | 55.46 | | | 27,110 | | 55.46 | |
| 2.43 | | 106,331 | | $ | 43.62 | | | 91,297 | | $ | 44.39 | |
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 11
(ii)Compensation expense related to SARs and TSARs:
Compensation expense for SARs and TSARs is measured based on their fair value and is recognized over the vesting period. Changes in fair value each period are recognized in net income for the proportion of the service that has been rendered at each reporting date. The fair value at September 30, 2022 was $16.9 million compared to the recorded liability of $15.9 million. The difference between the fair value and the recorded liability is $1.0 million and will be recognized over the weighted average remaining vesting period of approximately 1.4 years. The weighted average fair value was estimated at September 30, 2022 using the Black-Scholes option pricing model.
For the three and nine month periods ended September 30, 2022, compensation expense related to SARs and TSARs included a recovery in cost of sales and operating expense of $8.6 million (2021 - an expense of $18.2 million) and a recovery of $4.8 million (2021 - a recovery of $2.0 million), respectively. This included a recovery of $8.8 million (2021 - an expense of $17.6 million) and a recovery of $9.9 million (2021 - a recovery of $8.2 million), respectively, related to the effect of the change in the Company’s share price for the three and nine month periods ended September 30, 2022 and 2021 respectively.
b)Deferred, restricted and performance share units:
Deferred, restricted and performance share units outstanding at September 30, 2022 are as follows:
| | | | | | | | | | | | |
| Number of Deferred
Share Units | Number of Restricted
Share Units | | Number of
Performance Share Units |
| Outstanding at December 31, 2021 | 133,418 | | 332,385 | | | 689,688 | |
| Granted | 16,469 | | 104,810 | | | 199,430 | |
Performance factors impact on redemption 1 | — | | — | | | (14,796) | |
| Granted in-lieu of dividends | 902 | | 2,049 | | | 4,230 | |
| Redeemed | — | | (71,318) | | | (119,714) | |
| Cancelled | — | | (12,636) | | | (16,205) | |
| Outstanding at June 30, 2022 | 150,789 | | 355,290 | | | 742,633 | |
| Granted | 1,827 | | — | | | — | |
| | | | |
| Granted in-lieu of dividends | 822 | | 1,916 | | | 4,047 | |
| | | | |
| Cancelled | — | | (6,218) | | | (5,280) | |
| Outstanding at September 30, 2022 | 153,438 | | 350,988 | | | 741,400 | |
1 The number of performance share units that ultimately vest are determined by performance factors as described below. The performance factors impact relates to performance share units redeemed in the quarter ended March 31, 2022.
Performance share units are redeemable for cash based on the market value of the Company's common shares and are non-dilutive to shareholders. Units vest over three years and include two equally weighted performance factors: (i) relative total shareholder return of Methanex shares versus a specific market index (the market performance factor) and (ii) three year average Return on Capital Employed (the non-market performance factor). The market performance factor is measured by the Company at the grant date and reporting date using a Monte-Carlo simulation model to determine fair value. The non-market performance factor reflects management's best estimate to determine the expected number of units to vest. Based on these performance factors, the performance share unit payout will range between 0% to 200%.
Compensation expense for deferred, restricted and performance share units is measured at fair value based on the market value of the Company’s common shares and is recognized over the vesting period. Changes in fair value are recognized in net income for the proportion of the service that has been rendered at each reporting date. The fair value of deferred, restricted and performance share units at September 30, 2022 was $49.1 million compared to the recorded liability of $40.5 million. The difference between the fair value and the recorded liability of $8.6 million will be recognized over the weighted average remaining vesting period of approximately 1.7 years.
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 12
For the three and nine month periods ended September 30, 2022, compensation expense related to deferred, restricted and performance share units included in cost of sales and operating expenses was a recovery of $8.8 million (2021 - an expense of $17.5 million) and an expense of $5.4 million (2021 - an expense of $16.8 million), respectively. This included a recovery of $11.3 million (2021 - an expense of $15.4 million) and a recovery of $8.8 million (2021 - an expense of $4.0 million), respectively, related to the effect of the change in the Company’s share price for the three and nine month periods ended September 30, 2022 and 2021 respectively.
9.Changes in non-cash working capital:
Changes in non-cash working capital for the three and nine month periods ended September 30, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| Sep 30
2022 | Sep 30
2021 | | Sep 30
2022 | Sep 30
2021 |
| Changes in non-cash working capital: | | | | | |
| Trade and other receivables | $ | (65,002) | | $ | 8,027 | | | $ | (9,026) | | $ | (95,286) | |
| Inventories | 61,457 | | 17,545 | | | 42,043 | | (77,912) | |
| Prepaid expenses | (1,204) | | (6,774) | | | (7,683) | | (917) | |
Trade, other payables and accrued liabilities | 140,326 | | 37,796 | | | (18,654) | | 139,612 | |
| 135,577 | | 56,594 | | | 6,680 | | (34,503) | |
Adjustments for items not having a cash effect and working capital changes relating to taxes and interest paid | (51,768) | | (7,706) | | | (29,128) | | (40,136) | |
| Changes in non-cash working capital having a cash effect | $ | 83,809 | | $ | 48,888 | | | $ | (22,448) | | $ | (74,639) | |
| | | | | |
| These changes relate to the following activities: | | | | | |
| Operating | $ | 66,964 | | $ | 38,755 | | | $ | (53,864) | | $ | (67,135) | |
| Financing | 19,666 | | 1,599 | | | 21,492 | | 1,599 | |
| Investing | (2,821) | | 8,534 | | | 9,924 | | (9,103) | |
| Changes in non-cash working capital | $ | 83,809 | | $ | 48,888 | | | $ | (22,448) | | $ | (74,639) | |
10.Financial instruments:
Financial instruments are either measured at amortized cost or fair value.
In the normal course of business, the Company's assets, liabilities and forecasted transactions, as reported in U.S. dollars, are impacted by various market risks including, but not limited to, natural gas prices and currency exchange rates. The time frame and manner in which the Company manages those risks varies for each item based on the Company's assessment of the risk and the available alternatives for mitigating risks.
The Company uses derivatives as part of its risk management program to mitigate variability associated with changing market values. Changes in fair value of derivative financial instruments are recorded in earnings unless the instruments are designated as cash flow hedges. The Company designates as cash flow hedges derivative financial instruments to hedge its risk exposure to fluctuations in natural gas prices and derivative financial instruments to hedge its risk exposure to fluctuations in the Euro compared to the U.S. dollar.
The fair value of derivative instruments is determined based on industry-accepted valuation models with those using market observable inputs classified within Level 2 of the fair value hierarchy and those using significant unobservable inputs classified as Level 3. The fair value of all of the Company's derivative contracts as presented in the consolidated statements of financial position are determined based on present values and the discount rates used are adjusted for credit risk. The effective portion of the changes in fair value of derivative financial instruments designated as cash flow hedges is recorded in other comprehensive income as the change in fair value of cash flow hedges. The change in the fair value of the forward element of forward contracts is recorded separately in other comprehensive income as the forward element is excluded from the hedging relationships. Once a commodity hedge settles, the amount realized during the period and not recognized immediately in the statement of income is reclassified from accumulated other comprehensive income (equity) to inventory and ultimately through
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 13
cost of goods sold. Foreign currency hedges settled, are realized during the period directly to the statement of income, reclassified from the statement of other comprehensive income.
Until settled, the fair value of Level 2 derivative financial instruments will fluctuate based on changes in commodity prices or foreign currency exchange rates and the fair value of Level 3 derivative financial instruments will fluctuate based on changes in the observable and unobservable valuation model inputs.
North American Natural gas forward contracts
The Company manages its exposure to changes in natural gas prices for a portion of its North American natural gas requirements by executing a number of fixed price forward contracts: both financial and physical.
The Company has entered into forward contracts designated as cash flow hedges to manage its exposure to changes in natural gas prices for Geismar and Medicine Hat. Natural gas is fungible across the Geismar plants. Other costs incurred to transport natural gas from the contracted delivery point, either Henry Hub or AECO, to the relevant production facility represent an insignificant portion of the overall underlying risk and are recognized as incurred outside of the hedging relationship.
| | | | | | | | |
| As at | Sep 30
2022 | Dec 31
2021 |
| Maturities | 2022-2032 | 2022-2032 |
Notional quantity 1 | 306,990 | | 322,880 | |
Notional quantity per day 1 | 50 - 150 | 50 - 130 |
| Notional amount | $ | 1,003,520 | | $ | 1,053,917 | |
| Net fair value | $ | 357,587 | | $ | (3,986) | |
1 In thousands of Metric Million British Thermal Units (MMBtu)
Information regarding the gross amounts of the Company's natural gas forward contracts designated as cash flow hedges in the unaudited consolidated statements of financial position is as follows:
| | | | | | | | |
| As at | Sep 30
2022 | Dec 31
2021 |
| Other current assets | $ | 69,012 | | $ | 5,905 | |
| Other non-current assets | 289,467 | | 50,208 | |
| Other current liabilities | — | | (3,961) | |
| Other long-term liabilities | (892) | | (56,138) | |
| Net fair value | $ | 357,587 | | $ | (3,986) | |
Euro forward exchange contracts
The Company manages its foreign currency exposure to euro denominated sales by executing a number of forward contracts which it has designated as cash flow hedges for its highly probable forecast euro collections.
As at September 30, 2022, the Company had outstanding forward exchange contracts designated as cash flow hedges to sell a notional amount of 16.8 million euros (December 31, 2021 - 25.8 million euros). The euro contracts had a positive fair value of $0.9 million included in other current assets (December 31, 2021 - positive fair value of $0.7 million included in other current assets).
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 14
Fair value - Level 2 instruments
The fair value of the Company’s North American natural gas forward contracts and Euro forward exchange contracts are derivative financial instruments determined based on Bloomberg quoted market prices and confirmations received from counterparties, which are adjusted for credit risk.
The table below shows the nominal net cash flows for derivative hedging instruments, excluding credit risk adjustments, based upon contracted settlement dates. The amounts reflect the maturity profile of the hedging instruments and are subject to change based on the prevailing market rate at each of the future settlement dates. Financial asset derivative positions are held with investment-grade counterparties and therefore the settlement day risk exposure is considered to be minimal.
| | | | | | | | | | | | | | | | | | | | |
| | | Cash inflows (outflows) by term to maturity - undiscounted |
| Carrying amount | Contractual cash flows | 1 year or less | 1-3 years | 3-5 years | More than
5 years |
| Natural gas forward contracts assets | $ | 358,479 | | $ | 431,281 | | $ | 70,302 | | $ | 114,614 | | $ | 100,728 | | $ | 145,637 | |
| Natural gas forward contracts liabilities | (892) | | (1,040) | | — | | (990) | | (50) | | — | |
| Euro forward exchange contracts | 855 | | 855 | | 855 | | — | | — | | — | |
| $ | 358,442 | | $ | 431,096 | | $ | 71,157 | | $ | 113,624 | | $ | 100,678 | | $ | 145,637 | |
The carrying values of the Company’s financial instruments approximate their fair values, except as follows:
| | | | | | | | |
| September 30, 2022 |
| As at | Carrying Value | Fair Value |
| Long-term debt excluding deferred financing fees | $ | 2,168,931 | | $ | 1,782,877 | |
Long-term debt consists of limited recourse debt facilities and unsecured notes. There is no publicly traded market for the limited recourse debt facilities. The fair value of the limited recourse debt facilities as disclosed on a recurring basis and categorized as Level 2 within the fair value hierarchy is estimated by reference to current market rates as at the reporting date. The fair value of the unsecured notes disclosed on a recurring basis and also categorized as Level 2 within the fair value hierarchy is estimated using quoted prices and yields as at the reporting date. The fair value of the revolving and construction credit facilities are equal to their carrying values. The fair value of the Company’s long term debt will fluctuate until maturity.
Fair value - Egyptian natural gas supply contract (Level 3 instrument)
The Company holds a long-term natural gas supply contract expiring in 2036 with the Egyptian Natural Gas Holding Company ("EGAS"), a State-Owned enterprise in Egypt. The natural gas supply contract includes a base fixed price plus a premium based on the realized price of methanol for the full volume of natural gas to supply the plant for the remainder of its useful life.
The terms of this contract were amended during the third quarter of 2022 to redirect and sell the plant's contracted natural gas for a three-month period (Refer to Note 11 - Egypt Gas Redirection and Sale Proceeds). The amendment has modified the accounting for the contract whereby it is now considered a derivative to be measured at fair value.
There is no observable, liquid spot market or forward curve for natural gas in Egypt. In addition, there are limited observable prices for natural gas in Egypt as all natural gas purchases and sales are controlled by the government and the observed prices differ based on the produced output or usage.
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 15
Due to the absence of an observable market price for an equivalent or similar contract to measure fair value, we have estimated fair value using a Monte-Carlo model. The Monte-Carlo model includes significant unobservable inputs and as a result is classified within Level 3 of the fair value hierarchy. We have considered market participant assumptions in establishing the model inputs and determining fair value, including adjusting the base fixed price and methanol based premium at the valuation date to consider estimates of inflation since contract inception.
At September 30, 2022 the fair value of the derivative associated with the remaining term of the natural gas supply contract, following the redirection and sale is $9.1 million ($4.6 million - attributable to Methanex) recorded in Other assets and recognized as an unrealized gain in Finance income (loss) and other expenses.
The table presents the Level 3 inputs and the sensitivities of the Monte-Carlo model valuation to changes in these inputs:
| | | | | | | | | | | |
| Sensitivities |
| Valuation input | Input value or range | Change in input | Resulting change in valuation |
| Methanol price volatility (before impact of mean reversion) | 35% | +/- 5% | $+6/-5 million |
| Methanol price forecast | $350 - $500 per MT | +/- $25 per MT | $+/-3 million |
| Discount rate | 9.6% | +/- 1% | $+/-1 million |
| | | |
It is possible that the assumptions used in establishing fair value amounts will differ from future outcomes and the impact of such variations could be material.
11.Egypt gas redirection and sale proceeds:
In the third quarter of 2022, the Company entered into an agreement to redirect and sell the Egypt plant's contracted natural gas during an extended turnaround for a three-month period from late July to late October.
The Company has recognized $116.3 million ($58.2 million - attributable to Methanex) in the third quarter of 2022 to redirect and sell the contracted natural gas for the full three months.
METHANEX CORPORATION 2022 THIRD QUARTER
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED) PAGE 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on behalf by the undersigned, thereunto duly authorized.
| | | | | | | | | | | | | | |
| METHANEX CORPORATION |
| Date: October 26, 2022 | By: | /s/ KEVIN PRICE |
| | Name: | | Kevin Price |
| | Title: | | General Counsel
and Corporate Secretary |
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