Methanex Reports Stronger EBITDA in the Second Quarter-Projects in New Zealand and Louisiana Driving Future Growth
(firmenpresse) - VANCOUVER, BRITISH COLUMBIA -- (Marketwire) -- 07/25/12 -- Methanex Corporation (TSX: MX)(NASDAQ: MEOH)(SANTIAGO: METHANEX) For the second quarter of 2012, Methanex reported Adjusted EBITDA(1) of $113 million and Adjusted net income(1) of $44 million ($0.47 per share on a diluted basis(1)). This compares with Adjusted EBITDA(1) of $93 million and Adjusted net income(1) of $39 million ($0.41 per share on a diluted basis(1)) for the first quarter of 2012.
Bruce Aitken, President and CEO of Methanex commented, "Overall methanol demand has remained good and the pricing environment has been relatively stable, despite some demand softness in certain derivatives. We reported higher EBITDA in the second quarter due primarily to higher sales of Methanex-produced methanol."
Mr. Aitken added, "Industry demand growth is expected to significantly exceed new capacity additions over the next few years and we have a number of growth projects in place to capitalize on the positive industry conditions. In New Zealand, the recent restart of a second plant increases our cash generation capability and we are investigating further initiatives which could increase annual production capacity by up to 900,000 tonnes by the end of 2013. We also announced today that we have reached a final investment decision to proceed with the project to relocate an idle Chile facility to Geismar, Louisiana. The project is on track to add one million tonnes of annual production capacity by the end of 2014."
Mr. Aitken concluded, "With over US$600 million of cash on hand, an undrawn credit facility, a robust balance sheet, and strong cash flow generation, we are well positioned to repay our $200 million bond coming due in August, invest in the Louisiana project and other strategic opportunities to grow the Company, and continue to deliver on our commitment to return excess cash to shareholders."
A conference call is scheduled for July 26, 2012 at 12:00 noon ET (9:00 am PT) to review these second quarter results. To access the call, dial the Conferencing operator ten minutes prior to the start of the call at (416) 340-8018, or toll free at (866) 223-7781. A playback version of the conference call will be available for three weeks at (905) 694-9451, or toll free at (800) 408-3053. The passcode for the playback version is 2530127. There will be a simultaneous audio-only webcast of the conference call, which can be accessed from our website at . The webcast will be available on our website for three weeks following the call.
Methanex is a Vancouver-based, publicly traded company and is the world's largest supplier of methanol to major international markets. 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 .
FORWARD-LOOKING INFORMATION WARNING
This Second Quarter 2012 press release contains forward-looking statements with respect to us and the chemical industry. Refer to Forward-Looking Information Warning in the attached Second Quarter 2012 Management's Discussion and Analysis for more information.
2 Interim Report
For the Three Months Ended June 30, 2012
At July 25, 2012 the Company had 93,827,060 common shares issued and outstanding and stock options exercisable for 3,933,537 additional common shares.
SECOND QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS
Except where otherwise noted, all currency amounts are stated in United States dollars.
FINANCIAL AND OPERATIONAL HIGHLIGHTS
This Second Quarter 2012 Management's Discussion and Analysis ("MD&A") dated July 25, 2012 for Methanex Corporation ("the Company") should be read in conjunction with the Company's condensed consolidated interim financial statements for the period ended June 30, 2012 as well as the 2011 Annual Consolidated Financial Statements and MD&A included in the Methanex 2011 Annual Report. Unless otherwise indicated, the financial information presented in this interim report is prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The Methanex 2011 Annual Report and additional information relating to Methanex is available on SEDAR at and on EDGAR at .
Chile
We continue to operate our Chile facilities significantly below site capacity. This is primarily due to curtailments of natural gas supply from Argentina - refer to the Management's Discussion and Analysis included in our 2011 Annual Report for more information.
During the second quarter of 2012, we produced 82,000 tonnes in Chile operating one plant at approximately 30% of capacity. We continue to work closely with Empresa Nacional del Petroleo (ENAP) to manage through the seasonality of gas demand with the objective of maintaining our operations throughout the winter season in 2012.
Our primary goal is to progressively increase production at the Chile site with natural gas from suppliers in Chile. We are pursuing investment opportunities with ENAP, GeoPark Chile Limited (GeoPark) and others to help accelerate natural gas exploration and development in southern Chile. We are working with ENAP to develop natural gas in the Dorado Riquelme block. Under the arrangement, we fund a 50% participation in the block and, as at June 30, 2012, we had contributed approximately $111 million. Over the past few years, we have also provided funding to support and accelerate GeoPark's natural gas exploration and development activities in southern Chile. GeoPark has agreed to supply us with all natural gas sourced from the Fell block under a ten-year exclusive supply arrangement that commenced in 2008. During the second quarter of 2012, substantially all production at our Chilean facilities was produced with natural gas supplied from the Fell and Dorado Riquelme blocks. We are also participating in other exploration blocks with international oil and gas companies and as at June 30, 2012, we had contributed $14 million for our share of the exploration costs.
While significant investments have been made in the last few years for natural gas exploration and development in southern Chile, the timelines for significant increases in gas production are much longer than we had originally anticipated and existing gas fields are experiencing declines. As a result, the short-term outlook for gas supply in Chile continues to be challenging.
We announced today that we have reached a final investment decision to proceed with the project to relocate an idle Chile facility to Geismar, Louisiana and we are also examining the viability of other projects to increase the utilization of our Chilean assets.
The future operating rate of our Chile site is primarily dependent on demand for natural gas for residential purposes, which is higher in the southern hemisphere winter, production rates from existing natural gas fields, and the level of natural gas deliveries from future exploration and development activities in southern Chile. We cannot provide assurance that we, ENAP, GeoPark or others will be successful in the exploration and development of natural gas or that we will obtain any additional natural gas from suppliers in Chile on commercially acceptable terms. As a result, we cannot provide assurance in the level of natural gas supply or that we will be able to source sufficient natural gas to operate any capacity in Chile or that we will have sufficient future cash flows from Chile to support the carrying value of our Chilean assets and that this will not have an adverse impact on our results of operations and financial condition.
New Zealand
During the second quarter of 2012, we operated one Motunui facility in New Zealand and produced 210,000 tonnes, which represents full capacity for one Motunui facility. In July, we restarted a second Motunui facility, which adds 650,000 tonnes of annual production capacity to our New Zealand operations and brings the current site capacity to approximately 1.5 million tonnes. We are currently assessing the feasibility of debottlenecking the Motunui site and the potential to restart our nearby 530,000 tonne Waitara Valley plant which could add a further 900,000 tonnes of annual production capacity in New Zealand by the end of 2013.
Trinidad
In Trinidad, we own 100% of the Titan facility with an annual production capacity of 900,000 tonnes and have a 63.1% interest in the Atlas facility with an annual production capacity of 1,150,000 tonnes (63.1% interest). The Titan facility produced 196,000 tonnes in the second quarter of 2012 compared with 215,000 tonnes in the first quarter of 2012. Production in the second quarter of 2012 was lower than the first quarter of 2012 due to minor unplanned maintenance outages and periodic natural gas curtailments.
The Atlas facility produced 264,000 tonnes in the second quarter of 2012 compared with 127,000 tonnes in the first quarter of 2012. The Atlas facility was shut down for a 38 day outage in January 2012 for maintenance and to repair an equipment failure. At the end of the second quarter of 2012, the Atlas facility was operating at approximately 95% of capacity.
We continue to experience some natural gas curtailments to our Trinidad facilities due to a mismatch between upstream commitments to supply the Natural Gas Company in Trinidad (NGC) and downstream demand from NGC's customers which becomes apparent when an upstream supply issue arises. We are engaged with key stakeholders to find a solution to this issue, but in the meantime we expect to continue to experience some gas curtailments to our Trinidad site.
Egypt
The Egypt methanol facility produced 164,000 tonnes (60% interest) in the second quarter of 2012 compared with 202,000 tonnes in the first quarter of 2012. We have a 60% equity interest in the facility and marketing rights for 100% of the production. The lower second quarter of 2012 production is due to planned maintenance and inspection activities that commenced late in the quarter and to natural gas restrictions due to upstream gas platform outages and seasonal domestic demand for natural gas electricity generation.
Medicine Hat
Our 470,000 tonne per year facility in Medicine Hat, Alberta produced 118,000 tonnes in the second quarter of 2012 compared with 114,000 tonnes during the first quarter of 2012. We are currently assessing the feasibility of debottlenecking the Medicine Hat facility which could add a further 90,000 tonnes of annual production capacity.
FINANCIAL RESULTS
For the second quarter of 2012 we recorded Adjusted EBITDA of $113 million and Adjusted net income of $44 million ($0.47 per share on a diluted basis). This compares with Adjusted EBITDA of $93 million and Adjusted net income of $39 million ($0.41 per share on a diluted basis) for the first quarter of 2012 and Adjusted EBITDA of $102 million and Adjusted net income of $39 million ($0.41 per share on a diluted basis) for the second quarter of 2011.
We calculate Adjusted EBITDA and Adjusted net income by excluding amounts associated with the 40% non-controlling interest in Egypt that we do not own, the mark-to-market impact of share-based compensation as a result of changes in our share price and items which are considered by management to be non-operational. Refer to Additional Information - Supplemental Non-GAAP Measures for a further discussion on how we calculate these measures.
A reconciliation from net income attributable to Methanex shareholders to Adjusted net income and the calculation of Adjusted diluted net income per common share is as follows:
We review our financial results by analyzing changes in Adjusted EBITDA, mark-to-market impact of share-based compensation, Louisiana project relocation expenses, depreciation and amortization, finance costs, finance income and other expenses and income taxes. A summary of our consolidated statements of income are as follows:
ADJUSTED EBITDA (ATTRIBUTABLE TO METHANEX SHAREHOLDERS)
Our operations consist of a single operating segment - the production and sale of methanol. We review the results of operations by analyzing changes in the components of Adjusted EBITDA. For a discussion of the definitions used in our Adjusted EBITDA analysis, refer to How We Analyze Our Business.
The changes in Adjusted EBITDA resulted from changes in the following:
Early in the second quarter of 2012, methanol market conditions were tightening and methanol pricing increased. However, global economic uncertainty and lower energy pricing contributed to a moderation of industry supply and demand conditions and methanol pricing declined in the latter part of the quarter (refer to Supply/Demand Fundamentals section for more information). Our average non-discounted posted price for the second quarter of 2012 was $452 per tonne compared with $437 per tonne for the first quarter of 2012 and $421 per tonne for the second quarter of 2011. Our average realized price for the second quarter of 2012 was $384 per tonne compared with $382 per tonne for the first quarter of 2012 and $363 per tonne for the second quarter of 2011. The change in average realized price for the second quarter of 2012 increased Adjusted EBITDA by $4 million compared with the first quarter of 2012 and increased Adjusted EBITDA by $33 million compared with the second quarter of 2011. Our average realized price for the six months ended June 30, 2012 was $383 per tonne compared with $365 per tonne for the same period in 2011 and this increased Adjusted EBITDA by $57 million.
Sales volume
Methanol sales volumes excluding commission sales volumes were lower in the second quarter of 2012 compared with the first quarter of 2012 by 47,000 tonnes and this resulted in lower Adjusted EBITDA by $5 million. Methanol sales volumes excluding commission sales for the three and six month periods ended June 30, 2012 were lower than comparable periods in 2011 by 64,000 tonnes and 130,000 tonnes and this resulted in lower Adjusted EBITDA by $6 million and $11 million, respectively.
Total cash costs
The primary drivers of changes in our total cash costs are changes in the cost of methanol we produce at our facilities (Methanex-produced methanol) and changes in the cost of methanol we purchase from others (purchased methanol). All of our production facilities except Medicine Hat are underpinned by natural gas purchase agreements with pricing terms that include base and variable price components. We supplement our production with methanol produced by others through methanol offtake contracts and purchases on the spot market to meet customer needs and support our marketing efforts within the major global markets.
We have adopted the first-in, first-out method of accounting for inventories and it generally takes between 30 and 60 days to sell the methanol we produce or purchase. Accordingly, the changes in Adjusted EBITDA as a result of changes in Methanex-produced and purchased methanol costs primarily depend on changes in methanol pricing and the timing of inventory flows.
The impact on Adjusted EBITDA from changes in our cash costs are explained below:
Methanex-produced methanol costs
We purchase natural gas for the Chile, Trinidad, Egypt and New Zealand methanol facilities under natural gas purchase agreements where the terms include a base price and a variable price component linked to the price of methanol. For the second quarter of 2012 compared with the first quarter of 2012, Methanex-produced methanol costs were lower by $6 million primarily due to an improved operating rate at the Atlas facility which resulted in a lower natural gas cost per tonne. Methanex-produced methanol costs were higher for the three and six month periods ended June 30, 2012 compared with the same periods in 2011 by $10 million and $18 million, respectively, primarily due to the impact of higher methanol pricing on natural gas costs.
Proportion of Methanex-produced methanol sales
The cost of purchased methanol is directly linked to the selling price for methanol at the time of purchase and the cost of purchased methanol is generally higher than the cost of Methanex-produced methanol. Accordingly, an increase in the proportion of Methanex-produced methanol sales results in a decrease in our overall cost structure for a given period. For the second quarter of 2012 compared with the first quarter of 2012, a higher proportion of Methanex-produced methanol sales increased Adjusted EBITDA by $15 million. Sales of Methanex-produced methanol were higher in the second quarter of 2012 compared to the first quarter of 2012 primarily due to increased sales from the Atlas facility which underwent an outage in the first quarter of 2012 for maintenance and to repair an equipment failure.
For the three and six month periods ended June 30, 2012 compared with the same periods in 2011, a higher proportion of Methanex-produced methanol sales increased Adjusted EBITDA by $12 million and $30 million, respectively. The impact of higher sales volumes from the Egypt and Medicine Hat methanol facilities, which commenced operations in the first half of 2011, was partially offset by lower sales volumes from the Chile and Atlas methanol facilities in 2012.
Purchased methanol costs
Purchased methanol costs were higher for all periods presented primarily as a result of higher methanol pricing.
Logistics costs
For the second quarter of 2012 compared with the first quarter of 2012 and for the six month period ended June 30, 2012 compared with the same period in 2011, logistics cost variances were impacted by a one-time $7 million charge in the first quarter of 2012 to terminate a time charter vessel lease contract.
Other, net
For the three and six month periods ended June 30, 2012 compared with the same periods in 2011, other costs were higher by $2 million and $4 million, respectively, due to a portion of fixed manufacturing costs being charged directly to earnings rather than to inventory due to lower production at our Chile and Atlas facilities. The remaining differences for those periods are primarily due to the accounting for share-based compensation as more fully discussed in the share-based compensation section below.
Mark-to-Market Impact of Share-based Compensation
We grant share-based awards as an element of compensation. Share-based awards granted include stock options, share appreciation rights, tandem share appreciation rights, deferred share units, restricted share units and performance share units. Share-based compensation includes an amount related to the grant-date value and a mark-to-market impact as a result of subsequent changes in the Company's share price. The grant-date value amount is included in Adjusted EBITDA and Adjusted net income. The mark-to-market impact of share-based compensation as a result of changes in our share price is excluded from Adjusted EBITDA and Adjusted net income and analyzed separately below.
Share appreciation rights (SARs) and tandem share appreciation rights (TSARs) are units that grant the holder the right to receive a cash payment upon exercise for the difference between the market price of the Company's common shares and the exercise price, which is determined at the date of grant. The fair value of SARs and TSARs are re-measured each quarter using the Black-Scholes option pricing model, which considers the market value of the Company's common shares on the last trading day of the quarter.
Deferred, restricted and performance share units are grants of notional common shares that are redeemable for cash upon vesting based on the market value of the Company's common shares and are non-dilutive to shareholders. For deferred, restricted and performance share units, the value is initially measured at the grant date and subsequently re-measured based on the market value of the Company's common shares on the last trading day of each quarter.
For all the share-based awards, share-based compensation is recognized over the related vesting period for the proportion of the service that has been rendered at each reporting date. The grant-date value is recognized in Adjusted EBITDA and Adjusted net income while the mark-to-market impact as a result of subsequent changes in the share price is excluded from Adjusted EBITDA and Adjusted net income.
Louisiana Project Relocation Expenses
In July 2012, we reached a final investment decision to proceed with the project to relocate an idle Chile facility to Geismar, Louisiana with an estimated project cost of approximately $550 million. The project will add one million tonnes of annual production capacity and is expected to be operational by the end of 2014. Under International Financial Reporting Standards, certain costs associated with relocating an asset are not eligible for capitalization and are required to be charged directly to earnings. In addition to the $4 million of Louisiana project relocation expenses charged to earnings in the second quarter of 2012, we expect a further before-tax charge to earnings in the third quarter of 2012, currently estimated to be approximately $35 million, after which we expect the remaining project expenditures to be capitalized. In addition, in association with this decision, we expect to incur a one-time before-tax non-cash charge of approximately $25 million in the third quarter of 2012 related to a portion of the carrying value of the Chile facility that is being relocated to Louisiana.
Depreciation and Amortization
Depreciation and amortization was $44 million for the second quarter of 2012 compared with $38 million for the first quarter of 2012 and $40 million for the second quarter of 2011. Depreciation and amortization was higher in the second quarter of 2012 compared with the first quarter of 2012 and second quarter of 2011 primarily due to higher sales of Methanex-produced methanol. Depreciation and amortization was $82 million for the six month period ended June 30, 2012 compared with $69 million for the same period in 2011. The increase in depreciation and amortization in 2012 compared with 2011 is primarily a result of depreciation associated with the Egypt (100% basis) and Medicine Hat methanol facilities which commenced operations in the first and second quarters of 2011, respectively.
Finance costs before capitalized interest for the second quarter of 2012 were $20 million compared with $18 million for the first quarter of 2012 and $17 million for the second quarter of 2011. Finance costs before capitalized interest for the six month period ended June 30, 2012 were $38 million compared with $35 million for the same period in 2011. The increase in finance costs for all periods presented is primarily due to the impact of the interest expense on the $250 million of unsecured notes issued by the Company in late February 2012. The unsecured notes bear an interest rate of 5.25% and mature in 2022. We intend to repay the 8.75% $200 million unsecured notes due in August 2012 with cash on hand.
Capitalized interest relates to interest costs capitalized during the construction of the 1.26 million tonne per year methanol facility in Egypt (100% basis). The Egypt methanol facility commenced production in mid-March 2011 and accordingly, we ceased capitalization of interest costs from this date.
Finance income and other expenses for the second quarter of 2012 was nil compared with $2 million for the first quarter of 2012 and $1 million for the second quarter of 2011. The change in finance income and other expenses for all periods presented was primarily due to the impact of changes in foreign exchange rates.
Income Taxes
The effective tax rate for the second quarter of 2012 was 18% compared with approximately 23% for the first quarter of 2012.
We earn the majority of our pre-tax earnings in Trinidad, Egypt, Chile, Canada and New Zealand. In Trinidad and Chile, the statutory tax rate is 35% and in Egypt, the statutory tax rate is 25%. Our Atlas facility in Trinidad has partial relief from corporation income tax until 2014. We have significant loss carryforwards in Canada and New Zealand which have not been recognized for accounting purposes. During the second quarter of 2012, we earned a higher proportion of our consolidated income from methanol produced in Canada and New Zealand and this contributed to a lower effective tax rate compared with the first quarter of 2012.
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 deferred income tax expense and is subsequently reclassified to current income tax expense when earnings are distributed.
SUPPLY/DEMAND FUNDAMENTALS
We estimate that methanol demand, excluding methanol demand from integrated methanol to olefins facilities, is currently approximately 51 million tonnes on an annualized basis. Despite some demand softness in certain derivatives in the current economic environment, overall methanol demand has remained good and prices have remained relatively stable.
Traditional chemical derivatives consume about two-thirds of global methanol demand and growth is correlated to industrial production.
Energy derivatives consume about one third of global methanol demand and over the last few years high energy prices have driven strong demand growth for methanol into energy applications such as gasoline blending and DME, primarily in China. Growth of methanol blending into gasoline in China has been particularly strong and we believe that future growth in this application is supported by regulatory changes in that country.
Many provinces in China have implemented fuel blending standards, and China also has national standards in place for methanol fuel blending (M85 & M100, or 85% methanol and 100% methanol, respectively). Methanol demand into olefins ("MTO") is emerging as a significant methanol derivative. There are three integrated and one merchant MTO plants in production and there is a second merchant plant expected to commence operation in 2012 which could consume up to two million tonnes of methanol. We believe demand potential into energy derivatives and olefins production will continue to grow.
During the second quarter of 2012, market conditions and the pricing environment were relatively stable. Our average non- discounted price for July 2012 is $433 per tonne.
In July 2012, we restarted an idle plant in New Zealand that added 0.65 million tonnes of annual production capacity and production commenced at a 0.85 million tonne plant in Beaumont, Texas. We have secured an offtake for a substantial quantity of production from the Beaumont facility. Over the next few years, there is a modest level of new capacity expected to come on-stream relative to demand growth expectations. There is a 0.8 million tonne plant expected to restart in Channelview, Texas in late 2013 and a 0.7 million tonne plant expected to start up in Azerbaijan in 2013. In New Zealand, we are assessing the feasibility of initiatives which could increase annual production capacity by up to 900,000 tonnes by the end of 2013 and recently announced that we have reached a final investment decision to proceed with the project to relocate an idle Chile facility to Geismar, Louisiana. The Louisiana project is on track to add one million tonnes of annual production capacity by the end of 2014. We expect that production from new capacity in China will be onsumed in that country and that higher cost production capacity in China will need to operate in order to satisfy demand growth.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities
Cash flows from operating activities in the second quarter of 2012 were $135 million compared with $93 million for the first quarter of 2012 and $78 million for the second quarter of 2011. Cash flows from operating activities for the six month period ended June 30, 2012 were $229 million compared with $202 million for the same period in 2011.
The changes in cash flows from operating activities resulted from changes in the following:
Adjusted cash flows from operating activities
Adjusted cash flows from operating activities, which excludes the amounts associated with the 40% non-controlling interests in the methanol facility in Egypt, changes in non-cash working capital and Louisiana project relocation expenses, were $110 million in the second quarter of 2012 compared with $89 million for the first quarter of 2012 and $86 million for the second quarter of 2011. Adjusted cash flows from operating activities for the six month period ended June 30, 2012 were $199 million compared with $167 million for the same period in 2011.
The changes in adjusted cash flows from operating activities resulted from changes in the following:
Refer to the Additional Information - Supplemental Non-GAAP Measures section for a reconciliation of Adjusted cash flows from operating activities to the most comparable GAAP measure.
During the second quarter of 2012, the Board of Directors approved a 9 percent increase to our quarterly dividend to shareholders, from $0.17 to $0.185 per share, and we paid a quarterly dividend of $17 million.
We operate in a highly competitive commodity industry and believe it is appropriate to maintain a conservative balance sheet and to maintain financial flexibility. During the first quarter of 2012, we issued $250 million of unsecured notes that mature in 2022 and our cash balance at June 30, 2012 was $623 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 intend to repay the 8.75% $200 million unsecured notes due in August 2012 from cash on hand. We have a strong balance sheet and an undrawn $200 million credit facility provided by highly rated financial institutions that expires in mid-2015.
Our planned capital maintenance expenditure program directed towards maintenance, turnarounds and catalyst changes for existing operations is currently estimated to total approximately $150 million to the end of 2013, including major refurbishments at some of our plants. In July 2012, we reached a final investment decision to proceed with the project to relocate an idle Chile facility to Geismar, Louisiana. The estimated project costs are approximately $550 million and the plant is expected to be operational by the end of 2014.
We believe we are well positioned to meet our financial commitments, invest to grow the Company and continue to deliver on our commitment to return excess cash to shareholders.
SHORT-TERM OUTLOOK
Despite some demand softness in certain derivatives in the current economic environment, overall methanol demand has remained good and pricing relatively stable. In July, we restarted a second Motunui facility in New Zealand which adds 0.65 million tonnes of annual production capacity and increases our cash generation capability.
The methanol price will ultimately depend on the strength of the global economy, industry operating rates, global energy prices, new supply additions and the strength of global demand. We believe that our financial position and financial flexibility, outstanding global supply network and competitive-cost position will provide a sound basis for Methanex to continue to be the leader in the methanol industry and to invest to grow the Company.
CONTROLS AND PROCEDURES
For the three months ended June 30, 2012, 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.
ANTICIPATED CHANGES TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)
Consolidation and Joint Arrangement Accounting
In May 2011, the IASB issued new accounting standards related to consolidation and joint arrangement accounting. The IASB has revised the definition of "control," which is a criterion for consolidation accounting. In addition, changes to IFRS in the accounting for joint arrangements were issued which, under certain circumstances, removed the option for proportionate consolidation accounting so that the equity method of accounting for such interests would need to be applied. The impact of applying consolidation accounting or equity accounting does not result in any change to net earnings or shareholders' equity, but would result in a significant presentation impact. We are currently assessing the impact of these standards on our financial statements. We currently account for our 63.1% interest in Atlas Methanol Company using proportionate consolidation accounting and this represents the most significant potential change under these new standards. The effective date for these standards is for periods commencing on or after January 1, 2013, with earlier adoption permitted.
ADDITIONAL INFORMATION - SUPPLEMENTAL NON-GAAP MEASURES
In addition to providing measures prepared in accordance with International Financial Reporting Standards (IFRS), we present certain supplemental non-GAAP measures. These are Adjusted EBITDA, Adjusted net income, Adjusted diluted net income per common share, operating income and Adjusted cash flows from operating activities. 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 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. We believe these measures are useful in assessing operating performance and liquidity of the Company's ongoing business 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 (attributable to Methanex shareholders)
Adjusted EBITDA differs from the most comparable GAAP measure, cash flows from operating activities, because it includes share-based compensation excluding mark-to-market impact and does not include changes in non-cash working capital, other cash payments related to operating activities, Louisiana project relocation expenses, other non-cash items, income taxes paid, finance income and other expenses, and Adjusted EBITDA associated with the 40% non-controlling interest in the methanol facility in Egypt.
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 share appreciation rights, tandem share appreciation rights, deferred share units, restricted share units and performance share units. The mark-to-market impact related to performance share units that is excluded from Adjusted EBITDA and Adjusted net income is calculated as the difference between the grant date value determined using a Methanex total shareholder return factor of 100% 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.
The following table shows a reconciliation of cash flows from operating activities to Adjusted EBITDA:
Adjusted Net Income and Adjusted Diluted Net Income per Common Share
Adjusted net income and Adjusted diluted net income per common share are non-GAAP measures because they exclude the mark-to-market impact of share-based compensation, income taxes related to the mark-to-market impact of share-based compensation and items that are considered by management to be non-operational. The following table shows a reconciliation of net income attributable to Methanex shareholders to Adjusted net income and the calculation of Adjusted diluted net income per common share:
Adjusted Cash Flows from Operating Activities (attributable to Methanex shareholders)
Adjusted cash flows from operating activities differs from the most comparable GAAP measure, cash flows from operating activities, because it does not include cash flows associated with the 40% non- controlling interest in the methanol facility in Egypt, changes in non-cash working capital and Louisiana project relocation expenses.
The following table shows a reconciliation of cash flows from operating activities to adjusted cash flows from operating activities:
Operating Income
Operating income is reconciled directly to a GAAP measure in our consolidated statements of income.
QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of selected financial information for the prior eight quarters is as follows:
FORWARD-LOOKING INFORMATION WARNING
This Second Quarter 2012 Management's Discussion and Analysis ("MD&A") as well as comments made during the Second Quarter 2012 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," "potential," "estimates," "target," "interest," "planning" 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:
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:
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:
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 except as required by applicable securities laws.
HOW WE ANALYZE OUR BUSINESS
Our operations consist of a single operating segment - the production and sale of methanol. We review our results of operations by analyzing changes in the components of Adjusted EBITDA (refer to the Additional Information - Supplemental Non-GAAP Measures section on for a reconciliation to the most comparable GAAP measure).
In addition to the methanol that we produce at our facilities ("Methanex-produced methanol"), we also purchase and re-sell methanol produced by others ("purchased methanol") and we sell methanol on a commission basis. We analyze the results of all methanol sales together, excluding commission sales volumes. The key drivers of change in Adjusted EBITDA are average realized price, cash costs and sales volume which are defined and calculated as follows:
We own 63.1% of the Atlas methanol facility and market the remaining 36.9% of its production through a commission offtake agreement. We account for this investment using proportionate consolidation, which results in 63.1% of its results being included in revenues and expenses with the remaining 36.9% portion included as commission income.
We own 60% of the 1.26 million tonne per year Egypt methanol facility and market the remaining 40% of its production through a commission offtake agreement. We account for this investment using consolidation accounting, which results in 100% of the revenues and expenses being included in our financial statements with the other investors' interest in the methanol facility being presented as "non-controlling interests". For purposes of analyzing our business, Adjusted EBITDA, Adjusted net income and Adjusted cash flows from operating activities exclude the amounts associated with the other investors' 40% non-controlling interest, which are included in commission income on a consistent basis with how we present the Atlas facility.
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 supplier of methanol to major international markets in Asia Pacific, North America, Europe and Latin 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 include the Egypt methanol facility on a consolidated basis, with the other investors' 40% share presented as non-controlling interest, and the Company's proportionate share of the Atlas methanol facility.
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 July 25, 2012.
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 included in cost of sales and operating expenses and depreciation and amortization for the three and six month periods ended June 30, 2012 is $497 million (2011 - $490 million) and $1,015 million (2011 - $997 million), respectively.
3. Property, plant and equipment:
Subsequent to June 30, 2012, the Company made a final investment decision to proceed with the project to relocate an idle Chile facility to Geismar, Louisiana with an estimated project cost of approximately $550 million. Under International Financial Reporting Standards, certain costs incurred in relation to relocating an asset are not eligible for capitalization to Property, Plant and Equipment and are required to be charged directly to income. At June 30, 2012, the Company had incurred $19.3 million in expenditures related to this project, of which $15.6 million was recorded to Property, Plant and Equipment, and the remaining $3.7 million was recognized as Louisiana project relocation expenses in the Consolidated Statements of Income. The Company estimates that additional expenditures of approximately $35 million will be incurred in relation to the relocation which will be charged directly to income. In addition, the Company expects to incur a before-tax non-cash charge to income of approximately $25 million in the three month period ending September 30, 2012 related to a portion of the carrying value of the Chile facility that is being relocated to Louisiana.
4. Long-term debt:
The Company has a $200 million unsecured revolving bank facility provided by highly rated financial institutions which expires mid-2015.
The Atlas and Egypt limited recourse debt facilities are described as limited recourse as they are secured only by the assets of the Atlas joint venture and the Egypt entity, respectively. Accordingly, the lenders to the limited recourse debt facilities have no recourse to the Company or its other subsidiaries. The Atlas and Egypt limited recourse debt facilities have customary covenants and default provisions that apply only to these entities, including restrictions on the incurrence of additional indebtedness, a requirement to fulfill certain conditions before the payment of cash or other distributions and a restriction on these distributions if there is a default subsisting. The Egypt limited recourse debt facilities also contain a covenant to complete by March 31, 2013 certain land title registrations and related mortgages that require action by Egyptian government entities. Management does not believe that the finalization of these items is material.
At June 30, 2012, management believes the Company was in compliance with all of the covenants and default provisions related to long-term debt obligations.
5. Finance costs:
Finance costs are primarily comprised of interest on borrowings and finance lease obligations, the effective portion of interest rate swaps designated as cash flow hedges, amortization of deferred financing fees, and accretion expense associated with site restoration costs. Interest during construction of the Egypt methanol facility was capitalized until the plant was substantially completed and ready for productive use in mid-March of 2011. The Company has interest rate swap contracts on its Egypt limited recourse debt facilities 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 to March 31, 2015.
6.Net income per common share:
Diluted net income per common share is calculated by giving effect to the potential dilution that would occur if outstanding stock options and 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 cash-settled and equity-settled is used, regardless of how the plan is accounted for. Accordingly, TSARs that are accounted for using the cash-settled method will require an adjustment to the numerator and denominator if the equity-settled method is determined to have a dilutive effect on diluted net income per common share.
During the three month period ended June 30, 2012, the Company's share price declined and the Company recorded a share-based compensation recovery related to TSARs. For this period, the equity-settled method has been determined to be the more dilutive for purposes of calculating diluted net income per common share.
A reconciliation of the net income used for the purpose of calculating diluted net income per common share is as follows:
Stock options and TSARs 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 or TSAR. A reconciliation of the number of common shares used for the purposes of calculating basic and diluted net income per common share is as follows:
For the three month and six month periods ended June 30, 2012, basic and diluted net income per common share attributable to Methanex shareholders were as follows:
7. Share-based compensation:
Information regarding units outstanding and exercisable at June 30, 2012 is as follows:
For the three and six month periods ended June 30, 2012, compensation expense related to stock options included in cost of sales and operating expenses was $0.2 million (2011 - $0.2 million) and $0.4 million (2011 - $0.5 million), respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model.
Compensation expense for SARs and TSARs is initially 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 June 30, 2012 was $16.4 million compared with the recorded liability of $12.0 million. The difference between the fair value and the recorded liability of $4.4 million will be recognized over the weighted average remaining service period of approximately 1.8 years. The weighted average fair value of the vested SARs and TSARs was estimated at June 30, 2012 using the Black-Scholes option pricing model.
For the three and six month periods ended June 30, 2012, compensation expense related to SARs and TSARs included a recovery in cost of sales and operating expenses of $3.6 million (2011 - recovery of $1.1 million) and an expense of $7.1 million (2011 - expense of $3.9 million), respectively. This included a recovery of $6.4 million (2011 - recovery of $2.6 million) and an expense of $1.4 million (2011 - recovery of $0.4 million) related to the effect of the change in the Company's share price for the three and six month periods ended June 30, 2012, respectively.
Deferred, restricted and performance share units outstanding at June 30, 2012 are as follows:
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 earnings for the proportion of the service that has been rendered at each reporting date. The fair value of deferred, restricted and performance share units at June 30, 2012 was $44.5 million compared with the recorded liability of $37.5 million. The difference between the fair value and the recorded liability of $7.0 million will be recognized over the weighted average remaining service period of approximately 1.8 years.
For the three and six month periods ended June 30, 2012, compensation expense related to deferred, restricted and performance share units included in cost of sales and operating expenses was a recovery of $0.1 million (2011 - expense of $2.6 million) and an expense of $14.0 million (2011 - expense of $7.4 million), respectively. This included a recovery of $4.1 million (2011 - expense of $1.1 million) and an expense of $6.2 million (2011 - expense of $1.7 million) related to the effect of the change in the Company's share price for the three and six month periods ended June 30, 2012, respectively.
8. Changes in non-cash working capital:
Changes in non-cash working capital for the three months and years ended June 30, 2012 were as follows:
9. Financial instruments:
The Egypt limited recourse debt facilities bear interest at LIBOR plus a spread. The Company has 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 to March 31, 2015. The Company has designated these interest rate swaps as cash flow hedges. These interest rate swaps had outstanding notional amounts of $355 million as at June 30, 2012. The notional amounts decrease over the expected repayment period. At June 30, 2012, these interest rate swap contracts had a negative fair value of $36.8 million (2011 - $41.5 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 June 30, 2012, the Company had outstanding forward exchange contracts designated as cash flow hedges to sell a notional amount of 68.6 million euro in exchange for US dollars and these euro contracts had a negative fair value of $1.1 million (2011 - positive fair value of $0.3 million) recorded in trade, other payables and accrued liabilities. Changes in fair value of derivative financial instruments designated as cash flow hedges have been recorded in other comprehensive income.
10. Contingent liability:
The Board of Inland Revenue of Trinidad and Tobago issued an assessment in 2011 against the Company's 63.1% owned joint venture, Atlas Methanol Company Unlimited ("Atlas"), in respect of the 2005 financial year. All subsequent tax years remain open to assessment. The assessment relates to the pricing arrangements of certain long- term fixed price sales contracts that extend to 2014 and 2019 related to methanol produced by Atlas. The impact of the amount in dispute for the 2005 financial year is nominal as Atlas was not subject to corporation income tax in that year. Atlas has partial relief from corporation income tax until 2014.
The Company has lodged an objection to the assessment. Based on the merits of the case and legal interpretation, management believes its position should be sustained.
Contacts:
Jason Chesko
Director, Investor Relations
Methanex Corporation
604 661 2600 or Toll Free: 1 800 661 8851
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Datum: 25.07.2012 - 17:42 Uhr
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News-ID 1136599
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