Methanex Corporation
Annual Report 2013

Plain-text annual report

A N N U A L R E P O R T2013 Table of Contents 02 2013 Financial Highlights 03 President’s Message to Shareholders 05 Management’s Discussion and Analysis 41 Consolidated Financial Statements 46 Notes to Consolidated Financial Statements Methanex Corporation is the world’s largest producer and supplier of methanol to major international markets in North America, Asia Pacific, Europe and South America. Methanol is a versatile liquid chemical produced primarily from natural gas and used as a chemical feedstock in the manufacture of a wide range of consumer and industrial products such as building materials, foams, resins and plastics. The fastest-growing markets for methanol are in the energy sector which today represents approximately 40% of methanol demand. These include using methanol in olefins production and energy applications such as direct blending into transportation fuels, dimethyl ether (DME) and biodiesel. Methanol is also used to produce methyl tertiary-butyl ether (MTBE), a gasoline component. Methanex – Global Methanol Industry Leader Global Production Facilities Methanex’s global production hubs are strategically positioned to supply every major global market. Methanex in New Zealand Our three production facilities in New Zealand supply methanol primarily to customers in Asia Pacific. Methanex in Canada Our plant in Medicine Hat, Alberta, supplies methanol to customers in North America. Methanex in Trinidad Our two plants in Trinidad, Titan and Atlas (Methanex interest 63.1%), supply methanol markets in North America, Europe, Asia Pacific and South America. Methanex in Egypt Our joint venture facility in Egypt (Methanex interest 50%) is located on the Mediterranean Sea and supplies methanol markets in Europe and Asia Pacific. Methanex in Chile The Punta Arenas production complex in southern Chile is well positioned to supply customers in South America. Methanex in the United States We are moving two plants from Chile to Geismar, Louisiana. We are targeting for the first plant to be operational in late 2014 and the second plant in early 2016. Global Supply Chain Methanex has an extensive global supply chain and distribution network of terminals and storage facilities throughout North America, Asia Pacific, Europe and South America. Methanex’s wholly owned subsidiary, Waterfront Shipping, operates the largest methanol ocean tanker fleet in the world. The fleet forms a seamless transportation network dedicated to keeping an uninterrupted flow of methanol moving to storage terminals and customers’ plant sites around the world. For further information on Waterfront Shipping, please visit www.wfs-cl.com. Our Responsible Care® Commitment Methanex is a Responsible Care® company. Responsible Care is the umbrella under which Methanex and other leading chemical manufacturers manage issues relating to health, safety, the environment, community involvement, social responsibility, security and emergency preparedness. The total commitment to Responsible Care is an integral part of Methanex’s global corporate culture. 2013 Financial Highlights (US $ millions, except where noted) 2013 2012 20116 20106 20096,7 Operations Revenue Adjusted net income attributable to Methanex shareholders1 Net income (loss) attributable to Methanex shareholders Adjusted EBITDA1 Cash flows from operating activities Modified Return on Capital Employed (ROCE)2 Diluted Per Share Amounts (US $ per share) Adjusted net income attributable to Methanex shareholders1 Net income (loss) attributable to Methanex shareholders1 Financial Position Cash and cash equivalents Total assets Long-term debt, including current portion Debt to capitalization3 Net debt to capitalization4 Other Information Average realized price (US $ per tonne)5 Total sales volume (000s tonnes) Sales of Methanex-produced methanol (000s tonnes) 9 9 7 Adjusted EBITDA (US $ million) 9 4 6 4 3 4 0 5 4 6 3 7 7 2 4 9 2 4 0 3 3 1 9 2 2 4 1 3,024 2,543 2,608 471 329 736 586 180 (68) 429 416 182 201 427 392 23.0% 12.0% 13.8% 4.88 3.41 733 4,113 1,168 38% 19% 441 7,991 4,304 1.90 (0.73) 727 3,443 1,194 45% 24% 382 7,459 4,039 1.93 2.06 351 3,394 903 36% 26% 374 7,514 3,853 Share Price Performance (Indexed at December 31) Methanex (US$, NASDAQ) S&P 500 Chemicals Index 9 7 . 0 3 7 . 0 1 6 0 . 2 6 0 . 2 6 0 . 7 6 0 . Weighted Average Shares Outstanding (millions) 121.5 Regular Dividends per Share (US $) 5 5 . 0 0 5 . 0 1 4 0 . 8 2 . 0 1,967 91 96 291 303 8.0% .98 1.03 194 3,141 947 40% 35% 306 6,929 3,540 1,198 2 1 143 129 1.2% 0.02 0.01 170 2,923 914 40% 35% 225 5,948 3,764 350 300 250 200 150 100 175 150 125 100 95.3 75 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1 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 Supplemental Non-GAAP Measures on page 33 for a description of each non-GAAP measure and reconciliations to the most comparable GAAP measures. 2 Modified ROCE is defined as adjusted net income before finance costs (after-tax) divided by average productive capital employed. Average productive capital employed is the sum of average total assets (excluding plants under construction) less the average of current non interest-bearing liabilities. Average total assets exclude cash held in excess of $50 million. We use an estimated mid-life depreciated cost base for calculating our average assets in use during the period. The calculation of Modified ROCE includes our share of income, assets and liabilities in the Egypt and Atlas methanol facilities. 3 Defined as total debt divided by the sum of total equity and total debt (including 100% of debt related to the Egypt methanol facility). 4 Defined as total debt less cash and cash equivalents divided by the sum of total equity and total debt less cash and cash equivalents (including 100% of debt related to the Egypt methanol facility). 5 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 volumes of Methanex-produced methanol (attributable to Methanex shareholders) and purchased methanol. 6 Effective January 1, 2013, the Company has adopted new IASB accounting standards related to consolidation and joint arrangements. As a result, the Company’s 63.1% interest in the Atlas entity is now accounted for using the equity method. The company has restated its figures as at and for the year ended December 31, 2012 using the equity method. Figures prior to 2012 have not been restated. For more information refer to Note 24 of the Financial Statements: “Adoption of new accounting standards” on page 70. 7 The Company transitioned from Canadian GAAP to IFRS on January 1, 2010. The 2009 figures have not been restated in accordance with IFRS and are reported in accordance with Canadian GAAP. For additional highlights and additional information about Methanex, refer to our 2013 Factbook available at www.methanex.com. 2 Methanex Corporation (cid:2) Annual Report 2013 President’s Message to Shareholders Dear fellow shareholders: This was my inaugural year as CEO of Methanex, and I plant. In Chile, we received deliveries of gas from Argentina for couldn’t have taken over the leadership of this great orga- the first time since 2007 through a tolling arrangement. This nization at a more exciting time. In 2013, excellent progress arrangement has allowed us to enhance our Chile operation by was made towards reaching our target of eight million tonnes restarting one of the remaining Chile plants and operating it at of operating capacity by early 2016. The expansion and restart reduced rates. In the fall of 2013 our growth projects were projects in Canada and New Zealand were completed, and we completed to add distillation capacity in Medicine Hat and made significant progress on our projects to relocate two New Zealand and restart our idled facility in Waitara Valley, plants from Chile to Geismar, Louisiana. We furthered our New Zealand. These projects increased our operating capacity strategy of promoting demand for methanol in energy by 20 percent or 1 million tonnes. Finally, in December, we applications. Finally, in the midst of this activity, we achieved closed a transaction to divest a 10 percent interest in our Egypt record annual income and sales volumes, closing the year methanol facility to Arab Petroleum Investments Corporation with an exceptionally strong balance sheet. for $110 million or approximately $1,200 per tonne of installed Methanol industry fundamentals in 2013 were highly favour- able, featuring robust demand growth coupled with ongoing supply limitations. Methanol demand grew approximately capacity. This transaction strengthened a strategic partnership for Methanex Egypt while providing additional capital to fund our growth initiatives. eight percent in 2013, led by increasing demand for methanol Responsible Care is a very important part of our culture and in energy applications. In this period of sustained high oil encompasses safety, care for the environment and steward- prices, methanol – with its relatively lower-cost energy ship of our product. My number one concern is the safety and content and clean-burning attributes – is increasingly being well-being of our employees and contractors. With the used as a substitute for petroleum in many applications. heightened level of activity at our plant sites in Medicine Hat, Demand for methanol for use in the production of olefins New Zealand, Trinidad and Geismar, we were pleased to accounted for just under half of overall demand growth in record an improvement in our employee recordable injury 2013, as three merchant methanol-to-olefins plants, with the frequency rate (RIFR) in 2013. However, we saw a slight rise in capacity to consume over three million tonnes of methanol overall RIFR as our contractor safety performance did not fare per year, have started up since late 2012. Direct blending of as well. We are taking steps to address this important issue, methanol into gasoline now represents about 12 percent of including evaluating our contractor practices and investing global methanol demand. At the same time, limited new additional resources to improve our performance in this key methanol production capacity additions outside of China, area. Our goal is continual improvement and we ultimately combined with a series of unplanned outages and ongoing drive for zero harm. gas curtailments around the globe, considerably constrained methanol supply. This meant that producers were operating higher-cost capacity to meet demand, and, consequently, methanol prices increased steadily over 2013. This year we continued to actively promote demand for meth- anol into energy applications. The outlook for energy-related methanol demand growth is strong, and there is evidence of growing demand outside of China for methanol in energy 2013 was a remarkably busy year for Methanex. The dedi- applications, including biodiesel, marine fuels and methanol or cation and commitment of every individual in our orga- DME as a fuel. We are partnering with other industry players to nization has paid off as we made excellent progress in demonstrate these new applications for methanol. We are delivering on our growth strategy. Early in January, we working closely with shipping industry partners to demon- announced a 10-year contract with Chesapeake Energy to strate technologies for the use of methanol on board ships, supply gas to our Geismar 1 plant, which we’re targeting to and recently announced our agreement to commission six new start up in late 2014. In April, a final investment decision was flex-fuel vessels that can run on methanol. To promote made to move forward with a second plant relocation project methanol and DME as a fuel, we are co-sponsoring a project from Chile. Over the year, we moved the entire Geismar 1 with Coogee in Australia to demonstrate the benefits of plant in a total of five shipments from Chile to the site in “GEM” fuels (gasoline-ethanol-methanol blended fuels), and Louisiana, where work is well underway to reconstruct the we are working with Volvo Group to introduce DME-powered Methanex Corporation (cid:2) Annual Report 2013 3 trucks into North America. In June 2013, we announced a $5 Our commitment to our vision of Global Market Leadership million investment in Carbon Recycling International, an under the pillars of Global Leadership, Operational Excellence Iceland-based company that operates the world’s first and Low Cost remains our focus. In 2014, our plan is to safely renewable methanol plant, producing methanol from renew- execute our growth initiatives while continuing to run our able energy and recycled CO2 emissions. Energy applications existing assets safely and reliably. We are working hard to are the fastest-growing markets for methanol, and renewable enhance our feedstock security and to optimize the utilization methanol will play an important future role in those rates at all of our plants while improving our contractor safety applications. 2013 was a year of record results for Methanex. Our Adjusted net income of $471 million and Adjusted EPS (earnings per share) of $4.88 were the highest in company history. Sales volumes were also a record at eight million tonnes. Steady increases in methanol pricing over the year, combined with higher production stemming from our growth initiatives, were the main factors contributing to our solid financial per- performance. Our team continues to seek out new growth initiatives beyond 2016 that will add value for shareholders and reinforce our Global Leadership position. As we success- fully execute our projects to increase production, our capacity to generate cash should increase significantly. Our plan is to maintain a conservative balance sheet while striking a bal- anced approach between growing the company and returning excess cash to shareholders. formance. In addition, improvements in our cost structure I want to thank the Board of Directors, the members of the were achieved by successfully reducing our global logistics executive leadership team and all of our employees for the costs. Methanex closed the year in a solid financial position, energy and dedication they have brought to Methanex over with over $700 million in cash on our balance sheet and a the past year. We have accomplished a great deal in 2013 and $400 million undrawn credit facility. With remaining budg- achieved record results. eted capital expenditures of $635 million on our Geismar relocation projects, we are in an excellent financial position to deliver on our objective of reaching eight million tonnes of operating capacity by early 2016. John Floren President & Chief Executive Officer 4 Methanex Corporation (cid:2) Annual Report 2013 MANAGEMENT’S DISCUSSION & ANALYSIS Index 05 Overview of the Business 11 Financial Results 33 Supplemental Non-GAAP Measures 06 Our Strategy 08 Financial Highlights 09 Production Summary 10 How We Analyze Our Business 18 Liquidity and Capital Resources 34 Quarterly Financial Data (Unaudited) 22 Risk Factors and Risk Management 35 Selected Annual Information 30 Critical Accounting Estimates 35 Controls and Procedures 32 Anticipated Changes to International Financial Reporting Standards 36 Forward-Looking Statements This Management’s Discussion and Analysis (“MD&A”) is dated March 10, 2014 and should be read in conjunction with our consolidated financial statements and the accompanying notes for the year ended December 31, 2013. Except where otherwise noted, the financial information presented in this MD&A is prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. We use the United States dollar as our reporting currency and, except where otherwise noted, all currency amounts are stated in United States dollars. At March 10, 2014, we had 96,451,681 common shares issued and outstanding and stock options exercisable for 1,779,811 additional common shares. Additional information relating to Methanex, including our Annual Information Form, is available on our website at www.methanex.com, the Canadian Securities Administrators’ SEDAR website at www.sedar.com and on the United States Securities and Exchange Commission’s EDGAR website at www.sec.gov. OVERVIEW OF THE BUSINESS Methanol is a clear liquid commodity chemical that is predominantly produced from natural gas and also, particularly in China, from coal. Approximately 60% of all methanol demand is used to produce traditional chemical derivatives, including formaldehyde, acetic acid and a variety of other chemicals that form the basis of a large number of chemical derivatives for which demand is influenced by levels of global economic activity. The remaining 40% of methanol demand comes from a range of energy-related applications, many of which are experiencing strong growth in the current high energy price environment. These include direct blending of methanol into gasoline (primarily in China), using methanol as a feedstock in the production of dimethyl ether (DME) and biodiesel, and methanol-to-olefins (MTO). Methanol is also used to produce methyl tertiary-butyl ether (MTBE), a gasoline component. We are the world’s largest producer and supplier of methanol to the major international markets in Asia Pacific, North America, Europe and South America. Our total annual production capacity, including Methanex interests in jointly owned plants, is currently 7.3 million tonnes and is located in New Zealand, Trinidad, Egypt, Canada and Chile (refer to the Production Summary section on page 9 for more information). We are in the process of relocating two facilities from our Chile site to Geismar, Louisiana, and this is expected to increase our annual production capacity to 9.3 million tonnes. We have marketing rights for 100% of the production from the jointly owned plants in Trinidad and Egypt and this provides us with an additional 1.3 million tonnes per year of methanol offtake supply when the plants are operating at full capacity. In addition to the methanol produced at our sites, we purchase methanol produced by others under methanol offtake contracts and on the spot market. This gives us flexibility in managing our supply chain while continuing to meet customer needs and support our marketing efforts. 2013 Industry Overview & Outlook Methanol is a global commodity and our earnings are significantly affected by fluctuations in the price of methanol, which is directly impacted by changes in methanol supply and demand. Demand for methanol is driven primarily by levels of industrial production, energy prices and the strength of the global economy. Demand for methanol grew by 8% or 4 million tonnes in 2013, leading to global demand of approximately 55 million tonnes, excluding Methanex Corporation (cid:2) Annual Report 2013 5 demand from integrated methanol-to-olefins facilities. The increase in demand was driven by strong growth in energy-related applications and steady growth in traditional derivatives. There was a modest level of new industry supply additions outside of China in 2013. We increased our operating capacity by up to 1.0 million tonnes in 2013 and other industry additions included the restart of a 0.8 million tonne facility in Texas and a 0.7 million tonne plant start-up in Azerbaijan which is expected to start exporting methanol in 2014. New production from supply additions inside China was consumed in that country as China continued to be a significant net importer of methanol. Throughout 2013, industry supply was constrained by planned and unplanned outages and natural gas restrictions and this, in combina- tion with strong demand growth, led to tight market conditions and a steady increase in pricing. Our average realized price for 2013 was $441 per tonne compared with $382 per tonne in 2012. The outlook for methanol demand growth continues to be strong. The wide disparity between the price of crude oil and that of natural gas and coal has resulted in an increased use of methanol in energy-related applications. The direct blending of methanol into gasoline and the use of methanol in the production of DME and biodiesel now accounts for approximately 23% of global methanol demand. While methanol demand in energy-related applications is strongest in China, an increasing number of countries around the world have projects in place or are considering adopting these applications on a wider scale. China is also leading the commercialization of methanol’s use as a feedstock to manufacture olefins. The use of methanol to produce olefins, at prevailing energy and methanol prices, is proving to be cost competitive relative to the traditional production of olefins from naptha. The first MTO plant in China started up in 2010, and there are now six plants operating in China with the capacity to consume over eight million tonnes of methanol annually. Three of these plants were not expected to impact the merchant methanol market as they are integrated coal-to-methanol-to-olefins projects. However, over the past three years, these integrated plants have purchased merchant methanol to supplement their own methanol production. The three non-integrated plants (representing over three million tonnes of methanol demand annually) are dependent on merchant methanol supply. Several other integrated and non-integrated proj- ects are currently under construction in China. We believe demand potential into energy-related applications and olefins production will continue to grow. We are in the process of relocating two 1.0 million tonne methanol plants from Chile to Geismar, Louisiana, and are targeting for Geismar 1 to start up in late 2014 and Geismar 2 in early 2016. Beyond our own capacity additions in Geismar, there is a modest level of new capacity expected to come on stream over the next few years outside of China. We expect that production from new capacity in China will be con- sumed in that country and that higher-cost production capacity in China will need to operate in order to satisfy demand growth. Entering 2014, methanol demand has continued to be healthy, supported by the higher energy price environment. As production from our Geismar projects comes on line, we believe our leadership position in the industry will be strengthened and we will have significant upside potential to cash flows and earnings. The methanol price will ultimately depend on the strength of the global economy, industry operating rates, global energy prices, new sup- ply 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. OUR STRATEGY Our primary objective is to create value by maintaining and enhancing our leadership in the global production, marketing and delivery of methanol to customers. Our simple, clearly defined strategy – global leadership, low cost and operational excellence – has helped us achieve this objective. Global Leadership Global leadership is a key element of our strategy. We are focused on maintaining and enhancing our position as the major producer and supplier in the global methanol industry, enhancing our ability to cost-effectively deliver methanol to customers and supporting both traditional and energy-related global methanol demand growth. 6 Methanex Corporation (cid:2) Annual Report 2013 We are the leading producer and supplier of methanol to the major international markets in Asia Pacific, North America, Europe and South America. Our 2013 sales volumes of 8.0 million tonnes represented approximately 15% of global methanol demand. Our leadership position has enabled us to play an important role in the industry, which includes publishing Methanex reference prices that are used in each major market as the basis of pricing for most of our customer contracts. The geographically diverse locations of our production sites allow us to deliver methanol cost-effectively to customers in all major global markets, while investments in global distribution and supply infrastructure, which include a dedicated fleet of ocean-going vessels and terminal capacity within all major international markets, enable us to enhance value to customers by providing reliable and secure supply. A key component of our global leadership strategy is to strengthen our asset position. Our 2013 debottlenecking and plant restart ini- tiatives in New Zealand and Canada, along with our Geismar relocation projects, will enable us to reach 8 million tonnes of operating capacity by early 2016. Our Chile operations are currently operating at less than full capacity and provide further potential operating capacity. After idling our Chile operations during the southern hemisphere winter as a result of insufficient natural gas feedstock, we restarted the Chile I facility in September 2013. We are continuing to work with gas suppliers in Chile and Argentina to secure sufficient natural gas to sustain our operations through the upcoming southern hemisphere winter. Another key component of our global leadership strategy is our ability to supplement methanol production with methanol purchased from third parties to give us flexibility in our supply chain and continue to meet customer commitments. We purchase methanol through a combination of methanol offtake contracts and spot purchases. We manage the cost of purchased methanol by taking advantage of our global supply chain infrastructure, which allows us to purchase methanol in the most cost-effective region while still maintaining overall security of supply. The Asia Pacific region continues to lead global methanol demand growth and we have invested in and developed our presence in this important region. We have storage capacity in China, South Korea and Japan that allows us to cost-effectively manage supply to customers and we have offices in Hong Kong, Shanghai, Beijing, Seoul and Tokyo to enhance customer service and industry positioning in the region. This enables us to participate in and improve our knowledge of the rapidly evolving and high growth methanol markets in China and other Asian countries. Our expanding presence in Asia has also helped us identify several opportunities to support the development of applications for methanol in the energy-related sector. Low Cost A low cost structure is an important competitive advantage in a commodity industry and is a key element of our strategy. Our approach to major business decisions is guided by a drive to improve our cost structure, expand margins and create value for shareholders. The most significant components of total costs are natural gas for feedstock and distribution costs associated with delivering methanol to customers. Our production facilities in New Zealand, Trinidad and Egypt are well located to supply global methanol markets and are underpinned by natural gas purchase agreements where the natural gas price varies with methanol prices. This pricing relationship enables these facilities to be competitive throughout the methanol price cycle. In January 2013, we entered into a 10-year agreement to purchase all of the natural gas required for the first methanol plant we are relocating to Geismar, Louisiana. The agreement is also structured so that the natural gas price varies with methanol prices and will enable the project to be profitable across a broad range of methanol prices. We have a 0.6 million tonne facility located in Medicine Hat, Alberta, and we believe that the long-term natural gas dynamics in North America will support the long-term operation of this facility. The cost to distribute methanol from production locations to customers is also a significant component of total operating costs. These include costs for ocean shipping, in-market storage facilities and in-market distribution. We are focused on identifying initiatives to reduce these costs, including optimizing the use of our shipping fleet and taking advantage of prevailing conditions in the shipping market by varying the type and length of term of ocean vessel contracts. We are continuously investigating opportunities to further improve the efficiency and cost-effectiveness of distributing methanol from our production facilities to customers. We also look for opportunities to leverage our global asset position by entering into product exchanges with other methanol producers to reduce distribution costs. Methanex Corporation (cid:2) Annual Report 2013 7 Operational Excellence We maintain a focus on operational excellence in all aspects of our business. This includes excellence in manufacturing and supply chain processes, marketing and sales, human resources, corporate governance practices and financial management. To differentiate ourselves from competitors, we strive to be the best operator in all aspects of our business and to be the preferred supplier to customers. We believe that reliability of supply is critical to the success of our customers’ businesses and our goal is to deliver methanol reliably and cost-effectively. We have a commitment to Responsible Care (a risk-minimization approach developed by the Chemistry Industry Association of Canada) and we use it as the umbrella under which we manage issues related to health, safety, the environment, community involvement, social responsibility, sustainability, security and emergency preparedness at each of our facilities and locations. We believe a commitment to Responsible Care helps us reduce the likelihood of unplanned events and achieve an excellent overall environmental and safety record. Product stewardship is a vital component of a Responsible Care culture and guides our actions through the complete life cycle of our product. We aim for the highest safety standards to minimize risk to employees, customers and suppliers as well as to the environment and the communities in which we do business. We promote the proper use and safe handling of methanol at all times through a variety of internal and external health, safety and environmental initiatives, and we work with industry colleagues to improve safety standards. We readily share technical and safety expertise with key stakeholders, including customers, end-users, suppliers, logistics providers and industry associations in the methanol and methanol applications marketplace through active participation in local and international industry associations, seminars and conferences, and online education initiatives. As a natural extension of the Responsible Care ethic, we have a Social Responsibility Policy that aligns corporate governance, employee engagement and development, community involvement and social investment strategies with our core values and corporate strategy. Our strategy of operational excellence also includes the financial management of the Company. We operate in a highly competitive commodity industry. Accordingly, we believe it is important to maintain financial flexibility and we have adopted a prudent approach to financial management. We have an undrawn $400 million credit facility provided by highly rated financial institutions that expires in late-2016. At December 31, 2013, we had a strong balance sheet with a cash balance of over $700 million. We believe we are well positioned to meet our financial commitments, continue investing to grow the Company and return excess cash to shareholders. FINANCIAL HIGHLIGHTS ($ Millions, except as noted) Production (thousands of tonnes) (attributable to Methanex shareholders) 1 Sales volumes (thousands of tonnes): Methanex-produced methanol (attributable to Methanex shareholders) Purchased methanol Commission sales Total sales volumes1 Methanex average non-discounted posted price ($ per tonne) 2 Average realized price ($ per tonne)3 Revenue Adjusted EBITDA4 Cash flows from operating activities Adjusted net income 4 Net income (loss) (attributable to Methanex shareholders) Adjusted net income per common share ($ per share)4 5 Basic net income (loss) per common share ($ per share) Diluted net income (loss) per common share ($ per share) Common share information (millions of shares): Weighted average number of common shares Diluted weighted average number of common shares Number of common shares outstanding, end of period 2013 4,344 4,304 2,715 972 7,991 507 441 3,024 736 586 471 329 4.88 3.46 3.41 95 96 96 2012 4,071 4,039 2,565 855 7,459 443 382 2,543 429 416 180 (68) 1.90 (0.73) (0.73) 94 94 94 1 Methanex-produced methanol includes volumes produced by Chile using natural gas supplied from Argentina under a tolling arrangement. Commission sales represent volumes marketed on a commission basis related to the 36.9% of the Atlas methanol facility and the portion of the Egypt methanol facility that we do not own. 2 Methanex average non-discounted posted price represents the average of our non-discounted posted prices in North America, Europe and Asia Pacific weighted by sales volume. Current and historical pricing information is available at www.methanex.com. 3 Average realized price is calculated as revenue, 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 volumes of Methanex-produced (attributable to Methanex shareholders) and purchased methanol. 4 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 the Supplemental Non-GAAP Measures section on page 33 for a description of each non-GAAP measure and reconciliations to the most comparable GAAP measures. 5 For the year ended December 31, 2012, stock options have been excluded from the calculation of diluted net loss per common share (attributable to Methanex shareholders) as their effect would be anti-dilutive. However, for the calculation of adjusted net income per common share (attributable to Methanex shareholders), stock options have been included in the denominator and the diluted weighted average number of common shares outstanding for the year ended December 31, 2012 is 95 million. 8 Methanex Corporation (cid:2) Annual Report 2013 PRODUCTION SUMMARY The following table details the annual production capacity and actual production of our facilities in 2013 and 2012: (Thousands of tonnes) New Zealand2 Atlas (Trinidad) (63.1% interest) Titan (Trinidad) Egypt (50% interest)3 Medicine Hat (Canada) Chile I and IV Geismar 1 and 2, (Louisiana, USA)4 Annual production capacity1 2,430 1,125 875 630 560 1,720 – 7,340 2013 1,419 971 651 623 476 204 – 4,344 2012 1,108 826 786 557 481 313 – 4,071 1 Annual production capacity includes only those facilities which are currently capable of operating, assuming access to natural gas feedstock. We use the term operating capacity to exclude any portion of an asset that is underutilized due to a lack of natural gas feedstock over a prolonged period of time. Our current operating capacity is approximately 6.0 million tonnes, including 0.4 million tonnes related to our Chile operations. The annual production capacity of our production facilities may be higher than original nameplate capacity as, over time, these figures have been adjusted to reflect ongoing operating efficiencies at these facilities. Actual production for a facility in any given year may be higher or lower than annual production capacity due to a number of factors, including natural gas composition or the age of the facility’s catalyst. 2 The annual production capacity of New Zealand represents the two facilities at Motunui and the Waitara Valley facility (refer to the New Zealand section below). 3 On December 9, 2013, we completed the sale of a 10% equity interest in the Egypt facility. Production figures prior to December 9, 2013 reflect a 60% interest. 4 We are relocating two idle Chile facilities to Geismar, Louisiana and are targeting to be producing methanol from Geismar 1 in late 2014 and Geismar 2 by early 2016. New Zealand In New Zealand, we produced 1.4 million tonnes of methanol in 2013 compared with 1.1 million tonnes in 2012. During 2013, we restarted the 0.5 million tonne Waitara Valley facility and completed a debottlenecking project at the Motunui facilities. Since completing a major refurbishment of the Motunui 2 facility in December 2013, our New Zealand site is able to produce at its annual production capacity of 2.4 million tonnes, depending on natural gas composition. Our New Zealand facilities are ideally situated to supply the growing Asia Pacific market. We have entered into several natural gas purchase agreements with various suppliers to underpin the future operation of our New Zealand operations. Each natural gas purchase agreement has base and variable components, where the gas price varies with methanol prices. Trinidad Our equity ownership of methanol facilities in Trinidad represents 2.0 million tonnes of competitive-cost annual capacity. The Titan and Atlas facilities in Trinidad are well located to supply global methanol markets and are underpinned by natural gas purchase agreements that expire in 2014 and 2024, respectively, where the natural gas price varies with methanol prices. These facilities produced a total of 1.6 million tonnes in each of 2013 and 2012. Production from these facilities in 2013 was impacted by a planned maintenance turnaround at the Titan facility, unplanned outages and natural gas restrictions. During 2012 and 2013, we experienced some natural gas curtailments to our Trinidad facilities due to a mismatch between upstream commitments to supply. The National Gas Company of Trinidad and Tobago Limited (NGC) and downstream demand from NGC’s customers, which becomes apparent when an upstream supplier has a technical issue or planned maintenance that reduces gas delivery. We are engaged with key stakeholders to find a solution to this issue, but in the meantime expect to continue to experience some gas curtailments to the Trinidad site. Refer to the Risk Factors and Risk Management – Trinidad section on page 23 for more information. Egypt We operate a 1.26 million tonne per year methanol facility in Egypt and have marketing rights for 100% of the production. On December 9, 2013, we completed the sale of a 10% equity interest in the Egypt methanol facility to Arab Petroleum Investments Corporation (APICORP) for $110 million. Production from this facility attributable to Methanex reflects a 50% equity interest after December 9, 2013. The Egypt methanol facility is well located to supply European and Asia Pacific methanol markets and is underpinned by a natural gas purchase agreement where the gas price varies with methanol prices. The facility produced 1.0 million tonnes in 2013 on a 100% basis (Methanex share 0.6 million tonnes) compared with 0.9 million tonnes (Methanex share 0.6 million tonnes) in 2012. Production from the Egypt facility during 2013 was lower than capacity, primarily due to natural gas supply restrictions and some minor unplanned outages. Refer to the Risk Factors and Risk Management – Egypt section on page 23 for more information. Methanex Corporation (cid:2) Annual Report 2013 9 Canada The Medicine Hat facility produced 0.5 million tonnes in each of 2012 and 2013. During September 2013, we completed a debottlenecking project at the Medicine Hat facility that increased its annual production capacity by 0.1 million tonnes to 0.6 million tonnes. The Medicine Hat facility experienced an unplanned outage during the fourth quarter of 2013 which resulted in lost production of approximately 50,000 tonnes. Chile During 2012 and 2013, we operated our Chile methanol facilities significantly below annual production capacity due to insufficient natural gas feedstock. In 2007, our natural gas suppliers from Argentina curtailed all gas supplied to our plants in Chile pursuant to long-term gas supply agreements. Under the existing circumstances, we do not expect to receive any further natural gas supply from Argentina under those long-term gas supply agreements. However, during 2013 we received some natural gas from Argentina pursuant to a tolling agreement whereby the natural gas received is converted into methanol and then re-delivered to Argentina. Approximately 45% of the Chile production during 2013 was produced using natural gas supplied from Argentina under this arrangement. Over the past few years, investments have been made by us and others to accelerate the exploration and development of natural gas in southern Chile. However, the potential for a significant increase in gas production remains challenging. We are continuing to work with gas suppliers in Chile and Argentina to secure sufficient natural gas to sustain our operations, and while the continued operation of the Chile plant through the 2014 southern hemisphere winter is possible, it is dependent on the availability of natural gas in southern Chile. Refer to the Risk Factors and Risk Management – Chile section on page 24 for more information. United States We are relocating two methanol plants from Chile to Geismar, Louisiana. During the fourth quarter of 2013, we reached an important mile- stone with all of the major equipment pieces for Geismar 1 now on site in Louisiana. We are targeting to be producing methanol from the 1.0 million tonne Geismar 1 facility in late 2014 and from the 1.0 million tonne Geismar 2 facility in early 2016. 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 (refer to the Supplemental Non-GAAP Measures section on page 33 for a description of Adjusted EBITDA and a reconciliation to the most comparable GAAP measure), mark-to-market impact of share-based compensation, depreciation and amortization, write-off of oil and gas rights, Geismar project relocation expenses and charges, asset impairment charg- es, finance costs, finance income and other expenses, and income taxes. In addition to the methanol that we produce at our facilities (“Methanex-produced methanol”), we also purchase and resell methanol produced by others (“purchased methanol”) and we sell methanol on a commission basis. We analyze the results of all methanol sales 10 Methanex Corporation (cid:2) Annual Report 2013 together, excluding commission sales volumes. 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 meth- anol 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. 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 volumes, 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 and other expenses and income taxes is consistent with the presentation of our consolidated statements of income and excludes amounts related to Atlas. On December 9, 2013, we completed the sale of a 10% equity interest in the Egypt methanol facility. At December 31, 2013, 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 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’ interests in the methanol facility being presented as “non-controlling interests”. For purposes of analyzing our business, Adjusted EBITDA, Adjusted net income and Adjusted net income per common share exclude the amount associated with the other investors’ non-controlling interests. FINANCIAL RESULTS For the year ended December 31, 2013, we reported Adjusted EBITDA of $736 million and Adjusted net income of $471 million ($4.88 per share on a diluted basis), compared with Adjusted EBITDA of $429 million and Adjusted net income of $180 million ($1.90 per share on a diluted basis) for the year ended December 31, 2012. We calculate Adjusted EBITDA and Adjusted net income by including amounts related to our equity share of the Atlas (63.1% interest) and Egypt (50% interest as of December 9, 2013) facilities and by excluding the mark-to-market impact of share-based compensation as a result of changes in our share price and items that are considered by management to be non-operational. Refer to the Supplemental Non-GAAP Measures section on page 33 for further discussion on how we calculate these measures. During 2013, we recorded a non-cash before-tax write-off of $25 million ($19 million after-tax) related to certain oil and gas exploration properties in New Zealand and Chile and a before-tax $34 million charge to earnings related to Geismar project relocation expenses ($22 million after-tax). During 2012, we recorded a non-cash before-tax asset impairment charge of $297 million ($193 million after-tax) related to the carrying value of our Chile assets and a before-tax $65 million charge to earnings related to Geismar project relocation expenses Methanex Corporation (cid:2) Annual Report 2013 11 and charges ($41 million after-tax). Including these items and the mark-to-market impact of share-based compensation, we reported net income attributable to Methanex shareholders for the year ended December 31, 2013 of $329 million ($3.41 income per share on a diluted basis) compared with a net loss attributable to Methanex shareholders for the year ended December 31, 2012 of $68 million ($0.73 loss per share on a diluted basis). A reconciliation from net income (loss) attributable to Methanex shareholders to Adjusted net income and the calculation of Adjusted diluted net income per common share is as follows: ($ Millions, except number of shares and per share amounts) Net income (loss) attributable to Methanex shareholders Mark-to-market impact of share-based compensation, net of tax Write-off of oil and gas rights, net of tax Geismar project relocation expenses and charges, net of tax Asset impairment charge, net of tax Adjusted net income1 Diluted weighted average shares outstanding (millions) Adjusted net income per common share1 2 $ $ 2013 329 101 19 22 – 471 96 $ 4.88 2012 $ (68) 14 – 41 193 180 94 1.90 $ $ 1 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 the Supplemental Non-GAAP Measures section on page 33 for a description of the non-GAAP measures and a reconciliation to the most comparable GAAP measures. 2 For the year ended December 31, 2012, stock options have been excluded from the calculation of diluted net loss per common share (attributable to Methanex shareholders) as their effect would be anti-dilutive. However, for the calculation of adjusted diluted net income per common share (attributable to Methanex shareholders), stock options have been included in the denominator and the diluted weighted average number of common shares for the year ended December 31, 2012 is 95 million. A summary of our consolidated statements of income for 2013 and 2012 is as follows: ($ Millions) Consolidated statements of income: Revenue Cost of sales and operating expenses, excluding mark-to-market impact of share-based compensation Adjusted EBITDA of associate (Atlas)1 Comprised of: Adjusted EBITDA (attributable to Methanex shareholders)2 Amounts attributable to non-controlling interests Mark-to-market impact of share-based compensation Geismar project relocation expenses and charges Asset impairment charge Write-off of oil & gas rights Depreciation and amortization Earnings of associate, excluding amount included in Adjusted EBITDA Finance costs Finance income and other expenses Income tax recovery (expense) Net income (loss) Net income (loss) attributable to Methanex shareholders 2013 2012 $ 3,024 (2,267) $ 2,543 (2,075) 68 825 736 89 825 (110) (34) – (25) (123) (38) (57) 5 (66) 377 329 $ $ 34 502 429 73 502 (16) (65) (297) – (149) (34) (61) 1 85 (34) (68) $ $ 1 Earnings of associate has been divided into an amount included in Adjusted EBITDA and an amount excluded from Adjusted EBITDA. The amount excluded from Adjusted EBITDA represents depreciation and amortization, finance costs, finance income and other expenses and income tax expense relating to earnings of associate. 2 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 the Supplemental Non-GAAP Measures section on page 33 for a description of the non-GAAP measures and a reconciliation to the most comparable GAAP measures. 12 Methanex Corporation (cid:2) Annual Report 2013 Revenue There are many factors that impact our global and regional revenue levels. The methanol business is a global commodity industry affected by supply and demand fundamentals. Due to the diversity of the end products in which methanol is used, demand for methanol largely depends upon levels of industrial production, energy prices and changes in general economic conditions, which can vary across the major international methanol markets. Our total sales volumes and average realized price increased in 2013 and this resulted in rev- enue of $3.0 billion for 2013 compared with $2.5 billion in 2012. Methanex Average Realized Price 2012 - 2013 ) e n n o t r e p $ ( 500 450 400 350 300 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2012 2013 Quarterly Annual Average Demand for methanol grew by 8% or 4 million tonnes in 2013, leading to global methanol demand of approximately 55 million tonnes, excluding methanol demand from integrated methanol-to-olefins facilities. The increase in demand was driven by strong growth in energy-related applications and steady growth in traditional derivatives. In comparison to this demand growth there was a modest level of new industry supply additions outside of China in 2013. We increased our operating capacity by up to 1.0 million tonnes in 2013 and other industry additions included the restart of a 0.8 million tonne facility in Texas and a 0.7 million tonne plant start-up in Azerbaijan which is expected to start exporting methanol in 2014. New production from supply additions inside China was consumed in that country as China continued to be a significant net importer of methanol. Throughout 2013, industry supply was constrained by planned and unplanned outages and natural gas restrictions and this, in combina- tion with strong demand growth, led to tight market conditions and a steady increase in pricing. Our average realized price for 2013 was $441 per tonne compared with $382 per tonne in 2012. The methanol industry is highly competitive and prices are affected by supply and demand fundamentals. We publish regional non- discounted reference prices for each major methanol market and these posted prices are reviewed and revised monthly or quarterly based on industry fundamentals and market conditions. Most of our customer contracts use published Methanex reference prices as a basis for pricing, and we offer discounts to customers based on various factors. Our average non-discounted published reference price for 2013 was $507 per tonne compared with $443 per tonne in 2012. Methanex Corporation (cid:2) Annual Report 2013 13 Distribution of Revenue The geographic distribution of revenue by customer location for 2013 was similar to 2012. Details are as follows: ($ Millions, except where noted) Canada United States Europe China South Korea Other Asia Latin America 2013 2012 $ 214 474 925 378 397 249 387 $ 7% 16% 31% 12% 13% 8% 13% 180 432 772 409 286 189 275 7% 17% 31% 16% 11% 7% 11% $ 3,024 100% $ 2,543 100% Adjusted EBITDA (Attributable to Methanex Shareholders) 2013 Adjusted EBITDA was $736 million compared with $429 million in 2012, an increase of $307 million. The key drivers of changes in our Adjusted EBITDA are average realized price, sales volume and cash costs as described below (refer to the How We Analyze Our Business section on page 10 for more information). ($ Millions) Average realized price Sales volume Total cash costs Increase in Adjusted EBITDA Average Realized Price 2013 vs. 2012 $ 423 32 (148) $ 307 Our average realized price for the year ended December 31, 2013 was $441 per tonne compared with $382 per tonne for 2012, and this increased Adjusted EBITDA by $423 million (refer to the Revenue section on page 13 for more information). Sales Volumes Methanol sales volumes, excluding commission sales volumes, for the year ended December 31, 2013 were 415,000 tonnes higher than in 2012, and this increased Adjusted EBITDA by $32 million. Including commission sales volumes from the Atlas and Egypt facilities, our total methanol sales volumes were 8.0 million tonnes in 2013, 0.5 million tonnes higher than in 2012, primarily due to increased production vol- umes from our New Zealand facilities. Total Cash Costs The primary drivers of changes in our total cash costs are changes in the cost of methanol we produce at our facilities (Methanex-produced methanol) and changes in the cost of methanol we purchase from others (purchased methanol). All of our production facilities except Medicine Hat and Chile are underpinned by natural gas purchase agreements with pricing terms that include base and variable price components. We supplement our production with methanol produced by others through methanol offtake contracts and purchases on the spot market to meet customer needs and support our marketing efforts within the major global markets. We have adopted the first-in, first-out method of accounting for inventories and it generally takes between 30 and 60 days to sell the methanol we produce or purchase. Accordingly, the changes in Adjusted EBITDA as a result of changes in Methanex-produced and purchased methanol costs primarily depend on changes in methanol pricing and the timing of inventory flows. 14 Methanex Corporation (cid:2) Annual Report 2013 The changes in our total cash costs for 2013 compared with 2012 were due to the following: ($ Millions) Methanex-produced methanol costs Purchased methanol costs Logistics costs Other, net Increase in total cash costs Methanex-Produced Methanol Costs 2013 VS. 2012 $ (62) (138) 38 14 $ (148) Natural gas is the primary feedstock at our methanol facilities and is the most significant component of Methanex-produced methanol costs. We purchase natural gas for the New Zealand, Trinidad and Egypt methanol facilities under natural gas purchase agreements where the unique terms of each contract include a base price and a variable price component linked to the price of methanol to reduce our commodity price risk exposure. The variable price component of each gas contract is adjusted by a formula related to methanol prices above a certain level. We believe these pricing relationships enable each facility to be competitive throughout the methanol price cycle. Methanex-produced methanol costs were higher in 2013 compared with 2012 by $62 million, primarily due to the impact of higher realized methanol prices on our natural gas costs and a change in the mix of production sold from inventory. For additional information regarding our natural gas supply agreements refer to the Summary of Contractual Obligations and Commercial Commitments section on page 20. Purchased Methanol Costs A key element of our corporate strategy is global leadership and, as such, we have built a leading market position in each of the major global markets where methanol is sold. We supplement our production with purchased methanol through methanol offtake contracts and on the spot market to meet customer needs and support our marketing efforts within the major global markets. In structuring purchase agreements, we look for opportunities that provide synergies with our existing supply chain that allow us to purchase methanol in the lowest-cost region. The cost of purchased methanol consists principally of the cost of the methanol itself, which is directly related to the price of methanol at the time of purchase. As a result of higher methanol prices in 2013 and the timing of purchases, the cost of purchased methanol per tonne increased and this decreased Adjusted EBITDA by $138 million compared with 2012. Logistics costs Our investment in global distribution and supply infrastructure includes a dedicated fleet of ocean-going vessels. We utilize these vessels to enhance value to customers by providing reliable and secure supply and to optimize supply chain costs overall, including through third-party backhaul arrangements when available. Logistics costs can also vary from period to period depending on the levels of production from each of our production facilities and the resulting impact on our supply chain. For the year ended December 31, 2013 compared with 2012, ocean freight and other logistics costs were lower by $38 million. The savings resulted from the completion of sev- eral initiatives that have reduced logistics costs, an improvement in the efficiency of our supply chain as well as an increase in third-party backhaul opportunities for our ocean-going vessels that reduces the net logistics cost of a round-trip voyage. Other, Net We have commenced the process of building a manufacturing organization in Geismar, Louisiana. Under IFRS, costs incurred related to organizational build-up are not eligible for capitalization and are charged directly to earnings as incurred. During 2013, we incurred approximately $7 million of Geismar organizational build-up costs and the remaining organizational build-up costs are estimated to be $25 million. The remaining change in other, net relates to an insurance settlement recorded in 2013 and the impact of a restructuring of our Chile operations completed in 2012. Mark-to-Market Impact of Share-Based Compensation We grant share-based awards as an element of compensation. Share-based awards granted include stock options, share appreciation rights, tandem share appreciation rights, deferred share units, restricted share units and performance share units. For all the share-based Methanex Corporation (cid:2) Annual Report 2013 15 awards, share-based compensation is recognized over the related vesting period for the proportion of the service that has been rendered at each reporting date. Share-based compensation includes an amount related to the grant-date value and a mark-to-market impact as a result of subsequent changes in the Company’s share price. The grant-date value amount is included in Adjusted EBITDA and Adjusted net income. The mark-to-market impact of share-based compensation as a result of changes in our share price is excluded from Adjusted EBITDA and Adjusted net income and analyzed separately. ($ Millions, except as noted) Methanex Corporation share price1 Grant-date fair value expense included in Adjusted EBITDA and Adjusted net income Mark-to-market impact due to change in share price Total share-based compensation expense 2013 2012 $ 59.24 $ 31.87 21 110 131 $ 20 16 36 $ 1 US dollar share price of Methanex Corporation as quoted on NASDAQ Global Market on the last trading day of the respective period. For stock options, the cost is measured based on an estimate of the fair value at the date of grant using the Black-Scholes option pricing model, and this grant-date fair value is recognized as compensation expense over the related vesting period with no subsequent re-measurement in fair value. Accordingly, share-based compensation expense associated with stock options will not vary significantly from period to period. 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 values 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 each quarter. Deferred, restricted and performance share units are grants of notional common shares that are redeemable for cash based on the mar- ket value of the Company’s common shares and are non-dilutive to shareholders. Performance share units have an additional feature where the ultimate number of units that vest will be determined by the Company’s total shareholder return in relation to a pre- determined target over the period to vesting. The number of units that will ultimately vest will be in the range of 50% to 120% of the original grant. 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. The Methanex Corporation share price increased from $31.87 per share at December 31, 2012 to $59.24 per share at December 31, 2013. As a result of the increase in the share price and the resulting impact on the fair value of the outstanding units, we recorded a $110 million mark-to-market expense related to share-based compensation during 2013. Geismar Project Relocation Expenses and Charges In April 2013, we reached a final investment decision to proceed with the project to relocate a second Chile facility to Geismar, Louisiana. The Geismar 2 project is expected to add 1.0 million tonnes of operating capacity and is targeted to be operational in early 2016. Under IFRS, certain costs associated with relocating an asset are not eligible for capitalization and are required to be charged directly to earn- ings. During 2013, we charged $34 million ($22 million after-tax) of Geismar project relocation expenses directly to earnings. During 2012, we charged $65 million ($41 million after-tax) of Geismar project relocation expenses directly to earnings in relation to the Geismar 1 project. Write-off of Oil and Gas Rights Over the past few years, we have participated with international oil and gas companies in exploration activities in southern Chile and New Zealand. Based on the outlook for natural gas deliveries under certain of these arrangements, we recorded a non-cash $25 million ($19 million after-tax) charge to earnings in 2013 to write off the carrying value of the assets. The only remaining oil and gas activity for the Company relates to a producing property, Dorado Riquelme, in southern Chile. 16 Methanex Corporation (cid:2) Annual Report 2013 Depreciation and Amortization Depreciation and amortization was $123 million for the year ended December 31, 2013 compared with $149 million for the same period in 2012. The decrease in depreciation and amortization in 2013 compared with 2012 is primarily as a result of the lower carrying value of our Chile assets due to the asset impairment charge recorded in 2012. Finance Costs ($ Millions) Finance costs before capitalized interest Less capitalized interest Finance costs 2013 2012 $ $ 65 (8) 57 $ $ 63 (2) 61 Finance costs before capitalized interest primarily relate to interest expense on the unsecured notes and limited recourse debt facilities. Capitalized interest in 2013 and 2012 relate to interest costs capitalized for the Geismar projects. Finance Income and Other Expenses Finance income and other expenses were $5 million and $1 million, respectively, for the years ended December 31, 2013 and 2012. The change in finance income and other expenses in 2013 compared with 2012 is primarily related to the impact of changes in foreign exchange rates. Income Taxes A summary of our income taxes for 2013 compared with 2012 is as follows: ($ Millions, except where noted) 2013 2012 Amount before income tax Income tax recovery (expense) Amount after income tax Effective tax rate Net income Adjusted net income 1 Net income Adjusted net income 1 $ $ 443 (66) 377 15% $ $ 562 (91) 471 16% $ $ (119) 85 (34) 71% $ $ 217 (37) 180 17% 1 This item is a non-GAAP measure that does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other companies. Refer to Supplemental Non-GAAP Measures on page 33 for a description of the non-GAAP measure and reconciliation to the most comparable GAAP measure. The effective tax rate related to Adjusted net income was 16% for the year ended December 31, 2013 compared with 17% for the year ended December 31, 2012. We earn the majority of our pre-tax earnings in New Zealand, Trinidad, Egypt, Canada and Chile. In Trinidad and Chile, the statutory tax rate is 35%, and in Egypt, the statutory tax rate is 25%. 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 not included in total income taxes. The statutory rates in Canada and New Zealand are 26% and 28%, respectively. As of December 31, 2013, we have used substantially all previously unrecognized tax benefits in Canada and New Zealand, and as a result, the effective tax rates expected to be realized in these jurisdictions in future periods will more closely reflect their statutory rates. 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 category tax is initially recorded as future income tax expense and is subsequently reclassified to cur- rent income tax expense when earnings are distributed. Accordingly, the ratio of Chile’s current income tax expense to total income tax expense is dependent on the level of cash distributed from Chile. For additional information regarding income taxes, refer to note 15 of our 2013 consolidated financial statements. Methanex Corporation (cid:2) Annual Report 2013 17 LIQUIDITY AND CAPITAL RESOURCES A summary of our consolidated statements of cash flows is as follows: ($ Millions) Cash flows from operating activities: Cash flows from operating activities before changes in non-cash working capital1 Changes in non-cash working capital Cash flows from financing activities: Dividend payments Interest paid, including interest rate swap settlements Net proceeds on issue of long-term debt Repayment of long-term debt and limited recourse debt Sale of partial interest in subsidiary Other Cash flows from investing activities: Property, plant and equipment Geismar plants under construction Other assets Changes in non-cash working capital relating to investing activities Increase in cash and cash equivalents Cash and cash equivalents, end of year 2013 2012 $ $ 653 (67) 586 (75) (55) 10 (40) 110 (4) (54) (269) (309) (16) 68 (526) 6 733 $ $ 404 12 416 (68) (60) 590 (236) – (48) 178 (114) (74) (23) 3 (208) 386 727 1 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 the Supplemental Non-GAAP Measures section on page 33 for a description of the non-GAAP measures and a reconciliation to the most comparable GAAP measures. Cash Flow Highlights Cash Flows from Operating Activities Cash flows from operating activities for the year ended December 31, 2013 were $586 million compared with $416 million for 2012. The increase in cash flows from operating activities is primarily due to higher net income, after excluding depreciation and amortization, share-based compensation expense, Geismar project relocation non-cash charges, oil and gas write-offs, asset impairment charges and finance costs, and changes in non-cash working capital. The following table provides a summary of these items for 2013 and 2012: ($ Millions) Net income (loss) Add (deduct) loss (earnings) of associate Add (deduct) non-cash items: Depreciation and amortization Share-based compensation expense Geismar project relocation non-cash charges Oil and gas write-off, net of tax Asset impairment charge, net of tax Finance costs Other Cash flows from operating activities before changes in non-cash working capital Changes in non-cash working capital: Trade and other receivables Inventories Prepaid expenses Accounts payable and accrued liabilities, including long-term payables 2013 2012 $ 377 (31) 123 131 – 19 – 56 (22) 653 (117) (57) 5 102 (67) $ (34) – 149 36 25 – 193 61 (26) 404 (43) 18 (3) 40 12 Cash flows from operating activities $ 586 $ 416 18 Methanex Corporation (cid:2) Annual Report 2013 For a discussion of the changes in net income (loss), depreciation and amortization, share-based compensation expense, Geismar project relocation non-cash charges, oil and gas write-offs, asset impairment charges and finance costs, refer to the analysis of our financial results on page 11. Changes in non-cash working capital decreased cash flows from operating activities by $67 million for the year ended December 31, 2013, compared with an increase of $12 million for the year ended December 31, 2012. Trade and other receivables increased in 2013 and this decreased cash flows from operating activities by $117 million, primarily due to the impact on customer receivables from higher sales volumes and a higher average realized methanol price in the fourth quarter of 2013. Inventories increased primarily due to the impact of a higher methanol price on Methanex-produced methanol costs and purchased product costs, and this decreased cash flows from operating activities by $57 million. Accounts payable and accrued liabilities, including long-term payables, increased cash flows from operating activities by $102 million, primarily due to the impact of higher methanol prices on natural gas supply payables and higher costs for purchased methanol. Cash Flows from Financing Activities During 2013, we increased our regular quarterly dividend by 8% to $0.20 per share, beginning with the dividend payable on June 30, 2013. Total dividend payments in 2013 were $75 million compared with $68 million in 2012 and total interest payments in 2013 including interest rate swap settlements were $55 million compared with $60 million in 2012. During 2013, we sold a 10% equity interest in the Egypt methanol facility to APICORP for $110 million and repaid $40 million on the limited recourse debt facilities. In 2012, we issued two separate tranches of unsecured notes for net proceeds of $590 million and repaid $236 mil- lion of unsecured notes and other limited recourse debt. Cash Flows from Investing Activities We are in the process of relocating two methanol plants from Chile to Geismar, Louisiana. During 2013, we incurred capital expenditures of $309 million related to these projects and the remaining budgeted capital expenditures are $635 million. Other capital expenditures during 2013 of $269 million were primarily related to the restart of our Waitara Valley facility, debottlenecking projects in New Zealand and Medicine Hat, the major refurbishment of the Motunui 2 facility and a planned turnaround at the Titan facility. Liquidity and Capitalization Our objectives in managing liquidity and capital are to provide financial capacity and flexibility to meet our strategic objectives, to provide an adequate return to shareholders commensurate with the level of risk and to return excess cash through a combination of dividends and share repurchases. The following table provides information on our liquidity and capitalization position as at December 31, 2013 and December 31, 2012: ($ Millions, except where noted) Liquidity: Cash and cash equivalents Undrawn credit facilities Total liquidity Capitalization: Unsecured notes Limited recourse debt facilities, including current portion Total debt Non-controlling interest Shareholders’ equity Total capitalization Total debt to capitalization1 Net debt to capitalization2 2013 2012 $ 733 400 1,133 741 427 1,168 248 1,658 $ 727 400 1,127 739 455 1,194 188 1,290 $ 3,074 $ 2,672 38% 19% 45% 24% 1 Defined as total debt (including 100% of Egypt limited recourse debt facilities) divided by total capitalization. 2 Defined as total debt (including 100% of Egypt limited recourse debt facilities) less cash and cash equivalents divided by total capitalization less cash and cash equivalents. Methanex Corporation (cid:2) Annual Report 2013 19 We manage our liquidity and capital structure and make adjustments to it in light of changes to economic conditions, the underlying risks inherent in our operations and the capital requirements to maintain and grow our business. The strategies we employ include the issue or repayment of general corporate debt, the issue of project debt, the issue of equity, the payment of dividends and the repurchase of shares. We are not subject to any statutory capital requirements and have no commitments to sell or otherwise issue common shares except pursuant to outstanding employee stock options and tandem share appreciation rights. We operate in a highly competitive commodity industry and believe that it is appropriate to maintain a conservative balance sheet and retain financial flexibility. At December 31, 2013, we had a strong balance sheet with a cash balance of $733 million, including $59 million relating to the non-controlling interest in Egypt, and a $400 million undrawn credit facility. We invest our cash only in highly rated instruments that have maturities of three months or less to ensure preservation of capital and appropriate liquidity. At December 31, 2013, our long-term debt obligations included $750 million in unsecured notes ($150 million that matures in 2015, $350 million that matures in 2019 and $250 million that matures in 2022), $404 million related to the Egypt limited recourse debt facilities (100% basis) and $23 million of other limited recourse debt. We have covenant and default provisions under our long-term debt obligations and we also have certain covenants that could restrict access to the credit facility. At December 31, 2013, management believes the Company was in compliance with all significant terms and default provisions related to its long-term debt obligations. Our planned capital maintenance expenditure program directed towards maintenance, turnarounds and catalyst changes for existing operations is currently estimated to total approximately $70 million to the end of 2014. We are relocating two methanol plants from our Chile site to Geismar, Louisiana. During 2013, capital expenditures related to the Geismar projects were $309 million, excluding capitalized interest. The remaining budgeted capital expenditures related to the Geismar projects are $635 million, excluding capitalized interest. We believe we are well positioned to meet our financial commitments, invest to grow the Company and continue to deliver on our commitment to return excess cash to shareholders. Summary of Contractual Obligations and Commercial Commitments A summary of the estimated amount and estimated timing of cash flows related to our contractual obligations and commercial commit- ments as at December 31, 2013 is as follows: ($ Millions) Long-term debt repayments Long-term debt interest obligations Repayments of other long-term liabilities Natural gas and other Operating lease commitments 2014 2015-2016 2017-2018 After 2018 Total $ 42 54 74 279 132 $ 250 76 137 362 234 $ 97 71 11 127 254 $ 799 $ 1,188 75 50 684 900 276 272 1,452 1,520 $ 581 $ 1,059 $ 560 $ 2,508 $ 4,708 Long-Term Debt Repayments and Interest Obligations We have $150 million of unsecured notes that mature in 2015, $350 million of unsecured notes that mature in 2019 and $250 million of unsecured notes that mature in 2022. The remaining debt repayments represent the total expected principal repayments relating to the Egypt project debt and other limited recourse debt. Interest obligations related to variable interest rate long-term debt were estimated using current interest rates in effect at December 31, 2013. For additional information, refer to note 8 of our 2013 consolidated financial statements. Repayments of Other Long-Term Liabilities Repayments of other long-term liabilities represent contractual payment dates or, if the timing is not known, we have estimated the timing of repayment based on management’s expectations. 20 Methanex Corporation (cid:2) Annual Report 2013 Natural Gas and Other We have commitments under take-or-pay contracts to purchase natural gas and to pay for transportation capacity related to this natural gas. We also have take-or-pay contracts to purchase oxygen and other feedstock requirements in Trinidad. Take-or-pay means that we are obliged to pay for the supplies regardless of whether we take delivery. Such commitments are common in the methanol industry. These contracts generally provide a quantity that is subject to take-or-pay terms that is lower than the maximum quantity that we are entitled to purchase. The amounts disclosed in the table represent only the minimum take-or-pay quantity. The natural gas supply contracts for our facilities in New Zealand, Trinidad, Egypt and, commencing on the date of commercial oper- ations, Geismar 1, are take-or-pay contracts denominated in United States dollars and include base and variable price components to reduce our commodity price risk exposure. The variable price component of each natural gas contract is adjusted by a formula related to methanol prices above a certain level. We believe these pricing relationships enable these facilities to be competitive at all points in the methanol price cycle and provides gas suppliers with attractive returns. The amounts disclosed in the table for these contracts represent only the base price component. We have a program in place to purchase natural gas on the Alberta gas market to support the Medicine Hat facility and we believe that the long-term natural gas dynamics in North America will support the long-term operation of this facility. In the above table, we have included natural gas commitments at the contractual volumes and prices. The above table does not include costs for planned capital maintenance or expansion expenditures or any obligations with original matur- ities of less than one year. We have supply contracts that expire between 2017 and 2025 with Argentinean suppliers for natural gas sourced from Argentina for a significant portion of the capacity of our facilities in Chile. We have excluded these potential purchase obligations from the table above. Since June 2007, our natural gas suppliers from Argentina have curtailed all gas supply to our plants in Chile under these arrangements. Under the current circumstances, we do not expect to receive any further natural gas supply from Argentina under these arrangements. We also have contracts with ENAP to supply natural gas to produce approximately 0.8 million tonnes of methanol at our facilities in Chile. Over the last few years, deliveries from ENAP have been declining and ENAP has delivered significantly less than the full amount of natural gas that it was obligated to deliver under these contracts. We have excluded the potential purchase obligations from the table above. We have marketing rights for 100% of the production from our jointly owned Atlas and Egypt plants which results in purchase commit- ments of an additional 1.3 million tonnes per year of methanol offtake supply when these plants operate at capacity. At December 31, 2013, we also have methanol purchase commitments with other suppliers under contracts for approximately 1.0 million tonnes for 2014 and a total of 1.8 million tonnes thereafter. The pricing under these purchase commitments is referenced to pricing at the time of pur- chase or sale, and accordingly, no amounts have been included in the above table. Operating Lease Commitments The majority of these commitments relate to time charter vessel agreements with terms of up to 15 years. Time charter vessels typically meet most of our ocean-shipping requirements. During 2013, we entered into six new time charter agreements relating to vessels that will be delivered in 2016 and these commitments are included in the table above. Off-Balance Sheet Arrangements At December 31, 2013, we did not have any off-balance sheet arrangements, as defined by applicable securities regulators in Canada and the United States, that have, or are reasonably likely to have, a current or future material effect on our results of operations or financial condition. Financial Instruments A financial instrument is any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of another party. Financial instruments are either measured at amortized cost or fair value. Held-to-maturity investments, loans and receivables and other financial liabilities are measured at amortized cost. Held-for-trading financial assets and liabilities and available- for-sale financial assets are measured on the balance sheet at fair value. From time to time, we enter into derivative financial instruments to limit our exposure to commodity price, foreign exchange and variable interest rate volatility and to contribute towards achieving cost structure and revenue targets. Until settled, the fair value of derivative financial instruments will fluctuate based on changes in Methanex Corporation (cid:2) Annual Report 2013 21 commodity prices, foreign exchange rates and variable interest rates. Derivative financial instruments are classified as held-for-trading and are recorded on the consolidated statements of financial position at fair value unless exempted. Changes in fair value of held-for- trading derivative financial instruments are recorded in earnings unless the instruments are designated as cash flow hedges. The following table shows the carrying value of each of our categories of financial assets and liabilities and the related balance sheet item as at December 31, 2013 and December 31, 2012: ($ Millions) Financial assets: Financial assets held-for-trading: Derivative instruments designated as cash flow hedges2 Loans and receivables: Cash and cash equivalents Trade and other receivables, excluding tax receivable Project financing reserve accounts included in other assets Total financial assets1 Financial liabilities: Other financial liabilities: Trade, other payables and accrued liabilities, excluding tax payable Deferred gas payables included in other long-term liabilities Long-term debt, including current portion Financial liabilities held-for-trading: Derivative instruments designated as cash flow hedges2 Total financial liabilities 2013 2012 $ – 733 524 45 $ – 727 402 42 $ 1,302 $ 1,171 $ 581 74 1,168 20 $ 365 83 1,194 33 $ 1,843 $ 1,675 1 The carrying amount of the financial assets represents the maximum exposure to credit risk at the respective reporting periods. 2 The euro and New Zealand foreign currency hedges and the Egypt interest rate swaps designated as cash flow hedges are measured at fair value based on industry accepted valuation models and inputs obtained from active markets. At December 31, 2013, all of the financial instruments were recorded on the consolidated statements of financial position at amortized cost with the exception of held-for-trading derivative financial instruments, which are recorded at fair value. The Egypt limited recourse debt facilities bear interest at LIBOR plus a spread. We have entered into interest rate swap contracts to swap the LIBOR-based interest payments for an average aggregated fixed rate of 4.8% plus a spread on approximately 75% of the Egypt limited recourse debt facilities for the period to March 31, 2015. These interest rate swaps had outstanding notional amounts of $315 million as at December 31, 2013. The notional amount decreases over the expected repayment of the Egypt limited recourse debt facilities. At December 31, 2013, these interest rate swap contracts had a negative fair value of $20 million (December 31, 2012 – negative $33 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 euros and buy New Zealand dollars at a fixed US dollar exchange rate. At December 31, 2013, the Company had outstanding forward exchange contracts designated as cash flow hedges to sell a notional amount of 106 million euros and buy a notional amount of $7 million New Zealand dollars in exchange for US dollars. The euro contracts had a negative fair value of $0.6 million (2012 – negative fair value of $0.2 million) recorded in trade, other payables and accrued liabilities and the New Zealand dollar contracts had a positive fair value of $0.2 million (2012 – nil) recorded in accounts receiv- able. Changes in the fair value of derivative financial instruments designated as cash flow hedges have been recorded in other comprehensive income. RISK FACTORS AND RISK MANAGEMENT We are subject to risks that require prudent risk management. We believe the following risks, in addition to those described in the Critical Accounting Estimates section on page 30, to be among the most important for understanding the issues that face our business and our approach to risk management. 22 Methanex Corporation (cid:2) Annual Report 2013 Security of Natural Gas Supply and Price Natural gas is the principal feedstock for producing methanol and it accounts for a significant portion of our operating costs. Accordingly, our results from operations depend in large part on the availability and security of supply and the price of natural gas. If, for any reason, we are unable to obtain sufficient natural gas for any of our plants on commercially acceptable terms or we experience interruptions in the supply of contracted natural gas, we could be forced to curtail production or close such plants, which could have an adverse effect on our results of operations and financial condition. New Zealand We have three plants in New Zealand with a total production capacity of up to 2.4 million tonnes per year, depending on natural gas composition. Two plants are located at Motunui and the third is located at nearby Waitara Valley. We have entered into several agree- ments with various suppliers to underpin our New Zealand operations with terms that range in length up to 2022. All agreements in New Zealand are take-or-pay agreements and include base and variable price components where the variable price component is adjusted by a formula related to methanol prices above a certain level. We believe this pricing relationship enables these facilities to be competitive at all points in the methanol price cycle and provides gas suppliers with attractive returns. Certain of these contracts require the supplier to deliver a minimum amount of natural gas with additional volumes dependent on the success of exploring and developing the related natural gas field. We continue to pursue opportunities to contract additional natural gas to supply our plants in New Zealand. The future operation of our New Zealand facilities depends on the ability of our contracted suppliers to meet their commitments and the success of ongoing exploration and development activities in the region. We cannot provide assurance that our contracted suppliers will be able to meet their commitments or that their ongoing exploration and development activities in New Zealand will be successful to enable our operations to operate at capacity and that this will not have an adverse impact on our results of operations and financial condition. Trinidad Natural gas for our two methanol production facilities in Trinidad, with our share of total production capacity being 2.0 million tonnes per year, is supplied under take-or-pay contracts with NGC. The contracts for Titan and Atlas expire in 2014 and 2024, respectively, and have base and variable price components where the variable portion is adjusted by a formula related to methanol prices above a certain level. The current Titan gas contract includes an option to extend the contract for a five year period at terms to be agreed. We believe the supply and demand fundamentals for natural gas supply in Trinidad will support the continued operation of this facility, however we cannot provide assurance that we will be able to secure the natural gas on commercially acceptable terms and that this will not have an adverse impact on our results of operations and financial condition. Since 2011, large industrial consumers in Trinidad, including our Titan and Atlas facilities, have experienced periodic curtailments of natu- ral gas supply due to a mismatch between upstream commitments to supply NGC and downstream demand from NGC’s customers, which becomes apparent when an upstream supplier has a technical issue or planned maintenance that reduces gas delivery. We are engaged with key stakeholders to find a solution to this issue, but in the meantime expect to continue to experience some gas curtail- ments to our Trinidad facilities. We cannot provide assurance that we will not experience longer or greater than anticipated curtailments due to upstream outages or other issues in Trinidad and that these curtailments will not be material and that this would not have an adverse impact on our results of operations and financial condition. Egypt We have a 25-year, take-or-pay natural gas supply agreement for the 1.26 million tonne per year methanol plant in Egypt in which we have a 50% equity interest. The price paid for gas is based on a US dollar base price plus a variable price component that is adjusted by a formula related to methanol prices above a certain level. Under the contract, the gas supplier is obligated to supply, and we are obliged to take or pay for, a specified annual quantity of natural gas. Gas paid for, but not taken, in any year may be received in subsequent years subject to limitations. Natural gas is supplied to this facility from the same gas delivery grid infrastructure that supplies other industrial users in Egypt, as well as the general Egyptian population. The Egypt facility began experiencing periodic natural gas supply constraints in mid-2012 and since that time has operated below full capacity. Egypt’s government is currently in a transition, which has resulted in ongoing civil unrest, political uncertainty and an adverse Methanex Corporation (cid:2) Annual Report 2013 23 impact on the country’s economy. We believe that these factors are contributing to constraints in the development of new supplies of natural gas coming to market and an increase in the use of domestically-produced natural gas instead of more expensive imported energy for the purpose of generating domestic electricity. These factors have led to periodic natural gas supply restrictions to the Methanex Egypt facility. This situation may persist in the future and become more acute during the summer months when electricity demand is at its peak. We cannot provide assurance that we will not experience longer or greater than anticipated natural gas restrictions and that this would not have an adverse impact on our results of operations and financial condition. Canada We have a program in place to purchase natural gas for the 0.6 million tonnes per year Medicine Hat facility on the Alberta gas market. The future operation of our Medicine Hat facility depends on methanol industry supply and demand fundamentals and our ability to secure sufficient natural gas on commercially acceptable terms. We cannot provide assurance that we will be able to continue to secure sufficient natural gas for our Medicine Hat facility on commercially acceptable terms and that this will not have an adverse impact on our results of operations and financial condition. Chile In June 2007, our natural gas suppliers from Argentina curtailed all gas supplied to our plants in Chile pursuant to our long-term gas supply agreements. Under the current circumstances, we do not expect to receive any further natural gas supply from Argentina under those long-term gas supply agreements. However, in March 2013, we began receiving some natural gas from Argentina pursuant to a tolling agreement whereby the natural gas received is converted into methanol and then re-delivered to Argentina. Since 2007, all of the methanol production at our Chile facilities, other than the natural gas received under the tolling arrangements in 2013, has been produced from natural gas from Chile. While both Methanex and its natural gas suppliers have made significant invest- ments in natural gas exploration and development in southern Chile and there have been new gas discoveries in the region, the potential for a significant increase in gas deliveries to our plants remains challenging. Entering 2014, we were operating one of the two remaining plants at less than capacity and while the continued operation of the Chile plant through the 2014 southern hemisphere winter is possible, it is dependent on the availability of natural gas in southern Chile. The future of our Chile operations is primarily dependent on the level of exploration and development in southern Chile and our ability to secure a sustainable natural gas supply to our facilities on economic terms from Chile and Argentina. We cannot provide assurance that we will be able to continue to operate our Chile operations and that this will not have an adverse impact on our results of operations or financial condition. United States We are in the process of relocating two idle Chile methanol plants to Geismar, Louisiana. We are targeting to be producing methanol from the 1.0 million tonne Geismar 1 facility in late 2014 and from the 1.0 million tonne Geismar 2 facility in early 2016. We have secured a 10-year take-or-pay natural gas agreement for the supply of all of Gesimar 1’s natural gas requirements and contractual deliveries and obligations commence on the first date of commercial operations. The price to be paid for the gas is based on a US dollar base price plus a variable price component where the variable price component is adjusted by a formula related to methanol prices above a certain level. We cannot provide assurance that the facilities will commence commercial operations on the planned dates, that our natural gas supplier for the Geismar 1 plant will supply the contracted gas or that we will be able to secure natural gas for the Geismar 2 plant on commercially acceptable terms. These factors could have an adverse impact on our results of operations and financial condition. Methanol Price Cyclicality and Methanol Supply and Demand The methanol business is a highly competitive commodity industry and prices are affected by supply and demand fundamentals. Methanol prices have historically been, and are expected to continue to be, characterized by cyclicality. New methanol plants are expected to be built and this will increase overall production capacity. Additional methanol supply can also become available in the future by restarting idle methanol plants, carrying out major expansions of existing plants or debottlenecking existing plants to increase 24 Methanex Corporation (cid:2) Annual Report 2013 their production capacity. Historically, higher-cost plants have been shut down or idled when methanol prices are low, but there can be no assurance that this practice will occur in the future. Demand for methanol largely depends upon levels of global industrial production, changes in general economic conditions and the level of energy prices. We are not able to predict future methanol supply and demand balances, market conditions, global economic activity, methanol prices or energy prices, all of which are affected by numerous factors beyond our control. Since methanol is the only product we produce and market, a decline in the price of methanol would have an adverse effect on our results of operations and financial condition. Global Economic Conditions Volatile global economic conditions over the past few years have added significant risks and uncertainties to our business, including risks and uncertainties related to the global supply and demand for methanol, its impact on methanol prices, changes in capital markets and corresponding effects on our investments, our ability to access existing or future credit and increased risk of defaults by customers, suppliers, insurers and other counterparties. While the demand for methanol grew in 2013 and methanol prices increased, there can be no assurance that future global economic conditions will not have an adverse impact on the methanol industry and that this will not have an adverse impact on our results of operations and financial condition. Methanol Demand Demand for Methanol – General Methanol is a global commodity and customers base their purchasing decisions principally on the delivered price of methanol and reli- ability of supply. Some of our competitors are not dependent on revenues from a single product and some have greater financial resources than we do. Our competitors also include state-owned enterprises. These competitors may be better able than we are to withstand price competition and volatile market conditions. Changes in environmental, health and safety laws, regulations or requirements could impact methanol demand. The US Environmental Protection Agency (EPA) is currently evaluating the human health effects of methanol as part of a standard review of chemicals under its Integrated Risk Information System (IRIS), a database of chemical health effects. Methanol is currently unclassified under IRIS. A draft assessment for methanol was released by the EPA in 2010 classifying methanol as “Likely to Be Carcinogenic to Humans.” In 2011, the EPA divided the draft assessment for methanol into cancer and non-cancer assessments. In September 2013, the EPA released the final non-cancer assessment, in which it established the maximum ingestion and inhalation levels for methanol that it claims will not result in adverse health impacts. The timeline for the final cancer assessment remains unknown. We are unable to determine whether the current draft classification will be maintained in the final cancer assessment or if this will lead other government agencies to reclassify methanol. Any reclassification could reduce future methanol demand, which could have an adverse effect on our results of operations and financial condition. Demand for Methanol in the Production of Formaldehyde In 2013, methanol demand for the production of formaldehyde represented approximately 32% of global demand. The largest use for formaldehyde is as a component of urea-formaldehyde and phenol-formaldehyde resins, which are used in adhesives for plywood, particleboard, oriented strand board, medium-density fibreboard and other reconstituted or engineered wood products. There is also demand for formaldehyde as a raw material for engineering plastics and in the manufacture of a variety of other products, including elastomers, paints, building products, foams, polyurethane and automotive products. The current EPA IRIS carcinogenicity classification for formaldehyde is “Likely to Be Carcinogenic to Humans;” however, the EPA is review- ing this classification for formaldehyde as part of a standard review of chemicals. In 2010, the EPA released its draft formaldehyde assessment, proposing formaldehyde as “Known to be Carcinogenic to Humans.” The release of the final assessment of formaldehyde is expected in 2014. In 2009, the US National Cancer Institute (NCI) published a report on the health effects of occupational exposure to formaldehyde and a possible link to leukemia, multiple myeloma and Hodgkin’s disease. The NCI report concluded that there may be an increased risk of cancers of the blood and bone marrow related to a measure of peak formaldehyde exposure. The NCI report is the first part of an update of the 2004 NCI study that indicated possible links between formaldehyde exposure and nasopharyngeal cancer and leukemia. The International Agency for Research on Cancer also concluded that there is sufficient evidence in humans of a causal association of formaldehyde with Methanex Corporation (cid:2) Annual Report 2013 25 leukemia. In 2011, the US Department of Health and Human Services’ National Toxicology Program released its 12th Report on Carcinogens, modifying its listing of formaldehyde from “Reasonably Anticipated to be a Human Carcinogen” to “Known to be a Human Carcinogen.” We are unable to determine at this time if the EPA or other governments or government agencies will reclassify formaldehyde or what limits could be imposed related to formaldehyde emissions in the United States or elsewhere. Any such actions could reduce future methanol demand for use in producing formaldehyde, which could have an adverse effect on our results of operations and financial condition. Demand for Methanol in the Production of MTBE In 2013, methanol demand for the production of MTBE represented approximately 11% of global methanol demand. Demand growth has been healthy, particularly in China where there is growing MTBE capacity. MTBE is used primarily as a source of octane and as an oxygenate for gasoline to reduce the amount of harmful exhaust emissions from motor vehicles. Several years ago, environmental concerns and legislative action related to gasoline leaking into water supplies from underground gasoline storage tanks in the United States resulted in the phase-out of MTBE as a gasoline additive in the United States. We believe that methanol has not been used in the United States to make MTBE for use in domestic fuel blending since 2007. However, approximately 0.7 million tonnes of methanol was used in the United States in 2013 to produce MTBE for export markets. Additionally, the EPA in the United States is preparing an IRIS review of the human health effects of MTBE, including its potential carcinogenicity. The timeline for the final report is currently unknown. The European Union issued a final risk assessment report on MTBE in 2002 that permitted the continued use of MTBE, although several risk-reduction measures relating to the storage and handling of fuels were recommended. Governmental efforts in recent years in some countries, primarily in the European Union and Latin America, to promote biofuels and alternative fuels through legislation or tax policy put competitive pressures on the use of MTBE in gasoline in these countries. However, due to healthy MTBE demand in other countries, particularly in Asia, we have observed methanol demand growth for MTBE production. This increased demand, as well as favourable economics for MTBE, has led many producers with ethyl tertiary-butyl ether (ETBE) capacity to switch to MTBE, if possible. Although MTBE demand has remained healthy outside of the United States, we cannot provide assurance that further legislation ban- ning or restricting the use of MTBE or promoting alternatives to MTBE will not be passed or that negative public perceptions will not develop outside of the United States, either of which could lead to a decrease in the global demand for methanol for use in MTBE. Declines in demand for methanol for use in MTBE could have an adverse effect on our results of operations and financial condition. Foreign Operations A significant portion of our operations and investments are located outside of North America, in New Zealand, Trinidad, Egypt, Chile, Europe and Asia. We are subject to risks inherent in foreign operations such as loss of revenue, property and equipment as a result of expropriation; import or export restrictions; anti-dumping measures; nationalization, war, insurrection, civil unrest, terrorism and other political risks; increases in duties, taxes and governmental royalties; renegotiation of contracts with governmental entities; as well as changes in laws or policies or other actions by governments that may adversely affect our operations. Many of the foregoing risks related to foreign operations may also exist for our domestic operations in North America. Because we derive a significant portion of our revenues from production and sales by subsidiaries outside of Canada, the payment of dividends or the making of other cash payments or advances by these subsidiaries may be subject to restrictions or exchange controls on the transfer of funds in or out of the respective countries or result in the imposition of taxes on such payments or advances. We have organized our foreign operations in part based on certain assumptions about various tax laws (including capital gains and with- holding taxes), foreign currency exchange and capital repatriation laws and other relevant laws of a variety of foreign jurisdictions. While we believe that such assumptions are reasonable, we cannot provide assurance that foreign taxation or other authorities will reach the same conclusion. Further, if such foreign jurisdictions were to change or modify such laws, we could suffer adverse tax and financial consequences. The dominant currency in which we conduct business is the United States dollar, which is also our reporting currency. The most sig- nificant components of our costs are natural gas feedstock and ocean-shipping costs and substantially all of these costs are incurred in United States dollars. Some of our underlying operating costs, capital expenditures and purchases of methanol, however, are incurred in currencies other than the United States dollar, principally the Canadian dollar, the Chilean peso, the Trinidad and Tobago dollar, the New Zealand dollar, the euro, the Egyptian pound and the Chinese yuan. We are exposed to increases in the value of these currencies that 26 Methanex Corporation (cid:2) Annual Report 2013 could have the effect of increasing the United States dollar equivalent of cost of sales, operating expenses and capital expenditures. A portion of our revenue is earned in euros, Canadian dollars and Chinese yuan. We are exposed to declines in the value of these currencies compared to the United States dollar, which could have the effect of decreasing the United States dollar equivalent of our revenue. Trade in methanol is subject to duty in a number of jurisdictions. Methanol sold in China from any of our producing regions is currently subject to duties ranging from 0% to 5.5%. In 2010, the Chinese Ministry of Commerce investigated allegations made by domestic Chinese producers related to the dumping into China of imported methanol. In December 2010, the Ministry recommended that duties of approx- imately 9% be imposed on methanol imports from New Zealand, Malaysia and Indonesia for five years starting from December 24, 2010. However, citing special circumstances, the Customs Tariff Commission of the State Council, which is China’s chief administrative author- ity, suspended enforcement of the recommended dumping duties with the effect that methanol will continue to be allowed to be imported from these three countries without the imposition of additional duties. If the suspension is lifted, we do not expect there to be a significant impact on industry supply/demand fundamentals and we would realign our supply chain to minimize the payment of duties. Currently, the costs we incur in respect of duties are not significant. However, there can be no assurance that the duties that we are currently subject to will not increase, that the suspension of Chinese dumping duties will not be lifted, that duties will not be levied in other jurisdictions in the future or that we will be able to mitigate the impact of future duties, if levied. Methanol is a globally traded commodity that is produced by many producers at facilities located in many countries around the world. Some producers and marketers may have direct or indirect contacts with countries that may, from time to time, be subject to interna- tional trade sanctions or other similar prohibitions (“Sanctioned Countries”). In addition to the methanol we produce, we purchase methanol from third parties under purchase contracts or on the spot market in order to meet our commitments to customers, and we also engage in product exchanges with other producers and marketers. We believe that we are in compliance with all applicable laws with respect to sales and purchases of methanol and product exchanges. However, as a result of the participation of Sanctioned Countries in our industry, we cannot provide assurance that we will not be exposed to reputational or other risks that could have an adverse impact on our results of operations and financial condition. Liquidity Risk At December 31, 2013, we had a cash balance of $733 million, including $59 million relating to the non-controlling interest in Egypt, and a $400 million undrawn revolving credit facility with a syndicate of banks. The facility expires in December 2016 and our ability to maintain access to the facility is subject to certain financial covenants, including an EBITDA to interest coverage ratio and a debt to capitalization ratio, as defined. At December 31, 2013, our long-term debt obligations include $750 million in unsecured notes ($150 million that matures in 2015, $350 mil- lion that matures in 2019 and $250 million that matures in 2022), $404 million related to the Egypt limited recourse debt facilities (100% basis) and $23 million related to other limited recourse debt. The covenants governing the unsecured notes, which are specified in an indenture, apply to the Company and its subsidiaries, excluding the Egypt entity (“limited recourse subsidiary”), and include restrictions on liens, sale and lease-back transactions, a merger or consolidation with another corporation or sale of all or substantially all of the Company’s assets. The indenture also contains customary default provisions. The Egypt limited recourse debt facilities are described as limited recourse as they are secured only by the assets of the Egypt entity. Accordingly, the lenders to the limited recourse debt facilities have no recourse to the Company or its other subsidiaries. The Egypt limited recourse debt facilities have covenants and default provisions that apply only to the Egypt entity, including restrictions on the incurrence of additional indebtedness and a requirement to fulfill certain conditions before the payment of cash or other distributions. For additional information regarding long-term debt, refer to note 8 of our 2013 consolidated financial statements. We cannot provide assurance that we will be able to access new financing in the future on commercially acceptable terms or at all, or that the financial institutions providing the credit facility will have the ability to honour future draws. Additionally, 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. Any of these factors could have a material adverse effect on our results of operations, our ability to pursue and complete strategic initiatives or on our financial condition. Methanex Corporation (cid:2) Annual Report 2013 27 Customer Credit Risk Our customers are large global or regional petrochemical manufacturers or distributors and a number are highly leveraged. We monitor our customers’ financial status closely; however, some customers may not have the financial ability to pay for methanol in the future and this could have an adverse effect on our results of operations and financial condition. Although credit losses have not been significant in the past, this risk still exists. Operational Risks Production Risks Most of our earnings are derived from the sale of methanol produced at our plants. Our business is subject to the risks of operating meth- anol production facilities, such as equipment breakdowns, interruptions in the supply of natural gas and other feedstocks, power failures, longer-than-anticipated planned maintenance activities, loss of port facilities, natural disasters or any other event, including unanticipated events beyond our control, that could result in a prolonged shutdown of any of our plants or impede our ability to deliver methanol to our customers. A prolonged plant shutdown at any of our major facilities could have an adverse effect on our results of operations and financial condition. Purchased Product Price Risk In addition to the sale of methanol produced at our plants, we also purchase methanol produced by others on the spot market and through purchase contracts to meet our customer commitments and support our marketing efforts. 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 purchase. Consequently, we have the risk of holding losses on the resale of this product to the extent that methanol prices decrease from the date of purchase to the date of sale. Holding losses, if any, on the resale of purchased methanol could have an adverse effect on our results of operations and financial condition. Distribution Risks Excess capacity within our fleet of ocean vessels resulting from a prolonged plant shutdown or other event could have an adverse effect on our results of operations and financial condition as our vessel fleet is subject to fixed time charter costs. In the event we have excess ship- ping capacity, we may be able to mitigate some of the excess costs by entering into sub-charters or third-party backhaul arrangements, although the success of this mitigation is dependent on conditions within the broader global shipping industry. If we suffer any disruptions in our distribution system and are unable to mitigate these costs this could have an adverse effect on our results of operations and financial condition. Insurance Risks Although we maintain operational and construction insurance, including business interruption insurance and delayed start-up insurance, we cannot provide assurance that we will not incur losses beyond the limits of, or outside the coverage of, such insurance or that insurers will be financially capable of honouring future claims. From time to time, various types of insurance for companies in the chemical and petrochemical industries have not been available on commercially acceptable terms or, in some cases, have been unavailable. We cannot provide assurance that in the future we will be able to maintain existing coverage or that premiums will not increase substantially. Geismar Relocation Projects We believe that our estimates for budgeted project costs and targeted completion dates for our Geismar projects are reasonable. However, as we could be impacted by any potential cost increase due to labour shortages, we cannot provide any assurance that the budgeted cost estimates will not be exceeded or that the facilities will begin commercial production within the targeted schedules, if at all, or that the facilities will operate at their designed capacity or on a sustained basis. Any changes to the targeted timing of completion or budgeted cost to complete these projects could have an adverse impact on our results of operations and financial condition. New Capital Projects As part of our strategy to strengthen our position as the global leader in the production and marketing of methanol, we intend to con- tinue pursuing new opportunities to enhance our strategic position in the methanol industry. Our ability to successfully identify, develop and complete new capital projects is subject to a number of risks, including finding and selecting favourable locations for new facilities or relocation of existing facilities where sufficient natural gas and other feedstock is available through long-term contracts with acceptable 28 Methanex Corporation (cid:2) Annual Report 2013 commercial terms, obtaining project or other financing on satisfactory terms, constructing and completing the projects within the con- templated budgets and schedules and other risks commonly associated with the design, construction and start-up of large complex industrial projects. We cannot provide assurance that we will be able to identify or develop new methanol projects. Environmental Regulation The countries in which we operate all have laws and regulations to which we are subject governing the environment and the management of natural resources as well as the handling, storage, transportation and disposal of hazardous or waste materials. We are also subject to laws and regulations governing emissions and the import, export, use, discharge, storage, disposal and transportation of toxic substances. The products we use and produce are subject to regulation under various health, safety and environmental laws. Non-compliance with these laws and regulations may give rise to compliance orders, fines, injunctions, civil liability and criminal sanctions. Laws and regulations protecting the environment have become more stringent in recent years and may, in certain circumstances, impose absolute liability rendering a person liable for environmental damage without regard to negligence or fault on the part of such person. Such laws and regulations may also expose us to liability for the conduct of, or conditions caused by, others, or for our own acts even if we complied with applicable laws at the time such acts were performed. To date, environmental laws and regulations have not had a significant adverse effect on our capital expenditures, earnings or competitive position. However, operating petrochemical manufactur- ing plants and distributing methanol exposes us to risks in connection with compliance with such laws and we cannot provide assurance that we will not incur significant costs or liabilities in the future. Management of Emissions Carbon dioxide (“CO2”) is a by-product of the methanol production process. The amount of CO2 generated by the methanol production process depends on the production technology (and hence often the plant age), the feedstock and any export of the by-product hydrogen. Plant efficiency, and thus CO2 emissions, is highly dependent on the design of the methanol plant, so the CO2 emission figure may vary from year to year depending on the asset mix that is operating. We also recognize that CO2 is generated from our marine oper- ations, and in that regard we measure the consumption of fuel by our ocean vessels based on the volume of product transported. We manufacture methanol in New Zealand, Trinidad, Egypt, Canada and Chile. All of these countries signed and ratified the Kyoto Protocol; however, Canada has since removed itself from that Agreement. We are not currently required to reduce greenhouse gases (GHGs) in Trinidad, Egypt and Chile but our production in New Zealand and Canada is subject to GHG regulations. New Zealand passed legislation to establish an Emissions Trading Scheme (“ETS”) that came into force in 2010. The ETS imposes a carbon price on producers of fossil fuels, including natural gas, which is passed on to Methanex, increasing the cost of gas that Methanex pur- chases in New Zealand. However, as a trade-exposed company, Methanex is entitled to a free allocation of emissions units to partially offset those increased costs. The New Zealand government confirmed that the legislation will continue providing further moderation and the free emission allocation provisions will remain unchanged until at least 2015. Consequently, our ETS-related costs are not expected to be significant to the end of 2015. However, after this date, the moderating features are expected to be removed and our eligibility for free allocation of emissions units may also be progressively reduced. As a consequence, we will likely incur increasing costs after 2015. It is impossible to accurately quantify the impact on our business of ETS-related costs after 2015 and therefore we cannot provide assurance that the ETS will not have a significant impact on our results of operations and financial condition. Our Medicine Hat facility is located in the Canadian province of Alberta, which has an established GHG reduction regulation that applies to our plant. The regulation requires that facilities reduce emissions intensities by up to 12% of their established emissions intensity base- line. “Emissions intensity” means the quantity of specified greenhouse gases released per unit of production. In order to meet the reduc- tion obligation, a facility can choose to make emissions reduction improvements or it can purchase either offset credits or “technology fund” credits for CDN$15 per tonne of CO2 equivalent. Financial obligations are set to begin in 2014, and based on the GHG baseline intensity and 2013 emissions, we do not believe that the costs are material. The federal government of Canada is in the process of developing a sector-by-sector approach to reduce GHG emissions in the chemical sector in support of its commitment to reduce GHGs from 2005 levels by 17% by 2020. Final proposed regulations are expected in 2014. As the sole methanol producer in Canada, Methanex is engaged in a consultative process to ensure achievable performance standards are set and that these incorporate equivalency agreements to prevent the potential of paying for GHG emissions under both provincial and federal regimes. Methanex Corporation (cid:2) Annual Report 2013 29 We are currently in the process of relocating two of our idle methanol plants in Chile to Geismar, Louisiana. The first of the reassembled plants in Geismar is targeted to be operational by late 2014 and the second in early 2016. Today, there is no GHG legislation that impacts us in the US. We continue to monitor the development of potential GHG legislation in the US and Louisiana to ensure compliance with any potential future requirements once the plants become operational. At this time, it is unknown what impact potential new GHG legis- lation or regulations could have on our operations in Geismar. We cannot provide assurance over ongoing compliance with existing legislation or that future laws and regulations to which we are sub- ject governing the environment and the management of natural resources as well as the handling, storage, transportation and disposal of hazardous or waste materials will not have an adverse effect on our results of operations and financial condition. Reputational Risk Damage to our reputation could result from the actual or perceived occurrence of any number of events, and could include any negative publicity (for example, with respect to our handling of environmental, health or safety matters), whether true or not. Although we believe that we conduct our operations in a prudent manner and that we take care in protecting our reputation, we do not ultimately have direct control over how we are perceived by others. Reputation loss may result in decreased investor confidence, an impediment to our overall ability to advance our projects or increased challenges in maintaining our social license to operate, which could have an adverse impact on our results of operations and financial condition. Legal Proceedings The Board of Inland Revenue of Trinidad and Tobago has issued assessments against our 63.1% owned joint venture, Atlas, in respect of the 2005, 2006 and 2007 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 extend to 2014 and 2019 related to methanol produced by Atlas. Atlas has partial relief from corporation income tax until 2014. The Company has lodged objections to the assessments. Although there can be no assurance, based on the merits of the cases and legal interpretation, management believes its position should be sustained. CRITICAL ACCOUNTING ESTIMATES We believe the following selected accounting policies and issues are critical to understanding the estimates, assumptions and uncertainties that affect the amounts reported and disclosed in our consolidated financial statements and related notes. See note 2 to our 2013 consolidated financial statements for our significant accounting policies. Property, Plant and Equipment Our business is capital intensive and has required, and will continue to require, significant investments in property, plant and equipment. At December 31, 2013, the net book value of our property, plant and equipment was $2,231 million. Capitalization Property, plant and equipment are initially recorded at cost. The cost of purchased equipment includes expenditures that are directly attributable to the purchase price, delivery and installation. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to the location and condition for their intended use, the costs of dis- mantling and removing the items and restoring the site on which they are located, and borrowing costs on self-constructed assets that meet certain criteria. Routine repairs and maintenance costs are expensed as incurred. At December 31, 2013, we have accrued $16.4 million for site restoration costs relating to the decommissioning and reclamation of our methanol production sites and oil and gas properties. Inherent uncertainties exist in this estimate because the restoration activities will take place in the future and there may be changes in governmental and environmental regulations and changes in removal technology and costs. It is difficult to estimate the future costs of these activities as our estimate of fair value is based on current regulations and technology. Because of uncertainties related to estimating the cost and timing of future site restoration activities, future costs could differ materially from the amounts estimated. Depreciation and Amortization Depreciation and amortization is generally provided on a straight-line basis at rates calculated to amortize the cost of property, plant and equipment from the commencement of commercial operations over their estimated useful lives to estimated residual value. 30 Methanex Corporation (cid:2) Annual Report 2013 The estimated useful lives of the Company’s buildings, plant installations and machinery, excluding costs related to turnarounds, range from 10 to 25 years depending on the specific asset component and the production facility to which it is related. The Company determines the estimated useful lives of individual asset components based on the shorter of its physical life or economic life. The physical life of these assets is generally longer than the economic life. The economic life is primarily determined by the nature of the natural gas feed- stock available to our various production facilities. Factors that influence the nature of natural gas feedstock availability include the terms of individual natural gas supply contracts, access to natural gas supply through open markets, regional factors influencing the exploration and development of natural gas, and the expected price of securing natural gas supply. We review the factors related to each production facility on an annual basis to determine if changes are required to the estimated useful lives. Recoverability of Asset Carrying Values Property, Plant and Equipment Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Examples of such events or changes in circumstances related to our long-lived assets include, but are not restricted to: a significant adverse change in the extent or manner in which the asset is being used or in its physical condition; a significant adverse change in our long-term methanol price assumption or in the price or availability of natural gas feedstock required to manufacture methanol; a significant adverse change in legal factors or in the business climate that could affect the asset’s value, including an adverse action or assessment by a foreign government that impacts the use of the asset; or a current-period operating or cash flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing losses associated with the asset’s use. As a consequence of the uncertain outlook for the future supply of natural gas feedstock to our Chile operations, we recorded an impair- ment charge at December 31, 2012 to reduce the carrying value of our Chile assets to their estimated recoverable amount. The post- impairment carrying value at December 31, 2012 of $245 million included the second methanol plant that management was then considering relocating to Geismar, Louisiana. During 2013, we made a final investment decision to relocate the second facility from Chile to Geismar, Louisiana and, as a result, the $75 million carrying value of this methanol plant (adjusted for 2013 year-to-date depreciation) was removed from the Chile cash-generating unit. At December 31, 2013, our Chile cash-generating unit consists primarily of the remaining two methanol plants in Chile with a carrying value of $165 million. As a result of insufficient natural gas feedstock during the southern hemisphere winter, we temporarily idled our Chile operations in April 2013. We restarted one methanol plant in September 2013 and operated the plant at approximately 50% of capacity in the fourth quarter of 2013 supported by natural gas supplies from both Chile and Argentina. The idling of our operations and the restart were both antici- pated in our December 31, 2012 recoverability test. While we continue to work with our natural gas suppliers to sustain our Chile oper- ations over the medium term, there is no assurance that we will be able to maintain operations through the upcoming southern hemisphere winter. As a consequence of the continued uncertain outlook for the future supply of natural gas feedstock to our Chile operations, the carrying value of our Chile assets was tested for recoverability at December 31, 2013. Recoverability of long-lived assets is measured by comparing the carrying value of an asset or cash-generating unit to the estimated recoverable amount, which is the higher of its estimated fair value less costs to sell or its value in use. Value in use was determined by measuring the pre-tax cash flows expected to be generated from the cash-generating unit over its estimated useful life discounted by a pre-tax discount rate. The pre-tax discount rate used of 13% was derived from the Company’s estimated cost of capital. An impairment writedown is recorded if the carrying value exceeds the estimated recoverable amount. An impairment writedown recognized in prior periods for an asset or cash-generating unit is reversed if there has been a subsequent recovery in the value of the asset or cash-generating unit due to changes in events and circumstances. For the purposes of recognition and measurement of an impairment writedown or reversal, we group our long-lived assets with other assets and liabilities to form a “cash-generating unit” at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. To the extent that our methanol facilities in a particular location are interdependent as a result of common infrastructure and/or feedstock from shared sources that can be shared within a facility location, we group our assets based on site locations for the purpose of determining impairment. There are two key variables that impact our estimate of future cash flows from producing assets: (1) the methanol price and (2) the price and availability of natural gas feedstock. Short-term methanol price estimates are based on current supply and demand fundamentals and current methanol prices. Long-term methanol price estimates are based on our view of long-term supply and demand, and Methanex Corporation (cid:2) Annual Report 2013 31 consideration is given to many factors, including, but not limited to, estimates of global industrial production rates, energy prices, changes in general economic conditions, future global methanol production capacity, industry operating rates and the global industry cost structure. Our estimate of the price and availability of natural gas takes into consideration the current contracted terms, as well as factors that we believe are relevant to supply under these contracts and supplemental natural gas sources. Other assumptions included in our estimate of future cash flows include the estimated cost incurred to maintain the facilities, estimates of transportation costs and other variable costs incurred in producing methanol in each period. Changes in these assumptions will impact our estimates of future cash flows and could impact our estimates of the useful lives of property, plant and equipment. Consequently, it is possible that our future operating results could be adversely affected by further asset impairment charges or by changes in depreciation and amortization rates related to property, plant and equipment. Based on the test performed at December 31, 2013, the estimated recoverable amount of our Chile cash-generating unit is approximately 15% in excess of its $165 million carrying value. Our estimate of the recoverable amount was based on a long-term methanol price assumption that is materially consistent with our historical results. A 10% decrease in our long term methanol price assumption would result in a reduction in the estimated recoverable amount by $60 million. Our estimate of the recoverable amount was also based on natural gas prices which are materially consistent with those currently being incurred in the region and our best estimate of future natu- ral gas availability, considering current contracted terms as well as factors that we believe are relevant to supply under these contracts and supplemental natural gas sources. A 10% increase in the natural gas price would result in a reduction in the estimated recoverable amount by $40 million and a 10% decrease in the natural gas availability would result in a reduction in the estimated recoverable amount by $40 million. We believe the estimated recoverable amount of all long-lived assets except our Chile cash-generating unit substantially exceeded their carrying value at December 31, 2013. Income Taxes Deferred income tax assets and liabilities are determined using enacted or substantially enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. We recognize deferred tax assets to the extent it is probable that taxable profit will be available against which the asset can be utilized. In making this determination, certain judgments are made relating to the level of expected future taxable income and to available tax-planning strategies and their impact on the use of existing loss carryforwards and other income tax deductions. We also consider historical profitability and volatility to assess whether we believe it is probable that the existing loss carryforwards and other income tax deductions will be used to offset future taxable income otherwise calculated. Our management routinely reviews these judgments. At December 31, 2013, we had recognized future tax assets of $158 million (presented as a reduction of our deferred tax liabilities) and unrecognized future income tax assets of $68 million. The determination of income taxes requires the use of judgment and estimates. If certain judgments or estimates prove to be inaccurate, or if certain tax rates or laws change, our results of operations and financial position could be materially impacted. Financial Instruments We enter into derivative financial instruments from time to time to manage certain exposures to commodity price volatility, foreign exchange volatility and variable interest rate volatility, which contributes towards managing our cost structure. Derivative financial instruments are classified as held-for-trading and are recorded on the balance sheet at fair value unless exempted. Changes in the fair value of held-for-trading derivative financial instruments are recorded in earnings unless the instruments are designated as cash flow hedges, in which case the effective portion of any changes in fair value are recorded in other comprehensive income. Assessment of con- tracts as derivative instruments, the valuation of financial instruments and derivatives, and hedge effectiveness assessments require a high degree of judgment and are considered critical accounting estimates due to the complex nature of these products and the potential impact on our financial statements. At December 31, 2013, the fair value of our derivative financial instruments used to limit our exposure to variable interest rate volatility that have been designated as cash flow hedges approximated their carrying value of negative $20 million. Until settled, the fair value of the derivative financial instruments will fluctuate based on changes in variable interest rates. ANTICIPATED CHANGES TO INTERNATIONAL FINANCIAL REPORTING STANDARDS We do not expect that the changes to International Financial Reporting Standards that are effective as of January 1, 2014 will have a sig- nificant impact on the Company’s financial statements and disclosures. 32 Methanex Corporation (cid:2) Annual Report 2013 SUPPLEMENTAL NON-GAAP MEASURES In addition to providing measures prepared in accordance with International Financial Reporting Standards (IFRS), we present certain sup- plemental measures that are not defined terms under IFRS (non-GAAP measures). These are Adjusted EBITDA, Adjusted net income, Adjusted net income per share, cash flow from operating activities before changes in non-cash working capital and operating income. These measures do not have any standardized meaning prescribed by IFRS and therefore are unlikely to be comparable to similar measures presented by other companies. We believe these measures are useful in assessing the operating performance and liquidity of the Company’s ongoing business. We also believe Adjusted EBITDA is frequently used by securities analysts and investors when comparing our results with those of other companies. These measures should be considered in addition to, and not as a substitute for, net income, cash flows and other measures of financial performance and liquidity reported in accordance with IFRS. Adjusted EBITDA (Attributable to Methanex Shareholders) Adjusted EBITDA differs from the most comparable GAAP measure, net income (loss) attributable to Methanex shareholders, because it excludes finance costs, finance income and other expenses, income tax expense (recovery), depreciation and amortization, mark-to-market impact of share-based compensation, Geismar project relocation expenses and charges, write-off of oil and gas rights and asset impairment charges. Adjusted EBITDA includes an amount representing our 63.1% share of the Atlas facility and our 50% share (60% share prior to December 9, 2013) of the Egypt facility. 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 from net income (loss) attributable to Methanex shareholders to Adjusted EBITDA: ($ Millions) Net income (loss) attributable to Methanex shareholders Finance costs Finance income and other expenses Income tax expense (recovery) Depreciation and amortization Mark-to-market impact of share-based compensation Geismar project relocation expenses and charges Write-off of oil and gas rights Asset impairment charge Earnings of associate, excluding amount included in Adjusted EBITDA1 Non-controlling interests adjustments1 Adjusted EBITDA (attributable to Methanex shareholders) 2013 2012 $ 329 $ (68) 57 (5) 66 123 110 34 25 – 38 (41) 61 (1) (85) 149 16 65 – 297 34 (39) $ 736 $ 429 1 These adjustments represent finance costs, finance income and other expenses, income tax expense, and depreciation and amortization associated with the non-controlling interest in the methanol facility in Egypt and our 63.1% interest in the Atlas methanol facility. Methanex Corporation (cid:2) Annual Report 2013 33 Adjusted Net Income and Adjusted Net Income per Common Share (Attributable to Methanex Shareholders) Adjusted net income and Adjusted net income per common share are non-GAAP measures because they exclude the mark-to-market impact of share-based compensation and items that are considered by management to be non-operational, including Geismar project relocation charges and expenses, asset impairment charges and write-off of oil and gas rights. The following table shows a reconciliation from net income (loss) attributable to Methanex shareholders to Adjusted net income and the calculation of Adjusted diluted net income per common share: ($ Millions, except number of shares and per share amounts) Net income (loss) attributable to Methanex shareholders Mark-to-market impact of share-based compensation Geismar project relocation expenses and charges Asset impairment charge Write-off of oil and gas rights Income tax recovery related to above items Adjusted net income1 Diluted weighted average shares outstanding Adjusted net income per common share1 2013 2012 $ $ $ 329 110 34 – 25 (27) 471 96 4.88 $ (68) 16 65 297 – (130) 180 94 1.90 $ $ 1 For the year ended December 31, 2012, stock options have been excluded from the calculation of diluted net loss per common share (attributable to Methanex shareholders) as their effect would be anti-dilutive. However, for the calculation of adjusted diluted net income per common share, stock options have been included in the denominator and the diluted weighted average number of common shares for the year ended December 31, 2012 is 95 million. Operating Income and Cash Flows from Operating Activities before Changes in Non-Cash Working Capital Operating income and cash flows from operating activities before changes in non-cash working capital are reconciled to GAAP measures in our consolidated statements of income and consolidated statements of cash flows, respectively. QUARTERLY FINANCIAL DATA (UNAUDITED) ($ Millions, except per share amounts) 2013 Revenue Adjusted EBITDA1 2 Adjusted net income1 2 Net income2 Adjusted net income per share1 2 Basic net income per common share2 Diluted net income per common share2 2012 Revenue Adjusted EBITDA1 2 Adjusted net income1 2 Net income (loss)2 Adjusted net income per share1 2 Basic net income (loss) per common share2 Diluted net income (loss) per common share2 Three months ended Dec 31 Sep 30 Jun 30 Mar 31 $ $ 881 245 167 128 1.72 1.33 1.32 $ 668 $ 119 61 (140) 0.64 (1.49) (1.49) 758 184 117 87 1.22 0.91 0.90 608 104 36 (3) 0.38 (0.03) (0.03) $ $ 733 157 99 54 1.02 0.57 0.56 613 113 44 52 0.47 0.56 0.50 $ 652 149 88 60 0.92 0.64 0.63 $ 654 93 39 22 0.41 0.24 0.23 1 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 the Supple- mental Non-GAAP Measures section on page 33 for a description of each non-GAAP measure and reconciliations to the most comparable GAAP measures. 2 Attributable to Methanex Corporation shareholders. A discussion and analysis of our results for the fourth quarter of 2013 is set out in our fourth quarter of 2013 Management’s Discussion and Analysis filed with the Canadian Securities Administrators and the US Securities and Exchange Commission and incorporated herein by reference. 34 Methanex Corporation (cid:2) Annual Report 2013 SELECTED ANNUAL INFORMATION ($ Millions, except per share amounts) Revenue Adjusted EBITDA1 2 Adjusted net income1 2 Net income (loss)2 Adjusted net income per share1 2 Basic net income (loss) per share2 Diluted net income (loss) per share2 Cash dividends declared per share Total assets Total long-term financial liabilities 2013 2012 20113 $ 3,024 $ 2,543 $ 2,608 736 471 329 4.88 3.46 3.41 0.785 4,113 1,315 429 180 (68) 1.90 (0.73) (0.73) 0.725 3,443 1,356 427 182 201 1.93 2.16 2.06 0.665 3,394 886 1 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 the Supplemental Non-GAAP Measures section on page 33 for a description of each non-GAAP measure and reconciliations to the most comparable GAAP measures. 2 Attributable to Methanex Corporation shareholders. 3 Effective January 1, 2013, the Company has adopted new IASB accounting standards related to consolidation and joint arrangements. As a result, the Company’s 63.1% interest in the Atlas entity is now accounted for using the equity method. The company has restated its figures as at and for the year ended December 31, 2012 using the equity method. Figures prior to 2012 have not been restated. For more information refer to Note 24 of the Financial Statements: “Adoption of new accounting standards” on page 70. CONTROLS AND PROCEDURES Disclosure Controls and Procedures Disclosure controls and procedures are those controls and procedures that are designed to ensure that the information required to be disclosed in the filings under applicable securities regulations is recorded, processed, summarized and reported within the time periods specified. As at December 31, 2013, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operation of the Company’s dis- closure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective. Management’s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accu- rately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide rea- sonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2013, based on the framework set forth in Internal Control – Integrated Framework issued in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under this framework, management concluded that our internal control over financial reporting was effective as of that date. KPMG LLP, an independent registered public accounting firm that audited and reported on our consolidated financial statements, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2013. The attestation report is included in our consolidated financial statements on page 40. Methanex Corporation (cid:2) Annual Report 2013 35 Changes in Internal Control over Financial Reporting There have been no changes during the year ended December 31, 2013 to internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting. FORWARD-LOOKING STATEMENTS This 2013 Management’s Discussion and Analysis (“MD&A”) contains 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” 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: (cid:2) expected demand for methanol and its derivatives, (cid:2) expected new methanol supply or restart of idled capacity and (cid:2) ability to meet covenants or obtain or continue to obtain waiv- ers associated with our long-term debt obligations, including, timing for start-up of the same, (cid:2) 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, (cid:2) expected methanol and energy prices, (cid:2) expected levels of methanol purchases from traders or other third parties, (cid:2) expected levels, timing and availability of economically priced natural gas supply to each of our plants, (cid:2) capital committed by third parties towards future natural gas exploration and development in the vicinity of our plants, (cid:2) our expected capital expenditures, including, without limitation, those to support natural gas exploration and development for our plants, (cid:2) anticipated production rates of our plants, (cid:2) expected operating costs, including natural gas feedstock costs and logistics costs, (cid:2) expected tax rates or resolutions to tax disputes, (cid:2) expected cash flows, earnings capability and share price, (cid:2) availability of committed credit facilities and other financing, without limitation, the Egypt limited recourse debt facilities that have conditions associated with the payment of cash or other distributions and the finalization of certain land title registration and related mortgages that require action by Egyptian governmental entities, (cid:2) our shareholder distribution strategy and anticipated dis- tributions to shareholders, (cid:2) commercial viability and timing of, or our ability to execute, future projects, plant restarts, capacity expansions, plant relocations, or other business initiatives or opportunities, includ- ing the planned relocation of idle Chile methanol plants to Geismar, Louisiana (“Geismar”), (cid:2) our financial strength and ability to meet future financial commitments, (cid:2) expected global or regional economic activity (including industrial production levels), (cid:2) expected outcomes of litigation or other disputes, claims and assessments, (cid:2) expected actions of governments, government agencies, gas suppliers, courts, tribunals or other third parties, and (cid:2) expected impact on our operations in Egypt or our financial condition as a consequence of civil unrest or actions taken or inaction by the Government of Egypt and its agencies. 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: (cid:2) the supply of, demand for and price of methanol, methanol (cid:2) our ability to procure natural gas feedstock on commercially derivatives, natural gas, coal, oil and oil derivatives, acceptable terms, (cid:2) the success of our natural gas exploration and development (cid:2) operating rates of our facilities, in Chile, 36 Methanex Corporation (cid:2) Annual Report 2013 (cid:2) receipt of remaining required permits in connection with our (cid:2) global and regional economic activity (including industrial Geismar project, production levels), (cid:2) receipt or issuance of third-party consents or approvals, (cid:2) absence of a material negative impact from major natural including, without limitation, governmental registrations of disasters, land title and related mortgages in Egypt, governmental approvals related to natural gas exploration rights or rights to purchase natural gas, (cid:2) the establishment of new fuel standards, (cid:2) operating costs, including natural gas feedstock and logistics costs, capital costs, tax rates, cash flows, foreign exchange rates and interest rates, (cid:2) the availability of committed credit facilities and other financing, (cid:2) timing of completion and cost of the Geismar projects, (cid:2) absence of a material negative impact from changes in laws or regulations, (cid:2) absence of a material negative impact from political instability in the countries in which we operate, (cid:2) enforcement of contractual arrangements and ability to per- form contractual obligations by customers, natural gas and other suppliers and other third parties, and (cid:2) satisfaction of conditions precedent contained in the Geismar 1 natural gas supply agreement. 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: (cid:2) conditions in the methanol and other industries, including fluctuations in the supply, demand for and price of methanol and its derivatives, including demand for methanol for energy uses, (cid:2) the price of natural gas, coal, oil and oil derivatives, (cid:2) the success of natural gas exploration and development activ- ities in southern Chile, (cid:2) our ability to obtain natural gas feedstock on commercially acceptable terms to underpin current operations and future (cid:2) competing demand for natural gas, especially with respect to domestic needs for gas and electricity in Chile and Egypt, (cid:2) actions of governments and governmental authorities, includ- ing, without limitation, the implementation of policies or other measures that could impact the supply of or demand for methanol or its derivatives, (cid:2) changes in laws or regulations, (cid:2) import or export restrictions, anti-dumping measures, increases in duties, taxes and government royalties, and other production growth opportunities, actions by governments that may adversely affect our oper- (cid:2) the ability to successfully carry out corporate initiatives and ations or existing contractual arrangements, strategies, (cid:2) actions of competitors, suppliers and financial institutions, (cid:2) conditions within the natural gas delivery systems that may prevent delivery of our natural gas supply requirements, (cid:2) our ability to meet timeline and budget targets for our Geismar projects, including cost pressures arising from labour costs, (cid:2) worldwide economic conditions, (cid:2) satisfaction of conditions precedent contained in the Geismar 1 natural gas supply agreement, and 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. Methanex Corporation (cid:2) Annual Report 2013 37 Responsibility for Financial Reporting The consolidated financial statements and all financial information contained in the annual report are the responsibility of management. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and, where appropriate, have incorporated estimates based on the best judgment of management. Management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the internal control framework set out in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. The Board of Directors (the Board) is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control, and is responsible for reviewing and approving the consolidated financial statements. The Board carries out this responsibility principally through the Audit, Finance and Risk Committee (the Committee). The Committee consists of four non-management directors, all of whom are independent as defined by the applicable rules in Canada and the United States. The Committee is appointed by the Board to assist the Board in fulfilling its oversight responsi- bility relating to: the integrity of the Company’s financial statements, news releases and securities filings; the financial report- ing process; the systems of internal accounting and financial controls; the professional qualifications and independence of the external auditor; the performance of the external auditors; risk management processes; financing plans; pension plans; and the Company’s compliance with ethics policies and legal and regulatory requirements. The Committee meets regularly with management and the Company’s auditors, KPMG LLP, Chartered Accountants, to discuss internal controls and significant accounting and financial reporting issues. KPMG has full and unrestricted access to the Committee. KPMG audited the consolidated financial statements and the effectiveness of internal controls over financial report- ing. Their opinions are included in the annual report. A. Terence Poole Chairman of the Audit, Finance and Risk Committee March 10, 2014 John Floren President and Chief Executive Officer Ian Cameron Senior Vice President, Finance and Chief Financial Officer 38 Methanex Corporation (cid:2) Annual Report 2013 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Methanex Corporation: We have audited the accompanying consolidated statements of financial position of Methanex Corporation as of December 31, 2013 and December 31, 2012, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of Methanex Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Methanex Corporation as of December 31, 2013 and December, 31, 2012, and its consolidated financial per- formance and its consolidated cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. As discussed in Note 24 to the consolidated financial statements, the company has changed its method of accounting for its 63.1% interest in Atlas Methanol Company Unlimited from proportionate consolidation to equity accounting in the years ended December 31, 2013 and December 31, 2012 due to the adoption of IFRS 11, Joint Arrangements, and included the presentation of the consolidated statement of financial position as at January 1, 2012. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Methanex Corporation’s internal control over financial reporting as of December 31, 2013, based on the criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2014 expressed an unqualified opinion on the effectiveness of Methanex Corporation’s internal control over financial reporting. Chartered Accounts Vancouver, Canada March 10, 2014 Methanex Corporation (cid:2) Annual Report 2013 39 Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors of Methanex Corporation: We have audited Methanex Corporation’s (“the Company”) internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the section entitled “Management’s Annual Report on Internal Control over Financial Reporting” included in the accompanying Management’s Discussion and Analysis. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal con- trol over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reli- ability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dis- positions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial position of the Company as of December 31, 2013, and 2012 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the years then ended and our report dated March 10, 2014 expressed an unqualified (unmodified) opinion on those consolidated financial statements. Chartered Accountants Vancouver, Canada March 10, 2014 40 Methanex Corporation (cid:2) Annual Report 2013 Consolidated Statements of Financial Position (thousands of US dollars, except number of common shares) As at ASSETS Current assets: Cash and cash equivalents Trade and other receivables (note 3) Inventories (note 4) Prepaid expenses Non-current assets: Property, plant and equipment (note 5) Investment in associate (note 6) Other assets (note 7) LIABILITIES AND EQUITY Current liabilities: Trade, other payables and accrued liabilities Current maturities on long-term debt (note 8) Current maturities on other long-term liabilities (note 9) Non-current liabilities: Long-term debt (note 8) Other long-term liabilities (note 9) Deferred income tax liabilities (note 15) Equity: Capital stock 25,000,000 authorized preferred shares without nominal or par value Unlimited authorization of common shares without nominal or par value Issued and outstanding common shares at December 31, 2013 were 96,100,969 (2012 – 94,309,970) Contributed surplus Retained earnings Accumulated other comprehensive loss Shareholders’ equity Non-controlling interests Total equity Commitments and contingencies (notes 6 and 21) See accompanying notes to consolidated financial statements. Approved by the Board: Dec 31 2013 Dec 31 2012 Jan 1 2012 (As adjusted – note 24) (As adjusted – note 24) $ 732,736 534,130 313,809 20,533 $ 727,385 417,156 256,340 25,588 $ 341,445 374,287 274,276 22,614 1,601,208 1,426,469 1,012,622 2,230,938 216,095 65,253 2,512,286 1,762,873 184,665 68,554 2,016,092 1,976,693 171,707 122,627 2,271,027 $ 4,113,494 $ 3,442,561 $ 3,283,649 $ 618,181 41,504 85,648 745,333 1,126,802 188,520 147,506 1,462,828 531,573 4,994 1,126,700 (5,544) 1,657,723 247,610 1,905,333 $ 377,666 $ 38,290 30,322 446,278 1,156,081 200,212 162,253 1,518,546 481,779 15,481 805,661 (13,045) 1,289,876 187,861 1,477,737 360,712 236,063 21,441 618,216 601,293 188,149 274,028 1,063,470 455,434 22,281 942,978 (15,968) 1,404,725 197,238 1,601,963 $ 4,113,494 $ 3,442,561 $ 3,283,649 A. Terence Poole (Director) John Floren (Director) Methanex Corporation (cid:2) Annual Report 2013 41 Consolidated Statements of Income (thousands of US dollars, except number of common shares and per share amounts) For the years ended December 31 2013 2012 Revenue Cost of sales and operating expenses (note 10) Depreciation and amortization (note 10) Write-off of oil and gas rights (note 7) Geismar project relocation expenses and charges (note 5) Asset impairment charge (notes 5 and 7) Operating income (loss) Earnings (loss) of associate (note 6) Finance costs (note 11) Finance income and other expenses Income (loss) before income taxes Income tax recovery (expense) (note 15): Current Deferred Net income (loss) Attributable to: Methanex Corporation shareholders Non-controlling interests Income (loss) per share for the period attributable to Methanex Corporation shareholders: Basic net income (loss) per common share (note 12) Diluted net income (loss) per common share (note 12) Weighted average number of common shares outstanding Diluted weighted average number of common shares outstanding See accompanying notes to consolidated financial statements. $ 3,024,047 (2,378,204) (123,335) (24,798) (33,867) – 463,843 30,799 (56,407) 4,446 442,681 (83,618) 17,937 (65,681) 377,000 329,167 47,833 377,000 3.46 3.41 95,259,066 96,430,842 $ $ $ $ $ (As adjusted – note 24) 2,542,664 $ (2,090,969) (149,411) – (64,543) (296,976) (59,235) (214) (61,464) 1,068 (119,845) (29,770) 115,040 85,270 (34,575) (68,105) 33,530 (34,575) (0.73) (0.73) 93,755,509 93,755,509 $ $ $ $ $ 42 Methanex Corporation (cid:2) Annual Report 2013 Consolidated Statements of Comprehensive Income (thousands of US dollars) For the years ended December 31 Net income (loss) Other comprehensive income (loss), net of taxes: Items that may be reclassified to income: Change in fair value of forward exchange contracts (note 18) Change in fair value of interest rate swap contracts (notes 15 and 18) Realized loss on interest rate swap contracts reclassified to finance costs Items that will not be reclassified to income: Actuarial gains (losses) on defined benefit pension plans (notes 15 and 20(a)) Comprehensive income (loss) Attributable to: Methanex Corporation shareholders Non-controlling interests See accompanying notes to consolidated financial statements. 2013 2012 $ 377,000 $ (34,575) (57) (936) 10,808 5,362 15,177 392,177 340,577 51,600 392,177 $ $ $ (320) (5,794) 11,198 (1,135) 3,949 (30,626) (66,317) 35,691 (30,626) $ $ $ Methanex Corporation (cid:2) Annual Report 2013 43 Consolidated Statements of Changes in Equity (thousands of US dollars, except number of common shares) Number of common shares Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss Shareholders’ equity Non-controlling interests Total equity 93,247,755 $ 455,434 $ 22,281 $ 942,978 $ (15,968) $ 1,404,725 $ 197,238 $ 1,601,963 (68,105) – (68,105) 33,530 (34,575) – – – – – – 1,062,215 18,819 – – 726 – (1,135) 2,923 1,788 726 18,819 – (68,077) – – 2,161 3,949 – – – – 726 18,819 – (68,077) (46,068) (46,068) 1,000 1,000 – – – – – – – – 329,167 5,362 – 6,048 329,167 11,410 47,833 3,767 377,000 15,177 722 – – 722 – 722 61,447 1,453 62,900 47,100 110,000 – – – – – 7,526 (7,526) – – – – – – (68,077) – – – – – – – – – – 1,790,999 38,585 – – 11,209 (11,209) – – – – – – (74,937) – – – – – – – – – – – – – – – 38,585 – (74,937) – – – – – 38,585 – (74,937) (39,951) (39,951) 1,000 1,000 Balance, December 31, 2011 Net income (loss) Other comprehensive income (loss) Compensation expense recorded for stock options Issue of shares on exercise of stock options Reclassification of grant-date fair value on exercise of stock options Dividend payments to Methanex Corporation shareholders Distributions to non-controlling interests Equity contributions by non- controlling interests Net income Other comprehensive income Compensation expense recorded for stock options Sale of partial interest in subsidiary Issue of shares on exercise of stock options Reclassification of grant-date fair value on exercise of stock options Dividend payments to Methanex Corporation shareholders Distributions to non-controlling interests Equity contributions by non- controlling interests Balance, December 31, 2012 94,309,970 $ 481,779 $ 15,481 $ 805,661 $ (13,045) $ 1,289,876 $ 187,861 $ 1,477,737 Balance, December 31, 2013 96,100,969 $ 531,573 $ 4,994 $ 1,126,700 $ (5,544) $ 1,657,723 $ 247,610 $ 1,905,333 See accompanying notes to consolidated financial statements. 44 Methanex Corporation (cid:2) Annual Report 2013 Consolidated Statements of Cash Flows (thousands of US dollars) For the years ended December 31 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) Add (deduct) loss (earnings) of associate Add (deduct) non-cash items: Depreciation and amortization Write-off of oil and gas rights Geismar project relocation non-cash charges Asset impairment charge Income tax expense (recovery) Share-based compensation expense (recovery) Finance costs Other Income taxes paid Other cash payments, including share-based compensation Cash flows from operating activities before undernoted Changes in non-cash working capital (note 16) CASH FLOWS FROM FINANCING ACTIVITIES Dividend payments to Methanex Corporation shareholders Interest paid, including interest rate swap settlements Net proceeds on issue of long-term debt and limited recourse debt Repayment of limited recourse debt and long-term debt Cash distributions to non-controlling interests Proceeds on issue of shares on exercise of stock options Sale of partial interest in subsidiary Other CASH FLOWS FROM INVESTING ACTIVITIES Property, plant and equipment Geismar plants under construction Other assets Changes in non-cash working capital related to investing activities (note 16) Increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See accompanying notes to consolidated financial statements. 2013 2012 (As adjusted – note 24) $ 377,000 (30,799) $ (34,575) 214 123,335 24,798 – – 65,681 130,873 56,407 1,364 (42,739) (52,596) 653,324 (67,527) 585,797 (74,937) (55,446) 10,000 (39,491) (39,951) 38,585 110,000 (2,777) (54,017) (269,367) (309,469) (15,608) 68,015 (526,429) 5,351 727,385 149,411 – 25,688 296,976 (85,270) 35,907 61,464 16,201 (28,254) (33,774) 403,988 11,750 415,738 (68,077) (60,226) 590,344 (236,061) (49,409) 18,819 – (17,702) 177,688 (113,794) (73,912) (22,853) 3,073 (207,486) 385,940 341,445 $ 732,736 $ 727,385 Methanex Corporation (cid:2) Annual Report 2013 45 Notes to Consolidated Financial Statements (Tabular dollar amounts are shown in thousands of US dollars, except where noted) Year ended December 31, 2013 1. Nature of operations: 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. 2. Significant accounting policies: a) Statement of compliance: These consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB). These consolidated financial statements were approved and authorized for issue by the Board of Directors on March 10, 2014. b) Basis of presentation and consolidation: These consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, less than wholly owned entities for which it has a controlling interest and its equity-accounted joint venture. Wholly owned subsidiaries are entities in which the Company has control, directly or indirectly, where control is defined as the power to govern the financial and operating policies of an enterprise so as to obtain benefits from its activities. For less than wholly owned entities for which the Company has a controlling interest, a non-controlling interest is included in the Company’s consolidated financial statements and represents the non-controlling shareholders’ interest in the net assets of the entity. The Company also consolidates any special purpose entity where the substance of the relationship indicates the Company has control. All significant intercompany transactions and balances have been eliminated. Preparation of these consolidated financial statements requires esti- mates, judgments and assumptions that affect the amounts reported and disclosed in the financial statements and related notes. The areas of estimation and judgment that management considers most significant are property, plant and equipment (note 2(h)), financial instruments (note 2(p)), and income taxes (note 2(r)). Actual results could differ from those estimates. c) Changes in accounting policies: The Company has adopted the following new standards and amendments effective January 1, 2013. (cid:2) Adoption of IFRS 10, Consolidated Financial Statements; IFRS 11, Joint Arrangements; and IFRS 12, Disclosure of Interests in Other Entities has resulted in the Company applying equity accounting for its 63.1% interest in the Atlas Methanol Company (Atlas). Previously, the Company accounted for Atlas using proportionate consolidation. The change to equity accounting does not result in any change to net earnings or shareholders’ equity, but does change the presentation of the consolidated statements of income, the consolidated state- ments of financial position and accompanying notes to the consolidated financial statements. The impact of adoption, including adjustments made to restate prior periods, are disclosed in note 24. Additionally, as a result of adoption of IFRS 12, the Company has expanded its disclosures relating to equity-accounted investees (note 6) and non-controlling interests (note 23). (cid:2) Adoption of IFRS 13, Fair Value Measurements, has resulted in incremental disclosures relating to fair value measurements included in note 18. (cid:2) As a result of amendments to IAS 1, Presentation of Financial Statements, the Company has separated the presentation of items in its statement of comprehensive income between items that may be reclassified to income and items that will not be reclassified to income. (cid:2) As a result of IAS 19 (2011), Employee Benefits, the Company has changed its accounting policy to comply with the revised standard whereby the net interest expense (income) is determined by applying the discount rate to the net defined benefit obligation (asset) as compared to the previous standard which applied a discount rate to the obligation and an expected return to the plan assets. The revised standard does not result in any change to the total amounts included in the consolidated statements of financial position, income or comprehensive income, but does change the presentation of items within the disclosure of the reconciliation of the defined benefit obligation (note 20). d) Reporting currency and foreign currency translation: Functional currency is the currency of the primary economic environment in which an entity operates. The majority of the Company’s business in all jurisdictions is transacted in United States dollars and, accordingly, these consolidated financial statements have been measured and expressed in that currency. The Company translates foreign currency denominated monetary items at the rates of exchange prevailing at the balance sheet dates, foreign currency denominated non-monetary items at historic rates, and revenues and expenditures at the rates of exchange at the dates of the transactions. Foreign exchange gains and losses are included in earnings. 46 Methanex Corporation (cid:2) Annual Report 2013 e) Cash equivalents: Cash equivalents include securities with maturities of three months or less when purchased. f) Receivables: The Company provides credit to its customers in the normal course of business. The Company performs ongoing credit evaluations of its custom- ers and maintains reserves for potential credit losses. The Company records an allowance for doubtful accounts or writes down the receivable to estimated net realizable value if not collectible in full. Credit losses have historically been within the range of management’s expectations. g) Inventories: Inventories are valued at the lower of cost and estimated net realizable value. Cost is determined on a first-in, first-out basis and includes direct purchase costs, cost of production, allocation of production overhead and depreciation based on normal operating capacity, and transportation. h) Property, plant and equipment: Initial recognition Property, plant and equipment are initially recorded at cost. The cost of purchased equipment includes expenditures that are directly attributable to the purchase price, delivery and installation. The cost of self-constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the assets to the location and condition for their intended use, the costs of dismantling and removing the items and restoring the site on which they are located, and borrowing costs on self-constructed assets that meet certain criteria. Borrowing costs, including the impact of related cash flow hedges, incurred during construction and commissioning are capitalized until the plant is operating in the manner intended by management. Subsequent costs Routine repairs and maintenance costs are expensed as incurred. At regular intervals, the Company conducts a planned shutdown and inspection (turnaround) at its plants to perform major maintenance and replacement of catalysts. Costs associated with these shutdowns are capitalized and amortized over the period until the next planned turnaround and the carrying amounts of replaced components are derecognized and included in earnings. Depreciation Depreciation and amortization is generally provided on a straight-line basis at rates calculated to amortize the cost of property, plant and equipment from the commencement of commercial operations over their estimated useful lives to estimated residual value. The estimated useful lives of the Company’s buildings, plant installations and machinery, excluding costs related to turnarounds, ranges from 10 to 25 years depending on the specific asset component and the production facility to which it is related. The Company determines the esti- mated useful lives of individual asset components based on the shorter of its physical life or economic life. The physical life of these assets is gen- erally longer than the economic life. The economic life is primarily determined by the nature of the natural gas feedstock available to the various production facilities. Factors that influence the nature of natural gas feedstock availability include the terms of individual natural gas supply con- tracts, access to natural gas supply through open markets, regional factors influencing the exploration and development of natural gas, and the expected price of securing natural gas supply. The Company reviews the factors related to each production facility on an annual basis to determine if changes are required to the estimated useful lives. Assets under finance lease are depreciated to their estimated residual value based on the shorter of their useful lives and the lease term. Oil and gas properties Costs incurred for oil and gas properties with proven reserves are capitalized to property, plant and equipment, including the reclassification of associated exploration costs and abandoned properties. These costs are depreciated using a unit-of-production method, taking into consideration estimated proven reserves and estimated future development costs. Proven and probable reserves for oil and gas properties are estimated based on independent reserve reports and represent the estimated quantities of natural gas that are considered commercially feasible. These reserve estimates are used to determine depreciation and to assess the carrying value of oil and gas properties. The accounting for costs incurred for oil and gas exploration properties that do not have proven reserves is described in note 2(i). Impairment The Company reviews the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable. Examples of such events or changes in circumstances include, but are not restricted to: a significant adverse change in the extent or manner in which the asset is being used or in its physical condition; a significant change in the long-term methanol price or in the price or availability of natural gas feedstock required to manufacture methanol; a significant adverse change in legal factors or in the business climate that could affect the asset’s value, including an adverse action or assessment by a foreign government that impacts the use of the asset; or a current-period operating or cash flow loss combined with a history of operating or cash flow losses, or a projection or forecast that demonstrates continuing losses associated with the asset’s use. Recoverability of long-lived assets is measured by comparing the carrying value of an asset or cash-generating unit to the estimated recoverable amount, which is the higher of its estimated fair value less cost to sell or its value in use. Value in use is determined by estimating the pre-tax cash Methanex Corporation (cid:2) Annual Report 2013 47 flows expected to be generated from the asset or cash-generating unit over its estimated useful life discounted by a pre-tax discount rate. An impairment writedown is recorded for the difference that the carrying value exceeds the estimated recoverable amount. An impairment write- down recognized in prior periods for an asset or cash-generating unit is reversed if there has been a subsequent recovery in the value of the asset or cash-generating unit due to changes in events and circumstances. For purposes of recognition and measurement of an impairment writedown, the Company groups long-lived assets with other assets and liabilities to form a “cash-generating unit” at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. To the extent that methanol facilities in a particular location are interdependent as a result of common infrastructure and/or feedstock from shared sources that can be shared within a facility location, the Company groups assets based on site locations for the purpose of determining impairment. i) Other assets: Intangible assets are capitalized to other assets and amortized to depreciation and amortization expense on an appropriate basis to charge the cost of the assets against earnings. Financing fees related to undrawn credit facilities are capitalized to other assets and amortized to finance costs over the term of the credit facility. Costs incurred for oil and gas exploration properties that do not have proven reserves are capitalized to other assets. Upon determination of proven reserves and internal approval for development, these costs are transferred to property, plant and equipment and are depreciated using a unit-of- production method based on estimated proven reserves. Costs are also transferred to property, plant and equipment and become subject to depreciation when the associated properties have been deemed abandoned by management. Upon transfer to property, plant and equipment an impairment assessment is performed. The Company assesses the recoverability of oil and gas exploration properties as part of a cash-generating unit as described in note 2(h). j) Leases: Leasing contracts are classified as either finance or operating leases. Where the contracts are classified as operating leases, payments are charged to income in the year they are incurred. A lease is classified as a finance lease if it transfers substantially all of the risks and rewards of ownership of the leased asset. The asset and liability associated with a finance lease are recorded at the lower of fair value and the present value of the minimum lease payments, net of executory costs. Lease payments are apportioned between interest expense and repayments of the liability. k) Site restoration costs: The Company recognizes a liability to dismantle and remove assets or to restore a site upon which the assets are located. The Company estimates the fair value of the liability by determining the current market cost required to settle the site restoration costs, adjusts for inflation through to the expected date of the expenditures and then discounts this amount back to the date when the obligation was originally incurred. As the liability is initially recorded on a discounted basis, it is increased each period until the estimated date of settlement. The resulting expense is referred to as accretion expense and is included in finance costs. The Company reviews asset retirement obligations and adjusts the liability and corresponding asset as necessary to reflect changes in the estimated future cash flows, timing, inflation and discount rates underlying the fair value measurement. l) Employee future benefits: The Company has non-contributory defined benefit pension plans covering certain employees and defined contribution pension plans. The Company does not provide any significant post-retirement benefits other than pension plan benefits. For defined benefit pension plans, the net of the present value of the defined benefit obligation and the fair value of plan assets is recorded to the consolidated statements of financial posi- tion. The determination of the defined benefit obligation and associated pension cost is based on certain actuarial assumptions including inflation rates, plan expenses, salary growth and discount rates. The present value of the defined benefit obligation (asset) is determined by discounting the net estimated future cash flows using current market bond yields that have terms to maturity approximating the terms of the net obligation. Actuarial gains and losses arising from differences between these assumptions and actual results are recognized in other comprehensive income and recorded in retained earnings. The cost for defined contribution benefit plans is recognized in net income as earned by the employees. The Company recognizes gains and losses on the settlement of a defined benefit plan when the settlement occurs. m) Share-based compensation: The Company grants share-based awards as an element of compensation. Share-based awards granted by the Company can include stock options, tandem share appreciation rights, share appreciation rights, deferred share units, restricted share units or performance share units. For stock options granted by the Company, the cost of the service received is measured based on an estimate of the fair value at the date of grant. The grant-date fair value is recognized as compensation expense over the vesting period with a corresponding increase in contributed surplus. On the exercise of stock options, consideration received, together with the compensation expense previously recorded to contributed surplus, is cred- ited to share capital. The Company uses the Black-Scholes option pricing model to estimate the fair value of each stock option tranche at the date of grant. Share appreciation rights (SARs) 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 that is determined at the date of grant. Tandem share appreciation rights 48 Methanex Corporation (cid:2) Annual Report 2013 (TSARs) give the holder the choice between exercising a regular stock option or a SAR. For SARs and TSARs, the cost of the service received is ini- tially measured based on an estimate of the fair value at the date of grant. The grant-date fair value is recognized as compensation expense over the vesting period with a corresponding increase in liabilities. For SARs and TSARs, the liability is re-measured at each reporting date based on an estimate of the fair value with changes in fair value recognized as compensation expense for the proportion of the service that has been rendered at that date. The Company uses the Black-Scholes option pricing model to estimate the fair value for SARs and TSARs. Deferred, restricted and performance share units are grants of notional common shares that are redeemable for cash based on the market value of the Company’s common shares and are non-dilutive to shareholders. Performance share units have an additional feature where the ultimate number of units that vest will be determined by the Company’s total shareholder return in relation to a predetermined target over the period to vesting. The number of units that will ultimately vest will be in the range of 50% to 120% of the original grant. For deferred, restricted and performance share units, the cost of the service received as consideration is initially measured based on the market value of the Company’s common shares at the date of grant. The grant-date fair value is recognized as compensation expense over the vesting period with a corresponding increase in liabilities. Deferred, restricted and performance share units are re-measured at each reporting date based on the market value of the Company’s common shares with changes in fair value recognized as compensation expense for the proportion of the service that has been rendered at that date. Additional information related to the stock option plan, tandem share appreciation rights, share appreciation rights and the deferred, restricted and performance share units is described in note 13. n) Net income (loss) per common share: The Company calculates basic net income (loss) per common share by dividing net income (loss) attributable to Methanex shareholders by the weighted average number of common shares outstanding and calculates diluted net income (loss) per common share under the treasury stock method. Under the treasury stock method, diluted net income (loss) per common share is calculated by considering the potential dilution that would occur if outstanding stock options and, under certain circumstances, TSARs were exercised or converted to common shares. 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. Outstanding TSARs may be settled in cash or common shares at the holder’s option. For the purposes of calculating diluted net income per com- mon share, the more dilutive of the cash-settled or 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. The calculation of basic net income (loss) per common share and a reconciliation to diluted net income (loss) per common share is presented in note 12. o) Revenue recognition: Revenue is recognized based on individual contract terms when the risk of loss to the product transfers to the customer, which usually occurs at the time shipment is made. Revenue is recognized at the time of delivery to the customer’s location if the Company retains risk of loss during shipment. For methanol sold on a consignment basis, revenue is recognized when the customer consumes the methanol. For methanol sold on a commission basis, the commission income is included in revenue when earned. p) Financial instruments: The Company enters into derivative financial instruments to manage certain exposures to commodity price volatility, foreign exchange volatility and variable interest rate volatility. Financial instruments are classified into one of five categories and, depending on the category, will either be measured at amortized cost or fair value. Held-to-maturity investments, loans and receivables and other financial liabilities are measured at amortized cost. Financial assets and liabilities held-for-trading and available-for-sale financial assets are measured at fair value. Changes in the fair value of held-for-trading financial assets and liabilities are recognized in net income and changes in the fair value of available-for-sale financial assets are recorded in other comprehensive income until the investment is derecognized or impaired at which time the amounts would be recorded in net income. The Company classifies cash and cash equivalents and trade and other receivables as loans and receivables. Trade, other payables and accrued liabilities, long-term debt, net of financing costs, and other long-term liabilities are classified as other financial liabilities. Under these standards, derivative financial instruments, including embedded derivatives, are classified as held-for-trading and are recorded in the consolidated statements of financial position at fair value unless they are in accordance with the Company’s normal purchase, sale or usage requirements. The valuation of derivative financial instruments is a critical accounting estimate due to the complex nature of these products, the degree of judgment required to appropriately value these products and the potential impact of such valuation on the Company’s financial state- ments. The Company records all changes in fair value of held-for-trading derivative financial instruments in net income unless the instruments are designated as cash flow hedges. The Company enters into and designates as cash flow hedges certain forward exchange purchase and sales contracts to hedge foreign exchange exposure on anticipated purchases or sales. The Company also enters into and designates as cash flow Methanex Corporation (cid:2) Annual Report 2013 49 hedges certain interest rate swap contracts to hedge variable interest rate exposure on its limited recourse debt. The Company assesses at inception and on an ongoing basis whether the hedges are and continue to be effective in offsetting changes in the cash flows of the hedged transactions. The effective portion of changes in the fair value of these hedging instruments is recognized in other comprehensive income. Any gain or loss in fair value relating to the ineffective portion is recognized immediately in net income. Until settled, the fair value of the derivative financial instruments will fluctuate based on changes in foreign exchange or variable interest rates. q) Fair value measurements: Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements within the scope of IFRS 13 are categorized into Level 1, 2 or 3 based on the degree to which the inputs are observable and the significance of the inputs to the fair value measurement in its entirety. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. Financial instruments measured at fair value and categorized within the fair value hierarchy are disclosed in note 18. r) Income taxes: Income tax expense represents current tax and deferred tax. The Company records current tax based on the taxable profits for the period calcu- lated using tax rates that have been enacted or substantively enacted by the reporting date. Income taxes relating to uncertain tax positions are provided for based on the Company’s best estimate, including related interest and penalty charges. Deferred income taxes are accounted for using the liability method. The liability method requires that income taxes reflect the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities and their tax bases. Deferred income tax assets and liabilities are determined for each temporary difference based on currently enacted or substantially enacted tax rates that are expected to be in effect when the underlying items are expected to be realized. The effect of a change in tax rates or tax legislation is recognized in the period of substantive enactment. Deferred tax assets, such as non-capital loss carryforwards, are recognized to the extent it is probable that taxable profit will be available against which the asset can be utilized. The Company accrues for taxes that will be incurred upon distributions from its subsidiaries when it is probable that the earnings will be repatriated. s) Provisions: Provisions are recognized where a legal or constructive obligation has been incurred as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation. t) Segmented information: The Company’s operations consist of the production and sale of methanol, which constitutes a single operating segment. u) Anticipated changes to International Financial Reporting Standards: The Company does not expect that the changes to International Financial Reporting Standards that are effective as of January 1, 2014 will have a significant impact on the Company’s results of operations or financial position. 3. Trade and other receivables: As at Trade Value-added and other tax receivables Other 4. Inventories: Dec 31 2013 Dec 31 2012 Jan 1 2012 $ 426,506 $ 332,014 $ 303,989 71,892 35,732 43,326 41,816 38,864 31,434 $ 534,130 $ 417,156 $ 374,287 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 year ended December 31, 2013 is $2,114 million (2012 – $1,871 million). 50 Methanex Corporation (cid:2) Annual Report 2013 5. Property, plant and equipment: Cost at January 1, 2013 Additions Disposals and other Cost at December 31, 2013 Accumulated depreciation at January 1, 2013 Disposals and other Depreciation Accumulated depreciation at December 31, 2013 Net book value at December 31, 2013 Cost at January 1, 2012 Additions Disposals and other Cost at December 31, 2012 Accumulated depreciation at January 1, 2012 Disposals and other Depreciation Asset impairment charge Accumulated depreciation at December 31, 2012 Net book value at December 31, 2012 Buildings, plant installations and machinery Plant under construction Oil and gas properties Other TOTAL $ 2,866,013 $ 75,238 $ 80,368 $ 68,906 $ 3,090,525 257,571 (22,987) 3,100,597 1,225,202 (14,673) 106,800 1,317,329 1,783,268 $ $ $ $ 317,806 – 393,044 – – – – 393,044 $ $ $ $ 5,957 (13) 86,312 74,151 – 4,077 78,228 8,084 13,615 35 82,556 28,299 (120) 7,835 36,014 46,542 $ $ $ $ $ $ $ $ 594,949 (22,965) 3,662,509 1,327,652 (14,793) 118,712 1,431,571 2,230,938 $ $ $ $ Buildings, plant installations and machinery Plant under construction Oil and gas properties Other TOTAL $ 2,816,808 $ 1,326 $ 77,486 $ 88,642 $ 2,984,262 109,843 (60,638) 2,866,013 933,808 (30,271) 120,912 200,753 1,225,202 1,640,811 $ $ $ $ 73,912 – 75,238 – – – – – 75,238 $ $ $ $ 2,882 – 80,368 32,990 – 18,437 22,724 74,151 6,217 $ $ $ $ 4,457 (24,193) 68,906 40,771 (18,673) 6,201 – 28,299 40,607 $ $ $ $ 191,094 (84,831) 3,090,525 1,007,569 (48,944) 145,550 223,477 1,327,652 1,762,873 $ $ $ $ Included in buildings, plant installations and machinery at December 31, 2013 and 2012 are capitalized costs of $32.2 million relating to the oxygen production facilities in Trinidad accounted for as finance leases (note 9). The net book value of these assets as at December 31, 2013 was $4.4 million (2012 – $7.0 million). Other property, plant and equipment includes ocean-shipping vessels with a total net book value of $33.2 million at December 31, 2013 (2012 – $26.8 million). The Company is relocating two idle Chile facilities to Geismar, Louisiana. For the year ended December 31, 2013, the Company incurred $351.7 million (2012 – $112.8 million) in expenditures related to the Geismar projects. Under IFRS, 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. As a result, $317.8 million (2012 – $73.9 million) was recorded to property, plant and equipment and the remaining $33.9 million (2012 – $38.9 million) was recognized as Geismar project relocation expenses and charges in the consolidated statements of income. During 2012, the Company recorded a non-cash before-tax asset impairment charge of $297 million ($193 million after-tax) to write down the carrying value of the Chile assets. $223 million of the pre-tax asset impairment charge was allocated to property, plant and equipment and $74 million was allocated to other assets (note 7). Methanex Corporation (cid:2) Annual Report 2013 51 6. Interest in Atlas joint venture: a) The Company has a 63.1% equity interest in the Atlas Methanol Company Unlimited (Atlas) joint venture. Atlas owns a 1.8 million tonne per year methanol production facility in Trinidad. Effective January 1, 2013, the Company accounts for its interest in Atlas using the equity method (refer to note 24) as the shareholder agreement governing Atlas establishes joint control between the owners. Summarized financial information of Atlas (100% basis) is as follows: Consolidated statements of financial position as at Cash and cash equivalents Other current assets1 Non-current assets Current liabilities1 Long-term debt, including current maturities Other long-term liabilities, including current maturities Net assets at 100% Net assets at 63.1% Long-term receivable from Atlas1 Investment in associate Consolidated statements of income for the years ended December 31 Revenue1 Cost of sales and depreciation and amortization Operating income Finance costs, finance income and other expenses Income tax expense Net earnings (loss) at 100% Earnings (loss) of associate at 63.1% 1 Includes related party transactions between Atlas and the Company (see note 22). b) Contingent liability: Dec 31 2013 20,776 161,765 378,890 (47,359) (56,752) (136,730) 320,590 202,292 13,803 216,095 $ $ $ $ Dec 31 2012 Jan 1 2012 $ 28,883 $ 14,685 104,933 407,362 (65,005) (80,594) (123,801) 271,778 171,492 13,173 184,665 $ $ $ 102,872 411,465 (29,473) (104,435) (122,995) 272,119 171,707 – 171,707 $ $ $ 2013 2012 $ 379,411 $ 247,434 (301,479) (228,818) 77,932 (12,899) (16,223) 48,810 30,799 $ $ 18,616 (16,496) (2,459) (339) (214) $ $ The Board of Inland Revenue of Trinidad and Tobago has issued assessments against Atlas in respect of the 2005, 2006 and 2007 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 extend to 2014 and 2019 related to methanol produced by Atlas. Atlas has partial relief from corporation income tax until 2014. The Company has lodged objections to the assessments. Based on the merits of the cases and legal interpretation, the Company believes its position should be sustained. 7. Other assets: As at Oil and gas assets(a) Restricted cash Deferred financing costs, net of accumulated amortization Investment in Carbon Recycling International(b) Defined benefit pension plans (note 20) Other Dec 31 2013 $ – $ 45,623 1,655 4,502 6,777 6,696 Dec 31 2012 11,209 42,142 2,161 – 1,516 11,526 $ Jan 1 2012 50,946 39,470 2,007 – – 30,204 $ 65,253 $ 68,554 $ 122,627 52 Methanex Corporation (cid:2) Annual Report 2013 a) Oil and gas properties: Costs incurred for oil and natural gas exploration properties that do not have reserves are capitalized to other assets. Upon determination of pro- ven reserves and internal approval for development, the costs are transferred to property, plant and equipment. During the year, the Company incurred $13.6 million (2012 – $30.0 million) in exploration and evaluation expenditures and nil (2012 – $3.8 million) in non-cash additions. Based on exploration results and the outlook for natural gas deliveries under certain arrangements, the Company recorded a non-cash $24.8 million ($19.5 million after-tax) charge to earnings to write off the carrying value of oil and gas properties. At December 31, 2012, the Company recorded an asset impairment charge relating to its Chile assets that included a $74 million asset impairment charge allocated to other assets. b) Investment in Carbon Recycling International: During 2013, the Company made a $4.5 million investment to acquire a minority interest in Carbon Recycling International (CRI), a privately held company headquartered in Reykjavik, Iceland. The investment is considered a portfolio investment and has been recorded at cost. 8. Long-term debt: As at Unsecured notes: (i) (ii) 3.25% due December 15, 2019 (effective yield 3.40%) 5.25% due March 1, 2022 (effective yield 5.30%) (iii) 6.00% due August 15, 2015 (effective yield 6.10%) (iv) 8.75% due August 15, 2012 (effective yield 8.88%) Egypt limited recourse debt facilities: Four facilities with interest payable semi-annually with rates based on LIBOR plus a spread ranging from 1.0% to 1.7% per annum. Principal is paid in 24 semi-annual payments, which commenced in September 2010. Other limited recourse debt Total long-term debt1 Less current maturities $ Dec 31 2013 344,530 246,650 149,581 – 740,761 404,722 22,823 1,168,306 (41,504) $ Dec 31 2012 343,828 246,326 149,344 – 739,498 438,631 16,242 1,194,371 (38,290) $ Jan 1 2012 – – 149,119 199,643 348,762 470,208 18,386 837,356 (236,063) $ 1,126,802 $ 1,156,081 $ 601,293 1 Total debt is presented net of deferred financing fees of $18.8 million at December 31, 2013 (2012 – $22.2 million). The Egypt limited recourse debt facilities bear interest at LIBOR plus a spread. The Company has entered into interest rate swap contracts to swap the LIBOR-based interest payments for an average aggregated fixed rate of 4.8% plus a spread on approximately 75% of the Egypt limited recourse debt facilities for the period to March 31, 2015 (note 18). During 2013, the Company issued other limited recourse debt for $10 million. This facility has a remaining term of approximately three years, with interest payable at LIBOR plus 2.25%. Additionally, other limited recourse debt includes one limited recourse facility with a remaining term of approximately six years with interest payable at LIBOR plus 0.75% and another limited recourse debt facility with a remaining term of approx- imately two years with interest payable at LIBOR plus 2.8%. All of these financial obligations are paid in equal quarterly payments including principal and interest. For the year ended December 31, 2013, non-cash accretion, on an effective interest basis, of deferred financing costs included in finance costs was $3.4 million (2012 – $3.2 million). The minimum principal payments for long-term debt in aggregate and for each of the five succeeding years are as follows: 2014 2015 2016 2017 2018 Thereafter $ 41,504 199,396 50,647 46,897 49,972 799,326 $ 1,187,742 Methanex Corporation (cid:2) Annual Report 2013 53 The covenants governing the Company’s unsecured notes apply to the Company and its subsidiaries, excluding the Egypt entity (“limited recourse subsidiaries”), and include restrictions on liens, sale and lease-back transactions, a merger or consolidation with another corporation or sale of all or substantially all of the Company’s assets. The indenture also contains customary default provisions. The Company has a $400 million unsecured credit facility with a syndicate of highly rated financial institutions that expires in December 2016. This facility contains covenant and default provisions in addition to those of the unsecured notes as described above. Significant covenants and default provisions under this facility include: a) the obligation to maintain an EBITDA to interest coverage ratio of greater than 2:1 calculated on a four-quarter trailing basis and a debt to capitalization ratio of less than or equal to 50%, in accordance with definitions in the credit agreement that include adjustments related to the limited recourse subsidiaries, b) a default if payment is accelerated by the creditor on any indebtedness of $25 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 the 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 Egypt limited recourse debt facilities are described as limited recourse as they are secured only by the assets of the Egypt entity. Accordingly, the lenders to the limited recourse debt facilities have no recourse to the Company or its other subsidiaries. The Egypt limited recourse debt facili- ties have covenants and default provisions that apply only to the Egypt entity, including restrictions on the incurrence of additional indebtedness and a requirement to fulfill certain conditions before the payment of cash or other distributions. 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. At December 31, 2013, management believes the Company was in compliance with all significant terms and default provisions related to long-term debt obligations. 9. Other long-term liabilities: As at Site restoration costs(a) Deferred gas payments(b) Finance lease obligations(c) Share-based compensation liability (note 13) Fair value of Egypt interest rate swap (note 18) Defined benefit pension plans (note 20) Less current maturities a) Site restoration costs: $ Dec 31 2013 16,410 55,918 7,204 148,195 19,829 26,612 274,168 (85,648) Dec 31 2012 Jan 1 2012 $ 21,789 $ 24,885 70,844 10,982 62,570 32,707 31,642 230,534 (30,322) 51,079 14,391 42,157 41,536 35,542 209,590 (21,441) $ 188,520 $ 200,212 $ 188,149 The Company has accrued liabilities related to the decommissioning and reclamation of its methanol production sites and oil and gas properties. Because of uncertainties in estimating the amount and timing of the expenditures related to the sites, actual results could differ from the amounts estimated. At December 31, 2013, the total undiscounted amount of estimated cash flows required to settle the liabilities was $21.8 million (2012 – $26.5 million). The movement in the provision during the year is explained as follows: Balance at January 1 New or revised provisions Amounts charged against provisions Accretion expense Balance at December 31 54 Methanex Corporation (cid:2) Annual Report 2013 2013 2012 $ 21,789 $ 24,885 (5,089) (577) 287 (1,656) (1,917) 477 $ 16,410 $ 21,789 b) Deferred gas payments: The Company has a long-term liability of $73.9 million (2012 – $82.8 million) related to deferred natural gas payments that is payable in installments in 2014, 2015 and 2016, of which $18.0 million (2012 – $11.9 million), representing the current portion, has been recorded in trade, other payables and accrued liabilities. At December 31, 2013, the total undiscounted amount of estimated cash flows required to settle the liability was $74.4 million (2012 – $86.5 million). c) Finance lease obligations: At December 31, 2013, the Company has a finance lease obligation related to an oxygen production facility in Trinidad that is set to expire in 2015. The liability matures as follows until the expiry of the lease: 2014 2015 10. Expenses: For the years ended December 31 Cost of sales Selling and distribution Administrative expenses Total expenses by function Cost of raw materials and purchased methanol Ocean freight and other logistics Employee expenses, including share-based compensation Other expenses Cost of sales and operating expenses Depreciation and amortization Total expenses by nature 11. Finance costs: For the years ended December 31 Finance costs Less capitalized interest Lease payments Interest component $ $ 4,557 3,114 7,671 $ $ 384 83 467 Finance lease obligations $ $ 4,173 3,031 7,204 2013 2012 $ 2,057,502 $ 1,835,524 303,044 140,993 2,501,539 1,673,824 256,461 274,463 173,456 $ $ 342,122 62,734 2,240,380 1,521,708 300,936 178,879 89,446 2,378,204 $ 2,090,969 123,335 149,411 2,501,539 $ 2,240,380 $ $ $ $ 2013 64,742 (8,335) 56,407 $ $ 2012 63,047 (1,583) 61,464 $ $ Finance costs are primarily comprised of interest on borrowings and finance lease obligations, the effective portion of interest rate swaps des- ignated as cash flow hedges, amortization of deferred financing fees, and accretion expense associated with site restoration costs. 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. For the year ended December 31, 2013, interest rate swap payments recognized in finance costs were $14.4 million (2012 – $14.9 million). Capitalized interest relates to interest capitalized during construction until a plant is substantially completed and ready for productive use. 12. Net income (loss) per common share: Diluted net income (loss) 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. During the year ended December 31, 2012, the Company incurred a net loss attributable to Methanex shareholders and therefore the impact of the potential dilution of stock options and TSARs is anti-dilutive. Methanex Corporation (cid:2) Annual Report 2013 55 Stock options and 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 stock option or TSAR. A reconciliation of the number of common shares used for the purposes of calculating basic and diluted net income (loss) per common share is as follows: For the years ended December 31 Denominator for basic net income (loss) per common share Effect of dilutive stock options Denominator for diluted net income (loss) per common share 2013 2012 95,259,066 93,755,509 1,171,776 – 96,430,842 93,755,509 For the years ended December 31, 2013 and 2012, basic and diluted net income (loss) per common share attributable to Methanex shareholders were as follows: For the years ended December 31 Basic net income (loss) per common share Diluted net income (loss) per common share 13. Share-based compensation: 2013 3.46 3.41 $ $ 2012 (0.73) (0.73) $ $ The Company provides share-based compensation to its directors and certain employees through grants of stock options, tandem share appreciation rights (TSARs), share appreciation rights (SARs) and deferred, restricted or performance share units. At December 31, 2013, the Company had 1,260,436 common shares reserved for future grants of stock options and tandem share appreciation rights under the Company’s stock option plan. a) Share appreciation rights and tandem share appreciation rights: All SARs and TSARs granted have a maximum term of seven years with one-third vesting each year after the date of grant. SARs and TSARs units outstanding at December 31, 2013 are as follows: Outstanding at December 31, 2011 Granted Exercised Cancelled Outstanding at December 31, 2012 Granted Exercised Cancelled Outstanding at December 31, 2013 SARs TSARs Number of units Exercise price USD Number of units Exercise price USD 623,547 353,890 (55,331) (24,581) $ 26.72 31.64 26.07 29.10 1,219,735 652,000 (15,800) (40,400) $ 26.65 31.69 25.93 27.61 897,525 $ 28.63 1,815,535 $ 28.45 360,900 (159,808) (5,500) 38.24 27.10 30.86 544,200 (496,250) (4,900) 38.24 26.49 31.36 1,093,117 $ 32.02 1,858,585 $ 31.83 56 Methanex Corporation (cid:2) Annual Report 2013 Information regarding the SARs and TSARs outstanding at December 31, 2013 is as follows: Range of exercise prices SARs $23.36 to $38.24 TSARs $23.36 to $38.24 Units outstanding at December 31, 2013 Units exercisable at December 31, 2013 Weighted average remaining contractual life (years) Number of units outstanding Weighted average exercise price Number of units exercisable 4.9 4.9 1,093,117 1,858,585 $ $ 32.02 420,179 31.83 729,074 Weighted average exercise price $ $ 27.55 27.78 The fair value of each SARs and TSARs grant was estimated on December 31, 2013 using the Black-Scholes option pricing model with the following weighted average assumptions: Risk-free interest rate Expected dividend yield Expected life of SARs and TSARs Expected volatility Expected forfeitures Weighted average fair value (USD per share) 2013 0.4% 1% 2012 0.2% 2% 2 YEARS 2 YEARS 29% 1% 34% 4% $ 28.02 $ 6.89 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 in 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 December 31, 2013 was $78.5 million compared with the recorded liability of $69.7 million included in other liabilities. The difference between the fair value and the recorded liability of $8.8 million will be recognized over the weighted average remaining vesting period of approximately 1.6 years. For the year ended December 31, 2013, compensation expense related to SARs and TSARs included in cost of sales and operating expenses was an expense of $70.7 million (2012 – expense of $10.8 million). This included an expense of $61.2 million (2012 – expense of $3.1 million) related to the effect of the change in the Company’s share price. b) Deferred, restricted and performance share units: Deferred, restricted and performance share units outstanding at December 31, 2013 are as follows: Outstanding at December 31, 2011 Granted Granted in lieu of dividends Redeemed Cancelled Outstanding at December 31, 2012 Granted Granted in lieu of dividends Redeemed Cancelled Outstanding at December 31, 2013 Number of deferred share units Number of restricted share units Number of performance share units 597,911 21,649 13,821 (66,531) – 566,850 11,009 8,103 (239,148) – 346,814 48,588 20,400 1,502 (31,607) – 38,883 22,500 971 (18,223) – 44,131 1,103,049 358,330 25,339 (413,138) (19,711) 1,053,869 304,600 15,835 (410,177) (17,681) 946,446 Methanex Corporation (cid:2) Annual Report 2013 57 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 December 31, 2013 was $90.4 mil- lion compared with the recorded liability of $77.3 million included in other liabilities. The difference between the fair value and the recorded liability of $13.1 million will be recognized over the weighted average remaining vesting period of approximately 1.6 years. For the year ended December 31, 2013, compensation expense related to deferred, restricted and performance share units included in cost of sales and operating expenses was an expense of $59.5 million (2012 – expense of $24.4 million). This included an expense of $49.2 million (2012 – expense of $12.4 million) related to the effect of the change in the Company’s share price. c) Stock options: The exercise price of each incentive stock option is equal to the quoted market price of the Company’s common shares at the date of the grant. Options granted have a maximum term of seven years with one-third of the options vesting each year after the date of grant. Common shares reserved for outstanding incentive stock options at December 31, 2013 and 2012 are as follows: Outstanding at December 31, 2011 Granted Exercised Cancelled Outstanding at December 31, 2012 Granted Exercised Cancelled Outstanding at December 31, 2013 Number of stock options Weighted average exercise price 4,004,204 $ 84,000 (1,062,215) (43,042) 19.19 31.73 18.03 18.13 2,982,947 $ 19.97 75,600 (1,790,999) (48,128) 38.24 21.40 16.13 1,219,420 $ 19.15 Information regarding the stock options outstanding at December 31, 2013 is as follows: Range of exercise prices Options $6.33 to $11.56 $23.92 to $38.24 Options outstanding at December 31, 2013 Options exercisable at December 31, 2013 Weighted average remaining contractual life (years) Number of stock options outstanding 2.1 2.4 2.3 532,715 686,705 1,219,420 Weighted average exercise price $ $ 6.41 29.03 19.15 Number of stock options exercisable 532,715 534,055 1,066,770 Weighted average exercise price $ $ 6.41 27.46 16.95 For the year ended December 31, 2013, compensation expense related to stock options was $0.7 million (2012 – $0.7 million). 58 Methanex Corporation (cid:2) Annual Report 2013 14. Segmented information: The Company’s operations consist of the production and sale of methanol, which constitutes a single operating segment. During the years ended December 31, 2013 and 2012, revenues attributed to geographic regions, based on the location of customers, were as follows: Revenue United States Canada 2013 2012 $ $ 474,139 432,220 $ $ 213,708 180,283 $ $ Europe 924,700 772,338 $ $ China 378,109 408,557 Korea Other Asia Latin America TOTAL $ $ 397,597 285,963 $ $ 249,174 188,702 $ $ 386,620 274,601 $ $ 3,024,047 2,542,664 For the year ended December 31, 2013, revenues from a single customer across multiple geographic regions represented approximately 11% of the Company’s total revenues (refer to note 19(c)). As at December 31, 2013 and 2012, the net book value of property, plant and equipment by country was as follows: United States Chile Trinidad Egypt New Zealand Canada Other TOTAL 2013 Property, plant and equipment 2012 Property, plant and equipment $ $ 531,853 $ 162,825 $ 226,760 $ 857,615 $ 322,833 $ 87,074 $ 41,978 $ 2,230,938 144,059 $ 235,925 $ 217,736 $ 899,060 $ 172,458 $ 57,900 $ 35,735 $ 1,762,873 The Company is relocating two facilities from Chile to Geismar, Louisiana which are included in the United States in the table above. 15. Income and other taxes: a) Income tax expense: For the years ended December 31 Current tax expense: Current period Impact of asset impairment charge, Geismar project relocation expenses and charges, and write-off of oil and gas rights Adjustments to prior years Deferred tax (recovery): Origination and reversal of temporary differences Impact of asset impairment charge, Geismar project relocation expenses and charges, and write-off of oil and gas rights Adjustments to prior years Other 2013 2012 $ 80,578 $ 28,760 2,647 393 83,618 4,812 (21,760) (1,987) 998 (17,937) 1,349 (339) 29,770 12,246 (128,917) 576 1,055 (115,040) Total income tax expense (recovery) $ 65,681 $ (85,270) b) Income tax expense included in other comprehensive income: Included in other comprehensive income for the year ended December 31, 2013 is a deferred income tax expense of $3.2 million (2012 – $3.3 million) related to the change in fair value of interest rate swap contracts and defined benefit pension plans where the amounts are deductible for tax purposes upon settlement. Methanex Corporation (cid:2) Annual Report 2013 59 c) Reconciliation of the effective tax rate: The Company operates in several tax jurisdictions and therefore its income is subject to various rates of taxation. Income tax expense differs from the amounts that would be obtained by applying the Canadian statutory income tax rate to net income (loss) before income taxes as follows: For the years ended December 31 Income (loss) before income taxes Deduct: (earnings) loss of associate Add back: asset impairment charge, Geismar project relocation expenses and charges, and write-off of oil and gas rights Canadian statutory tax rate Income tax expense calculated at Canadian statutory tax rate Increase (decrease) in income tax expense resulting from: Impact of income and losses taxed in foreign jurisdictions Taxes on asset impairment charge, Geismar project relocation expenses and charges, and write-off of oil and gas rights Previously unrecognized loss carryforwards and temporary differences Adjustments to prior years Other Total income tax expense (recovery) d) Net deferred income tax liabilities: 2013 2012 $ 442,681 $ (119,845) (30,799) 58,665 470,547 25.8% 214 361,519 241,888 25.0% $ 121,401 $ 60,472 9,062 (19,113) (60,318) (1,594) 16,243 (4,960) (127,567) (22,686) 237 9,234 $ 65,681 $ (85,270) (i) The tax effect of temporary differences that give rise to deferred income tax liabilities and deferred income tax assets are as follows: As at Deferred income tax liabilities: Property, plant and equipment Repatriation taxes Other Deferred income tax assets: Non-capital loss carryforwards Fair value of interest rate swap contracts Share-based compensation Other Dec 31 2013 Dec 31 2012 Jan 1 2012 $ 213,938 $ 197,794 $ 244,273 87,017 4,425 101,690 5,362 305,380 304,846 81,498 4,198 31,719 40,459 157,874 99,016 7,385 12,403 23,789 142,593 103,822 37,847 385,942 40,284 10,384 8,929 52,317 111,914 Net deferred income tax liabilities $ 147,506 $ 162,253 $ 274,028 The Company recognizes deferred income tax assets to the extent that it is probable that the benefit of these assets will be realized. The Company has $189 million of deductible temporary differences in the United States that have not been recognized. (ii) Analysis of the change in deferred income tax liabilities: Balance, January 1 Deferred income tax recovery included in net income (loss) Deferred income tax expense included in other comprehensive income (loss) Balance, December 31 2013 2012 $ 162,253 $ 274,028 (17,937) 3,190 (115,040) 3,265 $ 147,506 $ 162,253 60 Methanex Corporation (cid:2) Annual Report 2013 16. Changes in non-cash working capital: Changes in non-cash working capital for the years ended December 31, 2013 and 2012 are as follows: For the years ended December 31 Decrease (increase) in non-cash working capital: Trade and other receivables Inventories Prepaid expenses Trade, other payables and accrued liabilities, including long-term payables included in other long-term liabilities Adjustments for items not having a cash effect and working capital changes relating to taxes and interest paid Changes in non-cash working capital These changes relate to the following activities: Operating Investing Changes in non-cash working capital 17. Capital disclosures: 2013 2012 $ (116,974) $ (42,869) (57,469) 5,055 226,637 57,249 (56,761) 488 (67,527) 68,015 488 $ $ $ 17,936 (2,975) 36,719 8,811 6,012 14,823 11,750 3,073 14,823 $ $ $ The Company’s objectives in managing its liquidity and capital are to safeguard the Company’s ability to continue as a going concern, to provide financial capacity and flexibility to meet its strategic objectives, to provide an adequate return to shareholders commensurate with the level of risk, and to return excess cash through a combination of dividends and share repurchases. As at Liquidity: Cash and cash equivalents Undrawn credit facility Total liquidity Capitalization: Unsecured notes Limited recourse debt facilities, including current portion Total debt Non-controlling interests Shareholders’ equity Total capitalization Total debt to capitalization1 Net debt to capitalization2 $ $ $ Dec 31 2013 732,736 400,000 1,132,736 740,761 427,545 1,168,306 247,610 1,657,723 $ $ $ Dec 31 2012 727,385 400,000 1,127,385 739,498 454,873 1,194,371 187,861 1,289,876 $ $ $ Jan 1 2012 341,445 400,000 741,445 348,762 488,549 837,356 197,238 1,404,725 $ 3,073,639 $ 2,672,108 $ 2,439,319 38% 19% 45% 24% 34% 24% 1 Total debt (including 100% of Egypt limited recourse debt facilities) divided by total capitalization. 2 Total debt (including 100% of Egypt limited recourse debt facilities) less cash and cash equivalents divided by total capitalization less cash and cash equivalents. The Company manages its liquidity and capital structure and makes adjustments to it in light of changes to economic conditions, the underlying risks inherent in its operations and capital requirements to maintain and grow its operations. The strategies employed by the Company include the issue or repayment of general corporate debt, the issue of project debt, the issue of equity, the payment of dividends and the repurchase of shares. The Company is not subject to any statutory capital requirements and has no commitments to sell or otherwise issue common shares except pursuant to outstanding employee stock options. The undrawn credit facility in the amount of $400 million is provided by highly rated financial institutions, expires in December 2016 and is subject to certain financial covenants (note 8). 18. Financial instruments: Financial instruments are either measured at amortized cost or fair value. Held-to-maturity investments, loans and receivables and other financial liabilities are measured at amortized cost. Held-for-trading financial assets and liabilities and available-for-sale financial assets are measured on the consolidated statement of financial position at fair value. Derivative financial instruments are classified as held-for-trading and are recorded on the consolidated statement of financial position at fair value unless exempted. Changes in fair value of held-for-trading derivative financial instruments are recorded in earnings unless the instruments are designated as cash flow hedges. Methanex Corporation (cid:2) Annual Report 2013 61 The following table provides the carrying value of each category of financial assets and liabilities and the related balance sheet item: As at Financial assets: Financial assets held-for-trading: Dec 31 2013 Dec 31 2012 Jan 1 2012 Derivative financial instruments designated as cash flow hedges1 $ 156 $ – $ 300 Loans and receivables: Cash and cash equivalents Trade and other receivables, excluding tax receivable Project financing reserve accounts included in other assets Total financial assets2 Financial liabilities: Other financial liabilities: Trade, other payable and accrued liabilities, excluding tax payable Deferred gas payments included in other long-term liabilities Long-term debt, including current portion Financial liabilities held-for-trading: Derivative financial instruments designated as cash flow hedges1 Total financial liabilities 732,736 523,809 45,623 $ 1,302,324 $ 580,180 73,888 1,168,306 727,385 401,088 42,142 1,170,615 365,003 82,760 1,194,371 $ $ 341,445 373,427 39,470 754,642 345,471 51,079 837,356 $ $ 20,412 32,910 41,536 $ 1,842,786 $ 1,675,044 $ 1,275,442 1 The euro and New Zealand foreign currency hedges and the Egypt interest rate swaps designated as cash flow hedges are categorized as Level 2 within the fair value hierarchy and measured on a recurring basis at fair value based on industry-accepted valuation models and inputs obtained from active markets. 2 The carrying amount of the financial assets represents the maximum exposure to credit risk at the respective reporting periods. At December 31, 2013, all of the Company’s financial instruments are recorded on the consolidated statement of financial position at amortized cost, with the exception of derivative financial instruments, which are recorded at fair value unless exempted. 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 $315 million as at December 31, 2013. The notional amounts decrease over the expected repayment period. At December 31, 2013, these interest rate swap contracts had a negative fair value of $19.8 million (2012 – $32.7 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 euros at a fixed US dollar exchange rate. At December 31, 2013, the Company had outstanding forward exchange contracts designated as cash flow hedges to sell a notional amount of 106.2 million euros and buy a notional amount of NZD $7.1 million in exchange for United States dollars. The euro contracts had a negative fair value of $0.6 million (2012 – negative fair value of $0.2 million) recorded in trade, other payables and accrued liabilities and the New Zealand dollar contracts had a positive fair value of $0.2 million (2012 – nil) recorded in accounts receivable. Changes in the fair value of derivative financial instruments des- ignated as cash flow hedges have been recorded in other comprehensive income. The table below shows cash outflows for derivative hedging instruments based upon contractual payment dates using LIBOR at December 31, 2013. The amounts reflect the maturity profile of the fair value liability where the instruments will be settled net and are subject to change based on the prevailing LIBOR at each of the future settlement dates. The swaps are with high investment-grade counterparties and therefore the settlement day risk exposure is considered to be negligible. As at Within one year 1 to 2 years 2 to 3 years $ Dec 31 2013 13,824 6,229 – $ Dec 31 2012 14,490 13,348 6,042 $ 20,053 $ 33,880 The fair values of the Company’s derivative financial instruments as disclosed above are determined based on Bloomberg quoted market prices and confirmations received from counterparties, which are adjusted for credit risk. 62 Methanex Corporation (cid:2) Annual Report 2013 The Company is exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments but does not expect any counterparties to fail to meet their obligations. The Company deals with only highly rated counterparties, normally major financial institutions. The Company is exposed to credit risk when there is a positive fair value of derivative financial instruments at a reporting date. The maximum amount that would be at risk if the counterparties to derivative financial instruments with positive fair values failed completely to perform under the contracts was $0.2 million at December 31, 2013 (December 31, 2012 – nil). The carrying values of the Company’s financial instruments approximate their fair values, except as follows: As at Long-term debt Dec 31 2013 Dec 31 2012 Carrying value Fair value Carrying value Fair value $ 1,183,534 $ 1,205,740 $ 1,212,596 $ 1,246,600 There is no publicly traded market for the limited recourse debt facilities. The fair value disclosed on a recurring basis and categorized as Level 2 within the fair value hierarchy is estimated by reference to current market prices for debt securities with similar terms and characteristics. The fair value of the unsecured notes disclosed on a recurring basis and also categorized as Level 2 within the fair value hierarchy was estimated by refer- ence to a limited number of small transactions at the end of 2013 and 2012. The fair value of the Company’s unsecured notes will fluctuate until maturity. 19. Financial risk management: a) Market risks: The Company’s operations consist of the production and sale of methanol. Market fluctuations may result in significant cash flow and profit vola- tility risk for the Company. Its worldwide operating business as well as its investment and financing activities are affected by changes in methanol and natural gas prices and interest and foreign exchange rates. The Company seeks to manage and control these risks primarily through its regu- lar operating and financing activities and uses derivative instruments to hedge these risks when deemed appropriate. This is not an exhaustive list of all risks, nor will the risk management strategies eliminate these risks. Methanol price risk The methanol industry is a highly competitive commodity industry and methanol prices fluctuate based on supply and demand fundamentals and other factors. Accordingly, it is important to maintain financial flexibility. The Company has adopted a prudent approach to financial management by maintaining a strong balance sheet including back-up liquidity. Natural gas price risk Natural gas is the primary feedstock for the production of methanol and the Company has entered into long-term natural gas supply contracts for its production facilities in New Zealand, Trinidad and Egypt. These natural gas supply contracts include base and variable price components to reduce the commodity price risk exposure. The variable price component is adjusted by formulas related to methanol prices above a certain level. The Company has entered into short-term natural gas forward supply contracts at fixed prices for a portion of the feedstock requirements for its Medicine Hat operations. Interest rate risk Interest rate risk is the risk that the Company suffers financial loss due to changes in the value of an asset or liability or in the value of future cash flows due to movements in interest rates. Methanex Corporation (cid:2) Annual Report 2013 63 The Company’s interest rate risk exposure is mainly related to long-term debt obligations. Approximately one-half of its debt obligations are subject to interest at fixed rates. The Company also seeks to limit this risk through the use of interest rate swaps, which allows the Company to hedge cash flow changes by swapping variable rates of interest into fixed rates of interest. As at Fixed interest rate debt: Unsecured notes Variable interest rate debt: Egypt limited recourse debt facilities Other limited recourse debt facilities Dec 31 2013 740,761 740,761 404,722 22,823 427,545 $ $ $ $ Dec 31 2012 739,498 739,498 438,631 16,242 454,873 $ $ $ $ Jan 1 2012 348,762 348,762 470,208 18,386 488,594 $ $ $ $ For fixed interest rate debt, a 1% change in interest rates would result in a change in the fair value of the debt (disclosed in note 18) of approx- imately $40.5 million as of December 31, 2013 (2012 – $48.9 million). The fair value of variable interest rate debt fluctuates primarily with changes in credit spreads. For the variable interest rate debt that is unhedged, a 1% change in LIBOR would result in a change in annual interest payments of $1.1 million as of December 31, 2013 (2012 – $1.2 million). For the Egypt variable interest rate debt that is hedged (see note 8) with a variable-for-fixed interest rate swap (note 18), a 1% change in the interest rates along the yield curve would result in a change in fair value of the interest rate swaps of approximately $3.7 million as of December 31, 2013 (2012 – $7.1 million). These interest rate swaps are designated as cash flow hedges, which results in the effective portion of changes in their fair value being recorded in other comprehensive income. Foreign currency risk The Company’s international operations expose the Company to foreign currency exchange risks in the ordinary course of business. Accordingly, the Company has established a policy that provides a framework for foreign currency management and hedging strategies and defines the approved hedging instruments. The Company reviews all significant exposures to foreign currencies arising from operating and investing activities and hedges exposures if deemed appropriate. The dominant currency in which the Company conducts business is the United States dollar, which is also the reporting currency. Methanol is a global commodity chemical that is priced in United States dollars. In certain jurisdictions, however, the transaction price is set either quarterly or monthly in the local currency. Accordingly, a portion of the Company’s revenue is transacted in Canadian dollars, euros, Chinese yuan and, to a lesser extent, other currencies. For the period from when the price is set in local currency to when the amount due is collected, the Company is exposed to declines in the value of these currencies compared to the United States dollar. The Company also purchases varying quantities of methanol for which the transaction currency is the euro, Chinese yuan and, to a lesser extent, other currencies. In addition, some of the Company’s underlying operating costs and capital expenditures are incurred in other currencies. The Company is exposed to increases in the value of these currencies that could have the effect of increasing the United States dollar equivalent of cost of sales and operating expenses and capital expenditures. The Company has elected not to actively manage these exposures at this time except for a portion of the net exposure to euro revenues, which is hedged through forward exchange contracts each quarter when the euro price for methanol is established. As at December 31, 2013, the Company had a net working capital asset of $124.0 million in non-US-dollar currencies (2012 – $94.6 million). Each 10% strengthening (weakening) of the US dollar against these currencies would decrease (increase) the value of net working capital and pre-tax cash flows and earnings by approximately $12.4 million (2012 – $9.5 million). b) Liquidity risks: Liquidity risk is the risk that the Company will not have sufficient funds to meet its liabilities, such as the settlement of financial debt and lease obligations and payment to its suppliers. The Company maintains liquidity and makes adjustments to it in light of changes to economic con- ditions, underlying risks inherent in its operations and capital requirements to maintain and grow its operations. At December 31, 2013, the Company had $732.7 million of cash and cash equivalents. In addition, the Company has an undrawn credit facility of $400 million provided by highly rated financial institutions that expires in December 2016. 64 Methanex Corporation (cid:2) Annual Report 2013 In addition to the above-mentioned sources of liquidity, the Company constantly monitors funding options available in the capital markets, as well as trends in the availability and costs of such funding, with a view to maintaining financial flexibility and limiting refinancing risks. The expected cash outflows of financial liabilities from the date of the balance sheet to the contractual maturity date are as follows: As at December 31, 2013 Trade and other payables1 Deferred gas payments included in other long- term liabilities Long-term debt2 Egypt interest rate swaps 1 Excludes tax and accrued interest. Carrying amount Contractual cash flows 1 Year or less 1-3 Years 3-5 Years $ 570,480 $ 570,480 $ 570,480 $ – $ 73,888 1,168,306 19,829 74,350 1,444,256 20,053 17,969 81,861 13,824 56,381 320,365 6,229 – – 167,734 – More than 5 years $ – – 874,296 – $ 1,832,503 $ 2,109,139 $ 684,134 $ 382,975 $ 167,734 $ 874,296 2 Contractual cash flows include contractual interest payments related to debt obligations. Interest rates on variable rate debt are based on prevailing rates at December 31, 2013. c) Credit risks: Counterparty credit risk is the risk that the financial benefits of contracts with a specific counterparty will be lost if a counterparty defaults on its obligations under the contract. This includes any cash amounts owed to the Company by those counterparties, less any amounts owed to the counterparty by the Company where a legal right of offset exists and also includes the fair values of contracts with individual counterparties that are recorded in the financial statements. Trade credit risk Trade credit risk is defined as an unexpected loss in cash and earnings if the customer is unable to pay its obligations in due time or if the value of the security provided declines. The Company has implemented a credit policy that includes approvals for new customers, annual credit evaluations of all customers and specific approval for any exposures beyond approved limits. The Company employs a variety of risk- mitigation alternatives, including certain contractual rights in the event of deterioration in customer credit quality and various forms of bank and parent company guarantees and letters of credit to upgrade the credit risk to a credit rating equivalent or better than the stand-alone rating of the counterparty. Trade credit losses have historically been minimal and at December 31, 2013 substantially all of the trade receivables were classified as current. Cash and cash equivalents To manage credit and liquidity risk, the Company’s investment policy specifies eligible types of investments, maximum counterparty exposure and minimum credit ratings. Therefore, the Company invests only in highly rated investment-grade instruments that have maturities of three months or less. Derivative financial instruments The Company’s hedging policies specify risk management objectives and strategies for undertaking hedge transactions. The policies also include eligible types of derivatives and required transaction approvals, as well as maximum counterparty exposures and minimum credit ratings. The Company does not use derivative financial instruments for trading or speculative purposes. To manage credit risk, the Company only enters into derivative financial instruments with highly rated investment-grade counterparties. Hedge transactions are reviewed, approved and appropriately documented in accordance with company policies. Methanex Corporation (cid:2) Annual Report 2013 65 20. Retirement plans: a) Defined benefit pension plans: The Company has non-contributory defined benefit pension plans covering certain employees. The Company does not provide any significant post-retirement benefits other than pension plan benefits. Information concerning the Company’s defined benefit pension plans, in aggregate, is as follows: As at Accrued benefit obligations: Balance, beginning of year Current service cost Interest cost on accrued benefit obligations Benefit payments Settlements Actuarial loss Foreign exchange loss (gain) Balance, end of year Fair values of plan assets: Balance, beginning of year Interest income on assets Contributions Benefit payments Settlements Return on plan assets Foreign exchange gain (loss) Balance, end of year Unfunded status Minimum funding requirement Defined benefit obligation, net Dec 31 2013 Dec 31 2012 $ 79,497 $ 78,558 2,272 3,329 (3,841) (3,719) (2,157) (5,070) 70,311 49,371 1,745 5,777 (3,841) (3,719) 4,076 (2,933) 50,476 19,835 – 2,994 3,618 (4,375) (7,673) 2,865 3,510 79,497 43,276 2,215 13,981 (4,375) (7,673) 963 984 49,371 30,126 – $ 19,835 $ 30,126 The Company has an unfunded retirement obligation of $26.1 million at December 31, 2013 (2012 – $30.9 million) for its employees in Chile that will be funded at retirement in accordance with Chilean law. The accrued benefit for the unfunded retirement arrangement in Chile is paid when an employee leaves the Company in accordance with plan terms and Chilean regulations. The Company has a funded retirement asset of $6.8 million at December 31, 2013 (2012 – $1.5 million) for certain employees and retirees in Canada and a funded obligation of $0.5 million at December 31, 2013 (2012 – $0.7 million) in Europe. These defined benefit plans expose the Company to actuarial risks, such as longevity risk, currency risk, interest rate risk and market risk on the funded plans. Additionally, as the plans provide benefits to plan members predominantly in Canada and Chile, the plans expose the Company to foreign currency risk for funding requirements. The primary long-term risk is that the Company will have sufficient plan assets and liquidity to meet obligations when they fall due. The weighted average duration of the defined benefit obligation is 11 years. The Company estimates that it will make additional contributions relating to its defined benefit pensions plans totalling $5.2 million in 2014. The Company’s net defined benefit pension plan expense charged to the consolidated statements of income for the years ended December 31, 2013 and 2012 is as follows: For the years ended December 31 Net defined benefit pension plan expense: Current service cost Net interest cost (income) Cost of settlement 2013 2,272 1,584 909 $ $ 4,765 2012 2,994 1,403 624 5,021 $ $ 66 Methanex Corporation (cid:2) Annual Report 2013 The Company’s current year actuarial (gains) losses, recognized in the consolidated statements of comprehensive income for the years ended December 31, 2013 and 2012, are as follows: For the years ended December 31 Actuarial (gain) loss Minimum funding requirement Actuarial (gain) loss, net 2013 (5,362) – (5,362) $ $ 2012 1,278 (260) 1,018 $ $ The Company uses a December 31 measurement date for its defined benefit pension plans. Actuarial reports for the Company’s defined benefit pension plans were prepared by independent actuaries for funding purposes as of December 31, 2013 in Canada. The next actuarial reports for funding purposes for the Company’s Canadian defined benefit pension plans are scheduled to be completed as of December 31, 2016. The discount rate is the most significant actuarial assumption used in accounting for the defined benefit pension plans. At December 31, 2013, the weighted average discount rate for the defined benefit obligation was 4.7% (2012 – 4.5%). A decrease of 1% in the weighted average discount rate at the end of the reporting period, while holding all other assumptions constant, would result in an increase to the defined benefit obligation of approximately $7.5 million. The asset allocation for the defined benefit pension plan assets as at December 31, 2013 and 2012 is as follows: As at Equity securities Debt securities Cash and other short-term securities Total Dec 31 2013 Dec 31 2012 47% 25% 28% 100% 44% 26% 30% 100% The fair values of the above equity and debt instruments are determined based on quoted market prices in active markets whereas the fair values of cash and other short-term securities are not based on quoted market prices in active markets. The plan assets are held separately from those of the Company in funds under the control of trustees. b) Defined contribution pension plans: The Company has defined contribution pension plans. The Company’s funding obligations under the defined contribution pension plans are limited to making regular payments to the plans, based on a percentage of employee earnings. Total net pension expense for the defined contribution pension plans charged to operations during the year ended December 31, 2013 was $4.3 million (2012 – $4.2 million). 21. Commitments and contingencies: a) Take-or-pay purchase contracts and related commitments: The Company has commitments under take-or-pay natural gas supply contracts to purchase feedstock supplies and to pay for transportation capacity related to these supplies up to 2035. The minimum estimated commitment under these contracts, except as noted below, is as follows: AS AT DECEMBER 31, 2013 2014 2015 2016 2017 2018 $ 279,553 $ 182,306 $ 179,816 $ 85,984 $ 40,978 Thereafter $ 683,666 In the above table, the Company has included natural gas commitments at the contractual volumes and prices. The Company is in the process of relocating two facilities from Chile to Geismar, Louisiana. During 2013, the Company entered into a 10-year natural gas agreement for the supply of Geismar 1’s natural gas requirements and this is included in the above table. Methanex Corporation (cid:2) Annual Report 2013 67 b) Chile and Argentina natural gas supply contracts: The Company has supply contracts with Argentinean suppliers for natural gas sourced from Argentina for a significant portion of the capacity for its facilities in Chile with expiration dates between 2017 and 2025. Since June 2007, the Company’s natural gas suppliers from Argentina have curtailed all gas supply to the Company’s plants in Chile. Under the current circumstances, the Company does not expect to receive any further natural gas supply from Argentina under these long-term arrangements. These potential purchase obligations have been excluded from the table above. The Company also has supply contracts with Empresa Nacional del Petroleo (ENAP) for a portion of the capacity for its facilities in Chile. Over the last few years, deliveries from ENAP have been declining and ENAP has delivered significantly less than the full amount of natural gas that it was obligated to deliver under these contracts. These potential purchase obligations have been excluded from the table above. c) Operating lease commitments: The Company has future minimum lease payments under operating leases relating primarily to vessel charter, terminal facilities, office space, equipment and other operating lease commitments as follows: AS AT DECEMBER 31, 2013 2014 $ 132,301 2015 $ 115,530 2016 $ 118,542 2017 2018 $ 128,388 $ 125,386 Thereafter $ 899,545 During 2013, the Company entered into six new time charter agreements relating to vessels that will be delivered in 2016 and these commitments are included in the table above. For the year ended December 31, 2013, the Company recognized as an expense $124.6 million (2012 – $139.8 million) relating to operating lease payments, including time charter vessel payments. d) Purchased methanol: The Company has marketing rights for 100% of the production from its jointly owned plants (the Atlas plant in Trinidad in which it has a 63.1% interest and the plant in Egypt in which it has a 50% interest), which results in purchase commitments of an additional 1.3 million tonnes per year of methanol offtake supply when these plants operate at capacity. At December 31, 2013, the Company also had commitments to purchase meth- anol under other contracts for approximately 1.0 million tonnes for 2014 and 1.8 million tonnes thereafter. The pricing under these purchase commitments is referenced to pricing at the time of purchase or sale, and accordingly, no amounts have been included above. 22. Related parties: The Company has interests in significant subsidiaries and joint ventures as follows: Name Significant subsidiaries: Methanex Asia Pacific Limited Methanex Europe NV Methanex Methanol Company, LLC Egyptian Methanex Methanol Company S.A.E. Methanex Chile S.A. Methanex New Zealand Limited Methanex Trinidad (Titan) Unlimited Methanex U.S.A. LLC Methanex Louisiana LLC Waterfront Shipping Company Limited Significant joint ventures: Atlas Methanol Company Unlimited1 Interest % Country of incorporation Principal activities Dec 31 2013 Dec 31 2012 Hong Kong Belgium United States Egypt Chile New Zealand Trinidad United States United States Cayman Islands Marketing & distribution Marketing & distribution Marketing & distribution Production Production Production Production Production Production Shipping 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 60% 100% 100% 100% 100% – 100% Trinidad Production 63.1% 63.1% 1 Summarized financial information for the group’s investment in Atlas is disclosed in note 6. Transactions between the Company and Atlas are considered related party and are included within the summarized financial information in note 6. Atlas revenue for the year ended December 31, 2013 of $379 million (2012 – $247 million) is a related party transaction as the Company has marketing rights for 100% of the methanol produced by Atlas. Balances outstanding with Atlas at December 31, 2013 and provided in the summarized financial information in note 6 include receivables owing from Atlas to the Company of $15 million (2012 – $15 million), loans from the Company to Atlas of $9 million (2012 – $8 million) and payables to Atlas of $87 million (2012 – $31 million) all of which are unsecured and due on demand. 68 Methanex Corporation (cid:2) Annual Report 2013 Remuneration of non-management directors and senior management, which includes the members of the executive leadership team, is as follows: For the years ended December 31 Short-term employee benefits Post-employment benefits Other long-term employee benefits Share-based compensation expense Total 23. Non-controlling interest: 2013 2012 $ 11,653 $ 11,223 645 79 69,708 746 82 19,690 $ 82,085 $ 31,741 The Company has a 50% interest in Egyptian Methanex Methanol Company S.A.E. (Methanex Egypt) located in Egypt, which has material non- controlling interests. The following table summarizes the Methanex Egypt financial information, except as noted, included in the consolidated financial statements, before any inter-company eliminations: As at Current assets Non-current assets Current liabilities Non-current liabilities Net assets Carrying amount of Methanex Egypt non-controlling interest Carrying amount of other non-controlling interests Total carrying amount of non-controlling interests For the years ended December 31 Revenue Net income Other comprehensive income Total comprehensive income Net income allocated to Methanex Egypt non-controlling interest Net income allocated to other non-controlling interests Total net income allocated to non-controlling interests Other comprehensive income allocated to non-controlling interest Dividends paid to non-controlling interest For the years ended December 31 Cash flows from operating activities Cash flows from financing activities Cash flows from investing activities Dec 31 2013 $ 234,923 $ 852,177 (85,430) (495,842) 505,828 239,387 8,223 247,610 $ $ $ $ Dec 31 2012 164,144 891,614 (104,692) (492,514) 458,522 180,907 6,954 187,861 2013 2012 $ 385,666 $ 283,348 100,140 9,872 110,012 46,065 1,768 47,833 3,767 38,451 2013 124,046 (94,318) (2,044) $ $ $ 42,440 5,404 47,844 32,074 1,456 33,530 2,161 38,419 2012 113,634 (93,589) (6,690) $ $ $ In December 2013, the Company completed the sale of a 10% equity interest in Methanex Egypt for cash proceeds of $110 million. The sale reduced the Company’s interest in Methanex Egypt to approximately 50% while retaining control of the entity. The sale has been accounted for as a trans- action between equity holders as Methanex controls Methanex Egypt before and after the transaction and the $62.9 million gain on sale has been reflected as an increase in shareholders’ equity. Methanex Corporation (cid:2) Annual Report 2013 69 24. Adoption of new accounting standards: Effective January 1, 2013, the Company has adopted the following new IASB accounting standards related to consolidation and joint arrangements: IFRS 10, Consolidated Financial Statements; IFRS 11, Joint Arrangements; and IFRS 12, Disclosure of Interests in Other Entities. As a result of the adoption of these new standards, the Company’s 63.1% interest in the Atlas entity is accounted for using the equity method. The Company has restated its consolidated statement of financial position as at January 1, 2012 and December 31, 2012 and its consolidated statement of income and comprehensive income for the year ended December 31, 2012. Reconciliations of the restatements of the consolidated statement of financial position as at January 1, 2012 and December 31, 2012 and consolidated statement of income and comprehensive income for the year ended December 31, 2012 are as follows: CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at January 1, 2012 ASSETS Current assets: Cash and cash equivalents Trade and other receivables Inventories Prepaid expenses Non-current assets: Property, plant and equipment Investment in associate Other assets LIABILITIES AND EQUITY Current liabilities: Trade, other payables and accrued liabilities Current maturities on long-term debt Current maturities on other long-term liabilities Non-current liabilities: Long-term debt Other long-term liabilities Deferred income tax liabilities Equity: Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss Shareholders’ equity Non-controlling interests Total equity As previously stated Restatement of Atlas to equity method As adjusted $ 350,711 378,430 281,015 24,465 1,034,621 2,233,023 – 125,931 2,358,954 $ (9,266) (4,143) (6,739) (1,851) (21,999) (256,330) 171,707 (3,304) (87,927) $ 341,445 374,287 274,276 22,614 1,012,622 1,976,693 171,707 122,627 2,271,027 $ 3,393,575 $ (109,926) $ 3,283,649 $ 327,130 251,107 24,744 602,981 652,148 234,151 302,332 1,188,631 455,434 22,281 942,978 (15,968) 1,404,725 197,238 1,601,963 $ $ 33,582 (15,044) (3,303) 15,235 – (50,855) (46,002) (28,304) (125,161) – – – – – – – 360,712 236,063 21,441 618,216 601,293 188,149 274,028 1,063,470 455,434 22,281 942,978 (15,968) 1,404,725 197,238 1,601,963 $ 3,393,575 $ (109,926) $ 3,283,649 70 Methanex Corporation (cid:2) Annual Report 2013 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at December 31, 2012 ASSETS Current assets: Cash and cash equivalents Trade and other receivables Inventories Prepaid expenses Non-current assets: Property, plant and equipment Investment in associate Other assets LIABILITIES AND EQUITY Current liabilities: Trade, other payables and accrued liabilities Current maturities on long-term debt Current maturities on other long-term liabilities Non-current liabilities: Long-term debt Other long-term liabilities Deferred income tax liabilities Equity: Capital stock Contributed surplus Retained earnings Accumulated other comprehensive loss Shareholders’ equity Non-controlling interests Total equity As previously stated Restatement of Atlas to equity method $ 745,610 429,203 253,023 28,314 1,456,150 2,014,748 – 73,724 2,088,472 $ (18,225) (12,047) 3,317 (2,726) (29,681) (251,875) 184,665 (5,170) (72,380) As adjusted $ 727,385 417,156 256,340 25,588 1,426,469 1,762,873 184,665 68,554 2,016,092 $ 3,544,622 $ (102,061) $ 3,442,561 $ 353,744 $ 53,334 33,903 440,981 1,191,891 242,435 191,578 1,625,904 481,779 15,481 805,661 (13,045) 1,289,876 187,861 1,477,737 23,922 (15,044) (3,581) 5,297 (35,810) (42,223) (29,325) (107,358) – – – – – – – $ 377,666 38,290 30,322 446,278 1,156,081 200,212 162,253 1,518,546 481,779 15,481 805,661 (13,045) 1,289,876 187,861 1,477,737 $ 3,544,622 $ (102,061) $ 3,442,561 Methanex Corporation (cid:2) Annual Report 2013 71 CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME For the year ended December 31, 2012 Revenue Cost of sales and operating expenses Depreciation and amortization Geismar project relocation expenses and charges Asset impairment charge Operating loss Loss of associate Finance costs Finance income and other expenses Loss before income taxes Income tax recovery (expense): Current Deferred Net loss Change in fair value of forward exchange contracts, net of tax Change in fair value of interest rate swap contracts, net of tax Realized loss in interest rate swap contracts reclassified to finance costs, net of tax Actuarial losses on defined benefit pension plans, net of tax Comprehensive loss Attributable to: Methanex Corporation shareholders Non-controlling interests As previously stated Restatement of Atlas to equity method As adjusted $ 2,672,954 $ (130,290) $ 2,542,664 (2,187,288) (171,635) (64,543) (296,976) (47,488) – (71,314) 509 (118,293) (30,302) 114,020 83,718 $ (34,575) $ (320) (5,794) 11,198 (1,135) $ (30,626) (66,317) 35,691 $ (30,626) $ $ 96,319 22,224 – – (11,747) (214) 9,850 559 (1,552) 532 1,020 1,552 – – – – – – – – – (2,090,969) (149,411) (64,543) (296,976) (59,235) (214) (61,464) 1,068 (119,845) (29,770) 115,040 85,270 $ (34,575) (320) (5,794) 11,198 (1,135) (30,626) (66,317) 35,691 (30,626) $ $ 72 Methanex Corporation (cid:2) Annual Report 2013 Executive Leadership Team John Floren President and Chief Executive Officer Wendy Bach Senior Vice President, Corporate Resources and General Counsel Vanessa James Senior Vice President, Marketing and Logistics Ian Cameron Senior Vice President, Finance and Chief Financial Officer Harvey Weake Senior Vice President, Manufacturing Mike Herz Senior Vice President, Corporate Development Board of Directors Thomas Hamilton Chairman of the Board Board member since May 2007 John Floren President and CEO of Methanex Corporation Board member since January 2013 Bruce Aitken Member of the Public Policy and Responsible Care Committees. Board Member since July 2004 Howard Balloch Chair of the Public Policy Committee. Member of the Audit, Finance & Risk Committee. Board member since December 2004 Phillip Cook Chair of the Responsible Care Committee. Member of the Public Policy Committee. Board member since May 2006 Robert Kostelnik Member of the Corporate Governance and Responsible Care Committees. Board member since September 2008 Douglas Mahaffy Member of the Corporate Governance and Human Resources Committees. Board member since May 2006 A. Terence Poole Chair of the Audit, Finance & Risk Committee. Member of the Public Policy Committee. Board member since September 2003 and from February 1994 to June 2003 John Reid Chair of the Human Resources Committee. Member of the Audit, Finance & Risk Committee. Board member since September 2003 Janice Rennie Member of the Audit, Finance & Risk and Human Resources Committees. Board member since May 2006 Monica Sloan Chair of the Corporate Governance Committee. Member of the Responsible Care Committee. Board member since September 2003 2013 A N N U A L R E P O R T 

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