Methanex Corporation
Annual Report 2014

Plain-text annual report

2014 A N N U A L R E P O R T 2014 A N N U A L R E P O R T TABLE OF CONTENTS 2 2014 Financial Highlights 3 President’s Message to Shareholders 5 Chairman’s Message to Shareholders 6 Management’s Discussion and Analysis 42 Consolidated Financial Statements 47 Notes to Consolidated Financial Statements ThePowerofAgility™ In 2014, we launched our key brand differentiator, The Power of Agility.™ The Power of Agility™ is what sets us apart from our competitors – what really makes us stand out in the marketplace. It is the ability of our global team members to quickly adapt and respond to our customers’ needs. It is our ability to swiftly create and capitalize on opportunities. It is our ability to safely and professionally respond to production challenges with innovative solutions. It helps us attract the right customers and top talent. All of this inspires us to achieve our vision of global methanol leadership. The Power of Agility™ is a reflection of what we believe and how we behave. For customers, this means peace of mind: secure supply and safe, responsive, reliable and cost-effective operations. For shareholders, this means confidence that Methanex will sustain its competitive advantage and global leadership position and deliver value through profitable investments. For employees, it is a culture aligned with their values, personal well-being and professional development. For communities, this means upholding our commitment to health, safety, environment and social responsibility. Methanex – Global Methanol Industry Leader …………………………………………………………………………………………………………………………………………………………………………………………………………………………… EUROPE BRUSSELS DAMIETTA MIDDLE EAST DUBAI CAIRO IROOIRO AFRICA ASIA BEIJING SEOUL SHANGHAI HONG KONG TOKYO VANCOUVER MEDICINE HAT NORTH AMERICA DALLAS GEISMAR TRINIDAD & TOBAGO SOUTH AMERICA SANTIAGO PUNTA ARENAS TA ARA R NEW ZEALAND Production Sites Global Office Locations Distribution Terminals and Storage Facilities Shipping Lanes 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 Canada Our plant in Medicine Hat, Alberta, supplies methanol to customers in North America. Methanex in Chile The Punta Arenas production complex in southern Chile is well positioned to supply customers in South America. 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 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 the United States Our new Geismar 1 facility in Louisiana will supply customers in the U.S.A. The Geismar 1 plant was relocated from our Chile site and produced first methanol in January 2015. We are relocating a second plant from Chile, Geismar 2, and are on track to produce methanol at that facility in late Q1 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. 2014 Methanex Corporation Annual Report 1 2014 Financial Highlights (US$ millions, except where noted) Operations Revenue Adjusted net income1 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 income1 Net income (loss) (attributable to Methanex shareholders) 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) 2014 3,223 397 455 702 801 16.2% 4.12 4.55 952 4,775 1,722 46% 27% 437 8,504 4,878 2013 2012 20116 20106 3,024 2,543 2,608 1,967 471 329 736 586 180 (68) 429 416 182 201 427 392 91 96 291 303 23.0% 12.0% 13.8% 8.0% 4.88 3.41 733 4,121 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 0.98 1.03 194 3,141 947 40% 35% 306 6,929 3,540 Adjusted EBITDA (US $ million) 9 9 7 9 4 6 Share Price Performance (Indexed at December 31) Methanex (US$, NASDAQ) S&P 500 Chemicals Index 6 3 7 2 0 7 0 5 4 7 2 4 9 2 4 0 3 3 1 9 2 2 4 1 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Regular Dividends Per Share (US $) Weighted Average Shares Outstanding (millions) 5 9 0 . 117.80 9 7 0 . 3 7 0 . 7 6 0 . 1 6 0 . 2 6 0 . 2 6 0 . 5 5 0 . 0 5 0 . 1 4 0 . 94.90 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 400 300 200 100 0 120 110 100 90 80 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 34 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 volume of Methanex-produced (attributable to Methanex shareholders) and purchased methanol. 6 Effective January 1, 2013, the Company 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 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 additional highlights and additional information about Methanex, refer to our 2014 Factbook available at www.methanex.com. 2 2014 Methanex Corporation Annual Report President’s Message to Shareholders DEAR FELLOW SHAREHOLDERS, This was another outstanding year for Methanex. In what excellent financial position to complete our Geismar project turned out to be a challenging year for methanol markets due and meet our other financial obligations. to the impact of declining oil prices, we achieved solid financial results in 2014, including record sales volume of 8.5 million tonnes. We recently completed the construction of our one million tonne Geismar 1 plant in Louisiana, raising our current operating capacity to approximately seven million tonnes per year, and we are on track to reach our target of eight million tonnes of operating capacity by late Q1 2016. We also increased the longevity of our existing assets by securing additional contracted gas in New Zealand, Medicine Hat and Trinidad. In keeping with our established track record of returning cash to shareholders, we initiated a new share repurchase program and a 25% dividend increase in early April 2014, and returned just over $340 million to shareholders in the form of dividends and share buybacks. To further strengthen our liquidity position, we successfully raised $600 million in new bond financing. Finally, we launched a new logo and brand, The Power of Agility™, which defines our competitive advantage and sets the stage for our continued growth and global methanol leadership. Our Responsible Care performance in 2014 was outstanding, with zero employee recordable injuries, zero reportable spills or environmental discharges, and zero Process Safety Tier 1 incidents. Furthermore, our combined employee and contractor recordable injury frequency rate (“RIFR”) (recordable injuries per 200,000 hours worked) dropped from 0.85 in 2013 to 0.28 in 2014. This improvement reflects work done to assess and implement enhancements to our safety management systems during the year. We expect these refinements to yield lasting improvements in support of our commitment to operational excellence at our facilities. We will work hard in 2015 to continually improve all aspects of our Responsible Care program. In 2014, we recorded Adjusted EBITDA of $702 million and Adjusted Net Income per share of $4.12, an excellent result that reflects the steady progress we have made in growing the earnings power of the Company. Sales volume was a record high at 8.5 million tonnes. During the year we issued a new $300 million 10-year bond expiring in 2024 as well as a $300 million 30-year bond expiring in 2044. This was the first time we have accessed the 30-year debt market, made possible by our solid investment grade credit rating. We also renewed and extended our $400 million credit facility through 2019. With this undrawn facility and over $900 million in cash on December 31, 2014, Methanex closed the year in an Through the commitment and dedication of our global organization working as one team, we made fantastic progress in delivering on our growth strategy. By late 2013, all the pieces for our Geismar 1 plant had arrived at our new site in Louisiana from our plant site in Chile. Over the course of 2014, we reconstructed the plant and completed it on schedule, with the first methanol produced in January 2015. At the same time, our Chile team finished dismantling a second plant and all of the equipment was successfully delivered to Geismar by September 2014. The Geismar 2 plant is on track to be completed and begin producing methanol by late Q1 2016. With the start-up of Geismar, the risk profile of our asset portfolio continues to improve, with proportionately more of our assets now located in lower risk jurisdictions. At our other locations we improved the security of our natural gas feedstock supply to underpin our assets. We signed a term sheet to renew our Titan gas contract in Trinidad for a period of five years. In New Zealand, we secured additional natural gas to underpin our three-plant operation for the medium term. We also maintained relatively healthy gas allocations in Egypt in 2014, despite a significant shortage of supply to meet demand in the country. In Medicine Hat, we have hedged 80 percent of our 2015 and 2016 natural gas requirements and we plan to lock in an additional 10 percent of our 2015 and 2016 natural gas requirements. Given current market conditions for natural gas in Alberta, we are looking to lock in our Medicine Hat gas requirements for periods beyond 2016. Methanol pricing fluctuated significantly in 2014. Early in the year, the industry experienced a tight supply environment that led to a spike in the price of methanol. Prices retreated in the second quarter as supply was restored and then stabilized over the summer months. In the fall, OPEC’s decision not to cut back production in response to declining oil prices sent oil markets into a tailspin, pulling down related downstream product prices for olefins, gasoline and propane. The decline in these prices made methanol less affordable for use in certain energy-related applications, contributing to lower methanol prices late in the calendar year. While the impact on methanol demand stemming from a lower oil price has created some short-term methanol market uncertainty, we want to reinforce that we run our business for the long term. We craft our strategy and design our tactics to manage through the trough of any price cycle while being 2014 Methanex Corporation Annual Report 3 poised to generate substantial shareholder value when the To further promote growth, we announced in December that cycle peaks. Certain key elements of our strategy have been, we are partnering with the Egyptian General Petroleum and will continue to be, critical to our track record of Corporation and the Methanol Institute to conduct a methanol generating solid long-term value for shareholders. First, we fuel-blending pilot program in Egypt during 2015, strive to be the supplier of choice for our customers and the demonstrating M15 fuel blends. We also continue to work with leader in the industry. Customers are the life blood of our Coogee Chemicals in Australia to demonstrate the benefits of company and the solid relationships we have built with them GEM fuels (gasoline-ethanol-methanol blended fuels), with a over our history have been critical to our long-term success. target of a limited commercial launch in 2015. In addition, with Second, we produce methanol at the mid to low range of the the support of the International DME Association, we are cost curve and we structure the majority of our gas supply supporting Volvo and other stakeholders in commercializing contracts to be linked to the price of methanol, giving us a dimethyl ether trucks for the heavy-duty truck market. lower cost structure when methanol prices are lower. Finally, we maintain a conservative balance sheet that enables us to move forward when others might choose to retrench and allows us to deliver on our growth initiatives, seize new strategic opportunities and sustain our dividend commitments. Our view of the longer-term fundamentals underpinning the methanol industry has not changed. Methanol is a critical chemical building block and its potential uses as an energy product continue to have solid potential. At the same time, the industry structure has exhibited limited growth in supply as a result of significant entry barriers that include high capital costs and limited access to competitive, long-term contracted gas feedstock. In 2012, we embarked on an initiative to redefine the Methanex brand, and in September 2014 we launched a new brand differentiator, logo and website. As part of this process we asked our global stakeholders what they value most about Methanex and we discovered it to be The Power of Agility™. The Power of Agility™ is our competitive advantage. It is what allows us to swiftly respond to our customers’ needs, to operate as one integrated team around the globe and to capitalize quickly on opportunities as they arise in the marketplace, maximizing value for shareholders. The recent relocation of our Chile plants to Geismar, Louisiana embodies the essence of The Power of Agility™. We have made this new brand a critical element of our strong global culture, inspiring While the recent pullback in oil prices has caused some and empowering us to deliver continued growth and global concern about the current affordability of methanol for use in methanol leadership. certain applications, we remain focused on developing longer- term opportunities for methanol to meet the world’s increasing need for clean-burning energy products. We continue to work with Stena Line and other stakeholders to develop methanol as a fuel for ships. The Stena Germanica ferry engine conversion to run on methanol is on track. The first of four methanol fuel engines was installed in March 2015, and the remaining three by mid-year. We also look forward to taking delivery of seven of our own methanol flex-fuel vessels in 2016. Methanol as a vehicle fuel also continues to experience strong growth, with several new commercial announcements made in China over the past year. I want to thank the Board of Directors, the members of the executive leadership team and all of our team members throughout the organization for the energy and dedication they have brought to Methanex over the past year. We have accomplished a great deal in 2014 and are well positioned to continue to grow and prosper in the years to come. John Floren President & Chief Executive Officer 4 2014 Methanex Corporation Annual Report Chairman’s Message to Shareholders DEAR FELLOW SHAREHOLDERS, With corporate governance remaining a focus for continuous improvement for the Board, I would like to share some of the actions taken this past year to enhance Methanex’s corporate governance practices. (i) provide for the quorum for Board meetings to be changed from two directors to a majority of directors, (ii) increase the quorum for shareholder meetings from 20% to 25% of votes entitled to be cast and (iii) remove the entitlement of the Chairman to a second or deciding vote at Board meetings where an equal number of votes are cast in favour of a motion. Shareholder Engagement Second, and most importantly, advance notice requirements While it is common for the President and other management were added to the By-laws. These requirements ensure that to meet with large institutional shareholders, it is less practical any shareholder who wishes to nominate a person for election for boards to do so. Other avenues need to be considered to as director provides Methanex with adequate notice and facilitate engagement with shareholders. To that end, certain relevant information regarding each director nominee. John Reid, the Chair of the Human Resources Committee, and I This provides Methanex with adequate time to distribute to met with representatives from the Canadian Coalition of Good shareholders such relevant information about each director Governance (“CCGG”) and discussed numerous governance nominee and thereby allows shareholders to vote in a fully issues of interest to all shareholders. CCGG reports its findings informed manner. Such requirements have become common from these types of engagement meetings to its membership among North American public companies. who include many large shareholders. Methanex was recently recognized by CCGG for its use of a New Disclosure Rules web-based survey enabling shareholders to provide management with specific feedback regarding executive compensation. This goes beyond the more usual “say on pay” vote that Methanex continues to include as an agenda item at its annual shareholder meeting. Amendment to By-laws This year, the shareholders’ meeting will also be a special shareholders’ meeting and shareholders will be asked to confirm amendments to the Company By-laws recently approved by the Board. These amendments have two purposes. First, a number of changes were made to modernize the By-laws. This is the first significant set of changes made to the By-laws since 1999. In particular, the amendments I also want to acknowledge the new disclosure rules adopted by the Ontario Securities Commission in late 2014 addressing, among other things, board and management gender diversity and director tenure. These topics have been discussed for some time by the Methanex Board and its Corporate Governance Committee culminating with the Company adopting both a Diversity Policy and a Director Tenure Policy. The Information Circular explains Methanex’s approach to these important matters. Tom Hamilton Chairman of the Board 2014 Methanex Corporation Annual Report 5 Management’s Discussion and Analysis Index Overview of the Business Financial Results 34 Supplemental Non-GAAP Measures Our Strategy Financial Highlights Production Summary Liquidity and Capital Resources Quarterly Financial Data (Unaudited) Risk Factors and Risk Management Selected Annual Information 31 Critical Accounting Estimates Controls and Procedures How We Analyze Our Business Anticipated Changes to International Forward-Looking Statements Financial Reporting Standards This Management’s Discussion and Analysis (“MD&A”) is dated March 9, 2015 and should be read in conjunction with our consolidated financial statements and the accompanying notes for the year ended December 31, 2014. 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 9, 2015, we had 91,679,012 common shares issued and outstanding and stock options exercisable for 1,878,689 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 is also produced from coal, particularly in China. 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. These include direct blending of methanol into gasoline (primarily in China), and using methanol as a feedstock in the production of dimethyl ether (“DME”) 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 8.3 million tonnes and is located in New Zealand, Trinidad, the United States, Egypt, Canada, and Chile (refer to the Production Summary section on page 10 for more information). In 2014 we completed the relocation of a 1 million tonne plant from our site in Chile to Geismar, Louisiana (“Geismar 1”). We are in the process of completing construction on a second facility relocated from Chile to Geismar (“Geismar 2”), and this is expected to increase our annual operating capacity to 8 million tonnes by late in the first quarter of 2016. 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. We have marketing rights for 100% of the production from the jointly-owned plants in Trinidad and Egypt, which provides us with an additional 1.3 million tonnes per year of methanol offtake supply when the plants are operating at full capacity. 2014 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 4% or 2 million tonnes in 2014, leading to total demand in the year of approximately 58 million tonnes, excluding demand from integrated MTO facilities. The increase in demand was driven by relatively strong growth in energy-related applications (notably MTO and fuel blending) and steady growth in traditional derivatives, particularly formaldehyde. 6 2014 Methanex Corporation Annual Report MTO and methanol-to-propylene (“MTP”) demand grew in 2014. There were seven completed MTO and MTP plants in China at the end of 2014 which are dependent on merchant methanol supply and these have the capacity to consume just under 7 million tonnes of methanol annually. There are also a number of other plants at various stages of construction which are anticipated to be completed in the 2015-16 timeframe. Direct methanol blending into gasoline in China has remained strong and we believe that future growth in this application is supported by numerous provincial fuel-blending standards. Fuel blending continues to gain interest outside of China with several countries currently conducting demonstration programs to test the use of methanol-blended fuels. DME demand declined in 2014 as a number of producers came under pressure in the second half of the year amidst declining liquefied petroleum gas prices in China. There was a modest level of new industry supply additions outside of China in 2014. A 0.7 million tonne plant in Azerbaijan began selling methanol in mid-2014 and we increased our annual operating capacity by 1.0 million tonnes with the completion of the Geismar 1 facility. New production from supply additions inside China was consumed in that country as China continued to be a significant net importer of methanol. We commenced first methanol production from our new Geismar 1 plant in January 2015 and are targeting to be producing methanol from Geismar 2 late in the first quarter of 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. With respect to China, we estimate that approximately 6 million tonnes of net new capacity was added in 2014. This was higher than expected. Although the number of restarts in China was lower, we saw a higher than expected number of new builds, consisting of small coke oven plants. To the end of 2016, we anticipate that approximately 6 million tonnes of net new capacity (not including integrated MTO production) will be added to meet growing domestic methanol demand in China. We expect that production from new capacity in China will be consumed in that country and that higher-cost production capacity in China will need to operate in order to satisfy demand growth. As production from our Geismar project 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. Over the past five to six years, methanol demand growth has been led by strong demand from energy-related applications, as relatively high oil prices generated an economic incentive to substitute lower cost methanol for petroleum products or as a feedstock in energy related products. A steep drop in oil and related product prices late in 2014 lowered the affordability for methanol into certain of these energy-related applications and this pushed global methanol pricing lower at the end of the year. Some higher cost methanol plants ceased to operate and we believe that any sustained period of methanol pricing below the marginal cash cost of production should result in further rationalization of higher cost methanol supply. While the impact of lower energy prices has created some short-term methanol market uncertainty, we believe the industry fundamentals underpinning our strategy are intact. We remain focused on developing longer-term opportunities for methanol to meet the world’s increasing need for clean-burning energy products. Future methanol prices will ultimately depend on the strength of the global economy, industry operating rates, global energy prices, new supply additions and the strength of global demand. We believe that our financial position and financial flexibility, outstanding global supply network and competitive-cost position will provide a sound basis for Methanex to continue to be the leader in the methanol industry and to 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. To achieve this objective we have a simple, clearly defined strategy: global leadership, low cost and operational excellence. In September 2014 we launched a new brand differentiator: “The Power of Agility.™” The Power of Agility™ defines our culture of flexibility, responsiveness and creativity that allows us to capitalize on opportunities quickly as they arise, and swiftly respond to customer needs. This brand is a critical element of our strong global culture, and it inspires us to achieve our vision of global methanol leadership. 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, improving our ability to cost-effectively deliver methanol to customers and supporting both traditional and energy-related global methanol demand growth. 2014 Methanex Corporation Annual Report 7 We are the leading producer and supplier of methanol to the major international markets in Asia Pacific, North America, Europe and South America. Our 2014 sales volume of 8.5 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 Geismar project is expected to enable us to reach 8 million tonnes of operating capacity late in the first quarter of 2016. Our Chile operations are currently operating at less than full capacity and provide further potential upside to our operating capacity. 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 Geismar 1 facility and 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. Our Titan gas contract expired in 2014, and we recently signed a term sheet to extend that contract for an additional five years. We have a 0.6 million tonne facility located in Medicine Hat, Alberta, and we recently locked in 80% of our gas requirements for that facility to the end of 2016. We continue to pursue opportunities to further solidify our gas costs for our Medicine Hat 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. 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. 8 2014 Methanex Corporation Annual Report 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- 2019. At December 31, 2014, we had a strong balance sheet with a cash balance of over $900 million. We believe we are well-positioned to meet our financial commitments, continue investing to grow the Company and return excess cash to shareholders. FINANCIAL HIGHLIGHTS ($ Millions, except as noted) Production (thousands of tonnes) (attributable to Methanex shareholders)1 Sales volume (thousands of tonnes): Methanex-produced methanol (attributable to Methanex shareholders) Purchased methanol Commission sales Total sales volume1 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 income4 Net income (attributable to Methanex shareholders) Adjusted net income per common share ($ per share)4 Basic net income per common share ($ per share) Diluted net income 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 2014 4,853 4,878 2,685 941 8,504 507 437 3,223 702 801 397 455 4.12 4.79 4.55 95 96 92 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 1 Methanex-produced methanol includes volume produced by Chile using natural gas supplied from Argentina under a tolling arrangement. Commission sales represent volume 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 volume 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 34 for a description of each non-GAAP measure and reconciliations to the most comparable GAAP measures. 2014 Methanex Corporation Annual Report 9 PRODUCTION SUMMARY The following table details the annual production capacity and actual production of our facilities in 2014 and 2013: (Thousands of tonnes) New Zealand3 Atlas (Trinidad) (63.1% interest) Titan (Trinidad) Geismar 1 and 2, (Louisiana, USA)4 Egypt (50% interest)5 Medicine Hat (Canada) Chile I and IV Annual production capacity1 Annual operating capacity2 2,430 1,125 875 1,000 630 560 1,720 8,340 2,430 1,125 875 1,000 630 560 400 2014 2,196 907 664 – 416 505 165 2013 1,419 971 651 – 623 476 204 7,020 4,853 4,344 1 Annual production capacity includes only those facilities which are currently capable of operating, assuming access to natural gas feedstock. 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. The Geismar 2 facility is currently under construction. Once construction on Geismar 2 is complete, annual production capacity will increase to 9.3 million tonnes. 2 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 7.0 million tonnes, including 0.4 million tonnes related to our Chile operations. Once construction on Geismar 2 is complete, annual operating capacity will increase to 8.0 million tonnes. 3 Annual production capacity of New Zealand represents the two facilities at Motunui and the Waitara Valley facility (refer to the New Zealand section below). 4 We commenced methanol production from Geismar 1 in January 2015 and we are targeting to be producing methanol from Geismar 2 by late in the first quarter of 2016. Each facility has an annual production capacity of 1.0 million tonnes. 5 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. New Zealand In New Zealand, we produced 2.2 million tonnes of methanol in 2014 compared with 1.4 million tonnes in 2013. Since re-starting the Waitara Valley facility, completing debottlenecking projects at Motunui and completing a major refurbishment of the Motunui 2 facility in 2013, our New Zealand facilities are able to produce at annual production capacity of up to 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 facilities. 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 cost-competitive 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, where the natural gas price varies with methanol prices. The Atlas gas contract expires in 2024. The Titan contract expired in 2014 and we recently signed a term sheet to renew that contract for an additional five years. These facilities produced a total of 1.6 million tonnes (Methanex share) in each of 2013 and 2014. For both 2013 and 2014, we operated these facilities at below operating capacity due to unplanned outages and natural gas restrictions. During 2013 and 2014, we continued to experience 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. United States In January 2015, the Geismar 1 plant commenced first methanol production. We continue to make excellent progress on the construction of Geismar 2 and we are targeting to be producing methanol late in the first quarter of 2016. The Geismar 2 facility will add an incremental one million tonnes to our annual operating capacity. We have entered into a natural gas purchase agreement for our Geismar 1 facility that has base and variable components, where the gas price varies with methanol prices. 10 2014 Methanex Corporation Annual Report 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 0.8 million tonnes in 2014 on a 100% basis (Methanex share 0.4 million tonnes) compared with 1.0 million tonnes (Methanex share 0.6 million tonnes) in 2013. Production from the Egypt facility during 2014 was lower than capacity, primarily due to natural gas supply restrictions. Refer to the Risk Factors and Risk Management – Egypt section on page 24 for more information. Canada The Medicine Hat facility produced 0.5 million tonnes in each of 2013 and 2014. An unplanned outage early in the year along with continuing production constraints resulted in lost production in 2014. We purchase natural gas on the Alberta gas market, and by the end of 2014 we had contracted sufficient natural gas volume to meet approximately 80% of our requirements for 2015 and 2016. Chile During 2013 and 2014, 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 and 2014 we received some natural gas from Argentina pursuant to a tolling agreement whereby the Company converts the natural gas into methanol and then re-delivers the methanol to Argentina. Approximately 60% of the Chile production during 2014 was produced using natural gas supplied from Argentina under this arrangement, compared to 45% in 2013. In recent 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 2015 southern hemisphere winter is possible based on the current projections of gas availability, it is unlikely. Refer to the Risk Factors and Risk Management – Chile section on page 25 for more information. 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 34 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, Argentina gas settlement, asset impairment charges, finance costs, finance income and other expenses, and income taxes. 2014 Methanex Corporation Annual Report 11 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 together, excluding commission sales volume. The key drivers of changes in Adjusted EBITDA are average realized price, cash costs and sales volume, which are defined and calculated as follows: PRICE The change in Adjusted EBITDA as a result of changes in average realized price is calculated as the difference from period to period in the selling price of methanol multiplied by the current period total methanol sales volume, excluding commission sales volume, plus the difference from period to period in commission revenue. CASH COSTS The change in Adjusted EBITDA as a result of changes in cash costs is calculated as the difference from period to period in cash costs per tonne multiplied by the current period total methanol sales volume excluding commission sales volume in the current period. The cash costs per tonne is the weighted average of the cash cost per tonne of Methanex-produced methanol and the cash cost per tonne of purchased methanol. The cash cost per tonne of Methanex-produced methanol includes absorbed fixed cash costs per tonne and variable cash costs per tonne. The cash cost per tonne of purchased methanol consists principally of the cost of methanol itself. In addition, the change in Adjusted EBITDA as a result of changes in cash costs includes the changes from period to period in unabsorbed fixed production costs, consolidated selling, general and administrative expenses and fixed storage and handling costs. VOLUME The change in Adjusted EBITDA as a result of changes in sales volume is calculated as the difference from period to period in total methanol sales volume, excluding commission sales volume, multiplied by the margin per tonne for the prior period. The margin per tonne for the prior period is the weighted average margin per tonne of Methanex-produced methanol and margin per tonne of purchased methanol. The margin per tonne for Methanex-produced methanol is calculated as the selling price per tonne of methanol less absorbed fixed cash costs per tonne and variable cash costs per tonne. The margin per tonne for purchased methanol is calculated as the selling price per tonne of methanol less the cost of purchased methanol per tonne. We own 63.1% of the Atlas methanol facility and market the remaining 36.9% of its production through a commission offtake agreement. A contractual agreement between us and our partners establishes joint control over Atlas. As a result, we account for this investment using the equity method of accounting, which results in 63.1% of the net assets and net earnings of Atlas being presented separately in the consolidated statements of financial position and consolidated statements of income, respectively. For purposes of analyzing our business, Adjusted EBITDA, Adjusted net income and Adjusted net income per common share include an amount representing our 63.1% equity share in Atlas. Our analysis of depreciation and amortization, finance costs, finance income and other expenses and income taxes is consistent with the presentation of our consolidated statements of income and excludes amounts related to Atlas. We own 50% of the 1.26 million tonne per year Egypt methanol facility and market the remaining 50% of its production through a commission offtake agreement. We 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, 2014, we reported Adjusted EBITDA of $702 million and Adjusted net income of $397 million ($4.12 per share on a diluted basis), compared with Adjusted EBITDA of $736 million and Adjusted net income of $471 million ($4.88 per share on a diluted basis) for the year ended December 31, 2013. 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 the impact of certain items associated with specific identified events. Adjusted EBITDA is a non-GAAP measure with no standardized meaning prescribed under IFRS. Refer to the Supplemental Non-GAAP Measures section on page 34 for further discussion on how we calculate these measures. 12 2014 Methanex Corporation Annual Report During 2014, we recorded a gain of $42 million ($27 million after-tax) after reaching a settlement with Total Austral S.A. (“Total”) in relation to Total’s natural gas delivery obligations pursuant to a long-term gas supply agreement in Chile. 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). 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, 2014 of $455 million ($4.55 income per share on a diluted basis) compared with a net income attributable to Methanex shareholders for the year ended December 31, 2013 of $329 million ($3.41 income per share on a diluted basis). A reconciliation from net income attributable to Methanex shareholders to Adjusted net income and the calculation of Adjusted diluted net income per common share is as follows: ($ Millions, except number of shares and per share amounts) Net income attributable to Methanex shareholders Mark-to-market impact of share-based compensation, net of tax Argentina gas settlement, net of tax Write-off of oil and gas rights, net of tax Geismar project relocation expenses and charges, net of tax Adjusted net income1 Diluted weighted average shares outstanding (millions) Adjusted net income per common share1 2014 2013 $ 455 $ (31) (27) – – 329 101 – 19 22 $ 397 $ 471 96 96 $ 4.12 $ 4.88 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 34 for a description of the non-GAAP measures and a reconciliation to the most comparable GAAP measures. A summary of our consolidated statements of income for 2014 and 2013 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 Depreciation and amortization Argentina gas settlement Geismar project relocation expenses and charges Write-off of oil & gas rights Earnings of associate, excluding amount included in Adjusted EBITDA Finance costs Finance income and other expenses Income tax expense Net income Net income attributable to Methanex shareholders 2014 2013 $ 3,223 $ 3,024 (2,464) (2,255) 41 800 702 98 800 38 (143) 42 – – (32) (37) (7) (155) 506 455 $ $ 56 825 736 89 825 (110) (123) – (34) (25) (34) (57) 5 (70) 377 329 $ $ 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 34 for a description of the non-GAAP measures and a reconciliation to the most comparable GAAP measures. 2014 Methanex Corporation Annual Report 13 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 volume increased while our average realized price slightly decreased in 2014 resulting in revenue of $3.2 billion for 2014 compared to revenue of $3.0 billion in 2013. Methanex Average Realized Price 2013-2014 ) e n n o t r e p $ ( 600 500 400 300 200 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 Quarterly Annual Average Demand for methanol grew by 4% or 2 million tonnes in 2014, leading to total annual global methanol demand of approximately 58 million tonnes, excluding methanol demand from integrated methanol-to-olefins facilities. The increase in demand was driven by relatively strong growth in energy-related applications (notably MTO and fuel blending) and steady growth in traditional derivatives, particularly formaldehyde. At the beginning of 2014, supply constraints primarily in Asia Pacific resulted in rising methanol prices which stabilized through the second quarter when several plants returned to operation. A steep drop in oil and related product prices in the second half of 2014 lowered the affordability for methanol into certain energy-related applications and this, along with sufficient industry supply, pushed global methanol pricing lower at the end of the year. Some higher cost capacity ceased to operate and we believe that any sustained period of methanol pricing below the marginal cash cost of production should result in further rationalization of higher cost supply. Our average realized price for 2014 was $437 per tonne compared with $441 per tonne in 2013. 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 both 2014 and 2013 was $507 per tonne. Distribution of Revenue The geographic distribution of revenue by customer location for 2014 was similar to 2013. Details are as follows: ($ Millions, except where noted) Canada United States Europe China South Korea Other Asia Latin America 14 2014 Methanex Corporation Annual Report $ 248 459 1,001 320 447 340 408 2014 8% $ 14% 31% 10% 14% 10% 13% 214 474 925 378 397 249 387 2013 7% 16% 31% 12% 13% 8% 13% $ 3,223 100% $ 3,024 100% Adjusted EBITDA (Attributable to Methanex Shareholders) 2014 Adjusted EBITDA was $702 million compared with 2013 Adjusted EBITDA of $736 million, a decrease of $34 million. The key drivers of changes in our Adjusted EBITDA are average realized price, sales volume and cash costs as described below (refer to the How We Analyze Our Business section on page 11 for more information). ($ Millions) Average realized price Sales volume Total cash costs Decrease in Adjusted EBITDA Average Realized Price 2014 vs. 2013 $ (45) 69 (58) (34) $ Our average realized price for the year ended December 31, 2014 was $437 per tonne compared with $441 per tonne for 2013, and this decreased Adjusted EBITDA by $45 million (refer to the Revenue section on page 14 for more information). Sales Volume Methanol sales volume, excluding commission sales volume, for the year ended December 31, 2014 was 544,000 tonnes higher than in 2013, and this increased Adjusted EBITDA by $69 million. Including commission sales volume from the Atlas and Egypt facilities, our total methanol sales volume was 8.5 million tonnes in 2014, 0.5 million tonnes higher than in 2013, primarily due to increased production volume from our New Zealand facilities. Total Cash Costs The primary drivers of changes in our total cash costs are changes in the cost of Methanex-produced methanol and changes in the cost of purchased methanol. All of our production facilities except Medicine Hat have natural gas purchase agreements with pricing terms that include base and variable price components. We supplement our production with methanol produced by others through methanol offtake contracts and purchases on the spot market to meet customer needs and support our marketing efforts within the major global markets. We have adopted the first-in, first-out method of accounting for inventories and it generally takes between 30 and 60 days to sell the methanol we produce or purchase. Accordingly, the changes in Adjusted EBITDA as a result of changes in Methanex-produced and purchased methanol costs primarily depend on changes in methanol pricing and the timing of inventory flows. The changes in our total cash costs for 2014 compared with 2013 were due to the following: ($ Millions) Methanex-produced methanol costs Proportion of Methanex-produced methanol sales Purchased methanol costs Other, net Increase in total cash costs Methanex-Produced Methanol Costs 2014 vs. 2013 $ (63) 48 (29) (14) (58) $ 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 2014 compared with 2013 by $63 million, primarily due to the impact of higher realized methanol prices on our natural gas costs in the first half of the year, timing of inventory flows and changes 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 21. 2014 Methanex Corporation Annual Report 15 Proportion of Methanex-produced methanol sales The cost of purchased methanol is directly linked to the selling price for methanol at the time of purchase and the cost of purchased methanol is generally higher than the cost of Methanex-produced methanol. Accordingly, an increase in the proportion of Methanex- produced methanol sales results in a decrease in our overall cost structure for a given period. Sales of Methanex-produced methanol made up a higher proportion of our total sales and this increased Adjusted EBITDA by $48 million for 2014 compared with 2013. 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 most cost effective 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 changes in methanol prices in 2014 and the timing of inventory flows and purchases, the cost of purchased methanol per tonne increased and this decreased Adjusted EBITDA by $29 million compared with 2013. Other, Net 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, 2014 compared with 2013, ocean freight and other logistics costs were higher, decreasing Adjusted EBITDA by $9 million related to increased production volume. The remaining change in other, net relates to an insurance settlement recorded in 2013 and costs related to our Geismar project. Certain costs incurred for the Geismar project are related to organizational build-up and are not eligible for capitalization under IFRS. These costs are charged directly to earnings as incurred and were higher in 2014 compared with 2013. Mark-to-Market Impact of Share-Based Compensation We grant share-based awards as an element of compensation. Share-based awards granted include stock options, share appreciation rights, tandem share appreciation rights, deferred share units, restricted share units and performance share units. For all the share-based awards, share-based compensation is recognized over the related vesting period for the proportion of the service that has been rendered at each reporting date. Share-based compensation includes an amount related to the grant-date value and a mark-to-market impact as a result of subsequent changes in the Company’s share price. The grant-date value amount is included in Adjusted EBITDA and Adjusted net income. The mark-to-market impact of share-based compensation as a result of changes in our share price is excluded from Adjusted EBITDA and Adjusted net income and analyzed separately. ($ 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 (recovery), before tax 1 U.S. dollar share price of Methanex Corporation as quoted on NASDAQ Global Market on the last trading day of the respective period. 2014 2013 $ 45.83 $ 59.24 22 (38) (16) $ 21 110 131 $ 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, 16 2014 Methanex Corporation Annual Report 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 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 grants prior to 2014 and in the range of 25% to 150% for subsequent grants. 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 price of the Company’s common shares as quoted on the NASDAQ Global Market decreased from $59.24 per share at December 31, 2013 to $45.83 per share at December 31, 2014. As a result of the decrease in the share price and the resulting impact on the fair value of the outstanding units, we recorded a $38 million mark-to-market recovery related to share-based compensation during 2014. Depreciation and Amortization Depreciation and amortization was $143 million for the year ended December 31, 2014 compared with $123 million for the same period in 2013. The increase in depreciation and amortization in 2014 compared with 2013 is primarily as a result of depreciation associated with capital projects to increase production completed late in 2013 in New Zealand. Argentina Gas Settlement In the second quarter of 2014, we entered into a settlement agreement with Total in relation to Total’s natural gas delivery obligations pursuant to a long-term supply agreement in Chile. Total paid the Company a lump sum payment of $42 million to terminate its obligations under the agreement. Finance Costs ($ Millions) Finance costs before capitalized interest Less capitalized interest Finance costs 2014 2013 $ $ 65 (28) 37 $ $ 65 (8) 57 Finance costs before capitalized interest primarily relate to interest expense on the unsecured notes and limited recourse debt facilities. Capitalized interest in 2014 and 2013 relate to interest costs capitalized for the Geismar project. Finance Income and Other Expenses Finance income and other expenses was a loss of $7 million for the year ended December 31, 2014 compared to a gain of $5 million for the same period in 2013. The change in finance income and other expenses in 2014 compared with 2013 is primarily related to the impact of changes in foreign exchange rates. Income Taxes A summary of our income taxes for 2014 compared with 2013 is as follows: ($ Millions, except where noted) 2014 2013 Amount before income tax Income tax expense Amount after income tax Effective tax rate Net income Adjusted net income1 Net income Adjusted net income1 $ $ 662 (156) 506 24% $ $ 520 (123) 397 24% $ $ 447 (70) 377 16% $ $ 562 (91) 471 16% 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 34 for a description of the non-GAAP measure and reconciliation to the most comparable GAAP measure. 2014 Methanex Corporation Annual Report 17 The effective tax rate related to Adjusted net income was 24% for the year ended December 31, 2014 compared with 16% for the year ended December 31, 2013. Adjusted net income represents the amount that is attributable to Methanex shareholders and excludes the mark-to-market impact of share-based compensation and the impact of certain items associated with specific identified events. The effective tax rate on both net income and Adjusted net income in 2013 was lower compared to 2014 due to the recognition of previously unrecognized tax assets in Canada and New Zealand in 2013. We earn the majority of our pre-tax earnings in Trinidad, Egypt, Chile, Canada and New Zealand. In Trinidad and Chile, the statutory tax rate is 35%. The statutory rates in Canada and New Zealand are 26% and 28%, respectively. During the year, there was a temporary change to the Egypt statutory tax rate to 30% from 25% for the years 2014 to 2016. 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. 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 current 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. During 2014, Chile passed a tax reform which modifies how companies and shareholders will pay taxes on income. Effective 2017, a dual tax system will apply whereby companies will have to elect to be taxed at either 35% payable on accrued taxable income or 44% split over two periods: 27% payable on accrued taxable income and a further 17% tax payable on repatriation of taxed profits out of Chile. The tax reform did not have a significant impact on our effective tax rate for 2014. For additional information regarding income taxes, refer to note 15 of our 2014 consolidated financial statements. 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: Payments for the repurchase of shares 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 Loan to associate Other Changes in non-cash working capital relating to financing activities 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 2014 2013 $ $ 743 58 801 (253) (90) (53) 592 (42) – (29) (17) (9) 99 (84) (574) (2) (21) (681) 219 952 $ 666 (80) 586 – (75) (55) 10 (40) 110 – (4) – (54) (269) (309) (16) 68 (526) 6 $ 733 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 34 for a description of the non-GAAP measures and a reconciliation to the most comparable GAAP measures. 18 2014 Methanex Corporation Annual Report Cash Flow Highlights Cash Flows from Operating Activities Cash flows from operating activities for the year ended December 31, 2014 were $801 million compared with $586 million for 2013. The increase in cash flows from operating activities is primarily due to higher net income, after excluding depreciation and amortization, share-based compensation expense (recovery), oil and gas write-offs, finance costs and changes in non-cash working capital. The following table provides a summary of these items for 2014 and 2013: ($ Millions) Net income Deduct earnings of associate Add dividends received from associate Add (deduct) non-cash items: Depreciation and amortization Share-based compensation expense (recovery) Oil and gas write-off, 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 2014 2013 $ 506 $ 377 (9) 25 143 (16) – 37 57 743 130 28 (3) (97) 58 801 (23) – 123 131 19 56 (17) 666 (117) (70) 5 102 (80) $ 586 Cash flows from operating activities $ For a discussion of the changes in net income, depreciation and amortization, share-based compensation expense (recovery), oil and gas write-offs and finance costs, refer to the analysis of our financial results on page 12. Changes in non-cash working capital increased cash flows from operating activities by $58 million for the year ended December 31, 2014, compared with a decrease of $80 million for the year ended December 31, 2013. Trade and other receivables decreased in 2014 and this increased cash flows from operating activities by $130 million, primarily due to the impact on customer receivables from a lower average realized methanol price in the fourth quarter of 2014. Inventories decreased primarily due to the impact of a lower methanol price on Methanex-produced methanol costs and purchased product costs, and this increased cash flows from operating activities by $28 million. Accounts payable and accrued liabilities, including long-term payables, decreased cash flows from operating activities by $97 million, primarily due to the impact of lower methanol prices on natural gas supply payables and lower costs for purchased methanol. Cash Flows from Financing Activities During 2014, we increased our regular quarterly dividend by 25% to $0.25 per share, beginning with the dividend payable on June 30, 2014. Total dividend payments in 2014 were $90 million compared with $75 million in 2013 and total interest payments in 2014, including interest rate swap settlements, were $53 million compared with $55 million in 2013. In 2014, we issued two separate tranches of unsecured notes for net proceeds of $592 million and repaid $42 million of unsecured notes and other limited recourse debt. Proceeds from the notes issued have been or will be used to repay limited recourse third party debt, to repay senior unsecured notes due in 2015, to fund capital expenditures and for working capital purposes. Cash Flows from Investing Activities During 2014, we incurred capital expenditures of $574 million related to our Geismar project. Other capital expenditures during 2014 of $84 million were primarily related to sustaining projects in New Zealand, Trinidad, Egypt and Medicine Hat. 2014 Methanex Corporation Annual Report 19 Liquidity and Capitalization Our objectives in managing liquidity and capital are to provide financial capacity and flexibility to meet our strategic objectives, to provide an adequate return to shareholders commensurate with the level of risk and to return excess cash through a combination of dividends and share repurchases. The following table provides information on our liquidity and capitalization position as at December 31, 2014 and December 31, 2013: ($ 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 2014 2013 $ $ 952 400 1,352 1,333 389 1,722 267 1,786 3,775 $ $ 733 400 1,133 741 427 1,168 248 1,658 3,074 46% 27% 38% 19% 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. 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 have employed 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, 2014, we had a strong balance sheet with a cash balance of $952 million, including $69 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. 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, 2014, 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 $110 million to the end of 2015. During 2014, capital expenditures related to the Geismar project were $574 million, excluding capitalized interest. The remaining capital expenditures related to the Geismar project are estimated to be $350 million, excluding capitalized interest. We believe we are well positioned to meet our financial commitments, invest to grow the Company and continue to deliver on our commitment to return excess cash to shareholders. 20 2014 Methanex Corporation Annual Report Summary of Contractual Obligations and Commercial Commitments A summary of the estimated amount and estimated timing of cash flows related to our contractual obligations and commercial commitments as at December 31, 2014 is as follows: ($ Millions) Long-term debt repayments Long-term debt interest obligations Repayments of other long-term liabilities Natural gas and other Operating lease commitments 2015 2016-2017 2018-2019 After 2019 Total $ 194 $ 70 56 394 146 860 $ $ 103 125 87 720 271 453 124 6 469 256 $ 996 530 51 1,300 859 $ 1,746 849 200 2,883 1,532 $ 1,306 $ 1,308 $ 3,736 $ 7,210 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, $250 million of unsecured notes that mature in 2022, $300 million of unsecured notes that mature in 2024 and $300 million of unsecured notes that mature in 2044. 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, 2014. For additional information, refer to note 8 of our 2014 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. 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 the United States 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 this pricing relationship enables 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 volume and prices. The above table does not include costs for planned capital maintenance or expansion expenditures or any obligations with original maturities 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 Empresa Nacional del Petróleo (“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. 2014 Methanex Corporation Annual Report 21 We have marketing rights for 100% of the production from our jointly owned Atlas and Egypt plants 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, 2014, we also have methanol purchase commitments with other suppliers under contracts for approximately 0.9 million tonnes for 2015 and a total of 1.0 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 in the table above. 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 2014, we entered into one new time charter agreement in addition to the six time charter agreements entered into in 2013 relating to vessels that will be delivered in 2016; these commitments are included in the table above. Off-Balance Sheet Arrangements At December 31, 2014, 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 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, 2014 and December 31, 2013: ($ Millions) Financial assets: Financial assets held-for-trading: Derivative instruments designated as cash flow hedges1 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 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 hedges1 Total financial liabilities 2014 2013 $ 1 $ – 952 394 37 733 524 45 $ 1,384 $ 1,302 $ 486 56 1,722 $ 581 74 1,168 6 20 $ 2,270 $ 1,843 1 The euro foreign currency hedge 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. 2 The carrying amount of the financial assets represents the maximum exposure to credit risk at the respective reporting periods. 22 2014 Methanex Corporation Annual Report At December 31, 2014, 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 $287 million as at December 31, 2014. At December 31, 2014, these interest rate swap contracts had a negative fair value of $6.5 million (December 31, 2013 – negative $20 million) recorded in other long-term liabilities. The Company also designates as cash flow hedges forward exchange contracts to sell euros at a fixed U.S. dollar exchange rate. At December 31, 2014, the Company had outstanding forward exchange contracts designated as cash flow hedges to sell a notional amount of 25 million euros. The euro contracts had a positive fair value of $1.1 million (2013 – negative fair value of $0.6 million) recorded in current assets. 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 31, to be among the most important for understanding the issues that face our business and our approach to risk management. 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 agreements 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 U.S. dollar 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 volume 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 have U.S. dollar base and variable price components, where the variable portion is adjusted by a formula related to methanol prices above a certain level. The 2014 Methanex Corporation Annual Report 23 contract for Atlas expires in 2024. The Titan contract expired in 2014 and we recently signed a term sheet to renew that contract for an additional five years. Titan gas costs will increase as a result of the renewed terms. We believe the supply and demand fundamentals for natural gas supply in Trinidad will support the continued operation of these facilities, however we cannot provide assurance that our contracted suppliers will be able to fully meet their commitments 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 natural 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 curtailments 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. United States In January 2015, the Geismar 1 plant commenced first methanol production. We continue to make excellent progress on the construction of Geismar 2 and we are targeting to be producing methanol late in the first quarter of 2016. The Geismar 1 and Geismar 2 facilities will each add an incremental 1.0 million tonnes to our annual operating capacity. We have secured a 10-year take-or-pay agreement for the supply of all of the natural gas requirements for Geismar 1 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 U.S. 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. While we believe that our estimates of project costs and anticipated completion for the Geismar 2 facility are reasonable, we cannot provide assurance that the cost estimates will not be exceeded or that the Geismar 2 facility will commence commercial operations within the anticipated schedule, if at all. We cannot provide assurance 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. 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 U.S. 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, and at times significant, natural gas supply constraints in mid-2012 and since that time has operated below full capacity. Over the past few years, Egypt’s government has been in a transition, which has resulted in ongoing civil unrest, including acts of sabotage, political uncertainty, and an adverse 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, the delivery of natural gas and an increase in the use of domestically-produced natural gas instead of more expensive imported energy for the purpose of generating domestic electricity, particularly during the summer months when electricity demand is at its peak. These factors have led to periodic natural gas supply restrictions to the Methanex Egypt facility which became more significant in 2014 and into early 2015. This situation may persist in the future. 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 and we recently entered into fixed price contracts to supply 80% of our gas requirements for the facility for 2015 and 2016. 24 2014 Methanex Corporation Annual Report 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. We continue to receive some natural gas from Argentina pursuant to a tolling agreement whereby the natural gas received is converted into methanol and then the methanol is 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 2014 and 2013, has been produced from natural gas from Chile. While both Methanex and its natural gas suppliers have made significant investments 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 2015, we were operating one of the two remaining plants at less than capacity and while the continued operation of the Chile plant through the 2015 southern hemisphere winter is possible, it is unlikely based on the current projections of gas availability. 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. 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 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 2014, 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 reliability 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. 2014 Methanex Corporation Annual Report 25 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. No authoritative body has classified methanol as a carcinogen. 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 2014, methanol demand for the production of formaldehyde represented approximately 30% 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 reviewing 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 2015. 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 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 – Energy Approximately 40% of methanol demand is from energy related applications. Over the past five to six years, methanol demand growth has been led by strong demand from these applications, as relatively high oil prices generated an economic incentive to substitute lower cost methanol for petroleum products or as a feedstock in energy related products. Methanol can be substituted for petroleum products in energy-related applications with relative ease. For example, methanol can be blended directly with gasoline, and DME (a methanol derivative) can be blended with liquified petroleum gas (propane). Because of this substitutability, methanol demand is sensitive to the pricing of these energy products, which in turn are generally linked to global energy prices. A steep drop in oil and related energy product prices late in 2014 lowered the affordability for methanol into certain energy-related applications and this negatively impacted methanol pricing. We cannot provide assurance that energy pricing will recover from current levels or that methanol demand growth will not be affected. The future operating rates and methanol consumption from energy-related applications using methanol as a feedstock will ultimately depend on the strength of the global economy, industry operating rates, global energy prices, new supply additions and the strength of global demand. 26 2014 Methanex Corporation Annual Report 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 withholding 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 significant 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 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 approximately 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 authority, 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, or that future duties won’t have material adverse effect. Methanol is a globally traded commodity that is produced by many producers at facilities located around the world. Some producers and marketers may have direct or indirect contacts with countries that may, from time to time, be subject to international 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. 2014 Methanex Corporation Annual Report 27 Liquidity Risk At December 31, 2014, we had a cash balance of $952 million, including $69 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 2019 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, 2014, our long-term debt obligations include $1,350 million in unsecured notes ($150 million that matures in 2015, $350 million that matures in 2019, $250 million that matures in 2022, $300 million that matures in 2024 and $300 million that matures in 2044), $369 million related to the Egypt limited recourse debt facilities (100% basis) and $20 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, 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 2014 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. 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 from operations and financial condition. Credit losses have not been significant in the past. 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 methanol 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. 28 2014 Methanex Corporation Annual Report 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 shipping 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 Project We believe that our estimate for budgeted project costs and targeted completion date for our Geismar 2 project is reasonable. However, as we could be impacted by potential cost increases including the impact of costs due to labour shortages, we cannot provide any assurance that the cost estimates will not be exceeded or that the facility will begin commercial production within the targeted schedule, if at all, or that the facility will operate at its designed capacity or on a sustained basis. Any changes to the targeted timing of completion or estimated cost to complete the project or future ability to operate at production capacity 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 continue 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 commercial terms, obtaining project or other financing on satisfactory terms, constructing and completing the projects within the contemplated 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 manufacturing 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. 2014 Methanex Corporation Annual Report 29 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 operations, 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, the United States, Egypt, Canada, and Chile. Except for the United States, 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. Today, there is no GHG legislation that requires GHG reductions in the United States, however we are required to track and report the quantity of GHG emissions from our site in Geismar, Louisiana. 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 purchases 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 may be removed and our eligibility for free allocation of emissions units may also be progressively reduced. As a consequence, we may 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 baseline. “Emissions intensity” means the quantity of specified greenhouse gases released per unit of production. In order to meet the reduction obligation, a facility can choose to make emissions reduction improvements or it can purchase either offset credits or “technology fund” credits for CAD$15 per tonne of CO2 equivalent. Financial obligations began in 2014, and to date the costs for us to purchase offset credits have not been 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 to be published by the fall of 2015. 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. In January 2015, the Geismar 1 plant commenced first methanol production and we are targeting to be producing methanol at Geismar 2 late in the first quarter of 2016. Today, there is no GHG legislation that requires GHG reductions in the United States, however we are required to track and report the quantity of GHG emissions from our site. We continue to monitor the development of potential legislation in the United States and Louisiana that would require GHG reductions to ensure compliance with any potential future requirements. At this time, it is unknown what impact potential new GHG legislation 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 subject 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, 30 2014 Methanex Corporation Annual Report 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, 2007 and 2008 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 from 2005 to 2019 related to methanol produced by Atlas. Atlas had partial relief from corporation income tax until 2014. We have lodged objections to the assessments. Although there can be no assurance, based on the merits of the cases and legal interpretation, we believe our 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 2014 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, 2014, the net book value of our property, plant and equipment was $2,778 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 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. Routine repairs and maintenance costs are expensed as incurred. At December 31, 2014, we have accrued $24 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. 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 feedstock 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 2014 Methanex Corporation Annual Report 31 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 impairment 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, 2014, our Chile cash-generating unit consists primarily of the remaining two methanol plants in Chile with a carrying value of approximately $150 million. As a result of insufficient natural gas feedstock during the southern hemisphere winter, we temporarily idled our Chile operations in April 2014. We restarted one methanol plant in September 2014 and operated the plant at approximately 30% of capacity in the fourth quarter of 2014 supported by natural gas supplies from both Chile and Argentina. The idling of our operations and the restart were both anticipated in our December 31, 2012 recoverability test. While we continue to work with our natural gas suppliers to sustain our Chile operations over the medium term, there is no assurance that we will be able to maintain operations through the upcoming southern hemisphere winter. 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 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 an update of our previous model for current period assumptions, the estimated recoverable amount of our Chile cash- generating unit is approximately 18% in excess of its $150 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 $50 million. Our estimate of the 32 2014 Methanex Corporation Annual Report 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 natural 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 $50 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, 2014. 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, 2014, we had recognized future tax assets of $105 million (presented as a reduction of our deferred tax liabilities) and had $458 million of deductible temporary differences in the United States that have not been recognized. 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 contracts 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, 2014, 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 is negative $6.5 million. ANTICIPATED CHANGES TO INTERNATIONAL FINANCIAL REPORTING STANDARDS In May 2014, the International Accounting Standards Board (“IASB”) issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) establishing a comprehensive framework for revenue recognition. The standard replaces IAS 18, Revenue and IAS 11, Construction Contracts and related interpretations and is effective for annual periods beginning on or after January 1, 2017, with early adoption permitted. The Company is in the process of determining the impact of IFRS 15 on its consolidated financial statements. In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments (“IFRS 9”), which reflects all phases of the financial instruments project and replaces IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”), and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Company has chosen to early adopt IFRS 9 commencing January 1, 2015. The adoption of IFRS 9 will have an effect on the classification of the Company’s financial assets, but no impact on the classification of the Company’s financial liabilities. Specifically, cash and cash equivalents and trade and other receivables previously classified as loans and receivables at amortized cost have been reclassified to financial assets 2014 Methanex Corporation Annual Report 33 at amortized cost with no resulting change in carrying value. Upon adoption of IFRS 9, the Company’s existing hedging relationships that qualified for hedge accounting under IAS 39 were reassessed and will continue under the new hedge accounting requirements in IFRS 9. The Company does not expect that any other new or amended standards or interpretations that are effective as of January 1, 2015 will have a significant impact on the Company’s results of operations or financial position. SUPPLEMENTAL NON-GAAP MEASURES In addition to providing measures prepared in accordance with International Financial Reporting Standards (“IFRS”), we present certain supplemental 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 attributable to Methanex shareholders, because it excludes finance costs, finance income and other expenses, income tax expense, 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 the Argentina gas settlement. 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 attributable to Methanex shareholders to Adjusted EBITDA: ($ Millions) Net income attributable to Methanex shareholders Finance costs Finance income and other expenses Income tax expense Depreciation and amortization Mark-to-market impact of share-based compensation Geismar project relocation expenses and charges Write-off of oil and gas rights Argentina gas settlement Earnings of associate, excluding amount included in Adjusted EBITDA1 Non-controlling interests adjustments1 Adjusted EBITDA (attributable to Methanex shareholders) 2014 2013 $ 455 $ 329 37 7 155 143 (38) – – (42) 32 (47) 57 (5) 70 123 110 34 25 – 34 (41) $ 702 $ 736 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. 34 2014 Methanex Corporation Annual Report 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 the impact of certain items associated with specific identified events, including Geismar project relocation charges and expenses, write-off of oil and gas rights, and the Argentina gas settlement. The following table shows a reconciliation from net income 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) 2014 2013 Net income attributable to Methanex shareholders Mark-to-market impact of share-based compensation Geismar project relocation expenses and charges Write-off of oil and gas rights Argentina gas settlement Income tax recovery (expense) related to above items Adjusted net income Diluted weighted average shares outstanding Adjusted net income per common share $ 455 $ (38) – – (42) 22 397 96 4.12 $ $ $ $ 329 110 34 25 – (27) 471 96 4.88 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) 2014 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 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 Three months ended Dec 31 Sep 30 Jun 30 Mar 31 $ $ 733 150 80 133 0.85 1.43 1.11 881 245 167 128 1.72 1.33 1.32 $ $ 730 137 66 52 0.69 0.55 0.54 758 184 117 87 1.22 0.91 0.90 $ $ 792 160 91 125 0.94 1.30 1.24 733 157 99 54 1.02 0.57 0.56 $ $ 968 255 160 145 1.65 1.51 1.50 652 149 88 60 0.92 0.64 0.63 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 34 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 2014 is set out in our fourth quarter of 2014 Management’s Discussion and Analysis filed with the Canadian Securities Administrators and the US Securities and Exchange Commission and incorporated herein by reference. 2014 Methanex Corporation Annual Report 35 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 2014 2013 2012 $ 3,223 $ 3,024 $ 2,543 702 397 455 4.12 4.79 4.55 0.950 4,775 1,669 736 471 329 4.88 3.46 3.41 0.785 4,121 1,315 429 180 (68) 1.90 (0.73) (0.73) 0.725 3,443 1,356 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 34 for a description of each non-GAAP measure and reconciliations to the most comparable GAAP measures. 2 Attributable to Methanex Corporation shareholders. 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, 2014, 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 disclosure 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, accurately 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 reasonable 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, 2014, based on the framework set forth in Internal Control – Integrated Framework issued in 2013 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, 2014. The attestation report is included in our consolidated financial statements on page 41. Changes in Internal Control over Financial Reporting There have been no changes during the year ended December 31, 2014 to internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting. 36 2014 Methanex Corporation Annual Report FORWARD-LOOKING STATEMENTS This 2014 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 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 (cid:2) our ability to meet covenants or obtain or continue to obtain waivers associated with our long-term debt obligations, including, 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 which require actions by Egyptian governmental entities, (cid:2) expected impact on our results of 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 third parties, agencies, (cid:2) expected levels, timing and availability of economically (cid:2) our shareholder distribution strategy and anticipated priced natural gas supply to each of our plants, distributions to shareholders, (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, (cid:2) anticipated operating 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, (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, including the completion of the Geismar project, (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, and (cid:2) expected actions of governments, government agencies, gas suppliers, courts, tribunals or other third parties. 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 land title and related mortgages in Egypt and governmental derivatives, natural gas, coal, oil and oil derivatives, approvals related to rights to purchase natural gas, (cid:2) our ability to procure natural gas feedstock on commercially (cid:2) the establishment of new fuel standards, acceptable terms, (cid:2) operating rates of our facilities, (cid:2) operating costs, including natural gas feedstock and logistics costs, capital costs, tax rates, cash flows, foreign exchange (cid:2) receipt or issuance of third-party consents or approvals, rates and interest rates, including, without limitation, governmental registrations of (cid:2) the availability of committed credit facilities and other financing, 2014 Methanex Corporation Annual Report 37 (cid:2) timing of completion and cost of the Geismar project, (cid:2) global and regional economic activity (including industrial production levels), (cid:2) absence of a material negative impact from major natural disasters, (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, and (cid:2) enforcement of contractual arrangements and ability to perform contractual obligations by customers, natural gas and other suppliers and other third parties. However, forward-looking statements, by their nature, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The risks and uncertainties primarily include those attendant with producing and marketing methanol and successfully carrying out major capital expenditure projects in various jurisdictions, including, without limitation: (cid:2) conditions in the methanol and other industries, including fluctuations in the supply, demand and price for methanol (cid:2) competing demand for natural gas, especially with respect to domestic needs for gas and electricity in Chile and Egypt, and its derivatives, including demand for methanol for energy uses, (cid:2) the price of natural gas, coal, oil and oil derivatives, (cid:2) actions of governments and governmental authorities, including, without limitation, implementation of policies or other measures that could impact the supply of or demand (cid:2) our ability to obtain natural gas feedstock on commercially acceptable terms to underpin current operations and future for methanol or its derivatives, (cid:2) changes in laws or regulations, production growth opportunities, (cid:2) import or export restrictions, anti-dumping measures, (cid:2) the ability to carry out corporate initiatives and strategies, increases in duties, taxes and government royalties, and (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 project, including cost pressures arising from labour costs, other actions by governments that may adversely affect our operations or existing contractual arrangements, (cid:2) worldwide economic conditions, and (cid:2) other risks described in the 2014 Management’s Discussion and Analysis. Having in mind these and other factors, investors and other readers are cautioned not to place undue reliance on forward-looking statements. They are not a substitute for the exercise of one’s own due diligence and judgment. The outcomes implied in forward- looking statements may not occur and we do not undertake to update forward-looking statements except as required by applicable securities laws. 38 2014 Methanex Corporation Annual Report 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 (2013) 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, 2014. 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 responsibility relating to: the integrity of the Company’s financial statements, news releases and securities filings; the financial reporting 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 reporting. Their opinions are included in the annual report. A. Terence Poole Chairman of the Audit, Finance and Risk Committee March 9, 2015 John Floren Ian Cameron President and Chief Executive Officer Senior Vice President, Finance and Chief Financial Officer 2014 Methanex Corporation Annual Report 39 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, 2014 and December 31, 2013 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, 2014 and December 31, 2013, and its consolidated financial performance 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. 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, 2014, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission COSO, and our report dated March 9, 2015 expressed an unqualified (unmodified) opinion on the effectiveness of Methanex Corporation’s internal control over financial reporting. Chartered Accountants Vancouver, Canada March 9, 2015 40 2014 Methanex Corporation Annual Report 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, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. 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 accompanying “Management’s Annual Report on Internal Control over Financing 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 control 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 reliability 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 dispositions 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, 2014, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with 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, 2014 and December 31, 2013, 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 9, 2015 expressed an unqualified (unmodified) opinion on those consolidated financial statements. Chartered Accountants Vancouver, Canada March 9, 2015 2014 Methanex Corporation Annual Report 41 Dec 31 2014 Dec 31 2013 $ 951,600 $ 732,736 404,363 306,802 23,137 534,130 334,968 20,533 1,685,902 1,622,367 2,778,078 216,235 95,125 3,089,438 2,230,938 202,342 65,253 2,498,533 $ 4,775,340 $ 4,120,900 $ 566,881 $ 618,181 193,831 59,118 819,830 1,528,207 140,861 233,225 1,902,293 521,022 2,803 1,262,961 (413) 1,786,373 266,844 2,053,217 41,504 85,648 745,333 1,126,802 188,520 154,912 1,470,234 531,573 4,994 1,126,700 (5,544) 1,657,723 247,610 1,905,333 $ 4,775,340 $ 4,120,900 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, 2014 were 92,326,487 (2013 – 96,100,969) 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: A. Terence Poole (Director) John Floren (Director) 42 2014 Methanex Corporation Annual Report Consolidated Statements of Income (thousands of US dollars, except number of common shares and per share amounts) For the years ended December 31 Revenue Cost of sales and operating expenses (note 10) Depreciation and amortization (note 10) Argentina gas settlement Geismar project relocation expenses and charges (note 5) Write-off of oil and gas rights Operating income Earnings of associate (note 6) Finance costs (note 11) Finance income and other expenses Income before income taxes Income tax recovery (expense) (note 15): Current Deferred Net income Attributable to: Methanex Corporation shareholders Non-controlling interests Income per share for the period attributable to Methanex Corporation shareholders: Basic net income per common share (note 12) Diluted net income 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. 2014 2013 $ 3,223,399 $ 3,024,047 (2,425,821) (2,365,520) (142,738) 42,000 – – 696,840 9,132 (37,042) (7,285) 661,645 (79,865) (75,472) (155,337) 506,308 454,610 51,698 506,308 4.79 4.55 $ $ $ $ $ (123,335) – (33,867) (24,798) 476,527 22,554 (56,407) 4,446 447,120 (83,618) 13,498 (70,120) 377,000 329,167 47,833 377,000 3.46 3.41 94,996,094 96,193,981 95,259,066 96,430,842 $ $ $ $ $ 2014 Methanex Corporation Annual Report 43 Consolidated Statements of Comprehensive Income (thousands of US dollars) For the years ended December 31 Net income Other comprehensive income, 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 on defined benefit pension plans (notes 15 and 20(a)) Comprehensive income Attributable to: Methanex Corporation shareholders Non-controlling interests See accompanying notes to consolidated financial statements. 2014 2013 $ 506,308 $ 377,000 849 412 9,137 32 10,430 516,738 459,773 56,965 516,738 $ $ $ (57) (936) 10,808 5,362 15,177 392,177 340,577 51,600 392,177 $ $ $ 44 2014 Methanex Corporation Annual Report 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 Balance, December 31, 2012 94,309,970 $ 481,779 $ 15,481 $ 805,661 $ (13,045) $ 1,289,876 $ 187,861 $ 1,477,737 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 1,790,999 38,585 – – 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 – – – – 11,209 (11,209) – – – – – – – – 329,167 – 329,167 47,833 377,000 5,362 6,048 11,410 3,767 15,177 722 – – 722 – 722 61,447 1,453 62,900 47,100 110,000 – – (74,937) – – – – – – – 38,585 – (74,937) – – – – – 38,585 – (74,937) (39,951) (39,951) 1,000 1,000 Balance, December 31, 2013 96,100,969 $ 531,573 $ 4,994 $ 1,126,700 $ (5,544) $ 1,657,723 $ 247,610 $ 1,905,333 Net income Other comprehensive income Compensation expense recorded for stock options Issue of shares on exercise of – – – – – – stock options 536,724 10,657 – – 777 – Reclassification of grant-date fair value on exercise of stock options Payments for shares repurchased Dividend payments to Methanex Corporation shareholders Distributions to non-controlling interests Equity contributions by non-controlling interests – 2,968 (2,968) (4,311,206) (24,176) – – – – – – – – – – 454,610 – 454,610 51,698 506,308 32 5,131 5,163 5,267 10,430 – – – (228,468) (89,913) – – – – – – – – – 777 10,657 – (252,644) (89,913) – – – – – – – 777 10,657 – (252,644) (89,913) (47,338) (47,338) 9,607 9,607 Balance, December 31, 2014 92,326,487 $ 521,022 $ 2,803 $ 1,262,961 $ (413) $ 1,786,373 $ 266,844 $ 2,053,217 See accompanying notes to consolidated financial statements. 2014 Methanex Corporation Annual Report 45 Consolidated Statements of Cash Flows (thousands of US dollars) For the years ended December 31 CASH FLOWS FROM OPERATING ACTIVITIES Net income Deduct earnings of associate Dividends received from associate Add (deduct) non-cash items: Depreciation and amortization Asset impairment charge Income tax expense 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 Payments for repurchase of shares Dividend payments to Methanex Corporation shareholders Interest paid, including interest rate swap settlements Net proceeds on issue of long-term debt Repayment of long-term debt and limited recourse debt Equity contributions by non-controlling interests Cash distributions to non-controlling interests Sale of partial interest in subsidiary Proceeds on issue of shares on exercise of stock options Proceeds from limited recourse debt Loan to associate Other Changes in non-cash working capital related to financing activities (note 16) 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. 46 2014 Methanex Corporation Annual Report 2014 2013 $ 506,308 $ 377,000 (9,132) 25,240 142,738 – 155,337 (15,805) 37,042 8,549 (51,156) (56,030) 743,091 57,926 801,017 (252,644) (89,913) (52,995) 592,275 (41,504) 9,607 (34,158) – 10,657 – (29,371) (4,172) (8,913) 98,869 (84,168) (573,844) (1,758) (21,252) (22,554) – 123,335 24,798 70,120 130,873 56,407 1,364 (42,739) (52,596) 666,008 (80,211) 585,797 – (74,937) (55,446) – (39,491) – (39,951) 110,000 38,585 10,000 – (2,777) – (54,017) (269,367) (309,469) (15,608) 68,015 (681,022) (526,429) 218,864 732,736 5,351 727,385 $ 951,600 $ 732,736 Notes to Consolidated Financial Statements (Tabular dollar amounts are shown in thousands of US dollars, except where noted) Year ended December 31, 2014 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 9, 2015. 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 estimates, 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(g)), financial instruments (note 2(o)), fair value measurement (note 2(p)) and income taxes (note 2(q)). Actual results could differ from those estimates. c) 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. d) Cash and cash equivalents: Cash and cash equivalents include securities with maturities of three months or less when purchased. e) Receivables: The Company provides credit to its customers in the normal course of business. The Company performs ongoing credit evaluations of its customers 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. f) 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. 2014 Methanex Corporation Annual Report 47 g) 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 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 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 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. 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(h). 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 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 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 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 48 2014 Methanex Corporation Annual Report 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. h) 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(g). i) 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. j) 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. k) 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 position. The determination of the defined benefit obligation and associated pension cost is based on certain actuarial assumptions including inflation rates, mortality, plan expenses, salary growth and discount rates. The present value of the net 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 Company recognizes gains and losses on the settlement of a defined benefit plan in income when the settlement occurs. The cost for defined contribution benefit plans is recognized in net income as earned by the employees. l) 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 credited 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. 2014 Methanex Corporation Annual Report 49 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 (“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 initially 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 grants prior to 2014 and in the range of 25% to 150% for subsequent grants. 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. m) Net income per common share: The Company calculates basic net income per common share by dividing net income attributable to Methanex shareholders by the weighted average number of common shares outstanding and calculates diluted net income per common share under the treasury stock method. Under the treasury stock method, diluted net income 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 common 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 per common share and a reconciliation to diluted net income per common share is presented in note 12. n) 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. o) 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. 50 2014 Methanex Corporation Annual Report 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 statements. 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 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. p) 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. q) Income taxes: Income tax expense represents current tax and deferred tax. The Company records current tax based on the taxable profits for the period calculated 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. r) 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. s) Segmented information: The Company’s operations consist of the production and sale of methanol, which constitutes a single operating segment. t) Reclassification of transactions with associate: The Company has a 63.1% equity interest in the Atlas Methanol Company Unlimited (“Atlas”) accounted for as an investment in associate. During 2014, the Company reclassified the presentation of certain profit amounts on the purchases of inventory from associate. As a result, $14 million after-tax was reclassified from investment in associate to inventory in the consolidated statement of financial position as at December 31, 2013 with the tax impact reflected in deferred income tax liabilities and $8 million was reclassified from earnings of associate to cost of sales and operating expenses in the consolidated statement of income for the year ended December 31, 2013 with the tax impact reflected in deferred income tax expense. This change in presentation was applied retroactively and impacted the comparative disclosures relating to inventories (note 4), equity-accounted investees (note 6), expenses by nature and function (note 10), income and other taxes (note 15), changes in non-cash working capital (note 16) and related parties (note 22). 2014 Methanex Corporation Annual Report 51 u) Anticipated changes to International Financial Reporting Standards: In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers (“IFRS 15”) establishing a comprehensive framework for revenue recognition. The standard replaces IAS 18, Revenue and IAS 11, Construction Contracts and related interpretations and is effective for annual periods beginning on or after January 1, 2017, with early adoption permitted. The Company is in the process of determining the impact of IFRS 15 on its consolidated financial statements. In July 2014, the IASB issued the final version of IFRS 9, Financial Instruments (“IFRS 9”), which reflects all phases of the financial instruments project and replaces IAS 39, Financial Instruments: Recognition and Measurement (“IAS 39”), and all previous versions of IFRS 9. The standard introduces new requirements for classification and measurement, impairment, and hedge accounting. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, with early application permitted. The Company has chosen to early adopt IFRS 9 commencing January 1, 2015. The adoption of IFRS 9 will have an effect on the classification of the Company’s financial assets, but no impact on the classification of the Company’s financial liabilities. Specifically, cash and cash equivalents and trade and other receivables previously classified as loans and receivables at amortized cost will be reclassified to financial assets at amortized cost with no resulting change in carrying value. Upon adoption of IFRS 9, the Company’s existing hedging relationships that qualified for hedge accounting under IAS 39 were reassessed and will continue under the new hedge accounting requirements in IFRS 9. The Company does not expect that any other new or amended standards or interpretations that are effective as of January 1, 2015 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 Dec 31 2014 Dec 31 2013 $ 319,231 $ 426,506 46,059 39,073 71,892 35,732 $ 404,363 $ 534,130 4. Inventories: Inventories are valued at the lower of cost, determined on a first-in first-out basis, and estimated net realizable value. The amount of inventories included in cost of sales and operating expenses and depreciation and amortization for the year ended December 31, 2014 is $2,330 million (2013 – $2,101 million). 52 2014 Methanex Corporation Annual Report 5. Property, plant and equipment: Cost at January 1, 2014 Additions Disposals and other Cost at December 31, 2014 Accumulated depreciation at January 1, 2014 Disposals and other Depreciation Accumulated depreciation at December 31, 2014 Net book value at December 31, 2014 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 Buildings, plant installations and machinery Plant under construction Oil and gas properties Finance leases $ 3,068,367 $ 393,044 $ 86,312 $ 32,230 $ 59,978 (31,145) 3,097,200 1,289,455 (37,966) 132,611 1,384,100 1,713,100 $ $ $ $ 601,869 1,102 996,015 – – – – 996,015 $ $ $ $ $ $ 1,664 (290) 87,686 78,228 – 5,914 84,142 – – 32,230 27,874 – 2,614 30,488 3,544 $ 1,742 $ $ $ $ $ $ $ $ Other 82,556 24,290 (102) 106,744 36,014 (100) 7,153 43,067 63,677 TOTAL $ 3,662,509 687,801 (30,435) 4,319,875 1,431,571 (38,066) 148,292 1,541,797 2,778,078 $ $ $ $ Buildings, plant installations and machinery Plant under construction Oil and gas properties Finance leases Other TOTAL $ 2,833,783 $ 75,238 $ 80,368 $ 32,230 $ 68,906 $ 3,090,525 257,571 (22,987) 3,068,367 1,199,941 (14,673) 104,187 1,289,455 1,778,912 $ $ $ $ 317,806 – 393,044 – – – – 393,044 $ $ $ $ 5,957 (13) 86,312 74,151 – 4,077 78,228 8,084 $ $ $ $ – – 32,230 25,261 – 2,613 27,874 4,356 $ $ $ $ 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 $ $ $ $ Included in finance leases at December 31, 2014 and 2013 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, 2014 was $1.7 million (2013 – $4.4 million). Other property, plant and equipment includes ocean-shipping vessels with a total net book value of $30.9 million at December 31, 2014 (2013 – $33.2 million) and ocean vessels under construction of $19.1 million (2013 – nil). For the year ended December 31, 2014, the Company incurred $601.9 million (2013 – $351.7 million) in capital expenditures related to the Geismar project. 2014 Methanex Corporation Annual Report 53 6. Interest in Atlas joint venture: a) The Company has a 63.1% equity interest in the Atlas joint venture. Atlas owns a 1.8 million tonne per year methanol production facility in Trinidad. 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, 2 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 at 100% Earnings of associate at 63.1% Dividends received from associate Dec 31 2014 24,834 70,594 352,616 (29,442) – Dec 31 2013 $ 20,776 128,232 378,890 (47,359) (56,752) (145,336) (124,994) 273,266 172,431 43,804 216,235 $ $ $ 298,793 188,539 13,803 202,342 $ $ $ $ 2014 2013 $ 363,570 $ 359,309 (334,648) (301,479) 28,922 (10,438) (4,011) 14,473 9,132 25,240 $ $ $ 57,830 (12,899) (9,188) 35,743 22,554 – $ $ $ 1 Includes related party transactions between Atlas and the Company (see note 22). 2 During the year ended December 31, 2014, the Company extended a $29.4 million unsecured loan to Atlas due December 4, 2024 with interest due semi-annually. b) Contingent liability: The Board of Inland Revenue of Trinidad and Tobago has issued assessments against Atlas in respect of the 2005, 2006, 2007 and 2008 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 from 2005 to 2019 related to methanol produced by Atlas. Atlas had partial relief from corporation income tax until late July 2014. The Company has lodged objections to the assessments. Based on the merits of the cases and legal interpretation, management believes its position should be sustained. 7. Other assets: As at Restricted cash Chile VAT receivable Deferred financing costs, net of accumulated amortization Investment in Carbon Recycling International Defined benefit pension plans (note 20) Canadian income tax installments Other 54 2014 Methanex Corporation Annual Report Dec 31 2014 Dec 31 2013 $ 37,090 $ 45,623 24,778 2,309 4,502 5,968 4,400 16,078 – 1,655 4,502 6,777 – 6,696 $ 95,125 $ 65,253 8. Long-term debt: As at Unsecured notes: (i) 6.00% due August 15, 2015 (ii) 3.25% due December 15, 2019 (iii) 5.25% due March 1, 2022 (iv) 4.25% due December 1, 2024 (v) 5.65% due December 1, 2044 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 2014 Dec 31 2013 $ 149,835 $ 345,387 246,991 296,073 294,936 149,581 344,530 246,650 – – 1,333,222 740,761 368,678 20,138 404,722 22,823 1,722,038 1,168,306 (193,831) (41,504) $ 1,528,207 $ 1,126,802 1 Total debt is presented net of discounts and deferred financing fees of $24.2 million at December 31, 2014 (2013 – $18.8 million). During 2014, the Company issued $300 million in unsecured notes bearing a coupon of 4.25% due December 1, 2024 and $300 million of unsecured notes bearing a coupon of 5.65% due December 1, 2044. 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). Other limited recourse debt includes a limited recourse facility with a remaining term of approximately two years, with interest payable at LIBOR plus 2.25%, a limited recourse facility with a remaining term of approximately five years with interest payable at LIBOR plus 0.75% and another limited recourse debt facility with a remaining term of approximately two years with interest payable at LIBOR plus 2.5%. For the year ended December 31, 2014, non-cash accretion, on an effective interest basis, of deferred financing costs included in finance costs was $3.6 million (2013 – $3.4 million). The minimum principal payments for long-term debt in aggregate and for each of the five succeeding years are as follows: 2015 2016 2017 2018 2019 Thereafter $ 193,996 56,047 46,897 49,972 403,000 996,326 $ 1,746,238 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. During 2014, the Company renewed and extended its $400 million unsecured credit facility with a syndicate of highly rated financial institutions that expires in December 2019. 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 55%, 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 2014 Methanex Corporation Annual Report 55 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 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. 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, 2014, 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) Other Less current maturities a) Site restoration costs: $ Dec 31 2014 23,830 52,030 3,031 84,774 6,474 22,149 7,691 199,979 (59,118) $ Dec 31 2013 16,410 55,918 7,204 148,195 19,829 26,612 – 274,168 (85,648) $ 140,861 $ 188,520 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, 2014, the total undiscounted amount of estimated cash flows required to settle the liabilities was $31.5 million (2013 – $21.8 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 b) Deferred gas payments: 2014 2013 $ 16,410 $ 21,789 7,107 – 313 (5,089) (577) 287 $ 23,830 $ 16,410 The Company has a liability of $55.9 million (2013 – $73.9 million) related to deferred natural gas payments that is payable in installments in 2015 and 2016, of which $3.9 million (2013 – $18.0 million), representing the current portion, has been recorded in trade, other payables and accrued liabilities. At December 31, 2014, the total undiscounted amount of estimated cash flows required to settle the liability was $56.4 million (2013 – $74.4 million). c) Finance lease obligations: At December 31, 2014, the Company has a finance lease obligation related to an oxygen production facility in Trinidad that is set to expire in 2015. Total lease payments for 2015 of $3.1 million include an interest component of $0.1 million. 56 2014 Methanex Corporation Annual Report 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 2014 2013 $ 2,202,586 $ 2,044,818 327,621 38,352 2,568,559 1,847,138 287,350 124,111 167,222 2,425,821 142,738 2,568,559 $ $ $ $ 303,044 140,993 2,488,855 1,661,140 256,461 274,463 173,456 2,365,520 123,335 2,488,855 $ $ $ $ 2014 65,067 (28,025) 37,042 $ $ 2013 64,742 (8,335) 56,407 $ $ Finance costs are primarily comprised of interest on borrowings and finance lease obligations, the effective portion of interest rate swaps designated as cash flow hedges, amortization of deferred financing fees, and accretion expense associated with site restoration costs. 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, 2014, interest rate swap payments recognized in finance costs were $13.6 million (2013 – $14.4 million). Capitalized interest relates to interest capitalized during construction until a plant is substantially completed and ready for productive use. 12. Net income per common share: Diluted net income per common share is calculated by considering the potential dilution that would occur if outstanding stock options and, under certain circumstances, TSARs were exercised or converted to common shares. Outstanding TSARs may be settled in cash or common shares at the holder’s option and for purposes of calculating diluted net income per common share, the more dilutive of the cash-settled and equity-settled method is used, regardless of how the plan is accounted for. Accordingly, TSARs that are accounted for using the cash-settled method will require adjustments to the numerator and denominator if the equity-settled method is determined to have a dilutive effect on diluted net income per common share as compared to the cash-settled method. The equity settled method was more dilutive for the year ended December 31, 2014. 2014 Methanex Corporation Annual Report 57 A reconciliation of the numerator used for the purposes of calculating diluted net income per common share is as follows: For the years ended December 31 Numerator for basic net income per common share Adjustment for the effect of TSARs: Cash-settled recovery included in net income Equity-settled expense Numerator for diluted net income per common share 2014 2013 $ 454,610 $ 329,167 (11,286) (5,627) – – $ 437,697 $ 329,167 Stock options and, if calculated using the equity-settled method, TSARs are considered dilutive when the average market price of the Company’s common shares during the period disclosed exceeds the exercise price of the stock option or TSAR. A reconciliation of the denominator used for the purposes of calculating basic and diluted net income per common share is as follows: For the years ended December 31 Denominator for basic net income per common share Effect of dilutive stock options Effect of dilutive TSARs Denominator for diluted net income per common share 2014 2013 94,996,094 95,259,066 545,421 652,466 1,171,776 – 96,193,981 96,430,842 For the years ended December 31, 2014 and 2013, basic and diluted net income per common share attributable to Methanex shareholders were as follows: For the years ended December 31 Basic net income per common share Diluted net income per common share 2014 4.79 4.55 $ $ 2013 3.46 3.41 $ $ 13. Share-based compensation: The Company provides share-based compensation to its directors and certain employees through grants of stock options, TSARs, SARs and deferred, restricted or performance share units. At December 31, 2014, the Company had 1,370,271 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, 2014 are as follows: SARs TSARs Number of units Exercise price USD Number of units Exercise price USD $ 897,525 360,900 (159,808) (5,500) 1,093,117 $ 230,590 (217,810) (20,650) 1,085,247 $ 28.63 38.24 27.10 30.86 32.02 71.85 29.36 44.62 40.78 1,815,535 $ 544,200 (496,250) (4,900) 1,858,585 $ 311,950 (421,250) (17,100) 1,732,185 $ 28.45 38.24 26.49 31.36 31.83 72.30 29.69 36.07 39.59 Outstanding at December 31, 2012 Granted Exercised Cancelled Outstanding at December 31, 2013 Granted Exercised Cancelled Outstanding at December 31, 2014 58 2014 Methanex Corporation Annual Report Information regarding the SARs and TSARs outstanding at December 31, 2014 is as follows: Range of exercise prices SARs $23.36 to $73.13 TSARs $23.36 to $73.13 Units outstanding at December 31, 2014 Units exercisable at December 31, 2014 Weighted average remaining contractual life (years) Number of units outstanding Weighted average exercise price Number of units exercisable 4.5 4.4 1,085,247 1,732,185 $ $ 40.78 515,543 39.59 861,101 Weighted average exercise price $ $ 30.33 30.21 The fair value of each outstanding SARs and TSARs grant was estimated on December 31, 2014 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) 2014 0.5% 2% 2013 0.4% 1% 2 YEARS 2 YEARS 32% 0.4% 29% 1% $ 12.72 $ 28.02 Compensation expense for SARs and TSARs is 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, 2014 was $34.1 million compared with the recorded liability of $32.5 million. The difference between the fair value and the recorded liability of $1.6 million will be recognized over the weighted average remaining vesting period of approximately 2 years. For the year ended December 31, 2014, compensation expense related to SARs and TSARs included a recovery in cost of sales and operating expenses of $14.5 million (2013 – expense of $70.7 million). This included a recovery of $24.5 million (2013 – expense of $61.2 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, 2014 are as follows: Outstanding at December 31, 2012 Granted Granted performance factor1 Granted in lieu of dividends Redeemed Cancelled Outstanding at December 31, 2013 Granted Granted performance factor1 Granted in lieu of dividends Redeemed Cancelled Outstanding at December 31, 2014 Number of deferred share units Number of restricted share units Number of performance share units 566,850 11,009 – 8,103 (239,148) – 346,814 4,200 – 5,183 (54,039) – 302,158 38,883 22,500 – 971 (18,223) – 44,131 7,000 – 714 (21,480) – 30,365 1,053,869 304,600 82,035 15,835 (492,212) (17,681) 946,446 139,160 55,677 12,842 (334,062) (21,119) 798,944 1 Performance share units have a feature where the ultimate number of units that vest are adjusted by a performance factor of the original grant as determined by the Company’s total shareholder return in relation to a predetermined target over the period to vesting. 2014 Methanex Corporation Annual Report 59 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, 2014 was $55.6 million compared with the recorded liability of $52.0 million. The difference between the fair value and the recorded liability of $3.6 million will be recognized over the weighted average remaining vesting period of approximately 1 year. For the year ended December 31, 2014, compensation expense related to deferred, restricted and performance share units included in cost of sales and operating expenses was a recovery of $2.1 million (2013 – expense of $59.5 million). This included a recovery of $13.6 million (2013 – expense of $49.2 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, 2014 and 2013 are as follows: Outstanding at December 31, 2012 Granted Exercised Cancelled Outstanding at December 31, 2013 Granted Exercised Cancelled Expired Outstanding at December 31, 2014 Number of stock options Weighted average exercise price 2,982,947 75,600 (1,790,999) (48,128) 1,219,420 45,600 (536,724) (6,200) (22,835) 699,261 $ $ $ 19.97 38.24 21.40 16.13 19.15 73.13 19.72 43.10 22.82 21.90 Information regarding the stock options outstanding at December 31, 2014 is as follows: Range of exercise prices Options $6.33 to $25.22 $28.43 to $73.13 Options outstanding at December 31, 2014 Options exercisable at December 31, 2014 Weighted average remaining contractual life (years) 1.3 3.3 2.2 Number of stock options outstanding 379,185 320,076 699,261 Weighted average exercise price $ $ 8.81 37.41 21.90 Number of stock options exercisable 379,185 202,276 581,461 Weighted average exercise price $ $ 8.81 30.11 16.22 For the year ended December 31, 2014, compensation expense related to stock options was $0.8 million (2013 – $0.7 million). 60 2014 Methanex Corporation Annual Report 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, 2014 and 2013, revenues attributed to geographic regions, based on the location of customers, were as follows: Revenue 2014 2013 Canada United States Europe China South Korea Other Asia Latin America TOTAL $ 247,723 $ 458,792 $ 1,001,041 $ 320,313 $ 447,236 $ 340,480 $ 407,814 $ 3,223,399 $ 213,708 $ 474,139 $ 924,700 $ 378,109 $ 397,597 $ 249,174 $ 386,620 $ 3,024,047 For the year ended December 31, 2014, revenues from a single customer across multiple geographic regions represented approximately 12% (2013 – 11%) of the Company’s total revenues (refer to note 19(c)). As at December 31, 2014 and 2013, the net book value of property, plant and equipment by country was as follows: Property, plant and equipment United States Chile Trinidad Egypt New Zealand Canada Other TOTAL 2014 2013 $ 1,134,824 $ 146,360 $ 204,919 $ 818,352 $ 313,936 $ 101,447 $ 58,240 $ 2,778,078 $ 531,853 $ 162,825 $ 226,760 $ 857,615 $ 322,833 $ 87,074 $ 41,978 $ 2,230,938 15. Income and other taxes: a) Income tax expense: For the years ended December 31 Current tax expense: Current period before undernoted items Impact of Argentina gas settlement, Geismar project relocation expenses and charges, and write-off of oil and gas rights Adjustments to prior years Deferred tax expense (recovery): Origination and reversal of temporary differences Impact of Argentina gas settlement, Geismar project relocation expenses and charges, and write-off of oil and gas rights Adjustments to prior years Change in tax rate Other Total income tax expense 2014 2013 $ 72,276 $ 80,578 $ $ 8,820 (1,231) 79,865 68,993 5,880 709 (7,538) 7,428 $ $ 2,647 393 83,618 9,251 (21,760) (1,987) – 998 $ 75,472 $ 155,337 $ $ (13,498) 70,120 b) Income tax expense included in other comprehensive income: Included in other comprehensive income for the year ended December 31, 2014 is a deferred income tax expense of $2.8 million (2013 – $3.2 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. 2014 Methanex Corporation Annual Report 61 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 before income taxes as follows: For the years ended December 31 Income before income taxes Deduct earnings of associate Impact of Argentina gas settlement, 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 Argentina gas settlement, 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 d) Net deferred income tax liabilities: 2014 2013 $ 661,645 $ 447,120 (9,132) (42,000) 610,513 (22,554) 58,665 483,231 26.0 % 25.8 % $ 158,733 $ 124,674 (20,766) 10,228 14,700 (5,454) (522) 8,646 $ 155,337 $ (19,113) (60,318) (1,594) 16,243 70,120 (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 Net deferred income tax liabilities Dec 31 2014 Dec 31 2013 $ 220,088 $ 213,938 95,663 22,903 338,654 42,864 1,118 18,307 43,140 87,017 11,831 312,786 81,498 4,198 31,719 40,459 105,429 157,874 $ 233,225 $ 154,912 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 $458 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 expense (recovery) included in net income Deferred income tax expense included in other comprehensive income Balance, December 31 2014 2013 $ 154,912 $ 165,219 75,472 2,841 (13,497) 3,190 $ 233,225 $ 154,912 62 2014 Methanex Corporation Annual Report 16. Changes in non-cash working capital: Changes in non-cash working capital for the years ended December 31, 2014 and 2013 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 Financing Investing Changes in non-cash working capital 2014 2013 $ 129,767 $ (116,974) 28,166 (2,604) (54,304) 101,025 (73,264) 27,761 57,926 (8,913) (21,252) (70,153) 5,055 226,637 44,565 (56,761) (12,196) (80,211) – 68,015 $ $ 27,761 $ (12,196) $ $ $ 17. Capital disclosures: The Company’s objectives in managing its liquidity and capital are to safeguard the Company’s ability to continue as a going concern, to provide financial capacity and flexibility to meet its strategic objectives, to provide an adequate return to shareholders commensurate with the level of risk, and to return excess cash through a combination of dividends and share repurchases. 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 2014 Dec 31 2013 $ $ $ 951,600 400,000 1,351,600 1,333,222 388,816 1,722,038 266,844 1,786,373 $ $ $ 732,736 400,000 1,132,736 740,761 427,545 1,168,306 247,610 1,657,723 $ 3,775,255 $ 3,073,639 46% 27% 38% 19% 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 2019 and is subject to certain financial covenants (note 8). 2014 Methanex Corporation Annual Report 63 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. 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 2014 Dec 31 2013 Derivative financial instruments designated as cash flow hedges1 $ 1,089 $ 156 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 951,600 394,040 37,090 732,736 523,809 45,623 $ 1,383,819 $ 1,302,324 $ 485,845 $ 580,180 55,927 73,888 1,722,038 1,168,306 6,474 20,412 $ 2,270,284 $ 1,842,786 1 The euro 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, 2014, 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. These interest rate swaps had outstanding notional amounts of $287 million as at December 31, 2014. At December 31, 2014, these interest rate swap contracts had a negative fair value of $6.5 million (2013 – $19.8 million) recorded in current liabilities. The Company also designates as cash flow hedges forward exchange contracts to sell euros at a fixed U.S. dollar exchange rate. At December 31, 2014, the Company had outstanding forward exchange contracts designated as cash flow hedges to sell a notional amount of 25 million euros in exchange for United States dollars. The euro contracts had a fair value of $1.1 million (2013 – negative fair value of $0.6 million) recorded in current assets. Changes in the fair value of derivative financial instruments designated as cash flow hedges have been recorded in other comprehensive income. 64 2014 Methanex Corporation Annual Report The table below shows cash outflows for derivative hedging instruments, excluding credit risk adjustments, based upon contractual payment dates using LIBOR at December 31, 2014. 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 2014 Dec 31 2013 $ 6,487 $ 13,824 – – 6,229 – $ 6,487 $ 20,053 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. 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 1.1 million at December 31, 2014 (December 31, 2013 – $0.2 million). The carrying values of the Company’s financial instruments approximate their fair values, except as follows: As at Dec 31 2014 Dec 31 2013 Carrying value Fair value Carrying value Fair value Long-term debt excluding deferred financing fees1 $ 1,739,767 $ 1,777,670 $ 1,183,534 $ 1,205,740 1 The carrying value and fair value include the balance of unsecured notes due August 15, 2015 that are part of current maturities on long-term debt. 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 reference to a limited number of small transactions at the end of 2014 and 2013. 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 volatility risk for the Company. Its worldwide operating business as well as its investment and financing activities are affected by changes in methanol and natural gas prices and interest and foreign exchange rates. The Company seeks to manage and control these risks primarily through its regular operating and financing activities and uses derivative instruments to hedge these risks when deemed appropriate. This is not an exhaustive list of all risks, nor will the risk management strategies eliminate these risks. Methanol price risk The methanol industry is a highly competitive commodity industry and methanol prices fluctuate based on supply and demand fundamentals and other factors. Accordingly, it is important to maintain financial flexibility. The Company has adopted a prudent approach to financial management by maintaining a strong balance sheet including back-up liquidity. 2014 Methanex Corporation Annual Report 65 Natural gas price risk Natural gas is the primary feedstock for the production of methanol and the Company has entered into medium to long-term natural gas supply contracts for its production facilities in New Zealand, Trinidad, the United States 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. From time to time the Company enters into natural gas forward supply contracts at fixed prices to manage its exposure to natural gas price risk. Interest rate risk Interest rate risk is the risk that the Company suffers financial loss due to changes in the value of an asset or liability or in the value of future cash flows due to movements in interest rates. The Company’s interest rate risk exposure is mainly related to long-term debt obligations. 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 2014 Dec 31 2013 $ 1,333,222 $ 740,761 $ 1,333,222 $ 740,761 $ $ 368,678 20,138 388,816 $ 404,722 22,823 $ 427,545 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 approximately $109.5 million as of December 31, 2014 (2013 – $40.5 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 $1.0 million as of December 31, 2014 (2013 – $1.1 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 nil as of December 31, 2014 (2013 – $3.7 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. 66 2014 Methanex Corporation Annual Report As at December 31, 2014, the Company had a net working capital asset of $117.1 million in non U.S. dollar currencies (2013 – $124.0 million). Each 10% strengthening (weakening) of the U.S. dollar against these currencies would decrease (increase) the value of net working capital and pre-tax cash flows and earnings by approximately $11.7 million (2013 – $12.4 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 conditions, underlying risks inherent in its operations and capital requirements to maintain and grow its operations. At December 31, 2014, the Company had $951.6 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 2019. 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, 2014 Carrying amount Contractual cash flows 1 year or less 1-3 years 3-5 years Trade and other payables1 $ 473,400 $ 473,400 $ 473,400 $ – $ – $ Deferred gas payments included in other current payables and in other long- term liabilities Long-term debt2 Egypt interest rate swaps 1 Excludes tax and accrued interest. 55,927 56,380 1,722,038 2,595,268 6,474 6,487 3,897 263,474 6,487 52,483 228,265 – – 577,319 1,526,210 – – $ 2,257,839 $ 3,131,535 $ 747,258 $ 280,748 $ 577,319 $ 1,526,210 More than 5 years – – 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, 2014. 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, 2014 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. 2014 Methanex Corporation Annual Report 67 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 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 loss Balance, end of year Unfunded status Minimum funding requirement Defined benefit obligation, net Dec 31 2014 Dec 31 2013 $ 70,189 $ 79,497 1,851 2,998 (3,509) – (404) (6,779) 64,346 50,477 2,164 1,791 (3,509) – 1,347 (4,105) 48,165 16,181 – 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 – $ 16,181 $ 19,835 The Company has an unfunded retirement obligation of $22.1 million at December 31, 2014 (2013 – $26.1 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 net funded retirement asset of $5.2 million at December 31, 2014 (2013 – $6.8 million) for certain employees and retirees in Canada and a funded retirement asset of $0.8 million at December 31, 2014 (2013 – $0.5 million obligation) 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 10 years. The Company estimates that it will make additional contributions relating to its defined benefit pension plans totaling $3.5 million in 2015. 68 2014 Methanex Corporation Annual Report The Company’s net defined benefit pension plan expense charged to the consolidated statements of income for the years ended December 31, 2014 and 2013 is as follows: For the years ended December 31 Net defined benefit pension plan expense: Current service cost Net interest cost Cost of settlement 2014 $ 1,851 $ 834 – 2013 2,272 1,584 909 $ 2,685 $ 4,765 The Company’s current year actuarial gains, recognized in the consolidated statements of comprehensive income for the years ended December 31, 2014 and 2013, are as follows: For the years ended December 31 Actuarial gain Minimum funding requirement Actuarial gain, net 2014 32 – 32 $ $ 2013 5,362 – 5,362 $ $ 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, 2014, the weighted average discount rate for the defined benefit obligation was 4.0% (2013 – 4.7%). 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 $6.6 million. The asset allocation for the defined benefit pension plan assets as at December 31, 2014 and 2013 is as follows: As at Equity securities Debt securities Cash and other short-term securities Total Dec 31 2014 Dec 31 2013 47% 30% 23% 100% 47% 25% 28% 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, 2014 was $5.1 million (2013 – $4.3 million). 2014 Methanex Corporation Annual Report 69 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, 2014 2015 2016 2017 2018 2019 $ 393,765 $ 405,845 $ 314,445 $ 261,848 $ 206,652 Thereafter $ 1,300,148 In the above table, the Company has included natural gas commitments at the contractual volume and prices. 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, 2014 2015 2016 2017 2018 2019 $ 146,459 $ 132,152 $ 138,744 $ 134,244 $ 121,295 Thereafter $ 859,317 For the year ended December 31, 2014, the Company recognized as an expense $130.5 million (2013 – expense of $124.6 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, 2014, the Company also had commitments to purchase methanol under other contracts for approximately 0.9 million tonnes for 2015 and 1.0 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. 70 2014 Methanex Corporation Annual Report 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 Country of incorporation Principal activities Interest % Dec 31 2014 Dec 31 2013 Hong Kong Marketing & distribution Belgium Marketing & distribution United States Marketing & distribution Egypt Chile Production Production New Zealand Production Trinidad Production United States Production United States Production Cayman Islands Shipping 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 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, 2014 of $364 million (2013 – $359 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, 2014 and provided in the summarized financial information in note 6 include receivables owing from Atlas to the Company of $13 million (2013 – $15 million), and payables to Atlas of $81 million (2013 – $87 million). The Company has total loans outstanding to Atlas at December 31, 2014 of $43.8 million (2013 – $13.8 million) which are unsecured and due at maturity. 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 (recovery) expense Total 2014 2013 $ 8,782 $ 11,653 500 52 645 79 (7,117) 69,708 $ 2,217 $ 82,085 2014 Methanex Corporation Annual Report 71 23. Non-controlling interest: 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 2014 Dec 31 2013 $ 251,100 $ 234,923 819,125 (100,035) (455,377) 514,813 248,754 18,090 266,844 $ $ 852,177 (85,430) (495,842) 505,828 239,387 8,223 247,610 $ $ 2014 2013 $ 287,600 $ 385,666 53,526 9,549 63,075 49,778 1,920 51,698 5,267 100,140 9,872 110,012 46,065 1,768 47,833 3,767 $ 32,498 $ 38,451 2014 111,361 (88,660) (2,835) $ $ 2013 124,046 (94,318) (2,044) $ $ 72 2014 Methanex Corporation Annual Report Executive Leadership Team John Floren President and Chief Executive Officer Wendy Bach Senior Vice President, Corporate Resources and General Counsel Ian Cameron Senior Vice President, Finance and Chief Financial Officer Mike Herz Senior Vice President, Corporate Development Vanessa James Senior Vice President, Marketing and Logistics Harvey Weake Senior Vice President, Manufacturing 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 Corporate Information Head Office Methanex Corporation 1800 Waterfront Centre 200 Burrard Street Vancouver, BC V6C 3M1 Tel 604 661 2600 Fax 604 661 2676 Toll Free 1 800 661 8851 Within North America Web Site www.methanex.com Sales Inquiries: sales@methanex.com Transfer Agent CST Trust Company acts as transfer agent and registrar for Methanex stock and maintains all primary shareholder records. All inquiries regarding share transfer requirements, lost certificates, changes of address, or the elimination of duplicate mailings should be directed to CST Trust Company at: 1 800 387 0825 Toll Free within North America Investor Relations Inquiries Sandra Daycock Director, Investor Relations Tel 604 661 2600 Annual General Meeting The Annual General Meeting will be held at the Pan Pacific Hotel in Vancouver, British Columbia on Thursday, April 30, 2015 at 11:00 a.m. (Pacific Time). Shares Listed Toronto Stock Exchange – MX NASDAQ Global Market – MEOH Annual Information Form (AIF) The corporation’s AIF can be found online at www.sedar.com. A copy of the AIF can also be obtained by contacting our head office. 2014 A N N U A L R E P O R T 2014 A N N U A L R E P O R T 

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