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Methanex Generates Significant Cash Flows in Second Quarter and Industry Supply/Demand Fundamentals Remain Strong

July 25, 2006

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - July 25, 2006) - For the second quarter of 2006, Methanex (TSX:MX)(NASDAQ:MEOH) recorded net income of US$82.1 million (diluted net income per share of US$0.75) and Adjusted EBITDA(1) of US$153.0 million.

Bruce Aitken, President and CEO of Methanex commented, "We are pleased to deliver another quarter of strong earnings and cash flows. Continued demand growth and competitor outages caused the market to remain balanced and pricing to remain at high levels in the second quarter. Our average realized price this quarter was US$279 per tonne compared with US$283 per tonne for the first quarter of 2006."

These results for the second quarter of 2006 compare with net income of US$115.2 million (diluted net income per share of US$1.02) and Adjusted EBITDA(1) of US$166.5 million for the first quarter of 2006. Before recording an adjustment in the first quarter of 2006 to increase earnings and reduce future income tax expense related to a change in Trinidad tax legislation, income before unusual items (after-tax)(1) was US$89.4 million and diluted income before unusual items (after-tax) per share(1) was US$0.79.

The Methanex European posted contract price has been set for the third quarter at 250 euros per tonne (US$315 per tonne at the time of settlement) and July posted contract prices for the United States and Asia are US$333 per tonne and US$305 per tonne, respectively. This represents an average decrease to posted prices across the global regions of approximately US$27 per tonne from April to July.

Mr. Aitken added, "Despite these recent decreases to our posted prices, industry fundamentals continue to be very strong and our August posted contract price in the United States has been increased by US$10 per tonne to US$343 per tonne. Numerous planned and unplanned outages during the second quarter have caused global inventories for both producers and consumers to decline. As we enter the third quarter, demand continues to be strong and several more maintenance outages have been announced. During July, approximately 1.1 million tonnes of annual capacity was shut down or idled including our 530,000 tonne Waitara Valley facility in New Zealand which was idled on July 10th. This plant remains a flexible asset for us with future operations dependent on securing additional natural gas on commercially acceptable terms. Finally, we do not expect any production from new world-scale plants to be available to the market until early 2007. As a result of these and other factors, we expect the methanol market to be tight during the third quarter."

Mr. Aitken concluded, "Our cash generation was excellent this quarter. With US$174 million cash on hand at the end of the second quarter, a strong balance sheet and a US$250 million undrawn credit facility, we have the financial capacity to complete our capital maintenance spending program, pursue new opportunities to enhance our leadership position in the methanol industry and continue to deliver on our commitment to return excess cash to shareholders."

A conference call is scheduled for Wednesday, July 26, 2006 at 11:00 am EDT (8:00 am PDT) to review these second quarter results. To access the call, dial the Telus Conferencing operator ten minutes prior to the start of the call at (416) 883-0139, or toll free at (888) 458-1598. The passcode for the call is 75577. A playback version of the conference call will be available for two weeks at (877) 653-0545. The reservation number for the playback version is 302058. There will be a simultaneous audio-only webcast of the conference call, which can be accessed from our website at www.methanex.com. In addition, an audio recording of the conference call can be downloaded from our website for three weeks after the call.

Methanex is a Vancouver based, publicly-traded company engaged in the worldwide production and marketing of methanol. Methanex shares are listed for trading on the Toronto Stock Exchange in Canada under the trading symbol "MX" and on the Nasdaq Global Market in the United States under the trading symbol "MEOH."

Forward-Looking Statements

Information contained in this press release and the attached Management's Discussion and Analysis for the Second Quarter of 2006 contains forward-looking statements. 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. Methanex believes that it has a reasonable basis for making such forward-looking statements. However, forward-looking statements, by their nature, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The risks and uncertainties include those attendant with producing and marketing methanol and successfully carrying out major capital expenditure projects in various jurisdictions, the ability to successfully carry out corporate initiatives and strategies, conditions in the methanol and other industries including the supply and demand balance for methanol, actions of competitors and suppliers, world-wide economic conditions and other risks described in our 2005 Management's Discussion & Analysis and the attached Management's Discussion and Analysis for the Second Quarter of 2006. Undue reliance should not be placed on forward-looking statements. They are not a substitute for the exercise of one's own due diligence and judgment. The outcomes anticipated in forward-looking statements may not occur and we do not undertake to update forward-looking statements. These materials also contain certain non-GAAP financial measures. Non-GAAP financial measures do not have any standardized meaning and therefore are unlikely to be comparable to similar measures used by other companies. For more information regarding these non-GAAP measures, please see our 2005 Management's Discussion & Analysis and the attached Management's Discussion and Analysis for the Second Quarter of 2006.

(1) These items are non-GAAP measures that do not have any standardized meaning prescribed by Canadian generally accepted accounting principles (GAAP) and therefore are unlikely to be comparable to similar measures presented by other companies. Refer to Supplemental Non-GAAP Measures for a description of each non-GAAP measure and a reconciliation to the most comparable GAAP measure.

Interim Report For the Six Months Ended June 30, 2006

At July 24, 2006 the Company had 108,237,417 common shares issued and outstanding and stock options exercisable for 817,700 additional common shares.

Share Information

Methanex Corporation's common shares are listed for trading on the Toronto Stock Exchange under the symbol MX and on the Nasdaq Global Market under the symbol MEOH.



Transfer Agents & Registrars
CIBC Mellon Trust Company
320 Bay Street
Toronto, Ontario, Canada M5H 4A6
Toll free in North America:
1-800-387-0825

Investor Information
All financial reports, news releases and corporate information can be
accessed on our website at www.methanex.com.

Contact Information
Methanex Investor Relations
1800 - 200 Burrard Street
Vancouver, BC Canada V6C 3M1

E-mail: invest@methanex.com
Methanex Toll-Free: 1-800-661-8851

 


SECOND QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS

Except where otherwise noted, all currency amounts are stated in United States dollars.

This second quarter 2006 Management's Discussion and Analysis should be read in conjunction with the 2005 Annual Consolidated Financial Statements and the Management's Discussion and Analysis included in the Methanex 2005 Annual Report. The Methanex 2005 Annual Report and additional information relating to Methanex is available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.



Three Months Ended Six Months Ended
----------------------- ----------------
($ millions, except Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
where noted) 2006 2006 2005 2006 2005
---------------------------------------------------- ----------------
---------------------------------------------------- ----------------
Sales volumes (thousands
of tonnes)
Company produced
Chile and Trinidad 1,241 1,254 1,129 2,495 2,256
New Zealand and Kitimat 110 67 203 177 451
---------------------------------------------------- ----------------
1,351 1,321 1,332 2,672 2,707
Purchased methanol 294 297 269 591 565
Commission sales(1) 133 141 158 274 303
---------------------------------------------------- ----------------
Total sales volumes 1,778 1,759 1,759 3,537 3,575

Average realized price
($ per tonne)(2) 279 283 256 281 259
Methanex average
non-discounted posted
price ($ per tonne)(3) 340 335 308 338 309
Operating income(4) 128.7 142.9 98.1 271.6 212.8
Net income 82.1 115.2 62.9 197.3 139.0
Income before unusual
items (after-tax)(4) 82.1 89.4 62.9 171.5 139.0
Cash flows from operating
activities(4)(5) 129.5 113.9 98.5 243.4 212.6
Adjusted EBITDA(4) 153.0 166.5 119.6 319.6 254.3
Basic net income per
common share 0.75 1.02 0.53 1.78 1.17
Diluted net income per
common share 0.75 1.02 0.53 1.77 1.16
Diluted income before
unusual items (after-tax)
per share(4) 0.75 0.79 0.53 1.54 1.16
Common share information
(millions of shares):
Weighted average number
of common shares 109.7 112.4 118.4 111.0 119.2
Diluted weighted average
number of common shares 110.0 112.9 118.9 111.5 120.0
Number of common shares
outstanding, end of
period 108.6 110.6 117.6 108.6 117.6
---------------------------------------------------- ----------------

(1) Commission sales represent volumes marketed on a commission
basis. Commission income is included in revenue when earned.

(2) Average realized price is calculated as revenue, net of
commissions earned, divided by the total sales volumes of
produced and purchased methanol.

(3) 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 on our website at
www.methanex.com.

(4) These items are non-GAAP measures that do not have any
standardized meaning prescribed by Canadian generally accepted
accounting principles (GAAP) and therefore are unlikely to be
comparable to similar measures presented by other companies.
Refer to Supplemental Non-GAAP Measures for a description of
each non-GAAP measure and a reconciliation to the most
comparable GAAP measure.

(5) Cash flows from operating activities in the above table
represents cash flows from operating activities before changes
in non-cash working capital.

 


For the second quarter of 2006 we recorded Adjusted EBITDA of $153.0 million and net income and income before unusual items (after-tax) of $82.1 million ($0.75 per share on a diluted basis). This compares with Adjusted EBITDA of $166.5 million, net income of $115.2 million ($1.02 per share on a diluted basis) and income before unusual items (after-tax) of $89.4 million ($0.79 per share on a diluted basis) for the first quarter of 2006 and Adjusted EBITDA of $119.6 million and net income and income before unusual items (after-tax) of $62.9 million ($0.53 per share on a diluted basis) for the second quarter of 2005.

For the six months ended June 30, 2006, we recorded Adjusted EBITDA of $319.6 million, net income of $197.3 million ($1.77 per share on a diluted basis) and income before unusual items (after-tax) of $171.5 million ($1.54 per share on a diluted basis) compared with Adjusted EBITDA of $254.3 million and net income and income before unusual items (after-tax) of $139.0 million ($1.16 per share on a diluted basis) during the same period in 2005.

The following is a reconciliation of net income to income before unusual items (after-tax):



Three Months Ended Six Months Ended
----------------------- ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2006 2006 2005 2006 2005
---------------------------------------------------- ----------------
---------------------------------------------------- ----------------
Net income $ 82.1 $ 115.2 $ 62.9 $ 197.3 $ 139.0
Deduct unusual item:
Future income taxes
related to change in
tax legislation - (25.8) - (25.8) -
---------------------------------------------------- ----------------
Income before unusual items
(after-tax) $ 82.1 $ 89.4 $ 62.9 $ 171.5 $ 139.0
---------------------------------------------------------------------

 


In February 2006, the Government of Trinidad and Tobago passed an amendment that changed the retroactive effective date of tax legislation introduced in 2005. As a result of this amendment we recorded adjustments during the first quarter of 2006 to decrease future income tax expense by a total of $25.8 million. Refer to Income Taxes for further information regarding this change in legislation.

EARNINGS ANALYSIS

A core element of our strategy is to strengthen our position as a low cost producer. Over the last several years we have shifted our production from higher cost plants exposed to market prices for natural gas feedstock to new low cost plants underpinned by long-term take-or-pay natural gas purchase agreements with pricing terms that vary with methanol prices. Our low cost production hubs in Chile and Trinidad have an annual production capacity of 5.8 million tonnes and represent over 90% of our current annual production capacity. The operating results for these facilities represent a substantial proportion of our Adjusted EBITDA and accordingly, we separately discuss the impact of the changes in average realized price, sales volumes and total cash costs related to these facilities.

Over the last few years we have been shutting down our high cost production. We permanently closed our Kitimat facility on November 1, 2005 and sold the remaining inventory from this facility during the first quarter of 2006. On July 10, 2006, the Waitara Valley plant in New Zealand was idled for maintenance and is currently positioned as a flexible production asset with future operations dependent on securing additional natural gas on commercially acceptable terms. As the operating results for these facilities represent a smaller proportion of our Adjusted EBITDA, the impact of changes in average realized price, sales volumes and total cash costs have been combined and presented as the change in cash margin related to these facilities in our analysis of Adjusted EBITDA. For a further discussion of the definitions and calculations used in our Adjusted EBITDA analysis, refer to How We Analyze Our Business.

Adjusted EBITDA

The changes in Adjusted EBITDA resulted from the following:



Q2 2006 Q2 2006 YTD Q2 2006
compared with compared with compared with
($ millions) Q1 2006 Q2 2005 YTD Q2 2005
--------------------------------------------------------------------
--------------------------------------------------------------------
Increase (decrease)
in Adjusted EBITDA
related to changes in:
Average realized price $ (6) $ 25 $ 50
Total cash costs (12) (21) (37)
Sales volumes (2) 17 38
Margin on the sale
of purchased methanol - 1 4
--------------------------------------------------------------------
(20) 22 55
Margin earned from
New Zealand and
Kitimat facilities 6 11 10
--------------------------------------------------------------------
$ (14) $ 33 $ 65
--------------------------------------------------------------------



Average realized price


Three Months Ended Six Months Ended
Methanol Price Information ----------------------- ----------------
($ per tonne, except Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
where noted) 2006 2006 2005 2006 2005
--------------------------------------------------- ----------------
--------------------------------------------------- ----------------
Methanex average
non-discounted posted price 340 335 308 338 309
Methanex average realized
methanol price 279 283 256 281 259
Average discount 18% 16% 17% 17% 16%
--------------------------------------------------------------------

 


We continue to operate in a favourable price environment as a result of strong demand and tight methanol supply conditions resulting from planned and unplanned outages during the second quarter of 2006. Our average realized price for the second quarter of 2006 decreased slightly to $279 per tonne from $283 per tonne for the first quarter of 2006 and increased from $256 per tonne for the second quarter of 2005. The change in our average realized price for the second quarter of 2006 decreased our Adjusted EBITDA by $6 million compared with the first quarter of 2006 and increased our Adjusted EBITDA by $25 million compared with the second quarter of 2005. Our average realized price for the six months ended June 30, 2006 was $281 per tonne compared with $259 per tonne during the same period in 2005 resulting in an increase in Adjusted EBITDA of $50 million.

The methanol industry is highly competitive and prices are affected by supply/demand fundamentals. We publish non-discounted reference prices for each major methanol market and offer discounts to customers based on various factors. To reduce the impact of cyclical pricing on our earnings, we have entered into long-term contracts for a portion of our production volume with certain global customers where prices are either fixed or linked to our costs plus a margin. We expect the discount from our non-discounted posted prices will narrow during periods of lower methanol pricing. We believe it is important to maintain financial flexibility throughout the methanol price cycle and these strategic contracts are a part of our balanced approach to managing cash flow and liquidity.

Total cash costs

Maintaining a low cost structure provides a competitive advantage in a commodity industry and is a key element of our strategy. Our low cost production facilities in Chile and Trinidad are underpinned by long-term low cost take-or-pay natural gas purchase agreements with pricing terms that include base and variable price components. The variable component is adjusted in relation to increases in methanol prices above a pre-determined price. We believe this enables these facilities to be competitive throughout the methanol price cycle.

Total cash costs for the second quarter of 2006 were higher than in the first quarter of 2006 by $12 million. The increase in total cash costs was primarily due to higher ocean shipping and supply chain costs as well as higher stock-based compensation expense due to the impact of increases in our share price. The increase in ocean shipping and supply chain costs primarily relates to a change in shipping patterns and higher fuel costs during the second quarter of 2006.

Total cash costs for the second quarter of 2006 and the six months ended June 30, 2006 were higher than in the comparable periods in 2005 and this decreased Adjusted EBITDA by $21 million and $37 million, respectively. The increase in cash costs primarily relates to the impact of higher methanol prices on natural gas costs at our Chile and Trinidad facilities, higher ocean shipping costs and higher stock-based compensation expense due to the impact of increases in our share price.

Chile and Trinidad sales volumes

Sales volumes of methanol produced at our Chile and Trinidad production hubs for the second quarter of 2006 were lower by 13,000 tonnes compared with the first quarter of 2006 and this decreased Adjusted EBITDA by $2 million.

The commencement of operations of Chile IV in June 2005 increased our annual low cost production capacity to 5.8 million tonnes from 5.0 million tonnes. Sales volumes of methanol produced at our Chile and Trinidad production hubs for the second quarter of 2006 and the six months ended June 30, 2006 were higher than in the comparable periods in 2005 by 112,000 tonnes and 239,000 tonnes, respectively. Higher sales volumes for these periods increased Adjusted EBITDA by $17 million and $38 million, respectively.

Margin earned from New Zealand and Kitimat facilities

For the second quarter of 2006, our cash margin on the sale of New Zealand inventory was $9 million compared with a cash margin on the sale of New Zealand and Kitimat inventory of $3 million for the first quarter of 2006 and a negative cash margin of $2 million for the second quarter of 2005. The increase in cash margin for the second quarter of 2006 compared with the first quarter of 2006 primarily relates to higher sales volumes of New Zealand inventory during the second quarter of 2006 and a negative cash margin earned on sale of our remaining Kitimat inventory during the first quarter of 2006.

For the six months ended June 30, 2006, our cash margin on the sale of New Zealand and Kitimat inventory was $12 million compared with a cash margin of $2 million during the same period in 2005. The increase in cash margin for the second quarter of 2006 and six months ended June 30, 2006 compared with the same periods in 2005 primarily relates to lower sales volumes of high cost Kitimat inventory and higher methanol prices during 2006.

Depreciation and Amortization

Depreciation and amortization was $24 million for the second quarter of 2006 compared with $22 million for the second quarter of 2005. For the six months ended June 30, 2006, depreciation and amortization was $48 million compared with $41 million for the same period in 2005. In June 2005, the Chile IV methanol facility commenced operations and in late 2005, we entered into a capital lease agreement for an oceangoing vessel. The increase in depreciation and amortization for the second quarter of 2006 and the six months ended June 30, 2006 compared with the same periods in 2005 is primarily due to the depreciation of Chile IV and the leased oceangoing vessel.



Interest Expense

Three Months Ended Six Months Ended
----------------------- ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2006 2006 2005 2006 2005
--------------------------------------------------- ----------------
--------------------------------------------------- ----------------
Interest expense before
capitalized interest $ 11 $ 11 $ 14 $ 22 $ 27
Less capitalized interest
related to Chile IV - - (3) - (7)
--------------------------------------------------- ----------------
Interest expense $ 11 $ 11 $ 11 $ 22 $ 20
--------------------------------------------------------------------

 


Interest incurred during construction is capitalized to the cost of the asset until the asset is substantively complete and ready for productive use. The Chile IV methanol facility commenced operations in June 2005.



Interest and Other Income

Three Months Ended Six Months Ended
----------------------- ----------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2006 2006 2005 2006 2005
--------------------------------------------------- ----------------
--------------------------------------------------- ----------------
Interest and other income $ 4 $ 3 $ - $ 6 $ 1
--------------------------------------------------------------------

 


The change in interest and other income for the six months ended June 30, 2006 compared with the same period in 2005 relates primarily to the impact on earnings of changes in foreign exchange rates.

Income Taxes

During 2005, the Government of Trinidad and Tobago introduced new tax legislation retroactive to January 1, 2004. As a result, during 2005 we recorded a $16.9 million charge to increase future income tax expense to reflect the retroactive impact for the period January 1, 2004 to December 31, 2004. In February 2006, the Government of Trinidad and Tobago passed an amendment to this legislation that changes the retroactive effective date to January 1, 2005. As a result of this amendment we recorded an adjustment to decrease future income tax expense by a total of $25.8 million during the first quarter of 2006. The adjustment includes a reversal of the previous charge to 2005 earnings and an additional adjustment to recognize the benefit of tax deductions that were reinstated as a result of the change in the retroactive effective date.

Excluding the above-noted adjustment, the effective tax rate for the second quarter of 2006 was 32% compared with 34% for the first quarter of 2006 and 28% for the second quarter of 2005. The effective tax rate for the six months ended June 30, 2006 was 33% compared with 29% for the same period in 2005. The increase in effective tax rates in 2006 compared with 2005 primarily relates to the expiry of the tax holiday for the Titan facility in 2005.

The statutory tax rate in Chile and Trinidad, where we earn substantially all of our pre-tax earnings, is 35%. In Chile the tax rate consists of a first category tax that is payable when income is earned and a second category 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 current income tax expense to total income tax expense is highly dependent on the level of cash distributed from Chile.



PRODUCTION SUMMARY
YTD YTD
Q2 2006 Q1 2006 Q2 2005 Q2 2006 Q2 2005
(thousands Capa- Product- Product- Product- Product- Product-
of tonnes) city ion ion ion ion ion
---------------------------------------------------------------------
---------------------------------------------------------------------
Chile and
Trinidad:
Chile I, II,
III and IV 960 872 882 702 1,754 1,429
Titan 210 214 215 135 429 337
Atlas
(63.1%
interest) 268 273 253 252 526 487
---------------------------------------------------------------------
1,438 1,359 1,350 1,089 2,709 2,253

Other:
New Zealand 132 118 104 103 222 223
Kitimat - - - 120 - 239
---------------------------------------------------------------------
132 118 104 223 222 462
---------------------------------------------------------------------
1,570 1,477 1,454 1,312 2,931 2,715
---------------------------------------------------------------------

 


During the second quarter of 2006, our methanol facilities produced 1,477,000 tonnes compared with an operating capacity of 1,570,000 tonnes, or 94% of overall capacity.

Our methanol facilities in Trinidad operated very well and in excess of design capacity despite losing approximately 30,000 tonnes of production due to short-term delivery infrastructure constraints of our natural gas suppliers.

Our methanol production facilities in Chile produced 872,000 tonnes compared with an operating capacity of 960,000 tonnes during the second quarter of 2006. Production was lower than capacity primarily due to planned maintenance at our Chile I facility in June resulting in lost production of approximately 30,000 tonnes and reduced gas supply as a result of repair and maintenance of delivery infrastructure by our natural gas suppliers resulting in lost production of approximately 40,000 tonnes. We did not experience any significant curtailments of natural gas as a result of redirection orders from the Argentinean government during the second quarter of 2006. Excluding the impact of planned maintenance at our Chile I facility and repair and maintenance activities by our natural gas suppliers, our facilities in Chile operated at 98% of capacity for the second quarter of 2006.

Effective July 25, 2006, the government of Argentina increased the tax on exports of natural gas from Argentina to Chile. This tax is applicable to approximately 32% of the total current gas supply for our plants in Chile. The new tax is $2.25 per mmbtu, which represents an average increase of approximately $1.95 per mmbtu over the existing export tax currently paid by the affected Argentinean gas suppliers. For all gas sourced from Argentina we have contractual protection against such export taxes. However, we cannot provide assurance that this proposed tax will not have an adverse effect on our results of operations and financial condition.

The Waitara Valley facility in New Zealand is currently positioned as a flexible production asset. We restarted this facility in early 2006 with sufficient contracted natural gas to produce approximately 230,000 tonnes during 2006. On July 10, the Waitara Valley facility was idled. We are continuing to seek other supplies of natural gas to supplement this production and to extend the life of our New Zealand operations; however there can be no assurance that we will be able to secure additional gas on commercially acceptable terms.

SUPPLY/DEMAND FUNDAMENTALS

Methanol industry fundamentals continue to be favourable and we continue to operate in a strong pricing environment underpinned by high global energy prices. Over the next 12 months, we expect new capacity and expansions of existing capacity, outside of China, to increase methanol supply by approximately 2.6 million tonnes. Over the same period, we expect a similar volume of high cost capacity to shut down as a result of high energy prices. The only world-scale increment of new industry capacity is the 1.7 million tonne per year NPC facility in Iran which we do not expect will have product available to the market until early 2007.

In China, a 0.6 million tonne per year natural gas-based methanol plant is under development on Hainan Island and is expected to commence operations during the second half of 2006. Due to its location on the coast, this plant could export or supply traditional methanol markets in coastal provinces in East and South China.

Demand for methanol in China is growing at higher rates than we expected. We believe that a large proportion of this additional unexpected demand is related to non-traditional uses for methanol such as gasoline blending and production of di-methyl ether (DME). DME can be used as a cooking, heating or transportation fuel. Therefore, while there are a number of smaller-scale plants expected to be constructed in China during 2006, we continue to believe substantially all domestic methanol production will be consumed within the local market. As a result, we expect 2006 imports into China to remain at levels similar to 2005 and we also expect that imports into China will grow over time.

During 2005, just over two million tonnes of methanol was used in the production of MTBE for consumption in the United States. As a result of the 2005 United States Energy Policy Act, MTBE has been substantially removed from gasoline in the United States. However, export markets for MTBE produced in the United States are attractive and a number of MTBE producers in the United States continue to produce to supply these markets. MTBE is currently more economic than many other components of gasoline and this has caused strong demand for MTBE, outside of the United States. To date, the net loss of methanol demand as a result of the changes occurring to gasoline formulations in the United States has had a relatively minor impact on the global methanol market. We continue to believe the impact of lower demand for methanol for MTBE consumed in the United States in 2006 will be more than offset by increases in demand for methanol for MTBE elsewhere in the world as well as demand growth related to other derivatives.

It is our view that global supply and demand fundamentals continue to support a high price environment. As expected, the market experienced some volatility in the second quarter, partly due to the phase-out of MTBE demand in the United States, and, accordingly, we decreased contract prices in May and again in July.

The Methanex non-discounted posted price in the United States is $333 per tonne for July, compared with $356 per tonne in April. The European quarterly contract price for the third quarter of 2006 is EUR 250 (US$315 per tonne at the time of settlement compared with US$348 per tonne for the second quarter of 2006). The Methanex non-discounted posted price in Asia is $305 per tonne for July, compared with $330 per tonne in April.



Methanex Non Discounted Regional
Posted Contract Prices(1)

July April
US$ PER TONNE 2006 2006
---------------------------------------------------------------------
---------------------------------------------------------------------
United States $ 333 $ 356
Europe(2) $ 315 $ 348
Asia $ 305 $ 330

(1) Discounts from our posted prices are offered to customers based
on various factors.
(2) EUR 250 at July 2006 (April 2006 - EUR 285) converted to United
States dollars at the date of settlement.
---------------------------------------------------------------------

 


Despite these recent price decreases, we believe that global supply and demand fundamentals remain very strong and as a result, we increased our August posted contract price in the United States by US$10 per tonne to US$343 per tonne. Given the large number of maintenance outages that occurred in the latter part of the second quarter, global inventories are lower at the start of the third quarter than they were in the first half of the year. As we enter the third quarter, demand continues to be strong and several more maintenance outages have been announced. At the beginning of the third quarter approximately 1.1 million tonnes of annualized capacity was either permanently shut down or idled, including plants in the Netherlands and Germany as well as our own plant in New Zealand which was idled on July 10. As a result of these and other factors, we expect the methanol market to be tight during the third quarter.

LIQUIDITY AND CAPITAL RESOURCES

Cash flows from operating activities before changes in non-cash working capital in the second quarter of 2006 were $129.5 million compared with $98.5 million for the same period in 2005. During the second quarter of 2006, our non-cash working capital decreased by $47 million. Approximately one-half of this relates to a cash inflow on collection of the Chile IV incentive tax credit. The remaining decrease in our non-cash working capital is primarily due to the timing of cash payments of our trade payables.

During the second quarter of 2006, we repurchased for cancellation a total of 2.3 million common shares at an average price of US$22.66 per share, totaling $52 million. This includes 1.5 million common shares repurchased under a normal course issuer bid that expired May 16, 2006 and 0.8 million common shares repurchased under a new normal course issuer bid that commenced May 17, 2006. On closing of the normal course issuer bid that expired at May 16, 2006, we had repurchased a total of 9.4 million common shares at an average price of US$18.65 per share, totaling $175 million. On May 9, 2006, the new normal course issuer bid was approved. This bid commenced May 17, 2006 and expires May 16, 2007 and allows us to repurchase for cancellation up to 5.5 million common shares.

Also during the second quarter of 2006, our Board of Directors approved a 14% increase in our regular quarterly dividend to shareholders, from US$0.11 per share to US$0.125 per share. During the second quarter of 2006 we paid quarterly dividends of approximately $14 million.

We are developing a methanol project in Eqypt with our joint venture partners. The proposed project involves the construction of a 1.3 million tonne per year methanol facility at Damietta Port on the Meditteranean Sea. We continue to make progress in meeting project milestones and expect to make a final decision to proceed with this project before the end of 2006.We have excellent financial capacity and flexibility. Our cash balance at June 30, 2006 was $174 million and we have a strong balance sheet and an undrawn $250 million credit facility. The planned capital maintenance expenditure program directed towards major maintenance, turnarounds and catalyst changes is currently estimated to total approximately $75 million for the period to the end of 2008.

We have the financial capacity and flexibility to complete our capital maintenance spending program, pursue new opportunities to enhance our leadership position in the methanol industry and continue to deliver on our commitment to return excess cash to shareholders.



The credit ratings for our unsecured notes at June 30, 2006 were as
follows:
---------------------------------------------------------------------
---------------------------------------------------------------------
Standard & Poor's Rating Services BBB- (negative)
Moody's Investor Services Ba1 (stable)
Fitch Ratings BBB (stable)

Credit ratings are not recommendations to purchase, hold or sell
securities and do not comment on market price or suitability for a
particular investor. There is no assurance that any rating will
remain in effect for any given period of time or that any rating
will not be revised or withdrawn entirely by a rating agency in
the future.
---------------------------------------------------------------------

 


SHORT-TERM OUTLOOK

We expect that global supply/demand fundamentals will continue to be favourable. We believe that strong demand and low global inventory levels will continue to support a high pricing environment. Although there is likely to be price volatility as the year progresses, barring a major unexpected event such as a recession, we continue to believe that the methanol pricing environment should remain strong for the remainder of the year.

The methanol price will ultimately depend on industry operating rates, the rate of industry restructuring and the strength of global demand. We believe that our excellent financial position and financial flexibility, outstanding global supply network and low cost position will provide the sound basis for Methanex continuing to be the leader in the methanol industry.

ADDITIONAL INFORMATION - SUPPLEMENTAL NON-GAAP MEASURES

In addition to providing measures prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP), we present certain supplemental non-GAAP measures. These are Adjusted EBITDA, income before unusual items (after-tax), diluted income before unusual items (after-tax) per share, operating income and cash flows from operating activities before changes in non-cash working capital. These measures do not have any standardized meaning prescribed by Canadian GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. We believe these measures are useful in evaluating the operating performance and liquidity of the Company's ongoing business. These measures should be considered in addition to, and not as a substitute for, net income, cash flows and other measures of financial performance and liquidity reported in accordance with Canadian GAAP.

Adjusted EBITDA

This supplemental non-GAAP measure is provided to assist readers in determining our ability to generate cash from operations. We believe this measure is useful in assessing performance and highlighting trends on an overall basis. We also believe Adjusted EBITDA is frequently used by securities analysts and investors when comparing our results with those of other companies. Adjusted EBITDA differs from the most comparable GAAP measure, cash flows from operating activities, primarily because it does not include changes in non-cash working capital, other cash payments related to operating activities, stock-based compensation, other non-cash items, interest expense, interest and other income, and current income taxes.

The following table shows a reconciliation of cash flows from operating activities to Adjusted EBITDA:



Three Months Ended Six Months Ended
---------------------------- -------------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2006 2006 2005 2006 2005
------------------------------------------------ -------------------
------------------------------------------------ -------------------
Cash flows from
operating
activities $ 176,960 $ 20,074 $ 114,469 $ 197,034 $ 207,396
Add (deduct):
Changes in
non-cash working
capital (47,467) 93,865 (15,962) 46,398 5,221
Other cash payments 1,362 5,872 1,019 7,234 2,611
Stock-based
compensation (7,463) (6,019) (2,186) (13,482) (6,752)
Other non-cash
items (681) (1,533) (2,987) (2,214) (2,587)
Interest expense 10,945 10,958 10,514 21,903 19,575
Interest and
other income (3,772) (2,535) (108) (6,307) (1,370)
Current income
taxes 23,129 45,864 14,831 68,993 30,196
------------------------------------------------ -------------------
Adjusted EBITDA $ 153,013 $ 166,546 $ 119,590 $ 319,559 $ 254,290
--------------------------------------------------------------------

 


Income before Unusual Items (after-tax) and Diluted Income before Unusual Items (after-tax) Per Share

These supplemental non-GAAP measures are provided to assist readers in comparing earnings from one period to another without the impact of unusual items that management considers to be non-operational and/or non-recurring. Diluted income before unusual items (after-tax) per share has been calculated by dividing income before unusual items (after-tax) by the diluted weighted average number of common shares outstanding.

The following table shows a reconciliation of net income to income before unusual items (after-tax) and the calculation of diluted income before unusual items (after-tax) per share:



Three Months Ended Six Months Ended
------------------------------ ---------------------
Jun 30 Mar 31 Jun 30 Jun 30 Jun 30
($ millions) 2006 2006 2005 2006 2005
--------------------------------------------- ---------------------
--------------------------------------------- ---------------------
Net income $ 82,097 $ 115,177 $ 62,935 $ 197,274 $ 138,967
Deduct
unusual
items:
Future income
taxes related
to change
in tax
legislation - (25,753) - (25,753) -
--------------------------------------------- ---------------------
Income before
unusual items
(after
-tax) $ 82,097 $ 89,424 $ 62,935 $ 171,521 $ 138,967

Diluted weighted
average number
of common
shares
outstanding
110,013,684 112,906,385 118,938,355 111,451,670 119,982,283
Diluted income
before unusual
items
(after-tax)
per share $ 0.75 $ 0.79 $ 0.53 $ 1.54 $ 1.16
---------------------------------------------------------------------

 


Operating Income and Cash Flows from Operating Activities before Non-Cash Working Capital

Operating income and cash flows from operating activities before changes in non-cash working capital are reconciled to Canadian GAAP measures in our consolidated statements of income and consolidated statements of cash flows, respectively.

QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected financial information for the prior eight quarters is as follows:



Three Months Ended
--------------------------------------------
($ thousands, except Jun 30 Mar 31 Dec 31 Sep 30
per share amounts) 2006 2006 2005 2005
--------------------------------------------------------------------
--------------------------------------------------------------------
Revenue $ 460,915 $ 459,590 $ 459,615 $ 349,291
Net Income (loss) 82,097 115,177 48,574 (21,789)
Basic net income (loss)
per common share 0.75 1.02 0.42 (0.19)
Diluted net income
(loss) per common
share 0.75 1.02 0.42 (0.19)
---------------------------------------------------------------------


Three Months Ended
--------------------------------------------
($ thousands, except Jun 30 Mar 31 Dec 31 Sep 30
per share amounts) 2005 2005 2004 2004
--------------------------------------------------------------------
--------------------------------------------------------------------
Revenue $ 410,914 $ 438,300 $ 485,408 $ 428,840
Net Income 62,935 76,032 66,061 71,178
Basic net income
per common share 0.53 0.63 0.55 0.59
Diluted net income
per common share 0.53 0.63 0.54 0.58
--------------------------------------------------------------------

 


Our quarterly revenues are not materially impacted by seasonality. However, during the period May to August (the winter season in the southern hemisphere) in each of 2004 and 2005, our Chilean production facilities experienced production losses of approximately 50,000 tonnes and 100,000 tonnes, respectively, as a result of curtailments of natural gas resulting from redirection orders from the Argentinean government. During the second quarter of 2006, we did not experience any significant curtailments of natural gas as a result of redirection orders from the Argentinean government. There can be no assurance that natural gas supply to our facilities will not be impacted in the future. See our 2005 Annual Report for further details.

HOW WE ANALYZE OUR BUSINESS

We review our results of operations by analyzing changes in the components of our Adjusted EBITDA (refer to Supplemental Non-GAAP Measures for a reconciliation to the most comparable GAAP measure), depreciation and amortization, interest expense, interest and other income, unusual items and income taxes. In addition to the methanol that we produce at our facilities, we also purchase and re-sell methanol produced by others. We analyze the results of produced methanol sales separately from purchased methanol sales as the margin characteristics of each are very different.

Produced Methanol

The key drivers of changes in our Adjusted EBITDA for produced methanol are average realized price, sales volume and cash costs. We provide separate discussion of the changes in Adjusted EBITDA related to our core Chile and Trinidad production hubs and the changes in Adjusted EBITDA related to our Kitimat and New Zealand facilities.

Our low cost production hubs in Chile and Trinidad are underpinned by long-term take-or-pay natural gas purchase agreements and the operating results for these facilities represent a substantial portion of our Adjusted EBITDA. Accordingly, in our analysis of Adjusted EBITDA for our facilities in Chile and Trinidad we separately discuss the impact of changes in average realized price, sales volume and cash costs.

Our facilities in Kitimat and New Zealand incur higher production costs and their operating results represent a smaller proportion of our Adjusted EBITDA. To eliminate our exposure to high cost North American natural gas feedstock, we permanently closed our Kitimat production facility on November 1, 2005. Our 530,000 tonne per year Waitara Valley facility in New Zealand has been positioned as a flexible production asset. The impact of changes in average realized price, sales volume and cash costs on the Adjusted EBITDA for our Kitimat and New Zealand facilities has been combined and presented as the change in cash margin.

The price, cash cost and volume variances included in our Adjusted EBITDA analysis for produced methanol are defined and calculated as follows:

PRICE - The change in our Adjusted EBITDA as a result of changes in average realized price is calculated as the difference from period-to-period in the selling price of produced methanol multiplied by the current period sales volume of produced methanol. Sales under long-term contracts where the prices are either fixed or linked to our costs plus a margin are included as sales of produced methanol. Accordingly, the selling price of produced methanol will differ from the selling price of purchased methanol.

COST - The change in our Adjusted EBITDA as a result of changes in cash costs is calculated as the difference from period-to-period in cash costs per tonne multiplied by the sales volume of produced methanol in the current period plus the change in unabsorbed fixed cash costs. The change in selling, general and administrative expenses and fixed storage and handling costs are included in the analysis of methanol produced at our Chile and Trinidad facilities.

VOLUME - The change in our Adjusted EBITDA as a result of changes in sales volume is calculated as the difference from period-to-period in the sales volume of produced methanol multiplied by the margin per tonne for the prior period. The margin per tonne is calculated as the selling price per tonne of produced methanol less absorbed fixed cash costs per tonne and variable cash costs per tonne.

Purchased Methanol

The cost of sales of purchased methanol consists principally of the cost of the methanol itself, which is directly related to the price of methanol at the time of purchase. Accordingly, the analysis of purchased methanol and its impact on our Adjusted EBITDA is discussed on a net margin basis.

FORWARD-LOOKING STATEMENTS

Information contained in this Management's Discussion and Analysis contains forward-looking statements. 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. Methanex believes that it has a reasonable basis for making such forward-looking statements. However, forward-looking statements, by their nature, involve risks and uncertainties that could cause actual results to differ materially from those contemplated by the forward-looking statements. The risks and uncertainties include those attendant with producing and marketing methanol and successfully carrying out major capital expenditure projects in various jurisdictions, the ability to successfully carry out corporate initiatives and strategies, conditions in the methanol and other industries including the supply and demand balance for methanol, actions of competitors and suppliers, world-wide economic conditions and other risks described in our 2005 Management's Discussion & Analysis which is available on SEDAR at www.sedar.com and EDGAR at www.sec.gov.

Undue reliance should not be placed on forward-looking statements. They are not a substitute for the exercise of one's own due diligence and judgment. The outcomes anticipated in forward-looking statements may not occur and we do not undertake to update forward-looking statements.



Methanex Corporation
Consolidated Statements of Income (unaudited)
(thousands of US dollars, except number of common shares and
per share amounts)

Three Months Ended Six Months Ended
------------------------ -------------------------
Jun 30 Jun 30 Jun 30 Jun 30
2006 2005 2006 2005
--------------------------------------------------------------------
--------------------------------------------------------------------

Revenue $ 460,915 $ 410,914 $ 920,505 $ 849,214

Cost of sales and
operating expenses 307,902 291,324 600,946 594,924
Depreciation and
amortization 24,338 21,531 47,961 41,484
--------------------------------------------------------------------
Operating income
before undernoted
items 128,675 98,059 271,598 212,806
Interest expense
(note 9) (10,945) (10,514) (21,903) (19,575)
Interest and
other income 3,772 108 6,307 1,370
--------------------------------------------------------------------
Income before
income taxes 121,502 87,653 256,002 194,601

Income taxes:
Current (23,129) (14,831) (68,993) (30,196)
Future (16,276) (9,887) (15,488) (25,438)
Future income
taxes related
to change in tax
legislation
(note 5) - - 25,753 -
--------------------------------------------------------------------
(39,405) (24,718) (58,728) (55,634)
--------------------------------------------------------------------
Net income $ 82,097 $ 62,935 $ 197,274 $ 138,967
--------------------------------------------------------------------
--------------------------------------------------------------------

Net income per
common share:
Basic $ 0.75 $ 0.53 $ 1.78 $ 1.17
Diluted $ 0.75 $ 0.53 $ 1.77 $ 1.16

Weighted
average number
of common
shares
outstanding:
Basic 109,658,750 118,369,623 111,016,514 119,162,266
Diluted 110,013,684 118,938,355 111,451,670 119,982,283

Number of common
shares
outstanding at
period end 108,580,667 117,627,617 108,580,667 117,627,617

See accompanying notes to consolidated financial statements.



Methanex Corporation
Consolidated Balance Sheets (unaudited)
(thousands of US dollars, except number of common shares and per
share amounts)

Jun 30 Dec 31
2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 173,531 $ 158,755
Receivables 287,994 296,522
Inventories 163,503 140,104
Prepaid expenses 19,149 13,555
---------------------------------------------------------------------
644,177 608,936
Property, plant and equipment (note 2) 1,378,009 1,396,126
Other assets 109,196 101,045
---------------------------------------------------------------------
$ 2,131,382 $ 2,106,107
---------------------------------------------------------------------
---------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 215,123 $ 235,487
Current maturities on long-term debt (note 4) 14,032 14,032
Current maturities on other long-term
liabilities 19,128 9,663
---------------------------------------------------------------------
248,283 259,182
Long-term debt (note 4) 479,900 486,916
Other long-term liabilities 71,302 79,421
Future income tax liabilities (note 5) 320,809 331,074
Shareholders' equity:
Capital stock 483,369 502,879
Contributed surplus 6,474 4,143
Retained earnings 521,245 442,492
---------------------------------------------------------------------
1,011,088 949,514
---------------------------------------------------------------------
$ 2,131,382 $ 2,106,107
---------------------------------------------------------------------
---------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



Methanex Corporation
Consolidated Statements of Shareholders' Equity (unaudited)
(thousands of US dollars, except number of common shares and per
share amounts)

Total
Number of Contri- Sharehold-
Common Capital buted Retained ers'
Shares Stock Surplus Earnings Equity
--------------------------------------------------------------------
Balance, December
31, 2004 120,022,417 $ 523,255 $ 3,454 $ 422,535 $ 949,244
Net income - - - 165,752 165,752
Compensation
cost recorded
for stock
options - - 2,849 - 2,849
Proceeds on
issue of
shares on
exercise of
stock options 1,338,475 10,621 - - 10,621
Reclassification
of grant date
fair value on
exercise of
stock options - 2,160 (2,160) - -
Payments for
shares
repurchased (7,715,600) (33,157) - (97,806) (130,963)
Dividend
payments - - - (47,989) (47,989)
--------------------------------------------------------------------
Balance, December
31, 2005 113,645,292 502,879 4,143 442,492 949,514
Net income - - - 115,177 115,177
Compensation
cost recorded
for stock
options - - 762 - 762
Proceeds on
issue of
shares on
exercise of
stock options 194,736 1,889 - - 1,889
Reclassification
of grant date
fair value on
exercise of
stock options - 214 (214) - -
Payments for
shares
repurchased (3,199,600) (14,143) - (50,964) (65,107)
Dividend
payments - - - (12,239) (12,239)
---------------------------------------------------------------------
Balance, March
31, 2006 110,640,428 490,839 4,691 494,466 989,996
Net income - - - 82,097 82,097
Compensation
cost recorded
for stock
options - - 2,358 - 2,358
Proceeds on
issue of
shares on
exercise of
stock options 240,939 2,376 - - 2,376
Reclassification
of grant date
fair value on
exercise of
stock options - 575 (575) - -
Payments for
shares
repurchased (2,300,700) (10,421) - (41,707) (52,128)
Dividend
payments - - - (13,611) (13,611)
--------------------------------------------------------------------
Balance, June
30, 2006 108,580,667 $ 483,369 $ 6,474 $ 521,245 $ 1,011,088
--------------------------------------------------------------------
--------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



Methanex Corporation
Consolidated Statements of Cash Flows (unaudited)
(thousands of US dollars, except number of common shares and per
share amounts)



Three Months Ended Six Months Ended
------------------- -----------------------
Jun 30 Jun 30 Jun 30 Jun 30
2006 2005 2006 2005
--------------------------------------------------------------------
--------------------------------------------------------------------

CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 82,097 $ 62,935 $ 197,274 $ 138,967
Add (deduct):
Depreciation and
amortization 24,338 21,531 47,961 41,484
Future income taxes 16,276 9,887 (10,265) 25,438
Stock-based compensation 7,463 2,186 13,482 6,752
Other non-cash items 681 2,987 2,214 2,587
Other cash payments (1,362) (1,019) (7,234) (2,611)
--------------------------------------------------------------------
Cash flows from
operating activities
before undernoted 129,493 98,507 243,432 212,617
Changes in non-cash
working capital
(note 8) 47,467 15,962 (46,398) (5,221)
--------------------------------------------------------------------
176,960 114,469 197,034 207,396
--------------------------------------------------------------------

CASH FLOWS FROM FINANCING
ACTIVITIES
Payments for shares
repurchased (52,128) (42,273) (117,235) (66,773)
Dividend payments (13,611) (12,942) (25,850) (22,541)
Proceeds on issue
of shares on exercise
of stock options 2,376 3,675 4,265 9,944
Funding of debt service
reserve account (2,301) - (2,301) -
Repayment of limited
recourse long-term debt (7,016) (4,032) (7,016) (4,032)
Repayment of other
long-term liabilities (2,515) (5,689) (3,725) (5,727)
--------------------------------------------------------------------
(75,195) (61,261) (151,862) (89,129)
--------------------------------------------------------------------

CASH FLOWS FROM INVESTING
ACTIVITIES
Property, plant and
equipment and other
assets (21,206) (23,849) (28,739) (32,622)
Plant and equipment
construction costs - (19,766) - (31,958)
Changes in non-cash
working capital - (895) (1,657) 2,376
--------------------------------------------------------------------
(21,206) (44,510) (30,396) (62,204)
--------------------------------------------------------------------
Increase in cash and
cash equivalents 80,559 8,698 14,776 56,063
Cash and cash
equivalents,
beginning of period 92,972 257,414 158,755 210,049
--------------------------------------------------------------------
Cash and cash
equivalents, end of
period $ 173,531 $ 266,112 $ 173,531 $ 266,112
--------------------------------------------------------------------
--------------------------------------------------------------------

SUPPLEMENTARY CASH FLOW
INFORMATION
Interest paid, net
of capitalized
interest $ 5,567 $ 1,421 $ 18,564 $ 21,533
Income taxes paid,
net of amounts
refunded $ 25,507 $ 17,113 $ 61,374 $ 23,852

See accompanying notes to consolidated financial statements.


Methanex Corporation
Notes to Consolidated Financial Statements (unaudited)
Except where otherwise noted, tabular dollar amounts are stated in
thousands of US dollars.

 


1. Basis of presentation

These interim consolidated financial statements are prepared in accordance with generally accepted accounting principles in Canada on a basis consistent with those followed in the most recent annual consolidated financial statements. These accounting principles are different in some respects from those generally accepted in the United States and the significant differences are described and reconciled in Note 12. These interim consolidated financial statements do not include all note disclosures required by Canadian generally accepted accounting principles for annual financial statements, and therefore should be read in conjunction with the annual consolidated financial statements included in the Methanex Corporation 2005 Annual Report.



2. Property, plant and equipment

Accumulated
Cost Depreciation Net Book Value
---------------------------------------------------------------------
---------------------------------------------------------------------
June 30, 2006
Plant and equipment $ 2,728,921 $ 1,425,679 $ 1,303,242
Other 113,746 38,979 74,767
---------------------------------------------------------------------
$ 2,842,667 $ 1,464,658 $ 1,378,009
---------------------------------------------------------------------
December 31, 2005
Plant and equipment $ 2,711,775 $ 1,383,105 $ 1,328,670
Other 101,718 34,262 67,456
---------------------------------------------------------------------
$ 2,813,493 $ 1,417,367 $ 1,396,126
---------------------------------------------------------------------

 


3. Interest in Atlas joint venture

The Company has a 63.1% joint venture interest in Atlas Methanol Company (Atlas). Atlas owns a 1.7 million tonne per year methanol production facility in Trinidad. Included in the consolidated financial statements are the following amounts representing the Company's proportionate interest in Atlas:



Jun 30 Dec 31
Consolidated Balance Sheets 2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Cash and cash equivalents $ 28,517 $ 24,032
Other current assets 28,875 32,937
Property, plant and equipment 274,127 281,765
Other assets 20,289 20,409
Accounts payable and accrued liabilities 25,241 30,340
Future income tax liabilities (note 5) 10,742 21,988
Long-term debt, including current maturities
(note 4) 143,932 150,948
---------------------------------------------------------------------



Three Months Ended Six Months Ended
------------------- ------------------
Consolidated Statements Jun 30 Jun 30 Jun 30 Jun 30
of Income 2006 2005 2006 2005
------------------------------------------------- ------------------
------------------------------------------------- ------------------
Revenue $ 43,479 $ 52,629 $ 91,930 $ 103,594
Expenses (36,244) (40,897) (76,089) (80,279)
--------------------------------------------------------------------
Income before income taxes 7,235 11,732 15,841 23,315
Future income taxes (note 5) (2,532) - 11,246 -
--------------------------------------------------------------------
Net income $ 4,703 $ 11,732 $ 27,087 $ 23,315
--------------------------------------------------------------------



Three Months Ended Six Months Ended
------------------- ------------------
Consolidated Statements Jun 30 Jun 30 Jun 30 Jun 30
of Cash Flows 2006 2005 2006 2005
------------------------------------------------- ------------------
------------------------------------------------- ------------------
Cash inflows from operating
activities $ 14,306 $ 2,592 $ 22,960 $ 13,851
Cash outflows from financing
activities (7,016) (4,032) (7,016) (4,032)
Cash outflows from investing
activities (322) (2,216) (399) (3,808)
---------------------------------------------------------------------


4. Long-term debt:

Jun 30 Dec 31
2006 2005
--------------------------------------------------------------------
--------------------------------------------------------------------
Unsecured notes
8.75% due August 15, 2012 $ 200,000 $ 200,000
6.00% due August 15, 2015 150,000 150,000
--------------------------------------------------------------------
350,000 350,000
Atlas limited recourse debt facilities 143,932 150,948
--------------------------------------------------------------------
493,932 500,948
Less current maturities (14,032) (14,032)
--------------------------------------------------------------------
$ 479,900 $ 486,916
--------------------------------------------------------------------

 


The limited recourse debt facilities of Atlas are described as limited recourse as they are secured only by the assets of the joint venture.

5. Future income taxes related to change in tax legislation:

During 2005, the Government of Trinidad and Tobago introduced new tax legislation retroactive to January 1, 2004. As a result, during 2005 we recorded a $16.9 million charge to increase future income tax expense to reflect the retroactive impact for the period January 1, 2004 to December 31, 2004. In February 2006, the Government of Trinidad and Tobago passed an amendment to this legislation that changes the retroactive date to January 1, 2005. As a result of the amendment we recorded an adjustment to decrease future income taxes by a total of $25.8 million. The adjustment is made up of the reversal of the previous charge to 2005 earnings of $16.9 million and an additional adjustment of $8.9 million to recognize the benefit of tax deductions that were reinstated as a result of the change in the implementation date.

6. Net income per common share:

A reconciliation of the weighted average number of common shares outstanding is as follows:



Three Months Ended Six Months Ended
-------------------- -------------------------
Jun 30 Jun 30 Jun 30 Jun 30
2006 2005 2006 2005
------------------------------------------- -------------------------
------------------------------------------- -------------------------
Denominator for
basic net income
per common share 109,658,750 118,369,623 111,016,514 119,162,266
Effect of dilutive
stock options 354,934 568,732 435,156 820,017
---------------------------------------------------------------------
Denominator for
diluted net
income per common
share 110,013,684 118,938,355 111,451,670 119,982,283
---------------------------------------------------------------------


7. Stock-based compensation:

a) Stock options:

(i) Incentive stock options:

Common shares reserved for outstanding incentive stock options at
June 30, 2006:

Options Denominated in CAD$ Options Denominated in US$
--------------------------- --------------------------
Number of Weighted Number of Weighted
Stock Average Stock Average
Options Exercise Price Options Exercise Price
------------------------------------------ --------------------------
------------------------------------------ --------------------------
Outstanding at
December 31,
2005 316,650 $ 9.67 1,328,450 $ 13.29
Granted - - 348,675 20.76
Exercised (71,000) 12.21 (123,736) 9.36
Cancelled (8,000) 11.00 (3,250) 12.23
---------------------------------------------------------------------
Outstanding at
March 31, 2006 237,650 8.87 1,550,139 15.28
Granted - - 1,300,925 20.79
Exercised (32,250) 9.96 (208,689) 10.00
Cancelled - - (3,750) 17.85
---------------------------------------------------------------------
Outstanding at
June 30, 2006 205,400 $ 8.70 2,638,625 $ 18.41
---------------------------------------------------------------------


Information regarding the incentive stock options outstanding at
June 30, 2006 is as follows:

Options Outstanding Options Exercisable
at June 30, 2006 at June 30, 2006
--------------------------------- --------------------
Weighted
Average
Remaining Number of Weighted Number of Weighted
Range of Contractual Stock Average Stock Average
Exercise Life Options Exercise Options Exercise
Prices (Years) Outstanding Price Exercisable Price
------------------------------------------------ --------------------
Options
denominated
in CAD
$3.29 to 13.65 3.5 205,400 $ 8.70 205,400 $ 8.70
---------------------------------------------------------------------
Options
denominated
in USD
$6.45 to 10.01 6.4 323,875 $ 8.39 323,875 $ 8.39
$11.56 to 22.52 6.4 2,314,750 19.81 277,225 18.20
---------------------------------------------------------------------
6.4 2,638,625 $ 18.41 601,100 $ 12.92
---------------------------------------------------------------------

 


On March 3, 2006, the Board of Directors approved for grant 1,629,600 incentive stock options with an exercise price of US$20.76 per share. At the date of Board approval, the Company had 348,675 common shares reserved for incentive stock options and, accordingly, the number of incentive stock options granted was limited to 348,675. On May 9, 2006 shareholder approval was received to increase the number of common shares reserved for incentive stock options to 5,250,000 and therefore the remaining 1,280,925 incentive stock options were granted. An additional 20,000 incentive stock options were granted during the three months ended June 30, 2006 at an exercise price of US$22.52 per share.

(ii) Performance stock options:

As at June 30, 2006, there were 50,000 shares reserved for performance stock options with an exercise price of CAD $4.47. All outstanding performance stock options have vested and are exercisable.

(iii) Compensation expense related to stock options:

For the three and six month periods ended June 30, 2006, compensation expense related to stock options included in cost of sales and operating expenses is $2.4 million (2005 - $0.8 million) and $3.1 million (2005 - $1.3 million), respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:



2006 2005
---------------------------------------------------------------------
---------------------------------------------------------------------
Risk-free interest rate 5% 4%
Expected dividend yield 2% 2%
Expected life 5 years 5 years
Expected volatility 40% 43%
Expected forfeitures 5% 5%
Weighted average fair value of options granted
($US per share) $ 8.82 $ 6.51
---------------------------------------------------------------------


b) Deferred, restricted and performance share units:

Deferred, restricted and performance share units outstanding at
June 30, 2006 are as follows:

Number of Number of Number of
Deferred Share Restricted Share Performance
Units Units Share Units
--------------------------------------------------------------------
--------------------------------------------------------------------
Outstanding at
December 31, 2005 427,264 1,089,836 -
Granted 29,110 20,000 402,460
Granted in-lieu of
dividends 2,430 5,994 2,173
Cancelled - (14,964) -
--------------------------------------------------------------------
Outstanding at
March 31, 2006 458,804 1,100,866 404,633
Granted 1,369 - -
Granted in-lieu of
dividends 1,673 5,905 2,327
Redeemed - (71,237) -
Cancelled - (5,131) (2,222)
--------------------------------------------------------------------
Outstanding at
June 30, 2006 461,846 1,030,403 404,738
--------------------------------------------------------------------

 


On March 3, 2006, the Company granted 402,460 performance share units. Performance share units are grants of notional common shares 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. The performance share units granted on March 3, 2006 will vest on December 31, 2008.

Compensation expense for deferred, restricted and performance share units is initially measured at fair value based on the market value of the Company's common shares and is recognized over the related service period. Changes in fair value are recognized in earnings for the proportion of the service that has been rendered at each reporting date. The fair value of deferred, restricted and performance share units at June 30, 2006 was $43 million compared with the recorded liability of $26 million. The difference between the fair value and the recorded liability of $17 million will be recognized over the weighted average remaining service period of approximately 1.9 years.

For the three and six month periods ended June 30, 2006, compensation expense related to deferred, restricted and performance share units included in cost of sales and operating expenses was $5.0 million (2005 - $1.0 million) and $10.3 million (2005 - $5.0 million), respectively. For the three and six month periods ended June 30, 2006, the compensation expense included $2.4 million (2005 - recovery of $1.0 million) and $4.9 million (2005 - $0.9 million), respectively, related to the effect of the change in the Company's share price.

8. Changes in non-cash working capital related to operating activities:

The decrease (increase) in non-cash working capital related to operating activities are as follows:



Three Months Ended Six Months Ended
------------------- ---------------------
Jun 30 Jun 30 Jun 30 Jun 30
2006 2005 2006 2005
--------------------------------------------- ---------------------
--------------------------------------------- ---------------------
Receivables $ 21,199 $ 14,108 $ 8,528 $ 47,698
Inventories 4,060 7,287 (20,435) (152)
Prepaid expenses (6,787) (7,477) (5,594) (2,184)
Accounts payable and
accrued liabilities 28,995 2,044 (28,897) (50,583)
--------------------------------------------------------------------
$ 47,467 $ 15,962 $ (46,398) $ (5,221)
--------------------------------------------------------------------


9. Interest expense:

Three Months Ended Six Months Ended
------------------- ---------------------
Jun 30 Jun 30 Jun 30 Jun 30
2006 2005 2006 2005
--------------------------------------------- ---------------------
--------------------------------------------- ---------------------
Interest expense before
capitalized interest $ 10,945 $ 14,072 $ 21,903 $ 27,339
Less: capitalized interest
related to Chile IV - (3,558) - (7,764)
-------------------------------------------------------------------
$ 10,945 $ 10,514 $ 21,903 $ 19,575
-------------------------------------------------------------------

 


10. Retirement plans:

Total net pension expense for the Company's defined benefit and defined contribution pension plans during the three and six month periods ended June 30, 2006 was $1.8 million (2005 - $1.5 million) and $3.0 million (2005 - $2.5 million), respectively.

11. Derivative financial instruments:

As at June 30, 2006, the Company's forward exchange contracts to purchase and sell foreign currency in exchange for US dollars were as follows:



Average
Exchange
Notional Amount Rate Maturity
---------------------------------------------------------------------
---------------------------------------------------------------------
Forward exchange purchase
contracts
New Zealand dollar 14 million 0.6007 2006
Chilean peso 15 billion 0.0019 2006
Forward exchange sales
contracts
Euro 61 million 1.2445 2006
Chilean peso 30 billion 0.0019 2006
British pound 2 million 1.7489 2006
---------------------------------------------------------------------

 


As at June 30, 2006, the carrying value of the forward exchange purchase and sales contracts was a liability of $0.4 million which approximates the fair value of these contracts. The Company also has an interest rate swap contract recorded in other long-term liabilities with a carrying value of negative $1.0 million which approximates fair value.

12. United States Generally Accepted Accounting Principles:

The Company follows generally accepted accounting principles in Canada ("Canadian GAAP") which are different in some respects from those applicable in the United States and from practices prescribed by the United States Securities and Exchange Commission ("US GAAP").

The significant differences between Canadian GAAP and US GAAP with respect to the Company's consolidated statements of income for the three month and six month periods ended June 30, 2006 and 2005 are as follows:



Three Months Ended Six Months Ended
------------------- --------------------
Jun 30 Jun 30 Jun 30 Jun 30
2006 2005 2006 2005
---------------------------------------------- --------------------
---------------------------------------------- --------------------
Net income in accordance
with Canadian GAAP $ 82,097 $ 62,935 $ 197,274 $ 138,967
Add (deduct) adjustments
for:
Depreciation and
amortization (a) (478) (478) (956) (956)
Stock-based
compensation (b) 17 240 (128) 115
Forward exchange
contracts (c) - (125) - (306)
Income tax effect of
above adjustments 167 211 335 430
--------------------------------------------------------------------
Net income in accordance
with US GAAP $ 81,803 $ 62,783 $ 196,525 $ 138,250
--------------------------------------------------------------------

--------------------------------------------------------------------
Per share information in
accordance with US GAAP:
Basic net income per
share $ 0.75 $ 0.53 $ 1.77 $ 1.16
Diluted net income per
share $ 0.74 $ 0.53 $ 1.76 $ 1.15
--------------------------------------------------------------------


The consolidated statements of comprehensive income for the three
month and six month periods ended June 30, 2006 and 2005 are as
follows:


Three Months Ended Six Months Ended
------------------- --------------------
Jun 30 Jun 30 Jun 30 Jun 30
2006 2005 2006 2005
---------------------------------------------- --------------------
---------------------------------------------- --------------------
Net income in accordance
with US GAAP $ 81,803 $ 62,783 $ 196,525 $ 138,250
Other comprehensive
income:
Change in fair value of
forward exchange
contracts (c) - - - 142
--------------------------------------------------------------------
Comprehensive income
in accordance with
US GAAP $ 81,803 $ 62,783 $ 196,525 $ 138,392
--------------------------------------------------------------------

(a) Business Combinations: Effective January 1, 1993, the Company
combined its business with a methanol business located in New
Zealand and Chile. Under Canadian GAAP, the business
combination was accounted for using the pooling-of-interest
method. Under US GAAP, the business combination would have been
accounted for as a purchase with the Company identified as the
acquirer. During the three and six month periods ended June 30,
2006, an increase to depreciation expense of $0.5 million
(2005 - $0.5 million) and $1.0 million (2005 - $1.0 million)
respectively, was recorded in accordance with US GAAP.

(b) Stock-based compensation: The Company has 76,600 options that
are accounted for as a liability under US GAAP because the
exercise price of the stock options is denominated in a
currency other than the Company's functional currency or the
currency in which the optionee is normally compensated. For
Canadian GAAP purposes, no compensation expense has been
recorded as these options were granted in 2001 which is prior
to the effective implementation date for fair value accounting
under Canadian GAAP. During the three and six month periods
ended June 30, 2006, no adjustment to operating expenses
(2005 - decrease of $0.2 million) and an increase to operating
expenses of $0.1 million (2005 - decrease of $0.1 million),
respectively, was recorded in accordance with US GAAP.

(c) Forward exchange contracts: Under Canadian GAAP, forward
exchange contracts that are designated and qualify as hedges
are recorded at fair value and recognized in earnings when
the hedged transaction is recorded. Under US GAAP, forward
exchange contracts that are designated and qualify as hedges
are recorded at fair value at each reporting date, with the
change in fair value either being recognized in earnings to
offset the change in fair value of the hedged transaction, or
recorded in other comprehensive income until the hedged
transaction is recorded. The ineffective portion, if any, of
the change in fair value of forward exchange contracts that
are designated and qualify as hedges is immediately
recognized in earnings. For the three and six month periods
ended June 30, 2006, no adjustment to operating expenses
(2005 - increase of $0.1 million) and no adjustment to
operating expenses (2005 - increase of $0.3 million),
respectively, was recorded in accordance with US GAAP.

(d) Interest in Atlas joint venture: US GAAP requires interests
in joint ventures to be accounted for using the equity
method. Canadian GAAP requires proportionate consolidation
of interests in joint ventures. The Company has not made an
adjustment in this reconciliation for this difference in
accounting principles because the impact of applying the
equity method of accounting does not result in any change
to net income or shareholders' equity. This departure from
US GAAP is acceptable for foreign private issuers under
the practices prescribed by the United States Securities
and Exchange Commission.

(e) Performance Share Units: On March 3, 2006, the Company
granted 402,460 performance share units. Performance share
units are grants of notional common shares 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. Under Canadian GAAP, the
fair value of performance share units is measured each
reporting period as the market price multiplied by the total
shareholder return result. This fair value is recognized
over the related service period with changes in fair value
being recognized in earnings for the proportion of the
service that has been rendered at each reporting date. Under
US GAAP, the fair value of performance share units is
calculated each reporting period using a pricing model
that incorporates the service and market conditions related
to the performance share units. This fair value is recognized
over the related service period with changes in fair value
being recognized in earnings for the proportion of the service
that has been rendered at each reporting date. For the three
and six month periods ended June 30, 2006, no adjustment to
operating expenses was recorded in accordance with US GAAP.



Methanex Corporation
Quarterly History (unaudited)

YTD
2006 Q2 Q1
--------------------------------------------------------------------

METHANOL SALES VOLUMES
(thousands of tonnes)

Company produced 2,672 1,351 1,321
Purchased product 591 294 297
Commission sales(1) 274 133 141
--------------------------------------------------------------------

3,537 1,778 1,759
--------------------------------------------------------------------

METHANOL PRODUCTION
(thousands of tonnes)

Chile 1,754 872 882
Titan, Trinidad 429 214 215
Atlas, Trinidad (63.1%) 526 273 253
New Zealand 222 118 104
Kitimat - - -
--------------------------------------------------------------------

2,931 1,477 1,454
--------------------------------------------------------------------

AVERAGE REALIZED METHANOL PRICE (2)

($/tonne) 281 279 283
($/gallon) 0.85 0.84 0.85


PER SHARE INFORMATION
($ per share)
Basic net income (loss) $ 1.78 0.75 1.02
Diluted net income (loss) $ 1.77 0.75 1.02



2005 Q4 Q3 Q2 Q1
--------------------------------------------------------------------

METHANOL SALES VOLUMES
(thousands of tonnes)

Company produced 5,341 1,504 1,130 1,332 1,375
Purchased product 1,174 285 325 269 295
Commission sales(1) 537 158 75 158 146
--------------------------------------------------------------------

7,052 1,947 1,530 1,759 1,816
--------------------------------------------------------------------

METHANOL PRODUCTION
(thousands of tonnes)

Chile 3,029 916 684 702 727
Titan, Trinidad 715 195 184 135 201
Atlas, Trinidad (63.1%) 895 251 157 252 235
New Zealand 343 - 120 103 120
Kitimat 376 34 102 120 120
--------------------------------------------------------------------

5,358 1,396 1,247 1,312 1,403
--------------------------------------------------------------------

AVERAGE REALIZED
METHANOL PRICE (2)

($/tonne) 254 256 240 256 262
($/gallon) 0.76 0.77 0.72 0.77 0.79


PER SHARE INFORMATION
($ per share)
Basic net income (loss) 1.41 0.42 (0.19) 0.53 0.63
Diluted net income (loss) 1.40 0.42 (0.19) 0.53 0.63



2004 Q4 Q3 Q2 Q1
--------------------------------------------------------------------

METHANOL SALES VOLUMES
(thousands of tonnes)

Company produced 5,298 1,531 1,307 1,233 1,227
Purchased product 1,960 402 423 600 535
Commission sales(1) 169 128 41 - -
--------------------------------------------------------------------

7,427 2,061 1,771 1,833 1,762
--------------------------------------------------------------------

METHANOL PRODUCTION
(thousands of tonnes)

Chile 2,692 690 640 666 696
Titan, Trinidad 740 154 176 220 190
Atlas, Trinidad (63.1%) 421 264 157 - -
New Zealand 1,088 266 304 229 289
Kitimat 486 122 121 121 122
--------------------------------------------------------------------

5,427 1,496 1,398 1,236 1,297
--------------------------------------------------------------------

AVERAGE REALIZED
METHANOL PRICE (2)

($/tonne) 237 251 248 225 223
($/gallon) 0.71 0.75 0.75 0.68 0.67


PER SHARE INFORMATION
($ per share)
Basic net income (loss) 1.95 0.55 0.59 0.43 0.39
Diluted net income (loss) 1.92 0.54 0.58 0.42 0.38


(1) Commission sales volumes include the 36.9% of production from
Atlas that we do not own.
(2) Average realized price is calculated as revenue, excluding
commissions earned, divided by the total sales volumes of
produced and purchased methanol. Prior to 2005, in-market
distribution costs were also deducted from revenue when
calculating average realized methanol price for presentation in
the Management's Discussion and Analysis. The presentation of
average methanol price for prior periods has been restated.

 




FOR FURTHER INFORMATION PLEASE CONTACT:


Methanex Corporation
Wendy Bach
Director, Investor Relations
(604) 661-2600
www.methanex.com