Methanex Kitimat to Provide Terminalling to Encana

Methanex Kitimat to Provide Terminalling to Encana

Overview:

Methanex, a methanol producing and selling company, agreed to provide terminalling services to Encana at Methanex's Kitimat. However, it recently announced to close down its methanol production at Kitimat and would still continue to use it to import methanol from other production facitilies through Kitimat.

Analysis and Recommendations:

Issue: Shutting down methanol production at Kitimat

Discontinued Operations Operating Expense

Kitimat is a reportable or operating segment that one can distinguish it from other operations of the company. Methanex used Kitimat as a separate operating unit on its financial reports.

Kitimat is a component of an entity where the operations, cash flows, and financial elements are clearly distinguishable from the rest of the enterprise.

Kitimat has its own asset group which generates its own net cash flows.

The agreement indicated that a probable sale could happen if either Methanex wants to sell Kitimat to Encana or Encana wants to buy Kitimat from Methanex. Therefore, an authorized paln to sell exists

After the announcement of shutting down Kitimat, the asset is available for immediate slae in its current state.

-Changes to the plan are unlikely to happen since the production of methanol and ammonia production was permanately closed on November 1st, 2005.

Before the agreement, all the production and selling expenses are considered as operating expenses.

After the agreement, the company still "used the Kitimat terminal facilities to import methanol from other production facilities through Kitimat" Kitimat can be still considered as part of the company's operating unit.

The terminal facilities do add value to the sale of methanol for the company, so it should be considered as an operating expense if the services are used.

"This will allow us to continue to provide a secure, long term supply of methanol to our customers in the Pacific Northwest" indicates that even by disposing Kitimat, Kitimat is still used by the company for operation purposes.

Conclusion: Treat the disposition of Kitimat as discontinued operations because the company does not use it for the production of