Methanex Corporation
Q1 2013 Earnings Call Transcript

Published: 26 Apr 2013

[Operator:]

All participants, ladies and gentlemen, thank you for standing by and welcome to the Methanex Corporation’s first quarter results conference call. I would now like to turn the conference call over to Ms. Sandra Daycock, Director of Investor Relations. Please go ahead, Ms. Daycock.

[Sandra Daycock:]

Thanks. Good morning, ladies and gentlemen. Our 2013 first quarter report, along with the presentation slides summarizing the Q1 results can be accessed at our website at www.methanex.com. I would like to remind our listeners that our comments and answers to your questions today may contain forward-looking information. This information, by its nature, is subject to risks and uncertainties that may cause the stated outcome to differ materially from the actual outcome. Certain material factors or assumptions were applied in drawing the conclusions or making the forecasts or projections, which are included in the forward-looking information. Please refer to our lastest MBNA and to our 2012 annual report for more information. For clarification, effective with this first quarter report, we account for the Atlas entity using the equity method of accounting. However, any references to EBITDA, cash flow or income made in today’s remarks reflect our 63.1% economic interest in the Atlas facility and our 60% economic interest in the Egypt facility. In addition, we reported an adjusted EBITDA and adjusted net income to exclude the mark-to-market impact on share-based compensation and other non-operating items. We report our results in this way to make them a better measure of underlying operating performance and we encourage analysts coving the company to report the results in this manner. I would like to know turn the call over to Mr. John Floren, Methanex’s President and CEO, for his comments and a question-and-answer period.

[John Floren:]

Good morning. You would have seen from our results, we had another very solid quarter, adjusted income of $0.92 per share and EBITDA of 149 million. We also are pleased to announce an increase in our dividend to $0.80 a share annualized and we are also extremely excited to proceed with the Geismar 2 relocation, which will commence once the Chile operation shuts down, which we expect to be in the near future and we expect to have that plant up and running in Geismar in the first quarter of 2016. Overall, the demand is good and it’s quite strong in Energy, fuel binding and MTO leading the way. The industry itself is dealing with ongoing production issues, which is leading to $100 price differential between the Atlantic and the Pacific basin. And we do not seem to think that that’s going to change in the short term. We also saw less production in Q1 versus Q4 in the industry. Our own production was quite good. We did have a number of unplanned outages, small ones in Trinidad and we had a fairly significant outage in New Zealand during the quarter. We are also experiencing some gas restrictions in Trinidad, but better than last year and we are ongoing restrictions in Egypt. These combined lead to about 100,000 tons of loss production in the first quarter. In Chile we have started to receive Argentina gas and we expect to receive it for about 40 days on average of around 500,000 cubic meters a day, which allowed us to make about 20,000 tons of methanol. We're doing this on a toll basis. We don't own the gas. We don't own the methanol. We're receiving gas from White (Inaudible) in Argentina tolling it for them and returning the methanol back to Argentina. As I mentioned, we expect to idle the Chile Three plant, which is running shortly due to a lack of gas in the basin and that's the plant that we plan to relocate to Geismar. We will spend some modest amounts of capital over the next three to five months to have Chile One ready to start later this year when we expect the gas availability in the region to allow us to operate at higher rates than we have been in the last 12 months. Egypt is consuming all of the available gas that we're getting in a very difficult environment. We're still comfortable with the guidance we've given of 70 percent operating rates for 2013. We're also pleased to announce that we have recently expanded our commercial relationship with LyondellBasell whereby we will offtake and market a significant portion of their merchant methanol supply once they're Channelview methanol plant restarts later this year. And as you go through our results you'll see that we've had quite a significant improvement in cost related to our supply chain our shipping and terminal. I know our team there has been working hard to look for ways to reduce costs and it's starting to show in the results. So I'll stop now and available to take questions.

[Operator:]

(Operator instructions). First question is from Jacob Bout of CIBC. Your line is now open. Please, go ahead.

[Jacob Bout CIBC Work Markets:]

Hello. Question on moving the plant from Chile to Geismar, in just the cost for the CapEx, it seems to be about $100 million from what you're talking about previously, I was just wondering what was the driver there?

[John Floren:]

Thanks for the question, Jacob. I think I got pressured quite a lot on the last call on we going to make a decision on relocating a second plant. I recall saying that things that we were looking for was the capital cost and confirming those. We are going to experience quite a bit of savings related to the first plant in relocating the second one with onetime cost. Unfortunately, as we've gone into the EPC market we have seen rates for engineering and labor increase. I think it's important for us to get out in front of the curve on moving this second plant because we do anticipate with the number of announcements not only in the methanol industry, but the chemical industry in general because of the shale gas, that we would expect rates to increase. We built quite a bit of contingencies in the Geismar 2 relocation because of the escalation in rates we're seeing. I'll remind you that we're doing these projects based on time-and-materials basis as opposed to a turnkey. So, we just thought it was prudent to build in quite a bit of contingency.

[Jacob Bout CIBC Work Markets:]

So, at this point it looks as if the – moving the plant, the second plant is going to be about the same cost?

[John Floren:]

Sorry, Jacob, you're breaking up there. Could you repeat it, please?

[Jacob Bout CIBC Work Markets:]

At this point it looks like the cost to move the second plant is going to be similar to the first plant?

[John Floren:]

Yeah, that's how I would characterize it, Jacob.

[Jacob Bout CIBC Work Markets:]

Okay. And then just the tolling agreement that you have in – with that Argentinian gas, does that change as far as the availability of gas for the two remaining plants in Chile? And just remind us is – the last time you got gas from Argentina was that back in 2007?

[John Floren:]

Yeah, you're right. The last time we did get any flows it was 2007. I think it's a fairly significant milestone just to be getting gas again from Argentina. Having said that, this is an arrangement that will come to an end here shortly. We're anticipating that to be able to access gas in the fall, not only in Chile, but optimistically from Argentina. Why is Argentina sending us gas? They need methanol. Argentina has biodiesel at 7% they're planning to increase that to 10%. And from their point of view it's a nice way. We have idle capacity. They have excess gas in their summer and they need methanol. So, it's a great win-win where they ship us gas, we make methanol and send it back to them. So, conditions should be similar in the fall, but there’s certainly no guarantees that we'll be getting Argentina gas, but we're optimistic.

[Jacob Bout CIBC Work Markets:]

They're a net importer of 20 to 30,000 tons?

[John Floren:]

Of methanol?

[Jacob Bout CIBC Work Markets:]

Yes.

[John Floren:]

I think what we understand, Jacob, they do make methanol as well in Argentina they probably need around a 100,000 tons of various others sources of methanol to meet their country needs.

[Jacob Bout CIBC Work Markets:]

Thank you.

[Operator:]

Thank you. The next question is from Ben Isaacson with Scotiabank. Please, go ahead.

[Ben Isaacson Scotiabank:]

Good morning. Thank you. Just maybe a follow up to Jacob's first question. Can you talk about how much contingency or maybe what the difference contingency is between Geismar 1 and Geismar 2? I guess I'm kind of looking at it is there risk now that Geismar one CapEx could go over budget?

[John Floren:]

Maybe I'll ask Michael MacDonald,our SVP of Global Operations, who is managing the project to comment.

[Michael MacDonald:]

Thanks, John. I don't want to get into specific numbers. What I just emphasize is that we are seeing some pressure. I think we're still on track on Geismar 1. We've actually just moved in the last week a couple of the big modules down in the staging area and so forth and getting ready for shipment. So that pilot project is going real well. The site preparation is going well. But what John commented before is really the point that we are seeing outward pressure on EPC in U.S. market and we think it's – as John said, we think it's prudent. I think also emphasizes the importance of us moving quickly on these projects, we get ahead of the engineering too for the whole industry. And I think it outlines considerable advantage that we see for our relocation compared to other people trying to build new capacity in the industry. So we're seeing an uptake in EPC generally, it’s not just going to impact our project, it's going to impact other people's products and other industries. So again, think we think it's just smart to announce get out there and get plants moving.

[Ben Isaacson Scotiabank:]

Okay. Thank you. And then just my second question. Are we now at risk of starting to see some demand destruction in European chemical derivative markets? I mean, the methanol price spreads between Europe and Asia has blown out so much I can't really see how this is sustainable. Thank you.

[John Floren:]

Yeah. Ben, we're not seeing any demand destruction per se because of the differential between the two basins. Most of the applications of – for methanol are makeup of a very small overall cost of end products. We're certainly seeing soft demand in Europe just because of the economic conditions. You know, Southern Europe continues to be a challenge. Northern Europe continues to chug alone, but it's not really related to the differential, any demands softness is not related to the differential between the two basins.

[Operator:]

Thank you the next question is from Laurence Alexander with Jefferies. Your line is now open, please go ahead.

[Laurence Alexander Jefferies:]

Good afternoon. I guess first of all on the demand destruction team are you seeing any indications of DME demand slipping in China? There's been some chatter in the trade press about another 8 to 9% methanol price increase. I just want to get a sense for how sustainable that might be?

[John Floren:]

Yeah. We have not seen any demand destruction to date on DME in China. In fact, rights are probably a little higher today than they would have been 30 days ago. We would do watch that affordability on methanol into DME in China because that is the energy application that would be the first one that maybe under pressure if oil prices continue to go down. The affordability of DME in China, in the southern part of China is quite a bit higher than the eastern part of China, so that we do focus on that. We believe that number today is around 370 to 375 somewhere in that area, Laurence. Some of those East China plants as well are integrated to methanol so they may have different operating conditions which may even, if they get below the affordability, socalled affordability they may continue to operate, which we've seen in the past, but as of right now we haven't seen any downtick in DME.

[Laurence Alexander Jefferies:]

And secondly on the tax rates I mean, it was low this quarter where will it shake out this year?

[John Floren:]

Maybe I'll ask your CFO, Ian Cameron, to comment on that.

[Ian Cameron CFO:]

So Laurence, the guidance that we've provided historically is that we do expect the structural tax rate to be about 20 to 25%. With the very low production levels in Chile, and that's where our highest tax rate is 35% percent, our tax rate structurally, temporarily anyway, is a little bit lower than that. So it's a little below 20%. So as long as Chile has low earnings we would expect that structural tax rate to get Chile back into operation and with Geismar coming on stream in 2014 we would see the structural tax rate to head more into that range at 20 to 25%.

[Laurence Alexander Jefferies:]

Thank you.

[Operator:]

(Operator Instructions). The next question is from Hassan Ahmed with Alembic Global. Please, go ahead.

[Hassan Ahmed Alembic Global:]

Hi there, John. Question around, you know, recently we have seen some downside on the crude oil side of things as well as Chinese coal prices. Now historically, obviously, there was a pretty tight linkage between the prices of these commodities and methanol and it seems methanol is kind of going in the other direction. So what do you attribute this delinkage to? Is it just effective utilization rates being quite tight?

[John Floren:]

Yeah, there's a number of questions and issues in. There coal did go down in China, but we've seen it stabilize for the last six to eight months at around $105 a ton equivalent U.S. that puts the cost curve somewhere between 350 and 360 and that's kind of where we see the cost curve selling out in China. With regards to oil, I mentioned DME and that's the one that trades, let's say more on its energy value of 3.7 or 4 to 1. The other energy applications don't trade higher on their energy content like fuel blending and MTO and biodiesel is more of a mandate thing than let's say an economic proposition. So the one we watch is DME and if we do see pricing continue to increase on methanol and oil going down and relative propane prices going down we could start to see, especially in East China, some downturn in DME. We haven't seen it yet, so we're watching, it's hard to predict the future. The price of methanol itself, it's really being driven more by supply outages in both basins, a number of unplanned and planned outages, anticipate that to continue in Q2. At the same time the energy applications like MTO are quite strong. Skyford in China operated better than anticipated and we saw in the other one that's on the coast that's going to use merchant methanol is expected to start commissioning sometime in the summer. So that, again, is going to use another million tons of methanol. So, these large applications, demand applications, tend to dwarf some of other noise that we see in the marketplace.

[Hassan Ahmed Alembic Global:]

Now in the past on the Chile side of things, in the past you guys had talked about maybe potentially considering coal gasification. I mean, is that something that you're still considering or is that off the table?

[John Floren:]

Yeah. Coal making methanol from coal is off the table in Chile. Even with the installed capacity we have there the capital costs were just far too high for us to consider making methanol from coal. There is an interesting project that's going on, a different company, we're supporting them with some technical expertise and they're thinking of making synthetic natural gas from coal. Early stages of that project, if it did go forward, you know, you’re talking three or four years down the road, I think that company, from what we understand, will make some sort of decisions in the coming months with regards to whether they're going to proceed or not, but it's early days.

[Hassan Ahmed Alembic Global:]

Fair enough. One final one if I may, you know, obviously, in the extreme near-term, you know, we have [inaudible] facility coming, coming up the second half of that year. I mean, you think there’s enough local, sort of North American demand to just to suck up that capacity? I mean, just trying to figure out net on pricing ramification.

[Hassan Ahmed Alembic Global:]

I think the global industry is growing quite nicely. The industry does need new production, so we're kind of happy that we are starting to see some new production. One of my biggest concerns on these energy applications is that methanol prices get out in front of affordability and we see what might have happened in California happening again, you know, where the methanol, because of pricing gets so far in front of the demand for energy that you destroy some of that demand. So I think the industry needs more production. We've announced, as I've just said in my comments, that we will be marketing a good part of that – those molecules. We have the ability to readjust our supply chain quite easily and significantly to make those molecules disappear in the North American market. So it's hard to predict what's going to be at the end of year. We anticipate them to come up at that time and we'll adjust or supply chain according.

[Hassan Ahmed Alembic Global:]

Very good thanks so much.

[Operator:]

Thank you. The next question is from Steve Hansen with Raymond James. Please, go ahead.

[Steve Hansen Raymond James:]

Good morning, everyone. John, on the Geismar 2 move, or G,2 I think it's sometimes called, you've obviously gone ahead with the FID decision, which is great news. I was just hoping you could provide us an update on how you and the Board feel about the potential for another gas contract, whether it be on a portion of the production or the full basis?

[John Floren:]

So, Steve, we’d prefer to have a gas contract link with the second one. I think what one of criteria to move a second one was to have a gas contract for the first one and we achieved that in January with Chesapeake. We're talking to a number of different players, not only in Geismar, but in Medicine Hat to secure longer-term gas contracts. We have nothing to report today. I think when we talked to gas suppliers when there is a firm project or a firm outlet for methanol that's not five years away that you can start taking gas in Medicine Hat tomorrow and in Geismar in early 2016, you get a lot more traction. So I know our team is working hard. I know we're the only company still that have achieved a tenyear contract with some sort of link other than to the forward curve on Nimex, so we're optimistic, but we've got a lot of work to do to bring it across the line.

[Steve Hansen Raymond James:]

And maybe this is followup to that on Medicine Hat. Can you give us an update on your current gas hedge position for Medicine Hat? I recall when you first got that plant up and running you had a good deal of hedges locked in lot of those are starting roll off at this point just trying to get a sense of where those hedge positions might be for this year and winter months.

[John Floren:]

Yes. Steve, it's not public, but I think we're a lot more comfortable with the gas in Medicine Hat. The original strategy when we started up is we wanted to, obviously, get the capital back, but we also guarantee, you know, our employees that rejoined us that we'd be keeping them employed for three years. So, I think we wanted to tie up gas to get our capital back, as well as to have a sustained run. Our view of the market today in Western Canada is quite optimistic. You know, the U.S. still imports quite a bit of natural gas from Canada. We would expect over the coming years for that to go down and the pipeline between Alberta and the coast is progressing slowly. So we do believe the Western Canada gas is going to be more stranded in the future than it has been up even up to now. So we're totally comfortable in being exposed more to the spot market than we have been in the last years. And I think those prices today are in the mid-350, 360, something like that. So, we are buying spot gas today and we do have some strips as well which do expire.

[Operator:]

Thank you the next question is from Alex (Shernick) with BMO Capital Markets. Please, go ahead.

[Alex (Shernick):]

Hi, just a question, I’m wondering if you could maybe touch on the operating rates in Trinidad and whether maybe we can expect similar run rates in Q2 as we saw in Q1?

[John Floren:]

Yes, so the operating rates in Trinidad, as I mentioned, we did have a number of negly outages, short-term outages mainly on a Titan plant. Since we've done the turn around on Alice it's ran it's run extremely well. We saw some gas restrictions in the quarter, not near as bad as 2012 and that was our anticipation going into the year we expected as the year goes on gas restrictions to be less. I think there's another pinch period in September, which we're seeing, but we are taking our Titan plant down at that time for turnaround, which was planned. So we expect, provided our plants run according to plan, that the production in Trinidad will be better in 2013 than they were in 2012.

[Alex (Shernick):]

Okay. Great thanks. And then just moving over to Machnewie and I guess the equipment failure there, what was the nature of that and was there, I guess, any kind of onetime cost or anything that would have been imbedded there in your numbers associated with that?

[John Floren:]

Sure, I'll ask Michael MacDonald to attend to that one, Alex.

[Michael MacDonald:]

Thanks, John. So, it was just an equipment failure, it took a little longer to get the plant back up and running, because we had quite a big fix to do. So, the team down there did a great job and it's nothing in terms of a huge capital cost to get it fixed. We've got some ongoing repairs that we're looking at to deal with the issue in the longer term. You’ve got to recall these are plants that started up in the 1980s, so we've got a little bit so the last stuff that we're dealing through that that was an example of that, but I think the team is right on top of it. And the real issue was the production outage for us and the volume that we lost, not the cost to actually get the plant back up and running.

[Alex (Shernick):]

Okay great thanks very helpful that's all for me thank you. Operator Thank you the next question is from Charles Neivert with Cowen Securities. Please, go ahead.

[Charles Neivert Cowen Securities:]

Yeah, I had two quick ones. Once you talked about bringing Chile 1 back online some time later this year when you get some gas. Can we anticipate what will we anticipate for run rates? I mean, back then were you getting round numbers near 100,000-plus tons out of that Chilean facilities when gas was a little bit more available, are we going to be able to see numbers up that high or are we looking more like we see more recently in the 50,000 to 60,000ton range? And then the other the follow on question is, there's been some noise and activity in the U.S. around possibly additional board plants and things like that that are going to consume a lot more formaldehyde and therefore, the possibility of demand increases of some substance in the U.S. coming from that front, which it's sort of been on a little bit of a decline lately. Have you been hearing any noise in those areas? I think Georgia Pacific was specifically mentioned as one that might be bringing up a new capacity for boards, you know, for structural boards.

[John Floren:]

Okay. First question on Chile 1, I think I mentioned that we anticipate, based on our current view, for gas in the fall to be running at higher rates in Chile than we have in the last 12 months, so that's our expectation. Again, it's hard to predict the future. There's a lot of work to do to put together a gas profile that makes sense. Whether Argentina is part of that or not, it’s still too early to tell. So we anticipate to be able to run that site higher than we have in the last 12 months and as we get closer we'll certainly disclose what our thoughts are. With regard to formaldehyde in the U.S. I haven't seen that particular announcement you're referring to. We do see the formaldehyde industry in general, because of how things start and refurbishments, etc., better than it was anticipate. The idle capacity that's out there to run at harder rates before new build, but I can't comment on what you're talking about, Charlie, because I haven't soon the announcement. But there is quite a bit of idle capacity or capacity that's running at less than full rates in the U.S. and we have started to see based on demand increase the capacities toes operating rates increase.

[Charles Neivert Cowen Securities:]

I'm guessing the announcements or at least the talk was about additional board capacity so that would obviously consume more formaldehyde and since it's new capacity it would therefore need for of the formaldehyde that's on the ground, so it just means maybe that the operating rates come up even higher, but again, it's early stage but the numbers were pretty large that they were talking about in terms of board feet and things like that.

[John Floren:]

It makes sense. I mean, I think board capacity probably per efficiencies, etc. new plants make sense as we see in South America, but I would be surprised if we saw additional resin or formaldehyde capacity, because there's quite a bit still that can be restarted or operated at a higher rates.

[Charles Neivert Cowen Securities:]

Okay. Great thanks very much.

[Operator:]

Thank you. (Operator instructions.) The next question is from Robert Kwan with RBC Capital Markets.

[Robert Kwan RBC Capital Markets:]

Good morning, John. You mentioned that Titan scheduled for an outage in September, just wondering kind of throughout the rest of fleet if you can just refresh over the next year or two what the expected planned outages are? I think there was a major plant for New Zealand as well.

[John Floren:]

Well, we do have that statutory turnaround that we have been pretty public on in New Zealand and that's in the fall of this year. And we're going to not really a turnaround it's a major refurbish of the reformer and the distillation columns. Beyond that, I mentioned Titan, we don't usually indicate when our outages are planned, but I just mentioned Titan because there's quite a bit of noise out in the market about potential outages in September for gas in Trinidad. So, we're working with the other people that use gas in the estate to see what makes sense if we know t that there might be some potential outages on the upstream to see if we can coordinate our time down amount a similar time to the whole estate benefits. We really don't talk beyond that, Robert, about our planned outages for turnaround.

[Robert Kwan RBC Capital Markets:]

Okay. And then just you commented a little bit about DME in China around some of the breakevens and we've talked a bit about all the talk about you pushing more propane out of North America. There's been a little bit more around potentially pushing ethylene up as well just what are your thoughts and kind of what are you hearing with respect to that going to Asia with respect to just MTO development?

[John Floren:]

Yes, so the MTO is not really competing with ethylene I mean, the best way to make olefins from methanol and that's the most cost effective and we'll continue we believe at that will continue to grow in the olefin space because of the shale gas phenomena in North America. The MTO is really substituting for NASA based olefins which still make up half what we understand half the production of olefins around the world. The market is around 220 million tons. So, there's 110 million tons of olefins made from NASA. The methanol is really competing with that which trades on somewhere on an oil basis. Our current view based on NASA and MTO is even buying merchant methanol affordability 450, 460 on a realized basis for methanol so there's quite a bit of room in Asia still to substitution of NASA based olefins and there's volumes are quite large. So, it's 110 million tons made from NASA converts into 330 tons of methanol potential so it's three tons of methanol to make a ton of olefins. So these are very large markets they're obviously not all going to convert to methanol, but the economic value proposition is quite strong. China is wanting to be more self-sufficient in a number of things surviving some of this merchant MTO being located on the coast where the oil olefins are make a lot of sense. The capital to make 200,000 olefin plant makes a lot more sense integrated, So there's a number of drivers here. As far as ethylene being reexported probably. I don't follow that market that close, but from what we see on the methanol to olefins in China it's still a very, very small art of the overall olefins global. Thanks.

[Operator:]

The next question is from call is from Paul D'Amico with TD Securities.

[Paul D'Amico TD Securities:]

Just a quick one on housekeeping on the cap split for relocation number 2 150 million John can you or Ian, can you walk through the timing on how that's going to play out?

[Ian Cameron:]

Well, Paul it tends to be short term sort of a next year a hundred million dollars roughly and then there's a big bulge in the middle and then move trickle into 2016. So a hundred, 250, 250 is short of roughly the profile.

[Paul D'Amico TD Securities:]

Okay. Then the money for the one that's starting when we're starting now?

[Ian Cameron:]

Yeah, as John mentioned we're going to start decommissioning the plant once when the Chile operations ceases operation so that would be the first step in terms of the capital spend we've seen relative modest spend through the first six or seven months and then it would pick up in mid next year.

[Paul D'Amico TD Securities:]

I'll ask Michael MacDonald to add.

[Michael MacDonald:]

Hi, Paul. The one comment I'd make is that as an indicated the spin profile is little more uniform in a lot of projects and the simple reason for that is we don't have a big Procuren end on this so we don't have front load stuff to go out and buy equipment. And again it's just emphasizes that attractiveness of these projects not moving a project getting in line up for equipment and so forth.

[Paul D'Amico TD Securities:]

Appreciate it, Mike. I don't know how this can happen or not or if you guys could consider it but is it possible given the materiality this and transparency that you've got with respect to these projects you got a line item Louisiana what do you call it? Louisiana project expenditures. Is there a way that you can that segment that Louisiana project 1, Louisiana project 2 so that we we are able to have a transparent window into the cap X reach project secretary.

[Ian Cameron:]

Actually, Paul, what we're planning to do is probably bring them together. I mean, it's going to be extremely hard as we have two projects running with similar teams and similar partners that are executing to keep them really separate it's probably not adding that much value. So we're probably looking for consolidate the two projects going order. Yes. There's a lot of common infrastructure as well so it really does make sense. One big project.

[Paul D'Amico TD Securities:]

Okay. And the only reason I was asking for that is because the time that they come online is different. So I was hoping to have that kind of connection connecting the dots, but I understand. Thank you.

[John Floren:]

Maybe we'll take that offline and provide some guidance.

[Paul D'Amico TD Securities:]

Appreciate that.

[Operator:]

Thank you the next question is from Steve Hansen with Raymond James.

[Steve Hansen Raymond James:]

Yes. Hi. John, just a follow up I know you mentioned that you're really unchanged in terms of guidance but I was hoping that you could at least talk about some of things you might be expecting being through the summer months here as heating demand does ramp up and we might see possibilities of outages just as derivative of that is there any progress on the ground being made in terms of gas distribution infrastructure?

[John Floren:]

There were some announcements in the upstream in the last couple weeks on further exploration in Egypt. I can't really provide any more than I have. We do anticipate the runs for the year and we do anticipate on average to be 70%. If I look at the first quarter and I look at April we operated higher than that, but on average we think that's still guidance again Egypt is really difficult to predict, but don't anticipate at this time that we'll be shutting down due to lack of gas.

[Steve Hansen Raymond James.:]

Okay. Thank you. Very helpful.

[Operator:]

Thank you the next question is from Chris McDougall with Westlake Securities. Please, go ahead.

[Chris McDougall:]

Hello, John. Thanks for taking the questions here. First what do you expect your maintenance CapEx will be once both of the Louisiana plants are up kind of on a pro forma basis in 2016?

[John Floren:]

Yes. So, how I look at maintenance capital we're going to have these six sites and quite a few plants. So, I think how I would characterize it is for every million tons of installed capacity you should be thinking $10 million that's how I would guide you on that.

[Chris McDougall:]

Okay. Great. In the fuel blending in China what is your thought on how much demand that is for the gasoline blending and then the DMA and then the other energy applications, I guess, with the bio diesel.

[John Floren:]

Yes. So, right now the fuel blending, which includes some cooking is probably six and a half million tons. The DME is just north of three million tons. There's quite a bit of MTBE growth in China, it's probably one and a half million tons. And then we've got MTO. So, the MTO at nonintegrated, we've got one in inner China which is around 800,000 tons of methanol. The Skyfert plant is 1.7 million tons of methanol at full rates and the one I mentioned Wisong which is in Nanjing coming up here in the summer is another just around a million tons. Neither merchant or buying methanol to make olefins not integrated.

[Chris McDougall:]

Okay. And what's your aside from the MTO what's your read on the kind of yearoveryear growth in the fuel blending?

[John Floren:]

Around 10%.

[Chris McDougall:]

Okay great.

[John Floren:]

I'll remind you it's growing outside of China, right. It's not being used and Iceland, the UK, Poland. A lot of the European pull 3% in the current fuel specs. There trials going on in Australia and New Zealand is looking at it. Israel's got a full blown program. Iran announced they're going to be blending. So it's a little hard to predict how much people are going to use, but it is getting quite a bit of traction outside of outside of China. And we've got this company "stand up" look to go use it on board their ships which is a huge demand just in that Baltic particular area. If it all went to methanol, which it's not going to, it's 40 million tons, if a third of it goes to methanol it's ten. So, these are large, large numbers. Methanol I said, fairly small market and olefins is larger and energy is expedientially larger these are huge applications. One ship use 40,000 of methanol, so...

[Chris McDougall:]

Thanks a lot.

[Operator:]

(Operator Instructions.) . The next question is from Duffy Fischer have with Barclays. Please, go ahead.

[Duffy Fischer:]

Yes, good day. Question on the unintegrated MTO you walked through kind of what's coming on line maybe in the near term, but as you look over maybe the next two, three, and four years how much unintegrated MTO do you see coming online in China?

[John Floren:]

It's a little bit, again, hard to predict I think we're comfortable with the projects that I've spoken about there's other that are under construction or under consideration. Numbers I've seen are six million, whether that all happens it's really, really, early date to predict that. I say the economics are there today, makes sense. So, usually economics drive things, the number I would be comfortable with is six million. Okay. And are those folks looking at those plants are they looking to lock in longer term contracts under methanol or are they comfortable just kind of playing it with spot as they go forward?

[Duffy Fischer:]

That's a great point.

[John Floren:]

And one of the of key issues of maybe why some of this won't go forward is they're having a real difficult time in securing the methanol for these plants. We're in discussions with a number of these players that are either operating or about to operate or want to operate and their biggest concern is not the capital it's not the affordability it's securing the methanol going forward, because obviously, they don't have raw material. They can't make olefin, so that's their biggest concern. And I think there's companies from China that will be looking to invest in methanol if they can't secure merchant or from somebody else. So I think it's a big watch out for that industry. So I'm glad to see things like line delinquent coming on stream, because the industry certainly needs the molecules. Okay. And so fair to say that the bid ask right now between what you want for a longer term contract and what they're willing to pay is still fairly wide?

[John Floren:]

I mean, our contracts are structured such that it's our mark or less discount, so I think we do have a small contract with Skyford and we're learning as we go. It's a market related contract. We're not interested in entering into contracts that are not market related, but I think it's really a shortage of molecules at this time. So one of the things that's really great with your industry is you've got all this demand growth and not a lot of supply growth at the same time and we're bringing on three million tons of low last capacity to meet this demand growth. So I think others have echoed that executing these projects quickly and on time on budget very safely with a high quality is what we're focused on adding three million tons by early 2016 in an industry that really needs the product is just great, great business for us and that's what we'll be focused on. Great thanks very much.

[Operator:]

Thank you the next question is a follow up question from Charles Neivert with Cowen Securities.

[Charles Neivert Cowen Securities:]

Yes. Just quickly I talked about the couple turn and you guys have scheduled for later this year are you guys looking at building or are you actively building some inventory to try to take care of that or are we just going to have substantially lower sales because you won't have the tonnage to supply during the downtime?

[John Floren:]

You won't see our sales change, Charles. They'll be what they are around 1.8, 1.9 per quarter. We have a lot of flexibility in our supply chain. You have seen our inventories over the quarter build a little bit and it's a lot of it is some of it is produced products so that's good news for the future as well, but no our sales won't change and we'll just manage these outages as we usually do in our supply chain and they're well planned for and our teams do a really, really good job in making sure our customers are kept full whether they're planned or unplanned outages. So, I don't think you should see any sale impact at all.

[Charles Neivert Cowen Securities:]

Okay. So what we'll see is the production dip but not necessarily a sales dip and the sales could conceivably could come out of produced inventory.

[John Floren:]

Yes. Partially we are building some produced inventory you can see in the quarter it's how the inventory flows through little bit more complicated than even I can understand. We have a lot of smart people here that do that. But I think we are building some inventory ahead of some of our own turnarounds. It's just to have a little bit more buffer in our system, because we do see the markets as being extremely tight for the next period. So having a little bit more flexibility I think is good business and allows us, for example, to take advantage of this arbitrage today between the two basins, which is around a hundred dollars a ton. So, I think you've seen this in our results as well.

[Charles Neivert Cowen Securities:]

Great.

[John Floren:]

Good to have a bit more inventory right now.

[Charles Neivert Cowen Securities:]

Great thanks very much. Operator Thank you the next question is also a follow up question from Chris McDougall with Westlake Securities.

[Chris McDougall:]

John, what is your expectation or belief that the new build cap X for methanol plant on the U.S. gulf coast is? I know when you originally were planning the move you thought it saves you about 30% and I was just curious if the costs for new build have increased along with the rest of this DTC world.

[John Floren:]

Yes. That's a great question. Obviously, we're looking to our next project beyond Geismar 2 and we've done some work on capital for new build in North America. We've looked at capital in the gulf coast, as well as in Alberta and the numbers we're seeing are quite shocking. It's around a thousand dollars a ton for new build and that's at a site like Medicine Hat, where we think there's about a hundred million in savings because it's a brown field site. Probably to build down in the gulf it's a little less than what it would be Medicine Hat, because the labor rate's a little higher there, but we're continuing to do quite a bit of work on this. I say our view today is probably like 20,000foot view. We need to get more granularity in it, but we're quite surprised about the new build capital and our view is and our team's view is it's only going to escalate as you get this increase inactivity, especially in the gulf coast for olefins and methanol and other things that have been announced by /SAS a etc..

[Chris McDougal West Lake Securities:]

And internationally sounds like most of your work has been on new construction in North America, but internationally there have been a number of large gas discoveries and then maybe some other more midsize one that would be more appropriately sized for methanol plant versus and L&G plant is there anything there you're looking at? And as I recall of high CO2 was good for you, but bad for L&G so that might be the perfect spot. Is there anything there? Is it mainly North America focused?

[John Foren:]

We would got a group of people looking everywhere. We're looking for projects. We the industry environment as being quite attractive. We need to add capacity to keep our leadership position, but it has to add capacity that makes sense. I mentioned that thousand dollars a ton number, we're trading today as a replacement cost around 650 with not any value for tour Chile assets, which I'm still pretty optimistic one day they'll run at a much higher rate. So, I think to spend a now dollars a ton when you're trading at 650 is not very good business. So we'll see where we are about this time next year to see what we do with new build, but we have a team that's scouring around the world for projects. And what I would say in North America is a great place to build. We wouldn't build a green field site without a longterm gas contract so that's a bit of a challenge in North America today. In addition where there is gas whether that be Mozambique or Papua New Guinea you or some of those places we're really competing with L&G. And L&G is still selling into Japan and Korea and markets like that at over $10 and MA BTU and even at the low methanol price today we can't afford to pay compete with that type much gas when we're thinking about methanol. So, I think methanol prices will have to go up quite a bit before we can compete with L&G at the current L&G selling prices. But again it's hard to predict the future. When we build a green filed site it's 20 years we start getting our money back somewhere years seven or eight. So a bit more risky than what we're doing with relocations and restarts of idle capacity. So that will be a lit bigger decision for us.

[Chris McDougall:]

Okay. Great. Thanks a lot. Operator Thank you. (Operator Instructions.) The next question is from Brian Lally with Barclays. Please, go ahead.

[Brian Lally:]

Hi, guys. Good afternoon. Question from the six income side if I may. Just getting your comments in the press release around feeling comfortable with your current liquidity and also cash generation; how do we extrapolate that to future funding plans and I guess to that extent, would that mean there maybe aren't any in terms of to come to any new issuance in the future?

[John Floren:]

So, again, I just spent quite a bit of time talking about a new build so after we execute these three million tons of low cost capacity at a price even lower than what we're seeing today for methanol around $400 a ton realized you get to that 2016 grid we're generating over a billion dollars in EBITDA of that if we don't do anything on the new build side, quite a bit of that is free cash, probably 600 million, we do have those bonds that are coming due in 2015. So it's early days but our strategy will be the same as it has always been we'll stay focused on methanol. We'll invest in growth opportunities that they make sense and add shareholder value. We want a sustaining growing dividend. You saw us increase the dividend again today to $0.80. So t we'll continue to look at that I think shareholder like a sustainable growing dividend. And with that excess cash if we don't have good ways to invest it that are positive for shareholder we'll return it and what we've done in the past is return it through share buybacks. So I think it's early days to see what we're going to do, but finding fixed is probably not in our short term or medium term plans. We feel very good with your balance sheet and funding of the three million tons of new capacity we have in front of us. So, from a balance sheet pointed of view we feel very very good.

[Brian Lally:]

And then one follow up if I may, appreciate that might be perfect answer to this, but of the three agencies only, Moody's, doesn't rate you guys fully investment grade. The last time they put out an opinion on you guys it was before the Chesapeake announcement, obviously, before today's announcement around Geismar 2. Methanol prices have moved up from your perspective what do you think those guys need to potentially move you guys up to fully investment grade? And is that something you're sort of actively pursuing this year as part of the plan. Thanks for the time.

[John Floren:]

First of all, we do have two of the three investment grade and certainly in terms of the metrics clearly, clearly investment grade. Moody's it's been very difficult to push them over the line they have had a positive outlook on our rating for a long time. It's unusual typical when you have a positive outlook on a rating you make an adjustment within a few months. As I say it's been outstanding for probably 18 months. So we're constant contact with them I think the robust cash flow is the high price environment. The fact that we do have Chesapeake deal in place are certainly positive in terms of having impact on rating. Having said that it is independent and very, very difficult to. Certainly from a rating point of view we feel very comfortable that you should think of us as investment grade company. All right.

[Operator:]

Thank you I would now like the turn the meeting ban over to Mr. John Floren.

[John Foren:]

Okay. Well, thanks very much for all the questions and all the interest in the company. Certainly with our expectations for Q2 at this point our production numbers are looking quite good. We anticipate sales volumes to be quite healthy and in higher price environment our earnings in Q2 should be higher than they were in Q1. And look forward to speaking to you in about 90 days thanks very much.