SEC Company Response from METHANEX CORP (MEOH) (CIK 0000886977) (MEOH) — Jan 21, 2020
METHANEX CORP (MEOH) (CIK 0000886977)
Date: Jan. 21, 2020 · CIK: 0000886977 · Accession: 0001628280-20-000425
AI Filing Summary & Sentiment
File numbers found in text: 000-20115
Referenced dates: December 12, 2019, November 6, 2019
Letter
United States Securities and Exchange Commission Attention: Terence O’Brien, Accounting Branch Chief Form 40-F for the Year Ended December 31, 2018 Filed March 12, 2019 File No. 000-20115 Response Dated December 3, 2019
Dear Ms. Howser and Mr. O’Brien:
We have reviewed your comments outlined in your letter of December 12, 2019 relating to the captioned items and offer the following responses.
Form 40-F for the Year Ended December 31, 2018
Significant accounting policies
n) Revenue recognition, page 56
SEC Comment:
1.
We note your response to comment 1 in our letter dated November 6, 2019. Specifically, you note that only sales of product from your Atlas joint venture facility are recognized on a commission basis. However, we note your disclosure on page 11 of Exhibit 99.2 of Form 40-F that volume produced at your Egypt facility is also recognized on a commission basis. Please advise.
Our Response:
Methanex holds 100% methanol offtake arrangements for both the Atlas facility in Trinidad and the Egypt facility whereby we facilitate the sale of all methanol produced at each facility. Methanex is
considered an agent and earns a commission on all methanol volume sold from each facility through these offtake arrangements. However, the presentation of the revenue in the consolidated financial statements is dependent on the accounting for each facility as follows:
Atlas
Egypt
Methanex Economic Interest
63.1%
50%
Methanex Voting Interest
50% (joint control)
>50% (majority control)
Methanex’s accounting treatment for the investment
Joint venture accounted for using the equity method.
Consolidated subsidiary with presentation of non-controlling interest.
Arrangement between Methanex and Atlas/Egypt
100% sold through offtake arrangement with Methanex
100% sold through offtake arrangement with Methanex
Accounting result
Methanex’s consolidated revenue includes commission revenue (net presentation) in relation to 100% of methanol sold produced from the Atlas facility.
On a non-consolidated basis, Methanex recognizes commission revenue (net presentation) in relation to 100% of the methanol sold that was produced from the Egypt facility. This is consistent with the accounting for Atlas.
Upon consolidation of the Egypt subsidiary, the commission revenue is eliminated and the methanol sales revenue (gross presentation) is recognized as a result of consolidating the Egyptian subsidiary. Non-controlling interest reflects the ownership interest of the other shareholders.
Our financial statements are prepared on the basis as outlined in the table above. As a result, consolidated revenue only includes Atlas facility commission revenue presented on a net basis.
SEC Comment:
2.
We note the accounting analysis you have provided in concluding you are the agent in the contracts with your customers that are fulfilled with methanol produced by the Atlas joint venture facility. Specifically, you state you do have legal ownership of the commission volume prior to selling to your customers. Please tell us if this legal ownership is only momentarily before transfer. Refer to IFRS 15.B35. If the legal ownership is not a flash title, please tell us why you believe you need to consider the indicators of control discussed in IFRS 15.B37. Refer to IFRS 15.B37A for additional guidance. To the extent that the indicators are necessary for determining control, please tell us how you determined that you do not have inventory risk solely because you obtain insurance that you are reimbursed. Refer to IFRS 15.B37(b) for guidance. Also, please tell us who is primarily responsible for fulfilling the promise to provide methanol to your customer. Refer to IFRS 15.B37(a). Finally, please tell us whether you are a principal or agent in your sales of methanol purchased from other third-party suppliers and how your evaluation of significant indicators of control differs.
Our Response:
We have concluded that we do not obtain control of the methanol produced by the Atlas facility. IFRS 15.33 indicates that control occurs when there is the ability to direct the use of, and obtain substantially
all of the remaining benefits from the asset. The benefits of the sale of methanol relate to the proceeds from the eventual sale of the product, including any potential increases in profit as a result of movement in market prices. We do not obtain substantially all of the remaining benefits from the sale of methanol produced by the Atlas facility as we do not receive a substantial amount of the proceeds. We receive a fixed commission percentage only which is insignificant when compared to the gross proceeds on the sale. The profit associated with the sale of this methanol is earned by Atlas and will vary depending on the selling price realized from the 3rd party customer, which is influenced by market factors at the time of the sale.
Below we have included our responses to the specific questions posed within your letter dated December 12, 2019:
i.
Please tell us if this legal ownership is only momentarily before transfer. Refer to IFRS 15.B35. If the legal ownership is not a flash title, please tell us why you believe you need to consider the indicators of control discussed in IFRS 15.B37.
Legal ownership of Atlas produced methanol is not a flash title transfer. In acting as an intermediary, Methanex’s legal ownership of Atlas produced methanol starts at the load-point when the Atlas produced methanol is loaded at the Atlas facility onto vessels for delivery to the customer and finishes at the point in time when control of the product transfers to the third-party customer (which is on delivery). Therefore, Methanex’s title to the product is only while it is in transit from the Atlas facility to the customer.
The average period between Methanex taking title to the methanol and it being transferred to the end customer is approximately 20-35 days. This substantially represents the sea shipping time from the Atlas facility in Trinidad and the various customer locations. As such, Methanex does not take flash title to the methanol produced by Atlas but legal title is not held by Methanex for any substantive period when it is not in transport.
As noted above, we have concluded we do not meet the definition of control for the Atlas produced product based on the definition of control. Below we have evaluated the fact pattern against the indicators included within IFRS15.B37. As noted in IFRS 15.B37A, the relevance of each of the indicators will vary depending on the nature of the good and the specific terms of the contract.
ii.
To the extent that the indicators are necessary for determining control, please tell us how you determined that you do not have inventory risk solely because you obtain insurance that you are reimbursed. Refer to IFRS 15.B37(b) for guidance. Also, please tell us who is primarily responsible for fulfilling the promise to provide methanol to your customer. Refer to IFRS 15.B37(a).
Below we have considered the indicators included within IFRS 15.B37. As there is no specific hierarchy for the indicators listed under IFRS 15.B37, we have determined it is necessary to consider all indicators at arriving at our conclusion that control is not obtained:
a.)
The entity has inventory risk.
Inventory risk is considered in the following analysis:
Factors suggesting inventory risk
Methanex-Atlas specific considerations
Liable for damage and product loss
Methanex holds custody of the methanol produced by Atlas only while in transit.
Risk associated with damage or product loss is covered by insurance. Atlas is the beneficiary of this insurance and is responsible for the costs associated with this insurance.
Liable for customer returns
Methanol is not subject to returns. All product is inspected to determine if the product meets the required standards at the Atlas facility before transportation. There is no history of returns. If a return did occur, the sales price loss would be to the account for Atlas (either through non-payment by the customer or through insurance).
The risk of being unable to sell all inventory while being required to purchase a minimum quantity.
The offtake arrangement is for 100% of Atlas produced methanol akin to a minimum order quantity. However, Methanex does not obtain methanol from Atlas and then determine how and where to sell it. The customer has been determined prior to Methanex taking title of the methanol and it being loaded for transportation.
The risk that the sale price of the inventory will fall
Due to the commodity nature of methanol, we believe this factor is highly relevant to the analysis.
The selling price of the Atlas produced methanol may not be determined at the time of loading of methanol for transportation at the facility. A provisional price is determined at the time of loading, the final selling price and therefore the profit earned by Atlas is dependent on the sale price paid by the 3rd party customer which is largely dictated by market conditions at the time of delivery.
For example, if the sales price of methanol were to fall between the time the product was produced and the time it was delivered to the customer, the risk associated with the lower sales price would be borne primarily by Atlas. Methanex receives a net commission, and therefore does not have significant exposure to this risk.
We have concluded that Methanex does not have substantive inventory risk associated with Atlas produced methanol in its capacity as the intermediary.
b.)
Primary responsibility for fulfilling the promise to provide the specified good.
Methanex has contracts with third-party customers however Atlas is responsible for producing the specified good, methanol. In the view of our customers, Methanex would be the party responsible for delivering the contracted methanol.
As a commodity product, customers are largely indifferent to where the product is sourced and are accustom to intermediaries or marketers arranging and sourcing product as needed. In fact, it would not be uncommon that the product could be sourced from multiple locations or producers in order to reliably supply the customer. Given the nature of the product as a
homogenous commodity, we consider this indicator to be less relevant than the assessment of inventory risk.
c.)
The entity has discretion in establishing prices for specified goods or services.
The price of methanol globally is dictated fundamentally by supply and demand. Methanex publishes or posts prices in Asia and North America on a monthly basis and Europe on a quarterly basis. While this posted price is used as a reference for contracts, it is guided by the bounds of the market. Ultimately Methanex’s customer contracts do not provide it with any substantive ability to set prices for the commodity. The amount received by Atlas will vary based on the selling price realized at the time of the sale of methanol to the 3rd party customer, while Methanex solely receives a net commission on this sale.
We have concluded that Methanex does not have discretion in establishing prices for Atlas produced methanol.
Based on the analysis above, Methanex in its capacity as intermediary, does not obtain control of Atlas produced methanol because we do not direct the use of, or obtain substantially all of the remaining benefits from the asset. The conclusion reached required the consideration of the additional indicators of control in IFRS 15.B37 that, although we may be considered by the customer to have primary responsibility to deliver the product, our role is as a methanol marketer and not as the original producer. Further, we do not have discretion to establish price. Our conclusion also rests on the fact that we do not have substantive inventory risk and that we receive only a net commission on the sale. Given the consideration of these factors we have concluded that Methanex does not obtain control over the Atlas commission volume and as a result acts as an agent and records commission revenue on a net basis.
We note that within our consolidated financial statements, Methanex consolidated revenue includes the commission earned on the sale of Atlas produced methanol. Note 6 includes details of our equity investee, Atlas and provides the gross revenue earned by Atlas through the sale of this product.
iii.
Finally, please tell us whether you are a principal or agent in your sales of methanol purchased from other third party suppliers and how your evaluation of significant indicators of control differs.
Methanex acts as the principal with respect to the sale of methanol purchased from other third-party suppliers.
Unlike the arrangement with Atlas, Methanex bears inventory risk associated with methanol purchased from other third-party suppliers and obtains control once the product is purchased. The purchase transaction is at one price. The sale transaction is at another price. There is no direct connection between each transaction.
Based on the definition of control, unlike the arrangement with Atlas, Methanex will obtain substantially all of the benefits of the methanol once purchased from the third-party and therefore has control. If the price of methanol rises or falls, Methanex will bear full exposure to this variability. Unlike Atlas, the third-party supplier is not exposed to this variability after Methanex has taken custody of the product.
As a result, we have concluded that Methanex directs the use of, and obtains substantially all of the remaining benefits from the asset as the principal in the sale of methanol purchased from third-party suppliers.
SEC Comment:
o) Financial instruments, page 56
3.
We note your response to comment 2 in our letter dated November 6, 2019. Based on your disclosures and response, the variability in pricing in the supply contract is based on the price of methanol rather than revenue, which is derived from the pricing of methanol and the quantities sold to your customers. (i) Please provide us with a more comprehensive explanation for your conclusion that methanol price is a non-financial variable. (ii) Provide the specific details of the calculation of the variable price component. (iii) Explain how you determined the price of a commodity could be a non-financial variable akin to revenue when it does not factor in the quantity sold. (iv) Explain your basis for considering a strong correlation between quantities of natural gas used and methanol produced and sold as a factor in the analysis.
Our Response:
We share revenue with our gas suppliers based on a formula in the contract (“contract variable”) which estimates our revenue from the sale of methanol, consistent with a royalty. The amount of revenue we share is based on the volume of natural gas consumed which in our business leads directly to the production and sale of methanol. The predictability and consistency of the conversion ratio in manufacturing methanol from natural gas underpins this connection. In addition, the time lag between the production and sale of methanol is limited as there is very limited storage ability for methanol. As a result, we believe the contract variable is not a derivative as revenue is a non-financial variable specific to a party in the contract.
In the analysis below we provide relevant background on the methanol industry and natural gas market dynamics specific to the regions in which we operate to provide context and then address the specific questions posed above.
Background
Methanex generates 100% of its revenue from the manufacture and sale of methanol. We sell methanol on a contract basis, pri
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CORRESP 1 filename1.htm Document Methanex Corporation 1800 - 200 Burrard St. Vancouver, BC Canada V6C 3M1 Investor Relations: 604-661-2600 Toll-Free: 1-800-661-8851 http://www.methanex.com January 21, 2020 United States Securities and Exchange Commission 100 F Street N.E. Washington, D.C. 20549 Attention: Terence O’Brien, Accounting Branch Chief RE: Methanex Corporation Form 40-F for the Year Ended December 31, 2018 Filed March 12, 2019 File No. 000-20115 Response Dated December 3, 2019 Dear Ms. Howser and Mr. O’Brien: We have reviewed your comments outlined in your letter of December 12, 2019 relating to the captioned items and offer the following responses. Form 40-F for the Year Ended December 31, 2018 Significant accounting policies n) Revenue recognition, page 56 SEC Comment: 1. We note your response to comment 1 in our letter dated November 6, 2019. Specifically, you note that only sales of product from your Atlas joint venture facility are recognized on a commission basis. However, we note your disclosure on page 11 of Exhibit 99.2 of Form 40-F that volume produced at your Egypt facility is also recognized on a commission basis. Please advise. Our Response: Methanex holds 100% methanol offtake arrangements for both the Atlas facility in Trinidad and the Egypt facility whereby we facilitate the sale of all methanol produced at each facility. Methanex is considered an agent and earns a commission on all methanol volume sold from each facility through these offtake arrangements. However, the presentation of the revenue in the consolidated financial statements is dependent on the accounting for each facility as follows: Atlas Egypt Methanex Economic Interest 63.1% 50% Methanex Voting Interest 50% (joint control) >50% (majority control) Methanex’s accounting treatment for the investment Joint venture accounted for using the equity method. Consolidated subsidiary with presentation of non-controlling interest. Arrangement between Methanex and Atlas/Egypt 100% sold through offtake arrangement with Methanex 100% sold through offtake arrangement with Methanex Accounting result Methanex’s consolidated revenue includes commission revenue (net presentation) in relation to 100% of methanol sold produced from the Atlas facility. On a non-consolidated basis, Methanex recognizes commission revenue (net presentation) in relation to 100% of the methanol sold that was produced from the Egypt facility. This is consistent with the accounting for Atlas. Upon consolidation of the Egypt subsidiary, the commission revenue is eliminated and the methanol sales revenue (gross presentation) is recognized as a result of consolidating the Egyptian subsidiary. Non-controlling interest reflects the ownership interest of the other shareholders. Our financial statements are prepared on the basis as outlined in the table above. As a result, consolidated revenue only includes Atlas facility commission revenue presented on a net basis. SEC Comment: 2. We note the accounting analysis you have provided in concluding you are the agent in the contracts with your customers that are fulfilled with methanol produced by the Atlas joint venture facility. Specifically, you state you do have legal ownership of the commission volume prior to selling to your customers. Please tell us if this legal ownership is only momentarily before transfer. Refer to IFRS 15.B35. If the legal ownership is not a flash title, please tell us why you believe you need to consider the indicators of control discussed in IFRS 15.B37. Refer to IFRS 15.B37A for additional guidance. To the extent that the indicators are necessary for determining control, please tell us how you determined that you do not have inventory risk solely because you obtain insurance that you are reimbursed. Refer to IFRS 15.B37(b) for guidance. Also, please tell us who is primarily responsible for fulfilling the promise to provide methanol to your customer. Refer to IFRS 15.B37(a). Finally, please tell us whether you are a principal or agent in your sales of methanol purchased from other third-party suppliers and how your evaluation of significant indicators of control differs. Our Response: We have concluded that we do not obtain control of the methanol produced by the Atlas facility. IFRS 15.33 indicates that control occurs when there is the ability to direct the use of, and obtain substantially all of the remaining benefits from the asset. The benefits of the sale of methanol relate to the proceeds from the eventual sale of the product, including any potential increases in profit as a result of movement in market prices. We do not obtain substantially all of the remaining benefits from the sale of methanol produced by the Atlas facility as we do not receive a substantial amount of the proceeds. We receive a fixed commission percentage only which is insignificant when compared to the gross proceeds on the sale. The profit associated with the sale of this methanol is earned by Atlas and will vary depending on the selling price realized from the 3rd party customer, which is influenced by market factors at the time of the sale. Below we have included our responses to the specific questions posed within your letter dated December 12, 2019: i. Please tell us if this legal ownership is only momentarily before transfer. Refer to IFRS 15.B35. If the legal ownership is not a flash title, please tell us why you believe you need to consider the indicators of control discussed in IFRS 15.B37. Legal ownership of Atlas produced methanol is not a flash title transfer. In acting as an intermediary, Methanex’s legal ownership of Atlas produced methanol starts at the load-point when the Atlas produced methanol is loaded at the Atlas facility onto vessels for delivery to the customer and finishes at the point in time when control of the product transfers to the third-party customer (which is on delivery). Therefore, Methanex’s title to the product is only while it is in transit from the Atlas facility to the customer. The average period between Methanex taking title to the methanol and it being transferred to the end customer is approximately 20-35 days. This substantially represents the sea shipping time from the Atlas facility in Trinidad and the various customer locations. As such, Methanex does not take flash title to the methanol produced by Atlas but legal title is not held by Methanex for any substantive period when it is not in transport. As noted above, we have concluded we do not meet the definition of control for the Atlas produced product based on the definition of control. Below we have evaluated the fact pattern against the indicators included within IFRS15.B37. As noted in IFRS 15.B37A, the relevance of each of the indicators will vary depending on the nature of the good and the specific terms of the contract. ii. To the extent that the indicators are necessary for determining control, please tell us how you determined that you do not have inventory risk solely because you obtain insurance that you are reimbursed. Refer to IFRS 15.B37(b) for guidance. Also, please tell us who is primarily responsible for fulfilling the promise to provide methanol to your customer. Refer to IFRS 15.B37(a). Below we have considered the indicators included within IFRS 15.B37. As there is no specific hierarchy for the indicators listed under IFRS 15.B37, we have determined it is necessary to consider all indicators at arriving at our conclusion that control is not obtained: a.) The entity has inventory risk. Inventory risk is considered in the following analysis: Factors suggesting inventory risk Methanex-Atlas specific considerations Liable for damage and product loss Methanex holds custody of the methanol produced by Atlas only while in transit. Risk associated with damage or product loss is covered by insurance. Atlas is the beneficiary of this insurance and is responsible for the costs associated with this insurance. Liable for customer returns Methanol is not subject to returns. All product is inspected to determine if the product meets the required standards at the Atlas facility before transportation. There is no history of returns. If a return did occur, the sales price loss would be to the account for Atlas (either through non-payment by the customer or through insurance). The risk of being unable to sell all inventory while being required to purchase a minimum quantity. The offtake arrangement is for 100% of Atlas produced methanol akin to a minimum order quantity. However, Methanex does not obtain methanol from Atlas and then determine how and where to sell it. The customer has been determined prior to Methanex taking title of the methanol and it being loaded for transportation. The risk that the sale price of the inventory will fall Due to the commodity nature of methanol, we believe this factor is highly relevant to the analysis. The selling price of the Atlas produced methanol may not be determined at the time of loading of methanol for transportation at the facility. A provisional price is determined at the time of loading, the final selling price and therefore the profit earned by Atlas is dependent on the sale price paid by the 3rd party customer which is largely dictated by market conditions at the time of delivery. For example, if the sales price of methanol were to fall between the time the product was produced and the time it was delivered to the customer, the risk associated with the lower sales price would be borne primarily by Atlas. Methanex receives a net commission, and therefore does not have significant exposure to this risk. We have concluded that Methanex does not have substantive inventory risk associated with Atlas produced methanol in its capacity as the intermediary. b.) Primary responsibility for fulfilling the promise to provide the specified good. Methanex has contracts with third-party customers however Atlas is responsible for producing the specified good, methanol. In the view of our customers, Methanex would be the party responsible for delivering the contracted methanol. As a commodity product, customers are largely indifferent to where the product is sourced and are accustom to intermediaries or marketers arranging and sourcing product as needed. In fact, it would not be uncommon that the product could be sourced from multiple locations or producers in order to reliably supply the customer. Given the nature of the product as a homogenous commodity, we consider this indicator to be less relevant than the assessment of inventory risk. c.) The entity has discretion in establishing prices for specified goods or services. The price of methanol globally is dictated fundamentally by supply and demand. Methanex publishes or posts prices in Asia and North America on a monthly basis and Europe on a quarterly basis. While this posted price is used as a reference for contracts, it is guided by the bounds of the market. Ultimately Methanex’s customer contracts do not provide it with any substantive ability to set prices for the commodity. The amount received by Atlas will vary based on the selling price realized at the time of the sale of methanol to the 3rd party customer, while Methanex solely receives a net commission on this sale. We have concluded that Methanex does not have discretion in establishing prices for Atlas produced methanol. Based on the analysis above, Methanex in its capacity as intermediary, does not obtain control of Atlas produced methanol because we do not direct the use of, or obtain substantially all of the remaining benefits from the asset. The conclusion reached required the consideration of the additional indicators of control in IFRS 15.B37 that, although we may be considered by the customer to have primary responsibility to deliver the product, our role is as a methanol marketer and not as the original producer. Further, we do not have discretion to establish price. Our conclusion also rests on the fact that we do not have substantive inventory risk and that we receive only a net commission on the sale. Given the consideration of these factors we have concluded that Methanex does not obtain control over the Atlas commission volume and as a result acts as an agent and records commission revenue on a net basis. We note that within our consolidated financial statements, Methanex consolidated revenue includes the commission earned on the sale of Atlas produced methanol. Note 6 includes details of our equity investee, Atlas and provides the gross revenue earned by Atlas through the sale of this product. iii. Finally, please tell us whether you are a principal or agent in your sales of methanol purchased from other third party suppliers and how your evaluation of significant indicators of control differs. Methanex acts as the principal with respect to the sale of methanol purchased from other third-party suppliers. Unlike the arrangement with Atlas, Methanex bears inventory risk associated with methanol purchased from other third-party suppliers and obtains control once the product is purchased. The purchase transaction is at one price. The sale transaction is at another price. There is no direct connection between each transaction. Based on the definition of control, unlike the arrangement with Atlas, Methanex will obtain substantially all of the benefits of the methanol once purchased from the third-party and therefore has control. If the price of methanol rises or falls, Methanex will bear full exposure to this variability. Unlike Atlas, the third-party supplier is not exposed to this variability after Methanex has taken custody of the product. As a result, we have concluded that Methanex directs the use of, and obtains substantially all of the remaining benefits from the asset as the principal in the sale of methanol purchased from third-party suppliers. SEC Comment: o) Financial instruments, page 56 3. We note your response to comment 2 in our letter dated November 6, 2019. Based on your disclosures and response, the variability in pricing in the supply contract is based on the price of methanol rather than revenue, which is derived from the pricing of methanol and the quantities sold to your customers. (i) Please provide us with a more comprehensive explanation for your conclusion that methanol price is a non-financial variable. (ii) Provide the specific details of the calculation of the variable price component. (iii) Explain how you determined the price of a commodity could be a non-financial variable akin to revenue when it does not factor in the quantity sold. (iv) Explain your basis for considering a strong correlation between quantities of natural gas used and methanol produced and sold as a factor in the analysis. Our Response: We share revenue with our gas suppliers based on a formula in the contract (“contract variable”) which estimates our revenue from the sale of methanol, consistent with a royalty. The amount of revenue we share is based on the volume of natural gas consumed which in our business leads directly to the production and sale of methanol. The predictability and consistency of the conversion ratio in manufacturing methanol from natural gas underpins this connection. In addition, the time lag between the production and sale of methanol is limited as there is very limited storage ability for methanol. As a result, we believe the contract variable is not a derivative as revenue is a non-financial variable specific to a party in the contract. In the analysis below we provide relevant background on the methanol industry and natural gas market dynamics specific to the regions in which we operate to provide context and then address the specific questions posed above. Background Methanex generates 100% of its revenue from the manufacture and sale of methanol. We sell methanol on a contract basis, pri