Hybrid density functional theory has been used to investigate the catalytic mechanism of methyl-coenzyme M reductase (MCR), an essential enzyme in methanogenesis. In a previous study of methane formation, a scheme was suggested involving oxidation of Ni(I) in the starting square-planar coordination to the high-spin Ni(II) form in the CoM-S-Ni(II)F-430 octahedral intermediate. The methyl radical, concomitantly released by methyl-coenzyme M (CoM), is rapidly quenched by hydrogen atom transfer from the coenzyme B (CoB) thiol group, yielding methane as the first product of the reaction. The present investigation primarily concerns the second and final step of the reaction: oxidation of CoB and CoM to the CoB-S-S-CoM heterodisulfide product and reduction of nickel back to the Ni(I) square-planar form. The activation energy for the second step is found to be around 10 kcal/mol, implying that the first step of methane formation with an activation energy of 20 kcal/mol should be rate-limiting. An oxygen of the Gln147 residue, occupying the rear axial position in the oxidized Ni(II) state, is shown to stabilize the intermediate by 6 kcal/mol, thereby slightly decreasing the barrier for the preceding rate-limiting transition state. The mechanism suggested is discussed in the context of available experimental data. An analysis of the flexibility of the F-430 cofactor during the reaction cycle is also given.