e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the Quarterly Period Ended March 31, 2006 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File
Number 1-10351
POTASH CORPORATION OF SASKATCHEWAN INC.
(Exact name of registrant as specified in its charter)
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Canada |
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N/A |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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122 1st Avenue South |
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Saskatoon, Saskatchewan, Canada |
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S7K 7G3 |
(Address of principal executive offices) |
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(Zip Code) |
306-933-8500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES þ NO o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Exchange Act
Rule 12b-2).
YES þ NO o
Indicate by check mark whether the registrant is a shell company
(as defined in Exchange Act Rule 12b-2).
YES o NO þ
As at April 30, 2006, Potash Corporation of Saskatchewan
Inc. had 103,676,570 Common Shares outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
Potash Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Financial Position
(in millions of US dollars except share amounts)
(unaudited)
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March 31, |
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December 31, |
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2006 |
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2005 |
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Assets
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Current assets
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Cash and cash equivalents
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$ |
172.7 |
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$ |
93.9 |
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Accounts receivable
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390.0 |
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453.3 |
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Inventories (Note 2)
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513.4 |
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522.5 |
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Prepaid expenses and other current assets
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68.1 |
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41.1 |
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1,144.2 |
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1,110.8 |
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Property, plant and equipment
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3,327.2 |
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3,262.8 |
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Other assets (Note 3)
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989.8 |
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852.8 |
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Intangible assets
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33.9 |
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34.5 |
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Goodwill
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97.0 |
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97.0 |
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$ |
5,592.1 |
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$ |
5,357.9 |
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Liabilities
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Current liabilities
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Short-term debt
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$ |
604.9 |
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$ |
252.2 |
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Accounts payable and accrued charges
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591.4 |
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842.7 |
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Current portion of long-term debt
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1.2 |
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1.2 |
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1,197.5 |
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1,096.1 |
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Long-term debt
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1,257.3 |
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1,257.6 |
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Future income tax liability
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561.5 |
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543.3 |
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Accrued pension and other post-retirement benefits
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213.0 |
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213.9 |
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Accrued environmental costs and asset retirement obligations
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100.1 |
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97.3 |
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Other non-current liabilities and deferred credits
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15.3 |
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17.2 |
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3,344.7 |
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3,225.4 |
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Contingencies and Guarantees (Notes 10 and 11,
respectively)
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Shareholders Equity
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Share capital
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1,383.0 |
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1,379.3 |
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Unlimited authorization of common shares without par value;
issued and outstanding 103,672,170 and 103,593,792 at
March 31, 2006 and December 31, 2005, respectively
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Unlimited authorization of first preferred shares; none
outstanding
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Contributed surplus
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37.3 |
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36.3 |
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Retained earnings
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827.1 |
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716.9 |
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2,247.4 |
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2,132.5 |
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$ |
5,592.1 |
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$ |
5,357.9 |
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(See Notes to the Condensed Consolidated Financial Statements)
2
Potash Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Operations and Retained
Earnings
(in millions of US dollars except per-share amounts)
(unaudited)
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Three Months Ended |
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March 31 |
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2006 |
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2005 |
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Sales (Note 6)
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$ |
861.6 |
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$ |
921.4 |
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Less: Freight
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54.9 |
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67.2 |
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Transportation
and distribution
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31.2 |
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28.9 |
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Cost of
goods sold
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572.0 |
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566.8 |
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Gross Margin
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203.5 |
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258.5 |
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Selling and administrative
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30.8 |
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29.3 |
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Provincial mining and other taxes
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14.2 |
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38.4 |
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Foreign exchange gain
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(2.4 |
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(5.9 |
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Other income (Note 8)
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(31.2 |
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(20.0 |
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11.4 |
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41.8 |
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Operating Income
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192.1 |
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216.7 |
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Interest Expense
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23.2 |
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20.7 |
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Income Before Income Taxes
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168.9 |
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196.0 |
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Income Taxes (Note 4)
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43.4 |
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64.7 |
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Net Income
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125.5 |
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131.3 |
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Retained Earnings, Beginning of Period
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716.9 |
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701.5 |
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Dividends
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(15.3 |
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(16.8 |
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Retained Earnings, End of Period
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$ |
827.1 |
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$ |
816.0 |
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Net Income Per Share (Note 5)
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Basic
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$ |
1.21 |
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$ |
1.18 |
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Diluted
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$ |
1.19 |
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$ |
1.15 |
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Dividends Per Share
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$ |
0.15 |
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$ |
0.15 |
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(See Notes to the Condensed Consolidated Financial Statements)
3
Potash Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Cash Flow
(in millions of US dollars)
(unaudited)
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Three Months Ended |
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March 31 |
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2006 |
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2005 |
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Operating Activities
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Net income
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$ |
125.5 |
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$ |
131.3 |
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Adjustments to reconcile net income to cash (used in) provided
by operating activities |
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Depreciation and amortization
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58.8 |
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59.6 |
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Stock-based compensation
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1.5 |
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1.0 |
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Loss on disposal of long-term assets
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0.3 |
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2.0 |
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Foreign exchange on future income tax
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(0.2 |
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(1.2 |
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Provision for future income tax
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13.9 |
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6.5 |
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Undistributed earnings of equity investees
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(12.4 |
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(13.1 |
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Other long-term liabilities
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2.0 |
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5.2 |
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Subtotal of adjustments
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63.9 |
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60.0 |
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Changes in non-cash operating working capital
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Accounts receivable
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63.3 |
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(63.5 |
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Inventories
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8.9 |
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(1.7 |
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Prepaid expenses and other current assets
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(27.0 |
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(6.2 |
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Accounts payable and accrued charges
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(247.1 |
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1.8 |
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Subtotal of changes in non-cash operating working capital
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(201.9 |
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(69.6 |
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Cash (used in) provided by operating activities
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(12.5 |
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121.7 |
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Investing Activities
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Additions to property, plant and equipment
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(120.0 |
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(63.0 |
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Purchase of long-term investments
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(126.3 |
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Proceeds from disposal of property, plant and equipment
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2.0 |
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4.4 |
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Proceeds from sale of long-term investments
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5.2 |
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Other assets and intangible assets
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(4.5 |
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3.0 |
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Cash used in investing activities
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(248.8 |
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(50.4 |
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Cash before financing activities
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(261.3 |
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71.3 |
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Financing Activities
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Repayment of long-term debt obligations
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(0.3 |
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(0.2 |
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Proceeds from short-term debt obligations
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352.7 |
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0.8 |
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Dividends
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(15.3 |
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(16.5 |
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Repurchase of common shares
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(82.3 |
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Issuance of common shares
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3.0 |
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47.0 |
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Cash provided by (used in) financing activities
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340.1 |
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(51.2 |
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Increase in Cash and Cash Equivalents
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78.8 |
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20.1 |
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Cash and Cash Equivalents, Beginning of Period
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93.9 |
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458.9 |
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Cash and Cash Equivalents, End of Period
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$ |
172.7 |
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$ |
479.0 |
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Supplemental cash flow disclosure
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Interest paid
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$ |
16.3 |
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$ |
11.2 |
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Income taxes paid
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$ |
142.0 |
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$ |
75.5 |
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(See Notes to the Condensed Consolidated Financial Statements)
4
Potash Corporation of Saskatchewan Inc.
Notes to the Condensed Consolidated Financial Statements
For the Three Months Ended March 31, 2006
(in millions of US dollars except share and per-share
amounts)
(unaudited)
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1. |
Significant Accounting Policies |
Basis of Presentation
With its subsidiaries, Potash Corporation of Saskatchewan Inc.
(PCS) together known as
PotashCorp or the company except to the
extent the context otherwise requires forms an
integrated fertilizer and related industrial and feed products
company. The companys accounting policies are in
accordance with accounting principles generally accepted in
Canada (Canadian GAAP). These policies are
consistent with accounting principles generally accepted in the
United States (US GAAP) in all material respects
except as outlined in Note 12. The accounting policies used
in preparing these interim condensed consolidated financial
statements are consistent with those used in the preparation of
the 2005 annual consolidated financial statements, except as
described below.
These interim condensed consolidated financial statements
include the accounts of PCS and its subsidiaries; however, they
do not include all disclosures normally provided in annual
consolidated financial statements and should be read in
conjunction with the 2005 annual consolidated financial
statements. In managements opinion, the unaudited
financial statements include all adjustments (consisting solely
of normal recurring adjustments) necessary to present fairly
such information. Interim results are not necessarily indicative
of the results expected for the fiscal year.
Significant Accounting Policies
Implicit Variable Interests
In January 2006, the company adopted Emerging Issues Committee
Abstract No. 157, Implicit Variable Interests Under
AcG-15
(EIC-157).
This EIC addresses whether a company has an implicit variable
interest in a variable interest entity (VIE) or
potential VIE when specific conditions exist. An implicit
variable interest acts the same as an explicit variable interest
except that it involves the absorbing and/or receiving of
variability indirectly from the entity (rather than directly).
The identification of an implicit variable interest is a matter
of judgment that depends on the relevant facts and
circumstances. The implementation of EIC-157 did not have a
material impact on the companys consolidated financial
statements.
Recent Accounting Pronouncements
Comprehensive Income, Equity, Financial Instruments and
Hedges
In January 2005, the CICA issued Section 1530,
Comprehensive Income, Section 3251,
Equity, Section 3855, Financial
Instruments Recognition and Measurement and
Section 3865, Hedges. The new standards
increase harmonization with US GAAP and will require the
following:
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Financial assets will be classified as either held-to-maturity,
held-for-trading or available-for-sale. Held-to-maturity
classification will be restricted to fixed maturity instruments
that the company intends and is able to hold to maturity and
will be accounted for at amortized cost. Held-for-trading
instruments will be recorded at fair value with realized and
unrealized gains and losses reported in net income. The
remaining financial assets will be classified as
available-for-sale. These will be recorded at fair value with
unrealized gains and losses reported in a new category of the
Consolidated Statements of Financial Position under
shareholders equity called other comprehensive income
(OCI); and |
5
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Derivatives will be classified as held-for-trading unless
designated as hedging instruments. All derivatives, including
embedded derivatives that must be separately accounted for, will
be recorded at fair value on the Consolidated Statements of
Financial Position. For derivatives that hedge the changes in
fair value of an asset or liability, changes in the
derivatives fair value will be reported in net income and
be substantially offset by changes in the fair value of the
hedged asset or liability attributable to the risk being hedged.
For derivatives that hedge variability in cash flows, the
effective portion of the changes in the derivatives fair
value will be initially recognized in OCI and the ineffective
portion will be recorded in net income. The amounts temporarily
recorded in OCI will subsequently be reclassified to net income
in the periods when net income is affected by the variability in
the cash flows of the hedged item. |
The guidance will apply for interim and annual financial
statements relating to fiscal years beginning on or after
October 1, 2006. Earlier adoption will be permitted only as
of the beginning of a fiscal year. The impact of implementing
these new standards is not yet determinable as it is highly
dependent on fair values, outstanding positions and hedging
strategies at the time of adoption.
Conditional Asset Retirement Obligations
In November 2005, the Emerging Issues Committee issued Abstract
No. 159, Conditional Asset Retirement
Obligations, to clarify the accounting treatment for a
legal obligation to perform an asset retirement activity in
which the timing and/or method of settlement are conditional on
a future event that may or may not be within the control of the
entity. Under this EIC, an entity is required to recognize a
liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably
estimated. The guidance is effective for the second quarter of
2006 and is to be applied retroactively, with restatement of
prior periods. The implementation of this EIC is not expected to
have a material impact on the companys consolidated
financial statements.
Stripping Costs Incurred in the Production Phase of a Mining
Operation
In March 2006, the Emerging Issues Committee issued Abstract
No. 160, Stripping Costs Incurred in the Production
Phase of a Mining Operation. This EIC discusses the
treatment of costs associated with the activity of removing
overburden and other mine waste minerals in the production phase
of a mining operation. The EIC concludes that such stripping
costs should be accounted for according to the benefit received
by the entity and recorded as either a component of inventory or
a betterment to the mineral property, depending on the benefit
received. The implementation of this EIC is not expected to have
a material impact on the companys consolidated financial
statements.
2. Inventories
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March 31, |
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December 31, |
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2006 |
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2005 |
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Finished product
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$ |
261.2 |
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$ |
268.5 |
|
Intermediate products
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|
96.0 |
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|
94.9 |
|
Raw materials
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57.8 |
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59.9 |
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Materials and supplies
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|
98.4 |
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99.2 |
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$ |
513.4 |
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$ |
522.5 |
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3. Other Assets
In February 2006, the company acquired an additional
10.01-percent interest in the ordinary shares of Sinochem Hong
Kong Holdings Limited (Sinofert) for cash
consideration of $126.3. The purchase price was financed by
short-term debt. The additional investment increased the
companys interest in Sinofert to 20 percent.
6
In April 2006, the company purchased an additional 220,100
shares of Arab Potash Company Inc. (APC) for cash
consideration of $3.7. The companys ownership interest in
APC remains at approximately 28 percent.
4. Income Taxes
The companys consolidated effective income tax rate for
the three month period ended March 31, 2006 is
approximately 26 percent (2005
33 percent). The reduction in the effective rate for the
quarter was due to the receipt of income tax refunds relating to
a recent Canadian appeals court decision (pertaining to a
uranium producer) which affirmed the deductibility of the
Saskatchewan Capital Tax Resource Surcharge. The refunds related
to the 2002-2004 taxation years. The company also expects income
tax refunds in connection with the 1999-2001 taxation years.
These refunds are currently under review and have not been
reflected in these interim condensed consolidated financial
statements.
In April 2006, the Province of Saskatchewan announced changes to
the corporation income tax and the capital tax resource
surcharge. The corporate income tax rate will be reduced from
17 percent to 12 percent over the next three years,
with a 3 percentage point reduction (to 14 percent)
effective July 1, 2006 and further 1 percentage point
reductions on July 1, 2007 and July 1, 2008. The
capital tax resource surcharge will be reduced from
3.6 percent to 3.0 percent over this same period, with
a reduction to 3.3 percent on July 1, 2006,
3.1 percent on July 1, 2007 and 3.0 percent on
July 1, 2008. The condensed consolidated financial
statements for the three months ended March 31, 2006 do not
reflect the benefit of these announced changes.
5. Net Income Per Share
Basic net income per share for the quarter is calculated on the
weighted average shares issued and outstanding for the three
months ended March 31, 2006 of 103,641,000
(2005 111,110,000).
Diluted net income per share is calculated based on the weighted
average number of shares issued and outstanding during the
period. The denominator is: (i) increased by the total of
the additional common shares that would have been issued
assuming exercise of all stock options with exercise prices at
or below the average market price for the period; and
(ii) decreased by the number of shares that the company
could have repurchased if it had used the assumed proceeds from
the exercise of stock options to repurchase them on the open
market at the average share price for the period. The weighted
average number of shares outstanding for the diluted net income
per share calculation for the three months ended March 31,
2006 was 105,825,000 (2005 114,265,000).
6. Segment Information
The company has three reportable business segments: potash,
nitrogen and phosphate. These business segments are
differentiated by the chemical nutrient contained in the product
that each produces. Inter-segment sales are made under terms
that approximate market value. The accounting policies of the
segments are the same as those described in Note 1.
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Three Months Ended March 31, 2006 |
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Potash |
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Nitrogen |
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Phosphate |
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All Others |
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Consolidated |
|
Sales
|
|
$ |
225.8 |
|
|
$ |
331.9 |
|
|
$ |
303.9 |
|
|
$ |
|
|
|
$ |
861.6 |
|
Freight
|
|
|
25.0 |
|
|
|
9.6 |
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|
20.3 |
|
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|
54.9 |
|
Transportation and distribution
|
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|
7.4 |
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|
13.3 |
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|
10.5 |
|
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|
31.2 |
|
Net sales third party
|
|
|
193.4 |
|
|
|
309.0 |
|
|
|
273.1 |
|
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|
|
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|
Cost of goods sold
|
|
|
102.6 |
|
|
|
229.6 |
|
|
|
239.8 |
|
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|
572.0 |
|
Gross margin
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|
90.8 |
|
|
|
79.4 |
|
|
|
33.3 |
|
|
|
|
|
|
|
203.5 |
|
Depreciation and amortization
|
|
|
11.8 |
|
|
|
19.3 |
|
|
|
24.3 |
|
|
|
3.4 |
|
|
|
58.8 |
|
Inter-segment sales
|
|
|
4.0 |
|
|
|
31.9 |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005 |
|
|
Potash |
|
Nitrogen |
|
Phosphate |
|
All Others |
|
Consolidated |
|
Sales
|
|
$ |
352.1 |
|
|
$ |
304.8 |
|
|
$ |
264.5 |
|
|
$ |
|
|
|
$ |
921.4 |
|
Freight
|
|
|
37.2 |
|
|
|
10.2 |
|
|
|
19.8 |
|
|
|
|
|
|
|
67.2 |
|
Transportation and distribution
|
|
|
9.1 |
|
|
|
11.7 |
|
|
|
8.1 |
|
|
|
|
|
|
|
28.9 |
|
Net sales third party
|
|
|
305.8 |
|
|
|
282.9 |
|
|
|
236.6 |
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
129.6 |
|
|
|
217.6 |
|
|
|
219.6 |
|
|
|
|
|
|
|
566.8 |
|
Gross margin
|
|
|
176.2 |
|
|
|
65.3 |
|
|
|
17.0 |
|
|
|
|
|
|
|
258.5 |
|
Depreciation and amortization
|
|
|
18.1 |
|
|
|
16.9 |
|
|
|
22.3 |
|
|
|
2.3 |
|
|
|
59.6 |
|
Inter-segment sales
|
|
|
2.0 |
|
|
|
19.8 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
7. Pension and Other Post-Retirement
Expenses
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended March 31 |
Defined Benefit Pension Plans |
|
2006 |
|
2005 |
|
Service cost
|
|
$ |
3.6 |
|
|
$ |
3.6 |
|
Interest cost
|
|
|
8.4 |
|
|
|
7.8 |
|
Expected return on plan assets
|
|
|
(9.6 |
) |
|
|
(8.9 |
) |
Net amortization
|
|
|
2.9 |
|
|
|
1.7 |
|
|
Net expense
|
|
$ |
5.3 |
|
|
$ |
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended March 31 |
Other Post-Retirement Plans |
|
2006 |
|
2005 |
|
Service cost
|
|
$ |
1.2 |
|
|
$ |
1.4 |
|
Interest cost
|
|
|
3.0 |
|
|
|
3.3 |
|
Net amortization
|
|
|
(0.1 |
) |
|
|
0.4 |
|
|
Net expense
|
|
$ |
4.1 |
|
|
$ |
5.1 |
|
|
For the three months ended March 31, 2006, the company
contributed $6.8 to its defined benefit pension plans, $6.0 to
its defined contribution pension plans and $2.1 to its other
post-retirement plans. Total 2006 contributions to these plans
are not expected to differ significantly from the amounts
previously disclosed in the consolidated financial statements
for the year ended December 31, 2005.
8. Other Income
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended March 31 |
|
|
2006 |
|
2005 |
|
Share of earnings of equity investees
|
|
$ |
12.4 |
|
|
$ |
13.1 |
|
Dividend income
|
|
|
9.1 |
|
|
|
3.1 |
|
Other
|
|
|
9.7 |
|
|
|
3.8 |
|
|
|
|
$ |
31.2 |
|
|
$ |
20.0 |
|
|
9. Seasonality
The companys sales of fertilizer can be seasonal.
Typically, the second quarter of the year is when fertilizer
sales will be highest, due to the North American spring planting
season. However, planting conditions and the timing of customer
purchases will vary each year and sales can be expected to shift
from one quarter to another.
8
10. Contingencies
Canpotex
PotashCorp is a shareholder in Canpotex Limited
(Canpotex), which markets potash offshore. Should
any operating losses or other liabilities be incurred by
Canpotex, the shareholders have contractually agreed to
reimburse Canpotex for such losses or liabilities in proportion
to their productive capacity. There were no such operating
losses or other liabilities during the first three months of
2006 or 2005.
Mining Risk
In common with other companies in the industry, the company is
unable to acquire insurance on its underground assets.
Investment in APC
The company is party to a shareholders agreement with Jordan
Investment Company (JIC) with respect to its
investment in APC. The terms of the shareholders agreement
provide that, from October 17, 2006 to October 16,
2009, JIC may seek to exercise a put option (the
Put) to require the company to purchase JICs
remaining common shares in APC. If the Put were exercised, the
companys purchase price would be calculated in accordance
with a specified formula based, in part, on future earnings of
APC. The amount, if any, which the company may have to pay for
JICs remaining common shares if there were to be a valid
exercise of the Put is not presently determinable.
Legal and Other Matters
In 1994, PCS Joint Venture responded to information requests
from the US Environmental Protection Agency (USEPA)
and the Georgia Department of Natural Resources, Environmental
Protection Division (GEPD) regarding conditions at
its Moultrie, Georgia location. PCS Joint Venture believes that
the lead-contaminated soil and groundwater found at the site are
attributable to former operations at the site prior to PCS Joint
Ventures ownership. In 2005, the GEPD approved a
Corrective Action Plan to address environmental conditions at
this location. As anticipated, the approved remedy requires some
excavation and off-site disposal of impacted soil and
installation of a groundwater recovery and treatment system. PCS
Joint Venture began the remediation in November 2005 and
completed soil excavation activities in March 2006. No
significant change to managements estimate of accrued
costs was required as of March 31, 2006 as a result of
approval of the remedial action plan.
In 1998, the company, along with other parties, was notified by
the USEPA of potential liability under the US Comprehensive
Environmental Response, Compensation and Liability Act of 1980
(CERCLA) with respect to certain soil and
groundwater conditions at a PCS Joint Venture blending facility
in Lakeland, Florida and certain adjoining property. In 1999,
PCS Joint Venture signed an Administrative Order and Consent
with the USEPA pursuant to which PCS Joint Venture agreed to
conduct a Remedial Investigation and Feasibility Study
(RI/FS) of these conditions. PCS Joint Venture and
another party are sharing the costs of the RI/FS. The draft
feasibility study has been submitted for review and approval. In
January 2006, the parties responded to comments of the USEPA and
Florida Department of Environment on the draft feasibility
study. No final determination has yet been made of the nature,
timing or cost of remedial action that may be needed, nor to
what extent costs incurred may be recoverable from third parties.
In 2003, the USEPA notified PCS Nitrogen that it considers PCS
Nitrogen to be a potentially responsible party with respect to a
former fertilizer blending operation in Charleston, South
Carolina, known as the Planters Property or Columbia Nitrogen
site, formerly owned by a company from whom PCS Nitrogen
acquired certain other assets. In March 2005, the USEPA released
for public comment a range of remedial alternatives and a
proposed remedy for this site. In September 2005, Ashley II
of Charleston, L.L.C. (Ashley II), the current
owner of the site, filed a petition in the United States
District Court for the District of South Carolina seeking a
declaratory judgment that PCS Nitrogen is liable to pay
environmental response costs at the site and reimbursement of
environmental response and other costs incurred and to be
incurred by
9
Ashley II. In December 2005, PCS Nitrogen filed a motion to
dismiss the petition filed by Ashley II, which was denied
in March 2006. In February 2006, PCS Nitrogen and other
potentially responsible parties received a notice from the USEPA
requesting reimbursement of previously incurred response costs
of approximately $3.0 plus interest, and the performance or
financing of future site investigation and response. PCS
Nitrogen will continue to monitor these and other developments
with respect to the site. PCS Nitrogen intends to vigorously
defend its interests in these actions. It will also continue to
assert its position that it is not a responsible party and to
work to identify former site owners and operators that would be
responsible parties with respect to the site.
The USEPA announced an initiative to evaluate implementation
within the phosphate industry of a particular exemption for
mineral processing wastes under the hazardous waste program. In
connection with this industry-wide initiative, the USEPA
conducted hazardous waste compliance evaluation inspections at
numerous phosphate operations, including the companys
plants in Aurora, North Carolina, Geismar, Louisiana and White
Springs, Florida. In September 2005 and December 2005,
respectively, the USEPA notified the company of various alleged
violations of the US Resource Conservation and Recovery Act at
its Aurora and White Springs plants. The company is currently
reviewing and responding to these notices. At this early stage,
it is unable to evaluate the extent of any exposure that it may
have in these matters.
The company is also engaged in ongoing site assessment and/or
remediation activities at a number of other facilities and
sites. Based on current information, it believes that its future
obligations with respect to these facilities and sites are not
reasonably likely to have a material adverse effect on the
companys consolidated financial position or results
of operations.
Various other claims and lawsuits are pending against the
company in the ordinary course of business. While it is not
possible to determine the ultimate outcome of such actions at
this time, and there exist inherent uncertainties in predicting
such outcomes, it is managements belief that the ultimate
resolution of such actions is not reasonably likely to have a
material adverse effect on the companys consolidated
financial position or results of operations.
The breadth of the companys operations and the global
complexity of tax regulations require assessments of
uncertainties and judgments in estimating the ultimate taxes the
company will pay. The final taxes paid are dependent upon many
factors, including negotiations with taxing authorities in
various jurisdictions, outcomes of tax litigation and resolution
of disputes arising from federal, provincial, state and local
tax audits. The resolution of these uncertainties and the
associated final taxes may result in adjustments to the
companys tax assets and tax liabilities.
The company owns facilities which have been either permanently
or indefinitely shut down. The company expects to incur nominal
annual expenditures for site security and other maintenance
costs at certain of these facilities. Should the facilities be
dismantled, certain other shutdown-related costs may be
incurred. Such costs would not be expected to have a material
adverse effect on the companys consolidated financial
position or results of operations and would be recognized and
recorded in the period in which they were incurred.
11. Guarantees
In the normal course of operations, the company provides
indemnifications that are often standard contractual terms to
counterparties in transactions such as purchase and sale
contracts, service agreements, director/officer contracts and
leasing transactions. These indemnification agreements may
require the company to compensate the counterparties for costs
incurred as a result of various events, including environmental
liabilities and changes in (or in the interpretation of) laws
and regulations, or as a result of litigation claims or
statutory sanctions that may be suffered by the counterparty as
a consequence of the transaction. The terms of these
indemnification agreements will vary based upon the contract,
the nature of which prevents the company from making a
reasonable estimate of the maximum potential amount that it
could be required to pay to counterparties. Historically, the
company has not made any significant payments under such
indemnifications and no amounts have been accrued in the
accompanying condensed consolidated financial statements with
respect to these indemnification guarantees.
10
The company enters into agreements in the normal course of
business that may contain features which meet the definition of
a guarantee. Various debt obligations (such as overdrafts, lines
of credit with counterparties for derivatives, and back-to-back
loan arrangements) and other commitments (such as railcar
leases) related to certain subsidiaries have been directly
guaranteed by the company under such agreements with third
parties. The company would be required to perform on these
guarantees in the event of default by the guaranteed parties. No
material loss is anticipated by reason of such agreements and
guarantees. At March 31, 2006, the maximum potential amount
of future (undiscounted) payments under significant guarantees
provided to third parties approximated $257.7. As many of these
guarantees will not be drawn upon and the maximum potential
amount of future payments does not consider the possibility of
recovery under recourse or collateral provisions, this amount is
not indicative of future cash requirements or the companys
expected losses from these arrangements. At March 31, 2006,
no subsidiary balances subject to guarantees were outstanding in
connection with the companys cash management facilities,
and the company had no liabilities recorded for other
obligations other than subsidiary bank borrowings of
approximately $5.9, which are reflected in other long-term debt,
and cash margins held of approximately $116.0 to maintain
derivatives, which are included in accounts payable and accrued
charges.
The company has guaranteed the gypsum stack capping, closure and
post-closure obligations of its phosphate operations in Florida
and Louisiana, pursuant to the financial assurance regulatory
requirements in those states. In February 2005, the Florida
Environmental Regulation Commission approved certain
modifications to the financial assurance requirements designed
to ensure that responsible parties have sufficient resources to
cover all closure and post-closure costs and liabilities
associated with gypsum stacks in the state. The new requirements
became effective in July 2005 and include financial strength
tests that are more stringent than under previous law and a
requirement that gypsum stack closure cost estimates include the
cost of treating process water. The company has met its
financial assurance responsibilities as of March 31, 2006.
Costs associated with the retirement of long-lived tangible
assets have been accrued in the accompanying interim condensed
consolidated financial statements to the extent that a legal
liability to retire such assets exists.
The environmental regulations of the Province of Saskatchewan
require each potash mine to have decommissioning and reclamation
(D&R) plans. In 2001, agreement was reached with
the provincial government on the financial assurances for the
D&R plan to cover an interim period to July 1, 2005. In
October 2004, this interim period was extended to July 1,
2006. A government/industry task force has been established to
assess decommissioning options for all Saskatchewan potash
producers and to produce mutually acceptable revisions to the
plans. The company has posted an irrevocable Cdn $2.0
letter of credit as collateral.
During the period, the company entered into various other
commercial letters of credit in the normal course of operations.
The company expects that it will be able to satisfy all
applicable credit support requirements without disrupting normal
business operations.
12. Reconciliation of Canadian and United States
Generally Accepted Accounting Principles
Canadian GAAP varies in certain significant respects from US
GAAP. As required by the US Securities and Exchange Commission
(SEC), the effect of these principal differences on
the companys interim condensed consolidated financial
statements is described and quantified below. For a complete
discussion of US and Canadian GAAP differences, see Note 33
to the consolidated financial statements for the year ended
December 31, 2005 in the companys 2005 Annual
Report Financial Review.
(a) Long-term investments: Investments for which the
company is unable to exercise significant influence, control or
joint control are stated at cost. US GAAP requires that these
investments be classified as available-for-sale and be stated at
market value with the difference between market value and cost
reported as a component of other comprehensive
income (OCI).
Certain of the companys investments in international
entities are accounted for under the equity method. Accounting
principles generally accepted in those foreign jurisdictions may
vary in certain important respects
11
from Canadian GAAP and in certain other respects from
US GAAP. The companys share of earnings of these
equity investees under Canadian GAAP has been adjusted for the
significant effects of conforming to US GAAP.
(b) Property, plant and equipment and goodwill: The net
book value of property, plant and equipment and goodwill under
Canadian GAAP is higher than under US GAAP, as past
provisions for asset impairment under Canadian GAAP were
measured based on the undiscounted cash flow from use together
with the residual value of the assets. Under US GAAP, they
were measured based on fair value, which was lower than the
undiscounted cash flow from use together with the residual value
of the assets. Fair value for this purpose was determined based
on discounted expected future net cash flows.
(c) Depreciation and amortization: Depreciation and
amortization under Canadian GAAP is higher than under
US GAAP, as a result of differences in the carrying amounts
of property, plant and equipment and goodwill under Canadian and
US GAAP.
(d) Exploration costs: Under Canadian GAAP, capitalized
exploration costs are classified under property, plant and
equipment. For US GAAP, these costs are generally expensed
until such time as a final feasibility study has confirmed the
existence of a commercially mineable deposit.
(e) Pre-operating costs: Operating costs incurred during
the start-up phase of
new projects are deferred under Canadian GAAP until commercial
production levels are reached, at which time they are amortized
over the estimated life of the project. US GAAP requires
that these costs be expensed as incurred.
(f) Pension and other post-retirement benefits: Under
Canadian GAAP, when a defined benefit plan gives rise to an
accrued benefit asset, a company must recognize a valuation
allowance for the excess of the adjusted benefit asset over the
expected future benefit to be realized from the plan asset.
Changes in the pension valuation allowance are recognized in
income. US GAAP does not specifically address pension
valuation allowances and the US regulators have interpreted this
to be a difference between Canadian and US GAAP. In light
of these developments, a difference between Canadian and
US GAAP has been recorded for the effects of recognizing a
pension valuation allowance and the changes therein under
Canadian GAAP.
The companys accumulated benefit obligation for its US
pension plans exceeds the fair value of plan assets.
US GAAP requires the recognition of an additional minimum
pension liability in the amount of the excess of the unfunded
accumulated benefit obligation over the recorded pension
benefits liability. An offsetting intangible asset is recorded
equal to the unrecognized prior service costs, with any
difference recorded as a reduction of accumulated OCI. No
similar requirement exists under Canadian GAAP.
(g) Foreign currency translation adjustment: The company
adopted the US dollar as its functional and reporting
currency on January 1, 1995. At that time, the consolidated
financial statements were translated into US dollars at the
December 31, 1994 year-end exchange rate using the
translation of convenience method under Canadian GAAP. This
translation method was not permitted under US GAAP.
US GAAP required the comparative Consolidated Statements of
Operations and Consolidated Statements of Cash Flow to be
translated at applicable weighted-average exchange rates;
whereas, the Consolidated Statements of Financial Position were
permitted to be translated at the December 31,
1994 year-end exchange rate. The use of disparate exchange
rates under US GAAP gave rise to a foreign currency
translation adjustment. Under US GAAP, this adjustment is
reported as a component of accumulated OCI.
(h) Derivative instruments and hedging activities: Under
Canadian GAAP, derivatives used for
non-trading purposes
that do not qualify for hedge accounting are carried at fair
value on the Consolidated Statements of Financial Position, with
changes in fair value reflected in earnings. Derivatives
embedded within instruments are generally not separately
accounted for except for those related to equity-linked deposit
contracts, which are not applicable to the company. Gains and
losses on derivative instruments held within an effective hedge
relationship are recognized in earnings on the same basis and in
the same period as the underlying hedged items. There is no
difference in accounting between Canadian and US GAAP in
respect of derivatives that do not qualify for hedge accounting.
Unlike Canadian GAAP, however, the company recognizes all of its
derivative instruments (whether designated in hedging
relationships or not, or embedded within hybrid instruments) at
fair value on the Consolidated Statements of Financial Position
for US GAAP
12
purposes. Under US GAAP, the accounting for changes in the
fair value (i.e., gains or losses) of a derivative instrument
depends on whether it has been designated and qualifies as part
of a hedging relationship. For strategies designated as fair
value hedges, the effective portion of the change in the fair
value of the derivative is offset in income against the change
in fair value, attributed to the risk being hedged, of the
underlying hedged asset, liability or firm commitment. For cash
flow hedges, the effective portion of the changes in the fair
value of the derivative is accumulated in OCI until the
variability in cash flows being hedged is recognized in earnings
in future accounting periods. For both fair value and cash flow
hedges, if a derivative instrument is designated as a hedge and
meets the criteria for hedge effectiveness, earnings offset is
available, but only to the extent that the hedge is effective.
Ineffective portions of fair value or cash flow hedges are
recorded in earnings in the current period.
(i) Comprehensive income: Comprehensive income is
recognized and measured under US GAAP pursuant to
SFAS No. 130, Reporting Comprehensive
Income. This standard defines comprehensive income as all
changes in equity other than those resulting from investments by
owners and distributions to owners. Comprehensive income is
comprised of two components, net income and OCI. OCI refers to
amounts that are recorded as an element of shareholders
equity but are excluded from net income because these
transactions or events were attributed to changes from
non-owner sources. As
described in Note 1, Canadian standards relating to
comprehensive income are not effective until fiscal years
beginning on or after October 1, 2006.
(j) Stock-based compensation: Under Canadian GAAP, the
companys stock-based compensation plan awards classified
as liabilities are measured at intrinsic value at each reporting
period. Effective January 1, 2006, US GAAP under
EITF 04-6 requires
that these liability awards be measured at fair value at each
reporting period. As at March 31, 2006, the difference
between Canadian and US GAAP was not significant. The
company uses a Monte Carlo simulation model to estimate the fair
value of its liability awards for US GAAP purposes.
(k) Stripping costs: Under Canadian GAAP, the company
capitalizes and amortizes costs associated with the activity of
removing overburden and other mine waste minerals in the
production phase. Effective January 1, 2006, US GAAP
requires such stripping costs to be attributed to ore produced
in that period as a component of inventory and recognized in
cost of sales in the same period as related revenue. In
accordance with US GAAP, the company has recorded the
effect of initially applying this consensus as a
cumulative-effect adjustment recognized in the opening balance
of retained earnings as of January 1, 2006.
(l) Income taxes related to the above adjustments: The
income tax adjustment reflects the impact on income taxes of the
US GAAP adjustments described above. Accounting for income
taxes under Canadian and US GAAP is similar, except that
income tax rates of enacted or substantively enacted tax law
must be used to calculate future income tax assets and
liabilities under Canadian GAAP; whereas only income tax rates
of enacted tax law can be used under US GAAP.
(m) Income tax consequences of stock-based employee
compensation: Under Canadian GAAP, the income tax benefit
attributable to stock-based compensation that is deductible in
computing taxable income but is not recorded in the consolidated
financial statements as an expense of any period (the
excess benefit) is considered to be a permanent
difference. Accordingly, such amount is treated as an item that
reconciles the statutory income tax rate to the companys
effective income tax rate. Under US GAAP, the excess benefit is
recognized as additional
paid-in capital.
(n) Cash flow statements: US GAAP does not permit
the use of certain subtotals within the classification of cash
provided by operating activities, nor does it permit the
subtotal of cash before financing activities.
13
The application of US GAAP, as described above, would have
had the following effects on net income, net income per share,
total assets, shareholders equity, comprehensive income
and accumulated other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
|
2006 |
|
2005 |
|
Net income as reported Canadian GAAP
|
|
$ |
125.5 |
|
|
$ |
131.3 |
|
Items increasing (decreasing) reported net income
|
|
|
|
|
|
|
|
|
|
Cash flow hedge ineffectiveness
|
|
|
0.4 |
|
|
|
0.2 |
|
|
Depreciation and amortization
|
|
|
2.1 |
|
|
|
2.1 |
|
|
Stripping costs
|
|
|
1.5 |
|
|
|
|
|
|
Deferred income taxes related to the above adjustments
|
|
|
(1.4 |
) |
|
|
(0.7 |
) |
|
Income taxes related to stock-based compensation
|
|
|
(0.8 |
) |
|
|
(10.8 |
) |
|
Net income US GAAP
|
|
$ |
127.3 |
|
|
$ |
122.1 |
|
|
Basic weighted average shares outstanding
US GAAP
|
|
|
103,641,000 |
|
|
|
111,110,000 |
|
|
Diluted weighted average shares outstanding
US GAAP
|
|
|
105,825,000 |
|
|
|
114,265,000 |
|
|
Basic net income per share US GAAP
|
|
$ |
1.23 |
|
|
$ |
1.10 |
|
|
Diluted net income per share US GAAP
|
|
$ |
1.20 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
Total assets as reported Canadian GAAP
|
|
$ |
5,592.1 |
|
|
$ |
5,357.9 |
|
Items increasing (decreasing) reported total assets
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
0.2 |
|
|
|
(7.2 |
) |
|
Available-for-sale securities (unrealized holding gain)
|
|
|
429.8 |
|
|
|
355.2 |
|
|
Fair value of derivative instruments
|
|
|
208.1 |
|
|
|
277.1 |
|
|
Property, plant and equipment
|
|
|
(116.0 |
) |
|
|
(118.1 |
) |
|
Exploration costs
|
|
|
(6.4 |
) |
|
|
(6.4 |
) |
|
Stripping costs
|
|
|
(22.9 |
) |
|
|
|
|
|
Pension and other post-retirement benefits
|
|
|
14.1 |
|
|
|
14.1 |
|
|
Intangible asset relating to additional minimum pension liability
|
|
|
11.1 |
|
|
|
11.1 |
|
|
Investment in equity investees
|
|
|
4.8 |
|
|
|
4.8 |
|
|
Goodwill
|
|
|
(46.7 |
) |
|
|
(46.7 |
) |
|
Total assets US GAAP
|
|
$ |
6,068.2 |
|
|
$ |
5,841.8 |
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
Total shareholders equity as reported Canadian
GAAP
|
|
$ |
2,247.4 |
|
|
$ |
2,132.5 |
|
Items increasing (decreasing) reported shareholders equity
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net of related income
taxes
|
|
|
396.4 |
|
|
|
343.2 |
|
|
Foreign currency translation adjustment
|
|
|
20.9 |
|
|
|
20.9 |
|
|
Provision for asset impairment
|
|
|
(218.0 |
) |
|
|
(218.0 |
) |
|
Depreciation and amortization
|
|
|
55.3 |
|
|
|
53.2 |
|
|
Exploration costs
|
|
|
(6.4 |
) |
|
|
(6.4 |
) |
|
Stripping costs
|
|
|
1.5 |
|
|
|
|
|
|
Cash flow hedge ineffectiveness
|
|
|
5.3 |
|
|
|
4.9 |
|
|
Pension and other post-retirement benefits
|
|
|
14.1 |
|
|
|
14.1 |
|
|
Share of earnings of equity investees
|
|
|
3.7 |
|
|
|
3.7 |
|
|
Deferred income taxes relating to the above adjustments
|
|
|
25.6 |
|
|
|
27.0 |
|
|
Cumulative-effect adjustment to retained earnings in respect of
stripping costs
|
|
|
(16.3 |
) |
|
|
|
|
|
Shareholders equity US GAAP
|
|
$ |
2,529.5 |
|
|
$ |
2,375.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
|
2006 |
|
2005 |
|
Net income US GAAP
|
|
$ |
127.3 |
|
|
$ |
122.1 |
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
Change in unrealized holding gain on available-for-sale
securities
|
|
|
74.6 |
|
|
|
42.4 |
|
|
Change in gains and losses on derivatives designated as cash
flow hedges
|
|
|
(40.7 |
) |
|
|
94.0 |
|
|
Reclassification to income of gains and losses on cash
flow hedges
|
|
|
(21.3 |
) |
|
|
(8.6 |
) |
|
Deferred income taxes related to other comprehensive income
|
|
|
40.6 |
|
|
|
(42.2 |
) |
|
|
Other comprehensive income, net of related income taxes
|
|
|
53.2 |
|
|
|
85.6 |
|
|
Comprehensive income US GAAP
|
|
$ |
180.5 |
|
|
$ |
207.7 |
|
|
The balances related to each component of accumulated other
comprehensive income, net of related income taxes, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
Unrealized gains and losses on available-for-sale securities
|
|
$ |
330.9 |
|
|
$ |
236.3 |
|
Gains and losses on derivatives designated as cash
flow hedges
|
|
|
141.0 |
|
|
|
182.4 |
|
Additional minimum pension liability
|
|
|
(55.4 |
) |
|
|
(55.4 |
) |
Share of accumulated other comprehensive income of equity
investees
|
|
|
0.8 |
|
|
|
0.8 |
|
Foreign currency translation adjustment
|
|
|
(20.9 |
) |
|
|
(20.9 |
) |
|
Accumulated other comprehensive
income(1)
US GAAP
|
|
$ |
396.4 |
|
|
$ |
343.2 |
|
|
|
|
(1) |
Accumulated other comprehensive income is a separate component
of shareholders equity under US GAAP. |
Supplemental US GAAP Disclosures
Recent Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, to clarify that abnormal amounts of
idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period
charges, and to require the allocation of fixed production
overheads to inventory based on the normal capacity of the
production facilities. The guidance was effective for inventory
costs incurred during 2006 and did not have a material impact on
the companys consolidated financial statements.
15
Available-for-Sale Security
The companys investments in Israel Chemicals Ltd. and
Sinofert are classified as available-for-sale. The fair market
value of these investments at March 31, 2006 was $821.2 and
the unrealized holding gain was $429.8.
Stock-based Compensation
The company has five stock-based employee compensation plans,
which are described below. The total compensation cost charged
to income in respect of these plans was $2.5 for the three
months ended March 31, 2006 (2005 $5.1).
Prior to January 1, 2006, the company had elected to
expense employee stock-based compensation using the fair value
method prospectively for all awards granted or modified on or
after January 1, 2003. Accordingly, stock-based employee
compensation cost has been recognized in the Consolidated
Statements of Operations since that time. Effective
January 1, 2006, the company adopted SFAS No. 123
(Revised 2004), Share-Based Payment
(SFAS No. 123(R)), using the
modified-prospective application transition method. Results for
prior periods have not been restated. Because the fair value
recognition provisions of SFAS No. 123,
Stock-Based Compensation, and
SFAS No. 123(R) were materially consistent under our
equity plans, the adoption of SFAS No. 123(R) did not
have a significant impact on our financial position or our
results of operations. Prior to our adoption of
SFAS No. 123(R), benefits of tax deductions in excess
of recognized compensation costs were reported as operating cash
flows. SFAS No. 123(R) requires excess tax benefits be
reported as a financing cash inflow rather than as a reduction
of taxes paid.
Stock Option Plans
The company has three stock option plans. Under the Officers and
Employees Plan, the company may, after February 3, 1998,
issue up to 13,852,250 common shares pursuant to the exercise
of options.
Under the Directors Plan, the company may, after
January 24, 1995, issue up to 912,000 common shares
pursuant to the exercise of options. No stock options have been
granted under the Directors Plan since November 2002, and the
PCS Board of Directors determined in 2003 to discontinue
granting stock options to directors. Under both plans, the
exercise price is the quoted market closing price of the
companys common shares on the last trading day immediately
preceding the date of the grant and an options maximum
term is 10 years. All options granted to date have provided
that one-half of the options granted in a year will vest one
year from the date of the grant, with the other half vesting the
following year.
Under the 2005 Performance Option Plan the company may, after
February 28, 2005 and before January 1, 2006, issue
options to acquire up to 1,200,000 common shares. Under the
plan, the exercise price is the quoted market closing price of
the companys common shares on the last trading day
immediately preceding the date of the grant and an options
maximum term is 10 years. The key design difference between
the 2005 Performance Option Plan and the companys other
stock option plans is the performance-based vesting feature. In
general, options will vest, if at all, according to a schedule
based on the three-year average excess of the companys
consolidated cash flow return on investment over weighted
average cost of capital.
The company issues new common shares to satisfy stock option
exercises.
16
A summary of option activity under the plans for the three
months ended March 31, 2006, and changes during the period
then ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Option Plan |
|
Officers and Employees and Directors Option Plans |
|
|
|
Weighted- |
|
|
|
Weighted- |
|
|
|
|
Number of |
|
Weighted- |
|
Average |
|
Aggregate |
|
Number of |
|
Weighted- |
|
Average |
|
Aggregate |
|
|
Shares |
|
Average |
|
Remaining |
|
Intrinsic |
|
Shares |
|
Average |
|
Remaining |
|
Intrinsic |
|
|
Subject to |
|
Exercise |
|
Contractual |
|
Value (in |
|
Subject to |
|
Exercise |
|
Contractual |
|
Value (in |
|
|
Option |
|
Price |
|
Term (Years) |
|
millions) |
|
Option |
|
Price |
|
Term (Years) |
|
millions) |
|
Outstanding at January 1, 2006
|
|
|
1,186,000 |
|
|
$ |
90.08 |
|
|
|
|
|
|
|
|
|
|
|
3,895,756 |
|
|
$ |
38.41 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,531 |
) |
|
|
39.45 |
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6,500 |
) |
|
|
90.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006
|
|
|
1,179,500 |
|
|
$ |
90.04 |
|
|
|
9 |
|
|
$ |
|
|
|
|
3,819,225 |
|
|
$ |
38.37 |
|
|
|
6 |
|
|
$ |
189.9 |
|
|
Exercisable at March 31, 2006
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
3,819,225 |
|
|
$ |
38.37 |
|
|
|
6 |
|
|
$ |
189.9 |
|
|
The total intrinsic value of stock options exercised was $3.8
during the three months ended March 31, 2006. The company
did not grant any stock options during the first three months of
2006, and no stock options vested during the reporting period.
The company estimates the fair value of each option grant as of
the date of grant using the Black-Scholes-Merton option-pricing
model. The following weighted-average assumptions were used in
arriving at the grant date fair values associated with stock
options for which compensation cost was recognized during 2005
and 2006:
|
|
|
|
|
|
|
|
|
|
|
Year of Grant |
|
|
2005 |
|
2003 |
|
Expected dividend
|
|
|
$ 0.60 |
|
|
|
$ 0.50 |
|
Expected volatility
|
|
|
28% |
|
|
|
27% |
|
Risk-free interest rate
|
|
|
3.86% |
|
|
|
4.06% |
|
Expected life of options
|
|
|
6.5 years |
|
|
|
8 years |
|
The expected dividend on the companys stock was based on
the current annualized dividend rate as at the date of grant.
Expected volatility was based on historical volatility of the
companys stock over a period commensurate with the
expected term of the stock option. The
risk-free interest rate
for the expected life of the option was based on, as applicable,
the implied yield available on zero-coupon government issues
with an equivalent remaining term at the time of the grant.
Historical data was used to estimate the expected life of
the option.
A summary of the status of the companys nonvested shares
as of March 31, 2006, and changes during the period then
ended, is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
Average |
|
|
Number of |
|
Grant-Date |
|
|
Shares |
|
Fair Value |
|
Nonvested at January 1, 2006
|
|
|
1,186,000 |
|
|
$ |
88.25 |
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6,500 |
) |
|
|
88.25 |
|
|
Nonvested at March 31, 2006
|
|
|
1,179,500 |
|
|
$ |
88.25 |
|
|
As of March 31, 2006, 1,179,500 options remained unvested
and there was $8.4 of total unrecognized compensation cost
related to the companys stock option plans. This cost is
expected to be recognized over the period through
December 31, 2007.
17
Cash received from stock option exercises for the three months
ended March 31, 2006 was $3.0 (2005 $47.0), and
the excess tax benefit recognized as additional paid in capital
was $0.8 for the quarter (2005 $10.8).
Deferred Share Unit and Other Plans
The company offers a deferred share unit plan to non-employee
directors, which entitles those directors to receive
discretionary grants of deferred share units (DSUs),
each of which has a value equal to the market value of a common
share at the time of its grant. The plan also allows each
director to choose to receive, in the form of DSUs, all or a
percentage of the directors fee, which would otherwise be
payable in cash. Each DSU fully vests upon award, but is
distributed only when the director has ceased to be a member of
the Board of Directors of the company. Vested units are settled
in cash based on the common share price at that time. As of
March 31, 2006, the total DSUs held by participating
directors was 64,419 (2005 51,982). Compensation
cost recognized in respect of DSUs for the three month period
ended March 31, 2006 was not significant.
The company offers a performance unit incentive plan to senior
executives and other key employees. The performance objectives
under the plan are designed to further align the interests of
executives and key employees with those of shareholders by
linking the vesting of awards to the total return to
shareholders over the three-year performance period ending
December 31, 2008. Total shareholder return measures the
capital appreciation in the companys common shares,
including dividends paid over the performance period. Vesting of
one-half of the awards is based on increases in the total
shareholder return over the three-year performance period.
Vesting of the remaining one-half of the awards is based on the
extent to which the total shareholder return matches or exceeds
the total shareholder return of the common shares of a
pre-defined peer group. Vested units are settled in cash based
on the common share price generally at the end of the
performance period. Compensation expense for this program is
recorded and remeasured at fair value over the three-year
performance cycle of the program. The company uses a Monte Carlo
simulation model to estimate the fair value of these awards.
During the quarter, the company issued 152,960 performance units
(2005 nil) under the performance unit incentive plan
at a weighted-average grant-date fair value of $78.08 per unit.
As at March 31, 2006, 149,883 units remained unvested and
outstanding. Total unrecognized compensation cost approximated
$10.7, which is expected to be recognized over the period
through December 31, 2008. However, such amount will be
subject to change, as these liability awards are remeasured at
fair value at each reporting period.
During the three months ended March 31, 2006, cash of $34.5
was used to settle the companys liability in respect of
its performance unit incentive plan for the performance period
January 1, 2003 to December 31, 2005. No other cash
payments were made in respect of the companys stock-based
compensation plans during the quarter.
Derivative Instruments and Hedging Activities
Cash Flow Hedges
The company has designated its natural gas derivative
instruments as cash flow hedges. The portion of gain or loss on
derivative instruments designated as cash flow hedges that are
effective at offsetting changes in the hedged item is reported
as a component of accumulated OCI and then is reclassified into
cost of goods sold when the product containing the hedged item
is sold. Any hedge ineffectiveness is recorded in cost of goods
sold in the current period. During the first quarter of 2006, a
gain of $20.9 (2005 $8.6) was recognized in cost of
goods sold. Of the deferred gains at quarter-end, approximately
$81.3 will be reclassified to cost of goods sold within the next
12 months. The fair value of the companys gas hedging
contracts at March 31, 2006 was $208.1 (2005
$144.8).
18
Fair Value Hedges
At March 31, 2006, the company had receive-fixed,
pay-variable interest rate swap agreements outstanding with
total notional amounts of $nil (2005 $225.0). The
fair value of the swaps outstanding at March 31, 2006 was a
liability of $nil (2005 $1.3).
13. Comparative Figures
Certain of the prior periods figures have been
reclassified to conform with the current periods
presentation.
|
|
ITEM 2. |
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis is the responsibility of
management and is as of May 4, 2006. The Board of Directors
carries out its responsibility for review of this disclosure
principally through its audit committee, comprised exclusively
of independent directors. The audit committee reviews and prior
to its publication, approves, pursuant to the authority
delegated to it by the Board of Directors, this disclosure. The
term PCS refers to Potash Corporation of
Saskatchewan Inc. and the terms we, us,
our, PotashCorp and the
company refer to PCS and, as applicable, PCS and its
direct and indirect subsidiaries as a group. Additional
information relating to the company, including our Annual Report
on Form 10-K, can
be found on SEDAR at www.sedar.com and on EDGAR at
www.sec.gov/edgar.shtml.
POTASHCORP AND OUR BUSINESS ENVIRONMENT
PotashCorp has built a global business on the natural nutrients
potash, phosphate and nitrogen. Our products serve three
different markets: fertilizer, feed and industrial. We sell
fertilizer to North American retailers, cooperatives and
distributors that provide storage and application services to
farmers, the end users. Our offshore customers are government
agencies and private importers that tend to buy under contract,
while spot sales are more prevalent in North America.
Fertilizers are sold primarily for spring and fall application
in both northern and southern hemispheres.
Transportation is an important part of the final purchase price
for fertilizer so producers usually sell to the closest
customers. In North America, we sell mainly on a delivered basis
via rail, barge, truck and pipeline. Offshore customers purchase
product either at the port where it is loaded or with freight
included.
Potash, phosphate and nitrogen are also used as inputs for the
production of animal feed and industrial products. Most feed and
industrial sales are by contract and are more evenly distributed
throughout the year than fertilizer sales.
POTASHCORP VISION
We envision PotashCorp as the partner of choice, providing
superior value to all our stakeholders. We strive to be the
highest-quality low-cost producer and sustainable gross margin
leader in the products we sell and the markets we serve. Through
our strategy, we attempt to minimize the natural volatility of
our business. We strive for increased earnings and to outperform
our peer group and other basic materials companies in total
shareholder return, a key measure of any companys value.
We link our financial performance with areas of extended
responsibility: the environment and our social and economic
stakeholders. We focus on increased transparency to improve our
relationships with all our stakeholders, believing this gives us
a competitive advantage.
POTASHCORP STRATEGY
To provide our stakeholders with superior value, our strategy
focuses on generating long-term growth while striving to
minimize the natural volatility of our business by reducing
fluctuations in our upward earnings trend line. Applying our
strategy daily to maximize gross margin, we concentrate on our
highest-margin
19
products, which dictates our Potash First strategy. We
complement that by focusing on Trinidad nitrogen and purified
phosphoric acid.
Our goal is to be the low-cost global potash supplier on a
delivered basis into all key world markets. We supplement this
potash strategy by leveraging our strengths in nitrogen with our
lower-cost gas in Trinidad and our specialty phosphate products,
particularly the industrial product, purified acid, produced in
North Carolina.
In our day-to-day actions, we seek to maximize gross margin by
focusing on the right blend of price, volumes and asset
utilization. Our highest-margin products potash,
Trinidad nitrogen products and purified phosphoric
acid drive our strategy, and we strive to grow the
business by enhancing our position as supplier of choice. We aim
to build on our strengths by acquiring and maintaining low-cost,
high-quality capacity that complements our existing assets and
adds strategic value. Our sales, operating and investment
decisions are based on our cash flow return materially exceeding
cost of capital.
KEY PERFORMANCE DRIVERS PERFORMANCE COMPARED TO
GOALS
Each year we set targets to advance our long-term goals and
drive results. In 2005, we further developed key performance
indicators to monitor our progress and measure success. As we
drill down into the organization with these metrics, we believe:
|
|
|
management will focus on the most important things, which will
be reinforced by having the relevant results readily accessible; |
|
employees will understand and be able to effectively monitor
their contribution to the achievement of corporate goals; and |
|
we will be even more effective in meeting our targets. |
Our long-term goals and 2006 targets are set out on pages 9
to 14 of our 2005 Annual Report Business
Review. A summary of our progress against selected goals and
representative annual targets is set out below.
|
|
|
|
|
|
|
|
|
Representative |
|
Performance |
|
|
Goal |
|
2006 Annual Target |
|
to March 31, 2006 |
|
|
|
To continue to outperform our sector and other basic materials
companies in total shareholder return. |
|
Exceed total shareholder return performance for our sector and
companies on the DJUSBMI for 2006. |
|
PotashCorps total shareholder return in the first quarter
of 2006 was 10 percent, exceeding the DJUSBMI return of
6 percent and our sector average return of 8 percent. |
|
|
|
|
|
|
|
Carry a higher multiple than the average of other fertilizer
companies on both earnings and cash flow. |
|
The companys multiple at March 31, 2006 was 15.7 on
earnings and 10.3 on cash flow versus the average of other
fertilizer companies in our sector of 19.1 on earnings and 9.2
on cash flow. |
|
|
|
To remain the leader and preferred supplier of potash, nitrogen
and phosphate products worldwide. |
|
Increase North American realized prices for potash by
10 percent. |
|
North American realized potash prices were 11 percent higher in
the first quarter of 2006 compared to the 2005 annual average. |
|
|
|
|
|
|
|
Increase North American realized feed prices by 20 percent. |
|
Compared to the 2005 annual average, North American realized
feed prices increased as follows in the quarter ended
March 31, 2006: Monocal by 24 percent, Dical by
25 percent and DFP by 32 percent. |
|
|
|
|
|
|
|
Increase realized nitric acid prices by 5 percent. |
|
Realized nitric acid prices increased 26 percent during the
three months ended March 31, 2006 compared to the average
prices realized during 2005. |
|
|
|
20
|
|
|
|
|
|
|
|
|
Representative |
|
Performance |
|
|
Goal |
|
2006 Annual Target |
|
to March 31, 2006 |
|
|
|
To be the low-cost supplier in our industry. |
|
Achieve rock costs at Aurora and White Springs 3 percent
below 2005. |
|
Rock costs at Aurora decreased 8 percent while White
Springs increased 8 percent during the first quarter of
2006 compared to the corresponding quarter in 2005. Compared to
the 2005 annual average, rock costs for the first three months
of 2006 were down 2 percent at Aurora and up 5 percent
at White Springs. |
|
|
|
|
|
|
|
Achieve 5-percent reduction in per-tonne potash conversion costs
on a Canadian dollar basis. |
|
When compared to the 2005 annual average, Canadian dollar potash
conversion costs increased 57 percent per tonne during the
first quarter of 2006, largely as a result of the 222 days
of production shutdowns during the quarter as the company
matched production with demand. |
|
|
|
|
|
|
|
Improve energy efficiency in Trinidad by 10 percent from
2005. |
|
Trinidad energy efficiency rate improved 2 percent during
the first three months of 2006 compared to the 2005 annual
average. |
|
|
|
To move closer to our goal of no harm to people, no accidents,
no damage to the environment. |
|
Reduce recordable and lost- time injury rates by 30 percent
from 2005 levels. |
|
Recordable and lost-time injury rates were 1.47 and 0.15,
respectively, as compared to the targets of 1.60 and 0.19,
respectively. |
|
|
|
|
|
|
|
Reduce reportable releases and permit excursions by
30 percent from 2005 levels. |
|
Reportable release annualized rates declined 40 percent
while permit excursions were down 64 percent during the
first quarter of 2006 compared to 2005 annual levels. |
|
|
|
FINANCIAL OVERVIEW
This discussion and analysis is based on the companys
unaudited interim condensed consolidated financial statements
reported under generally accepted accounting principles in
Canada (Canadian GAAP). These principles differ in
certain significant respects from accounting principles
generally accepted in the United States. These differences are
described and quantified in Note 12 to the unaudited
interim condensed consolidated financial statements included in
Item 1 of this Quarterly Report on
Form 10-Q. All
references to per-share amounts pertain to diluted net income
per share. All amounts in dollars are expressed as US dollars
unless otherwise indicated. Certain of the prior periods
figures have been reclassified to conform with the current
periods presentation.
For an understanding of trends, events, uncertainties and the
effect of critical accounting estimates on our results and
financial condition, the entire document should be read
carefully together with our 2005 Annual Report
Financial Review.
Earnings Guidance
The companys guidance for earnings per share for the first
quarter of 2006 was in the range of $1.00 to $1.25 per
share, assuming a period end exchange rate of 1.15 Canadian
dollars per US dollar. The final result was net income of
$125.5 million, or $1.19 per share, based on an actual
exchange rate of 1.1671 Canadian dollars per US dollar at
March 31, 2006.
21
Overview of Actual Results
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
Dollar |
|
% |
(Dollars millions except per-share amounts) |
|
2006 |
|
2005 |
|
Change |
|
Change |
|
Sales
|
|
$ |
861.6 |
|
|
$ |
921.4 |
|
|
$ |
(59.8 |
) |
|
|
(6 |
) |
Freight
|
|
|
54.9 |
|
|
|
67.2 |
|
|
|
(12.3 |
) |
|
|
(18 |
) |
Transportation and distribution
|
|
|
31.2 |
|
|
|
28.9 |
|
|
|
2.3 |
|
|
|
8 |
|
Cost of goods sold
|
|
|
572.0 |
|
|
|
566.8 |
|
|
|
5.2 |
|
|
|
1 |
|
|
Gross margin
|
|
$ |
203.5 |
|
|
$ |
258.5 |
|
|
$ |
(55.0 |
) |
|
|
(21 |
) |
|
Operating income
|
|
$ |
192.1 |
|
|
$ |
216.7 |
|
|
$ |
(24.6 |
) |
|
|
(11 |
) |
|
Net income
|
|
$ |
125.5 |
|
|
$ |
131.3 |
|
|
$ |
(5.8 |
) |
|
|
(4 |
) |
|
Net income per share basic
|
|
$ |
1.21 |
|
|
$ |
1.18 |
|
|
$ |
0.03 |
|
|
|
3 |
|
|
Net income per share diluted
|
|
$ |
1.19 |
|
|
$ |
1.15 |
|
|
$ |
0.04 |
|
|
|
3 |
|
|
Improved performance in the nitrogen and phosphate segments and
increased income from global investments contributed to
PotashCorps record first-quarter earnings per share.
Despite potash volumes just over half of what they were in the
same quarter last year in the absence of a price settlement with
China, earnings rose to $1.19 per share, exceeding the $1.15 per
share from the same period last year. These first quarter
earnings were supplemented by a $12.3 million
($0.12 per share) income tax recovery that more than offset
additional costs related to potash mine shutdowns during the
quarter. Although net income declined from $131.3 million
to $125.5 million quarter over quarter, the rise in
earnings per share reflected the lower share base following the
repurchase of 9.5 million shares under our normal course
issuer bid during 2005.
The demand for potash, usually our most dominant performer,
slowed from previous quarters as price negotiations between
China and the Belarusian Potash Company extended through the
first three months of the year. This all but stopped shipments
to some of the largest potash customers, as they waited to see
the impact a new deal would have on price. With a settlement not
reached by the end of the quarter, many offshore customers began
buying their seasonal requirements. North American potash sales
were weaker than expected as a result of low crop commodity
prices, higher energy costs and uncertainty around planting
decisions. Dealers purchased cautiously in an attempt to end
this fertilizer season with no inventories. This temporary
slowdown of our higher-margin potash business affected total
gross margin, which went from $258.5 million in last
years first quarter to $203.5 million this year.
Potash was still the highest contributor to first-quarter gross
margin at $90.8 million.
Nitrogen gross margin rose 22 percent from the same period
last year to $79.4 million. Trinidad contributed
$50.4 million, or 63 percent of this total.
Supply/demand fundamentals remained tight and ammonia prices
stayed firm despite a drop in the North American spot price for
natural gas. Continuing high prices for Western European gas led
to ammonia production curtailments and, along with higher ocean
freight costs, caused Baltic producers to send a larger
percentage of their product to markets closer to their home.
In phosphate, prices continued to climb for all products in
response to continuing high input costs and reasonably tight
supply/demand fundamentals. Consequently, phosphate gross
margins nearly doubled quarter over quarter, to
$33.3 million.
Higher dividends received from our investment in Israel
Chemicals Ltd. (ICL) added an additional
$6.0 million to earnings for the first quarter of 2006. In
addition, the receipt of income tax refunds tied to 2002-2004
taxation years, brought about by a recent Canadian appeals court
decision (pertaining to a uranium producer) which affirmed the
deductibility of the Saskatchewan Capital Tax Resource Surcharge
contributed a further $12.3 million. Provincial mining and
other taxes were 63 percent lower than in the first quarter
of 2005 due to the significant decrease in potash gross margin.
22
Balance Sheet
Total assets were $5,592.1 million at March 31, 2006,
up $234.2 million or 4 percent over December 31,
2005. Total liabilities increased $119.3 million from
December 31, 2005 to $3,344.7 million at
March 31, 2006, and total shareholders equity
increased $114.9 million during the same period to
$2,247.4 million.
The largest contributors to the increase in assets during the
first three months of 2006 were intercorporate investments and
property, plant and equipment. During the quarter, we acquired
an additional 10 percent of the ordinary shares of Sinochem
Hong Kong Holdings Limited (Sinofert) for
$126.3 million and made additions to property plant and
equipment of $120.0 million ($53.3 million of which
was spent to bring back idled potash capacity at Allan and
Lanigan). Cash balances increased $78.8 million from
December 31, 2005 as a result of the timing of short-term
debt repayments in the quarter. These increases were partially
offset by a reduction in accounts receivable, which declined
14 percent (or $63.3 million) compared to
December 31, 2005, primarily as a result of a
4 percent drop in sales in the month of March 2006 compared
to the month of December 2005.
The increase in liabilities was largely attributable to an
increase of $352.7 million in short-term debt. This was
partially offset by a $251.3 million decline in accounts
payable of which $57.7 million related to a reduction in
hedging margin deposits associated with lower natural gas prices
at March 31, 2006 compared to December 31, 2005.
Current income taxes payable declined $116.0 million as a
result of the timing of payments during the quarter and lower
profits in the potash segment.
Share capital, retained earnings and contributed surplus all
increased at March 31, 2006 compared to December 31,
2005. Share capital at March 31, 2006 was $3.7 million
higher than December 31, 2005 as a result of the issuance
of common shares arising from stock option exercises and our
dividend reinvestment plan. Net earnings for the three months
ended March 31, 2006 of $125.5 million increased
retained earnings while dividends declared of $15.3 million
reduced the balance, for a net increase in retained earnings of
$110.2 million at March 31, 2006 compared to
December 31, 2005.
Business Segment Review
Note 6 to the unaudited interim condensed consolidated
financial statements provides information pertaining to our
business segments. Management includes net sales in segment
disclosures in the consolidated financial statements pursuant to
Canadian GAAP, which requires segmentation based upon our
internal organization and reporting of revenue and profit
measures derived from internal accounting methods. Net sales
(and the related per-tonne amounts) are the primary revenue
measures we use and review in making decisions about operating
matters on a business segment basis. These decisions include
assessments about potash, phosphate and nitrogen performance and
the resources to be allocated to these segments. We also use net
sales (and the related per-tonne amounts) for business planning
and monthly forecasting. Net sales are calculated as sales
revenues less freight, transportation and distribution expenses.
23
Our discussion of segment operating performance is set out below
and includes nutrient product and/or market performance where
applicable to give further insight into these results.
Potash
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
Dollars (millions) |
|
Tonnes (thousands) |
|
Average Price per Tonne(1) |
|
|
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
Sales
|
|
$ |
225.8 |
|
|
$ |
352.1 |
|
|
|
(36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
|
|
|
25.0 |
|
|
|
37.2 |
|
|
|
(33 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and distribution
|
|
|
7.4 |
|
|
|
9.1 |
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
193.4 |
|
|
$ |
305.8 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American
|
|
$ |
91.9 |
|
|
$ |
128.9 |
|
|
|
(29 |
) |
|
|
527 |
|
|
|
922 |
|
|
|
(43 |
) |
|
$ |
174.31 |
|
|
$ |
139.86 |
|
|
|
25 |
|
|
Offshore
|
|
|
97.2 |
|
|
|
172.8 |
|
|
|
(44 |
) |
|
|
732 |
|
|
|
1,401 |
|
|
|
(48 |
) |
|
$ |
132.90 |
|
|
$ |
123.35 |
|
|
|
8 |
|
|
|
|
|
189.1 |
|
|
|
301.7 |
|
|
|
(37 |
) |
|
|
1,259 |
|
|
|
2,323 |
|
|
|
(46 |
) |
|
$ |
150.24 |
|
|
$ |
129.90 |
|
|
|
16 |
|
|
Miscellaneous products
|
|
|
4.3 |
|
|
|
4.1 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193.4 |
|
|
|
305.8 |
|
|
|
(37 |
) |
|
|
1,259 |
|
|
|
2,323 |
|
|
|
(46 |
) |
|
$ |
153.61 |
|
|
$ |
131.64 |
|
|
|
17 |
|
Cost of goods sold
|
|
|
102.6 |
|
|
|
129.6 |
|
|
|
(21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
81.49 |
|
|
$ |
55.79 |
|
|
|
46 |
|
|
Gross margin
|
|
$ |
90.8 |
|
|
$ |
176.2 |
|
|
|
(48 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
72.12 |
|
|
$ |
75.85 |
|
|
|
(5 |
) |
|
|
|
(1) |
Rounding differences may occur due to the use of whole dollars
in per-tonne calculations. |
Highlights
|
|
|
|
|
As a result of reduced sales volumes, potash gross margin was
substantially lower than the first quarter of 2005. |
|
|
|
Potash demand slowed as many offshore customers delayed
purchasing while new pricing agreements with China were
negotiated. Despite North American and offshore volumes being
down 43 and 48 percent, respectively, compared to the first
quarter of 2005, North American realized prices were
25 percent higher and offshore prices were up
8 percent over the same quarter last year. |
|
|
|
We continued our approach of producing only what the market
needs and as such, took 31.7 mine shutdown weeks during the
quarter as compared to none in the first quarter of 2005. Potash
production declined from 2.4 million tonnes to
1.3 million tonnes quarter over quarter and increased
our costs. |
|
|
|
Our potash inventories of 1.15 million tonnes were flat
from the end of the fourth quarter of 2005, but higher than the
abnormally low levels at the end of the first quarter of
that year. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Potash gross margin variance attributable to: |
|
Dollars (millions) |
|
|
2006 vs. 2005 |
|
|
|
|
|
Change in |
|
|
|
|
Prices/Costs |
|
|
|
|
|
|
Total |
|
|
Change in |
|
|
|
Cost of |
|
Gross |
|
|
Sales |
|
Net |
|
Goods |
|
Margin |
|
|
Volumes |
|
Sales |
|
Sold |
|
Variance |
|
Domestic
|
|
$ |
(37.6 |
) |
|
$ |
18.6 |
|
|
$ |
(1.7 |
) |
|
$ |
(20.7 |
) |
Offshore
|
|
|
(55.6 |
) |
|
|
5.0 |
|
|
|
(14.5 |
) |
|
|
(65.1 |
) |
Other
|
|
|
0.3 |
|
|
|
(0.6 |
) |
|
|
0.7 |
|
|
|
0.4 |
|
|
Total
|
|
$ |
(92.9 |
) |
|
$ |
23.0 |
|
|
$ |
(15.5 |
) |
|
$ |
(85.4 |
) |
|
24
Sales and Cost of Goods Sold
The most significant sales and cost of goods sold contributors
to the $85.4-million decline in gross margin quarter over
quarter were as follows:
|
|
|
|
|
Offshore volumes were down 48 percent as sales by Canpotex
Limited (Canpotex), the offshore marketing company
for Saskatchewan potash producers, dropped from
1.18 million to 0.13 million tonnes in the most
significant markets of China, India and Brazil. China was
virtually absent from the market during the quarter as the
country waited to conclude new pricing contracts with suppliers,
including Canpotex, before coming back into the market for new
tonnage. Brazil continued to be affected by strengthening of the
Brazilian real relative to the US dollar accompanied by lower
soybean prices which continued to pressure margins for Brazilian
farmers and limited their credit availability, leading to fewer
acres being planted and in turn a decrease in imports. This
slowdown was not global, as volumes to many smaller
potash-consuming countries such as the Philippines, Taiwan,
Vietnam, Ecuador and Mexico were up from the same period
last year. |
|
|
|
North American sales volumes also dropped as dealer fill and
field application of potash was weaker than expected due to low
commodity prices, high energy input costs, uncertainty about
planting decisions and, to a lesser degree, weather. We believe
dealers want to end the fertilizer year with low inventories of
all fertilizers. They are therefore managing their purchasing
and exposure cautiously which also negatively impacted sales
volumes during the quarter. |
|
|
|
Realized prices in the North American market were higher as
price increases announced through 2005 held into the first
quarter of 2006. Prices in the North American market were $41
per tonne, or 31 percent, higher than offshore prices. The
gap between the two markets is partly due to offshore customers
purchasing under long-term contracts that lag behind North
American spot-market increases. The difference also reflects
product mix, as North American customers prefer granular product
that commands a premium over standard product, which is more
typically consumed offshore. |
|
|
|
Higher cost of goods sold negatively impacted the change in
gross margin due to the combination of higher unit costs
associated with plant shutdowns, increasing natural gas prices
and higher electrical rates. Costs associated with the
31.7 weeks of mine production shutdowns were
$12.4 million. Higher natural gas prices raised the cost of
potash production. Further, a stronger Canadian dollar
negatively impacted cost of goods sold by
$2.00 per tonne. |
25
Nitrogen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
Dollars (millions) |
|
Tonnes (thousands) |
|
Average Price per Tonne(1) |
|
|
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
Sales
|
|
$ |
331.9 |
|
|
$ |
304.8 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
|
|
|
9.6 |
|
|
|
10.2 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and distribution
|
|
|
13.3 |
|
|
|
11.7 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
309.0 |
|
|
$ |
282.9 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ammonia
|
|
$ |
123.0 |
|
|
$ |
98.9 |
|
|
|
24 |
|
|
|
364 |
|
|
|
406 |
|
|
|
(10 |
) |
|
$ |
337.69 |
|
|
$ |
243.78 |
|
|
|
39 |
|
|
Urea
|
|
|
81.4 |
|
|
|
90.3 |
|
|
|
(10 |
) |
|
|
281 |
|
|
|
359 |
|
|
|
(22 |
) |
|
$ |
289.81 |
|
|
$ |
251.43 |
|
|
|
15 |
|
|
Nitrogen solutions/Nitric acid/ Ammonium nitrate
|
|
|
81.0 |
|
|
|
65.2 |
|
|
|
24 |
|
|
|
382 |
|
|
|
450 |
|
|
|
(15 |
) |
|
$ |
211.96 |
|
|
$ |
144.76 |
|
|
|
46 |
|
|
Purchased
|
|
|
17.0 |
|
|
|
23.2 |
|
|
|
(27 |
) |
|
|
54 |
|
|
|
93 |
|
|
|
(42 |
) |
|
$ |
316.85 |
|
|
$ |
250.68 |
|
|
|
26 |
|
|
|
|
|
302.4 |
|
|
|
277.6 |
|
|
|
9 |
|
|
|
1,081 |
|
|
|
1,308 |
|
|
|
(17 |
) |
|
$ |
279.74 |
|
|
$ |
212.23 |
|
|
|
32 |
|
|
Miscellaneous
|
|
|
6.6 |
|
|
|
5.3 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
309.0 |
|
|
|
282.9 |
|
|
|
9 |
|
|
|
1,081 |
|
|
|
1,308 |
|
|
|
(17 |
) |
|
$ |
285.81 |
|
|
$ |
216.31 |
|
|
|
32 |
|
Cost of goods sold
|
|
|
229.6 |
|
|
|
217.6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
212.36 |
|
|
$ |
166.39 |
|
|
|
28 |
|
|
Gross margin
|
|
$ |
79.4 |
|
|
$ |
65.3 |
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
73.45 |
|
|
$ |
49.92 |
|
|
|
47 |
|
|
|
|
(1) |
Rounding differences may occur due to the use of whole dollars
in per-tonne calculations. |
Highlights
|
|
|
|
|
Price increases were realized in all nitrogen products quarter
over quarter. Supply/demand fundamentals remained tight and
ammonia prices stayed firm despite a drop in the North American
spot price for natural gas compared to fourth-quarter 2005. The
combination of high Western European natural gas prices and high
ocean freight costs for specialized ammonia vessels led to
higher-priced imports. Increases in ammonia and urea imports did
not offset US production curtailments. |
|
|
|
Higher ammonia and urea prices were beneficial for
PotashCorps Trinidad facility due to our long-term
lower-cost natural gas price contracts. Our Trinidad facility
provided $50.4 million or 63 percent of first-quarter
gross margin compared to $43.2 million in the first quarter
of 2005. |
|
|
|
US nitrogen operations generated $8.1 million in gross
margin in the quarter. |
|
|
|
We are capitalizing on our competitive advantage in Trinidad
with debottlenecking projects at our 01 and 02 plants that will
add 138,000 tonnes of annual capacity. One of these was
completed during the first quarter, giving us the ability to
produce another 70,000 tonnes per year. The second is
scheduled to wrap up in May. With the completion of these
projects, 62 percent of our total nitrogen production will
be supplied from Trinidad. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nitrogen gross margin variance attributable to: |
|
Dollars (millions) |
|
|
2006 vs. 2005 |
|
|
|
|
|
Change in |
|
|
|
|
Prices/Costs |
|
|
|
|
|
|
Total |
|
|
Change in |
|
|
|
Cost of |
|
Gross |
|
|
Sales |
|
Net |
|
Goods |
|
Margin |
|
|
Volumes |
|
Sales |
|
Sold |
|
Variance |
|
Ammonia
|
|
$ |
(3.5 |
) |
|
$ |
33.3 |
|
|
$ |
(23.0 |
) |
|
$ |
6.8 |
|
Urea
|
|
|
(9.1 |
) |
|
|
11.8 |
|
|
|
(11.2 |
) |
|
|
(8.5 |
) |
Solutions, NA, AN
|
|
|
(2.4 |
) |
|
|
23.1 |
|
|
|
(16.6 |
) |
|
|
4.1 |
|
Purchased
|
|
|
(5.9 |
) |
|
|
4.7 |
|
|
|
0.7 |
|
|
|
(0.5 |
) |
Hedge gains
|
|
|
|
|
|
|
|
|
|
|
12.3 |
|
|
|
12.3 |
|
Other
|
|
|
(0.9 |
) |
|
|
2.8 |
|
|
|
(2.0 |
) |
|
|
(0.1 |
) |
|
Total
|
|
$ |
(21.8 |
) |
|
$ |
75.7 |
|
|
$ |
(39.8 |
) |
|
$ |
14.1 |
|
|
26
Sales and Cost of Goods Sold
The gross margin increase of $14.1 million quarter over
quarter was largely attributable to the following sales and cost
of goods sold changes:
|
|
|
|
|
Hurricanes that struck the US Gulf region during 2005 and cold
weather in the US late in the year led to high natural gas
prices sustained at more than $13 per MMBtu during the
fourth quarter. This caused ammonia prices to climb rapidly in
late 2005 and led North American producers to curtail half of
their ammonia operating capacity by year-end, tightening market
supply. Though North American natural gas spot prices dropped
significantly during the first quarter of 2006, high ammonia
prices continued and as a result we realized ammonia prices
39 percent higher than first-quarter 2005. Production
curtailments at our Augusta and Lima facilities, which began in
late 2005 as a result of high natural gas prices, continued into
2006 and caused our supply of urea to be tight. We focused on
higher-margin sales and backed away from some lower-priced
business, contributing to the 15 percent increase in urea
realized prices. Our urea prices increased $38 per tonne as
compared to the NOLA benchmark increase of $8 per tonne.
Realized prices for nitrogen solutions, nitric acid and ammonium
nitrate generally followed the rise in ammonia and urea prices,
as a number of our customer contracts are tied to either natural
gas prices or the NOLA ammonia price. |
|
|
|
Total nitrogen sales volumes declined 17 percent. Nitrogen
fertilizer sales represented the significant portion of this
drop, down 30 percent primarily due to US farmers
purchasing less in first-quarter 2006 as we believe they were
hoping for lower prices. Therefore, approximately
70 percent of total nitrogen volumes, including both North
American and Trinidad production, were sold to our more stable
industrial customer base outside the fertilizer cycles.
Approximately 78 percent of our North American nitrogen
production was sold to industrial customers. |
|
|
|
Cost of goods sold increased 28 percent per tonne. This was
due to higher natural gas costs combined with reduced production
during the quarter resulting from more plant shutdowns for
turnarounds in the first three months of 2006 and the
continuation of production curtailments at our Augusta and Lima
facilities. Natural gas costs continue to be the single most
important contributor to cost of goods sold, typically
representing between 80 and 95 percent of the cash cost of
producing one tonne of ammonia. The companys total average
natural gas cost, including the benefit of the companys
hedge and lower-cost Trinidad gas contracts, was $4.34 per
MMBtu, 17 percent higher than the same period in 2005 but
25 percent lower than the fourth quarter of 2005. The
companys US natural gas hedging activities contributed
$20.9 million to the gross margin compared to
$8.6 million in the corresponding period last year. |
27
Phosphate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
|
Dollars (millions) |
|
Tonnes (thousands) |
|
Average Price per Tonne(1) |
|
|
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
2006 |
|
2005 |
|
% Change |
|
Sales
|
|
$ |
303.9 |
|
|
$ |
264.5 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight
|
|
|
20.3 |
|
|
|
19.8 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation and distribution
|
|
|
10.5 |
|
|
|
8.1 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
273.1 |
|
|
$ |
236.6 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fertilizer liquids
|
|
$ |
61.9 |
|
|
$ |
52.6 |
|
|
|
18 |
|
|
|
260 |
|
|
|
250 |
|
|
|
4 |
|
|
$ |
238.13 |
|
|
$ |
210.61 |
|
|
|
13 |
|
|
Fertilizer solids
|
|
|
93.1 |
|
|
|
71.3 |
|
|
|
31 |
|
|
|
377 |
|
|
|
327 |
|
|
|
15 |
|
|
$ |
246.86 |
|
|
$ |
217.89 |
|
|
|
13 |
|
|
Feed
|
|
|
52.3 |
|
|
|
55.1 |
|
|
|
(5 |
) |
|
|
165 |
|
|
|
230 |
|
|
|
(28 |
) |
|
$ |
317.20 |
|
|
$ |
239.25 |
|
|
|
33 |
|
|
Industrial
|
|
|
63.2 |
|
|
|
54.7 |
|
|
|
16 |
|
|
|
173 |
|
|
|
155 |
|
|
|
12 |
|
|
$ |
364.04 |
|
|
$ |
353.44 |
|
|
|
3 |
|
|
|
|
|
270.5 |
|
|
|
233.7 |
|
|
|
16 |
|
|
|
975 |
|
|
|
962 |
|
|
|
1 |
|
|
$ |
277.44 |
|
|
$ |
242.93 |
|
|
|
14 |
|
|
Miscellaneous
|
|
|
2.6 |
|
|
|
2.9 |
|
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
273.1 |
|
|
|
236.6 |
|
|
|
15 |
|
|
|
975 |
|
|
|
962 |
|
|
|
1 |
|
|
$ |
279.94 |
|
|
$ |
245.87 |
|
|
|
14 |
|
Cost of goods sold
|
|
|
239.8 |
|
|
|
219.6 |
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
245.79 |
|
|
$ |
228.20 |
|
|
|
8 |
|
|
Gross margin
|
|
$ |
33.3 |
|
|
$ |
17.0 |
|
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34.15 |
|
|
$ |
17.67 |
|
|
|
93 |
|
|
|
|
(1) |
Rounding differences may occur due to the use of whole dollars
in per-tonne calculations. |
Highlights
|
|
|
|
|
Gross margin of $33.3 million marked the best first-quarter
gross margin for phosphate in 7 years, driven by higher
prices across virtually all products in response to continuing
high input costs and reasonably tight supply/demand fundamentals. |
|
|
|
Feed phosphate provided $16.0 million of the phosphate
gross margin for the quarter, capitalizing on higher prices even
as volumes declined. |
|
|
|
Higher-margin industrial phosphate, long the foundation of our
phosphate business, added gross margin of $14.8 million for
the first quarter of 2006. Within industrial, purified acid was
again the most profitable product, generating gross margin of
$14.3 million, which was 32 percent of net sales. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phosphate gross margin variance attributable to: |
|
Dollars (millions) |
|
|
2006 vs. 2005 |
|
|
|
|
|
Change in |
|
|
|
|
Prices/Costs |
|
|
|
|
|
|
Total |
|
|
Change in |
|
|
|
Cost of |
|
Gross |
|
|
Sales |
|
Net |
|
Goods |
|
Margin |
|
|
Volumes |
|
Sales |
|
Sold |
|
Variance |
|
Fertilizer liquids
|
|
$ |
2.4 |
|
|
$ |
6.3 |
|
|
$ |
(2.5 |
) |
|
$ |
6.2 |
|
Fertilizer solids
|
|
|
5.8 |
|
|
|
10.4 |
|
|
|
(18.0 |
) |
|
|
(1.8 |
) |
Feed
|
|
|
(7.9 |
) |
|
|
12.8 |
|
|
|
6.8 |
|
|
|
11.7 |
|
Industrial
|
|
|
1.6 |
|
|
|
3.6 |
|
|
|
(2.4 |
) |
|
|
2.8 |
|
Other
|
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
(2.2 |
) |
|
|
(2.6 |
) |
|
Total
|
|
$ |
1.6 |
|
|
$ |
33.0 |
|
|
$ |
(18.3 |
) |
|
$ |
16.3 |
|
|
Sales and Cost of Goods Sold
The most significant sales and cost of goods sold contributors
to the $16.3-million increase in gross margin quarter over
quarter were as follows:
|
|
|
|
|
Higher industrial realized prices were a result of price
increases implemented during 2005. Additionally, higher cost
rock at our Geismar facility was a factor for certain customers.
Production cutbacks and increased demand from export markets
raised the realized price for fertilizer products. |
28
|
|
|
|
|
Sales volumes were relatively flat, though there was a marked
change in product mix. North American solid fertilizer sales
volumes were 7 percent higher due to an earlier spring
planting season in the Southeastern US in 2006, and export sales
volumes rose 43 percent. These were more than offset by a
28-percent decline in feed sales volumes resulting from the
companys decision to remain firm on pricing, while certain
of our competitors reduced prices to gain market share. |
|
|
|
Cost of goods sold increased $20.2 million though sales
volumes remained relatively flat. Cost of goods sold per tonne
increased 8 percent as higher raw material input costs more
than offset the positive effect of operating rate efficiencies
and change in product mix. The company benefited from operating
rate efficiencies as
P2O5
production levels increased 2 percent; however,
38 percent higher ammonia prices and 20 percent higher
sulfur prices combined to reduce gross margin. |
Expenses and Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
|
|
Dollar |
|
% |
Dollars (millions) |
|
2006 |
|
2005 |
|
Change |
|
Change |
|
Selling and administrative
|
|
$ |
30.8 |
|
|
$ |
29.3 |
|
|
$ |
1.5 |
|
|
|
5 |
|
Provincial mining and other taxes
|
|
|
14.2 |
|
|
|
38.4 |
|
|
|
(24.2 |
) |
|
|
(63 |
) |
Foreign exchange gain
|
|
|
2.4 |
|
|
|
5.9 |
|
|
|
(3.5 |
) |
|
|
(59 |
) |
Other income
|
|
|
31.2 |
|
|
|
20.0 |
|
|
|
11.2 |
|
|
|
56 |
|
Interest expense
|
|
|
23.2 |
|
|
|
20.7 |
|
|
|
2.5 |
|
|
|
12 |
|
Income tax expense
|
|
|
43.4 |
|
|
|
64.7 |
|
|
|
(21.3 |
) |
|
|
(33 |
) |
Selling and administrative expenses were virtually flat quarter
over quarter as minor reductions to benefit expenses associated
with the companys incentive plans were more than offset by
increased consulting and professional fees incurred during
the quarter.
Provincial mining and other taxes decreased by 63 percent
in first-quarter 2006 compared to the corresponding quarter last
year, principally due to decreased Saskatchewan Potash
Production Tax and corporate capital tax. Saskatchewans
Potash Production Tax is comprised of a base tax per tonne of
product sold and an additional tax based on mine profits. The
profits tax component declined significantly, driven by
46 percent lower potash sales volumes quarter over quarter,
despite the 16-percent increase in realized potash prices
compared to the first quarter of 2005.
The period-end translation of Canadian-dollar denominated
monetary items on the Consolidated Statement of Financial
Position contributed to net foreign exchange gains of
$2.4 million in the first quarter of 2006. The impact of
the change in the Canadian dollar relative to the US dollar
combined with the companys foreign currency risk
management activities was less significant for the quarter ended
March 31, 2006, than it was in the comparable period in
2005 where foreign exchange gains of $5.9 million were
recognized.
Other income increased $11.2 million quarter over quarter
primarily due to an increase of $6.0 million in dividend
income from our investment in ICL. Additionally, increased sales
of excess natural gas during the first quarter of 2006,
resulting from nitrogen production curtailments during the
period, contributed to the increase, as did a reduction in loss
on disposal of assets compared to that recognized during the
first quarter of 2005.
Weighted average long-term debt outstanding in first-quarter
2006 was $1,258.7 million (2005
$1,268.9 million) with a weighted average interest rate of
7.0 percent (2005 6.9 percent). The
weighted average interest rate on short-term debt outstanding in
the first quarter of 2006 was 4.7 percent (2005
2.7 percent) and the weighted average short-term debt
outstanding was $428.9 million (2005
$93.8 million). Though the average balance of short-term
debt outstanding was higher quarter over quarter at higher
interest rates, net interest expense increased only
$2.5 million due to the impact of the capitalized interest
on expansion projects.
29
The companys consolidated effective income tax rate for
the three month period ended March 31, 2006 is
approximately 26 percent (2005
33 percent). The reduction in the effective rate for the
quarter was due to the receipt of income tax refunds relating to
a recent Canadian appeals court decision (pertaining to a
uranium producer) which affirmed the deductibility of the
Saskatchewan Capital Tax Resource Surcharge. The refunds related
to the 2002-2004 taxation years. The company also expects income
tax refunds in connection with the 1999-2001 taxation years.
These refunds are currently under review and have not been
reflected in these interim condensed consolidated financial
statements. The combination of income tax refunds received and
lower operating income led to a decline in income tax expense of
$21.3 million compared to the first quarter of 2005. For
the first three months of 2006, 68 percent of the effective
rate pertained to current income taxes and 32 percent
related to future income taxes. The decrease in the current tax
provision from 90 percent in the same period last year is
largely due to the significant decrease in potash operating
income in Canada.
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements
The following aggregated information about our contractual
obligations and other commitments aims to provide insight into
our short- and long-term liquidity and capital resource
requirements. The information presented in the table below does
not include obligations that have original maturities of less
than one year or planned capital expenditures.
Contractual Obligations and Other Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
Dollars (millions) |
|
|
|
Total |
|
Within 1 year |
|
1 to 3 years |
|
3 to 5 years |
|
Over 5 years |
|
Long-term debt
|
|
$ |
1,258.5 |
|
|
$ |
1.2 |
|
|
$ |
400.4 |
|
|
$ |
0.6 |
|
|
$ |
856.3 |
|
Estimated interest payments on long-term debt
|
|
|
386.7 |
|
|
|
87.7 |
|
|
|
132.6 |
|
|
|
118.4 |
|
|
|
48.0 |
|
Operating leases
|
|
|
691.4 |
|
|
|
82.4 |
|
|
|
138.5 |
|
|
|
129.4 |
|
|
|
341.1 |
|
Purchase obligations
|
|
|
916.3 |
|
|
|
124.0 |
|
|
|
218.4 |
|
|
|
184.3 |
|
|
|
389.6 |
|
Other commitments
|
|
|
46.5 |
|
|
|
18.7 |
|
|
|
17.3 |
|
|
|
10.5 |
|
|
|
|
|
Other long-term liabilities
|
|
|
868.3 |
|
|
|
43.2 |
|
|
|
79.7 |
|
|
|
68.2 |
|
|
|
677.2 |
|
|
Total
|
|
$ |
4,167.7 |
|
|
$ |
357.2 |
|
|
$ |
986.9 |
|
|
$ |
511.4 |
|
|
$ |
2,312.2 |
|
|
Long-term Debt
Long-term debt consists of $1,250.0 million of notes
payable that were issued under US shelf registration
statements, a net of $5.9 million under a back-to-back loan
arrangement (described in Note 12 to the consolidated
financial statements in our 2005 Annual Report
Financial Review) and other commitments of $2.6 million
payable over the next five years.
The notes payable represent 99 percent of our total
long-term debt portfolio and are unsecured. Of the notes
outstanding, $400.0 million bear interest at
7.125 percent and mature in 2007, $600.0 million bear
interest at 7.750 percent and mature in 2011 and
$250.0 million bear interest at 4.875 percent and
mature in 2013. There are no sinking fund requirements. The
notes payable are not subject to any financial test covenants
but are subject to certain customary covenants (including
limitations on liens and sale and leaseback transactions) and
events of default, including an event of default for
acceleration of other debt in excess of $50.0 million. The
other long-term debt instruments are not subject to any
financial test covenants but are subject to certain customary
covenants and events of default, including, for other long-term
debt, an event of default for non-payment of other debt in
excess of $25.0 million. Non-compliance with such covenants
could result in accelerated payment of the related debt. The
company was in compliance with all covenants as at
March 31, 2006.
30
The estimated interest payments on long-term debt in the table
above include our cumulative scheduled interest payments on
fixed and variable rate long-term debt. Interest on variable
rate debt is based on interest rates prevailing at
March 31, 2006. At March 31, 2006, the company had
receive-fixed, pay-variable interest rate swap agreements
outstanding with total notional amounts of $nil
(2005 $225.0 million). The fair value of the
swaps outstanding at March 31, 2006 was a liability of $nil
(2005 $1.3 million).
Operating Leases
The company has various long-term operating lease agreements for
buildings, port facilities, equipment, ocean-going
transportation vessels, mineral leases and railcars, the latest
of which expires in 2025.
The most significant operating leases consist of three items.
The first is our lease of railcars, which extends to
approximately 2020. The second is the lease of port facilities
at the Port of Saint John for shipping New Brunswick potash
offshore. This lease runs until 2018. The third is the lease of
four vessels for transporting ammonia from Trinidad. One vessel
agreement runs until 2019; the others terminate in 2016.
Purchase Obligations
We have long-term agreements for the purchase of sulfur for use
in the production of phosphoric acid. These agreements provide
for minimum purchase quantities and certain prices are based on
market rates at the time of delivery. The commitments included
in the table above are based on contract prices.
We have entered into long-term natural gas contracts with the
National Gas Company of Trinidad, the latest of which expires in
2018. The contracts provide for prices that vary with ammonia
market prices, escalating floor prices and minimum purchase
quantities. The commitments included in the table above are
based on floor prices and minimum purchase quantities.
We also have long-term agreements for the purchase of phosphate
rock used at our Geismar facility and limestone used in Brazil.
The commitments included in the table above are based on the
expected purchase quantity and current net base prices.
Other Commitments
Other operating commitments consist principally of amounts
relating to various rail freight contracts, the latest of which
expires in 2010.
Other Long-term Liabilities
Other long-term liabilities consist primarily of net accrued
pension and post-retirement benefits, future income taxes,
environmental costs and asset retirement obligations.
Future income tax liabilities may vary according to changes in
tax laws, tax rates and the operating results of the company.
Since it is impractical to determine whether there will be a
cash impact in any particular year, all long-term future income
tax liabilities have been reflected in the over
5 years category in the table above.
Capital Expenditures
During 2006, we expect to incur capital expenditures of
approximately $340.0 million, plus capitalized interest,
for opportunity capital and approximately $160.0 million to
sustain operations at existing levels. The most significant
single project relates to bringing back idled capacity of
1.5 million tonnes at Lanigan, including the mill
refurbishment and expansion of surface, hoisting and underground
facilities. This project is scheduled to be complete in the
fourth quarter of 2007. During the first quarter of 2006, the
company substantially completed its project to increase potash
production capacity at Allan, which will contribute an
additional 0.4 million tonnes to annual potash production
capability. In addition, the company will be adding compacting
equipment at these sites that will increase granular capacity by
1.25 million tonnes per year.
We anticipate that all capital spending will be financed by
internally generated cash flows supplemented, if and as
necessary, by borrowing from existing financing sources.
31
Sources and Uses of Cash
The companys cash flows from operating, investing and
financing activities, as reflected in the interim Condensed
Consolidated Statements of Cash Flow, are summarized in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
|
|
% |
Dollars (millions) |
|
2006 |
|
2005 |
|
Change |
|
Cash (used in) provided by operating activities
|
|
$ |
(12.5 |
) |
|
$ |
121.7 |
|
|
|
(110 |
) |
Cash used in investing activities
|
|
$ |
(248.8 |
) |
|
$ |
(50.4 |
) |
|
|
394 |
|
Cash provided by (used in) financing activities
|
|
$ |
340.1 |
|
|
$ |
(51.2 |
) |
|
|
n/m |
|
n/m = not meaningful
The following table presents summarized working capital
information as at March 31, 2006 compared to
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
% |
Dollars (millions) except ratio amounts |
|
2006 |
|
2005 |
|
Change |
|
Current assets
|
|
$ |
1,144.2 |
|
|
$ |
1,110.8 |
|
|
|
3 |
|
Current liabilities
|
|
$ |
(1,197.5 |
) |
|
$ |
(1,096.1 |
) |
|
|
9 |
|
Working capital
|
|
$ |
(53.3 |
) |
|
$ |
14.7 |
|
|
|
n/m |
|
Current ratio
|
|
|
0.96 |
|
|
|
1.01 |
|
|
|
(5 |
) |
n/m = not meaningful
Our liquidity needs can be met through a variety of sources,
including cash generated from operations, short-term borrowings
against our line of credit and commercial paper program, and
long-term debt issued under our US shelf registration statement
and drawn down under our syndicated credit facility. Our primary
uses of funds are operational expenses, sustaining and
opportunity capital spending, dividends and interest and
principal payments on our debt securities.
Cash provided by operating activities declined
$134.2 million quarter over quarter. The unfavorable
variance was mainly attributable to a decrease in net cash flows
from non-cash operating working capital of $132.3 million.
This change was significantly influenced by a
$248.9 million decline in accounts payable and accrued
charges resulting from (i) reductions in income tax, potash
production tax and other taxes payable because of lower potash
operating income and higher income tax installments paid during
the quarter; (ii) a decline in hedging margin deposits due
to falling gas prices; and (iii) payments of larger
incentive compensation accruals than in the corresponding period
last year. The change in accounts payable and accrued charges
was partially offset by a $126.8 million reduction in the
change in accounts receivable resulting from a 46 percent
decline in potash sales volumes quarter over quarter.
Cash used in investing activities rose $198.4 million
quarter over quarter. The most significant cash outlays included:
|
|
|
|
|
In February 2006, the company acquired an additional
10 percent interest in the ordinary shares of Sinofert for
cash consideration of $126.3 million. The purchase price
was financed by short-term debt. |
|
|
|
The companys spending on property, plant and equipment
increased $57.0 million as compared to the same three-month
period last year, largely due to major capital expansion
projects in potash. These activities, totaling
$120.0 million for the quarter, were also financed by our
short-term credit facilities. |
Cash provided by financing activities during the first quarter
of 2006 was $391.3 million more than the same quarter last
year as a result of $351.9 million higher proceeds from
short-term debt. In the first quarter of 2005,
$82.3 million was used by the company to repurchase common
shares under its normal course issuer bid. The company completed
the repurchase program by December 31, 2005 and has not
initiated a new program
32
in 2006. We also received $44.0 million less proceeds from
issuance of common shares in the first quarter of 2006,
primarily due to fewer stock options being exercised compared to
the same quarter in 2005.
We believe that internally generated cash flow, supplemented by
borrowing from existing financing sources if necessary, will be
sufficient to meet our anticipated capital expenditures and
other cash requirements in 2006, exclusive of any possible
acquisitions, as was the case in 2005. At this time, we do not
reasonably expect any presently known trend or uncertainty to
affect our ability to access our historical sources of cash.
Principal Debt Instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
Total |
|
Amount |
|
Amount |
|
Amount |
Dollars (millions) |
|
Amount |
|
Outstanding |
|
Committed |
|
Available |
|
Syndicated credit facility
|
|
$ |
750.0 |
|
|
$ |
|
|
|
$ |
604.9 |
|
|
$ |
145.1 |
|
Line of credit
|
|
|
75.0 |
|
|
|
|
|
|
|
18.7 |
|
|
|
56.3 |
|
Commercial paper
|
|
|
750.0 |
|
|
|
604.9 |
|
|
|
|
|
|
|
145.1 |
|
US shelf registration
|
|
|
2,000.0 |
|
|
|
1,250.0 |
|
|
|
|
|
|
|
750.0 |
|
PotashCorp has a $750.0 million syndicated credit facility,
renewed in September 2005 for a five-year term, which provides
for unsecured advances. The amount available to us is the total
facility amount less direct borrowings and amounts committed in
respect of commercial paper outstanding. No funds were borrowed
under the facility as of March 31, 2006. The line of credit
is renewable annually and outstanding letters of credit and
direct borrowings reduce the amount available. Both the line of
credit and the syndicated credit facility have financial tests
and other covenants with which we must comply at each
quarter-end. Principal covenants under the credit facility and
line of credit require a debt-to-capital ratio of less than or
equal to 0.55:1, a long-term debt-to-EBITDA (defined in the
respective agreements as earnings before interest, income taxes,
provincial mining and other taxes, depreciation, amortization
and other non-cash expenses) ratio of less than or equal to
3.5:1, tangible net worth greater than or equal to
$1,250.0 million and debt of subsidiaries not to exceed
$590.0 million. The syndicated credit facility and line of
credit are also subject to other customary covenants and events
of default, including an event of default for non-payment of
other debt in excess of Cdn $40.0 million.
Non-compliance with any of the above covenants could result in
accelerated payment of the related debt and amount due under the
line of credit, and termination of the line of credit. We were
in compliance with all covenants as at March 31, 2006.
The commercial paper market is a source of same day
cash for the company. During the first quarter of 2006, we
increased our commercial paper program from $500.0 million
to $750.0 million. Access to this source of short-term
financing depends primarily on maintaining our R1 (low) credit
rating by Dominion Bond Rating Service (DBRS) and conditions in
the money markets. The interest rates we pay are partly based on
the quality of our credit ratings, which are all investment
grade. Our credit rating, as measured by Standard &
Poors senior debt ratings and Moodys senior debt
ratings remained unchanged from December 31, 2005, at BBB+
with a stable outlook and Baa1 with a stable outlook,
respectively.
We also have a US shelf registration statement under which we
may issue up to an additional $750.0 million in unsecured
debt securities.
For the first quarter of 2006, our weighted average cost of
capital was 8.65 percent (2005
8.64 percent), of which 84 percent represented equity
(2005 91 percent).
Outstanding Share Data
The company had 103,672,170 common shares issued and outstanding
at March 31, 2006, compared to 103,593,792 common shares
issued and outstanding at December 31, 2005. During the
first quarter of 2006, the company issued 78,378 common shares
pursuant to the exercise of stock options and our dividend
reinvestment plan. At March 31, 2006, there were 4,998,725
options to purchase common shares outstanding under the
companys three stock option plans, as compared to
5,081,756 at December 31, 2005.
33
Off-Balance Sheet Arrangements
In the normal course of operations, PotashCorp engages in a
variety of transactions that, under Canadian GAAP, are either
not recorded on our Consolidated Statements of Financial
Position or are recorded on our Consolidated Statements of
Financial Position in amounts that differ from the full contract
amounts. Principal off-balance sheet activities we undertake
include issuance of guarantee contracts, certain derivative
instruments and long-term fixed price contracts. We do not
expect any presently known trend or uncertainty to affect our
ability to continue using these arrangements. These types of
arrangements are discussed below.
Guarantee Contracts
In the normal course of operations, the company provides
indemnifications that are often standard contractual terms to
counterparties in transactions such as purchase and sale
contracts, service agreements, director/officer contracts and
leasing transactions. These indemnification agreements may
require the company to compensate the counterparties for costs
incurred as a result of various events, including environmental
liabilities and changes in (or in the interpretation of) laws
and regulations, or as a result of litigation claims or
statutory sanctions that may be suffered by the counterparty as
a consequence of the transaction. The terms of these
indemnification agreements will vary based upon the contract,
the nature of which prevents the company from making a
reasonable estimate of the maximum potential amount that it
could be required to pay to counterparties. Historically, the
company has not made any significant payments under such
indemnifications and no amounts have been accrued in the
accompanying interim condensed consolidated financial statements
with respect to these indemnification guarantees.
The company enters into agreements in the normal course of
business that may contain features which meet the definition of
a guarantee. Various debt obligations (such as overdrafts, lines
of credit with counterparties for derivatives, and back-to-back
loan arrangements) and other commitments (such as railcar
leases) related to certain subsidiaries have been directly
guaranteed by the company under such agreements with third
parties. The company would be required to perform on these
guarantees in the event of default by the guaranteed parties. No
material loss is anticipated by reason of such agreements and
guarantees. At March 31, 2006, the maximum potential amount
of future (undiscounted) payments under significant guarantees
provided to third parties approximated $257.7 million. As
many of these guarantees will not be drawn upon and the maximum
potential amount of future payments does not consider the
possibility of recovery under recourse or collateral provisions,
this amount is not indicative of future cash requirements or the
companys expected losses from these arrangements. At
March 31, 2006, no subsidiary balances subject to
guarantees were outstanding in connection with the
companys cash management facilities, and the company had
no liabilities recorded for other obligations other than
subsidiary bank borrowings of approximately $5.9 million,
which are reflected in other long-term debt, and cash margins
held of approximately $116.0 million to maintain
derivatives, which are included in accounts payable and accrued
charges.
The company has guaranteed the gypsum stack capping, closure and
post-closure obligations of its phosphate operations in Florida
and Louisiana, pursuant to the financial assurance regulatory
requirements in those states. In February 2005, the Florida
Environmental Regulation Commission approved certain
modifications to the financial assurance requirements designed
to ensure that responsible parties have sufficient resources to
cover all closure and post-closure costs and liabilities
associated with gypsum stacks in the state. The new requirements
became effective in July 2005 and include financial strength
tests that are more stringent than under previous law and a
requirement that gypsum stack closure cost estimates include the
cost of treating process water. The company has met its
financial assurance responsibilities as of March 31, 2006.
Costs associated with the retirement of long-lived tangible
assets have been accrued in the accompanying interim condensed
consolidated financial statements to the extent that a legal
liability to retire such assets exists.
The environmental regulations of the Province of Saskatchewan
require each potash mine to have decommissioning and reclamation
(D&R) plans. In 2001, agreement was reached with
the provincial government on the financial assurances for the
D&R plan to cover an interim period to July 1, 2005. In
October 2004, this interim period was extended to July 1,
2006. A government/industry task force has been
34
established to assess decommissioning options for all
Saskatchewan potash producers and to produce mutually acceptable
revisions to the plans. The company has posted an irrevocable
Cdn $2.0 million letter of credit as collateral.
During the period, the company entered into various other
commercial letters of credit in the normal course of operations.
The company expects that it will be able to satisfy all
applicable credit support requirements without disrupting normal
business operations.
Derivative Instruments
We use derivative financial instruments to manage exposure to
commodity price, interest rate and foreign exchange rate
fluctuations. We may choose to enter into certain derivative
transactions that may not qualify for hedge accounting treatment
under Canadian GAAP, but nonetheless economically hedge certain
of our business strategies. These economic hedges are recorded
at fair value on our Consolidated Statements of Financial
Position and marked-to-market each reporting period. However, we
consider any derivative transactions that are specifically
designated (and qualify) for hedge accounting under Canadian
GAAP to be off-balance sheet items since they are not recorded
at fair value.
We employ derivative instruments to hedge the future cost of the
committed and anticipated natural gas purchases primarily for
our US nitrogen plants. By policy, the maximum period for these
hedges cannot exceed ten years. Exceptions to policy may be made
with the specific approval of our Gas Policy Advisory Committee.
The fair value of the companys gas hedging contracts at
March 31, 2006 was $208.1 million (2005
$144.8 million). The companys futures contracts are
exchange-traded and fair value was determined based on exchange
prices. Swaps and option agreements are traded in the
over-the-counter market and fair value was calculated based on a
price that was converted to an exchange-equivalent price.
The company primarily uses interest rate swaps to manage the
interest rate mix of the total debt portfolio and related
overall cost of borrowing. At March 31, 2006, the company
had no swap agreements outstanding. At March 31, 2005, the
company had receive-fixed, pay-variable interest rate swap
agreements outstanding with total notional amounts of
$225.0 million.
Refer to Note 28 to the consolidated financial statements
in our 2005 Annual Report Financial Review for more
detail on our accounting for and types of financial instruments.
Other than as described above, there have been no significant
changes to these instruments during the first three months
of 2006.
Long-term Fixed Price Contracts
Certain of our long-term raw materials agreements contain fixed
price components. Our significant agreements, and the related
obligations under such agreements, are discussed in Cash
Requirements.
QUARTERLY FINANCIAL HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars (millions) |
|
March 31, |
|
|
December 31, |
|
September 30, |
|
June 30, |
|
March 31, |
|
|
December 31, |
|
September 30, |
|
June 30, |
except per-share amounts |
|
2006 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
|
2004 |
|
2004 |
|
2004 |
|
|
|
|
|
|
|
Sales
|
|
$ |
861.6 |
|
|
|
$ |
930.5 |
|
|
$ |
938.0 |
|
|
$ |
1,057.3 |
|
|
$ |
921.4 |
|
|
|
$ |
866.6 |
|
|
$ |
815.7 |
|
|
$ |
833.7 |
|
|
|
|
|
|
|
|
Gross margin
|
|
|
203.5 |
|
|
|
|
242.2 |
|
|
|
279.5 |
|
|
|
344.8 |
|
|
|
258.5 |
|
|
|
|
197.3 |
|
|
|
189.4 |
|
|
|
170.7 |
|
|
|
|
|
|
|
|
Net income
|
|
|
125.5 |
|
|
|
|
117.1 |
|
|
|
130.3 |
|
|
|
164.2 |
|
|
|
131.3 |
|
|
|
|
100.1 |
|
|
|
75.2 |
|
|
|
72.6 |
|
|
|
|
|
|
|
|
Net income per share basic
|
|
|
1.21 |
|
|
|
|
1.11 |
|
|
|
1.20 |
|
|
|
1.50 |
|
|
|
1.18 |
|
|
|
|
0.91 |
|
|
|
0.69 |
|
|
|
0.68 |
|
|
|
|
|
|
|
|
Net income per share diluted
|
|
|
1.19 |
|
|
|
|
1.09 |
|
|
|
1.17 |
|
|
|
1.46 |
|
|
|
1.15 |
|
|
|
|
0.88 |
|
|
|
0.68 |
|
|
|
0.67 |
|
|
|
|
|
|
|
|
Net income per share for each quarter has been computed based on
the weighted average number of shares issued and outstanding
during the respective quarter; therefore, quarterly amounts may
not add to the annual total.
35
Certain aspects of our business can be impacted by seasonal
factors. Fertilizers are sold primarily for spring and fall
application in both northern and southern hemispheres. However,
planting conditions and the timing of customer purchases will
vary each year and fertilizer sales can be expected to shift
from one quarter to another. Most feed and industrial sales are
by contract and are more evenly distributed throughout
the year.
RELATED PARTY TRANSACTIONS
The company sells potash from its Saskatchewan mines for use
outside of North America exclusively to Canpotex, a potash
export, sales and marketing company owned in equal shares by the
three potash producers in the Province of Saskatchewan. Sales to
Canpotex for the quarter ended March 31, 2006 were
$73.4 million (2005 $151.9 million). Sales
to Canpotex are at prevailing market prices and are settled on
normal trade terms.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and
results of operations are based upon our unaudited interim
condensed consolidated financial statements, which have been
prepared in accordance with Canadian GAAP. These principles
differ in certain significant respects from accounting
principles generally accepted in the United States. These
differences are described and quantified in Note 12 to the
unaudited interim condensed consolidated financial statements
included in Item 1 of this Quarterly Report on
Form 10-Q.
The accounting policies used in preparing the unaudited interim
condensed consolidated financial statements are consistent with
those used in the preparation of the 2005 annual consolidated
financial statements, except as disclosed in Note 1 to the
unaudited interim condensed consolidated financial statements.
Certain of these policies involve critical accounting estimates
because they require us to make particularly subjective or
complex judgments about matters that are inherently uncertain
and because of the likelihood that materially different amounts
could be reported under different conditions or using different
assumptions. There have been no material changes to our critical
accounting policies in the first three months of 2006.
We have discussed the development, selection and application of
our key accounting policies, and the critical accounting
estimates and assumptions they involve, with the audit committee
of the Board of Directors, and our audit committee has reviewed
the disclosures described in this section.
RECENT ACCOUNTING CHANGES
Significant Accounting Policies
In January 2006, we adopted Emerging Issues Committee Abstract
No. 157, Implicit Variable Interests Under
AcG-15
(EIC-157).
This EIC addresses whether a company has an implicit variable
interest in a variable interest entity (VIE) or
potential VIE when specific conditions exist. An implicit
variable interest acts the same as an explicit variable interest
except that it involves the absorbing and/or receiving of
variability indirectly from the entity (rather than directly).
The identification of an implicit variable interest is a matter
of judgment that depends on the relevant facts and
circumstances. The implementation of
EIC-157 did not have a
material impact on the companys consolidated financial
statements.
36
Recent Accounting Pronouncements
Canada
Comprehensive Income, Equity, Financial Instruments and
Hedges
In January 2005, the CICA issued Section 1530,
Comprehensive Income, Section 3251,
Equity, Section 3855, Financial
Instruments Recognition and Measurement and
Section 3865, Hedges. The new standards
increase harmonization with US GAAP and will require the
following:
|
|
|
|
|
Financial assets will be classified as either held-to-maturity,
held-for-trading or available-for-sale. Held-to-maturity
classification will be restricted to fixed maturity instruments
that the company intends and is able to hold to maturity and
will be accounted for at amortized cost. Held-for-trading
instruments will be recorded at fair value with realized and
unrealized gains and losses reported in net income. The
remaining financial assets will be classified as
available-for-sale. These will be recorded at fair value with
unrealized gains and losses reported in a new category of the
Consolidated Statements of Financial Position under
shareholders equity called other comprehensive income
(OCI); and |
|
|
|
Derivatives will be classified as held-for-trading unless
designated as hedging instruments. All derivatives, including
embedded derivatives that must be separately accounted for, will
be recorded at fair value on the Consolidated Statements of
Financial Position. For derivatives that hedge the changes in
fair value of an asset or liability, changes in the
derivatives fair value will be reported in net income and
be substantially offset by changes in the fair value of the
hedged asset or liability attributable to the risk being hedged.
For derivatives that hedge variability in cash flows, the
effective portion of the changes in the derivatives fair
value will be initially recognized in OCI and the ineffective
portion will be recorded in net income. The amounts temporarily
recorded in OCI will subsequently be reclassified to net income
in the periods when net income is affected by the variability in
the cash flows of the hedged item. |
The guidance will apply for interim and annual financial
statements relating to fiscal years beginning on or after
October 1, 2006. Earlier adoption will be permitted only as
of the beginning of a fiscal year. The impact of implementing
these new standards is not yet determinable as it is highly
dependent on fair values, outstanding positions and hedging
strategies at the time of adoption.
Conditional Asset Retirement Obligations
In November 2005, the Emerging Issues Committee issued Abstract
No. 159, Conditional Asset Retirement
Obligations, to clarify the accounting treatment for a
legal obligation to perform an asset retirement activity in
which the timing and/or method of settlement are conditional on
a future event that may or may not be within the control of the
entity. Under this EIC, an entity is required to recognize a
liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably
estimated. The guidance is effective for the second quarter of
2006 and is to be applied retroactively, with restatement of
prior periods. The implementation of this EIC is not expected to
have a material impact on the companys consolidated
financial statements.
Stripping Costs Incurred in the Production Phase of a
Mining Operation
In March 2006, the Emerging Issues Committee issued Abstract
No. 160, Stripping Costs Incurred in the Production
Phase of a Mining Operation. This EIC discusses the
treatment of costs associated with the activity of removing
overburden and other mine waste minerals in the production phase
of a mining operation. The EIC concludes that such stripping
costs should be accounted for according to the benefit received
by the entity and recorded as either as a component of inventory
or a betterment to the mineral property, depending on the
benefit received. The implementation of this EIC is not expected
to have a material impact on the companys consolidated
financial statements.
37
United States
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, to clarify that abnormal amounts of
idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period
charges, and to require the allocation of fixed production
overheads to inventory based on the normal capacity of the
production facilities. The guidance was effective for inventory
costs incurred during 2006 and did not have a material impact on
the companys consolidated financial statements.
In March 2005, the FASB ratified the consensus reached by the
Emerging Issues Task Force on Issue No. 04-6,
Accounting for Stripping Costs Incurred During Production
in the Mining Industry, that stripping costs incurred
during production are variable inventory costs that should be
attributed to ore produced in that period as a component of
inventory and recognized in cost of sales in the same period as
related revenue. The consensus was effective for the company in
the first quarter of 2006. In accordance with the transition
guidance and as disclosed in Note 12 to the interim
condensed consolidated financial statements, the company
recorded the effect of initially applying the consensus as a
cumulative-effect adjustment recognized in the opening balance
of US GAAP retained earnings as of January 1, 2006.
RISK MANAGEMENT
Effective planning and execution of our strategy requires
detailed analysis of associated risks and management of those
risks to prevent loss. PotashCorp has adopted a risk management
framework which identifies potential events that could have
adverse effects. We then manage those risk events to provide
reasonable assurance that they will not prevent us from
achieving our goals and objectives the road maps for
successful execution of our strategy. We assess risks by
identifying, measuring and prioritizing them, based on their
estimated likelihood and severity of loss. Through mitigation
responses, we accept, control, share or transfer, diversify or
avoid each risk. Thereafter, we monitor them at company, process
and activity levels.
We have identified six major corporate categories of risks:
markets/business, distribution, operational,
financial/information technology, regulatory and
integrity/empowerment. Together and separately, these threaten
our strategies and affect our ability to take advantage of
opportunities to maximize returns for all stakeholders, as our
value proposition requires. Risk threats are intricately
interwoven, but they can be reduced by implementing appropriate
mitigation activities. Most severe of all risk consequences is a
loss of reputation, as that could threaten our earnings, our
access to capital or our brand by creating negative opinions of
PotashCorp in the minds of employees, customers, investors or
our communities. A risk to reputation affects our ability to
execute our strategies.
All risks are plotted on a matrix that recognizes that the
inherent risks to the company can be reduced by lowering either
the expected frequency or the severity of the consequences.
These mitigation activities serve to reduce the residual risk
levels. Management identifies the most significant residual
risks to our strategy and reports to the Board on the mitigation
plans to manage them.
The identification, management, and reporting of risk is an
ongoing process because circumstances change, and risks change
or arise as a result. The Companys Risk Management Process
is continuous and ongoing. A discussion of enterprise-wide risk
management can be found on pages 20 to 22 of our 2005
Annual Report Financial Review. There have been no
significant changes to managements assessments during the
first three months of 2006.
OUTLOOK
The worlds potash market is well positioned to regain its
momentum. Most customers have worked through their product
supply, leaving available inventories in the hands of producers.
Shipments are expected to ramp up strongly partway through the
second quarter and continue at higher volumes through the end of
the year. However, due to the delay in reaching a settlement on
price with China, we are shutting down our Lanigan and Allan
mines for one week in May. Supply is being further constrained
by an illegal labor strike at APC in Jordan that began on
April 24, 2006, and there are reports of shutdowns at all
three of Silvinits mines in Russia and curtailments at
three of four Belarus mines.
38
After negotiations are completed, Canpotex shipments to China
for the remainder of the year are expected to approximate the
record volumes for all of 2005. Brazil is also expected to
purchase more vigorously in the second half, which is its spring
season, taking somewhere between the record tonnes of 2004 and
the reduced levels of 2005. The issues that slowed its 2005
purchases are being resolved, as potash inventories are low, a
significant government aid package for farmers has been
announced and the Brazilian real, while still strong, has
stabilized. India has worked through its inventories and is
currently negotiating new potash price and volume contracts. We
anticipate these negotiations will conclude quickly, as we
believe Indias NPK producers are short of potash.
Southeast Asian countries are expected to continue purchasing as
a result of favorable growing conditions, lower inventories and
an increasing need for potash. An expected favorable price
settlement with China and lower dry bulk ocean-freight rates
should support higher realized potash prices going forward.
In North America, the spring season is now strengthening, buoyed
by improving corn prices, decent weather and a need to catch up
on potash applications after less was used last fall.
PotashCorp also benefits from the evolving global energy story.
Continuing high natural gas prices are a reality, not only in
the US but globally as well. The increase in gas prices in
Western and Eastern Europe, including Russia, is making our
Trinidad asset even more valuable. First, the tightening energy
supply has pushed up prices for natural gas, which increases the
profitability of our Trinidad nitrogen operation. It not only
keeps nitrogen product prices high, but expands our margins,
given our favorable gas contracts. In addition, as oil prices
reach all-time highs, ocean-going vessel bunker costs rise, and
the proximity of Trinidad to the US becomes increasingly
important. These attributes give us an excellent opportunity to
capitalize on rising energy costs.
Secondly, the demand for ethanol and biofuels is rising. These
energy products are made from crops that are intensive users of
potash and other fertilizers. In Brazil, high fuel prices are
leading to a rapid expansion of sugar cane acreage a
crop that uses over four times as much potash per hectare as
soybeans in that country. In the US, the escalating energy
demand is strengthening corn fundamentals by boosting
consumption for ethanol production. In other countries,
increased oil crop production is required to meet rising demand
for biodiesel. This evolving shift to biofuels is tightening
supply/demand fundamentals and, in the short term, is improving
commodity prices for the crops involved. In the longer term, it
will require even greater crop yields, which should be favorable
for fertilizer consumption.
Natural gas futures for the next 12 months are trading at
between $7 and $12 per MMBtu, which is expected to drive
continued strong financial performance of our Trinidad asset.
The debottlenecking of our Trinidad 02 plant was completed in
the first quarter, increasing its annual ammonia production by
70,000 tonnes, or 17 percent. The 01 plant debottleneck
will be implemented during a three-week turnaround starting in
May 2006.
The current market value of our total North American 10-year gas
hedge position is approximately $270 million.
Capital expenditures for 2006 are now expected to be
$500 million, plus capitalized interest. Selling and
administrative expenses in the second quarter of 2006 are
expected to be similar to the same quarter last year. This is
again due to a non-cash expense associated with performance
stock options that, upon shareholder approval, are expected to
be granted in that quarter. However, our significant
Saskatchewan potash operations may allow us further benefits
from potential federal and provincial tax changes.
Based on a $1.15 Canadian dollar, PotashCorp is expecting
second-quarter net income per share to be in the range of $1.25
to $1.50 per diluted share and continues to believe net income
for the full year will be in the range of $5.25 to $6.25 per
diluted share. In the current trading range of the Canadian
dollar relative to the US dollar, each
one-cent change in the
Canadian dollar typically has an impact of approximately $3.8
million on the foreign-exchange line, or $0.03 per share on an
after-tax basis, although this is primarily a
non-cash item.
39
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q,
including those in the Outlook section of
Managements Discussion and Analysis of Financial Condition
and Results of Operations relating to the period after
March 31, 2006, are forward-looking statements subject to
risks and uncertainties. Statements containing words such as
could, expect, may,
anticipate, believe, intend,
estimate, plan and similar expressions
constitute forward-looking statements. These statements are
based on certain factors and assumptions including foreign
exchange rates, expected growth, results of operations,
performance and business prospects and opportunities. While the
company considers these factors and assumptions to be reasonable
based on information currently available, they may prove to be
incorrect. A number of factors could cause actual results to
differ materially from those in the forward-looking statements,
including, but not limited to: fluctuations in supply and demand
in fertilizer, sulfur, natural gas, transportation and
petrochemical markets; changes in competitive pressures,
including pricing pressures; risks associated with natural gas
and other hedging activities; changes in capital markets;
changes in currency and exchange rates; unexpected geological or
environmental conditions; and government policy changes.
Additional risks and uncertainties can be found in filings with
the U.S. Securities and Exchange Commission and the
Canadian provincial securities commissions. Forward-looking
statements are given only as at the date of this Quarterly
Report on Form 10-Q, and the company disclaims any
obligation to update or revise the forward looking statements,
whether as a result of new information, future events or
otherwise. In the case of guidance, should subsequent events
show that the forward-looking statements released herein may be
materially off-target, the company will evaluate whether to
issue, and, if appropriate following such review, issue a news
release updating guidance or explaining reasons for the
difference.
ITEM
3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential for loss from changes in the value
of financial instruments. The level of market risk to which we
are exposed varies depending on the composition of our
derivative instrument portfolio, as well as current and expected
market conditions. The following discussion provides additional
detail regarding our exposure to the risks of changing commodity
prices, interest rates and foreign exchange rates.
Commodity Risk
Our natural gas purchase strategy is based on diversification of
price for our total gas requirements (which represents the
forecast consumption of natural gas volumes by our manufacturing
and mining facilities). The objective is to acquire a reliable
supply of natural gas feedstock and fuel on a location-adjusted,
cost-competitive basis in a manner that minimizes volatility
without undue risk.
Our US nitrogen results are significantly affected by the price
of natural gas. We employ derivative commodity instruments
related to a portion of our natural gas requirements (primarily
futures, swaps and options) for the purpose of managing our
exposure to commodity price risk in the purchase of natural gas,
not for speculative or trading purposes. Changes in the market
value of these derivative instruments have a high correlation to
changes in the spot price of natural gas. Changes in the fair
value of such derivative instruments, with maturities in 2006
through 2015, will generally relate to changes in the spot price
of natural gas purchases.
A sensitivity analysis has been prepared to estimate our market
risk exposure arising from derivative commodity instruments. The
fair value of such instruments is calculated by valuing each
position using quoted market prices. Market risk is estimated as
the potential loss in fair value resulting from a hypothetical
10-percent adverse
change in such prices. The results of this analysis indicate
that as of March 31, 2006, our estimated derivative
commodity instruments market risk exposure was
$54.8 million (2005 $41.6 million). Actual
results may differ from this estimate.
40
Interest Rate Risk
We address interest rate risk by using a diversified portfolio
of fixed and floating rate instruments. This exposure is also
managed by aligning current and long-term assets with demand and
fixed-term debt and by monitoring the effects of market changes
in interest rates.
As at March 31, 2006, our short-term debt (comprised of
commercial paper) was $604.9 million, our current portion
of long-term debt was $1.2 million and our long-term debt
was $1,257.3 million. Long-term debt is comprised primarily
of $1,250.0 million of notes payable that were issued under
our US shelf registration statements at a fixed interest rate.
At March 31, 2006, we had no interest rate swap agreements
outstanding.
Since the majority of our outstanding borrowings have fixed
interest rates, the primary market risk exposure is to changes
in fair value. We estimate that, all else being constant, a
hypothetical 10-percent
change in interest rates would not materially impact our results
of operations or financial position. If interest rates changed
significantly, management would likely take actions to manage
our exposure to the change. However, due to the uncertainty of
the specific actions that would be taken and their possible
effects, the sensitivity analysis assumes no changes in our
financial structure.
Foreign Exchange Risk
We also enter into foreign currency forward contracts for the
primary purpose of limiting exposure to exchange rate
fluctuations relating to Canadian dollar operating and capital
expenditures. These contracts are not designated as hedging
instruments for accounting purposes. Gains or losses resulting
from foreign exchange contracts are recognized in earnings in
the period in which changes in fair value occur.
As at March 31, 2006, we had entered into forward contracts
to sell US dollars and receive Canadian dollars in the notional
amount of $116.0 million (2005
$24.0 million) at an average exchange rate of 1.1636 per US
dollar (2005 1.2143). We had also entered into
forward contracts to sell US dollars and receive Euros in the
notional amount of $7.5 million at an average exchange rate
of 1.2133 per Euro and to sell Canadian dollars and receive
Euros in the notional amount of $4.1 million at an average
exchange rate of 1.3961 per Euro. No such forward contracts were
outstanding as at March 31, 2005. Maturity dates for all
forward contracts are within 2006 and 2007.
ITEM 4. CONTROLS
AND PROCEDURES
As of March 31, 2006, we carried out an evaluation under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. There are inherent
limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and
procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving
their control objectives. Based upon that evaluation and as of
March 31, 2006, the Chief Executive Officer and Chief
Financial Officer concluded that the disclosure controls and
procedures were effective to provide reasonable assurance that
information required to be disclosed in the reports the company
files and submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported as and when
required.
There has been no change in our internal control over financial
reporting during the quarter ended March 31, 2006 that has
materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
41
PART II. OTHER
INFORMATION
ITEM 5. OTHER
INFORMATION
The companys 2006 Performance Option Plan (the 2006
Plan) was adopted by the companys Board of Directors
on February 27, 2006 and approved by shareholders of the
company on May 4, 2006. The 2006 Plan permits the grant to
eligible employees of options to purchase common shares of the
company at an exercise price based on the market value of the
shares on the date of grant. The options become vested and
exercisable, if at all, based upon the extent that the
applicable performance objectives are achieved over the
three-year performance period ending December 31, 2008. A
maximum aggregate of 1,400,000 common shares may be issued
pursuant to stock options granted under the 2006 Plan. A copy of
the 2006 Plan is attached as Exhibit 10(dd) to this
Quarterly Report on
Form 10-Q.
On May 4, 2006, the companys Board of Directors
approved the form of option agreement to be used in connection
with grants of options under the 2006 Plan. Also on May 4,
2006, a total number of 894,900 options to purchase common
shares of the company were granted under the 2006 Plan, at an
exercise price per share of Cdn $111.80 for those options
denominated in Canadian dollars and an exercise price per share
of US$101.01 for those options denominated in US dollars,
the closing price for a common share of the company on
May 3, 2006 on the Toronto Stock Exchange and New York
Stock Exchange, respectively. A copy of the form of option
agreement is attached hereto as Exhibit 10(dd).
ITEM
6. EXHIBITS
(a) EXHIBITS
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
3(a)
|
|
Articles of Continuance of the registrant dated May 15,
2002, incorporated by reference to Exhibit 3(a) to the
registrants report on Form 10-Q for the quarterly
period ended June 30, 2002 (the Second Quarter 2002
Form 10-Q). |
3(b)
|
|
Bylaws of the registrant effective May 15, 2002,
incorporated by reference to Exhibit 3(b) to the Second
Quarter 2002 Form 10-Q. |
4(a)
|
|
Term Credit Agreement between The Bank of Nova Scotia and other
financial institutions and the registrant dated
September 25, 2001, incorporated by reference to
Exhibit 4(a) to the registrants report on
Form 10-Q for the quarterly period ended September 30,
2001. |
4(b)
|
|
Syndicated Term Credit Facility Amending Agreement between The
Bank of Nova Scotia and other financial institutions and the
registrant dated as of September 23, 2003, incorporated by
reference to Exhibit 4(b) to the registrants report
on Form 10-Q for the quarterly period ended
September 30, 2003 (the Third Quarter 2003
Form 10-Q). |
4(c)
|
|
Syndicated Term Credit Facility Second Amending Agreement
between The Bank of Nova Scotia and other financial institutions
and the registrant dated as of September 21, 2004,
incorporated by reference to Exhibit 4(c) to the
registrants report on Form 8-K dated
September 21, 2004. |
4(d)
|
|
Syndicated Term Credit Facility Third Amending Agreement between
The Bank of Nova Scotia and other financial institutions and the
registrant dated as of September 20, 2005, incorporated by
reference to Exhibit 4(a) to the registrants report
on Form 8-K dated September 22, 2005. |
4(e)
|
|
Indenture dated as of June 16, 1997, between the registrant
and The Bank of Nova Scotia Trust Company of New York,
incorporated by reference to Exhibit 4(a) to the
registrants report on Form 8-K dated June 18,
1997 (the 1997 Form 8-K). |
4(f)
|
|
Indenture dated as of February 27, 2003, between the
registrant and The Bank of Nova Scotia Trust Company of New
York, incorporated by reference to Exhibit 4(c) to the
registrants report on Form 10-K for the year ended
December 31, 2002 (the 2002 Form 10-K). |
42
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
4(g)
|
|
Form of Notes relating to the registrants offering of
$400,000,000 principal amount of 7.125% Notes due June 15,
2007, incorporated by reference to Exhibit 4(b) to the 1997
Form 8-K. |
4(h)
|
|
Form of Notes relating to the registrants offering of
$600,000,000 principal amount of 7.75% Notes due May 31,
2011, incorporated by reference to Exhibit 4 to the
registrants report on Form 8-K dated May 17,
2001. |
4(i)
|
|
Form of Note relating to the registrants offering of
$250,000,000 principal amount of 4.875% Notes due March 1,
2013, incorporated by reference to Exhibit 4 to the
registrants report on Form 8-K dated
February 28, 2003. |
The registrant hereby undertakes to file with the Securities and
Exchange Commission, upon request, copies of any constituent
instruments defining the rights of holders of long-term debt of
the registrant or its subsidiaries that have not been filed
herewith because the amounts represented thereby are less than
10% of the total assets of the registrant and its subsidiaries
on a consolidated basis.
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
10(a)
|
|
Sixth Voting Agreement dated April 22, 1978, between
Central Canada Potash, Division of Noranda, Inc., Cominco Ltd.,
International Minerals and Chemical Corporation (Canada)
Limited, PCS Sales and Texasgulf Inc., incorporated by reference
to Exhibit 10(f) to the registrants registration
statement on Form F-1 (File No. 33-31303) (the
F-1 Registration Statement). |
10(b)
|
|
Canpotex Limited Shareholders Seventh Memorandum of Agreement
effective April 21, 1978, between Central Canada Potash,
Division of Noranda Inc., Cominco Ltd., International Minerals
and Chemical Corporation (Canada) Limited, PCS Sales, Texasgulf
Inc. and Canpotex Limited as amended by Canpotex S&P
amending agreement dated November 4, 1987, incorporated by
reference to Exhibit 10(g) to the F-1 Registration
Statement. |
10(c)
|
|
Producer Agreement dated April 21, 1978, between Canpotex
Limited and PCS Sales, incorporated by reference to
Exhibit 10(h) to the F-1 Registration Statement. |
10(d)
|
|
Canpotex/PCS Amending Agreement, dated as of October 1,
1992, incorporated by reference to Exhibit 10(f) to the
registrants report on Form 10-K for the year ended
December 31, 1995 (the 1995 Form 10-K). |
10(e)
|
|
Canpotex PCA Collateral Withdrawing/PCS Amending Agreement,
dated as of October 7, 1993, incorporated by reference to
Exhibit 10(g) to the 1995 Form 10-K. |
10(f)
|
|
Canpotex Producer Agreement amending agreement dated as of
January 1, 1999, incorporated by reference to
Exhibit 10(f) to the registrants report on
Form 10-K for the year ended December 31, 2000 (the
2000 Form 10-K). |
10(g)
|
|
Canpotex Producer Agreement amending agreement dated as of
July 1, 2002, incorporated by reference to
Exhibit 10(g) to the registrants report on
Form 10-Q for the quarterly period ended June 30, 2004
(the Second Quarter 2004 Form 10-Q). |
10(h)
|
|
Esterhazy Restated Mining and Processing Agreement dated
January 31, 1978, between International Minerals &
Chemical Corporation (Canada) Limited and the registrants
predecessor, incorporated by reference to Exhibit 10(e) to
the F-1 Registration Statement. |
10(i)
|
|
Agreement dated December 21, 1990, between International
Minerals & Chemical Corporation (Canada) Limited and
the registrant, amending the Esterhazy Restated Mining and
Processing Agreement dated January 31, 1978, incorporated
by reference to Exhibit 10(p) to the registrants
report on Form 10-K for the year ended December 31,
1990. |
43
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
10(j)
|
|
Agreement effective August 27, 1998, between International
Minerals & Chemical (Canada) Global Limited and the
registrant, amending the Esterhazy Restated Mining and
Processing Agreement dated January 31, 1978 (as amended),
incorporated by reference to Exhibit 10(l) to the 1998
Form 10-K. |
10(k)
|
|
Agreement effective August 31, 1998, among International
Minerals & Chemical (Canada) Global Limited,
International Minerals & Chemical (Canada) Limited
Partnership and the registrant assigning the interest in the
Esterhazy Restated Mining and Processing Agreement dated
January 31, 1978 (as amended) held by International
Minerals & Chemical (Canada) Global Limited to
International Minerals & Chemical (Canada) Limited
Partnership, incorporated by reference to Exhibit 10(m) to
the 1998 Form 10-K. |
10(l)
|
|
Potash Corporation of Saskatchewan Inc. Stock Option
Plan Directors, as amended January 23, 2001,
incorporated by reference to Exhibit 10(bb) to the Second
Quarter 2001 Form 10-Q. |
10(m)
|
|
Potash Corporation of Saskatchewan Inc. Stock Option
Plan Officers and Employees, as amended
January 23, 2001, incorporated by reference to
Exhibit 10(aa) to the 2000 Form 10-K. |
10(n)
|
|
Short-Term Incentive Plan of the registrant effective January
2000, as amended March 10, 2005, incorporated by reference
to Exhibit 10(x) to the registrants report on
Form 10-K for the year ended December 31, 2004. |
10(o)
|
|
Long-Term Incentive Plan of the registrant effective January
2003, incorporated by reference to Exhibit 10(y) to the
2002 Form 10-K. |
10(p)
|
|
Resolution and Forms of Agreement for Supplemental Retirement
Income Plan, for officers and key employees of the registrant,
incorporated by reference to Exhibit 10(o) to the 1995
Form 10-K. |
10(q)
|
|
Amending Resolution and revised forms of agreement regarding
Supplemental Retirement Income Plan of the registrant,
incorporated by reference to Exhibit 10(x) to the
registrants report on Form 10-Q for the quarterly
period ended June 30, 1996. |
10(r)
|
|
Amended and restated Supplemental Retirement Income Plan of the
registrant and text of amendment to existing supplemental income
plan agreements, incorporated by reference to
Exhibit 10(mm) to the registrants report on
Form 10-Q for the quarterly period ended September 30,
2000 (the Third Quarter 2000 Form 10-Q). |
10(s)
|
|
Form of Letter of amendment to existing supplemental income plan
agreements of the registrant dated November 4, 2002,
incorporated by reference to Exhibit 10(cc) to the 2002
Form 10-K. |
10(t)
|
|
Supplemental Retirement Benefits Plan for U.S. Executives
dated effective January 1, 1999, incorporated by reference
to Exhibit 10(aa) to the Second Quarter 2002 Form 10-Q. |
10(u)
|
|
Forms of Agreement dated December 30, 1994, between the
registrant and certain officers of the registrant, concerning a
change in control of the registrant, incorporated by reference
to Exhibit 10(p) to the 1995 Form 10-K. |
10(v)
|
|
Form of Agreement of Indemnification dated August 8, 1995,
between the registrant and certain officers and directors of the
registrant, incorporated by reference to Exhibit 10(q) to
the 1995 Form 10-K. |
10(w)
|
|
Resolution and Form of Agreement of Indemnification dated
January 24, 2001, incorporated by reference to
Exhibit 10(ii) to the 2000 Form 10-K. |
10(x)
|
|
Resolution and Form of Agreement of Indemnification
July 21, 2004, incorporated by reference to
Exhibit 10(ii) to the Second Quarter 2004 Form 10-Q. |
10(y)
|
|
Chief Executive Officer Medical and Dental Benefits,
incorporated by reference to Exhibit 10(jj) to the
Form 10-K for the year ended December 31, 2004. |
44
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
10(z)
|
|
Second Amended and Restated Membership Agreement dated
January 1, 1995, among Phosphate Chemicals Export
Association, Inc. and members of such association, including
Texasgulf Inc., incorporated by reference to Exhibit 10(t)
to the 1995 Form 10-K. |
10(aa)
|
|
International Agency Agreement dated January 1, 1995,
between Phosphate Chemicals Export Association, Inc. and
Texasgulf Inc. establishing Texasgulf Inc. as exclusive
marketing agent for such associations wet phosphatic
materials, incorporated by reference to Exhibit 10(u) to
the 1995 Form 10-K. |
10(bb)
|
|
Deferred Share Unit Plan for Non-Employee Directors,
incorporated by reference to Exhibit 4.1 to the
registrants Form S-8 (File No. 333-75742) filed
December 21, 2001. |
10(cc)
|
|
Potash Corporation of Saskatchewan Inc. 2005 Performance Option
Plan and Form of Option Agreement, incorporated by reference to
Exhibit 10(nn) to the registrants report on
Form 10-Q for the quarterly period ended March 31,
2005 (the First Quarter 2005 Form 10-Q). |
10(dd)
|
|
Potash Corporation of Saskatchewan Inc. 2006 Performance Option
Plan and Form of Option Agreement. |
10(ee)
|
|
Medium Term Incentive Plan of the registrant effective January
2006, incorporated by reference to Exhibit 10(dd) to the
2005 Form 10-K. |
11
|
|
Statement re Computation of Per Share Earnings. |
31(a)
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
31(b)
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
32
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
POTASH CORPORATION OF |
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SASKATCHEWAN INC. |
May 5, 2006
|
|
|
|
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Joseph Podwika |
|
Senior Vice President, General Counsel and Secretary |
May 5, 2006
|
|
|
|
By: |
/s/ Wayne R. Brownlee
|
|
|
|
|
|
Wayne R. Brownlee |
|
Executive Vice President, Treasurer and |
|
Chief Financial Officer |
|
(Principal Financial and Accounting Officer) |
46
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
3(a)
|
|
Articles of Continuance of the registrant dated May 15,
2002, incorporated by reference to Exhibit 3(a) to the
registrants report on Form 10-Q for the quarterly
period ended June 30, 2002 (the Second Quarter 2002
Form 10-Q). |
3(b)
|
|
Bylaws of the registrant effective May 15, 2002,
incorporated by reference to Exhibit 3(b) to the Second
Quarter 2002 Form 10-Q. |
4(a)
|
|
Term Credit Agreement between The Bank of Nova Scotia and other
financial institutions and the registrant dated
September 25, 2001, incorporated by reference to
Exhibit 4(a) to the registrants report on
Form 10-Q for the quarterly period ended September 30,
2001. |
4(b)
|
|
Syndicated Term Credit Facility Amending Agreement between The
Bank of Nova Scotia and other financial institutions and the
registrant dated as of September 23, 2003, incorporated by
reference to Exhibit 4(b) to the registrants report
on Form 10-Q for the quarterly period ended
September 30, 2003 (the Third Quarter 2003
Form 10-Q). |
4(c)
|
|
Syndicated Term Credit Facility Second Amending Agreement
between The Bank of Nova Scotia and other financial institutions
and the registrant dated as of September 21, 2004,
incorporated by reference to Exhibit 4(c) to the
registrants report on Form 8-K dated
September 21, 2004. |
4(d)
|
|
Syndicated Term Credit Facility Third Amending Agreement between
The Bank of Nova Scotia and other financial institutions and the
registrant dated as of September 20, 2005, incorporated by
reference to Exhibit 4(a) to the registrants report
on Form 8-K dated September 22, 2005. |
4(e)
|
|
Indenture dated as of June 16, 1997, between the registrant
and The Bank of Nova Scotia Trust Company of New York,
incorporated by reference to Exhibit 4(a) to the
registrants report on Form 8-K dated June 18,
1997 (the 1997 Form 8-K). |
4(f)
|
|
Indenture dated as of February 27, 2003, between the
registrant and The Bank of Nova Scotia Trust Company of New
York, incorporated by reference to Exhibit 4(c) to the
registrants report on Form 10-K for the year ended
December 31, 2002 (the 2002 Form 10-K). |
4(g)
|
|
Form of Notes relating to the registrants offering of
$400,000,000 principal amount of 7.125% Notes due June 15,
2007, incorporated by reference to Exhibit 4(b) to the 1997
Form 8-K. |
4(h)
|
|
Form of Notes relating to the registrants offering of
$600,000,000 principal amount of 7.75% Notes due May 31,
2011, incorporated by reference to Exhibit 4 to the
registrants report on Form 8-K dated May 17,
2001. |
4(i)
|
|
Form of Note relating to the registrants offering of
$250,000,000 principal amount of 4.875% Notes due March 1,
2013, incorporated by reference to Exhibit 4 to the
registrants report on Form 8-K dated
February 28, 2003. |
The registrant hereby undertakes to file with the Securities and
Exchange Commission, upon request, copies of any constituent
instruments defining the rights of holders of long-term debt of
the registrant or its subsidiaries that have not been filed
herewith because the amounts represented thereby are less than
10% of the total assets of the registrant and its subsidiaries
on a consolidated basis.
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
10(a)
|
|
Sixth Voting Agreement dated April 22, 1978, between
Central Canada Potash, Division of Noranda, Inc., Cominco Ltd.,
International Minerals and Chemical Corporation (Canada)
Limited, PCS Sales and Texasgulf Inc., incorporated by reference
to Exhibit 10(f) to the registrants registration
statement on Form F-1 (File No. 33-31303) (the
F-1 Registration Statement). |
47
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
10(b)
|
|
Canpotex Limited Shareholders Seventh Memorandum of Agreement
effective April 21, 1978, between Central Canada Potash,
Division of Noranda Inc., Cominco Ltd., International Minerals
and Chemical Corporation (Canada) Limited, PCS Sales, Texasgulf
Inc. and Canpotex Limited as amended by Canpotex S&P
amending agreement dated November 4, 1987, incorporated by
reference to Exhibit 10(g) to the F-1 Registration
Statement. |
10(c)
|
|
Producer Agreement dated April 21, 1978, between Canpotex
Limited and PCS Sales, incorporated by reference to
Exhibit 10(h) to the F-1 Registration Statement. |
10(d)
|
|
Canpotex/PCS Amending Agreement, dated as of October 1,
1992, incorporated by reference to Exhibit 10(f) to the
registrants report on Form 10-K for the year ended
December 31, 1995 (the 1995 Form 10-K). |
10(e)
|
|
Canpotex PCA Collateral Withdrawing/PCS Amending Agreement,
dated as of October 7, 1993, incorporated by reference to
Exhibit 10(g) to the 1995 Form 10-K. |
10(f)
|
|
Canpotex Producer Agreement amending agreement dated as of
January 1, 1999, incorporated by reference to
Exhibit 10(f) to the registrants report on
Form 10-K for the year ended December 31, 2000 (the
2000 Form 10-K). |
10(g)
|
|
Canpotex Producer Agreement amending agreement dated as of
July 1, 2002, incorporated by reference to
Exhibit 10(g) to the registrants report on
Form 10-Q for the quarterly period ended June 30, 2004
(the Second Quarter 2004 Form 10-Q). |
10(h)
|
|
Esterhazy Restated Mining and Processing Agreement dated
January 31, 1978, between International Minerals &
Chemical Corporation (Canada) Limited and the registrants
predecessor, incorporated by reference to Exhibit 10(e) to
the F-1 Registration Statement. |
10(i)
|
|
Agreement dated December 21, 1990, between International
Minerals & Chemical Corporation (Canada) Limited and
the registrant, amending the Esterhazy Restated Mining and
Processing Agreement dated January 31, 1978, incorporated
by reference to Exhibit 10(p) to the registrants
report on Form 10-K for the year ended December 31,
1990. |
10(j)
|
|
Agreement effective August 27, 1998, between International
Minerals & Chemical (Canada) Global Limited and the
registrant, amending the Esterhazy Restated Mining and
Processing Agreement dated January 31, 1978 (as amended),
incorporated by reference to Exhibit 10(l) to the 1998
Form 10-K. |
10(k)
|
|
Agreement effective August 31, 1998, among International
Minerals & Chemical (Canada) Global Limited,
International Minerals & Chemical (Canada) Limited
Partnership and the registrant assigning the interest in the
Esterhazy Restated Mining and Processing Agreement dated
January 31, 1978 (as amended) held by International
Minerals & Chemical (Canada) Global Limited to
International Minerals & Chemical (Canada) Limited
Partnership, incorporated by reference to Exhibit 10(m) to
the 1998 Form 10-K. |
10(l)
|
|
Potash Corporation of Saskatchewan Inc. Stock Option
Plan Directors, as amended January 23, 2001,
incorporated by reference to Exhibit 10(bb) to the Second
Quarter 2001 Form 10-Q. |
10(m)
|
|
Potash Corporation of Saskatchewan Inc. Stock Option
Plan Officers and Employees, as amended
January 23, 2001, incorporated by reference to
Exhibit 10(aa) to the 2000 Form 10-K. |
10(n)
|
|
Short-Term Incentive Plan of the registrant effective January
2000, as amended March 10, 2005, incorporated by reference
to Exhibit 10(x) to the registrants report on
Form 10-K for the year ended December 31, 2004. |
10(o)
|
|
Long-Term Incentive Plan of the registrant effective January
2003, incorporated by reference to Exhibit 10(y) to the
2002 Form 10-K. |
10(p)
|
|
Resolution and Forms of Agreement for Supplemental Retirement
Income Plan, for officers and key employees of the registrant,
incorporated by reference to Exhibit 10(o) to the 1995
Form 10-K. |
48
|
|
|
Exhibit |
|
|
Number |
|
Description of Document |
|
|
|
10(q)
|
|
Amending Resolution and revised forms of agreement regarding
Supplemental Retirement Income Plan of the registrant,
incorporated by reference to Exhibit 10(x) to the
registrants report on Form 10-Q for the quarterly
period ended June 30, 1996. |
10(r)
|
|
Amended and restated Supplemental Retirement Income Plan of the
registrant and text of amendment to existing supplemental income
plan agreements, incorporated by reference to
Exhibit 10(mm) to the registrants report on
Form 10-Q for the quarterly period ended September 30,
2000 (the Third Quarter 2000 Form 10-Q). |
10(s)
|
|
Form of Letter of amendment to existing supplemental income plan
agreements of the registrant dated November 4, 2002,
incorporated by reference to Exhibit 10(cc) to the 2002
Form 10-K. |
10(t)
|
|
Supplemental Retirement Benefits Plan for U.S. Executives
dated effective January 1, 1999, incorporated by reference
to Exhibit 10(aa) to the Second Quarter 2002 Form 10-Q. |
10(u)
|
|
Forms of Agreement dated December 30, 1994, between the
registrant and certain officers of the registrant, concerning a
change in control of the registrant, incorporated by reference
to Exhibit 10(p) to the 1995 Form 10-K. |
10(v)
|
|
Form of Agreement of Indemnification dated August 8, 1995,
between the registrant and certain officers and directors of the
registrant, incorporated by reference to Exhibit 10(q) to
the 1995 Form 10-K. |
10(w)
|
|
Resolution and Form of Agreement of Indemnification dated
January 24, 2001, incorporated by reference to
Exhibit 10(ii) to the 2000 Form 10-K. |
10(x)
|
|
Resolution and Form of Agreement of Indemnification
July 21, 2004, incorporated by reference to
Exhibit 10(ii) to the Second Quarter 2004 Form 10-Q. |
10(y)
|
|
Chief Executive Officer Medical and Dental Benefits,
incorporated by reference to Exhibit 10(jj) to the
Form 10-K for the year ended December 31, 2004. |
10(z)
|
|
Second Amended and Restated Membership Agreement dated
January 1, 1995, among Phosphate Chemicals Export
Association, Inc. and members of such association, including
Texasgulf Inc., incorporated by reference to Exhibit 10(t)
to the 1995 Form 10-K. |
10(aa)
|
|
International Agency Agreement dated January 1, 1995,
between Phosphate Chemicals Export Association, Inc. and
Texasgulf Inc. establishing Texasgulf Inc. as exclusive
marketing agent for such associations wet phosphatic
materials, incorporated by reference to Exhibit 10(u) to
the 1995 Form 10-K. |
10(bb)
|
|
Deferred Share Unit Plan for Non-Employee Directors,
incorporated by reference to Exhibit 4.1 to the
registrants Form S-8 (File No. 333-75742) filed
December 21, 2001. |
10(cc)
|
|
Potash Corporation of Saskatchewan Inc. 2005 Performance Option
Plan and Form of Option Agreement, incorporated by reference to
Exhibit 10(nn) to the registrants report on
Form 10-Q for the quarterly period ended March 31,
2005 (the First Quarter 2005 Form 10-Q). |
10(dd)
|
|
Potash Corporation of Saskatchewan Inc. 2006 Performance Option
Plan and Form of Option Agreement. |
10(ee)
|
|
Medium Term Incentive Plan of the registrant effective January
2006, incorporated by reference to Exhibit 10(dd) to the
2005 Form 10-K. |
11
|
|
Statement re Computation of Per Share Earnings. |
31(a)
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
31(b)
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002. |
32
|
|
Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. |
49