Attached files

file filename
EX-11 - EXHIBIT 11 - POTASH CORP OF SASKATCHEWAN INCo57660exv11.htm
EX-32 - EXHIBIT 32 - POTASH CORP OF SASKATCHEWAN INCo57660exv32.htm
EX-10.(M) - EXHIBIT 10(M) - POTASH CORP OF SASKATCHEWAN INCo57660exv10xmy.htm
EX-31.(A) - EXHIBIT 31(A) - POTASH CORP OF SASKATCHEWAN INCo57660exv31xay.htm
EX-31.(B) - EXHIBIT 31(B) - POTASH CORP OF SASKATCHEWAN INCo57660exv31xby.htm
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the Quarterly Period Ended September 30, 2009
 
OR
     
o
  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)
 
 
 
     
Canada   N/A
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
122 – 1st Avenue South
  S7K 7G3
Saskatoon, Saskatchewan, Canada
  (Zip Code)
(Address of principal executive offices)
   
 
 
306-933-8500
(Registrant’s 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES o     NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
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 October 31, 2009, Potash Corporation of Saskatchewan Inc. had 295,881,482 Common Shares outstanding.
 


 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Position
Condensed Consolidated Statements of Operations and Retained Earnings
Condensed Consolidated Statements of Cash Flow
Condensed Consolidated Statements of Comprehensive Income (Loss)
Notes to the Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS
Exhibit 10(m)
Exhibit 11
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32
 
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)
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Assets
               
Current assets
               
Cash and cash equivalents
  $ 391.2     $ 276.8  
Accounts receivable (Note 2)
    1,138.5       1,189.9  
Inventories (Note 3)
    639.9       714.9  
Prepaid expenses and other current assets
    161.4       85.6  
 
 
      2,331.0       2,267.2  
Property, plant and equipment
    5,890.7       4,812.2  
Investments
    3,322.5       2,750.7  
Other assets
    342.4       300.2  
Intangible assets
    20.0       21.5  
Goodwill
    97.0       97.0  
 
 
    $ 12,003.6     $ 10,248.8  
 
 
                 
Liabilities
               
Current liabilities
               
Short-term debt and current portion of long-term debt (Note 4)
  $ 489.5     $ 1,324.1  
Accounts payable and accrued charges
    704.0       1,183.6  
Current portion of derivative instrument liabilities
    58.7       108.1  
 
 
      1,252.2       2,615.8  
Long-term debt (Note 5)
    3,499.0       1,739.5  
Derivative instrument liabilities
    104.2       120.4  
Future income tax liability
    881.1       794.2  
Accrued pension and other post-retirement benefits
    274.5       253.4  
Accrued environmental costs and asset retirement obligations
    135.0       133.4  
Other non-current liabilities and deferred credits
    3.6       3.2  
 
 
      6,149.6       5,659.9  
 
 
Contingencies and Guarantees (Notes 16 and 17, respectively)
               
Shareholders’ Equity
               
Share capital
    1,425.9       1,402.5  
Unlimited authorization of common shares without par value; issued and outstanding 295,832,782 and 295,200,987 at September 30, 2009 and December 31, 2008, respectively
Unlimited authorization of first preferred shares; none outstanding
               
Contributed surplus
    147.0       126.2  
Accumulated other comprehensive income
    1,223.3       657.9  
Retained earnings
    3,057.8       2,402.3  
 
 
      5,854.0       4,588.9  
 
 
    $ 12,003.6     $ 10,248.8  
 
 
 
(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)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30     September 30  
    2009     2008     2009     2008  
   
 
Sales (Note 7)
  $ 1,099.1     $ 3,064.3     $ 2,877.6     $ 7,575.9  
Less: Freight
    53.7       81.4       130.2       287.2  
         Transportation and distribution
    36.3       31.6       101.0       97.2  
         Cost of goods sold
    662.9       1,210.3       1,900.0       3,157.2  
 
 
Gross Margin
    346.2       1,741.0       746.4       4,034.3  
 
 
Selling and administrative
    35.9       31.7       132.7       158.6  
Provincial mining and other taxes
    2.1       172.0       17.0       434.4  
Foreign exchange gain
    (9.0 )     (37.4 )     (1.3 )     (63.2 )
Other income (Note 10)
    (41.2 )     (140.0 )     (264.6 )     (255.2 )
 
 
      (12.2 )     26.3       (116.2 )     274.6  
 
 
Operating Income
    358.4       1,714.7       862.6       3,759.7  
Interest Expense (Note 11)
    31.1       15.3       80.8       42.2  
 
 
Income Before Income Taxes
    327.3       1,699.4       781.8       3,717.5  
Income Taxes (Note 12)
    78.5       463.3       37.6       1,010.3  
 
 
Net Income
  $ 248.8     $ 1,236.1       744.2       2,707.2  
                     
                     
Retained Earnings, Beginning of Period
                    2,402.3       2,279.6  
Repurchase of Common Shares
                    -       (2,829.1 )
Dividends
                    (88.7 )     (92.5 )
 
 
Retained Earnings, End of Period
                  $ 3,057.8     $ 2,065.2  
 
 
Net Income Per Share (Note 13)
                               
Basic
  $ 0.84     $ 4.07     $ 2.52     $ 8.73  
Diluted
  $ 0.82     $ 3.93     $ 2.45     $ 8.45  
 
 
Dividends Per Share
  $ 0.10     $ 0.10     $ 0.30     $ 0.30  
 
 
 
(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)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30     September 30  
    2009     2008     2009     2008  
   
 
Operating Activities
                               
Net income
  $ 248.8     $ 1,236.1     $ 744.2     $ 2,707.2  
 
 
Adjustments to reconcile net income to cash provided by operating activities
                               
Depreciation and amortization
    83.4       83.3       227.5       247.1  
Stock-based compensation
    3.6       4.2       26.2       32.1  
Loss (gain) on disposal of property, plant and equipment
    7.0       (21.5 )     8.4       (28.3 )
Provision for (gain on disposal of) auction rate securities
    -       27.5       (115.3 )     71.3  
Foreign exchange on future income tax
    1.1       (14.6 )     (1.0 )     (23.9 )
Provision for future income tax
    140.9       48.7       65.8       75.5  
Undistributed earnings of equity investees
    (32.5 )     (109.3 )     (1.3 )     (133.8 )
Derivative instruments
    (28.2 )     0.6       (70.0 )     (18.4 )
Other long-term liabilities
    (64.3 )     (4.3 )     (37.1 )     2.8  
 
 
Subtotal of adjustments
    111.0       14.6       103.2       224.4  
 
 
Changes in non-cash operating working capital
                               
Accounts receivable
    (139.0 )     (281.9 )     52.9       (776.8 )
Inventories
    9.4       (131.2 )     70.5       (360.5 )
Prepaid expenses and other current assets
    44.4       (10.7 )     (9.2 )     (34.1 )
Accounts payable and accrued charges
    46.2       86.1       (605.8 )     489.7  
 
 
Subtotal of changes in non-cash operating working capital
    (39.0 )     (337.7 )     (491.6 )     (681.7 )
 
 
Cash provided by operating activities
    320.8       913.0       355.8       2,249.9  
 
 
Investing Activities
                               
Additions to property, plant and equipment
    (424.5 )     (336.2 )     (1,190.2 )     (770.6 )
Purchase of long-term investments
    -       (78.3 )     -       (329.5 )
Proceeds from disposal of property, plant and equipment
    0.1       31.3       15.9       40.9  
Proceeds from disposal of auction rate securities
    -       -       132.5       -  
Other assets and intangible assets
    (25.6 )     (11.7 )     (36.1 )     (33.1 )
 
 
Cash used in investing activities
    (450.0 )     (394.9 )     (1,077.9 )     (1,092.3 )
 
 
Cash before financing activities
    (129.2 )     518.1       (722.1 )     1,157.6  
 
 
Financing Activities
                               
Proceeds from long-term debt obligations
    1,478.7       -       4,033.7       -  
Repayments of and finance costs on long-term debt obligations
    (1,062.2 )     -       (3,291.4 )     (0.2 )
(Repayments of) proceeds from short-term debt obligations
    (246.2 )     743.9       165.3       1,586.3  
Dividends
    (29.2 )     (29.8 )     (87.9 )     (92.3 )
Repurchase of common shares
    -       (1,005.8 )     -       (2,902.9 )
Issuance of common shares
    8.0       3.2       16.8       31.5  
 
 
Cash provided by (used in) financing activities
    149.1       (288.5 )     836.5       (1,377.6 )
 
 
Increase (Decrease) in Cash and Cash Equivalents
    19.9       229.6       114.4       (220.0 )
Cash and Cash Equivalents, Beginning of Period
    371.3       269.9       276.8       719.5  
 
 
Cash and Cash Equivalents, End of Period
  $ 391.2     $ 499.5     $ 391.2     $ 499.5  
 
 
Cash and cash equivalents comprised of:
                               
Cash
  $ 98.5     $ 62.5     $ 98.5     $ 62.5  
Short-term investments
    292.7       437.0       292.7       437.0  
 
 
    $ 391.2     $ 499.5     $ 391.2     $ 499.5  
 
 
Supplemental cash flow disclosure
                               
Interest paid
  $ 10.1     $ 14.3     $ 56.1     $ 51.4  
Income taxes paid
  $ 3.0     $ 210.1     $ 739.2     $ 595.7  
 
 
 
(See Notes to the Condensed Consolidated Financial Statements)


4


 

Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)
(in millions of US dollars)
(unaudited)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30     September 30  
(Net of related income taxes)   2009     2008     2009     2008  
   
 
Net income
  $ 248.8     $ 1,236.1     $ 744.2     $ 2,707.2  
 
 
Other comprehensive income
                               
Net increase (decrease) in unrealized gains on available-for-sale securities(1)
    115.8       (1,371.8 )     553.4       (402.2 )
Net losses on derivatives designated as cash flow hedges(2)
    (11.1 )     (258.9 )     (39.9 )     (60.2 )
Reclassification to income of net losses (gains) on cash flow hedges(3)
    14.5       (0.2 )     39.9       (14.4 )
Unrealized foreign exchange gains (losses) on translation of self-sustaining foreign operations
    4.7       (7.2 )     12.0       (2.3 )
 
 
Other comprehensive income (loss)
    123.9       (1,638.1 )     565.4       (479.1 )
 
 
Comprehensive income (loss)
  $ 372.7     $ (402.0 )   $ 1,309.6     $ 2,228.1  
 
 
 
(1) Available-for-sale securities are comprised of shares in Israel Chemicals Ltd. and Sinofert Holdings Limited and investments in auction rate securities. The amounts are net of income taxes of $NIL (2008 — $(129.2)) for the three months ended September 30, 2009 and $26.5 (2008 — $57.0) for the nine months ended September 30, 2009.
 
(2) Cash flow hedges are comprised of natural gas derivative instruments, and are net of income taxes of $(6.8) (2008 — $(105.8)) for the three months ended September 30, 2009 and $(24.3) (2008 — $(24.6)) for the nine months ended September 30, 2009.
 
(3) Net of income taxes of $8.9 (2008 — $(0.1)) for the three months ended September 30, 2009 and $24.3 (2008 — $(5.9)) for the nine months ended September 30, 2009.
 
Condensed Consolidated Statements of Accumulated Other Comprehensive Income
(in millions of US dollars)
(unaudited)
 
                 
    September 30,
    December 31,
 
(Net of related income taxes)   2009     2008  
   
 
Net unrealized gains on available-for-sale securities(1)
  $ 1,315.2     $ 761.8  
Net unrealized losses on derivatives designated as cash flow hedges(2)
    (100.6 )     (100.6 )
Unrealized foreign exchange gains (losses) on translation of self-sustaining foreign operations
    8.7       (3.3 )
 
 
Accumulated other comprehensive income
    1,223.3       657.9  
Retained earnings
    3,057.8       2,402.3  
 
 
Accumulated Other Comprehensive Income and Retained Earnings
  $ 4,281.1     $ 3,060.2  
 
 
 
(1) $1,465.5 before income taxes (2008 — $885.7)
 
(2) $(160.2) before income taxes (2008 — $(160.2))
 
(See Notes to the Condensed Consolidated Financial Statements)


5


 

 
Potash Corporation of Saskatchewan Inc.

Notes to the Condensed Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2009
(in millions of US dollars except share, per-share, percentage and ratio amounts)
(unaudited)
 
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 company’s 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 19. The accounting policies used in preparing these unaudited interim condensed consolidated financial statements are consistent with those used in the preparation of the 2008 annual consolidated financial statements, except as described below.
 
These unaudited 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 2008 annual consolidated financial statements. In management’s opinion, the unaudited interim condensed consolidated 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.
 
Change in Accounting Policy
 
Goodwill and Intangible Assets
 
In February 2008, the Canadian Institute of Chartered Accountants (“CICA”) issued amended accounting standards on goodwill and intangible assets, and research and development expenditures. The amended standards provide more specific guidance on the recognition of internally developed intangible assets, and require that research and development expenditures be evaluated against the same criteria as expenditures for intangible assets. The standards substantially harmonize Canadian standards with International Financial Reporting Standards (“IFRSs”) and were retrospectively applied on January 1, 2009.
 
Also in February 2008, the CICA withdrew and amended certain standards which the CICA concluded permitted deferral of costs that did not meet the definition of an asset. The amendments were retrospectively applied on January 1, 2009.
 
The implementation of these standards did not have a material impact on the company’s consolidated financial statements.
 
Recent Accounting Pronouncements
 
IFRSs
 
In April 2008, March 2009 and October 2009, the CICA’s Accounting Standards Board (“AcSB”) published exposure drafts on “Adopting IFRSs in Canada”. The exposure drafts propose to incorporate the IFRSs into the CICA Accounting Handbook effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. At this date, publicly accountable enterprises in Canada will be required to prepare financial statements in accordance with IFRSs. The exposure drafts make possible the early adoption of IFRSs by Canadian entities. Also, in October 2009, the AcSB issued the exposure draft “Improvements to IFRSs” to incorporate into Canadian GAAP the amendments to IFRSs that result from an exposure draft issued by the International Accounting Standards Board (“IASB”). The IASB’s exposure draft deals with minor amendments and focuses on areas of inconsistency in standards or where clarification of wording is required. It is expected that the


6


 

amendments will be effective January 1, 2011. The company is currently reviewing the standards to determine the potential impact on its consolidated financial statements.
 
Credit Risk and the Fair Value of Financial Assets and Financial Liabilities
 
In January 2009, the Emerging Issues Committee of the CICA (“EIC”) issued guidance on the implications of credit risk in determining fair value of an entity’s financial assets and financial liabilities. The guidance clarifies that an entity’s own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments, for presentation and disclosure purposes. The conclusions of the EIC were effective from the date of issuance of the abstract and did not have any impact on the company’s consolidated financial statements.
 
Business Combinations
 
In January 2009, the AcSB issued revised accounting standards in regards to business combinations with the intent of harmonizing those standards with IFRSs. The revised standards require the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establish the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. These standards apply prospectively to business combinations for which the acquisition date is after the beginning of the first annual reporting period beginning on or after January 1, 2011. The company is currently reviewing the standards to determine the impact, if any, on its consolidated financial statements.
 
Noncontrolling Interests in Consolidated Financial Statements
 
In January 2009, the AcSB issued accounting standards to require all entities to report noncontrolling (minority) interests as equity in consolidated financial statements. The standards eliminate the disparate treatment that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. These standards will be retrospectively applied on January 1, 2011. The company is currently reviewing the standards to determine the impact, if any, on its consolidated financial statements.
 
Mining Exploration Costs
 
In March 2009, the EIC issued guidance to clarify when an enterprise may capitalize mining exploration costs and when and how impairment of exploration costs is determined. The guidance is effective for financial statements issued subsequent to its release. The conclusions of the EIC did not have any impact on the company’s consolidated financial statements.
 
Financial Instrument Disclosure
 
In June 2009, the AcSB amended certain requirements related to financial instrument disclosure in response to amendments issued by the IASB. The AcSB’s amendments are consistent with its strategy to adopt IFRSs and to ensure the existing disclosure requirements for financial instruments are converged to IFRSs to the extent possible. The new disclosure standards require disclosure of fair values based on a fair value hierarchy as well as enhanced discussion and quantitative disclosure related to liquidity risk. The amended disclosure requirements will be applied to our December 31, 2009 annual financial statements.


7


 

 
2.   Accounts Receivable
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Trade accounts
  $ 476.7     $ 1,033.9  
Less allowance for doubtful accounts
    (8.5 )     (7.7 )
 
 
      468.2       1,026.2  
Taxes receivable
    511.1       -  
Margin deposit on derivative instruments
    89.9       91.1  
Other non-trade accounts
    69.3       72.6  
 
 
    $ 1,138.5     $ 1,189.9  
 
 
 
3.   Inventories
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Finished products
  $ 320.7     $ 421.8  
Intermediate products
    163.1       117.1  
Raw materials
    45.8       67.8  
Materials and supplies
    110.3       108.2  
 
 
    $ 639.9     $ 714.9  
 
 
 
During the three and nine months ended September 30, 2009, inventories of $579.5 (2008 — $1,158.6) and $1,581.3 (2008 — $3,057.8), respectively, were expensed through cost of goods sold. Writedowns of finished products, intermediate products and raw materials of $5.0, $4.7 and $1.4, respectively, were included in cost of goods sold during the three months ended September 30, 2009 (2008 — $NIL). During the nine months ended September 30, 2009, writedowns of finished products, intermediate products and raw materials of $45.2, $4.7 and $1.4, respectively, were included in cost of goods sold (2008 — $NIL). For the three and nine months ended September 30, 2009, the company recorded reversals of previous writedowns of finished products in the amount of $1.7 and $7.3, respectively (2008 — $NIL). The carrying amount of inventory recorded at net realizable value was $59.8 at September 30, 2009 and $181.3 at December 31, 2008 with the remaining inventory recorded at cost.
 
4.   Short-Term Debt and Current Portion of Long-Term Debt
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Commercial paper
  $ 489.2     $ 324.8  
Credit facility
    -       1,000.0  
 
 
      489.2       1,324.8  
Current portion of long-term debt
    0.3       0.2  
Less net unamortized debt costs
    -       (0.9 )
 
 
    $ 489.5     $ 1,324.1  
 
 
 
As of December 31, 2008, the company had a $1,000.0 364-day credit facility that was due on May 28, 2009, under which draws of $1,000.0 were classified as short-term debt. Effective January 21, 2009, the facility was amended to increase available borrowings to $1,500.0 and to extend the maturity date to May 28, 2010. The amount available under the credit facility was again increased on March 5, 2009 to $1,850.0. No amounts were outstanding under this credit facility at September 30, 2009.


8


 

 
5.   Long-Term Debt
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Senior notes
               
7.750% notes due May 31, 2011
  $ 600.0     $ 600.0  
4.875% notes due March 1, 2013
    250.0       250.0  
5.250% notes due May 15, 2014
    500.0       -  
3.750% notes due September 30, 2015
    500.0       -  
6.500% notes due May 15, 2019
    500.0       -  
4.875% notes due March 30, 2020
    500.0       -  
5.875% notes due December 1, 2036
    500.0       500.0  
Credit facilities
    180.0       400.0  
Other
    8.0       8.2  
 
 
      3,538.0       1,758.2  
Less net unamortized debt costs
    (42.9 )     (22.8 )
Add unamortized interest rate swap gains
    2.7       3.9  
 
 
      3,497.8       1,739.3  
Less current maturities
    (0.3 )     (0.2 )
Add current portion of amortization
    1.5       0.4  
 
 
    $ 3,499.0     $ 1,739.5  
 
 
 
On May 1, 2009, the company closed the issuance of $500.0 of 5.250 percent senior notes due May 15, 2014 and $500.0 of 6.500 percent senior notes due May 15, 2019. In addition, on September 28, 2009 the company closed the issuance of $500.0 of 3.750 percent senior notes due September 30, 2015 and $500.0 of 4.875 percent senior notes due March 30, 2020. The securities were issued under the company’s US shelf registration statement filed on December 12, 2007.
 
The company also has three long-term revolving credit facilities that provide for unsecured advances. The first is a $750.0 facility that provides for unsecured advances through May 31, 2013. As of September 30, 2009, $100.0 (December 31, 2008 — $220.0) of borrowings were outstanding under this facility. The second facility is a $180.0 facility entered into on December 22, 2008, with a maturity date of December 21, 2010. As at September 30, 2009, $80.0 (December 31, 2008 — $180.0) of borrowings were outstanding under this facility. The third facility is the company’s $1,850.0 facility, which is discussed in Note 4.
 
During the three months ended September 30, 2009, the company received proceeds from its long-term credit facilities of $500.0, and made repayments of $1,070.0 under these facilities. During the nine months ended September 30, 2009, the company received proceeds of $2,055.0 and made repayments of $3,275.0 under these facilities.
 
6.   Capital Management
 
The company’s objectives when managing its capital are to maintain financial flexibility while managing its cost of, and optimizing access to, capital. In order to achieve these objectives, the company’s strategy, which is unchanged from 2008, is to maintain its investment grade credit rating.


9


 

The company includes net debt and adjusted shareholders’ equity as components of its capital structure. The calculation of net debt, adjusted shareholders’ equity and adjusted capital are set out in the following table:
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Short-term debt and current portion of long-term debt
  $ 489.5     $ 1,324.1  
Long-term debt
    3,499.0       1,739.5  
 
 
Total debt
    3,988.5       3,063.6  
Less: cash and cash equivalents
    391.2       276.8  
 
 
Net debt
    3,597.3       2,786.8  
 
 
                 
Shareholders’ equity
    5,854.0       4,588.9  
Less: accumulated other comprehensive income
    1,223.3       657.9  
 
 
Adjusted shareholders’ equity
    4,630.7       3,931.0  
 
 
                 
Adjusted capital(1)
  $ 8,228.0     $ 6,717.8  
 
 
 
(1) Adjusted capital = (total debt – cash and cash equivalents) + (shareholders’ equity – accumulated other comprehensive income)
 
The company monitors capital on the basis of a number of factors, including the ratios of: adjusted earnings before interest expense, income taxes, depreciation and amortization, provision for auction rate securities, gain on disposal of auction rate securities and gain on sale of assets (“adjusted EBITDA”) to adjusted interest expense; net debt to adjusted EBITDA and net debt to adjusted capital. Adjusted EBITDA to adjusted interest expense and net debt to adjusted EBITDA are calculated utilizing twelve-month trailing adjusted EBITDA and adjusted interest expense.
 
                 
    As At or For the
    12 Months Ended
    September 30,
  December 31,
    2009   2008
 
 
Components of ratios
               
Adjusted EBITDA (twelve months ended)
  $ 1,948.1     $ 5,030.0  
Net debt
  $ 3,597.3     $ 2,786.8  
Adjusted interest expense (twelve months ended)
  $ 159.0     $ 105.7  
Adjusted capital
  $ 8,228.0     $ 6,717.8  
                 
Ratios
               
Adjusted EBITDA to adjusted interest expense(1)
    12.3       47.6  
Net debt to adjusted EBITDA(2)
    1.9       0.6  
Net debt to adjusted capital(3)
    43.7 %     41.5 %
 
(1) Adjusted EBITDA to adjusted interest expense = adjusted EBITDA (twelve months ended) / adjusted interest expense (twelve months ended)
 
(2) Net debt to adjusted EBITDA = (total debt – cash and cash equivalents) / adjusted EBITDA (twelve months ended)
 
(3) Net debt to adjusted capital = (total debt – cash and cash equivalents) / (total debt – cash and cash equivalents + total shareholders’ equity – accumulated other comprehensive income)
 
The company monitors its capital structure and, based on changes in economic conditions, may adjust the structure through adjustments to the amount of dividends paid to shareholders, the repurchase of shares, the issuance of new shares or the issuance of new debt.
 
The decrease in the ratio of adjusted EBITDA to adjusted interest expense is a result of a decrease in adjusted EBITDA and an increase in adjusted interest expense due to decreased net income and increased long-term debt during the twelve months ending September 30, 2009. The net debt to adjusted EBITDA ratio increased as net debt increased due to the issuance of long-term debt and adjusted EBITDA decreased. Net debt to adjusted capital ratio increased due to the company issuing more long-term debt.


10


 

The calculations of the twelve-month trailing net income, adjusted EBITDA, interest expense and adjusted interest expense are set out in the following tables:
 
                                                 
    Twelve
                            Twelve
 
    Months Ended
    Three Months Ended     Months Ended
 
    September 30,
    September 30,
    June 30,
    March 31,
    December 31,
    December 31,
 
    2009     2009     2009     2009     2008     2008  
   
 
Net income
  $ 1,532.2     $ 248.8     $ 187.1     $ 308.3     $ 788.0     $ 3,495.2  
Income taxes
    104.4       78.5       72.2       (113.1 )     66.8       1,077.1  
Interest expense
    101.4       31.1       26.5       23.2       20.6       62.8  
Depreciation and amortization
    307.9       83.4       70.1       74.0       80.4       327.5  
Provision for auction rate securities
    17.5       -       -       -       17.5       88.8  
Gain on disposal of auction rate securities
    (115.3 )     -       (115.3 )     -       -       -  
Gain on sale of assets
    -       -       -       -       -       (21.4 )
 
 
Adjusted EBITDA
  $ 1,948.1     $ 441.8     $ 240.6     $ 292.4     $ 973.3     $ 5,030.0  
 
 
 
                                                 
    Twelve
                            Twelve
 
    Months Ended
    Three Months Ended     Months Ended
 
    September 30,
    September 30,
    June 30,
    March 31,
    December 31,
    December 31,
 
    2009     2009     2009     2009     2008     2008  
   
 
Interest expense
  $ 101.4     $ 31.1     $ 26.5     $ 23.2     $ 20.6     $ 62.8  
Interest capitalized to property, plant and equipment
    57.6       16.8       17.2       12.8       10.8       42.9  
 
 
Adjusted interest expense
  $ 159.0     $ 47.9     $ 43.7     $ 36.0     $ 31.4     $ 105.7  
 
 
 
7.   Segment Information
 
The company has three reportable business segments: potash, phosphate and nitrogen. These business segments are differentiated by the chemical nutrient contained in the product that each segment 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.
 
                                         
    Three Months Ended September 30, 2009  
   
    Potash     Phosphate     Nitrogen     All Others     Consolidated  
   
 
Sales
  $ 423.4     $ 357.4     $ 318.3     $       -     $ 1,099.1  
Freight
    16.8       24.3       12.6       -       53.7  
Transportation and distribution
    9.2       13.9       13.2       -       36.3  
Net sales — third party
    397.4       319.2       292.5       -          
Cost of goods sold
    146.0       275.0       241.9       -       662.9  
Gross margin
    251.4       44.2       50.6       -       346.2  
Depreciation and amortization
    13.2       43.1       25.1       2.0       83.4  
Inter-segment sales
    -       -       23.3       -       -  
 
                                         
    Three Months Ended September 30, 2008  
   
    Potash     Phosphate     Nitrogen     All Others     Consolidated  
   
 
Sales
  $ 1,145.2     $ 1,080.2     $ 838.9     $       -     $ 3,064.3  
Freight
    36.0       27.3       18.1       -       81.4  
Transportation and distribution
    9.9       8.8       12.9       -       31.6  
Net sales — third party
    1,099.3       1,044.1       807.9       -          
Cost of goods sold
    189.6       536.9       483.8       -       1,210.3  
Gross margin
    909.7       507.2       324.1       -       1,741.0  
Depreciation and amortization
    18.9       36.1       26.2       2.1       83.3  
Inter-segment sales
    -       7.7       62.8       -       -  


11


 

                                         
    Nine Months Ended September 30, 2009
 
    Potash   Phosphate   Nitrogen   All Others   Consolidated
 
 
Sales
  $ 903.3     $ 1,012.0     $ 962.3     $       -     $ 2,877.6  
Freight
    34.1       58.3       37.8       -       130.2  
Transportation and distribution
    24.4       34.8       41.8       -       101.0  
Net sales — third party
    844.8       918.9       882.7       -          
Cost of goods sold
    320.6       845.4       734.0       -       1,900.0  
Gross margin
    524.2       73.5       148.7       -       746.4  
Depreciation and amortization
    26.6       120.0       74.3       6.6       227.5  
Inter-segment sales
    -       -       44.1       -       -  
 
                                         
    Nine Months Ended September 30, 2008
 
    Potash   Phosphate   Nitrogen   All Others   Consolidated
 
 
Sales
  $ 3,135.9     $ 2,375.4     $ 2,064.6     $       -     $ 7,575.9  
Freight
    151.6       89.2       46.4       -       287.2  
Transportation and distribution
    35.2       25.2       36.8       -       97.2  
Net sales — third party
    2,949.1       2,261.0       1,981.4       -          
Cost of goods sold
    638.4       1,256.9       1,261.9       -       3,157.2  
Gross margin
    2,310.7       1,004.1       719.5       -       4,034.3  
Depreciation and amortization
    65.7       104.4       71.1       5.9       247.1  
Inter-segment sales
    -       22.4       145.4       -       -  
 
Assets
 
                                         
    Potash   Phosphate   Nitrogen   All Others   Consolidated
 
 
Assets at September 30, 2009
  $ 4,396.8     $ 2,321.5     $ 1,590.9     $ 3,694.4     $ 12,003.6  
Assets at December 31, 2008
    3,350.0       2,283.0       1,593.6       3,022.2       10,248.8  
Change in assets
    1,046.8       38.5       (2.7 )     672.2       1,754.8  
Additions to property, plant and equipment
    864.9       243.2       77.0       5.1       1,190.2  
 
8.   Stock-Based Compensation
 
On May 7, 2009, the company’s shareholders approved the 2009 Performance Option Plan under which the company may, after February 20, 2009 and before January 1, 2010, issue options to acquire up to 1,000,000 common shares. Under the plan, the exercise price shall not be less than the quoted market closing price of the company’s common shares on the last trading day immediately preceding the date of grant and an option’s maximum term is 10 years. In general, options will vest, if at all, according to a schedule based on the three-year average excess of the company’s consolidated cash flow return on investment over weighted average cost of capital. As of September 30, 2009, options to purchase a total of 641,400 common shares have been granted under the plan. The weighted average fair value of options granted was $42.42 per option, estimated as of the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
 
         
Expected dividend
  $ 0.40  
Expected volatility
    48%  
Risk-free interest rate
    2.53%  
Expected life of options
    5.9 years  


12


 

 
9.   Pension and Other Post-Retirement Expenses
 
Defined Benefit Pension Plans
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2009     2008     2009     2008  
   
 
Service cost
  $ 4.3     $ 3.7     $ 12.9     $ 11.3  
Interest cost
    11.1       10.0       33.3       30.0  
Expected return on plan assets
    (9.6 )     (12.7 )     (28.8 )     (38.5 )
Net amortization and change in valuation allowance
    7.2       2.6       21.6       7.6  
 
 
Net expense
  $ 13.0     $ 3.6     $ 39.0     $ 10.4  
 
 
 
Other Post-Retirement Plans
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2009     2008     2009     2008  
   
 
Service cost
  $ 1.5     $ 1.5     $ 4.6     $ 4.3  
Interest cost
    4.1       4.0       12.4       12.0  
Net amortization
    0.2       0.2       0.5       0.5  
 
 
Net expense
  $ 5.8     $ 5.7     $ 17.5     $ 16.8  
 
 
 
For the three months ended September 30, 2009, the company contributed $90.2 to its defined benefit pension plans, $4.3 to its defined contribution pension plans and $2.5 to its other post-retirement plans. Contributions for the nine months ended September 30, 2009 were $104.4 to its defined benefit pension plans, $16.5 to its defined contribution pension plans and $7.2 to its other post-retirement plans. Total 2009 contributions to these plans are not expected to differ significantly from the amounts previously disclosed in Note 15 to the consolidated financial statements for the year ended December 31, 2008 in the company’s 2008 financial review annual report.
 
10.   Other Income
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2009     2008     2009     2008  
   
 
Share of earnings of equity investees
  $ 32.5     $ 109.3     $ 100.2     $ 193.0  
Dividend income
    11.4       30.3       51.8       64.0  
(Provision for) gain on disposal of auction rate securities
    -       (27.5 )     115.3       (71.3 )
Other
    (2.7 )     27.9       (2.7 )     44.2  
Gain on forward purchase contract for shares in Sinofert
    -       -       -       25.3  
 
 
    $ 41.2     $ 140.0     $ 264.6     $ 255.2  
 
 
 
In April 2009, the company recognized a gain on the disposal of auction rate securities of $115.3 due to the settlement of a claim the company filed in an arbitration proceeding against an investment firm that purchased auction rate securities for the company’s account without the company’s authorization. The investment firm paid the company the full par value of $132.5 in exchange for the transfer of the auction rate securities to the investment firm. The company retained all interest paid and accrued on these securities through the date of the transfer of the securities to the investment firm. The company was also reimbursed by the investment firm for $3.0 of the company’s legal costs. Prior to the settlement, the company had recognized in net income a loss of $115.3 related to these unauthorized securities placed in its account.


13


 

 
11.   Interest Expense
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2009     2008     2009     2008  
   
 
Interest expense on
                               
Short-term debt
  $ 3.6     $ 10.7     $ 17.3     $ 17.0  
Long-term debt
    46.0       23.9       119.8       71.2  
Interest capitalized to property, plant and equipment
    (16.8 )     (13.2 )     (46.8 )     (32.1 )
Interest income
    (1.7 )     (6.1 )     (9.5 )     (13.9 )
 
 
    $ 31.1     $ 15.3     $ 80.8     $ 42.2  
 
 
 
12.   Income Taxes
 
The company’s income tax provision was $78.5 for the three months ended September 30, 2009 as compared to $463.3 for the same period last year. For the nine months ended September 30, 2009, the company’s income tax provision was $37.6 (2008 — $1,010.3). The effective tax rate for the three and nine months ended September 30, 2009 was 24 percent and 5 percent, respectively, compared to 27 percent for the three and nine months ended September 30, 2008.
 
The provision for the nine months ended September 30, 2009 included:
 
  •  A future income tax recovery of $119.2 for a tax rate reduction resulting from an internal restructuring during the first quarter.
 
  •  A current income tax recovery of $47.6 recorded in the first quarter that related to an increase in permanent deductions in the US from prior years. The recovery will have a positive impact on cash.
 
  •  A future income tax provision of $24.4 related to a second-quarter functional currency election by the parent company for Canadian income tax purposes.
 
  •  The benefit of a lower proportion of consolidated income earned in higher-tax jurisdictions.
 
The provision for the nine months ended September 30, 2008 included:
 
  •  The benefit of a scheduled one and a half percentage point reduction in the Canadian federal income tax rate applicable to resource companies along with the elimination of the one percent surtax that became effective at the beginning of the year.
 
  •  In the third quarter of 2008, a current income tax recovery of $29.1 was recorded that related to an increase in permanent deductions in the US from prior years. This is in addition to the future income tax recovery of $42.0 recorded during the first quarter of 2008 that related to an increase in permanent deductions in the US from prior years.
 
  •  No tax expense on the $25.3 gain recognized in the first quarter that resulted from the change in fair value of the forward purchase contract for shares in Sinofert Holdings Limited (“Sinofert”) as the gain was not taxable.
 
13.   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 September 30, 2009 of 295,721,000 (2008 — 304,017,000). Basic net income per share for the nine months ended September 30, 2009 is calculated based on the weighted average shares issued and outstanding for the period of 295,467,000 (2008 — 310,076,000).
 
Diluted net income per share is calculated based on the weighted average number of shares issued and outstanding during the period. The denominator is: (1) increased by the total of the additional common shares that would have been issued assuming exercise of all stock options for which performance conditions have been met and with exercise prices at or below the average market price for the period; and (2) decreased by the number of shares


14


 

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 September 30, 2009 was 303,927,000 (2008 — 314,132,000) and for the nine months ended September 30, 2009 was 303,802,000 (2008 — 320,484,000).
 
14.   Financial Instruments and Related Risk Management
 
The company is exposed in varying degrees to a variety of financial risks from its use of financial instruments: credit risk, liquidity risk and market risk. The source of risk exposure and how each is managed is described in Note 28 to the consolidated financial statements for the year ended December 31, 2008 in the company’s 2008 financial review annual report.
 
Credit Risk
 
The company is exposed to credit risk on its cash and cash equivalents, accounts receivable and derivative instrument assets. The company was also exposed to credit risk on auction rate securities prior to the disposal of such securities in connection with the April 2009 settlement of the company’s arbitration claim. The maximum exposure to credit risk, as represented by the carrying amount of the financial assets, was:
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Cash and cash equivalents
  $ 391.2     $ 276.8  
Accounts receivable(1)
    627.4       1,189.9  
Derivative instrument assets
    22.1       17.9  
Auction rate securities
    -       17.2  
 
(1) Excludes taxes receivable of $511.1
 
The aging of trade receivables that were past due but not impaired was as follows:
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
1 — 30 days
  $ 14.1     $ 33.3  
31 — 60 days
    0.4       8.7  
Greater than 60 days
    1.8       1.7  
 
 
    $ 16.3     $ 43.7  
 
 
 
A reconciliation of the accounts receivable allowance for doubtful accounts is as follows:
 
                 
    As At and For the
    As At and For the
 
    Nine Months Ended
    Year Ended
 
    September 30,
    December 31,
 
    2009     2008  
   
 
Balance — beginning of period
  $ 7.7     $ 5.9  
Provision for receivables impairment
    0.8       5.0  
Receivables written off during the period as uncollectible (primarily related to offshore receivables)
    -       (3.2 )
 
 
Balance — end of period
  $ 8.5     $ 7.7  
 
 
 
Of total accounts receivable at September 30, 2009, $89.9 related to margin deposits on derivative instruments and $193.2 represented amounts receivable from Canpotex Limited (“Canpotex”). The company sells potash from its Saskatchewan mines for use outside Canada and the US exclusively to Canpotex. Sales to Canpotex are at prevailing market prices and are settled on normal trade terms. There were no significant amounts past due or impaired relating to the amounts owing to the company from Canpotex or the non-trade accounts receivable.


15


 

Liquidity Risk
 
Liquidity risk arises from the company’s general funding needs and in the management of the company’s assets, liabilities and optimal capital structure. The company manages its liquidity risk to maintain sufficient liquid financial resources to fund its operations and meet its commitments and obligations in a cost-effective manner. In managing its liquidity risk, the company has access to a range of funding options. The table below outlines the company’s available debt instruments:
 
                         
    September 30, 2009
    Total
  Amount Outstanding
   
    Amount   and Committed   Amount Available
 
 
Credit facilities
  $ 2,780.0 (1)   $ 659.2(1 )   $ 2,120.8 (1)
Line of credit
    75.0       32.3(2 )     42.7  
 
(1) The amount available under the $750.0 commercial paper program is limited to the availability of backup funds under the credit facilities. Included in the amount outstanding and committed is $479.2 of commercial paper (per the terms of the agreements, the commercial paper outstanding and committed, as applicable, is based on the US dollar balance or equivalent thereof in lawful money of other currencies at the time of issue; therefore, subsequent changes in the exchange rate applicable to Canadian dollar denominated commercial paper have no impact on this balance).
 
(2) Letters of credit committed.
 
The company has an unsecured line of credit available for short-term financing (net of letters of credit of $32.3 and direct borrowings of $NIL) in the amount of $42.7 at September 30, 2009 (December 31, 2008 — $55.0). The line of credit is renewable in June 2010.
 
The table below presents a maturity analysis of the company’s financial liabilities based on the expected cash flows from the date of the balance sheet to the contractual maturity date. The amounts are the contractual undiscounted cash flows.
 
                                                 
    Carrying
                               
    Amount of
                               
    Liability at
                               
    September 30,
    Contractual
    Within
                Over
 
    2009     Cash Flows     1 year     1 to 3 years     3 to 5 years     5 years  
   
 
Short-term debt obligations(1)
  $ 489.2     $ 480.0     $ 480.0     $ -     $ -     $ -  
Accounts payable and accrued charges(2)
    579.9       579.9       579.9       -       -       -  
Long-term debt obligations(1)
    3,538.0       5,330.2       198.0       1,031.6       1,122.7       2,977.9  
Derivative financial instrument liabilities
                                               
Natural gas hedging derivatives
    162.9       171.6       58.1       51.9       20.5       41.1  
 
 
    $ 4,770.0     $ 6,561.7     $ 1,316.0     $ 1,083.5     $ 1,143.2     $ 3,019.0  
 
 
 
(1) Contractual cash flows include contractual interest payments related to debt obligations. Interest rates on variable rate debt are based on prevailing rates at September 30, 2009.
 
(2) Excludes taxes, accrued interest, deferred revenues and current portions of accrued environmental costs and asset retirement obligations and accrued pension and other post-retirement benefits. This also excludes derivative financial instrument liabilities which have been presented separately.
 
Market Risk
 
Market risk is the risk that financial instrument fair values will fluctuate due to changes in market prices. The significant market risks to which the company is exposed are foreign exchange risk, interest rate risk and price risk (related to commodity and equity securities).


16


 

Foreign Exchange Risk
 
The following table shows the company’s exposure to exchange risk and the pre-tax effects on income and other comprehensive income (“OCI”) of reasonably possible changes in the relevant foreign currency. This analysis assumes all other variables remain constant.
 
                                         
    Carrying Amount
  Foreign Exchange Risk
    of Asset (Liability)
  5% increase in
  5% decrease in
    at September 
  US$   US$
    30, 2009   Income   OCI   Income   OCI
 
 
Available-for-sale investments
                                       
Israel Chemical Ltd. denominated in New Israeli Shekels
  $ 1,641.8     $ -     $ (82.1 )   $ -     $ 82.1  
Sinofert denominated in Hong Kong dollars
    682.9       -       (34.1 )     -       34.1  
Short-term debt denominated in Canadian dollars
    (319.8 )     16.0       -       (16.0 )     -  
Accounts payable denominated in Canadian dollars
    (161.5 )     8.1       -       (8.1 )     -  
Derivative instruments
                                       
Foreign currency forward contracts
    13.7       (28.3 )     -       28.3       -  
 
As at September 30, 2009, the company had entered into foreign currency forward contracts to sell US dollars and receive Canadian dollars in the notional amount of $552.4 (December 31, 2008 — $873.0) at an average exchange rate of 1.0988 (December 31, 2008 — 1.1522) per US dollar. The company had also entered into other small forward contracts. Maturity dates for all forward contracts are within 2009.
 
As at September 30, 2009, the company had no significant foreign currency exposure related to cash and cash equivalents and accounts receivable.
 
Interest Rate Risk
 
The following table shows the company’s exposure to interest rate risk and the pre-tax effects on net income and other comprehensive income of reasonably possible changes in the relevant interest rates. This analysis assumes all other variables remain constant.
 
                                         
    Carrying Amount
  Interest Rate Risk
    of Asset (Liability)
  1% decrease in
  1% increase in
    at September 30,
  interest rates   interest rates
    2009   Income   OCI   Income   OCI
 
 
Fixed rate instruments
                                       
Long-term debt obligations(1)
  $ (3,352.1 )   $ -     $     -     $ -     $     -  
Variable rate instruments
                                       
Cash and cash equivalents
    391.2       (3.9 )     -       3.9       -  
Long-term debt obligations
    (185.9 )     1.9       -       (1.9 )     -  
Short-term debt obligations(2)
    (489.2 )     -       -       -       -  
 
(1) The company does not measure any fixed rate debt at fair value. Therefore, changes in interest rates will not affect income or OCI as there is no change in the carrying value of fixed-rate debt and interest payments are fixed.
 
(2) Commercial paper is excluded from interest rate risk on short-term obligations since interest rates are fixed for their stated period. The company is only exposed to interest rate risk on the issuance of new commercial paper.


17


 

 
Price Risk
 
The following table shows the company’s exposure to price risk and the pre-tax effects on net income and other comprehensive income of reasonably possible changes in the relevant commodity or securities prices. This analysis assumes all other variables remain constant.
 
                                         
    Carrying Amount
               
    of Asset (Liability)
  Price Risk
    at September 30,
  10% decrease in prices   10% increase in prices
    2009   Income   OCI   Income   OCI
 
 
Derivative instruments
                                       
Natural gas hedging derivatives
  $ (154.5 )   $     -     $ (74.0 )   $     -     $ 74.4  
Available-for-sale investments
                                       
Intercorporate investments
    2,324.7       -       (232.5 )     -       232.5  
 
As at September 30, 2009, the company had derivatives qualifying for hedge accounting in the form of swaps which represented a notional amount of 120.0 million MMBtu with maturities in 2009 through 2019. At December 31, 2008 the notional amount of swaps was 135.4 million MMBtu with maturities in 2009 through 2018.
 
Fair Value
 
Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors. Presented below is a comparison of the fair value of each financial instrument to its carrying value.
 
                                 
    September 30,
  December 31,
    2009   2008
 
    Carrying
      Carrying
   
    Amount
  Fair Value
  Amount
  Fair Value
    of Asset
  of Asset
  of Asset
  of Asset
    (Liability)   (Liability)   (Liability)   (Liability)
 
 
Cash and cash equivalents
  $ 391.2     $ 391.2     $ 276.8     $ 276.8  
Accounts receivable(1)
    627.4       627.4       1,189.9       1,189.9  
Derivative financial instruments
    (140.8 )     (140.8 )     (210.6 )     (210.6 )
Investments
    3,322.5       6,331.1       2,750.7       4,615.2  
Short-term debt obligations
    (489.2 )     (489.2 )     (1,323.9 )     (1,323.9 )
Accounts payable and accrued charges
    (579.9 )     (579.9 )     (565.3 )     (565.3 )
Long-term debt
    (3,538.0 )     (3,705.5 )     (1,758.2 )     (1,730.3 )
 
(1) Excludes taxes receivable of $511.1.
 
Due to their short-term nature, the fair value of cash and cash equivalents, accounts receivable, short-term debt, and accounts payable and accrued charges is assumed to approximate carrying value. The effective interest rate on the company’s short-term debt at September 30, 2009 was 0.72 percent and 2.33 percent at December 31, 2008. The fair value of its senior notes at September 30, 2009 reflects the current yield valuation based on observed market prices. The current yield on the notes payable ranges from 2.15 percent to 5.8 percent. At December 31, 2008 the yield ranged from 5.05 percent to 6.73 percent. The fair value of the company’s other long-term debt instruments approximated carrying value.
 
15.   Seasonality
 
The company’s 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.


18


 

 
16.   Contingencies
 
Canpotex
 
PotashCorp is a shareholder in 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 nine months of 2009 or 2008.
 
Mining Risk
 
In common with other companies in the industry, the company is unable to acquire insurance for underground assets.
 
Legal and Other Matters
 
Significant matters of note include the following:
 
  •  In 1998, the company, along with other parties, was notified by the US Environmental Protection Agency (“USEPA”) of potential liability under the US federal 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 have shared the costs of the RI/FS, which is now complete. A Record of Decision (“ROD”) based upon the RI/FS was issued on September 27, 2007. The ROD provides for a remedy that requires excavation of impacted soils and interim treatment of groundwater. The total remedy cost is estimated in the ROD to be $8.5. On August 31, 2009, the U.S. District Court for the Middle District of Florida approved the Remedial Design/Remedial Action Consent Decree, pursuant to which PCS Joint Venture and additional potentially responsible parties will perform the ROD remedy. Implementation of the ROD remedy could begin in the first quarter of 2010. Although PCS Joint Venture sold the Lakeland property in July 2006, PCS Joint Venture has retained the above-described remediation responsibilities and has indemnified the third-party purchaser for the costs of remediation and certain related claims.
 
  •  The USEPA has identified PCS Nitrogen, Inc. (“PCS Nitrogen”) as 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 which PCS Nitrogen acquired certain other assets. The USEPA has requested reimbursement of $3.0 of previously incurred response costs and the performance or financing of future site investigation and response activities from PCS Nitrogen and other named potentially responsible parties. In September 2005, Ashley II of Charleston, L.L.C., the current owner of the Planters Property, filed a complaint in the United States District Court for the District of South Carolina (the “Court”) seeking a declaratory judgment that PCS Nitrogen is liable to pay environmental response costs that Ashley II of Charleston, L.L.C. alleges it has incurred and will incur in connection with response activities at the site. The Court entered an order bifurcating the case into two phases. In the third quarter of 2007, the Court issued its decision for the first phase of the case, in which it determined that PCS Nitrogen is the successor to a former owner of the site and may be liable to Ashley II of Charleston, L.L.C. for its environmental response costs at the site. PCS Nitrogen has filed and is pursuing third-party complaints against owners and operators that it believes should be responsible parties with respect to the site. In the first quarter of 2009, the judge who had been handling the case disqualified himself and the case was transferred to a new judge. The Court entered an order in June 2009 denying PCS Nitrogen’s motion to vacate the orders entered by the previous judge. PCS Nitrogen filed a motion seeking leave to appeal the Court’s order denying PCS Nitrogen’s motion to vacate and a separate motion to reconsider the order entered by the previous judge denying PCS Nitrogen’s motion for leave to appeal the order finding that PCS Nitrogen is a successor to a former owner of the site. In October 2009, the Court denied these motions. The second phase of the trial to allocate damages commenced on October 26, 2009.


19


 

  PCS Nitrogen denies that it is a potentially responsible party and is vigorously defending its interests in these actions.
 
  •  PCS Phosphate Company, Inc. (“PCS Phosphate”), along with several other entities, has received notice from parties to an Administrative Settlement Agreement (“Settling Parties”) with the USEPA of alleged contribution liability under CERCLA for costs incurred and to be incurred addressing PCB soil contamination at the Ward Superfund Site in Raleigh, North Carolina (“Site”). PCS Phosphate has agreed to participate, on a non-joint and several basis, with the Settling Parties in the performance of the removal action and the payment of certain other costs associated with the Site, including reimbursement of the USEPA’s past costs. The cost of performing the removal action at the Site is estimated at $70.0. The removal activities commenced at the Site in August 2007. In July 2009, the Settling Parties served the company, and more than 100 other entities, with complaints seeking contribution for and recovery of response costs incurred in performing the removal action. The company anticipates recovering some portion of its expenditures for the removal action from other liable parties through settlement or litigation. In addition to the removal action at the Site, investigation of sediments downstream of the Site in what is called “Operable Unit 1” has occurred. In September 2008, the USEPA issued a final remedy, with an estimated cost of $6.1, for Operable Unit 1. In October 2008, the USEPA issued special notice letters to PCS Phosphate and other alleged potentially responsible parties requiring a good-faith offer to perform and/or pay for the clean-up of Operable Unit 1, to perform further investigation at the Site and adjacent properties, and to reimburse USEPA for its past costs. In January 2009, in addition to good-faith offers made by other potentially responsible parties, PCS Phosphate, along with some of the Settling Parties, submitted a good-faith offer to the USEPA. The USEPA is reviewing the good-faith offers. At this time, the company is unable to evaluate the extent of any exposure that it may have for the matters addressed in the special notice letter.
 
  •  The USEPA has an ongoing 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 company’s plants in Aurora, North Carolina; Geismar, Louisiana; and White Springs, Florida. The USEPA has notified the company of various alleged violations of the US Resource Conservation and Recovery Act (“RCRA”) at its Aurora and White Springs plants. The company and other industry members have met with representatives of the US Department of Justice, the USEPA and various state environmental agencies regarding potential resolutions of these matters. During these meetings, the company was informed that the USEPA also believes the Geismar plant is in violation of these requirements. As part of the initiative, the company entered into RCRA 3013 Administrative Orders on Consent to perform certain site assessment activities at its White Springs, Aurora and Geismar plants. The company is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be. At this time, the company is unable to evaluate the extent of any exposure that it may have in these matters.
 
  •  The USEPA also has begun an initiative to evaluate compliance with the Clean Air Act at sulfuric and nitric acid plants. In connection with this industry-wide initiative, the USEPA has sent requests for information to numerous facilities, including the company’s plants in Augusta, Georgia; Aurora, North Carolina; Geismar, Louisiana; Lima, Ohio; and White Springs, Florida. The USEPA has notified the company of various alleged violations of the Clean Air Act at its Geismar and Lima plants. The company has met and will continue to meet with representatives of the USEPA and the US Department of Justice regarding potential resolutions of these matters. At this time, the company is unable to evaluate the extent of any exposure that it may have in these matters.
 
  •  Significant portions of the company’s phosphate reserves in Aurora, North Carolina are located in wetlands. Under the Clean Water Act, the company must obtain a permit from the US Army Corps of Engineers (the “Corps”) before disturbing the wetlands. On June 10, 2009, the Corps issued the company a permit to mine reserves in excess of thirty years. On June 17, 2009, USEPA advised the Corps that USEPA would not seek additional review of the permit or invoke its veto authority. In a related approval for mining, on March 12, 2009, four environmental organizations (Pamlico-Tar River Foundation, North Carolina


20


 

  Coastal Federation, Environmental Defense Fund, and Sierra Club) filed a Petition for a Contested Case Hearing before the North Carolina Office of Administrative Hearings challenging the Certification issued to the company by the North Carolina Department of Environment and Natural Resources Division of Water Quality pursuant to Section 401 of the Clean Water Act, 33 U.S.C. § 1341 and state rules. The company has intervened in this proceeding and, at this time, is unable to evaluate the extent of any exposure that it may have in this matter.
 
  •  Pursuant to the 1996 Corrective Action Consent Order (the “Order”) executed between PCS Nitrogen Fertilizer, L.P., formerly known as Arcadian Fertilizer, L.P. (“PCS Nitrogen Fertilizer”) and Georgia Department of Natural Resources, Environmental Protection Division (“GEPD”) in conjunction with PCS Nitrogen Fertilizer’s purchase of real property located in Augusta, Georgia from the entity from which PCS Nitrogen Fertilizer previously leased such property, PCS Nitrogen Fertilizer agreed to perform certain activities including a facility investigation and, if necessary, a corrective action. In accordance with the Order, PCS Nitrogen Fertilizer has performed an investigation of environmental site conditions, has documented its findings in several successive facility investigation reports submitted to GEPD, and has conducted a pilot study to evaluate the viability of in-situ bioremediation of groundwater at the site. Based on these findings, the requirements of the Order and the pilot study, in May 2009, PCS Nitrogen Fertilizer submitted a Corrective Action Plan (“CAP”) to GEPD proposing to utilize in-situ bioremediation of groundwater at the site. In the event GEPD approves the CAP, a full-scale bioremediation remedy will be implemented.
 
  •  In April 2009, the USEPA proposed rules to require greenhouse gas emission inventory reporting and proposed to find that greenhouse gas emissions from mobile sources endanger public health and welfare. In May 2009, the Canadian government announced that its new industrial greenhouse gas emissions policies will be coordinated with policies that may be implemented in the US. It is anticipated that target numbers for emissions reductions will not be published until December 2009 at the earliest. The company is monitoring these policy changes and any effect they may have on our operations when they become final. In September 2009, the USEPA promulgated rules requiring the reporting of greenhouse gas emissions for all sources emitting more than 25,000 tons of carbon dioxide equivalents. The company does not believe that compliance with this regulation will have a material adverse effect on its consolidated financial position or results of operations.
 
  •  At the direction of the USEPA, the Florida Department of Environmental Protection (“FDEP”) has announced a rulemaking to restrict nutrient concentrations in surface waters to levels below those currently permitted at the company’s White Springs, Florida plant. The company is working with FDEP on the rulemaking to pursue an acceptable resolution. In addition, the company along with other phosphate producers, through a trade association, has moved to intervene to challenge a consent decree filed in the U.S. District Court for the Northern District of Florida which would require the USEPA to develop numeric nutrient standards for Florida lakes and flowing waters by October 2010. The company is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be.
 
  •  The company, having been unable to agree with Mosaic Potash Esterhazy Limited Partnership (“Mosaic”) on the remaining amount of potash that the company is entitled to receive from Mosaic pursuant to the mining and processing agreement in respect of the company’s rights at the Esterhazy mine, issued a statement of claim in the Saskatchewan Court of Queen’s Bench against Mosaic on May 27, 2009. Under the statement of claim the company has asserted that it has the right under the mining and processing agreement to receive potash from Mosaic until at least 2012, and seeks an order from the Court declaring the amount of potash which the company has the right to receive. Mosaic in its statement of defense dated June 16, 2009, asserts that at a delivery rate of 1.24 million tons of product per year, the company’s entitlement to receive potash under the mining and processing agreement will terminate by August 30, 2010. Also, on June 16, 2009 Mosaic commenced a counterclaim against the company asserting that the company has breached the mining and processing agreement due to its refusal to take delivery of potash product under the agreement based on an event of force majeure. The company will continue to assert its position in these proceedings vigorously and it denies liability to Mosaic in connection with its counterclaim.


21


 

 
  •  Between September 11 and October 2, 2008, the company and PCS Sales (USA), Inc. were named as defendants in eight very similar antitrust complaints filed in federal courts. Other potash producers are also defendants in these cases. Each of the separate complaints alleges conspiracy to fix potash prices, to divide markets, to restrict supply and to fraudulently conceal the conspiracy, all in violation of Section 1 of the Sherman Act. Five of the eight complaints were brought by plaintiffs who claim to have purchased potash directly from at least one of the defendants during the period between July 1, 2003 and the present (collectively, the “Direct Purchaser Plaintiffs”). All five Direct Purchaser Plaintiffs purport to sue on behalf of a class of persons who purchased potash in the United States directly from a defendant. The Direct Purchaser Plaintiffs, who filed a single, consolidated amended complaint on November 13, 2008, seek unspecified treble damages, injunctive relief, attorneys’ fees, costs and pre- and post-judgment interest. The other three complaints were brought by plaintiffs who claim to be indirect purchasers of potash (collectively, the “Indirect Purchaser Plaintiffs”). The Indirect Purchaser Plaintiffs, who purport to sue on behalf of all persons who purchased potash indirectly in the United States, filed a single, consolidated amended complaint on November 13, 2008. In addition to the Sherman Act claim described above, the Indirect Purchaser Plaintiffs also assert claims for violation of various state antitrust laws; violations of various state consumer protection statutes; and for unjust enrichment. The Indirect Purchaser Plaintiffs seek injunctive relief, unspecified damages, treble damages where allowed, costs, fees and pre- and post-judgment interest. All eight lawsuits have been consolidated into a Multidistrict Litigation proceeding, or MDL (No. 1996), for coordinated pretrial proceedings before Judge Ruben Castillo in the United States District Court for the Northern District of Illinois (the “Court”). Two consolidated complaints, one for the Direct Purchaser Plaintiffs and one for the Indirect Purchaser Plaintiffs, have been filed. In June 2009, the company and PCS Sales (USA), Inc., along with the other defendants filed motions to dismiss the amended consolidated complaints filed by the Direct Purchaser Plaintiffs and the Indirect Purchaser Plaintiffs. On November 3, 2009 the court denied the defendants’ motion to dismiss the Direct Purchaser Plaintiffs’ complaints. The Court has granted in part and denied in part the defendants’ motion to dismiss the Indirect Purchaser Plaintiffs’ various causes of action. Specifically, the court has denied the defendants’ motions to dismiss the Indirect Purchaser Plaintiffs’ causes of action asserting state law antitrust claims under Michigan and Kansas law and an unjust enrichment claim under Iowa law. The Court also stated that it will structure discovery proceedings to concentrate on the alleged coordinated supply restrictions, which must be completed by April 30, 2010, following which the defendants may file expedited summary judgment motions. The company and PCS Sales (USA), Inc. believe each of these eight private antitrust law lawsuits is without merit and intend to defend them vigorously.
 
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 does not believe that its future obligations with respect to these facilities and sites are reasonably likely to have a material adverse effect on its consolidated financial position or results of operations.
 
In addition, 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 exists inherent uncertainties in predicting such outcomes, it is the company’s belief that the ultimate resolution of such actions is not reasonably likely to have a material adverse effect on its consolidated financial position or results of operations.
 
The breadth of the company’s operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating the taxes it will ultimately 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 company’s tax assets and tax liabilities.
 
The company owns facilities which have been either permanently or indefinitely shut down. It 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 company’s consolidated financial position or results of operations and would be recognized and recorded in the period in which they were incurred.


22


 

 
17.   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 unaudited interim condensed consolidated financial statements with respect to these indemnification guarantees (apart from any appropriate accruals relating to the underlying potential liabilities).
 
The company enters into agreements in the normal course of business that may contain features that 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 and investees 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 September 30, 2009, the maximum potential amount of future (undiscounted) payments under significant guarantees provided to third parties approximated $579.1. It is unlikely that these guarantees will be drawn upon and the maximum potential amount of future payments does not consider the possibility of recovery under recourse or collateral provisions. Accordingly, this amount is not indicative of future cash requirements or the company’s expected losses from these arrangements. At September 30, 2009, no subsidiary balances subject to guarantees were outstanding in connection with the company’s cash management facilities, and it had no liabilities recorded for other obligations other than subsidiary bank borrowings of approximately $5.9, which are reflected in other long-term debt.
 
The company has guaranteed the gypsum stack capping, closure and post-closure obligations of White Springs and PCS Nitrogen in Florida and Louisiana, respectively, pursuant to the financial assurance regulatory requirements in those states. The USEPA has announced that it plans to adopt rules requiring financial assurance from a variety of mining operations, including phosphate rock mining. It is too early in the rulemaking process to determine what the impact, if any, on our facilities will be when these rules are issued.
 
The environmental regulations of the Province of Saskatchewan require each potash mine to have decommissioning and reclamation plans. Financial assurances for these plans must be established within one year following their approval by the responsible provincial minister. The Minister of the Environment for Saskatchewan (“MOE”) provisionally approved the plans in July 2000. In July 2001, a CDN $2.0 irrevocable Letter of Credit was posted. The company submitted a revised plan when it was due in 2006. In early 2009, the MOE advised that the 2006 decommissioning and reclamation plans were approved and advised of its preferred position regarding the financial assurances to be provided by the company. The company anticipates that all matters regarding these financial assurances will be finalized in the fourth quarter of 2009. Under the regulations, the decommissioning and reclamation plans and financial assurances are to be reviewed at least once every five years, or sooner as required by the MOE. The next scheduled review for the decommissioning and reclamation plans and financial assurances is in 2011. Based on current information, the company does not believe that its financial assurance requirements or future obligations with respect to this matter are reasonably likely to have a material impact on its consolidated financial position or results of operations.
 
The company has met its financial assurance responsibilities as of September 30, 2009. Costs associated with the retirement of long-lived tangible assets have been accrued in the accompanying unaudited interim condensed consolidated financial statements to the extent that a legal liability to retire such assets exists.
 
During the period, the company entered into various other commercial letters of credit in the normal course of operations. As at September 30, 2009, $32.3 of letters of credit were outstanding.
 
The company expects that it will be able to satisfy all applicable credit support requirements without disrupting normal business operations.


23


 

 
18.   Related Party Commitment
 
In May 2009, the company committed to purchase minimum amounts of potash each quarter from Sociedad Quimica y Minera de Chile S.A., an investee accounted for by the equity method. There were no similar agreements in 2008. Future commitments, based on market rates for such potash as at November 5, 2009, are $59.1 within one year and $86.3 between one and three years.
 
19.   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 company’s unaudited 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, 2008 in the company’s 2008 financial review annual report.
 
(a) Inventory valuation: Under Canadian GAAP, when the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of the writedown is reversed. The reversal is limited to the amount of the original writedown. Under US GAAP, the reversal of a writedown is not permitted unless the reversal relates to a writedown recorded in a prior interim period during the same fiscal year.
 
(b) Long-term investments: Certain of the company’s 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 from Canadian GAAP and in certain other respects from US GAAP. The company’s share of earnings and other comprehensive income of these equity investees under Canadian GAAP have been adjusted for the significant effects of conforming to US GAAP.
 
In addition, the company’s interest in a foreign joint venture is accounted for using proportionate consolidation under Canadian GAAP. US GAAP requires joint ventures to be accounted for using the equity accounting method. As a result, an adjustment is recorded to reflect the company’s interest in the joint venture under the equity method of accounting.
 
(c) 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.
 
(d) 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 under Canadian and US GAAP.
 
(e) 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.
 
(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 this, 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.
 
In addition, under US GAAP the company is required to recognize the difference between the benefit obligation and the fair value of plan assets in the Consolidated Statements of Financial Position with the offset to OCI. No similar requirement currently exists under Canadian GAAP.


24


 

(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) Offsetting of certain amounts: US GAAP requires an entity to adopt a policy of either offsetting or not offsetting fair value amounts recognized for derivative instruments and for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The company adopted a policy to offset such amounts. Under Canadian GAAP offsetting of the margin deposits is not permitted.
 
(i) Stock-based compensation: Under Canadian GAAP, the company’s stock-based compensation plan awards classified as liabilities are measured at intrinsic value at each reporting period. US GAAP requires that these liability awards be measured at fair value at each reporting period. The company uses a Monte Carlo simulation model to estimate the fair value of its performance unit incentive plan liability for US GAAP purposes.
 
Under Canadian GAAP, stock options are recognized over the service period, which for PotashCorp is established by the option performance period. Effective January 1, 2006, under US GAAP, stock options are recognized over the requisite service period which does not commence until the option plan is approved by the company’s shareholders and options are granted thereunder. For options granted under the PotashCorp 2007 Performance Option Plan, the service period commenced January 1, 2007 under Canadian GAAP and May 3, 2007 under US GAAP. For options granted under the PotashCorp 2008 Performance Option Plan, the service period commenced January 1, 2008 under Canadian GAAP and May 8, 2008 under US GAAP. For options granted under the PotashCorp 2009 Performance Option Plan, the service period commenced January 1, 2009 under Canadian GAAP and May 7, 2009 under US GAAP. This difference impacts the stock-based compensation cost recorded and may impact diluted earnings per share.
 
(j) 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. 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.
 
(k) 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.
 
(l) 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 company’s effective tax rate. Under US GAAP, the excess benefit is recognized as additional paid-in capital.
 
(m) Income taxes related to uncertain income tax positions: US GAAP prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its consolidated financial statements uncertain income tax positions that it has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Canadian GAAP has no similar requirements related to uncertain income tax positions.


25


 

(n) Cash flow statements: US GAAP requires the disclosure of income taxes paid. Canadian GAAP requires the disclosure of income tax cash flows, which would include any income taxes recovered during the year. For the three months ended September 30, 2009, income taxes paid under US GAAP were $3.6 (2008 — $213.7) and for the nine months ended September 30, 2009, income taxes paid under US GAAP were $740.4 (2008 — $600.6).
 
The application of US GAAP, as described above, would have had the following effects on net income, net income per share, assets and shareholders’ equity.
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2009     2008     2009     2008  
   
 
Net income as reported — Canadian GAAP
  $ 248.8     $ 1,236.1     $ 744.2     $ 2,707.2  
Items increasing (decreasing) reported net income
                               
Inventory valuation (a)
    (1.4 )     -       (1.7 )     -  
Depreciation and amortization (d)
    2.1       2.1       6.3       6.3  
Exploration costs (e)
    (0.3 )     -       (0.3 )     (5.9 )
Stock-based compensation (i)
    (3.6 )     (0.7 )     0.5       2.8  
Stripping costs (j)
    (3.0 )     0.4       (5.8 )     (3.1 )
Share of earnings of equity investees (b)
    (0.6 )     (0.6 )     (0.6 )     (0.4 )
Pension and other post-retirement benefits (f)
    0.3       0.1       0.9       0.3  
Income taxes relating to the above adjustments and US GAAP effective tax rate (k, m)
    14.3       (0.2 )     15.7       (3.3 )
Income taxes related to stock-based compensation (l)
    (1.2 )     (3.9 )     (5.6 )     (33.0 )
Income taxes related to uncertain income tax positions (m)
    (4.5 )     (21.1 )     (8.4 )     (15.0 )
 
 
Net income — US GAAP
  $ 250.9     $ 1,212.2     $ 745.2     $ 2,655.9  
 
 
Basic weighted average shares outstanding — US GAAP
    295,721,000       304,017,000       295,467,000       310,076,000  
 
 
Diluted weighted average shares outstanding — US GAAP
    303,927,000       314,081,000       303,801,000       320,480,000  
 
 
Basic net income per share — US GAAP
  $ 0.85     $ 3.99     $ 2.52     $ 8.57  
 
 
Diluted net income per share — US GAAP
  $ 0.83     $ 3.86     $ 2.45     $ 8.29  
 
 
 
                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Assets as reported — Canadian GAAP
  $ 12,003.6     $ 10,248.8  
Items increasing (decreasing) reported assets
               
Inventory (a)
    (1.7 )     -  
Property, plant and equipment (c)
    (86.5 )     (92.8 )
Exploration costs (e)
    (13.3 )     (13.0 )
Stripping costs (j)
    (42.5 )     (36.7 )
Pension and other post-retirement benefits (f)
    (82.7 )     (105.2 )
Margin deposits associated with derivative instruments (h)
    (89.9 )     (91.1 )
Investment in equity investees (b)
    (3.3 )     1.3  
Income tax asset related to uncertain income tax positions (m)
    23.8       24.8  
Goodwill (c)
    (46.7 )     (46.7 )
 
 
Assets — US GAAP
  $ 11,660.8     $ 9,889.4  
 
 
 


26


 

                 
    September 30,
    December 31,
 
    2009     2008  
   
 
Shareholders’ equity as reported — Canadian GAAP
  $ 5,854.0     $ 4,588.9  
Items increasing (decreasing) reported shareholders’ equity
               
Accumulated other comprehensive income, net of related income taxes, consisting of:
               
Income taxes related to uncertain income tax positions (m)
    (1.2 )     (1.2 )
Pension and other post-retirement benefits (f)
    (232.6 )     (246.6 )
Share of accumulated other comprehensive income of equity investees (b)
    (1.8 )     -  
Foreign currency translation adjustment (g)
    (20.9 )     (20.9 )
Foreign currency translation adjustment (g)
    20.9       20.9  
Provision for asset impairment (c)
    (218.0 )     (218.0 )
Inventory valuation (a)
    (1.7 )     -  
Depreciation and amortization (d)
    84.8       78.5  
Exploration costs (e)
    (13.3 )     (13.0 )
Stripping costs (j)
    (42.5 )     (36.7 )
Pension and other post-retirement benefits (f)
    16.7       15.8  
Stock-based compensation (i)
    0.4       -  
Share of earnings of equity investees (b)
    0.7       1.3  
Income taxes relating to the above adjustments and US GAAP effective tax rate (k, m)
    (36.5 )     (52.2 )
Income taxes related to uncertain income tax positions (m)
    78.1       86.5  
 
 
Shareholders’ equity — US GAAP
  $ 5,487.1     $ 4,203.3  
 
 
 
Supplemental US GAAP Disclosures
 
Fair Value Measurement
 
The following table presents the company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2009.
 
                                         
                Fair Value Measurements Using:  
    Carrying
          Quoted Prices in
             
    Amount of
          Active Markets for
    Significant Other
    Significant
 
    Asset (Liability)
          Identical Assets or
    Observable
    Unobservable
 
    at September 30,
    Cash Collateral
    Liabilities
    Inputs
    Inputs
 
Description   2009     Netting     (Level 1)     (Level 2)     (Level 3)  
   
 
Derivative instrument assets
  $ 22.1     $ -     $ -     $ 13.8     $ 8.3  
Derivative instrument liabilities
    (73.0 )     89.9 (1)     -       (39.0 )     (123.9 )
Available-for-sale securities
    2,324.7       -       2,324.7       -       -  
 
(1) Amount represents the effect of legally enforceable master netting arrangements between the company and its counterparties and the payable or receivable for cash collateral held or placed with the same counterparty.
 

27


 

                                 
    Three Months
    Nine Months
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
  Ended September 30     Ended September 30  
For Derivative Instruments   2009     2008     2009     2008  
   
 
Beginning balance
  $ (116.7 )   $ 381.9     $ (110.8 )   $ 127.7  
Total gains (losses) (realized and unrealized) before income taxes
                               
Included in earnings
    (14.2 )     0.3       (37.4 )     18.2  
Included in other comprehensive income
    (4.2 )     (365.1 )     (17.5 )     (103.2 )
Purchases, sales, issuances and settlements
    19.5       (4.9 )     50.1       (30.5 )
 
 
Ending balance, September 30
  $ (115.6 )   $ 12.2     $ (115.6 )   $ 12.2  
 
 
Amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to instruments still held at the reporting date
  $ -     $ (6.5 )   $ (0.4 )   $ (9.9 )
 
 
(Losses) gains (realized and unrealized) included in earnings for the period reported in Cost of goods sold
  $ (14.2 )   $ 0.3     $ (37.4 )   $ 18.2  
 
 
 
                                 
    Three Months
    Nine Months
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
  Ended September 30     Ended September 30  
For Available-For-Sale Securities   2009     2008     2009     2008  
   
 
Beginning balance
  $       -     $ 46.9     $ 17.2     $ 56.0  
Total gains (losses) (realized and unrealized) before income taxes Included in earnings
    -       (27.5 )     115.3       (71.3 )
Included in other comprehensive income
    -       15.3       -       50.0  
Purchases, sales, issuances and settlements
    -       -       (132.5 )     -  
 
 
Ending balance, September 30
  $ -     $ 34.7     $ -     $ 34.7  
 
 
Amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to instruments still held at the reporting date
  $ -     $ (27.5 )   $ -     $ (71.3 )
 
 
Gains (losses) (realized and unrealized) included in earnings for the period reported in Other income
  $ -     $ (27.5 )   $ 115.3     $ (71.3 )
 
 
 
Recent Accounting Pronouncements
 
Derivative Instruments and Hedging Activities
 
In March 2008, the Financial Accounting Standards Board (“FASB”) issued accounting standards that require enhanced disclosures about an entity’s derivative and hedging activities. Entities are required to provide disclosures about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The standards increase convergence with IFRSs, as it relates to disclosures of derivative instruments. The applicable disclosures under these standards, which the company adopted effective January 1, 2009, are included below.
 
Accounting for Derivative Instruments
 
Derivative financial instruments are used by the company to manage its exposure to exchange rate, interest rate and commodity price fluctuations. The company recognizes its derivative instruments at fair value on the Consolidated Statements of Financial Position where appropriate. Contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments (except contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with expected purchase, sale or usage requirements), are accounted for as derivative financial instruments.

28


 

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 change 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. Ineffective portions of hedges are recorded in earnings in the current period. The change in fair value of derivative instruments not designated as hedges is recorded in income in the current period.
 
The company’s policy is not to use derivative financial instruments for trading or speculative purposes, although it may choose not to designate a relationship as an accounting hedge. The company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge transaction. This process includes linking derivatives to specific assets and liabilities or to specific firm commitments or forecast transactions. The company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values of hedged items. Hedge effectiveness related to the company’s natural gas hedges is assessed on a prospective and retrospective basis using regression analyses. A hedging relationship may be terminated because the hedge ceases to be effective; the underlying asset or liability being hedged is derecognized; or the derivative instrument is no longer designated as a hedging instrument. In such instances, the difference between the fair value and the accrued value of the hedging derivatives upon termination is deferred and recognized into earnings on the same basis that gains, losses, revenue and expenses of the previously hedged item are recognized. If a hedging relationship is terminated because it is no longer probable that the anticipated transaction will occur, then the net gain or loss accumulated in OCI is recognized into earnings in the current period.
 
Cash Flow Hedges
 
The company is exposed to commodity price risk resulting from its natural gas requirements. Its natural gas strategy is based on diversification for its total gas requirements (which represent the forecast consumption of natural gas volumes by its manufacturing and mining facilities). Its 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. The company employs derivative commodity instruments related to a portion of its natural gas requirements (primarily futures, swaps and options) for the purpose of managing its exposure to commodity price risk in the purchase of natural gas, not for speculative or trading purposes. The company has an Advisory Committee, comprised of members from senior management, responsible for developing policies and establishing procedural requirements relating to its natural gas activities. Such policies include the establishment of limits for the portion of its natural gas requirements that will be hedged as well as the types of instruments that may be utilized for such hedging activities. Natural gas futures and swap agreements, used to manage the cost of natural gas, are generally designated as cash flow hedges of anticipated transactions.
 
The portion of gain or loss on derivative instruments designated as cash flow hedges that are deferred in accumulated OCI is reclassified into cost of goods sold when the product containing the hedged item impacts earnings. Any hedge ineffectiveness is recorded in cost of goods sold in the current period. Of the gains and losses at September 30, 2009, approximately $60.0 of losses will be reclassified to cost of goods sold within the next 12 months.
 
Derivative Instruments Not Designated as Hedging Instruments
 
The company uses foreign currency forward contracts for the primary purpose of limiting exposure to exchange rate fluctuations relating to expenditures denominated in currencies other than the US dollar. These contracts are not designated as hedging instruments for accounting purposes. Accordingly, they are marked-to-market with changes in fair value recognized through foreign exchange gain or loss in earnings.


29


 

Fair Values of Derivative Instruments in the Consolidated Statements of Financial Position
 
                     
        September 30,
    December 31,
 
Derivative instrument assets (liabilities):(1)                          Balance Sheet Location   2009     2008  
   
 
Derivatives designated as hedging instruments
               
Natural gas contracts
  Prepaid expenses and other current assets   $ -     $ 0.1  
Natural gas contracts
  Other assets     8.2       11.5  
Natural gas contracts
  Current portion of derivative instrument liabilities     (58.5 )     (50.2 )
Natural gas contracts
  Derivative instrument liabilities     (104.2 )     (120.4 )
 
 
Total derivatives designated as hedging instruments
  $ (154.5 )   $ (159.0 )
 
 
                 
Derivatives not designated as hedging instruments
               
Natural gas contracts
  Prepaid expenses and other current assets   $ 0.2     $ -  
Natural gas contracts
  Current portion of derivative instrument liabilities     (0.2 )     -  
Foreign currency forward contracts
  Prepaid expenses and other current assets     13.7       6.3  
Foreign currency forward contracts
  Current portion of derivative instrument liabilities     -       (57.9 )
 
 
                 
Total derivatives not designated as hedging instruments
  $ 13.7     $ (51.6 )
 
 
 
(1) All fair value amounts are gross and exclude netted cash collateral balances
 
The Effect of Derivative Instruments on the Consolidated Statements of Operations for the Three Months Ended September 30
                                                         
                        Location of Loss
  Amount of Loss
                Amount of Loss
  Recognized in
  Recognized in
    Amount of Loss
  Location of Loss
  Reclassified from
  Income (Ineffective
  Income (Ineffective
    Recognized
  Reclassified
  Accumulated OCI
  Portion and Amount
  Portion and Amount
    in OCI
  from Accumulated
  into Income
  Excluded from
  Excluded from
Derivatives in Cash
  (Effective Portion)   OCI into Income
  (Effective Portion)   Effectiveness
  Effectiveness Testing)
Flow Hedging Relationships   2009   2008   (Effective Portion)   2009   2008   Testing)   2009   2008
 
 
Natural gas contracts
  $ (17.9 )   $ (358.3 )   Cost of goods sold   $ (23.4 )   $ (6.7 )   Cost of goods sold   $     -     $ (6.3 )
 
 
 
                     
Derivatives Not Designated
      Amount of Gain (Loss) Recognized in Income
as Hedging Instruments   Location of Gain (Loss) Recognized in Income   2009   2008
 
 
Foreign currency forward contracts
  Foreign exchange gain   $ 18.2     $ (7.6 )
 
 
 
The Effect of Derivative Instruments on the Consolidated Statements of Operations for the Nine Months Ended September 30
                                                         
                            Amount of Gain
                        Location of Loss
  (Loss) Recognized
                Amount of Loss
  Recognized in
  in Income
    Amount of Loss
  Location of Loss
  Reclassified from
  Income (Ineffective
  (Ineffective Portion
    Recognized
  Reclassified
  Accumulated OCI
  Portion and Amount
  and Amount
    in OCI
  from Accumulated
  into Income
  Excluded from
  Excluded from
Derivatives in Cash Flow
  (Effective Portion)   OCI into Income
  (Effective Portion)   Effectiveness
  Effectiveness Testing)
Hedging Relationships   2009   2008   (Effective Portion)   2009   2008   Testing)   2009   2008
 
 
Natural gas contracts
  $ (64.0 )   $ (74.8 )   Cost of goods sold   $ (64.0 )   $ (30.3 )   Cost of goods sold   $ 0.2     $ (9.9 )
 
 
 
                     
Derivatives Not Designated
      Amount of Loss Recognized in Income
as Hedging Instruments   Location of Loss Recognized in Income   2009   2008
 
 
Foreign currency forward contracts
  Foreign exchange gain   $ (4.3 )   $ (5.1 )
 
 


30


 

Methods and Assumptions
 
Estimated fair values for financial instruments are designed to approximate amounts at which the instruments could be exchanged in a current transaction between willing parties. The fair value of derivative instruments traded in active markets (such as natural gas futures and exchange-traded options) is based on quoted market prices at the date of the statement of financial position.
 
The fair value of derivative instruments that are not traded in an active market (such as natural gas swaps, over-the-counter option contracts and foreign currency forward contracts) is determined by using valuation techniques. The company uses a variety of methods and makes assumptions that are based on market conditions existing at the date of the statement of financial position. Natural gas swap valuations are based on a discounted cash flows model. The inputs used in the model include contractual cash flows based on prices for natural gas futures contracts, fixed prices and notional volumes specified by the swap contracts, the time value of money, liquidity and credit risk. Certain of the futures contract prices are supported by prices quoted in an active market and others are not based on observable market data. The fair value of swap contracts is especially sensitive to changes in futures contract prices. The interest rates used to discount estimated cash flows were between 0.25 percent and 4.37 percent (2008 — between 0.44 and 4.45) depending on the settlement date. Over-the-counter option contracts are valued based on quoted market prices for similar instruments where available or an option valuation model. The fair value of foreign currency forward contracts is determined using quoted forward exchange rates at the balance sheet date.
 
Contingent Features
 
Certain of the company’s derivative instruments contain provisions that require the company’s debt to maintain specified credit ratings from two of the major credit rating agencies. If the company’s debt were to fall below the specified ratings, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on September 30, 2009, is $161.7 for which the company has posted collateral of $89.9 in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on September 30, 2009, the company would have been required to post an additional $69.8 of collateral to its counterparties.
 
Business Combinations
 
In December 2007, the FASB issued accounting standards which require the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establish the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. In April 2009, the FASB issued guidance to address application issues raised by preparers, auditors and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. These standards applied prospectively. The implementation of these standards, effective January 1, 2009, did not have a material impact on the company’s consolidated financial statements.
 
Noncontrolling Interests in Consolidated Financial Statements
 
In December 2007, the FASB issued accounting standards to require all entities to report noncontrolling (minority) interests as equity in consolidated financial statements. The standards eliminate the disparate treatment that currently exists in accounting for transactions between an entity and noncontrolling interests by requiring they be treated as equity transactions. These standards were applied prospectively. The implementation of these standards, effective January 1, 2009, did not have a material impact on the company’s consolidated financial statements.


31


 

Framework for Fair Value Measurement
 
In February 2008, the FASB issued guidance related to the application of the framework for fair value measurement to non-financial assets and non-financial liabilities. The FASB decided to delay the effective date of applying the framework for fair value measurement to non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The implementation of this guidance, effective January 1, 2009, did not have a material impact on the company’s consolidated financial statements.
 
Pension Plan Asset Disclosure
 
In December 2008, the FASB issued guidance on an employer’s disclosure about plan assets of a defined benefit pension or other postretirement plan. The objectives of the disclosure about plan assets in an employer’s defined benefit pension or other postretirement plan are to provide users of financial statements with an understanding of: (1) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies; (2) the major categories of plan assets; (3) the inputs and valuation techniques used to measure the fair value of plan assets; (4) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period; and (5) significant concentrations of risk within plan assets. The amendments are effective for fiscal years ending after December 15, 2009. The company is currently reviewing the impact, if any, on the company’s consolidated financial statements.
 
Fair Value Measurement in Inactive Markets and Distressed Transactions
 
In April 2009, the FASB issued guidance for estimating fair value in accordance with the framework for fair value measurement, when the volume and level of activity for the asset or liability have significantly decreased. At the same time the FASB issued guidance on identifying circumstances that indicate a transaction is not orderly. The guidance, which was applied prospectively, was applied on June 30, 2009 and did not have a material impact on the company’s consolidated financial statements.
 
Other Than Temporary Impairment on Debt Securities
 
In April 2009, the FASB issued guidance to change the recognition threshold of an other than temporary impairment for debt securities. When an entity does not intend to sell the debt security and it is more likely than not that the entity will not have to sell the debt security before recovery of its cost basis, it will recognize only the credit loss component of an other than temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The guidance was applied on June 30, 2009 and did not have a material impact on the company’s consolidated financial statements.
 
Fair Value Disclosure
 
In April 2009, the FASB issued guidance to require disclosure of fair value information of financial instruments at each interim reporting period. The disclosures shall include the relevant carrying value as well as the methods and significant assumptions used to estimate the fair value. The guidance was applied on June 30, 2009. The company has included the relevant disclosures in the above disclosures related to financial instruments.
 
Subsequent Events
 
In May 2009, the FASB issued standards addressing subsequent events. The standards address the recognition and disclosure of events that occur after the balance sheet date but before the issuance of the financial statements. The FASB issued the standards in order to incorporate, within the accounting standards, principles that had originated in auditing standards. The standards also require an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. The standards do not differ significantly from previously applied standards on disclosure of subsequent events. The company adopted these standards prospectively on


32


 

June 30, 2009. The standards did not have a material impact on the company’s consolidated financial statements. The company has evaluated subsequent events through November 5, 2009, the date the financial statements were issued, and noted no subsequent events that required disclosure.
 
Variable Interest Entities
 
In June 2009, the FASB issued revised accounting standards to improve financial reporting by enterprises involved with variable interest entities. The standards replace the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and: (1) the obligation to absorb losses of the entity; or, (2) the right to receive benefits from the entity. The standards will be applied prospectively on January 1, 2010. The company is currently reviewing the impact, if any, on the company’s consolidated financial statements.
 
FASB Accounting Standards Codification
 
On July 1, 2009, the FASB issued the FASB Accounting Standards Codificationtm (the “Codification”) as the single source of authoritative US GAAP (other than guidance issued by the US Securities and Exchange Commission), superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. The Codification was applied on September 30, 2009. Now, only one level of authoritative US GAAP exists. All other literature is considered non-authoritative. The Codification does not change US GAAP; instead, it introduced a new structure that is organized in an online research system. The Codification did not have an impact on the company’s consolidated financial statements.


33


 

 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis is the responsibility of management and is as of November 5, 2009. 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 is an integrated producer of fertilizer, industrial and animal feed products. We are the world’s largest fertilizer enterprise by capacity, producing the three primary plant nutrients: potash, phosphate and nitrogen. 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 who buy under contract and on the spot market; spot sales are more prevalent in North America, South America and Southeast Asia. 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 delivered 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 STRATEGY
 
To provide our stakeholders with long-term value, our strategy focuses on generating growth while striving to minimize fluctuations in an upward-trending earnings line. This value proposition has given our stakeholders superior value for many years. We apply this strategy by concentrating on our highest margin products. Such analysis dictates our Potash First strategy, focusing our capital — internally and through investments — to build on our world-class potash assets and meet the rising global demand for this vital nutrient. By investing in potash capacity while producing to meet market demand, we create the opportunity for significant growth while limiting downside risk. We complement our potash operations with focused phosphate and nitrogen businesses that emphasize the production of higher-margin products with stable and sustainable earnings potential.
 
We strive to grow PotashCorp by enhancing our position as supplier of choice to our customers, delivering the highest quality products at market prices when they are needed. We seek to be the preferred supplier to high-volume, high-margin customers with the lowest credit risk. It is critical that our customers recognize our ability to create value for them based on the price they pay for our products.
 
As we plan our future, we carefully weigh our choices for our cash flow. We base all investment decisions on cash flow return materially exceeding cost of capital, evaluating the best return on any investment that matches our Potash First strategy. Most of our recent capital expenditures have gone to investments in our own potash capacity, and we look to increase our existing offshore potash investments and seek other merger and acquisition opportunities in this nutrient. We also consider share repurchase and increased dividends as ways to maximize shareholder value over the long term.
 
KEY PERFORMANCE DRIVERS — PERFORMANCE COMPARED TO GOALS
 
Each year we set targets to advance our long-term goals and drive results. Our long-term goals and 2009 targets are set out on pages 35 to 37 of our 2008 financial review annual report. A summary of our progress against selected goals and representative annual targets is set out below.


34


 

 
             
      Representative
    Performance
Goal
    2009 Annual Target     to September 30, 2009
Achieve no harm to people.     Reduce total site severity injury rate by 25 percent by the end of 2011 from 2008 levels.     Total site severity injury rate was 22 percent below the 2008 annual level for the first nine months of 2009. The total site severity injury rate was not tracked in the first nine months of 2008.
             
Achieve no damage to the environment.     Reduce total reportable releases, permit excursions and spills by 15 percent from 2008 levels.     Reportable release rate on an annualized basis declined 24 percent, annualized permit excursions were up 33 percent and annualized spills were up 17 percent during the first nine months of 2009 compared to 2008 annual levels. Compared to the first nine months of 2008, reportable releases and permit excursions were flat while spills were up 17 percent.
             
Maximize long-term shareholder value.     Exceed total shareholder return for our sector and companies on the DAXglobal Agribusiness Index for 2009.     PotashCorp’s total shareholder return was 24 percent in the first nine months of 2009 compared to our sector weighted average return of 49 percent and the DAXglobal Agribusiness Index weighted average return of 41 percent.
             
 
FINANCIAL OVERVIEW
 
This discussion and analysis is based on the company’s 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 19 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.
 
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 2008 financial review annual report.
 
Earnings Guidance — Third Quarter 2009
 
         
    Initial Company Guidance   Actual Results
 
 
Earnings per share
  $0.80 - $1.20   $0.82
Effective tax rate
  23% - 25%   24%


35


 

Overview of Actual Results
 
Operations
 
                                                                 
    Three Months Ended September 30     Nine Months Ended September 30  
   
Dollars (millions) — except
              Dollar
    %
                Dollar
    %
 
per-share amounts   2009     2008     Change     Change     2009     2008     Change     Change  
   
 
Sales
  $ 1,099.1     $ 3,064.3     $ (1,965.2 )     (64 )   $ 2,877.6     $ 7,575.9     $ (4,698.3 )     (62 )
Freight
    53.7       81.4       (27.7 )     (34 )     130.2       287.2       (157.0 )     (55 )
Transportation and distribution
    36.3       31.6       4.7       15       101.0       97.2       3.8       4  
Cost of goods sold
    662.9       1,210.3       (547.4 )     (45 )     1,900.0       3,157.2       (1,257.2 )     (40 )
 
 
Gross Margin
  $ 346.2     $ 1,741.0     $ (1,394.8 )     (80 )   $ 746.4     $ 4,034.3     $ (3,287.9 )     (81 )
 
 
Operating Income
  $ 358.4     $ 1,714.7     $ (1,356.3 )     (79 )   $ 862.6     $ 3,759.7     $ (2,897.1 )     (77 )
 
 
Net Income
  $ 248.8     $ 1,236.1     $ (987.3 )     (80 )   $ 744.2     $ 2,707.2     $ (1,963.0 )     (73 )
 
 
Net Income Per Share — Basic
  $ 0.84     $ 4.07     $ (3.23 )     (79 )   $ 2.52     $ 8.73     $ (6.21 )     (71 )
 
 
Net Income Per Share — Diluted
  $ 0.82     $ 3.93     $ (3.11 )     (79 )   $ 2.45     $ 8.45     $ (6.00 )     (71 )
 
 
Other Comprehensive Income (Loss)
  $ 123.9     $ (1,638.1 )   $ 1,762.0       n/m     $ 565.4     $ (479.1 )   $ 1,044.5       n/m  
 
 
n/m — not meaningful
 
Earnings in the third quarter and first nine months of 2009 were lower than the record levels in the same periods of 2008 due to lower prices and volumes for all nutrients except North American potash prices (higher year over year), industrial phosphate prices (higher year over year) and urea volumes (higher quarter over quarter and year over year). Potash represented 73 percent of third quarter gross margin and 70 percent of first nine months gross margin in 2009.
 
Fertilizer buyers remained cautious in the wake of economic uncertainty. North American potash producer shipments improved from the previous quarter, but third-quarter volumes were still more than 50 percent below the same quarter in 2008 and totals for the first nine months of 2009 were nearly 70 percent lower than in the first nine months of last year. In July, India signed new contracts with global potash producers, which we believed would inspire buyer confidence in other markets. This failed to materialize, as potash buyers appeared to respond instead to their perception of market conditions and risks, including healthy producer inventories, lack of engagement by Chinese buyers and a late US harvest. Moreover, the large inventory writedowns in nitrogen and phosphate taken by dealers over the past year limited the appetite for additional inventory risk. As a result, dealers and farmers continued to buy potash only on an as-needed basis, putting pressure on spot market pricing. In phosphate, US producer solid fertilizer domestic sales volumes moved closer to historical levels, while offshore volumes rose slightly as India continued to import significant quantities and shipments to Brazil increased in advance of its key planting season. In nitrogen, lower domestic natural gas costs allowed North American producers to be more competitive, contributing to a 24 percent decline in ammonia imports to the US compared to last year’s third quarter. Lower winter wheat plantings and continued deferral by fertilizer buyers reduced urea demand and prices in the quarter.
 
Other significant factors that also affected earnings in the third quarter and first nine months of 2009 compared to the same periods in 2008 were: (1) provincial mining and other taxes which declined as a result of anticipated lower potash margins, decreased sales tonnes and credits for expenditures incurred on our potash expansion projects; (2) other income which declined due to a decrease in our share of earnings from Sociedad Quimica y Minera de Chile (“SQM”) and Arab Potash Company Ltd. (“APC”) and a drop in dividends, partially due to timing differences, from Israel Chemicals Limited (“ICL”), offset in part for the first nine months of 2009 by a $115.3 million gain on disposal of auction rate securities in the second quarter; and (3) income taxes which decreased due to significantly lower earnings, a lower proportion of earnings from higher-tax jurisdictions and discrete items recognized. Other comprehensive income increased during the same periods due to the fair value of our investments in ICL increasing, and Sinofert Holdings Limited (“Sinofert”) not falling as much, compared to when values were falling last year, and the fair value of natural gas derivatives qualifying for hedge accounting increasing slightly as compared to decreasing in 2008 when natural gas prices were rapidly declining.


36


 

Balance Sheet
 
Change in Balances — December 31, 2008 to September 30, 2009 (in $ millions)
 
(PERFORMANCE GRAPH)
 
Additions to property, plant and equipment related primarily to our potash capacity expansions (73 percent). Investments increased mainly due to the fair value of our investment in ICL increasing, although the fair value of our investment in Sinofert decreased. The decrease in trade receivables (consistent with the decrease in sales) was partially offset by taxes receivable which were generated by an overpayment of taxes earlier in the year (instalments originally based on anticipated higher earnings). Phosphate finished goods inventory values decreased due to lower inventory levels and lower-cost sulfur and ammonia (more expensive in 2008 due to tight supply-demand fundamentals) being used in phosphate production. The decrease in phosphate inventories was partially offset by a significant increase in potash inventory tonnes (mine strikes limited production towards the end of 2008 and customers were on allocation for most of 2008 before the global economic downturn cut demand). Additional increases in assets pertained to higher cash and prepaid expenses and other current assets.
 
Long-term debt increased as a result of the settlement of the issuance of $1,000.0 million in senior notes in May and $1,000.0 million in senior notes in September, the net proceeds of which were used to repay outstanding credit facilities borrowings and for general corporate purposes. Accounts payable and accrued charges declined as a result of: (1) lower income taxes payable due to payments made during the first half of 2009 and significantly lower earnings compared to 2008; (2) lower accrued potash production taxes due to significantly reduced demand, forecasted lower potash margins and high deductions for potash capital expansion projects; and (3) lower accrued payroll due to lower incentives and stock-based compensation accruals; these declines were partially offset by higher accruals for capital expenditures in potash and higher interest accruals.
 
Significant changes in equity were primarily the result of net income and other comprehensive income earned during the first nine months of 2009, which is described above.


37


 

Business Segment Review
 
Note 7 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. As a component of gross margin, 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.
 
Our discussion of segment operating performance is set out below and includes nutrient product and/or market performance results where applicable to give further insight into these results. Certain of the prior periods’ figures have been reclassified to conform to the current period’s presentation.
 
Potash
 
                                                                         
    Three Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2009     2008     % Change     2009     2008     % Change     2009     2008     % Change  
   
 
Sales
  $ 423.4     $ 1,145.2       (63 )                                                
Freight
    16.8       36.0       (53 )                                                
Transportation and distribution
    9.2       9.9       (7 )                                                
 
 
Net sales
  $ 397.4     $ 1,099.3       (64 )                                                
 
 
Manufactured product
                                                                       
Net sales
                                                                       
North American
  $ 111.0     $ 298.0       (63 )     266       530       (50 )   $ 417.38     $ 561.70       (26 )
Offshore
    283.7       796.7       (64 )     748       1,325       (44 )   $ 379.24     $ 601.34       (37 )
 
 
      394.7       1,094.7       (64 )     1,014       1,855       (45 )   $ 389.24     $ 590.01       (34 )
Cost of goods sold
    139.1       185.6       (25 )                           $ 137.17     $ 99.93       37  
 
 
Gross margin
    255.6       909.1       (72 )                           $ 252.07     $ 490.08       (49 )
 
 
Other miscellaneous and purchased product                                                                        
Net sales
    2.7       4.6       (41 )                                                
Cost of goods sold
    6.9       4.0       73                                                  
 
 
Gross margin
    (4.2 )     0.6       n/m                                                  
 
 
Gross Margin
  $ 251.4     $ 909.7       (72 )                           $ 247.93     $ 490.40       (49 )
 
 
 


38


 

                                                                         
    Nine Months Ended September 30  
   
    Dollars (millions)           Tonnes (thousands)     Average per Tonne(1)  
   
    2009     2008     % Change     2009     2008     % Change     2009     2008     % Change  
   
 
Sales
  $ 903.3     $ 3,135.9       (71 )                                                
Freight
    34.1       151.6       (78 )                                                
Transportation and distribution
    24.4       35.2       (31 )                                                
 
 
Net sales
  $ 844.8     $ 2,949.1       (71 )                                                
 
 
Manufactured product
                                                                       
Net sales
                                                                       
North American
  $ 311.5     $ 1,027.1       (70 )     599       2,583       (77 )   $ 519.95     $ 397.54       31  
Offshore
    522.9       1,909.5       (73 )     1,283       4,527       (72 )   $ 407.57     $ 421.84       (3 )
 
 
      834.4       2,936.6       (72 )     1,882       7,110       (74 )   $ 443.34     $ 413.01       7  
Cost of goods sold
    306.3       629.7       (51 )                           $ 162.73     $ 88.55       84  
 
 
Gross margin
    528.1       2,306.9       (77 )                           $ 280.61     $ 324.46       (14 )
 
 
Other miscellaneous and purchased product                                                                        
Net sales
    10.4       12.5       (17 )                                                
Cost of goods sold
    14.3       8.7       64                                                  
 
 
Gross margin
    (3.9 )     3.8       n/m                                                  
 
 
Gross Margin
  $ 524.2     $ 2,310.7       (77 )                           $ 278.53     $ 324.99       (14 )
 
 
 
(1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
 
n/m = not meaningful
 
Potash gross margin variance attributable to:
 
                                                                                 
      Three Months Ended September 30
      Nine Months Ended September 30
 
Dollars (millions)     2009 vs. 2008       2009 vs. 2008  
              Change in
                      Change in
         
              Prices/Costs                       Prices/Costs          
      Change in
              Cost of Goods
              Change in
              Cost of Goods
         
      Sales Volumes       Net Sales       Sold       Total       Sales Volumes       Net Sales       Sold       Total  
Manufactured product
                                                                               
North American
    $ (162.8 )     $ (8.9 )     $ (4.9 )     $ (176.6 )     $ (684.2 )     $ 73.3       $ (1.3 )     $ (612.2 )
Offshore
      (402.6 )       (71.5 )       (2.6 )       (476.7 )       (1,181.6 )       (18.2 )       33.5         (1,166.3 )
Change in market mix
      (4.2 )       2.0         2.0         (0.2 )       (4.3 )       2.0         2.0         (0.3 )
 
 
Total manufactured product
    $ (569.6 )     $ (78.4 )     $ (5.5 )     $ (653.5 )     $ (1,870.1 )     $ 57.1       $ 34.2       $ (1,778.8 )
Other miscellaneous and purchased product                                     (4.8 )                                     (7.7 )
 
 
Total
                                  $ (658.3 )                                   $ (1,786.5 )
 
 
 
(PERFORMANCE GRAPH)

39


 

The most significant contributors to the change in total gross margin quarter over quarter were as follows1:
 
         
Net Sales Prices   Sales Volumes   Cost of Goods Sold
 
 
â Average realized offshore price dropped 37 percent as pricing in major markets supplied by Canpotex Limited2 declined following the contract settlement with India at prices lower than last year’s prices
á Offshore realized prices increased from the trailing quarter due to transportation and distribution costs being allocated over fewer sales tonnes in the previous quarter
â US published list prices declined 35-40 percent during the quarter
 
â Buyers continued to manage cash flow in a difficult economy. Dealers and farmers remained on the sidelines, buying just-in-time due to their perception of market conditions and risks, including higher producer inventories, lack of engagement by the Chinese market and a late US harvest
â Offshore volumes fell as customers worldwide, except India, destocked inventories
á India began to restock depleted inventories (caused, in part, by the absence of a contract with Canpotex in the first half of 2009) resulting in a 28 percent increase in shipped tonnes.
â China did not sign a contract with Canpotex (settled by second quarter in 2008) resulting in a 97 percent drop in volumes in that market. Shipments to Brazil were down 73 percent while Southeast Asia (except China) took 38 percent less tonnes from Canpotex. Brazil had more inventory to work through than Southeast Asia
â Sales to our North American customers declined due to very late spring plantings consequentially compressing the fall harvest (and subsequent application season), poor weather conditions in certain parts of Canada and the US hampering harvest progress, and perceived potash price risk
 
â The price variance was negative due to increased maintenance costs this year (partially deferred in 2008), high royalties (did not decline at the same rate as potash prices) and increased labor costs (due to new union contracts) partially offset by lower brine inflow management costs
â Per tonne costs increased as fixed costs were allocated over fewer tonnes sold
á The Canadian dollar weakened relative to the US dollar
 
 
1 Direction of arrows refer to impact on gross margin
2 Canpotex Limited (“Canpotex”) is the offshore marketing company for Saskatchewan potash producers


40


 

 
Quarterly potash gross margin for the first nine months of 2009, 2008 and 2007 was as follows:
 
(PERFORMANCE GRAPH)
 
The most significant contributors to the change in total gross margin year over year were as follows1:
 
         
Net Sales Prices   Sales Volumes   Cost of Goods Sold
 
 
â Price increases in Brazil, China and Southeast Asia carried over from 2008 to the first two quarters of 2009 were more than offset by price declines in many markets subsequent to the contract settlement with India in the third quarter of 2009
á North America realized prices up 31 percent as 2008 price increases largely carried over into the first two quarters of 2009 and US list price reductions were only introduced in the third quarter of 2009
â Weak demand in an environment of low volumes pressured pricing
â North American prices affected by the high proportion of industrial volumes relative to fertilizer
 
á India began restocking large volumes of inventory resulting in that country taking more tonnes than any other region
â Agreement not reached with China by September 30, 2009
â Worldwide volumes were weak. Customers continued to be cautious in the wake of the global economic downturn, resulting in an unprecedented decline in potash sales volumes. Potash buyers operated with caution, working through inventories and reducing fertilizer applications
 
á Offshore price variance was positive due to reduced brine inflow management costs (brine inflow rate was stable) at New Brunswick (production mainly sold in the offshore market)
â Labor costs higher due to three Saskatchewan mines being on strike in 2008 and increased staffing levels and wages that resulted from new union contracts signed at the end of 2008
â All per tonne costs amplified by fewer production tonnes over which to allocate costs
á Royalty costs lower due to lower production tonnes
á The Canadian dollar weakened relative to the US dollar


41


 

Phosphate
 
                                                                         
    Three Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2009     2008     % Change     2009     2008     % Change     2009     2008     % Change  
   
 
Sales
  $ 357.4     $ 1,080.2       (67 )                                                
Freight
    24.3       27.3       (11 )                                                
Transportation and distribution
    13.9       8.8       58                                                  
 
 
Net sales
  $ 319.2     $ 1,044.1       (69 )                                                
 
 
Manufactured product
                                                                       
Net sales
                                                                       
Fertilizer — liquids
  $ 68.1     $ 335.2       (80 )     255       271       (6 )   $ 267.58     $ 1,238.35       (78 )
Fertilizer — solids
    89.6       382.4       (77 )     334       352       (5 )   $ 267.71     $ 1,084.98       (75 )
Feed
    60.5       160.7       (62 )     143       155       (8 )   $ 424.69     $ 1,040.00       (59 )
Industrial
    95.7       157.7       (39 )     150       191       (21 )   $ 640.06     $ 825.00       (22 )
 
 
      313.9       1,036.0       (70 )     882       969       (9 )   $ 356.24     $ 1,069.38       (67 )
Cost of goods sold
    273.9       531.8       (48 )                           $ 310.89     $ 549.05       (43 )
 
 
Gross margin
    40.0       504.2       (92 )                           $ 45.35     $ 520.33       (91 )
 
 
Other miscellaneous and purchased product                                                                        
Net sales
    5.3       8.1       (35 )                                                
Cost of goods sold
    1.1       5.1       (78 )                                                
 
 
Gross margin
    4.2       3.0       40                                                  
 
 
Gross Margin
  $ 44.2     $ 507.2       (91 )                           $ 50.11     $ 523.43       (90 )
 
 
 
                                                                         
    Nine Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2009     2008     % Change     2009     2008     % Change     2009     2008     % Change  
   
 
Sales
  $ 1,012.0     $ 2,375.4       (57 )                                                
Freight
    58.3       89.2       (35 )                                                
Transportation and distribution
    34.8       25.2       38                                                  
 
 
Net sales
  $ 918.9     $ 2,261.0       (59 )                                                
 
 
Manufactured product
                                                                       
Net sales
                                                                       
Fertilizer — liquids
  $ 155.8     $ 558.9       (72 )     528       720       (27 )   $ 295.20     $ 776.74       (62 )
Fertilizer — solids
    262.5       913.7       (71 )     877       989       (11 )   $ 299.01     $ 923.62       (68 )
Feed
    201.2       396.1       (49 )     396       552       (28 )   $ 508.70     $ 717.95       (29 )
Industrial
    286.5       354.1       (19 )     400       549       (27 )   $ 717.47     $ 644.71       11  
 
 
      906.0       2,222.8       (59 )     2,201       2,810       (22 )   $ 411.72     $ 791.11       (48 )
Cost of goods sold
    841.1       1,228.2       (32 )                           $ 382.23     $ 437.16       (13 )
 
 
Gross margin
    64.9       994.6       (93 )                           $ 29.49     $ 353.95       (92 )
 
 
Other miscellaneous and purchased product                                                                        
Net sales
    12.9       38.2       (66 )                                                
Cost of goods sold
    4.3       28.7       (85 )                                                
 
 
Gross margin
    8.6       9.5       (9 )                                                
 
 
Gross Margin
  $ 73.5     $ 1,004.1       (93 )                           $ 33.39     $ 357.33       (91 )
 
 
 
 
(1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations.


42


 

 
Phosphate gross margin variance attributable to:
 
                                                                                 
      Three Months Ended September 30
      Nine Months Ended September 30
 
Dollars (millions)     2009 vs. 2008       2009 vs. 2008  
              Change in
                      Change in
         
              Prices/Costs                       Prices/Costs          
      Change in
              Cost of Goods
              Change in
              Cost of Goods
         
      Sales Volumes       Net Sales       Sold       Total       Sales Volumes       Net Sales       Sold       Total  
Manufactured product
                                                                               
Fertilizer — liquids
    $ (45.7 )     $ (205.7 )     $ 44.9       $ (206.5 )     $ (92.9 )     $ (254.2 )     $ 71.2       $ (275.9 )
Fertilizer — solids
      (15.3 )       (264.5 )       88.1         (191.7 )       (71.9 )       (544.8 )       94.1         (522.6 )
Feed
      (4.5 )       (76.1 )       10.6         (70.0 )       (47.0 )       (85.4 )       (40.4 )       (172.8 )
Industrial
      (17.9 )       (24.7 )       42.5         (0.1 )       (49.9 )       29.1         61.9         41.1  
Change in market mix
      5.7         (5.4 )       3.8         4.1         (19.9 )       20.4         -         0.5  
 
 
Total manufactured product
    $ (77.7 )     $ (576.4 )     $ 189.9       $ (464.2 )     $ (281.6 )     $ (834.9 )     $ 186.8       $ (929.7 )
Other miscellaneous and purchased product                                     1.2                                       (0.9 )
 
 
Total
                                  $ (463.0 )                                   $ (930.6 )
 
 
 
Quarter over quarter total gross margin changed largely as a result of the following1:
 
         
Net Sales Prices   Sales Volumes   Cost of Goods Sold
 
 
â Decrease in liquid fertilizer, solid fertilizer and feed products prices reflect weaker market conditions and markedly lower prices for raw material inputs compared to record highs in 2008
â Industrial product prices did not fall as significantly as certain industrial products are sold based on contracts that contain cost-plus or market index provisions that lag current market conditions
 
â Fertilizer sales volumes declined due to the delayed harvest, and certain offshore markets working through existing inventory levels
â Industrial sales volumes down due to low cost offshore imports and tempered US demand associated with the poor economic conditions
â Lower feed sales volumes associated with curbed demand in offshore markets
 
á Decrease mainly due to lower costs of sulfur (80 percent) and ammonia (29 percent)
â The price variance for feed was less favorable than other product lines due to higher costs associated with White Springs, Florida


43


 

Year over year total gross margin changed largely as a result of the following1:
 
         
Net Sales Prices   Sales Volumes   Cost of Goods Sold
 
 
â All major phosphate product prices, except industrial, decreased due to lower demand and input costs throughout 2009
á Industrial prices increased as a result of certain contracts based on prior year input costs which were significantly higher in 2008
 
â Fertilizer sales volumes fell due to customer uncertainty about prices, planting decisions, weather delays, and a late fall harvest. North American solid and liquid fertilizer dealers managed purchases and worked through inventory levels, buying only as much as needed in an effort to minimize risk
â Demand for feed products declined due to weak economics for the beef, pork and poultry industry and increased use of substitutes
â Industrial fell due to a slowdown in demand for purified phosphoric acid used for food (e.g., soft drinks, vegetable oils, salad dressings, etc.) and other commercial purposes (e.g., fire retardants, metal finishing, aluminum brightening, etc.)
 
á Decrease due to lower sulfur costs (50 percent) and lower ammonia costs (14 percent)
â Lower input costs were partially offset by fixed costs being allocated over fewer tonnes (due to reduced operating rates at both our White Springs, Florida and Aurora, North Carolina operations)
á All product lines benefited from lower sulfur costs but feed had a negative price variance due to a higher allocation of fixed costs (as a result of liquid fertilizer production volumes falling significantly and feed being the highest volume product at our White Springs, Florida plant which was shuttered for a significant portion of 2009 through September 30) and partially offset by a reversal of previously written down finished product
 
Significant sales volume declines in industrial and feed (for which prices are higher than fertilizers) coupled with price changes in industrial (which increased while fertilizer prices decreased) and feed prices (which didn’t fall as much as fertilizer prices), caused the change in market mix to produce an unfavorable variance of $19.9 million related to sales volumes and a favorable variance of $20.4 million in sales price.


44


 

Nitrogen
 
                                                                         
    Three Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2009     2008     % Change     2009     2008     % Change     2009     2008     % Change  
   
 
Sales
  $ 318.3     $ 838.9       (62 )                                                
Freight
    12.6       18.1       (30 )                                                
Transportation and distribution
    13.2       12.9       2                                                  
 
 
Net sales
  $ 292.5     $ 807.9       (64 )                                                
 
 
Manufactured product
                                                                       
Net sales
                                                                       
Ammonia
  $ 104.2     $ 344.4       (70 )     457       494       (7 )   $ 228.26     $ 697.82       (67 )
Urea
    100.7       219.7       (54 )     367       280       31     $ 274.14     $ 783.79       (65 )
Nitrogen solutions/Nitric acid/Ammonium nitrate
    75.7       193.4       (61 )     553       613       (10 )   $ 136.78     $ 315.46       (57 )
 
 
      280.6       757.5       (63 )     1,377       1,387       (1 )   $ 203.73     $ 546.17       (63 )
Cost of goods sold
    234.3       445.0       (47 )                           $ 170.11     $ 320.86       (47 )
 
 
Gross margin
    46.3       312.5       (85 )                           $ 33.62     $ 225.31       (85 )
 
 
Other miscellaneous and purchased product                                                                        
Net sales
    11.9       50.4       (76 )                                                
Cost of goods sold
    7.6       38.8       (80 )                                                
 
 
Gross margin
    4.3       11.6       (63 )                                                
 
 
Gross Margin
  $ 50.6     $ 324.1       (84 )                           $ 36.75     $ 233.67       (84 )
 
 
 
                                                                         
    Nine Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2009     2008     % Change     2009     2008     % Change     2009     2008     % Change  
   
 
Sales
  $ 962.3     $ 2,064.6       (53 )                                                
Freight
    37.8       46.4       (19 )                                                
Transportation and distribution
    41.8       36.8       14                                                  
 
 
Net sales
  $ 882.7     $ 1,981.4       (55 )                                                
 
 
Manufactured product
                          &