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EX-11 - EXHIBIT 11 - POTASH CORP OF SASKATCHEWAN INCd250543dex11.htm
EX-32 - EXHIBIT 32 - POTASH CORP OF SASKATCHEWAN INCd250543dex32.htm
EX-31.B - EXHIBIT 31_B - POTASH CORP OF SASKATCHEWAN INCd250543dex31b.htm
EX-31.A - EXHIBIT 31_A - POTASH CORP OF SASKATCHEWAN INCd250543dex31a.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, 2011

OR

 

¨ 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

Saskatoon, Saskatchewan, Canada

 

S7K 7G3

(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   ¨

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  ¨      No  ¨

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  ¨  

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

    Yes  ¨      No  þ

As at October 31, 2011, Potash Corporation of Saskatchewan Inc. had 856,478,084 Common Shares outstanding.

 

 

 


TABLE OF CONTENTS

 

      Page  

Part I. Financial Information

     1   

Item 1. Financial Statements

     1   

Condensed Consolidated Statements of Financial Position

     1   

Condensed Consolidated Statements of Income

     2   

Condensed Consolidated Statements of Comprehensive (Loss) Income

     3   

Condensed Consolidated Statements of Changes in Equity

     4   

Condensed Consolidated Statements of Cash Flow

     5   

Notes to the Condensed Consolidated Financial Statements

     6   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     52   

Item 4. Controls and Procedures

     52   

Part II. Other Information

     53   

Item 1. Legal Proceedings

     53   

Item 5. Other Information

     53   

Item 6. Exhibits

     54   

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)

(unaudited)

 

      September 30,
2011
     December 31,
2010
 

Assets

     

Current assets

     

Cash and cash equivalents

   $ 394       $ 412   

Receivables

     1,327         1,059   

Inventories (Note 2)

     581         570   

Prepaid expenses and other current assets

     38         54   
     2,340         2,095   

Non-current assets

     

Property, plant and equipment

     9,408         8,141   

Investments in equity-accounted investees

     1,166         1,051   

Available-for-sale investments (Note 3)

     2,491         3,842   

Other assets

     302         303   

Intangible assets

     115         115   

Total Assets

   $ 15,822       $ 15,547   

Liabilities

     

Current liabilities

     

Short-term debt and current portion of long-term debt (Note 4)

   $ 882       $ 1,871   

Payables and accrued charges

     1,201         1,198   

Current portion of derivative instrument liabilities

     82         75   
     2,165         3,144   

Non-current liabilities

     

Long-term debt (Note 4)

     3,704         3,707   

Derivative instrument liabilities

     193         204   

Deferred income tax liabilities

     1,064         737   

Accrued pension and other post-retirement benefits (Note 5)

     530         468   

Asset retirement obligations and accrued environmental costs

     614         455   

Other non-current liabilities and deferred credits

     85         147   

Total Liabilities

     8,355         8,862   

Shareholders’ Equity

     

Share capital (Note 6)

     1,468         1,431   

Contributed surplus

     296         308   

Accumulated other comprehensive income

     1,058         2,394   

Retained earnings

     4,645         2,552   

Total Shareholders’ Equity

     7,467         6,685   

Total Liabilities and Shareholders’ Equity

   $ 15,822       $ 15,547   

Contingencies (Note 12)

     

(See Notes to the Condensed Consolidated Financial Statements)

 

1   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Income

(in millions of US dollars except per-share amounts)

(unaudited)

 

    

Three Months Ended

September 30

    

Nine Months Ended

September 30

 
      2011      2010      2011      2010  

Sales (Note 7)

   $ 2,321       $ 1,575       $ 6,850       $ 4,726   

Freight, transportation and distribution

     (129      (119      (410      (373

Cost of goods sold

     (1,060      (906      (3,044      (2,489

Gross Margin

     1,132         550         3,396         1,864   

Selling and administrative expenses

     (46      (71      (176      (164

Provincial mining and other taxes

     (53      (16      (147      (56

Share of earnings of equity-accounted investees

     68         51         185         122   

Dividend income

     41         25         94         139   

Other expenses

             (22      (10      (43

Operating Income

     1,142         517         3,342         1,862   

Finance Costs

     (37      (22      (125      (87

Income Before Income Taxes

     1,105         495         3,217         1,775   

Income Taxes (Note 9)

     (279      (152      (819      (508

Net Income

   $ 826       $ 343       $ 2,398       $ 1,267   

Net Income Attributable to Common Shareholders

   $ 826       $ 343       $ 2,398       $ 1,267   

Net Income per Share (Note 10)

           

Basic

   $ 0.96       $ 0.39       $ 2.80       $ 1.43   

Diluted

   $ 0.94       $ 0.38       $ 2.73       $ 1.39   

Dividends per Share

   $ 0.07       $ 0.03       $ 0.21       $ 0.10   

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   2


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Comprehensive (Loss) Income

(in millions of US dollars)

(unaudited)

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
(Net of related income taxes)    2011      2010      2011      2010  

Net Income

   $ 826       $ 343       $ 2,398       $ 1,267   

Other comprehensive (loss) income

           

Net (decrease) increase in net unrealized gains on available-for-

sale investments(1) (Note 3)

     (983      924         (1,351      202   

Net actuarial losses on defined benefit plans(2) (Note 5)

     (125              (125        

Net losses on derivatives designated as cash flow hedges(3)

     (18      (61      (18      (125

Reclassification to income of net losses on cash flow hedges(4)

     10         12         38         36   

Other

     (5      5         (5      1   

Other Comprehensive (Loss) Income

     (1,121      880         (1,461      114   

Comprehensive (Loss) Income

   $ (295    $ 1,223       $ 937       $ 1,381   

Comprehensive (Loss) Income Attributable to Common Shareholders

   $ (295    $ 1,223       $ 937       $ 1,381   

 

(1) 

Available-for-sale investments are comprised of shares in Israel Chemicals Ltd. and Sinofert Holdings Limited.

 

(2) 

Net of income taxes of $(71) (2010 — $NIL) for the three and nine months ended September 30, 2011.

 

(3) 

Cash flow hedges are comprised of natural gas derivative instruments, and are net of income taxes of $(11) (2010 — $(37)) for the three months ended September 30, 2011 and $(11) (2010 — $(76)) for the nine months ended September 30, 2011.

 

(4) 

Net of income taxes of $7 (2010 — $8) for the three months ended September 30, 2011 and $23 (2010 — $22) for the nine months ended September 30, 2011.

(See Notes to the Condensed Consolidated Financial Statements)

 

3   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Changes in Equity

(in millions of US dollars)

(unaudited)

 

    Equity Attributable to Common Shareholders  
   

Share
Capital

   

Contributed
Surplus

    Accumulated Other Comprehensive Income    

Retained
Earnings

   

Total
Equity

 
      Net
unrealized
gains on
available-for-
sale
investments
   

Net

unrealized
losses on
derivatives
designated as
cash flow
hedges

   

Net

actuarial
losses on
defined
benefit
plans
(Note 5)

    Other     Total
Accumulated
Other
Comprehensive
Income
     

Balance — January 1, 2011

  $ 1,431      $ 308      $ 2,563      $ (177   $ (1)     $ 8      $ 2,394      $ 2,552      $ 6,685   

Net income

                                                     2,398        2,398   

Other comprehensive (loss) income

                  (1,351     20        (125     (5     (1,461            (1,461

Effect of share-based compensation

           (12                                               (12

Dividends declared

                                                     (180     (180

Issuance of common shares

    37                                                         37   

Transfer of actuarial losses on defined benefit plans

                                125               125        (125       

Balance — September 30, 2011

  $ 1,468      $ 296      $ 1,212      $ (157   $ (1)    $ 3      $ 1,058      $ 4,645      $ 7,467   

 

(1) 

Any amounts incurred during a period are cleared out to retained earnings at each period end. Therefore, no balance exists in the reserve at beginning or end of period.

 

    Equity Attributable to Common Shareholders  
                Accumulated Other Comprehensive Income              
     Share
Capital
    Contributed
Surplus
    Unrealized
gains on
available-for-
sale
investments
   

Net

unrealized
losses on
derivatives
designated as
cash flow
hedges

   

Net

actuarial
losses on
defined
benefit
plans

    Other     Total
Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Total
Equity
 

Balance — January 1, 2010

  $ 1,430      $ 273      $ 1,900      $ (111   $ (1)    $ 9      $ 1,798      $ 2,804      $ 6,305   

Net income

                                                     1,267        1,267   

Other comprehensive income (loss)

                  202        (89            1        114               114   

Effect of share-based compensation

           66                                                  66   

Dividends declared

                                                     (89     (89

Issuance of common shares

    52                                                         52   

Balance — September 30, 2010

  $ 1,482      $ 339      $ 2,102      $ (200   $ (1)     $ 10      $ 1,912      $ 3,982      $ 7,715   

 

(1) 

Any amounts incurred during a period are cleared out to retained earnings at each period end. Therefore, no balance exists in the reserve at beginning or end of period.

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   4


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Cash Flow

(in millions of US dollars)

(unaudited)

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
          2011              2010              2011              2010      

Operating Activities

           

Net income

   $ 826       $ 343       $ 2,398       $ 1,267   

Adjustments to reconcile net income to cash provided by operating activities

           

Depreciation and amortization

     122         106         374         325   

Share-based compensation

     3         3         22         22   

Realized excess tax benefit related to share-based compensation

     6         31         29         39   

Provision for deferred income tax

     189         13         342         88   

Undistributed earnings of equity-accounted investees

     (68      (50      (118      (78

Pension and other post-retirement benefits

     (145      (32      (131      (9

Asset retirement obligations and accrued environmental costs

     22         27         40         105   

Other

     9         15         (23      70   

Subtotal of adjustments

     138         113         535         562   

Changes in non-cash operating working capital

           

Receivables

     (88      (64      (277      326   

Inventories

     7         147         (14      117   

Prepaid expenses and other current assets

             5         12         (6

Payables and accrued charges

     (18      43         (35      128   

Subtotal of changes in non-cash operating working capital

     (99      131         (314      565   

Cash provided by operating activities

     865         587         2,619         2,394   

Investing Activities

           

Additions to property, plant and equipment

     (590      (562      (1,523      (1,517

Purchase of long-term investments

                             (422

Other assets and intangible assets

     (8      (28      (11      (99

Cash used in investing activities

     (598      (590      (1,534      (2,038

Cash before financing activities

     267         (3      1,085         356   

Financing Activities

           

Proceeds from long-term debt obligations

                             400   

Repayment of long-term debt obligations

                     (600      (400

(Repayments of) proceeds from short-term debt obligations

     (236      1         (395      (332

Dividends

     (60      (30      (148      (89

Issuance of common shares

     15         25         40         40   

Cash used in financing activities

     (281      (4      (1,103      (381

Decrease in Cash and Cash Equivalents

     (14      (7      (18      (25

Cash and Cash Equivalents, Beginning of Period

     408         367         412         385   

Cash and Cash Equivalents, End of Period

   $ 394       $ 360       $ 394       $ 360   

Cash and cash equivalents comprised of:

           

Cash

   $ 78       $ 91       $ 78       $ 91   

Short-term investments

     316         269         316         269   
     $ 394       $ 360       $ 394       $ 360   

Supplemental cash flow disclosure

           

Interest paid

   $ 35       $ 38       $ 168       $ 143   

Income taxes paid (recovered)

   $ 91       $ 64       $ 415       $ (76

(See Notes to the Condensed Consolidated Financial Statements)

 

5   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Potash Corporation of Saskatchewan Inc.

Notes to the Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 2011

(in millions of US dollars except share, per-share and percentage 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 previously prepared its financial statements in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) as set out in the Handbook of the Canadian Institute of Chartered Accountants (“CICA Handbook”). In 2010, the CICA Handbook was revised to incorporate International Financial Reporting Standards (“IFRS”), and required publicly accountable enterprises to apply such standards effective for years beginning on or after January 1, 2011, with early adoption permitted. Accordingly, these unaudited interim condensed consolidated financial statements are based on IFRS, as issued by the International Accounting Standards Board (“IASB”). In these unaudited interim condensed consolidated financial statements, the term “Canadian GAAP” refers to Canadian GAAP before the company’s adoption of IFRS.

These unaudited interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting”, and IFRS 1, “First-Time Adoption of International Financial Reporting Standards” (“IFRS 1”). Subject to certain transition elections disclosed in Note 13 to the financial statements included in Part I Item 1 of the company’s 2011 First Quarter Quarterly Report on Form 10-Q, the company has consistently applied the same accounting policies throughout all periods presented. Note 13 referred to above describes the impact of the transition to IFRS on the company’s reported financial position and financial performance, including the nature and effect of significant changes in accounting policies from those used in its Canadian GAAP consolidated financial statements as at January 1, 2010 and December 31, 2010, and for the year ended December 31, 2010. Note 15 describes the impact of the transition to IFRS on the company’s reported financial position and financial performance as at and for the periods ended September 30, 2010. Except as disclosed in Note 14, these policies are consistent with accounting principles generally accepted in the United States (“US GAAP”) in all material respects.

These unaudited interim condensed consolidated financial statements were authorized by the Audit Committee of the Board of Directors for issue on November 4, 2011. The company will ultimately prepare its opening statement of financial position and financial statements for 2010 and 2011 by applying existing IFRS with an effective date of December 31, 2011 or prior. Accordingly, the financial statements for 2010 and 2011 may differ from these unaudited interim condensed consolidated financial statements.

These unaudited interim condensed consolidated financial statements include the accounts of PCS and its wholly owned subsidiaries; however, they do not include all disclosures normally provided in annual consolidated financial statements and should be read in conjunction with the 2010 annual consolidated financial statements and Part I Item 1, Notes 1 and 13 of the company’s 2011 First Quarter Quarterly Report on Form 10-Q. Certain information and note disclosures which are considered material to the understanding of the company’s unaudited interim condensed consolidated financial statements and which are normally included in annual consolidated financial statements prepared in accordance with IFRS were provided in Part I Item 1, Notes 1 and 13 of the company’s 2011 First Quarter Quarterly Report on Form 10-Q, along with reconciliations and descriptions of the effect of the transition from Canadian GAAP to IFRS on financial performance and financial position. In management’s opinion, the unaudited interim condensed consolidated financial statements include all adjustments (consisting solely of normal recurring adjustments) necessary to fairly present such information. Interim results are not necessarily indicative of the results expected for the fiscal year.

These unaudited interim condensed consolidated financial statements were prepared under the historical cost convention, except for certain items not carried at historical cost as discussed in Note 1 to the financial statements included in Part I Item 1 of the company’s 2011 First Quarter Quarterly Report on Form 10-Q.

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   6


Recent Accounting Pronouncements

The following new standards and amendments or interpretations to existing standards have been published and are mandatory for periods beginning on or after January 1, 2011, or later:

IFRS 9, Financial Instruments

In November 2009, the IASB issued guidance relating to the classification and measurement of financial assets. Under IFRS 9, financial assets will generally be measured initially at fair value plus particular transaction costs, and subsequently at either amortized cost or fair value. In October 2010, the IASB issued additions to IFRS 9 relating to accounting for financial liabilities. Under the new requirements, an entity choosing to measure a financial liability at fair value will present the portion of any change in its fair value due to changes in the entity’s own credit risk in other comprehensive income (“OCI”), rather than within profit or loss. The standard is to be applied retrospectively and will be effective for periods commencing on or after January 1, 2013. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

Amendments to IFRIC 14, Prepayments of a Minimum Funding Requirement

In November 2009, the International Financial Reporting Interpretations Committee (“IFRIC”) issued amendments to IFRIC 14 relating to the prepayments of a minimum funding requirement for an employee defined benefit plan. The amendments apply when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements. The amendments permit such an entity to treat the benefit of such an early payment as an asset. The amendment must be applied from the beginning of the first comparative period presented in the first financial statements in which the amendment is applied and became effective for periods commencing on or after January 1, 2011. The company has applied these amendments, which had no effect on these unaudited interim condensed consolidated financial statements.

Amendments to IFRS 7, Financial Instruments: Disclosures

In May 2010, the IASB issued amendments to IFRS 7 as part of its annual improvements process. The amendments addressed various requirements relating to the disclosure of financial instruments and are effective for annual periods commencing on or after January 1, 2011.

Amendments to IFRS 7, Disclosures — Transfers of Financial Assets

In October 2010, the IASB issued amendments to IFRS 7, “Financial Instruments: Disclosures”. The amendments require entities to provide additional disclosures to assist users of financial statements in evaluating the risk exposures relating to transfers of financial assets that are not derecognized or for which the entity has a continuing involvement in the transferred asset. The amendments became effective for annual periods beginning on or after July 1, 2011. The company does not typically retain any continuing involvement in financial assets once transferred. It has applied these amendments, which had no effect on these unaudited interim condensed consolidated financial statements.

IFRS 10, Consolidated Financial Statements

In May 2011, the IASB issued guidance establishing principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. IFRS 10 (which supersedes IAS 27 and Standing Interpretations Committee (“SIC”) 12) builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of the parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. The standard is to be applied retrospectively, in most circumstances, and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

IFRS 11, Joint Arrangements

In May 2011, the IASB issued guidance establishing principles for financial reporting by parties to a joint arrangement. IFRS 11 (which supersedes IAS 31 and SIC 13) requires a party to a joint arrangement to determine the type of joint arrangement in which it is involved, either a joint operation or a joint venture, by assessing its rights and obligations arising from the arrangement. The existing policy choice of proportionate consolidation for jointly controlled entities has been eliminated and under IFRS 11, equity accounting is mandatory for participants in joint ventures. The standard is to be applied prospectively and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

 

 

7   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


IFRS 12, Disclosure of Interest in Other Entities

In May 2011, the IASB issued guidance relating to the disclosure requirements of interests in other entities. IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interest in other entities, including subsidiaries, joint arrangements, associates and unconsolidated structured entities. The standard is to be applied prospectively and is effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

IFRS 13, Fair Value Measurement

In May 2011, the IASB issued guidance establishing a single source for fair value measurement. IFRS 13 defines fair value, sets out a framework for measuring fair value and introduces consistent requirements for disclosures on fair value measurements. It does not determine when an asset, a liability or an entity’s own equity instrument is measured at fair value. Rather, the measurement and disclosure requirements of IFRS 13 apply when another IFRS requires or permits the item to be measured at fair value, with limited exceptions. The standard is to be applied prospectively and will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

Amendments to IAS 1, Presentation of Financial Statements

In June 2011, the IASB issued amendments to IAS 1 requiring items within OCI that may be reclassified to the profit or loss section of the income statement to be grouped together. The amendments are to be applied retrospectively and will be effective for annual periods commencing on or after July 1, 2012, with earlier application permitted. The company is currently reviewing these amendments to determine the potential impact on its consolidated financial statements.

Amendments to IAS 19, Employee Benefits

In June 2011, the IASB issued amendments to IAS 19 relating to the recognition and measurement of post-employment defined benefit expense and termination benefits, and to the disclosures for all employee benefits. The amendments are to be applied retrospectively, except for changes to the carrying value of assets that include capitalized employee benefit costs, which are to be applied prospectively. The amendments will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing these amendments to determine the potential impact on its consolidated financial statements.

IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine

In October 2011, the IFRIC issued IFRIC 20 clarifying the requirements for accounting for stripping costs in the production phase of a surface mine. This interpretation clarifies when production stripping should lead to the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. The interpretation will be effective for annual periods commencing on or after January 1, 2013, with earlier application permitted. The company is currently reviewing this interpretation to determine the potential impact, if any, on its consolidated financial statements.

 

2. Inventories

 

      September 30,
2011
     December 31,
2010
 

Finished products

   $ 252       $ 255   

Intermediate products

     100         127   

Raw materials

     88         65   

Materials and supplies

     141         123   
     $ 581       $ 570   

 

3. Available-for-Sale Investments

The company assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity instruments classified as available-for-sale, for which unrealized gains and losses are generally recognized in OCI, a significant or prolonged decline in the fair value of the investment below its cost may be evidence that the assets are impaired. If objective evidence of impairment were to exist, the impaired amount (i.e., the unrealized loss) would be recognized in net income; any subsequent reversals would be recognized in OCI and would not flow back into net income.

At September 30, 2011, the company assessed whether there was objective evidence that its investment in Sinofert Holdings Limited (“Sinofert”) was impaired. The fair value of the investment, recorded in the consolidated statements of financial position, was $396 compared to the cost of $575. Factors considered in assessing impairment included the length of time and extent to which fair value had been below cost, and current financial and market conditions specific to Sinofert and the Chinese market.

The company concluded that objective evidence of impairment did not exist as at September 30, 2011 and, as a result, the unrealized holding loss of $179 was included in OCI. Impairment will be assessed again in future reporting periods if the fair value is below cost.

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   8


4. Long-Term Debt

On May 31, 2011, the company fully repaid $600 of 7.750 percent 10-year senior notes.

 

5. Pension and Other Post-Retirement Benefits

During the nine months ended September 30, 2011, the company contributed $156 to its defined benefit pension plans.

A remeasurement of the defined benefit plan assets and liabilities was performed at September 30, 2011. As a result of a loss on pension plan assets and a significant change in the discount rate, the company recorded net actuarial losses on defined benefit plans of $125 in OCI, which was recognized immediately in retained earnings at September 30, 2011. The company’s pension plan assets decreased by $33, defined benefit pension and other post-retirement benefit liabilities increased by $163 and deferred income tax liabilities decreased by $71 at September 30, 2011.

The discount rate used to determine the benefit obligation for the company’s significant plans at September 30, 2011 was 4.75 percent.

The benefit obligations and plan assets for the company’s pension and other post-retirement plans were as follows:

 

      September 30,
2011
     December 31,
2010
 

Present value of defined benefit obligations

   $ (1,379    $ (1,191

Fair value of plan assets

     875         753   

Funded status

     (504      (438

Past service costs not recognized in statements of financial position

     (12      (13

Accrued pension and other post-retirement benefit liabilities

   $ (516    $ (451

Amounts included in:

     

Other assets

   $ 23       $ 26   

Liabilities

     

Current

     (9      (9

Long-term

     (530      (468
     $ (516    $ (451

 

6. Share Capital

Authorized

The company is authorized to issue an unlimited number of common shares without par value and an unlimited number of first preferred shares. The common shares are not redeemable or convertible. The first preferred shares may be issued in one or more series with rights and conditions to be determined by the Board of Directors. No first preferred shares have been issued.

Issued

 

      Number of
Common Shares
     Consideration  

Balance — December 31, 2010

     853,122,693       $ 1,431   

Issued under option plans

     3,234,318         35   

Issued for dividend reinvestment plan

     30,663         2   

Balance — September 30, 2011

     856,387,674       $ 1,468   

 

9   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


7. Segment Information

The company’s operating segments have been determined based on reports reviewed by the Chief Executive Officer, its chief operating decision maker, that are used to make strategic decisions. The company has three reportable operating segments: potash, phosphate and nitrogen. These operating segments are differentiated by the chemical nutrient contained in the product that each produces. Inter-segment sales are made under terms that approximate market value. The accounting policies of the segments are the same as those described in Note 1.

 

      Three Months Ended September 30, 2011  
      Potash        Phosphate        Nitrogen        All Others        Consolidated  

Sales

   $ 1,035         $ 690         $ 596         $         $ 2,321   

Freight, transportation and distribution

     (59        (46        (24                  (129

Net sales — third party

     976           644           572                  

Cost of goods sold

     (276        (475        (309                  (1,060

Gross margin

     700           169           263                     1,132   

Depreciation and amortization

     (33        (55        (32        (2        (122

Inter-segment sales

                         56                       

 

      Three Months Ended September 30, 2010  
      Potash        Phosphate        Nitrogen        All Others        Consolidated  

Sales

   $ 637         $ 536         $ 402         $         $ 1,575   

Freight, transportation and distribution

     (55        (44        (20                  (119

Net sales — third party

     582           492           382                  

Cost of goods sold

     (243        (396        (267                  (906

Gross margin

     339           96           115                     550   

Depreciation and amortization

     (28        (49        (27        (2        (106

Inter-segment sales

                         27                       

 

      Nine Months Ended September 30, 2011  
      Potash        Phosphate        Nitrogen        All Others        Consolidated  

Sales

   $ 3,265         $ 1,872         $ 1,713         $         $ 6,850   

Freight, transportation and distribution

     (212        (129        (69                  (410

Net sales — third party

     3,053           1,743           1,644                  

Cost of goods sold

     (817        (1,258        (969                  (3,044

Gross margin

     2,236           485           675                     3,396   

Depreciation and amortization

     (112        (159        (97        (6        (374

Inter-segment sales

                         133                       

 

      Nine Months Ended September 30, 2010  
      Potash        Phosphate        Nitrogen        All Others        Consolidated  

Sales

   $ 2,170         $ 1,301         $ 1,255         $         $ 4,726   

Freight, transportation and distribution

     (202        (107        (64                  (373

Net sales — third party

     1,968           1,194           1,191                  

Cost of goods sold

     (688        (985        (816                  (2,489

Gross margin

     1,280           209           375                     1,864   

Depreciation and amortization

     (87        (145        (87        (6        (325

Inter-segment sales

                         81                       

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   10


Assets    Potash        Phosphate        Nitrogen        All Others        Consolidated  

Assets at September 30, 2011

   $ 7,143         $ 2,672         $ 1,891         $ 4,116         $ 15,822   

Assets at December 31, 2010

   $ 5,773         $ 2,395         $ 1,808         $ 5,571         $ 15,547   

Change in assets

   $ 1,370         $ 277         $ 83         $ (1,455      $ 275   

Additions to property, plant and equipment
(nine months ended September 30, 2011)

   $ 1,238         $ 133         $ 117         $ 35         $ 1,523   

 

8. Share-Based Compensation

On May 12, 2011, the company’s shareholders approved the 2011 Performance Option Plan under which the company may, after February 22, 2011 and before January 1, 2012, issue options to acquire up to 3,000,000 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 the 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, 2011, options to purchase a total of 1,144,100 common shares had been granted under the plan. The weighted average fair value of options granted was $23.64 per share, estimated as of the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:

 

Expected dividend

   $  0.28   

Expected volatility

     52%   

Risk-free interest rate

     2.29%   

Expected life of options

     5.5 years   

 

9. Income Taxes

A separate estimated average annual effective tax rate is determined for each taxing jurisdiction and applied individually to the interim period pre-tax income of each jurisdiction.

For the three months ended September 30, 2011, the company’s income tax expense was $279 (2010 — $152). For the nine months ended September 30, 2011, its income tax expense was $819 (2010 — $508). The actual effective tax rate including discrete items for the three and nine months ended September 30, 2011 was 25 percent (2010 — 31 percent and 29 percent, respectively). Total discrete tax adjustments that impacted the rate in the three months ended September 30, 2011 resulted in an income tax recovery of $5 compared to an income tax expense of $17 in the same period last year. Total discrete tax adjustments that impacted the rate in the nine months ended September 30, 2011 resulted in an income tax recovery of $29 compared to an income tax expense of $42 in the same period last year. Significant items recorded included the following:

 

Ÿ  

In first-quarter 2011, a current tax recovery of $21 for previously paid withholding taxes;

 

Ÿ  

In third-quarter 2011, a current tax recovery of $12 due to income tax losses in a foreign jurisdiction;

 

Ÿ  

In the first nine months of 2010, a tax expense of $34 to adjust the 2009 income tax provision to the income tax returns filed for that year.

Income tax balances within the consolidated statements of financial position were comprised of the following:

 

Income tax assets (liabilities)    Statements of Financial Position Location    September 30,
2011
     December 31,
2010
 

Current income tax assets:

        

Current

   Receivables    $ 28       $ 46   

Non-current

   Other assets      114         122   

Deferred income tax assets

   Other assets      22         38   

Total income tax assets

        $ 164       $ 206   

Current income tax liabilities:

        

Current

   Payables and accrued charges    $ (179    $ (167

Non-current

   Other non-current liabilities and deferred credits      (80      (142

Deferred income tax liabilities

   Deferred income tax liabilities      (1,064      (737

Total income tax liabilities

        $ (1,323    $ (1,046

 

11   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


10. Net Income per Share

Basic net income per share for the quarter is calculated on the weighted average number of shares issued and outstanding for the three months ended September 30, 2011 of 856,022,000 (2010 — 890,913,000). Basic net income per share for the nine months ended September 30, 2011 is calculated based on the weighted average number of shares issued and outstanding for the period of 855,024,000 (2010 — 889,475,000).

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 the exercise of all stock options with exercise prices at or below the average market price for the period; and (2) decreased by the number of shares that the company could have repurchased if it had used the assumed proceeds from the exercise of stock options to repurchase them on the open market at the average share price for the period. For performance-based stock option plans, the number of contingently issuable common shares included in the calculation is based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the performance period and the effect were dilutive. The weighted average number of shares outstanding for the diluted net income per share calculation for the three months ended September 30, 2011 was 876,959,000 (2010 — 915,694,000) and for the nine months ended September 30, 2011 was 876,844,000 (2010 — 914,448,000).

Excluded from the calculation of diluted net income per share were weighted average options outstanding of 1,392,450 relating to the 2008 Performance Option Plan, as the options’ exercise prices were greater than the average market price of common shares for the period.

 

11. 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.

 

12. Contingencies

Canpotex

PCS is a shareholder in Canpotex Limited (“Canpotex”), which markets Saskatchewan potash offshore. Should any operating losses or other liabilities be incurred by Canpotex, the shareholders have contractually agreed to reimburse it for such losses or liabilities

in proportion to each shareholder’s productive capacity. Through September 30, 2011, there were no such operating losses or other liabilities.

Mining Risk

As is typical with other companies in the industry, the company is unable to acquire insurance for underground assets.

Legal and Other Matters

Significant environmental site assessment and/or remediation matters of note include the following:

 

Ÿ  

The company, along with other parties, has been notified by the US Environmental Protection Agency (“USEPA”) of potential liability under the US Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) with respect to certain soil and groundwater conditions at a site in Lakeland, Florida that includes a former PCS Joint Venture fertilizer blending facility and certain surrounding properties. A Record of Decision (“ROD”) was issued in September 2007 and 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 $9. In September 2010, the USEPA approved the Remedial Design Report to address the soil contamination. While subject to final construction inspection by the USEPA, the soil remediation has been performed.

 

Ÿ  

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 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. (“Ashley II”), the current owner of the Planters Property, filed a complaint in the United States District Court for the District of South Carolina seeking a declaratory judgment that PCS Nitrogen is liable to pay environmental response costs that Ashley II alleges it has incurred and will incur in connection with response activities at the site. After the Phase II trial, the district court allocated 30 percent of the liability for response costs at the site to PCS Nitrogen, as well as a proportional share of any costs that cannot be recovered from another responsible party. PCS Nitrogen and other responsible parties filed motions for amendment of the decision, and the Court ruled on those motions in May 2011. The Court’s amended judgment did not alter the 30 percent allocation of liability to PCS but did award relief to PCS under a contractual indemnification claim. PCS and another responsible party have

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   12


   

since submitted post-judgment motions to the Court, which are pending, and PCS filed a notice of appeal to the United States Court of Appeals for the Fourth Circuit. The notice of appeal was subsequently stayed by the Fourth Circuit pending resolution of the post-judgment motions. The ultimate amount of liability for PCS Nitrogen, if any, depends upon the amount needed for remedial activities, the ability of other parties to pay and the availability of insurance.

 

Ÿ  

PCS Phosphate has agreed to participate, on a non-joint and several basis, with parties to an Administrative Settlement Agreement with the USEPA (“Settling Parties”) in the performance of a removal action and the payment of certain other costs associated with PCB soil contamination at the Ward Superfund Site in Raleigh, North Carolina (“Site”), including reimbursement of the USEPA’s past costs. The removal activities commenced at the Site in August 2007. The cost of performing the removal action at the Site is estimated at $75. The Settling Parties have initiated CERCLA contribution litigation against PCS Phosphate and more than 100 other entities. PCS Phosphate filed crossclaims and counterclaims seeking cost recovery. In addition to the removal action at the Site, the USEPA has investigated sediments downstream of the Site in what is called “Operable Unit 1”. In September 2008, the USEPA issued a final remedy for Operable Unit 1, with an estimated cost of $6. The USEPA issued a Unilateral Administrative Order (UAO) dated September 29, 2011 to a number of entities, requiring them to implement the remedy for Operable Unit 1. PCS Phosphate did not receive the UAO. At this time, the company is unable to evaluate the extent of any exposure that it may have for the matters addressed in the UAO.

 

Ÿ  

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 to investigate and, if necessary, perform a corrective action for substances in soil and groundwater. The investigation has proceeded and various corrective measures for substances in groundwater have been proposed to GEPD. PCS Nitrogen Fertilizer expects that it will implement corrective measures for substances in groundwater, but until GEPD approves the investigation results and a final corrective action plan, PCS Nitrogen Fertilizer is unable to estimate with reasonable certainty the total cost of its corrective action obligations under the Order.

Ÿ  

In December 2009, during a routine inspection of a gypsum stack at the White Springs, Florida facility, a sinkhole was discovered that resulted in the loss of approximately 82 million gallons of water from the stack. The company is sampling production and monitoring wells on its property and drinking water wells on neighboring property to assess impacts. The company incurred costs of $17 to address the sinkhole between the time of discovery through completion of remediation in July 2011. In December 2010, the company entered into a consent order with the Florida Department of Environmental Protection pursuant to which the company agreed to, among other things, remediate the sinkhole and perform additional monitoring of the groundwater quality and hydrogeologic conditions related to the sinkhole collapse. The company also entered into an order on consent with the USEPA. In May 2011, the USEPA and the Board of Directors approved the company’s proposal to implement certain mitigation measures to meet the goals of the USEPA order on consent. The company remeasured the asset retirement obligation (“ARO”) for the White Springs gypsum stacks to account for the measures identified in the proposal. This remeasurement resulted in a $39 adjustment to the ARO, of which $33 was capitalized as an addition to the related long-lived asset and $6 was expensed in the first quarter of 2011.

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.

Other significant matters of note include the following:

 

Ÿ  

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 inspections at numerous phosphate operations and notified the company of various alleged violations of the US Resource Conservation and Recovery Act (“RCRA”) at its plants in Aurora, North Carolina; Geismar, Louisiana; and White Springs, Florida. The company has entered into RCRA 3013 Administrative Orders on Consent and has performed certain site assessment activities at all three plants. At this time, the company does not know the scope of corrective action, if any, that may be required. The company continues to participate in settlement discussions with the USEPA but 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.

 

 

13   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Ÿ  

The USEPA has also begun an initiative to evaluate compliance with the Clean Air Act at sulfuric acid 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, Louisiana plant. The government has demanded process changes and penalties that would cost a total of approximately $30, but the company denies that it has any liability for the Geismar, Louisiana matter. Although the company is proceeding with planning and permitting for the process changes demanded by the government, the company is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be. In July 2010, without alleging any specific violation of the Clean Air Act, the USEPA requested that the company meet and demonstrate compliance with the Clean Air Act for specified projects undertaken at the White Springs, Florida sulfuric acid plants. The company participated in such meeting but, at this time, is unable to evaluate if it has any exposure.

 

Ÿ  

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 mining in the wetlands. In January 2009, the Division of Water Quality of the North Carolina Department of Natural Resources issued a certification under Section 401 of the Clean Water Act that mining of phosphate in excess of 30 years from lands owned or controlled by the company, including some wetlands, would not degrade water quality. Thereafter, in June 2009, the Corps issued the company a permit that will allow the company to mine the phosphate deposits identified in the Section 401 certification. The USEPA decided not to seek additional review of the permit. In March 2009, four environmental organizations (Pamlico-Tar River Foundation, North Carolina Coastal Federation, Environmental Defense Fund and Sierra Club) filed a Petition for a Contested Case Hearing before the North Carolina Office of Administrative Hearings (“OAH”) challenging the Section 401 certification. The company has intervened in this proceeding. Cross motions for summary judgment by the Petitioners and the company have been filed, briefed and argued. The OAH has not issued a decision on them. At this time, the company is unable to evaluate the extent of any exposure that it may have in this matter.

 

Ÿ  

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. The Province of Saskatchewan is considering the adoption of greenhouse gas emission control requirements. Regulations pursuant to the Management and Reduction of Greenhouse Gases Act in

   

Saskatchewan, which impose a type of carbon tax to achieve a goal of a 20 percent reduction in greenhouse gas emissions by 2020 compared to 2006 levels, may become effective in 2012. There is no certainty as to the scope or timing of any final, effective provincial requirements. Although the US Congress has not passed any greenhouse gas emission control laws, the USEPA has adopted several rules to control greenhouse gas emissions using authority under existing environmental laws. In January 2011, the USEPA began phasing in requirements for all “stationary sources,” such as the company’s plants, to obtain permits incorporating the “best available control technology” for greenhouse gas emissions at a source if it is a new source that could emit 100,000 tons of greenhouse gases per year or if it is a modified source that increases such emissions by 75,000 tons per year. The company is not currently aware of any projects at its facilities that would be subject to these requirements. The company is monitoring these developments, and, except as indicated above, their effect on its operations cannot be determined with certainty at this time.

 

Ÿ  

In December 2010, the USEPA issued a final rule to restrict nutrient concentrations in surface waters in Florida to levels below those currently permitted at the company’s White Springs, Florida plant. The revised nutrient criteria will become part of Florida’s water quality standards in March 2012. Projected capital costs resulting from the rule could be in excess of $100 for the company’s White Springs, Florida plant, and there is no guarantee that controls can be implemented that are capable of achieving compliance with the revised nutrient standards under all flow conditions. This estimate assumes that the rule survives court challenges and that none of the site-specific mechanisms for relief from the revised nutrient criteria are available to the White Springs, Florida plant. Various judicial challenges to the rule have been filed, including one lawsuit by The Fertilizer Institute (“TFI”) and White Springs. On June 15, 2011, TFI, White Springs and additional parties filed a Motion for Summary Judgment seeking, among other things, to vacate the USEPA rule. On September 15, 2011, the USEPA filed its Motion for Summary Judgment seeking to uphold its rule. The prospects for a rule to be implemented as issued by the USEPA and the availability of the site-specific mechanisms are uncertain.

 

Ÿ  

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 (“Court”) against Mosaic on May 27, 2009 and the claim was amended on January 19, 2010. In the Amended Statement of Claim, the company has asserted that it has the right under the mining and processing agreement to receive potash from Mosaic

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   14


   

until at least 2012 and potentially much later, 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 Defence, 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 would terminate August 30, 2010.

In addition, at the time of filing its Statement of Defence, 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 was notified on May 2, 2011 that Mosaic believes that it has satisfied its obligation to produce potash at the Esterhazy mine for the company under the mining and processing agreement and as such it has no further obligation to deliver potash to the company from the Esterhazy mine, other than the company’s remaining inventory. The company disagreed and sought relief from the Court. On June 30, 2011, an injunction order was issued by the Court requiring delivery pursuant to the terms of the mining and processing agreement pending trial or a further order of the Court (“Injunction Order”). The trial is currently scheduled to commence in January 2012. Like every applicant for injunctive relief, the company was required to provide an undertaking to pay any damages that may be occasioned to Mosaic as a result of the granting of the injunction should it later be shown that Mosaic had, by reason of the injunction, sustained any damages which the company ought to pay. The company does not believe that Mosaic will be entitled to any damages arising from the issuance of the Injunction Order. On July 18, 2011, Mosaic filed a Notice of Appeal with the Court of Appeal for Saskatchewan (“Court of Appeal”) appealing the Injunction Order and seeking to set it aside. On October 24, 2011, the Court of Appeal dismissed Mosaic’s appeal of the Injunction Order.

The company will continue to assert its position in this litigation vigorously and it denies liability to Mosaic in connection with its counterclaim.

 

Ÿ  

Between September and October 2008, the company and PCS Sales (USA), Inc. were named as defendants in eight similar antitrust complaints filed in US 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. On September 23, 2011, the United States Court of Appeals for the Seventh Circuit issued an opinion directing the trial court to dismiss certain of the plaintiffs’ claims. The plaintiffs have petitioned for rehearing en banc and proceedings are ongoing.

   

The company and PCS Sales (USA), Inc. believe each of these eight private antitrust lawsuits is without merit and intend to defend them vigorously.

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 inherent uncertainties exist 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 that 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 are not 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 are incurred.

 

13. Related Party Transactions

The company sells potash from its Saskatchewan mines for use outside of North America exclusively to Canpotex, a potash export, sales and marketing company owned in equal shares by the three potash producers in the Province of Saskatchewan. Sales to Canpotex for the three months ended September 30, 2011 were $497 (2010 — $283) and nine months ended September 30, 2011 were $1,537 (2010 — $874). At September 30, 2011, $334 (December 31, 2010 — $298) was owing from Canpotex. Sales to Canpotex are at prevailing market prices and account balances resulting from the Canpotex transactions are settled on normal trade terms.

 

 

15   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


14. Reconciliation of IFRS and US GAAP

IFRS vary in certain significant respects from US GAAP. As required by the United States Securities and Exchange Commission, the effect of these principal differences on the company’s unaudited interim condensed consolidated financial statements is described and quantified below.

(a) Inventories:  Under IFRS, 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.

Under IFRS, interim price, efficiency, spending and volume variances of a manufacturing entity are recognized in income at interim reporting dates to the same extent that those variances are recognized in income at year-end. Deferral of variances that are expected to be absorbed by year-end is not appropriate because such deferrals could result in reporting inventory at the interim date at more or less than its portion of the actual cost of manufacture. Under US GAAP, variances that are planned and expected to be absorbed by the end of the year are ordinarily deferred at the end of an interim period.

(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 respects from US GAAP. The company’s share of earnings of these equity-accounted investees under IFRS has been adjusted for the significant effects of conforming to US GAAP.

(c) Property, plant and equipment:  The net book value of property, plant and equipment under IFRS differs from that under US GAAP in certain respects, including the following:

Major repairs and maintenance, including turnarounds, are capitalized under IFRS and expensed under US GAAP unless costs represent a betterment, in which case capitalization under US GAAP is appropriate.

Borrowing costs under IFRS are capitalized to property, plant and equipment based on the weighted average interest rate on all of the company’s outstanding third-party debt; under US GAAP, only the weighted average interest rate on third-party long-term debt is used to determine the capitalized amount.

(d) Impairment of assets:  Upon adopting IFRS, the company elected not to restate past business combinations, which resulted in the carrying amount of goodwill under IFRS being the same amount as it had been under previous Canadian GAAP at the date of transition to IFRS. Because past provisions for asset impairment were based on undiscounted cash flows from use under Canadian GAAP and on fair value under US GAAP, the carrying amount of goodwill is lower under US GAAP.

In respect of oil and gas assets, US GAAP requires that writedowns be based on discounted cash flows, a prescribed discount rate and the unweighted average first-day-of-the-month resource prices for the prior 12 months; IFRS requires discounted cash flows using estimated future resource prices based on the best information available to the company.

Assets, except goodwill, that were previously impaired can be reversed in subsequent periods, under IFRS, if the conditions that led to the original impairment reversed. Reversals of asset impairments are prohibited under US GAAP.

(e) Depreciation and amortization:  Depreciation and amortization under IFRS differ from that under US GAAP, as a result of differences in the carrying amounts of property, plant and equipment under IFRS and US GAAP, as described above.

(f) Exploration costs:  Under IFRS, capitalized exploration costs are classified as exploration and evaluation assets. 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.

(g) Pension and other post-retirement benefits:  Under US GAAP, the company recognizes 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. Amounts in OCI are amortized to net income. Under IFRS, actuarial gains and losses are recognized directly in OCI and cleared out to retained earnings without ever being amortized to net income. Unrecognized prior service costs are not recognized in OCI, but are amortized to net income over the average remaining vesting period.

(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 IFRS, offsetting of margin deposits is not permitted.

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   16


(i) Share-based compensation:  Under IFRS, stock options are recognized over the service period, which for PotashCorp is established by the option performance period. 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.

 

Performance

Option Plan Year

   Service Period Commenced  
   IFRS      US GAAP  

2008

     January 1, 2008         May 8, 2008   

2009

     January 1, 2009         May 7, 2009   

2010

     January 1, 2010         May 6, 2010   

2011

     January 1, 2011         May 12, 2011   

This difference impacts the share-based compensation cost recorded and may impact diluted earnings per share.

Further, under IFRS the company recognized an estimate of compensation cost in relation to performance options for which service commenced but which had not yet been granted. Specifically, an estimate of compensation cost was recognized at the end of the first quarter of 2011 in relation to the 2011 Performance Option Plan, which was approved by shareholders at the company’s annual meeting on May 12, 2011, for which service commenced but for which performance options had not yet been granted. The compensation cost recognized was reconciled in the second quarter once options were granted. Under US GAAP, no compensation cost is recognized until the option plans are approved.

(j) Stripping costs:  Under IFRS, 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) Provisions:  Asset retirement obligations under IFRS are measured and remeasured each reporting period using a current risk-free discount rate. Under US GAAP, the obligation is initially measured using a credit-adjusted risk-free discount rate. Subsequent upward revisions are measured using the current discount rate while downward revisions are valued using the historical discount rate. Under IFRS, obligations incurred through the production of inventory are included in the cost of that inventory. Under US GAAP, obligations incurred through the production of inventory are added to the carrying amount of the related long-lived asset or charged to expense as incurred. Under IFRS, provisions for asset retirement obligations include constructive obligations. Under US GAAP, only legal obligations are recognized.

Under IFRS, a provision is recognized for either a legal or constructive obligation when the applicable criteria are otherwise met. Under US GAAP, constructive obligations are recognized only when required under a specific standard.

(l) Income taxes related to the above adjustments:  The income tax adjustment reflects the impact on income taxes of the US GAAP adjustments described above. Accounting for income taxes under IFRS and US GAAP is similar, except that income tax rates of enacted or substantively enacted tax law must be used to calculate deferred income tax assets and liabilities under IFRS, whereas only income tax rates of enacted tax law can be used under US GAAP.

(m) Income taxes related to US GAAP effective income tax rate:  As it relates to interim periods, under IFRS a separate estimated average annual effective income tax rate is determined for each taxing jurisdiction and applied individually to the interim period pre-tax income of each jurisdiction, whereas under US GAAP a weighted average of the annual rates expected across all jurisdictions is applied.

(n) Income tax consequences of share-based employee compensation:  Under IFRS, the income tax benefit attributable to share-based compensation that is deductible in computing taxable income but is not recorded in the consolidated financial statements as an expense of any period includes the amount realized in the period (the “realized excess benefit”), as well as the amount of future tax deductions that the company expects to receive based on the current market price of the shares (the “unrealized excess benefit”). The unrealized excess benefit is recognized as a deferred income tax asset with the offset recorded in contributed surplus. Under US GAAP, only the realized excess benefit is recorded, in additional paid-in capital.

Under IFRS, the income tax benefit associated with share-based compensation that is recorded in the consolidated financial statements as an expense in the current or previous period is reviewed at each statement of financial position date and amended to the extent that it is no longer probable that the related tax benefit will be realized. Under US GAAP, this income tax benefit is calculated without estimating the income tax effects of anticipated share-based payment transactions.

 

 

17   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


(o) 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). IFRS have no similar requirements related to uncertain income tax positions. The company accounts for uncertain income tax positions under IFRS using the standards applicable to current income tax assets and liabilities, i.e., both liabilities and assets are recorded when probable at the company’s best estimate of the amount.

(p) Income taxes related to intragroup transactions:  Under IFRS, unrealized profits resulting from intragroup transactions are eliminated from the carrying amount of assets, but no equivalent adjustment is made for tax purposes. The difference between the tax rates of the two entities will result in an impact on net income. This differs from US GAAP, where the current tax payable in relation to such profits is recorded as a current asset until the transaction is realized by the group.

(q) Classification of deferred income taxes:  Under IFRS, deferred income taxes are classified as long-term. Under US GAAP, deferred income taxes are separated between current and long-term on the consolidated statements of financial position.

(r) Cash flow statements:  US GAAP requires the disclosure of income taxes paid. IFRS require the disclosure of income tax cash flows, which would include any income taxes recovered during the period. For the three and nine months ended September 30, 2011, income taxes paid under US GAAP were $104 (2010 — $74) and $462 (2010 — $145), respectively. Under IFRS, interest paid is not reduced for the effects of capitalized interest whereas under US GAAP this amount is net of capitalized interest. Interest paid under US GAAP for the three and nine months ended September 30, 2011 was $14 (2010 — $1) and $105 (2010 — $55), respectively.

(s) Diluted weighted average shares outstanding:  Under US GAAP, the year-to-date diluted earnings per share is based on the weighted average of each interim period’s dilutive incremental shares making up the year-to-date period. Under IFRS, diluted shares are determined independently on a year-to-date basis for the period.

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   18


The application of US GAAP, as described above, would have had the following effects on net income, net income per share, total assets and shareholders’ equity.

 

     Three Months Ended
September 30
    

Nine Months Ended

September 30

 
      2011      2010      2011      2010  

Net income as reported — IFRS

   $ 826       $ 343       $ 2,398       $ 1,267   

Items increasing (decreasing) reported net income

           

Inventory valuation(a)

                             1   

Manufacturing cost variances(a)

     18         49         4         34   

Share of earnings of equity-accounted investees(b)

                     (1        

Major repairs and maintenance(c)

     (7      (28      (19      (36

Borrowing costs(c)

     4         3         11         9   

Asset impairment, writedowns and recoveries(d)

             6         (1      (26

Depreciation and amortization(e)

     2         2         7         6   

Exploration costs(f)

     1                         (1

Pension and other post-retirement benefits(g)

     (6      (6      (16      (18

Share-based compensation(i)

     (2      (1                

Stripping costs(j)

     (1      (1      4         (16

Asset retirement obligations(k)

     26         8         37         33   

Constructive obligations(k)

             (1              (1

Deferred income taxes relating to the above adjustments(l)

     (9      (8      (7      2   

Income taxes related to US GAAP effective income tax rate(m)

     5         3         7         5   

Income taxes related to share-based employee compensation(n)

     3                 3           

Uncertain income tax positions(o)

     1         (14      7         (23

Income taxes related to intragroup transactions(p)

     5         8         2         26   

Net income — US GAAP

   $ 866       $ 363       $ 2,436       $ 1,262   

Basic weighted average shares outstanding — US GAAP

     856,022,000         890,913,000         855,024,000         889,475,000   

Diluted weighted average shares outstanding — US GAAP(I,s)

     876,948,000         915,656,000         876,624,000         914,409,000   

Basic net income per share — US GAAP

   $ 1.01       $ 0.41       $ 2.85       $ 1.42   

Diluted net income per share — US GAAP

   $ 0.99       $ 0.40       $ 2.78       $ 1.38   

 

References relate to differences between IFRS and US GAAP described above.

 

  

        
                      September 30,
2011
     December 31,
2010
 

Total assets as reported — IFRS

         $ 15,822       $ 15,547   

Items increasing (decreasing) reported total assets

           

Investment in equity-accounted investees(b)

           42         40   

Property, plant and equipment(d, e)

           (102      (109

Major repairs and maintenance(c)

           (71      (52

Borrowing costs(c)

           36         25   

Goodwill(d)

           (47      (47

Asset impairment, writedowns and recoveries(d)

           (6      (5

Exploration costs(f)

           (14      (14

Margin deposits associated with derivative instruments(h)

           (172      (198

Stripping costs(j)

           (58      (62

Asset retirement obligations(k)

           (117      (46

Uncertain income tax positions(o)

           (69      (122

Income taxes related to intragroup transactions(p)

           12         15   

Deferred income tax asset due to US GAAP adjustments

           (13      (13

Reclassification of deferred income taxes(q)

                       21         28   

Total assets — US GAAP

                     $ 15,264       $ 14,987   

References relate to differences between IFRS and US GAAP described above.

 

19   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


0 0
      September 30,
2011
     December 31,
2010
 

Total shareholders’ equity as reported — IFRS

   $ 7,467       $ 6,685   

Items increasing (decreasing) reported shareholders’ equity

     

Manufacturing cost variances(a)

     4           

Share of earnings of equity-accounted investees(b)

     41         42   

Major repairs and maintenance(c)

     (71      (52

Borrowing costs(c)

     36         25   

Asset impairment, writedowns and recoveries(d)

     (257      (256

Depreciation and amortization(e)

     102         95   

Exploration costs(f)

     (14      (14

Pension and other post-retirement benefits(g)

     14         13   

Stripping costs(j)

     (58      (62

Asset retirement obligations(k)

     116         79   

Constructive obligations(k)

     5         5   

Deferred income taxes relating to the above adjustments(l)

     1         12   

Income taxes related to US GAAP effective income tax rate(m)

     (40      (47

Deferred income taxes on share-based compensation(n)

     (88      (148

Uncertain income tax positions(o)

     40         33   

Income taxes related to intragroup transactions(p)

     8         6   

Shareholders’ equity — US GAAP

   $ 7,306       $ 6,416   

References relate to differences between IFRS and US GAAP described above.

Supplemental US GAAP Disclosures

Disclosures About Derivative Instruments and Hedging Activities

Derivative financial instruments are used by the company to manage its exposure to commodity price, exchange rate and interest rate fluctuations. Further information, including strategies, is provided in Note 12 to the consolidated financial statements in the company’s 2010 Financial Review Annual Report.

Fair Values of Derivative Instruments in the Condensed Consolidated Statements of Financial Position

 

Derivative Instrument Assets (Liabilities)(1)    Statements of Financial Position Location    September 30,
2011
     December 31,
2010
 

Derivatives designated as hedging instruments:

     

Natural gas derivatives

   Prepaid expenses and other current assets    $ 2       $   

Natural gas derivatives

   Other assets      2           

Natural gas derivatives

   Current portion of derivative instrument liabilities      (58      (75

Natural gas derivatives

   Derivative instrument liabilities      (193      (204

Total derivatives designated as hedging instruments

     (247      (279

Derivatives not designated as hedging instruments:

     

Natural gas derivatives

   Current portion of derivative instrument liabilities      (1        

Foreign currency derivatives

   Prepaid expenses and other current assets              5   

Foreign currency derivatives

   Current portion of derivative instrument liabilities      (23        

Total derivatives not designated as hedging instruments

   $ (24    $ 5   

 

(1) 

All fair value amounts are gross and exclude netted cash collateral balances.

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   20


The Effect of Derivative Instruments on the Condensed Consolidated Statements of Income for the Three Months Ended September 30

 

Derivatives in Cash

Flow Hedging

Relationships

  

Amount of Loss
Recognized in
OCI

(Effective
Portion)

    

Location of
Loss Reclassified
from Accumulated
OCI into Income

(Effective Portion)

  

Amount of Loss
Reclassified
from
Accumulated
OCI

into Income
(Effective
Portion)

    

Location of Loss
Recognized in Income
(Ineffective Portion
and Amount
Excluded from

Effectiveness Testing)

  

Amount of Loss
Recognized in
Income
(Ineffective
Portion

and Amount
Excluded from
Effectiveness
Testing)

 
   2011      2010         2011      2010         2011      2010  

Natural gas derivatives

   $ (29    $ (98    Cost of goods sold    $ (17    $ (20    Cost of goods sold    $       $   

 

         

Amount of (Loss) Gain

Recognized in

Income

 
Derivatives Not Designated as Hedging Instruments    Location of (Loss) Gain Recognized in Income    2011      2010  

Natural gas derivatives

   Cost of goods sold    $ (1    $   

Foreign currency derivatives

   Other expenses    $ (23    $ 10   

 

 

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Income for the Nine Months Ended September 30

 

Derivatives in Cash

Flow Hedging

Relationships

  

Amount of Loss
Recognized in
OCI

(Effective
Portion)

    

Location of

Loss Reclassified
from Accumulated
OCI into Income

(Effective Portion)

  

Amount of Loss
Reclassified
from
Accumulated
OCI

into Income
(Effective
Portion)

    

Location of Loss
Recognized in Income
(Ineffective Portion
and Amount
Excluded from

Effectiveness Testing)

  

Amount of Loss
Recognized in
Income
(Ineffective
Portion

and Amount
Excluded from
Effectiveness
Testing)

 
   2011      2010         2011      2010         2011      2010  

Natural gas derivatives

   $ (29    $ (201    Cost of goods sold    $ (61    $ (58    Cost of goods sold    $       $   

 

         

Amount of (Loss) Gain

Recognized in

Income

 
Derivatives Not Designated as Hedging Instruments    Location of (Loss) Gain Recognized in Income    2011      2010  

Natural gas derivatives

   Cost of goods sold    $ (1    $   

Foreign currency derivatives

   Other expenses    $ (12    $ 1   

 

21   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Financial Instruments and Related Risk Management

Financial Risks

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 25 to the consolidated financial statements in the company’s 2010 Financial Review Annual Report.

Credit Risk

The company is exposed to credit risk on its cash and cash equivalents, receivables and derivative instrument assets. The maximum exposure to credit risk is represented by the carrying amount of the financial assets.

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 amounts past due or impaired relating to amounts owing to the company from Canpotex.

Liquidity Risk

Liquidity risk arises from the company’s general funding needs and in the management of its assets, liabilities and optimal capital structure. It 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.

Certain derivative instruments of the company contain provisions that require its debt to maintain specified credit ratings from two 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 were in a liability position on September 30, 2011 was $252, for which the company has posted collateral of $172 in the normal course of business. If the credit risk-related contingent features underlying these agreements had been triggered on September 30, 2011, the company would have been required to post an additional $77 of collateral to its counterparties.

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 and price risk (related to natural gas used in operations).

Foreign Exchange Risk

At September 30, 2011, the company had entered into foreign currency forward contracts to sell US dollars and receive Canadian dollars in the notional amount of $530 (December 31, 2010 — $170) at an average exchange rate of 1.0041 (December 31, 2010 — 1.0170) per US dollar with maturities in 2011. At September 30, 2011, the company had foreign currency swaps to sell US dollars and receive Canadian dollars in the notional amount of $NIL (December 31, 2010 — $69) at an average exchange rate of NIL (December 31, 2010 — 1.0174) per US dollar.

Price Risk

At September 30, 2011, the company had natural gas derivatives qualifying for hedge accounting in the form of swaps for which it has price risk exposure; derivatives represented a notional amount of 51 million MMBtu with maturities in 2011 through 2019. At December 31, 2010, the notional amount of swaps was 103 million MMBtu with maturities in 2011 through 2019.

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   22


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, 2011     December 31, 2010  
     Carrying Amount
of Asset (Liability)
    Fair Value
of Asset (Liability)
    Carrying Amount
of Asset (Liability)
    Fair Value
of Asset (Liability)
 

Derivative instrument assets

       

Natural gas derivatives

  $ 4      $ 4      $      $   

Foreign currency derivatives

                  5        5   

Investments in ICL and Sinofert

    2,491        2,491        3,842        3,842   

Derivative instrument liabilities

       

Natural gas derivatives

    (252     (252     (279     (279

Foreign currency derivatives

    (23     (23              

Long-term debt

       

Senior notes

    (3,750     (4,194     (4,350     (4,525

Other

    (7     (7     (8     (8

Due to their short-term nature, the fair value of cash and cash equivalents, receivables, short-term debt, and payables and accrued charges is assumed to approximate carrying value. The fair value of the company’s senior notes at September 30, 2011 reflected the yield valuation based on observed market prices. Yield on senior notes ranged from 1.04 percent to 4.61 percent (December 31, 2010 — 1.08 percent to 5.66 percent). The fair value of the company’s other long-term debt instruments approximated carrying value.

Interest rates used to discount estimated cash flows related to derivative instruments that were not traded in an active market at September 30, 2011 were between 0.48 percent and 5.73 percent (December 31, 2010 — between 0.47 percent and 4.31 percent) depending on the settlement date.

The following table presents the company’s fair value hierarchy for those financial assets and financial liabilities carried at fair value at September 30, 2011.

 

          Fair Value Measurements at Reporting Date Using:  
Description   Carrying Amount
of Asset (Liability)
    Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   

Significant Other
Observable
Inputs

(Level 2)

   

Significant
Unobservable
Inputs

(Level 3)

 

September 30, 2011

       

Derivative instrument assets

       

Natural gas derivatives

  $ 4      $      $      $ 4 (2) 

Investments in ICL and Sinofert

    2,491        2,491 (1)               

Derivative instrument liabilities

       

Natural gas derivatives

    (252            (34 )(2)      (218 )(2) 

Foreign currency derivatives

    (23            (23 )(1)        
       

December 31, 2010

       

Derivative instrument assets

       

Foreign currency derivatives

  $ 5      $      $ 5      $   

Investments in ICL and Sinofert

    3,842        3,842                 

Derivative instrument liabilities

       

Natural gas derivatives

    (279            (55     (224

 

(1) 

During the period ending September 30, 2011, there were no transfers between Level 1 and Level 2.

 

(2) 

During the period ending September 30, 2011, there were no transfers into Level 3 and $4 was transferred out of Level 3 into Level 2 as (due to the passage of time) the terms of certain natural gas derivatives now mature within 36 months. Company policy is to recognize transfers at the end of the reporting period.

 

23   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

 

     Natural Gas Hedging Derivatives  
      Nine Months
Ended
September 30,
2011
     Twelve Months
Ended
December 31,
2010
 

Balance, beginning of period

   $ (224    $ (119

Total losses (realized and unrealized) before income taxes

     

Included in earnings (cost of goods sold)

     (20      (36

Included in other comprehensive income

     (1      (126

Settlements

     27         46   

Transfers out of Level 3

     4         11   

Balance, end of period

   $ (214    $ (224

Pension and Other Post-Retirement Expenses

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
Defined Benefit Pension Plans    2011      2010      2011      2010  

Service cost

   $ 6       $ 5       $ 18       $ 15   

Interest cost

     13         12         37         35   

Expected return on plan assets

     (14      (12      (40      (35

Net amortization

     6         6         18         19   

Net expense

   $ 11       $ 11       $ 33       $ 34   

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
Other Post-Retirement Plans    2011      2010      2011      2010  

Service cost

   $ 2       $ 1       $ 6       $ 5   

Interest cost

     4         4         12         12   

Net amortization

     (1              (2      (1

Net expense

   $ 5       $ 5       $ 16       $ 16   

For the three months ended September 30, 2011, the company contributed $151 to its defined benefit pension plans, $9 to its defined contribution pension plans and $1 to its other post-retirement plans. Contributions for the nine months ended September 30, 2011 were $156 to its defined benefit pension plans, $25 to its defined contribution pension plans and $6 to its other post-retirement plans. Approximately $193 is expected to be contributed by the company to all pension and post-retirement plans during 2011.

Uncertainty in Income Taxes

During the three and nine months ended September 30, 2011, unrecognized income tax adjustments decreased $34 and $69, respectively. The company currently expects that a reduction in the range of $9 to $11 of unrecognized income tax adjustments may occur within 12 months as a result of projected resolutions of worldwide income tax disputes.

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   24


Guarantees

In the normal course of operations, the company provides indemnifications, which 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 which meet the definition of a guarantee. Various debt obligations (such as overdrafts, lines of credit with counterparties for derivatives and back-to-back loan arrangements) and other commitments (such as railcar leases) related to certain subsidiaries 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, 2011, the maximum potential amount of future (undiscounted) payments under significant guarantees provided to third parties approximated $561. It is unlikely that these guarantees will be drawn upon, and since the maximum potential amount of future payments does not consider the possibility of recovery under recourse or collateral provisions, this amount is not indicative of future cash requirements or the company’s expected losses from these arrangements. At September 30, 2011, 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 $6.

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. In addition, it has guaranteed the performance of certain remediation obligations of PCS Joint Venture and PCS Nitrogen at the Lakeland, Florida and Augusta, Georgia sites, respectively. 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 the company’s 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, along with financial assurances for these plans, approved by the responsible provincial minister. The Minister of the Environment for Saskatchewan (“MOE”) has approved the plans previously submitted by the company. The company had previously provided a CDN $2 irrevocable letter of credit and a payment of CDN $3 into the agreed-upon trust fund. Under the regulations, the decommissioning and reclamation plans and financial assurances are to be reviewed at least once every five years, or as required by the MOE. The next scheduled review for the decommissioning and reclamation plans and financial assurances was to be completed by June 30, 2011. The company submitted its decommissioning and reclamation plans and its financial assurances proposal in May 2011 and is awaiting a response. The MOE has advised that it considers the company in compliance with the regulations until the review is finalized and a response is provided. The MOE had previously indicated that it would be seeking an increase of the amount paid into the trust fund by the company for this submission. 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, 2011. 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 or constructive 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, 2011, $50 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.

 

25   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Recent Accounting Pronouncements

Fair Value Measurements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued amendments to its fair value measurement standard to substantially converge the guidance in US GAAP and IFRS on fair value measurements and disclosures. The amendments will be effective for interim and annual periods beginning after December 15, 2011. The company is currently reviewing the impact, if any, on its consolidated financial statements.

Comprehensive Income

In June 2011, the FASB amended the standard for Comprehensive Income whereby total comprehensive income, the components of net income and the components of other comprehensive income can either be presented in a single continuous statement or in two separate but consecutive statements. Regardless of which option is chosen, items that are reclassified from other comprehensive income to net income should be presented on the face of the financial statements. The amendments will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The company is currently reviewing the impact, if any, on its consolidated financial statements.

Goodwill Impairment

In September 2011, the FASB amended the guidance on testing for goodwill impairment whereby entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of a reporting unit in step 1 of the goodwill impairment test. If entities determine, on the basis of qualitative factors, that the fair value of a reporting unit is more likely than not less than the carrying amount, the two-step impairment test would be required. Otherwise, further testing would not be required. The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The company is currently reviewing the impact, if any, on its consolidated financial statements.

 

15. Transition to IFRS

The company adopted IFRS on January 1, 2011 with effect from January 1, 2010. Its financial statements for the year ending December 31, 2011 will be the first annual consolidated financial statements that comply with IFRS. These unaudited interim condensed consolidated financial statements were prepared as described in Note 1, including the application of IFRS 1. Accordingly, the company will make an unreserved statement of compliance with IFRS beginning with its 2011 annual consolidated financial statements.

Changes in Accounting Policies

The key areas where the company has identified that accounting policies will differ or where accounting policy decisions are necessary that may impact its consolidated financial statements and the impact of transition policy choices made under IFRS 1 are described in Note 13 to the financial statements in Part I Item 1 of the company’s 2011 First Quarter Quarterly Report on Form 10-Q. The following table outlines some of these key areas related to the reconciliations from Canadian GAAP to IFRS. Since accounting policies and standards may change in the period between these unaudited interim condensed consolidated financial statements and the company’s first annual consolidated financial statements that comply with IFRS, the table below reflects the differences between IFRS and previous Canadian GAAP that are expected to apply. See Note 13 to financial statements in Part I Item 1 of the company’s 2011 First Quarter Quarterly Report on Form 10-Q for further details.

 

Accounting
Policy Area
  Differences from Previous Canadian GAAP

(a)   Employee Benefits

 

Actuarial gains and losses will be recognized directly in other comprehensive income rather than through profit or loss.

 

IAS 19 requires the past service cost element of defined benefit plans to be expensed on an accelerated basis, with vested past service costs expensed immediately and unvested past service costs recognized on a straight-line basis until the benefits become vested. Under Canadian GAAP, past service costs were generally amortized on a straight-line basis over the average remaining service period of active employees expected under the plan.

 

Under Canadian GAAP, certain gains and losses which were unrecognized at the time of adopting the current Canadian accounting standard were permitted to be amortized over a period under transitional provisions of the current standards. Those amounts must be recognized on transition to IFRS.

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   26


Accounting
Policy Area
  Differences from Previous Canadian GAAP

(b)  Provisions (including Asset Retirement Obligations)

 

IAS 37, “Provisions, Contingent Liabilities and Contingent Assets”, requires a provision to be recognized when: there is a present obligation (legal or constructive) as a result of a past transaction or event; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the obligation. “Probable” in this context means more likely than not. Under Canadian GAAP, constructive obligations were recognized only if required by a specific standard, and the criterion for recognition in the financial statements was “likely”, which is a higher threshold than “probable”. Therefore, it is possible that there may be some contingent liabilities not recognized under Canadian GAAP which would require a provision under IFRS.

 

Other differences between IFRS and Canadian GAAP exist in relation to the measurement of provisions, such as the methodology for determining the best estimate where there is a range of equally possible outcomes (IFRS uses the mid-point of the range whereas Canadian GAAP used the low end), and the requirement under IFRS for provisions to be discounted where material.

 

In relation to asset retirement obligations, measurement under IFRS will be based on management’s best estimate, while measurement under Canadian GAAP was based on the fair value of the obligation (which takes market assumptions into account). Under IFRS, the full asset retirement obligation will be remeasured each period using the current discount rate. Under Canadian GAAP, cash flow estimates associated with asset retirement obligations were discounted using historical discount rates. Changes in the discount rate alone did not result in a remeasurement of the liability. Changes in estimates that decreased the liability were discounted using the discount rate applied upon initial recognition of the liability. When changes in estimates increased the liability, the additional liability was discounted using the current discount rate.

 

IFRS require the company’s asset retirement obligations to be discounted using a risk-free rate. Under Canadian GAAP, asset retirement obligations were discounted using a credit-adjusted risk-free rate.

 

Under IFRS, the increase in the measurement of an asset retirement obligation due to the passage of time (unwinding of the discount) will be classified as a finance expense. Under Canadian GAAP, this amount was classified as an operating expense.

(c)   Property, Plant and Equipment

 

Under IFRS, where part of an item of property, plant and equipment has a cost that is significant in relation to the cost of the item as a whole, it must be depreciated separately from the remainder of the item. Canadian GAAP was similar in this respect; however, the componentization concept was not often applied to the same extent due to practicality and/or materiality.

 

Under IFRS, the cost of major overhauls on items of property, plant and equipment will be capitalized as a component of the related item of property, plant and equipment and amortized over the period until the next major overhaul. Under Canadian GAAP, these costs were expensed in the year incurred.

(d)  Investments

 

Under IFRS, jointly controlled entities will be accounted for using the equity method. Under Canadian GAAP, joint ventures were accounted for using proportionate consolidation.

 

Certain of the company’s equity-accounted investees adopted IFRS earlier than PotashCorp, resulting in certain IFRS 1 elections being made, particularly related to use of fair value as deemed cost on certain items of property, plant and equipment and related to the use of the business combinations exemption. As a result, the company will recognize its share of such elections as an adjustment to its opening retained earnings and its investments in equity-accounted investees.

(e)   Inventories

  Under IFRS, at interim periods, price, efficiency, spending and volume variances of a manufacturing entity will be recognized in income to the same extent that those variances will be recognized in income at financial year-end. Under IFRS, deferral of variances that are expected to be absorbed by year-end is not appropriate because it could result in reporting inventory at the interim date at more or less than its portion of the actual cost of manufacture. Under Canadian GAAP, variances that were planned and expected to be absorbed by the end of the year were ordinarily deferred at the end of an interim period. Net income and equity for annual periods will not be affected.

(f)   Borrowing Costs

  Under IFRS, borrowing costs will be capitalized to assets which take a substantial time to develop or construct using a capitalization rate based on the weighted average interest rate on all of the company’s outstanding third-party debt. Under the company’s Canadian GAAP policy, the interest capitalization rate was based only on the weighted average interest rate on third-party long-term debt.

 

27   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Accounting
Policy Area
  Differences from Previous Canadian GAAP

(g)  Share-Based Payments

 

IFRS 2, “Share-Based Payments”, requires that cash-settled share-based payments to employees be measured (both initially and at each reporting date) based on fair value of the awards. Canadian GAAP required that such payments be measured based on the intrinsic value of the awards. This difference is expected to impact the accounting measurement of some of the company’s cash-settled employee incentive plans, such as its performance unit incentive plan.

 

IFRS 2 requires an estimate of compensation cost to be recognized in relation to performance options for which service has commenced but which have not yet been granted. The compensation cost recognized would then be trued up once options have been granted. Under Canadian GAAP, compensation cost was first recognized when the options were granted. This will create a timing difference between IFRS and Canadian GAAP in terms of when compensation cost relating to employee service provided in the first quarter of the year is recognized. In relation to stock option costs in 2010, net income will decrease in the first quarter and increase in the second quarter by $13. Net income and equity for annual periods will not be affected.

(h)  Impairment of Assets

 

IAS 36, “Impairment of Assets”, uses a one-step approach for both testing for and measurement of impairment, with asset carrying values compared directly with the higher of fair value less costs to sell and value in use (which uses discounted future cash flows). Canadian GAAP generally used a two-step approach to impairment testing, first comparing asset carrying values with undiscounted future cash flows to determine whether impairment exists, and then measuring any impairment by comparing asset carrying values with fair values. This difference may potentially result in more impairments where carrying values of assets were previously supported under Canadian GAAP on an undiscounted cash flow basis, but could not be supported on a discounted cash flow basis.

 

In addition, IAS 36 requires the reversal of any previous impairment losses (to the amounts the assets would now be carried at had depreciation continued) where circumstances have changed such that the impairments have been reduced. Canadian GAAP prohibited reversal of impairment losses.

(i)    Income Taxes

 

Under IFRS, the guidance in IAS 12, “Income Taxes”, will be used to determine the benefit to be received in relation to uncertain tax positions. This differs from the methodology used under Canadian GAAP.

 

Under IFRS, deferred tax assets recognized in relation to share-based payment arrangements (for example, the company’s employee stock option plan in the US) will be adjusted each period to reflect the amount of future tax deductions that the company expects to receive in excess of stock-based compensation recorded in the consolidated financial statements based on the current market price of the shares. The benefit of such amounts will be recognized in contributed surplus and never impacts net income. Under the company’s Canadian GAAP policy, tax deductions for its employee stock option plan in the US were recognized as reductions to tax expense, within net income, in the period that the deduction was allowed.

 

Under IFRS, deferred tax assets associated with share-based compensation recorded in the consolidated financial statements as an expense in the current or previous period should be reviewed at each statement of financial position date and amended to the extent that it is no longer probable that the related tax benefit will be realized. Under Canadian GAAP, this income tax benefit was calculated without estimating the income tax effects of anticipated share-based payment transactions.

 

Under IFRS, adjustments relating to a change in tax rates will be recognized in the same category of comprehensive income in which the original amounts were recognized. Under Canadian GAAP, such adjustments were recognized in net income, regardless of the category in which the original amounts were recognized. In addition, adjustments to foreign exchange gains on deferred income tax liabilities originally recognized in other comprehensive income will be recorded in other comprehensive income under IFRS, but were recorded in net income under Canadian GAAP.

 

Under IFRS, deferred income taxes will be classified as long-term. Under Canadian GAAP, future income taxes were separated between current and long-term on the statement of financial position.

 

Under IFRS, unrealized profits resulting from intragroup transactions will be eliminated from the carrying amount of assets, but no equivalent adjustment will be made for tax purposes. The difference between the tax rates of the two entities will impact net income. This differs from Canadian GAAP, where the current tax payable in relation to such profits was recorded as a current asset until the transaction was realized by the group.

 

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   28


Reconciliations from Canadian GAAP to IFRS

Reconciliation of Net Income

 

     

Three Months
Ended

September 30,
2010

    

Nine Months
Ended

September 30,
2010

 

Net Income — Canadian GAAP

   $ 403       $ 1,324   

IFRS adjustments to net income:

     

Policy choices

     

Employee benefits — Actuarial gains and losses(a)

     7         20   

Other

     

Provisions — Changes in asset retirement obligations(b)

     (8      (33

Property, plant and equipment(c)

     28         36   

Manufacturing cost variances at interim periods(e)

     (48      (33

Borrowing costs(f)

     (3      (9

Employee benefits — Past service costs(a)

     (1      (2

Share-based payments(g)

     3         2   

Constructive obligations(b)

     1         1   

Impairment of assets(h)

     (6      (7

Income taxes — Tax effect of above differences

     7         8   

Income tax-related differences(i)

     (40      (40

Net Income — IFRS

   $ 343       $ 1,267   

References relate to items described in the Changes in Accounting Policies table above.

Reconciliation of Shareholders’ Equity

 

      September 30,
2010
 

Shareholders’ Equity — Canadian GAAP

   $ 7,851   

IFRS adjustments to shareholders’ equity:

  

Policy choices

  

Employee benefits — Actuarial gains and losses(a)

     (345

Other

  

Provisions — Changes in asset retirement obligations(b)

     (99

Property, plant and equipment(c)

     54   

Investments(d)

     (45

Manufacturing cost variances at interim periods(e)

     (33

Borrowing costs(f)

     (23

Employee benefits — Past service costs and Canadian GAAP transition amounts(a)

     11   

Share-based payments(g)

     5   

Constructive obligations(b)

     (2

Impairment of assets(h)

     1   

Income taxes — Tax effect of above differences

     160   

Income tax-related differences(i)

     180   

Shareholders’ Equity — IFRS

   $ 7,715   

References relate to items described in the Changes in Accounting Policies table above.

 

29   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Reconciliation of Comprehensive Income

 

     

Three Months
Ended

September 30,
2010

     Nine Months
Ended
September 30,
2010
 

Comprehensive Income — Canadian GAAP

   $ 1,283       $ 1,438   

IFRS adjustments to comprehensive income:

     

Differences in net income

     (60      (57

Comprehensive Income — IFRS

   $ 1,223       $ 1,381   

References relate to items described in the Changes in Accounting Policies table above.

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   30


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis are the responsibility of management and are as of November 4, 2011. 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 this disclosure, pursuant to the authority delegated to it by the Board of Directors. 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. The company is a foreign private issuer under the rules and regulations of the US Securities and Exchange Commission (the “SEC”); however, the company currently files voluntarily on the SEC’s domestic forms.

Adoption of International Financial Reporting Standards (“IFRS”)

The unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q (“financial statements in this 10-Q”) reflect the adoption of IFRS, with effect from January 1, 2010. Periods prior to January 1, 2010 have not been restated and were in accordance with Canadian GAAP which, as discussed in Item 1 of this Quarterly Report on Form 10-Q, was applied during the periods prior to the effective date of the company’s adoption of IFRS. As a foreign private issuer under the rules and regulations of the SEC, the company is permitted to use IFRS.

Our unaudited interim condensed consolidated financial statements included in Part I Item 1 of our 2011 First Quarter Quarterly Report on Form 10-Q contain a detailed description of our conversion to IFRS, including a reconciliation of key components of our financial statements previously prepared under Canadian GAAP to those under IFRS as at January 1 and December 31, 2010, and for the year ended December 31, 2010. Note 15 to the financial statements in this 10-Q contains a reconciliation of key components of our financial statements previously prepared under Canadian GAAP to those under IFRS as at and for the three months and nine months ended September 30, 2010.

Although the adoption of IFRS resulted in adjustments to our financial statements, it did not materially impact the underlying cash flows or profitability trends of our operating performance, debt covenants or compensation arrangements.

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 that buy under contract and on the spot market; spot market 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 directly to a specified location.

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. 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 — on our world-class potash assets to meet the rising global demand for this vital nutrient. By investing in potash capacity while producing to meet market demand, we seek to 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 enhance 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 to our success that our customers recognize our ability to create value for them based on the price they pay for our products.

As we plan for our future, we carefully weigh our choices for use of our cash flow. We base investment decisions on cash flow return materially exceeding cost of capital, evaluating the best prospects for return on investment that match our Potash First strategy. Most of

 

 

31   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


our recent capital expenditures have gone to investments in our own potash capacity; however, we also look to increase our existing offshore potash investments and seek other merger and acquisition opportunities related to this nutrient. In addition, we consider share repurchases 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 2011 targets are set out on pages 41 and 42 of our 2010 Financial Review Annual Report. A summary of our progress against selected goals and representative annual targets is set out below.

 

Goal  

Representative

2011 Annual Target

 

Performance

to September 30, 2011

Achieve no harm to people.   Reduce total site severity injury rate by 35 percent from 2008 levels by the end of 2012.   Total site severity injury rate was 42 percent below the 2008 annual level for the first nine months of 2011. It was 61 percent below the 2008 annual level for the first nine months of 2010 and 62 percent below the 2008 annual level by the end of 2010.
Achieve no damage to the environment.   Reduce total reportable releases, permit excursions and spills by 10 percent from 2010 levels.   Annualized total reportable releases, permit excursions and spills were down 33 percent during the first nine months of 2011 compared to 2010 annual levels. Compared to the first nine months of 2010, total reportable releases, permit excursions and spills during the same period of 2011 were down 23 percent.
Create superior long-term shareholder value.   Exceed total shareholder return performance for our sector and the DAXglobal Agribusiness Index for 2011.   PotashCorp’s total shareholder return was -16 percent in the first nine months of 2011 compared to our sector’s weighted average return (based on market capitalization) of -25 percent and the DAXglobal Agribusiness Index weighted average return (based on market capitalization) of -19 percent.

Financial Overview

This discussion and analysis are based on the company’s unaudited interim condensed consolidated financial statements reported under IFRS, unless otherwise stated. These principles differ in certain significant respects from accounting principles generally accepted in the United States. These differences are described and quantified in Note 14 to the financial statements in this 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 2010 Financial Review Annual Report and our 2011 First Quarter Quarterly Report on Form 10-Q.

Earnings Guidance — Third Quarter 2011

 

     Company Guidance     Actual Results  

Earnings per share

  $ 0.80 – $1.00      $ 0.94   

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   32


Overview of Actual Results

 

    Three Months Ended September 30      Nine Months Ended September 30  
Dollars (millions) —
except per-share amounts
  2011      2010      Change      % Change      2011      2010      Change      % Change  

Sales

  $ 2,321       $ 1,575       $ 746         47       $ 6,850       $ 4,726       $ 2,124         45   

Gross Margin

    1,132         550         582         106         3,396         1,864         1,532         82   

Operating Income

    1,142         517         625         121         3,342         1,862         1,480         79   

Net Income

    826         343         483         141         2,398         1,267         1,131         89   

Net Income per Share — Diluted

    0.94         0.38         0.56         147         2.73         1.39         1.34         96   

Other Comprehensive (Loss) Income

    (1,121      880         (2,001      n/m         (1,461      114         (1,575      n/m   

n/m = not meaningful

Earnings in the third quarter and first nine months of 2011 exceeded those in the same periods of 2010 due to higher sales prices for all nutrients and increased demand for potash, phosphate fertilizer and ammonia. Attractive economics for goods that use our products continued to increase our customers’ consumption of our products. Strong demand coupled with our low inventories put upward pressure on pricing for most products. Third-quarter potash gross margin represented 62 percent of total third-quarter gross margin (62 percent in 2010) and 66 percent of first nine months gross margin (69 percent in 2010). Sales prices for all phosphate and nitrogen products increased significantly during the third quarter and first nine months of 2011 compared to the same periods in 2010.

Despite macroeconomic concerns, the push to capitalize on strong crop economics continued to support demand for fertilizer products around the globe. Offshore potash demand remained robust during the third quarter and on pace to achieve record levels in 2011. Ongoing strength in key offshore spot markets offset limited shipments to India — a major buyer that was largely absent from the market since the first quarter until new contracts were signed in August. Domestic dealers moved late in the quarter to restock inventories to meet an anticipated strong fall application season. This supported healthy third-quarter domestic shipments from North American producers and raised the total for the first nine months to near-record levels. Even as North American producers achieved record third-quarter production, strong demand pulled physical inventories to their lowest levels for the year. Potash prices continued to rise during the quarter, reflecting tight supply/demand fundamentals.

In phosphate, robust agricultural demand supported healthy third-quarter domestic solid fertilizer shipments from US producers. While demand remained strong in offshore markets around the globe, movements from US producers slowed compared to third-quarter 2010, primarily due to timing of shipments under new six-month DAP contracts reached in the quarter with Indian customers. Rising sulfur and ammonia input costs, coupled with tight North American producer inventories, pushed up prices for most phosphate products. In nitrogen, the prospect of record US corn acreage in the upcoming planting season along with healthy industrial requirements drove record third-quarter US ammonia demand and helped raise US urea demand well above the same period last year. Numerous global ammonia supply outages — due to scheduled maintenance and to unexpected interruptions — along with robust demand moved prices higher for all nitrogen products.

Other significant factors that affected earnings in the third quarter and first nine months of 2011 compared to the same periods in 2010 were: (1) higher income taxes due to increased earnings before taxes; (2) increased provincial mining and other taxes as a result of improving potash sales revenue and profits; (3) elevated finance costs due to additional borrowings (year over year only) and lower capitalized interest; (4) more earnings from equity-accounted investees; and (5) lower selling and administrative expenses quarter over quarter due primarily to deferred share units (our share price fell in 2011 but rose in 2010). Other comprehensive loss for the third quarter and first nine months of 2011 was due to a decline in the fair value of our investments in Israel Chemicals Ltd (“ICL”) and Sinofert Holdings Limited (“Sinofert”) and net actuarial losses on our defined benefit plans as a result of a remeasurement during the third quarter of 2011. In 2010, other comprehensive income for the third quarter and first nine months was the result of increases in the fair values of our investments in both ICL and Sinofert and partly offset by the fair value of hedge-accounted natural gas derivatives, which declined due to falling natural gas prices.

 

33   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


Balance Sheet

LOGO

Property, plant and equipment increased primarily (81 percent) due to our previously announced potash capacity expansions and other potash projects. Available-for-sale investments declined due to the lower fair value of our investments in Sinofert (discussed further in Note 3 to the financial statements in this 10-Q) and ICL. Receivables were mainly impacted by higher trade receivables (consistent with higher sales) and partially offset by declines in hedge margin deposits on our natural gas derivatives. As at September 30, 2011, $327 million of our cash and cash equivalents were held in certain foreign subsidiaries. There are no current plans to repatriate these funds in a taxable manner.

Short-term debt and current portion of long-term debt decreased in the first nine months of 2011 as a result of repaying 10-year senior notes in the second quarter and commercial paper repayments exceeding issuances. Deferred income tax liabilities increased primarily due to tax depreciation exceeding accounting depreciation, reduced deferred tax assets on unexercised stock options and a partial offset from the tax impact on the remeasurement of our defined benefit plans (see Note 5 to the financial statements in this 10-Q). Asset retirement obligations and accrued environmental costs were impacted by the use of a lower risk-free interest rate.

Significant changes in equity were primarily the result of net income being offset, in part, by other comprehensive losses for the first nine months of 2011, as discussed in more detail above.

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   34


Operating Segment Review

Note 7 to the financial statements in this 10-Q provides information pertaining to our operating segments. Management includes net sales in segment disclosures in the unaudited interim condensed consolidated financial statements pursuant to IFRS, 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.

Potash

 

    Three Months Ended September 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2011     2010     % Change     2011     2010     % Change     2011     2010     % Change  

Sales

  $ 1,035      $    637        62               

Freight, transportation and distribution

    (59     (55     7                                                   

Net sales

  $ 976      $ 582        68                                                   

Manufactured product

                 

Net sales

                 

North America

  $ 410      $ 251        63        769        710        8      $ 533      $ 354        51   

Offshore

    563        328        72        1,387        1,187        17      $ 406      $ 277        47   
    973        579        68        2,156        1,897        14      $ 451      $ 306        47   

Cost of goods sold

    (274     (240     14                              $ (127   $ (127       

Gross margin

    699        339        106                              $ 324      $ 179        81   

Other miscellaneous and purchased product

                 

Net sales

    3        3                      

Cost of goods sold

    (2     (3     (33                                                

Gross margin

    1               n/m                                                   

Gross Margin

  $ 700      $ 339        106                              $ 325      $ 179        82   

 

 

(1)

Rounding differences may occur due to the use of whole dollars in per-tonne calculations.

n/m = not meaningful

 

35   PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q


    Nine Months Ended September 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2011     2010     % Change     2011     2010     % Change     2011     2010     % Change  

Sales

  $ 3,265      $ 2,170        50               

Freight, transportation and distribution

    (212     (202     5                                                   

Net sales

  $ 3,053      $ 1,968        55                                                   

Manufactured product

                 

Net sales

                 

North America

  $ 1,285      $ 914        41        2,692        2,551        6      $ 477      $ 358        33   

Offshore

    1,758        1,045        68        4,773        3,714        29      $ 368      $ 281        31   
    3,043        1,959        55        7,465        6,265        19      $ 408      $ 313        30   

Cost of goods sold

    (810     (685     18                              $ (109   $ (110     (1

Gross margin

    2,233        1,274        75                              $ 299      $ 203        47   

Other miscellaneous and purchased product

                 

Net sales

    10        9        11               

Cost of goods sold

    (7     (3     133                                                   

Gross margin

    3        6        (50                                                

Gross Margin

  $ 2,236      $ 1,280        75                              $ 300      $ 204        47   

 

 

 

(1)

Rounding differences may occur due to the use of whole dollars in per-tonne calculations

 

Potash gross margin variance attributable to:

 

1 1 1 1 1 1 1 1
   

Three Months Ended September 30

2011 vs. 2010

   

Nine Months Ended September 30

2011 vs. 2010

 
          Change in
Prices/Costs
                Change in
Prices/Costs
       
Dollars (millions)   Change in
Sales Volumes
    Net
Sales
    Cost of
Goods Sold
    Total     Change in
Sales Volumes
    Net
Sales
    Cost of
Goods Sold
    Total  

Manufactured product

                 

North America

    $17        $137        $   2        $156        $  41        $320        $ 13        $374   

Offshore

    41        180        (18     203        227        415        (57     585   

Change in market mix

    3        (2            1        30        (27     (3       

Total manufactured product

    $61        $315        $(16     $360        $298        $708        $(47     $959   

Other miscellaneous and purchased product

                            1                                (3

Total

                            $361                                $956   

 

PotashCorp 2011 Third Quarter Quarterly Report on Form 10-Q   36


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Canpotex Limited (“Canpotex”) sales to major markets, by percentage of sales volumes, were as follows:

 

    Three Months Ended September 30     Nine Months Ended September 30  
     2011     2010     Change     % Change     2011     2010     Change     % Change  

Asia (excluding China and India)

    40        28        12        43        45        42        3        7   

Latin America

    26        38        (12     (32     28        25        3        12   

China

    20        10        10