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EX-31.A - EXHIBIT 31(A) - POTASH CORP OF SASKATCHEWAN INCd922328dex31a.htm
EX-31.B - EXHIBIT 31(B) - POTASH CORP OF SASKATCHEWAN INCd922328dex31b.htm
EX-32 - EXHIBIT 32 - POTASH CORP OF SASKATCHEWAN INCd922328dex32.htm
EX-95 - EXHIBIT 95 - POTASH CORP OF SASKATCHEWAN INCd922328dex95.htm
10-Q - FORM 10-Q COURTESY PDF - POTASH CORP OF SASKATCHEWAN INCd922328d10q1.pdf

 

 

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 June 30, 2015

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

(Address of principal executive offices)

  

S7K 7G3

(Zip Code)

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  ¨

  

Smaller reporting company  ¨

    (Do not check if a smaller reporting company)   

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

  Yes  ¨    No  þ

As at June 30, 2015, Potash Corporation of Saskatchewan Inc. had 834,648,800 Common Shares outstanding.

 

 

 


Part I. Financial Information

 

 

Item 1. Financial Statements

Condensed Consolidated Statements of Income

 

Unaudited

In millions of US dollars except as otherwise noted

 

     Three Months Ended June 30      Six Months Ended June 30  
      2015      2014      2015      2014  

Sales (Note 2)

   $            1,731       $            1,892      $             3,396       $              3,572   

Freight, transportation and distribution

     (124      (158      (252      (324

Cost of goods sold

     (896      (987      (1,766      (1,936

Gross Margin

     711         747         1,378         1,312   
   

Selling and administrative expenses

     (60      (55      (120      (123

Provincial mining and other taxes

     (90      (69      (185      (123

Share of earnings of equity-accounted investees

     35         32         71         65   

Dividend income

     31         24         31         93   

Impairment of available-for-sale investment

                             (38

Other (expenses) income

     (8      7         3         31   

Operating Income

     619         686         1,178         1,217   
   

Finance costs

     (50      (48      (99      (95

Income Before Income Taxes

     569         638         1,079         1,122   
   

Income taxes (Note 3)

     (152      (166      (292      (310

Net Income

   $ 417       $ 472       $ 787       $ 812   

Net Income per Share

               

Basic

   $ 0.50       $ 0.56       $ 0.94       $ 0.96   

Diluted

   $ 0.50       $ 0.56       $ 0.94       $ 0.95   

Weighted Average Shares Outstanding

               

Basic

     834,441,000         840,342,000         832,924,000         846,596,000   

Diluted

     837,746,000         847,014,000         837,399,000         853,320,000   

(See Notes to the Condensed Consolidated Financial Statements)

 

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   LOGO    LOGO

 

1   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


Condensed Consolidated Statements of Comprehensive Income

 

Unaudited

In millions of US dollars

 

     Three Months Ended June 30      Six Months Ended June 30  
(Net of related income taxes)    2015      2014      2015      2014  

Net Income

   $               417       $               472       $               787       $               812   

Other comprehensive income (loss)

               

Items that have been or may be subsequently reclassified to net income:

               

Available-for-sale investments (1)

               

Net fair value gain (loss) during the period

     21         (15      59         35   

Cash flow hedges

               

Net fair value gain (loss) during the period (2)

     1                 (21      (1

Reclassification to income of net loss (3)

     15         7         26         13   

Other

             2         (4      4   

Other Comprehensive Income (Loss)

     37         (6      60         51   

Comprehensive Income

   $ 454       $ 466       $ 847       $ 863   

 

(1)  Available-for-sale investments are comprised of shares in Israel Chemicals Ltd. and Sinofert Holdings Limited.
(2)  Cash flow hedges are comprised of natural gas derivative instruments and treasury lock derivatives and were net of income taxes of $NIL (2014 – $NIL) for the three months ended June 30, 2015 and $12 (2014 – $1) for the six months ended June 30, 2015.
(3) Net of income taxes of $(8) (2014 – $(4)) for the three months ended June 30, 2015 and $(14) (2014 – $(8)) for the six months ended June 30, 2015.

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   2


Condensed Consolidated Statements of Cash Flow

 

Unaudited

In millions of US dollars

 

     Three Months Ended June 30      Six Months Ended June 30  
      2015      2014      2015      2014  

Operating Activities

               

Net income

   $               417       $               472      $               787       $ 812   

Adjustments to reconcile net income to cash provided by operating activities (Note 4)

     248         293         429         555   

Changes in non-cash operating working capital (Note 4)

     171         23         141         (40

Cash provided by operating activities

     836         788         1,357                   1,327   

Investing Activities

               

Additions to property, plant and equipment

     (294      (199      (522      (423

Other assets and intangible assets

     (10      (8      (15      (10

Cash used in investing activities

     (304      (207      (537      (433

Financing Activities

               

Proceeds from long-term debt obligations

                     494         737   

Repayment of long-term debt obligations

             (500              (500

Proceeds from (repayment of) short-term debt obligations

             429         (536      (41

Dividends

     (312      (283      (586      (576

Repurchase of common shares

             (669              (1,065

Issuance of common shares

     12         16         42         30   

Cash used in financing activities

     (300      (1,007      (586      (1,415

Increase (Decrease) in Cash and Cash Equivalents

     232         (426      234         (521

Cash and Cash Equivalents, Beginning of Period

     217         533         215         628   

Cash and Cash Equivalents, End of Period

   $ 449       $ 107       $ 449       $ 107   

Cash and cash equivalents comprised of:

               

Cash

   $ 62       $ 88       $ 62       $ 88   

Short-term investments

     387         19         387         19   
     $ 449       $ 107       $ 449       $ 107   

 

(See Notes to the Condensed Consolidated Financial Statements)

 

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3   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


Condensed Consolidated Statements of Changes in Equity

 

Unaudited

In millions of US dollars

 

                Accumulated Other Comprehensive Income              
     Share
Capital
    Contributed
Surplus
    Net
unrealized
gain on
available-for-
sale
investments
    Net loss on
derivatives
designated as
cash flow
hedges
    Other     Total
Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Total
Equity (1)
 

Balance – December 31, 2014

  $ 1,632      $ 234      $ 623      $ (119   $ (1   $ 503      $ 6,423      $ 8,792   

Net income

                                              787        787   

Other comprehensive income (loss)

                  59        5        (4     60               60   

Dividends declared

                                              (635     (635

Effect of share-based compensation including issuance of common shares

    56        1                                           57   

Shares issued for dividend reinvestment plan

    24                                                  24   

Balance – June 30, 2015

  $ 1,712      $ 235      $ 682      $ (114   $ (5   $ 563      $ 6,575      $ 9,085   

Balance – December 31, 2013

  $ 1,600      $ 219      $ 780      $ (105   $ (2   $ 673      $ 7,136      $ 9,628   

Net income

                                              812        812   

Other comprehensive income

                  35        12        4        51               51   

Shares repurchased

    (53     (2                                 (976     (1,031

Dividends declared

                                              (587     (587

Effect of share-based compensation including issuance of common shares

    40        13                                           53   

Shares issued for dividend reinvestment plan

    21                                                  21   

Balance – June 30, 2014

  $     1,608      $     230      $     815     $ (93 )   $     2      $     724     $     6,385     $     8,947   

 

(1)  All equity transactions were attributable to common shareholders.

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   4


Condensed Consolidated Statements of Financial Position

 

Unaudited

In millions of US dollars except as otherwise noted

 

As at    June 30,
2015
     December 31,
2014
 

Assets

       

Current assets

       

Cash and cash equivalents

   $                 449       $ 215   

Receivables

     805         1,029   

Inventories (Note 5)

     709         646   

Prepaid expenses and other current assets

     50         48   
     2,013         1,938   

Non-current assets

       

Property, plant and equipment

     12,801         12,674   

Investments in equity-accounted investees

     1,224         1,211   

Available-for-sale investments

     1,586         1,527   

Other assets

     286         232   

Intangible assets

     143         142   

Total Assets

   $ 18,053       $ 17,724   

Liabilities

       

Current liabilities

       

Short-term debt and current portion of long-term debt

   $ 495       $ 1,032   

Payables and accrued charges

     1,100         1,086   

Current portion of derivative instrument liabilities

     75         80   
     1,670         2,198   

Non-current liabilities

       

Long-term debt (Note 6)

     3,710         3,213   

Derivative instrument liabilities

     114         115   

Deferred income tax liabilities

     2,284         2,201   

Pension and other post-retirement benefit liabilities

     518         503   

Asset retirement obligations and accrued environmental costs

     557         589   

Other non-current liabilities and deferred credits

     115         113   

Total Liabilities

     8,968         8,932   

Shareholders’ Equity

       

Share capital (Note 7)

     1,712         1,632   

Contributed surplus

     235         234   

Accumulated other comprehensive income

     563         503   

Retained earnings

     6,575         6,423   

Total Shareholders’ Equity

     9,085         8,792   

Total Liabilities and Shareholders’ Equity

   $ 18,053       $             17,724   

(See Notes to the Condensed Consolidated Financial Statements)

 

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5   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


Notes to the Condensed Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2015

 

Unaudited

In millions of US dollars except as otherwise noted

 

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. These unaudited interim condensed consolidated financial statements are based on International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), and have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting.” The accounting policies and methods of computation used in preparing these unaudited interim condensed consolidated financial statements are consistent with those used in the preparation of the company’s 2014 annual consolidated financial statements.

These unaudited interim condensed consolidated financial statements include the accounts of PCS and its subsidiaries; however, they do not include all disclosures normally provided in annual consolidated financial statements and should be read in conjunction with the company’s 2014 annual consolidated financial statements. In management’s opinion, the unaudited interim condensed consolidated financial statements include all 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 authorized by the audit committee of the Board of Directors for issue on August 5, 2015.

 

 

Standards, Amendments and Interpretations not yet Effective and not Applied

The International Accounting Standards Board (“IASB”) and International Financial Reporting Interpretations Committee (“IFRIC”) have issued the following standards and amendments or interpretations to existing standards that were not yet effective and not applied as at June 30, 2015. The company does not anticipate early adoption of these standards at this time.

 

Standard   Description   Impact        Effective Date (1)

Amendments to IAS 1,

Presentation of Financial

Statements

  Issued to improve the effectiveness of presentation and disclosure in financial reports, with the objective of reducing immaterial note disclosures.   The company is reviewing the standard to determine the potential impact, if any.       January 1, 2016, applied prospectively.
Amendments to IAS 16, Property, Plant and Equipment and IAS 38, Intangible Assets   Issued to clarify acceptable methods of depreciation and amortization.   The company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.       January 1, 2016, applied prospectively.
Amendments to IFRS 11, Joint Arrangements   Issued to provide additional guidance on accounting for the acquisition of an interest in a joint operation.   The company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.       January 1, 2016, applied prospectively.
IFRS 15, Revenue From Contracts With Customers   Issued to provide guidance on the recognition of revenue from contracts with customers, including multiple-element arrangements and transactions not previously addressed comprehensively, and enhance disclosures about revenue.   The company is reviewing the standard to determine the potential impact, if any.       The IASB has voted to confirm a one-year deferral of the effective date to January 1, 2018, applied retrospectively with certain limitations.
IFRS 9, Financial Instruments   Issued to replace IAS 39, providing guidance on the classification, measurement and disclosure of financial instruments and introducing a new hedge accounting model.   The company is reviewing the standard to determine the potential impact, if any.       January 1, 2018, applied retrospectively with certain exceptions.

 

(1)  Effective date for annual periods beginning on or after the stated date.

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   6


2. Segment Information

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

 

                                                      
     Three Months Ended June 30, 2015  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 748       $ 559       $ 424       $       $ 1,731   

Freight, transportation and distribution – third party

     (59      (27      (38              (124

Net sales – third party

     689         532         386              

Cost of goods sold – third party

     (272      (323      (301              (896

Margin (cost) on inter-segment sales (1)

             13         (13                

Gross margin

     417         222         72                 711   

Depreciation and amortization

     (60      (47      (61      (5      (173

Assets

     9,621         2,478         2,353         3,601         18,053   

Cash outflows for additions to property, plant and equipment

     103         123         54         14         294   

 

(1)     Inter-segment net sales were $19.

 

              
     Three Months Ended June 30, 2014  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 747       $ 656       $ 489       $       $ 1,892   

Freight, transportation and distribution – third party

     (79      (28      (51              (158

Net sales – third party

     668         628         438              

Cost of goods sold – third party

     (273      (342      (372              (987

Margin (cost) on inter-segment sales (1)

             18         (18                

Gross margin

     395         304         48                 747   

Depreciation and amortization

     (65      (44      (90      17         (182

Assets

     9,365         2,258         2,385         3,483         17,491   

Cash outflows for additions to property, plant and equipment

     103         48         45         3         199   

 

(1)     Inter-segment net sales were $33.

 

              
     Six Months Ended June 30, 2015  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 1,486       $ 1,041       $ 869       $       $ 3,396   

Freight, transportation and distribution – third party

     (123      (50      (79              (252

Net sales – third party

     1,363         991         790              

Cost of goods sold – third party

     (518      (613      (635              (1,766

Margin (cost) on inter-segment sales (1)

             25         (25                

Gross margin

     845         403         130                 1,378   

Depreciation and amortization

     (118      (93      (125      (9      (345

Assets

     9,621         2,478         2,353         3,601         18,053   

Cash outflows for additions to property, plant and equipment

     214         183         90         35         522   

 

(1)     Inter-segment net sales were $37.

 

              

 

7   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


                                                      
     Six Months Ended June 30, 2014  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 1,418       $ 1,237       $ 917       $       $ 3,572   

Freight, transportation and distribution – third party

     (165      (59      (100              (324

Net sales – third party

     1,253         1,178         817              

Cost of goods sold – third party

     (558      (665      (713              (1,936

Margin (cost) on inter-segment sales (1)

             30         (30                

Gross margin

     695         543         74                 1,312   

Depreciation and amortization

     (117      (86      (168      13         (358

Assets

     9,365         2,258         2,385         3,483         17,491   

Cash outflows for additions to property, plant and equipment

     227         115         76         5         423   

 

(1)  Inter-segment net sales were $58.

3. Income Taxes

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

 

     Three Months Ended June 30      Six Months Ended June 30  
      2015      2014      2015      2014  

Income tax expense

   $         152       $         166      $         292       $         310   

Actual effective tax rate on ordinary earnings

     26%         27%         27%         27%   

Actual effective tax rate including discrete items

     27%         26%         27%         28%   

Discrete tax adjustments that impacted the tax rate

   $ 3       $ (6    $ 6       $ (4

In the first quarter of 2014, a $38 discrete non-tax deductible impairment of an available-for-sale investment was recorded. This increased the actual effective tax rate including discrete items for the six months ended June 30, 2014 by 1 percentage point.

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

 

Income Tax Assets (Liabilities)    Statements of Financial Position Location    June 30,
2015
     December 31,
2014
 

Current income tax assets

          

Current

   Receivables    $ 71       $ 145   

Non-current

   Other assets      76         83   

Deferred income tax assets

   Other assets      11         10   

Total income tax assets

        $ 158       $       238   

Current income tax liabilities

          

Current

   Payables and accrued charges    $ (64    $ (5

Non-current

   Other non-current liabilities and deferred credits      (113      (109

Deferred income tax liabilities

   Deferred income tax liabilities      (2,284      (2,201

Total income tax liabilities

        $ (2,461    $ (2,315

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   8


4. Consolidated Statements of Cash Flow

     Three Months Ended June 30      Six Months Ended June 30  
      2015      2014      2015      2014  

Reconciliation of cash provided by operating activities

               

Net income

   $        417       $        472      $        787       $        812   

Adjustments to reconcile net income to cash provided by operating activities

               

Depreciation and amortization

     173         182         345         358   

Share-based compensation

     4         4         19         19   

Net distributed (undistributed) earnings of equity-accounted investees

     19         28         (16      (3

Impairment of available-for-sale investment

                             38   

Provision for deferred income tax

     47         64         72         110   

Pension and other post-retirement benefits

     11         12         16         21   

Asset retirement obligations and accrued environmental costs

     (11      2         (24      9   

Other long-term liabilities and miscellaneous

     5         1         17         3   

Subtotal of adjustments

     248         293         429         555   

Changes in non-cash operating working capital

               

Receivables

     29         54         85         (104

Inventories

     2         (3      (60      17   

Prepaid expenses and other current assets

     11         9         3         27   

Payables and accrued charges

     129         (37      113         20   

Subtotal of changes in non-cash operating working capital

     171         23         141         (40

Cash provided by operating activities

     836         788         1,357         1,327   

Supplemental cash flow disclosure

               

Interest paid

   $ 55       $ 68       $ 93       $ 92   

Income taxes paid

   $ 23       $ 120       $ 65       $ 170   

5. Inventories

     

June 30,

2015

    

December 31,

2014

 

Finished products

   $        286       $        267   

Intermediate products

     115         85   

Raw materials

     87         78   

Materials and supplies

     221         216   
     $ 709       $ 646   

 

6. Long-Term Debt

On March 26, 2015, the company closed the issuance of $500 of 3.00 percent senior notes due April 1, 2025. The senior notes were issued under a US shelf registration statement.

 

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7. 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, 2014

     830,242,574       $ 1,632   

Issued under option plans

     3,745,610         56   

Issued for dividend reinvestment plan

     660,616         24   

Balance – June 30, 2015

     834,648,800       $ 1,712   

Dividends Declared

The company declared dividends per share of $0.38 (2014 – $0.35) during the three months ended June 30, 2015 and $0.76 (2014 – $0.70) during the six months ended June 30, 2015.

 

 

9   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


8. Share-Based Compensation

On May 12, 2015, the company’s shareholders approved the 2015 Performance Option Plan under which the company may, after February 20, 2015 and before January 1, 2016, grant options to acquire up to 3,500,000 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 June 30, 2015, options to purchase a total of 3,474,900 common shares had been granted under the plan. The weighted average fair value of options granted was $5.48 per share, estimated as of the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:

 

Exercise price per option

   $  32.41   

Expected annual dividend per share

   $ 1.52   

Expected volatility

     31%   

Risk-free rate of return

     1.54%   

Expected life of options

     5.5 years   

9. Financial Instruments

Fair Value

Estimated fair values for financial instruments are designed to approximate amounts at which the instruments could be exchanged in a current arm’s-length transaction between knowledgeable willing parties. The valuation policies and procedures for financial reporting purposes are determined by the company’s finance department.

Financial instruments included in the consolidated statements of financial position are measured either at fair value or amortized cost. The tables below explain the valuation methods used to determine the fair value of each financial instrument and its associated level in the fair value hierarchy.

 

Financial Instruments Measured at Fair Value   Fair Value Method
Cash and cash equivalents   Approximated carrying value.
Investments in Israel Chemicals Ltd. (“ICL”) and Sinofert Holdings Limited (“Sinofert”) designated as available-for-sale   Based on the closing bid price of the common shares (Level 1) as at the statements of financial position dates.
Foreign currency derivatives not traded in an active market   Determined using quoted forward exchange rates (Level 2) as at the statements of financial position dates.
Natural gas swaps not traded in an active market   Based on a discounted cash flow model. The inputs used in the model included contractual cash flows based on prices for natural gas futures contracts, fixed prices and notional volumes specified by the swap contracts, the time value of money, liquidity risk, the company’s own credit risk (related to instruments in a liability position) and counterparty credit risk (related to instruments in an asset position). Certain of the futures contract prices used as inputs in the model were supported by prices quoted in an active market (Level 2) and others were not based on observable market data (Level 3). For valuations that included both observable and unobservable data, if the unobservable input was determined to be significant to the overall inputs, the entire valuation was categorized in Level 3.
Natural gas futures   Based on closing prices provided by the exchange (NYMEX) (Level 1) as at the statements of financial position dates.

For natural gas swaps, the primary input into the valuation model was natural gas futures prices, which were based on delivery at the Henry Hub and were observable only for up to three years in the future. The unobservable futures price range as at June 30, 2015 was $3.34 to $4.08 per MMBtu (December 31, 2014 – $3.82 to $4.74 per MMBtu). A 10 percent increase in the unobservable natural gas futures prices that are not counterbalanced by offsetting derivative positions would result in an $8 (December 31, 2014 – $3) decrease in the fair value of the liability. A 10 percent decrease in the unobservable natural gas futures prices that are not counterbalanced by offsetting derivative positions would result in an $8 (December 31, 2014 – $3) increase in the fair value of the liability. Interest rates used to discount estimated cash flows as at June 30, 2015 were between 0.19 percent and 3.47 percent (December 31, 2014 – between 0.17 percent and 3.48 percent) depending on the settlement date.

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   10


Financial Instruments Measured at Amortized Cost   Fair Value Method
Receivables, short-term debt and payables and accrued charges   Assumed to approximate carrying value due to their short-term nature.
Long-term debt senior notes   Quoted market prices (Level 1 or 2 depending on the market liquidity of the debt).
Other long-term debt instruments   Assumed to approximate carrying value.

Presented below is a comparison of the fair value of the company’s senior notes to their carrying values.

 

     June 30, 2015      December 31, 2014  
     

Carrying Amount of

Liability

    

Fair Value of

Liability

    

Carrying Amount of

Liability

    

Fair Value of

Liability

 

Long-term debt senior notes

   $     4,250       $     4,482       $     3,750       $     4,182   

The following table presents the company’s fair value hierarchy for financial assets and financial liabilities carried at fair value on a recurring basis.

 

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

Significant Other
Observable
Inputs

(Level 2) (1,2)

    

Significant
Unobservable
Inputs

(Level 3) (2)

 

June 30, 2015

           

Derivative instrument assets

           

Natural gas derivatives

   $ 10       $       $ 2       $ 8   

Investments in ICL and Sinofert

     1,586         1,586                   

Derivative instrument liabilities

           

Natural gas derivatives

     (188              (110      (78

Foreign currency derivatives

     (1              (1        

December 31, 2014

           

Derivative instrument assets

           

Natural gas derivatives

   $ 7       $       $ (13    $ 20   

Investments in ICL and Sinofert

     1,527         1,527                   

Derivative instrument liabilities

           

Natural gas derivatives

     (193      (4      (58      (131

Foreign currency derivatives

     (2              (2        

 

(1)  During the six months ended June 30, 2015 and twelve months ended December 31, 2014, there were no transfers between Level 1 and Level 2.
(2)  During the six months ended June 30, 2015, there were no transfers into Level 3 and $43 of losses was transferred out of Level 3 into Level 2 as (due to the passage of time) the terms of certain natural gas derivatives now matured in their entirety within 36 months. During the twelve months ended December 31, 2014, there were no transfers into Level 3 and $50 of losses was transferred out of Level 3 into Level 2 as (due to the passage of time) the terms of certain natural gas derivatives now matured in their entirety within 36 months. The company’s policy is to recognize transfers at the end of the reporting period.

 

11   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


The following table presents a reconciliation of the beginning and ending balances of the company’s fair value measurements using significant unobservable inputs (Level 3):

 

     Natural Gas Derivatives  
      Six Months Ended
June 30, 2015
     Twelve Months Ended
December 31, 2014
 

Balance, beginning of period

   $ (111    $ (141

Total (losses) gains, realized and unrealized, before income taxes

       

Included in net income, within cost of goods sold

     (11      (19

Included in other comprehensive income

     (6      (30

Purchases

               

Sales

               

Issues

               

Settlements

     15         29   

Transfers of losses out of Level 3

             43                 50   

Balance, end of period

   $ (70    $ (111

Losses for the period included in net income, within cost of goods sold, were:

       

Change in unrealized losses relating to instruments still held at the reporting date

   $       $ (1

Total losses, realized and unrealized

     (11      (19

 

10. Seasonality

The company’s sales of fertilizer can be seasonal. Fertilizers are sold primarily for spring and fall application in both Northern and Southern Hemispheres. Typically, fertilizer sales are highest in the second quarter of the year, due to the North American spring planting season. However, planting conditions and the timing of customer purchases will vary each year and fertilizer sales can be expected to shift from one quarter to another. Feed and industrial sales are more evenly distributed throughout the year.

11. Contingencies and Other Matters

Canpotex

PCS is a shareholder in Canpotex Limited (“Canpotex”), a potash export, sales and marketing company owned in equal shares by the three potash producers in Saskatchewan, 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 June 30, 2015, there were no such operating losses or other liabilities.

Mining Risk

The risk of underground water inflows, as with other underground risks, is currently not insured.

Legal and Other Matters

The company is engaged in ongoing site assessment and/or remediation activities at a number of facilities and sites, and anticipated costs associated with these matters are added to accrued environmental costs in the manner previously described in Note 22 to the company’s 2014 annual consolidated financial statements. This includes matters related to investigation of potential brine migration at certain of the potash sites. The following environmental site assessment and/or remediation matters have uncertainties that may not be fully reflected in the amounts accrued for those matters:

Nitrogen and phosphate

 

  The US Environmental Protection Agency (“USEPA”) has identified PCS Nitrogen, Inc. (“PCS Nitrogen”) as a potentially responsible party at the Planters Property or Columbia Nitrogen site in Charleston, South Carolina. PCS Nitrogen is subject to a final judgment by the US District Court for the District of South Carolina allocating 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. In December 2013, the USEPA issued an order to PCS Nitrogen and four other respondents requiring them jointly and severally to conduct certain cleanup work at the site and reimburse the USEPA’s costs for overseeing that work. PCS Nitrogen is currently performing the work required by the USEPA order. The USEPA also has requested reimbursement of $4 of previously incurred response costs. The ultimate amount of liability for PCS Nitrogen depends upon the final outcome of litigation to impose liability on additional parties, the amount needed for remedial activities, the ability of other parties to pay and the availability of insurance.

 

 

PCS Phosphate Company, Inc (“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 a removal action and the payment of certain other costs associated with PCB soil contamination at the Ward Transformer Superfund Site in Raleigh, North Carolina (“Site”), including reimbursement of past USEPA costs. The removal activities commenced in August 2007 and are believed to be nearly complete. In September 2013, PCS Phosphate and other parties entered into an Administrative Order on Consent with the USEPA, pursuant to which a supplemental remedial investigation and focused feasibility study will be performed on the portion of the Site that was subject to the removal action. The completed and anticipated work on the Site is estimated to cost a total of $80. PCS Phosphate is a party to ongoing Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) contribution and cost recovery litigation for the recovery of costs of the removal activities. The USEPA

 

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   12


    has also issued an order to a number of entities requiring remediation downstream of the area subject to the removal action (“Operable Unit 1”). PCS Phosphate did not receive this order. At this time, the company is unable to evaluate the extent of any exposure that it may have for the matters addressed in the CERCLA litigation or for Operable Unit 1.

 

  In 1996, PCS Nitrogen Fertilizer, L.P. (“PCS Nitrogen Fertilizer”), then known as Arcadian Fertilizer, L.P., entered into a Consent Order (the “Order”) with the Georgia Environmental Protection Division (“GEPD”) in conjunction with PCS Nitrogen Fertilizer’s acquisition of real property in Augusta, Georgia. Under the Order, PCS Nitrogen Fertilizer is required to perform certain activities to investigate and, if necessary, implement corrective measures for substances in soil and groundwater. The investigation has proceeded and the results have been presented to GEPD. Two interim corrective measures for substances in groundwater have been proposed by PCS Nitrogen Fertilizer and approved by GEPD. PCS Nitrogen Fertilizer is implementing the approved interim corrective measures, which may be modified by PCS Nitrogen Fertilizer from time to time, but it is unable to estimate with reasonable certainty the total cost of its corrective action obligations under the Order at this time.

Based on current information and except for the uncertainties described in the preceding paragraphs, the company 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 statements.

Other legal matters with significant uncertainties include the following:

Nitrogen and phosphate

 

  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 alleged violations of the US Resource Conservation and Recovery Act (“RCRA”) at its plants in Aurora, North Carolina; Geismar, Louisiana; and White Springs, Florida; and one alleged Clean Air Act (“CAA”) violation at its Geismar, Louisiana plant. The company has entered into RCRA 3013 Administrative Orders on Consent and has performed certain site assessment activities at all of these plants. At this time, the company does not know the scope of action, if any, that may be required. As to the alleged RCRA violations, 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.

 

  The USEPA has pursued an initiative to evaluate compliance with the CAA at sulfuric acid and nitric acid plants. In connection with this industry-wide initiative, the company, without admitting liability, reached a global settlement with the USEPA in September 2014, which covers the sulfuric acid plants at the Aurora, North Carolina; Geismar, Louisiana; and White Springs, Florida facilities. The consent decree to implement the settlement became effective on February 26, 2015. The total
   

estimated costs for complying with the consent decree are expected to be at least $51 over a compliance period that extends into 2020.

General

 

  The scope or timing of any final, effective requirements to control the company’s greenhouse gas emissions in the US or Canada is uncertain. Canada has withdrawn from participation in the Kyoto Protocol, and the Canadian government has announced its intention to coordinate greenhouse gas policies with the US. Although the US Congress has not passed any greenhouse gas emission control laws, the USEPA has adopted several rules to control such emissions using authority under existing environmental laws. Some Canadian provinces and US states are considering the adoption of greenhouse gas emission control requirements. In Saskatchewan, provincial regulations pursuant to the Management and Reduction of Greenhouse Gases Act, 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 2015. None of these regulations has resulted in material limitations on greenhouse gas emissions at the company’s facilities. The company is monitoring these developments and their future effect on its operations cannot be determined with certainty at this time.

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 statements.

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.

12. Related Party Transactions

The company sells potash from its Saskatchewan mines for use outside Canada and the US exclusively to Canpotex. Sales are at prevailing market prices and are settled on normal trade terms. Sales to Canpotex for the three months ended June 30, 2015 were $413 (2014 – $342) and the six months ended June 30, 2015 were $768 (2014 – $591). At June 30, 2015, $170 (December 31, 2014 – $216) was owing from Canpotex.

 

 

13   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


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

The following discussion and analysis is the responsibility of management and is as of August 5, 2015. 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 PotashCorp (which, except as otherwise noted, is not incorporated by reference herein), including our Annual Report on Form 10-K for the year ended December 31, 2014 (2014 Form 10-K), can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. The company is a foreign private issuer under the rules and regulations of the US Securities and Exchange Commission (the SEC); however, it currently files voluntarily on the SEC’s domestic forms.

PotashCorp and Our Business Environment

PotashCorp is an integrated producer of fertilizer, industrial and animal feed products. We are the world’s largest fertilizer company by capacity, producing the three primary crop nutrients: potash (K), nitrogen (N) and phosphate (P). As the world’s largest potash producer by capacity, we are responsible for nearly one-fifth of global capacity through our Canadian operations. To enhance our global footprint, we have investments in four potash-related businesses in South America, the Middle East and Asia. We complement our potash assets with focused positions in nitrogen and phosphate.

A detailed description of our markets and customers can be found on pages 45 and 46 (potash), 55 and 56 (nitrogen) and 63 and 64 (phosphate) in our 2014 Annual Integrated Report (2014 AIR).

How We Create Value

Our Value Model, depicted below and outlined in further detail on pages 16 and 17 in our 2014 AIR, informs the goals and strategies we put in place to create value for all stakeholders.

 

LOGO

We believe strong financial performance is the cornerstone of PotashCorp’s value creation. It rewards our shareholders while allowing us to fulfill our broader social and environmental responsibilities. Our business strategies, depicted below and described in further detail on pages 18 and 19 in our 2014 AIR, did not change during the second quarter of 2015.

 

LOGO

 

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   14


How We Approach Risk

In our 2014 AIR, we provide an overview of our approach to risk (page 21), explain how we use a risk management ranking methodology to assess the key risks specific to our company (page 22) and describe each key risk and our risk management approach (pages 23 to 25). Our business is subject to constant and significant change that can result in changes to our key risks.

No additional key risks were identified or removed during the second quarter and first half of 2015 compared to those outlined in our 2014 AIR. The following tables outline our risk ranking matrix and continuing key risks as of December 31, 2014 and June 30, 2015.

 

Risk Ranking

Matrix1

 

 

 

Severity of Consequence

  Negligible

 

  Low

 

  Medium

 

  Major

 

  Extreme

 

LOGO

  Probable   C   B   B   A   A
  High   D   C   B   B   A
  Medium   D   D   C   B   B
  Low   E   D   D   C   B
  Remote   E   E   D   D   C

1      Refer to page 22 in our 2014 AIR for further detail

 

 

Key Risks  

Residual

Risk Level

Jun 30/15

 

Residual

Risk Level

Dec 31/14

  Status  

Link to

Business

Strategies1

      Key Risks  

Residual

Risk Level

Jun 30/15

 

Residual

Risk Level

Dec 31/14

  Status  

Link to

Business

Strategies1

Global potash demand   B   B   LOGO  

LOGO  

  LOGO     Product transportation mishaps   C   C   LOGO     LOGO
Competitive potash supply   B   B   LOGO  

LOGO  

  LOGO     Sustaining growth opportunities   C   C   LOGO     LOGO
Offshore potash sales and distribution   B   B   LOGO     LOGO     Transportation and distribution infrastructure   C   C   LOGO  

LOGO  

  LOGO
Potash operating capability   C   C   LOGO  

LOGO  

  LOGO     Trinidad natural gas supply   C   C   LOGO  

LOGO  

  LOGO
Safety, health, environmental and security   C   C   LOGO  

LOGO  

  LOGO     Cyber security   C   C   LOGO  

LOGO  

  LOGO

 

International operations

 

 

C

 

 

C

 

 

LOGO 2

LOGO  

 

 

LOGO

   

 

 

LOGO    No change to risk

LOGO   Increased risk

LOGO   Decreased risk

LOGO    Risk has materialized in part in the current or previous periods

 

1 

Darker sections of the triangle indicate the specific strategy (described in the triangle on page 14 of this 10-Q) impacted by the described risk in the table above. Faded sections of the triangle mean the specific strategy is not significantly impacted by the described risk.

2 

While the relative residual ranking of this risk has not changed since December 31, 2014, consistent with the first quarter of 2015 we believe the risk level is trending higher due to external factors affecting the business and operating environment in the foreign jurisdictions in which we have equity investments. This risk is further described on page 20 of our 2014 Form 10-K.

 

15   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


Key Performance Drivers – Performance Compared to Targets

Through our integrated value model, we set, evaluate and refine our goals and priorities to drive improvements that benefit all those impacted by our business. We demonstrate our accountability by tracking and reporting our progress against targets related to each goal. Our long-term goals and 2015 targets are set out on pages 36 to 41 of our 2014 AIR. A summary of our progress towards selected goals and representative annual targets is set out below.

 

Goal   Representative 2015 Annual Target   Performance to June 30, 2015
Create superior long-term shareholder value.   Exceed total shareholder return performance for our sector and the DAXglobal Agribusiness Index.   PotashCorp’s total shareholder return was -10 percent in the first six months of 2015 compared to our sector’s weighted average return (based on market capitalization) of 12 percent and the DAXglobal Agribusiness Index weighted average return (based on market capitalization) of 2 percent.
Attract, retain, develop and engage employees to achieve our long-term goals.   Fill 75 percent of senior staff openings with qualified internal candidates.   The percentage of senior staff positions filled internally in the first six months of 2015 was 78 percent.
Achieve no harm to people.   Achieve zero life-altering injuries at our sites.   Sadly, a workplace accident resulted in the loss of an employee at our White Springs phosphate operation during the first quarter of 2015.
   

 

Reduce total site recordable injury rate to 0.95 (or lower) and total lost-time injury rate to 0.10 (or lower).

 

 

During the first six months of 2015, total site recordable injury rate was 0.88 and total lost-time injury rate was 0.07.

Achieve no damage to the environment.   By 2018, reduce total reportable incidents (releases, permit excursions and spills) by 40 percent from 2014 levels.   Annualized total reportable incidents were down 17 percent during the first six months of 2015 compared to 2014 annual levels. Compared to the first six months of 2014, total reportable incidents were down 9 percent.

Performance Overview

This discussion and analysis are based on the company’s unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q (financial statements in this Form 10-Q) based on International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), unless otherwise stated. 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, this Form 10-Q should be read carefully, together with our 2014 AIR.

Earnings Guidance – Second Quarter 2015

 

 

      Company Guidance    Actual Results  

Earnings per share

   $0.45 – $0.55    $ 0.50   

Overview of Actual Results

 

 

     Three Months Ended June 30      Six Months Ended June 30  
Dollars (millions), except per-share amounts    2015      2014      Change      % Change      2015      2014      Change      % Change  

Sales

   $ 1,731       $   1,892       $ (161      (9    $ 3,396       $   3,572       $ (176      (5

Gross margin

     711         747         (36      (5      1,378         1,312         66         5   

Operating income

     619         686         (67      (10      1,178         1,217         (39      (3

Net income

     417         472         (55      (12      787         812         (25      (3

Net income per share – diluted

     0.50         0.56         (0.06      (11      0.94         0.95         (0.01      (1

Other comprehensive income (loss)

     37         (6      43         n/m         60         51         9         18   
n/m = not meaningful

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   16


LOGO

LOGO

 

 

Earnings in the second quarter of 2015 were lower than the same period in 2014 as higher gross margins in potash and phosphate were more than offset by lower gross margin in nitrogen. Earnings were negatively impacted further by increased provincial mining and other taxes.

Year over year earnings were lower than the same period in 2014. Higher potash and phosphate gross margins were more than offset by lower nitrogen gross margin, increased provincial mining and other taxes, and lower dividend income from our investment in Israel Chemicals Ltd. (ICL) in 2015 (a special dividend was received in 2014).

Global potash shipments remained strong during the second quarter of 2015, especially to China and India where higher contract volumes supported robust shipments for most producers. Demand in other offshore markets remained at historically high levels, although the impacts of weaker crop economics, currency volatility and credit availability slowed purchases from 2014’s record pace – most notably in Brazil. In North America, a shortened planting season and greater availability of product from offshore suppliers kept domestic producer sales below 2014’s exceptionally strong comparative period.

In nitrogen, prices for most products declined from those realized in second-quarter 2014 as market fundamentals weakened on increased global supply and record Chinese urea exports over the past 12 months. As the quarter progressed, urea prices found support on stronger demand in key import markets and slowing exports from China, while ammonia markets stabilized due to supply constraints in major exporting regions.

In phosphate, solid phosphate fertilizer prices were generally consistent with those in the second quarter of 2014 as improved Indian demand more than offset weakness in Latin America and record Chinese exports. Robust demand for other phosphate products – most notably liquid fertilizers in India and North America – supported improved prices relative to 2014’s second quarter.

Other comprehensive income for the second quarter and first half of 2015 mainly resulted from an increase in the fair value of our investment in Sinofert Holdings Limited (Sinofert), partially offset by a decrease in the fair value of our investment in ICL. Other comprehensive loss for the second quarter of 2014 mainly resulted from a decrease in the fair value of our investment in ICL. For the first half of 2014, other comprehensive income mainly resulted from an increase in the fair value of our investment in ICL.

 

 

17   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


Operating Segment Review

We report our results (including gross margin) in three business segments: potash, nitrogen and phosphate as described in Note 2 to the financial statements in this Form 10-Q. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. We include net sales in segment disclosures in the financial statements in this Form 10-Q pursuant to IFRS, which require segmentation based upon our internal organization and reporting of revenue and profit measures. 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, nitrogen and phosphate 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. Realized prices refer to net sales prices.

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.

 

 

LOGO

 

Potash Performance

Financial Performance

 

 

    Three Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne (1)  
     2015     2014     % Change     2015     2014     % Change     2015     2014     % Change  

Manufactured product

                       

Net sales

                       

North America

  $ 227      $ 303        (25     648        943        (31   $ 349      $ 321        9   

Offshore

    460        362        27        1,864        1,582        18      $ 247      $ 229        8   
    687        665        3        2,512        2,525        (1   $ 273      $ 263        4   

Cost of goods sold

    (265     (261     2                              $ (105   $ (102     3   

Gross margin

    422        404        4              $ 168      $ 161        4   

Other miscellaneous and purchased product gross margin (2)

    (5     (9     (44                                                

Gross Margin

  $ 417      $ 395        6                              $ 166      $ 156        6   

 

(1) 

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

(2) 

Comprised of net sales of $2 million (2014 — $3 million) less cost of goods sold of $7 million (2014 — $12 million).

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   18


    Six Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne (1)  
     2015     2014     % Change     2015     2014     % Change     2015     2014     % Change  

Manufactured product

                       

Net sales

                       

North America

  $ 506      $ 594        (15     1,448        1,931        (25   $ 349      $ 307        14   

Offshore

    848        649        31        3,413        2,905        17      $ 249      $ 223        12   
    1,354        1,243        9        4,861        4,836        1      $ 278      $ 257        8   

Cost of goods sold

    (502     (535     (6                           $ (103   $ (111     (7

Gross margin

    852        708        20              $ 175      $ 146        20   

Other miscellaneous and purchased product gross margin (2)

    (7     (13     (46                                                

Gross Margin

  $ 845      $ 695        22                              $ 174      $ 144        21   

 

(1) 

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

(2) 

Comprised of net sales of $9 million (2014 — $10 million) less cost of goods sold of $16 million (2014 — $23 million).

Potash gross margin variance was attributable to:

 

 

    Three Months Ended June 30
2015 vs 2014
    Six Months Ended June 30
2015 vs 2014
 
          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

  $ (70   $ 16      $ 14      $ (40   $ (111   $ 60      $ 26      $ (25

Offshore

    45        35        (22     58        75        86        8        169   

Change in market mix

    24        (26     2               42        (42              

Total manufactured product

  $ (1   $ 25      $ (6     18      $ 6      $ 104      $ 34        144   

Other miscellaneous and purchased product

                            4                                6   

Total

                          $ 22                              $ 150   

Sales to major offshore markets were as follows:

 

 

    Three Months Ended June 30     Six Months Ended June 30  
    By Canpotex  (1)     From New Brunswick     By Canpotex  (1)     From New Brunswick  
    Percentage of Annual
Sales Volumes
          Percentage of Annual
Sales Volumes
          Percentage of Annual
Sales Volumes
          Percentage of Annual
Sales Volumes
       
     2015     2014     % Change     2015     2014     % Change     2015     2014     % Change     2015     2014     % Change  

Other Asian countries (2)

    30        42        (12                          38        44        (6                     

Latin America

    37        29        8        100        100               30        28        2        100        100          

China

    20        13        7                             17        14        3                        

India

    8        10        (2                          9        7        2                        

Other countries

    5        6        (1                          6        7        (1                     
      100        100                100        100                100        100                100        100           

 

(1) 

Canpotex Limited (Canpotex).

(2) 

All Asian countries except China and India.

 

19   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


The most significant contributors to the change in total gross margin were as follows (direction of arrows refers to impact on gross margin):

 

     Quarter over Quarter   Year over Year
Net Sales Prices  

h Our average realized price improvement in 2015 reflected higher prices in most markets compared to last year’s second quarter when realizations were still recovering from the lows experienced in early 2014.

 

 

h Realized prices in 2015 benefitted from a recovery throughout 2014 driven by higher consumption.

 

Sales Volumes  

i North American sales volumes declined from the exceptionally strong comparative period in 2014.

 

h Offshore volumes increased as Canpotex shipments reached record levels in 2015 due to improved rail logistics and enhanced infrastructure and distribution capabilities.

 

i North American sales volumes declined due to lower fertilizer demand and higher offshore imports.

 

h Shipments to offshore markets rose due to strong demand in 2015 and improved rail logistics and enhanced infrastructure and distribution capabilities. Further, rail constraints in 2014 did not recur in 2015.

 

Cost of Goods Sold  

i More product from our higher-cost mines went to offshore customers resulting in a negative cost of goods sold variance.

 

h The Canadian dollar weakened relative to the US dollar, reducing cost of goods sold.

 

 

h The Canadian dollar weakened relative to the US dollar, reducing cost of goods sold.

 

Year over year the change in market mix produced a favorable variance of $42 million related to sales volumes and an unfavorable variance of $42 million in sales prices due to more lower-priced standard product being sold to the offshore market and less higher-priced granular sales to North America in 2015.

 

 

LOGO

   LOGO

Non-Financial Performance

 

          Three Months Ended June 30      Six Months Ended June 30  
            2015      2014      % Change      2015      2014      % Change  

Production

  

KCl tonnes produced (thousands)

     2,387         2,321         3         4,999         4,716         6   

Safety

  

Life-altering injuries

                                     1         (100
  

Total site recordable injury rate

     1.73         2.09         (17      1.57         1.71         (8
  

Total lost-time injury rate

     0.10         0.12         (17      0.15         0.17         (12

Employee

  

Percentage of senior staff positions filled internally

     50%         100%         (50      67%         100%         (33

Environmental

  

Environmental incidents

     1         5         (80      2         9         (78
    

Waste (million tonnes)

     5.3         4.9         8         10.6         9.4         13   

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   20


The most significant contributors to the changes in non-financial results were as follows:

 

     Quarter over Quarter   Year over Year

Employee

  In the second quarter of 2015, one of two senior staff positions was filled internally while all three available senior staff positions were filled internally in the same period in 2014.   In the first half of 2015, two of three senior staff positions were filled internally while all six available senior staff positions were filled internally in the same period in 2014.

Environmental

  In the second quarter of 2015, we had one environmental incident related to brine overflow, which resulted in a brine spill. Environmental incidents for the second quarter of 2014 mainly included brine and slurry pipe failures resulting in brine spills.   In the first half of 2015, environmental incidents included a minor propane gas release and brine spill. In the first half of 2014, environmental incidents mainly included brine and slurry pipeline failures resulting in brine spills.

 

Nitrogen Performance

Financial Performance

 

    Three Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne (1)  
     2015       2014     % Change     2015     2014     % Change     2015     2014     % Change  

Manufactured product (2)

                       

Net sales

                       

Ammonia

  $ 285      $ 360        (21     621        665        (7   $ 460      $ 542        (15

Urea

    98        114        (14     272        258        5      $ 358      $ 441        (19

Solutions, nitric acid, ammonium nitrate

    161        180        (11     739        740             $ 218      $ 243        (10
    544        654        (17     1,632        1,663        (2   $ 334      $ 393        (15

Cost of goods sold

    (327     (355     (8                           $ (201   $ (213     (6

Gross margin

    217        299        (27           $ 133      $ 180        (26

Other miscellaneous and purchased product gross margin (3)

    5        5                                                          

Gross Margin

  $ 222      $ 304        (27                           $ 136      $ 183        (26

 

(1) 

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

(2) 

Includes inter-segment ammonia sales, comprised of: net sales $18 million, cost of goods sold $6 million and 37,000 sales tonnes (2014 — net sales $31 million, cost of goods sold $14 million and 52,000 sales tonnes). Inter-segment profits are eliminated on consolidation.

(3) 

Comprised of third-party and inter-segment sales, including: third-party net sales $6 million less cost of goods sold $2 million (2014 — net sales $5 million less cost of goods sold $1 million) and inter-segment net sales $1 million less cost of goods sold $NIL (2014 — net sales $2 million less cost of goods sold $1 million). Inter-segment profits are eliminated on consolidation.

 

    Six Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne (1)  
     2015       2014     % Change     2015     2014     % Change     2015     2014     % Change  

Manufactured product (2)

                       

Net sales

                       

Ammonia

  $ 513      $ 606        (15     1,110        1,248        (11   $ 463      $ 486        (5

Urea

    195        264        (26     524        606        (14   $ 372      $ 436        (15

Solutions, nitric acid, ammonium nitrate

    295        344        (14     1,307        1,438        (9   $ 226      $ 239        (5
    1,003        1,214        (17     2,941        3,292        (11   $ 341      $ 369        (8

Cost of goods sold

    (609     (679     (10                           $ (207   $ (206       

Gross margin

    394        535        (26           $ 134      $ 163        (18

Other miscellaneous and purchased product gross margin (3)

    9        8        13                                                   

Gross Margin

  $ 403      $ 543        (26                           $ 137      $ 165        (17

 

(1) 

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

(2) 

Includes inter-segment ammonia sales, comprised of: net sales $36 million, cost of goods sold $12 million and 70,000 sales tonnes (2014 — net sales $56 million, cost of goods sold $26 million and 100,000 sales tonnes). Inter-segment profits are eliminated on consolidation.

(3) 

Comprised of third-party and inter-segment sales, including: third-party net sales $24 million less cost of goods sold $16 million (2014 — net sales $20 million less cost of goods sold $12 million) and inter-segment net sales $1 million less cost of goods sold $NIL (2014 — net sales $2 million less cost of goods sold $2 million). Inter-segment profits are eliminated on consolidation.

 

21   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


Nitrogen gross margin variance was attributable to:

 

    Three Months Ended June 30
2015 vs 2014
    Six Months Ended June 30
2015 vs 2014
 
          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

               

Ammonia

  $ (11   $ (48   $ 10      $ (49   $ (30   $ (26   $ 3      $ (53

Urea

    8        (23     5        (10     (12     (35     5        (42

Solutions, nitric acid, ammonium nitrate

    4        (18     3        (11     (15     (17     7        (25

Hedge

                  (12     (12                   (21     (21

Change in product mix

    2        (2                   4        (4              

Total manufactured product

  $ 3      $ (91   $ 6        (82   $ (53   $ (82   $ (6     (141

Other miscellaneous and purchased product

                                                           1   

Total

                          $ (82                           $ (140

 

     Three Months Ended June 30      Six Months Ended June 30  
     Sales Tonnes
(thousands)
     Average Net Sales Price
per Tonne
     Sales Tonnes
(thousands)
     Average Net Sales Price
per Tonne
 
      2015      2014      2015      2014      2015      2014      2015      2014  

Fertilizer

     583         551      $ 350       $ 424         971         1,128       $ 347       $ 396   

Industrial and Feed

     1,049         1,112       $ 324       $ 379         1,970         2,164       $ 338       $ 355   
       1,632         1,663       $ 334       $ 393         2,941         3,292       $ 341       $ 369   

The most significant contributors to the change in total gross margin were as follows (direction of arrows refers to impact on gross margin, while the • symbol signifies a neutral impact):

 

 

     Quarter over Quarter   Year over Year
Net Sales Prices  

i  Increased supply in key producing regions pressured benchmark prices and realizations for all our products.

 

 

i  Nitrogen prices weakened during the first half of 2015 on reduced demand in key markets and increased supply, including record Chinese urea exports. This was partially offset by elevated North American ammonia prices due to supply challenges in key exporting regions in the first quarter of 2015.

 

Sales Volumes  

h  There were no significant changes.

 

i   Sales volumes in 2015 were affected by weaker fertilizer demand, issues related to product availability caused by mechanical challenges at our Lima facility and curtailments in Trinidad related to natural gas supply.

 

Cost of Goods Sold  

h   Average costs, including our hedge position, for natural gas used as feedstock in production decreased 21 percent. Costs for natural gas used as feedstock in Trinidad production fell 18 percent (contract price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas decreased 41 percent. Including losses on our hedge position, US gas prices fell 23 percent.

 

i   Costs were impacted by higher losses on natural gas hedging derivatives included in cost of goods sold.

 

i   Costs were impacted by higher losses on natural gas hedging derivatives included in cost of goods sold.

 

h   Average costs, including our hedge position, for natural gas used as feedstock in production decreased 13 percent. Costs for natural gas used as feedstock in Trinidad production fell 5 percent (contract price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas decreased 40 percent. Including losses on our hedge position, US gas prices fell 22 percent.

 

•     Lower natural gas costs in the US were offset by a rise in Trinidad natural gas costs in the first quarter of 2015.

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   22


 

LOGO    LOGO

Non-Financial Performance

 

         Three Months Ended June 30     Six Months Ended June 30  
           2015     2014     % Change     2015     2014     % Change  

Production

  

N tonnes produced (thousands)

    753        830        (9     1,545        1,663        (7

Safety

  

Total site recordable injury rate

    0.19        0.28        (32     0.17        0.38        (55
  

Total lost-time injury rate

                                0.08        (100

Employee

  

Percentage of senior staff positions filled internally

    n/a        100%        n/m               100%        (100

Environmental

  

Greenhouse gas emissions (CO2 equivalent tonnes/tonne of product)

    2.0        2.2        (9     2.1        2.2        (5
    

Environmental incidents

    1               n/m        3        1        200   
n/a = not applicable as there were no senior staff positions available to be filled during the period
n/m = not meaningful

The most significant contributors to the changes in non-financial results were as follows:

 

     Quarter over Quarter   Year over Year
Safety   The total site recordable injury rate decreased from 2014 due to more hours being worked in 2015 as the number of recordable injuries was unchanged.   There were three recordable injuries in 2015 compared to five in 2014. Combined with more hours worked in 2015, the total site recordable injury rate declined. There were no lost-time injuries in 2015 compared to one in 2014.
Employee   There were no senior staff positions available to be filled in 2015.   In 2015, the one available senior staff position was not filled internally while all three available senior staff positions were filled internally in 2014.

Phosphate Performance

Financial Performance

 

    Three Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne (1)  
     2015     2014     % Change     2015     2014     % Change     2015     2014     % Change  

Manufactured product

                       

Net sales

                       

Fertilizer

  $ 184      $ 245        (25     383        539        (29   $ 480      $ 455        5   

Feed and Industrial

    192        187        3        296        310        (5   $ 647      $ 603        7   
    376        432        (13     679        849        (20   $ 553      $ 509        9   

Cost of goods sold

    (305     (387     (21                           $ (450   $ (457     (2

Gross margin

    71        45        58                $ 103      $ 52        98   

Other miscellaneous and purchased product gross margin (2)

    1        3        (67                                                

Gross Margin

  $ 72      $ 48        50                              $ 106      $ 57        86   

 

(1) 

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

(2) 

Comprised of net sales of $10 million (2014 — $6 million) less cost of goods sold of $9 million (2014 — $3 million).

 

23   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


    Six Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne (1)  
     2015     2014     % Change     2015     2014     % Change     2015     2014     % Change  

Manufactured product

                       

Net sales

                       

Fertilizer

  $ 378      $ 455        (17     754        1,041        (28   $ 501      $ 437        15   

Feed and Industrial

    371        352        5        576        582        (1   $ 644      $ 605        6   
    749        807        (7     1,330        1,623        (18   $ 563      $ 497        13   

Cost of goods sold

    (622     (738     (16                           $ (468   $ (455     3   

Gross margin

    127        69        84                $ 95      $ 42        126   

Other miscellaneous and purchased product gross margin (2)

    3        5        (40                                                

Gross Margin

  $ 130      $ 74        76                              $ 98      $ 46        113   

 

(1) 

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

(2) 

Comprised of net sales of $41 million (2014 — $10 million) less cost of goods sold of $38 million (2014 — $5 million).

Phosphate gross margin variance was attributable to:

 

 

    Three Months Ended June 30
2015 vs 2014
    Six Months Ended June 30
2015 vs 2014
 
          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

               

Fertilizer

  $ (12   $ 10      $ 27      $ 25      $ (25   $ 50      $ 32      $ 57   

Feed and Industrial

           11        (10     1        2        22        (23     1   

Change in product mix

    (8     9        (1            (15     15                 

Total manufactured product

  $ (20   $ 30      $ 16        26      $ (38   $ 87      $ 9        58   

Other miscellaneous and purchased product

                            (2                             (2

Total

                          $ 24                              $ 56   

The most significant contributors to the change in total gross margin were as follows (direction of arrows refers to impact on gross margin):

 

     Quarter over Quarter   Year over Year

Net Sales Prices

 

h  Our average realized price was above the same periods in 2014 mainly as a result of improved market fundamentals, due to strong demand and supply outages for certain key phosphate export regions.

 

Sales Volumes

 

i  Absence of production from our Suwannee River chemical plant, due to its closure in 2014, reduced tonnes available for sale in 2015.

 

i  Sales volumes were down due to a reduction in capacity caused by a turnaround at our Aurora facility in the second quarter of 2015 and the closure of Suwannee River in 2014. In addition a greater proportion of our phosphoric acid was directed to products with higher phosphate content.

Cost of Goods Sold

 

h  Depreciation was lower due to accelerated depreciation in the second quarter of 2014 related to fertilizer resulting from operations changes announced in late 2013.

 

h   Favorable adjustments to our asset retirement obligations occurred in 2015 while unfavorable adjustments occurred in 2014 as a result of changes in the relevant discount rates.

 

i  Costs rose due to increased reliability maintenance costs at Aurora and costs associated with our cooling ponds.

 

i  Sulfur costs were up 12 percent quarter over quarter and 17 percent year over year, increasing our cost of goods sold.

 

PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q   24


LOGO    LOGO

Non-Financial Performance

 

 

            Three Months Ended June 30      Six Months Ended June 30  
              2015      2014      % Change      2015      2014      % Change  

Production

     P2O 5 tonnes produced (thousands)      379         459         (17      745         828         (10
    

P2O5 operating rate percentage

     80%         77%         4         78%         70%         11   

Safety

    

Life-altering injuries

                             1                 n/m   
    

Total site recordable injury rate

     0.61         1.45         (58      0.86         1.43         (40
    

Total lost-time injury rate

             0.14         (100      0.07         0.15         (53

Employee

    

Percentage of senior staff positions filled internally

     100%         80%         25         50%         91%         (45

Environmental

    

Environmental incidents

     3         1         200         5         1         400   
       Water usage (m3 per tonne of product)      26         26                 27         28         (4
n/m = not meaningful

The most significant contributors to the changes in non-financial results were as follows:

 

 

     Quarter over Quarter   Year over Year
Safety   There were five recordable injuries in 2015 compared to nine in 2014. Combined with more hours worked in 2015, the total site recordable injury rate declined. There were no lost-time injuries in 2015 compared to one in 2014.   Sadly, a workplace accident resulted in the loss of an employee at our White Springs phosphate operation during the first quarter of 2015. There were 13 recordable injuries and one lost-time injury in 2015 compared to 17 recordable injuries and two lost-time injuries in 2014. Combined with more hours worked in 2015, the total site recordable injury rate declined.
Employee   In 2015, the one available senior staff position was filled internally while four of five senior staff positions were filled internally in 2014.   In 2015, one of two senior staff positions were filled internally while 10 of 11 senior staff positions were filled internally in 2014.
Environmental   Environmental incidents in the second quarter and first half of 2015 were related to releases of solids and phosphorus in waste water and a phosphoric acid release.

Other Expenses and Income

 

 

             Three Months Ended June 30                       Six Months Ended June 30          
Dollars (millions), except percentage amounts    2015      2014      Change      % Change      2015      2014      Change      % Change  

Selling and administrative expenses

   $ (60    $ (55    $ (5      9       $ (120    $ (123    $ 3         (2

Provincial mining and other taxes

     (90      (69      (21      30         (185      (123      (62      50   

Share of earnings of equity-accounted investees

     35         32         3         9         71         65         6         9   

Dividend income

     31         24         7         29         31         93         (62      (67

Impairment of available-for-sale investment

                                             (38      38         (100

Other (expenses) income

     (8      7         (15      n/m         3         31         (28      (90

Finance costs

     (50      (48      (2      4         (99      (95      (4      4   

Income taxes

     (152      (166      14         (8      (292      (310      18         (6
n/m = not meaningful

 

25   PotashCorp 2015 Second Quarter Quarterly Report on Form 10-Q


The