XTSE:POT Potash Corp of Saskatchewan Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012

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  ¨   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 July 31, 2012, Potash Corporation of Saskatchewan Inc. had 859,272,510 Common Shares outstanding.

 

 

 


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)

 

As at    June 30,
2012
     December 31,
2011
 

Assets

     

Current assets

     

Cash and cash equivalents

   $ 491       $ 430   

Receivables

     1,254         1,195   

Inventories (Note 2)

     721         731   

Prepaid expenses and other current assets

     66         52   
     2,532         2,408   

Non-current assets

     

Property, plant and equipment

     10,522         9,922   

Investments in equity-accounted investees

     1,204         1,187   

Available-for-sale investments (Note 3)

     2,132         2,265   

Other assets

     318         360   

Intangible assets

     116         115   

Total Assets

   $ 16,824       $ 16,257   

Liabilities

     

Current liabilities

     

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

   $ 690       $ 832   

Payables and accrued charges

     979         1,295   

Current portion of derivative instrument liabilities

     69         67   
     1,738         2,194   

Non-current liabilities

     

Long-term debt (Note 4)

     3,464         3,705   

Derivative instrument liabilities

     190         204   

Deferred income tax liabilities

     1,222         1,052   

Pension and other post-retirement benefit liabilities (Note 5)

     698         552   

Asset retirement obligations and accrued environmental costs

     638         615   

Other non-current liabilities and deferred credits

     93         88   

Total Liabilities

     8,043         8,410   

Shareholders’ Equity

     

Share capital (Note 6)

     1,490         1,483   

Contributed surplus

     315         291   

Accumulated other comprehensive income

     1,031         816   

Retained earnings

     5,945         5,257   

Total Shareholders’ Equity

     8,781         7,847   

Total Liabilities and Shareholders’ Equity

   $ 16,824       $ 16,257   

(See Notes to the Condensed Consolidated Financial Statements)

 

1   PotashCorp 2012 Second 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
June 30
    

Six Months Ended

June 30

 
      2012      2011      2012      2011  

Sales (Note 7)

   $ 2,396       $ 2,325       $ 4,142       $ 4,529   

Freight, transportation and distribution

     (123      (132      (227      (281

Cost of goods sold

     (1,074      (1,025      (2,018      (1,984

Gross Margin

     1,199         1,168         1,897         2,264   

Selling and administrative expenses

     (56      (55      (113      (130

Provincial mining and other taxes

     (72      (60      (100      (94

Share of earnings of equity-accounted investees

     68         66         143         117   

Dividend income

     67         53         67         53   

Impairment of available-for-sale investment (Note 3)

     (341              (341        

Other (expenses) income

     (8      3         (11      (10

Operating Income

     857         1,175         1,542         2,200   

Finance costs

     (31      (38      (65      (88

Income Before Income Taxes

     826         1,137         1,477         2,112   

Income taxes (Note 9)

     (304      (297      (464      (540

Net Income

   $ 522       $ 840       $ 1,013       $ 1,572   

Net Income per Share (Note 10)

           

Basic

   $ 0.61       $ 0.98       $ 1.18       $ 1.84   

Diluted

   $ 0.60       $ 0.96       $ 1.16       $ 1.79   

Dividends Declared per Share

   $ 0.14       $ 0.07       $ 0.28       $ 0.14   

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   2


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Comprehensive Income

(in millions of US dollars)

(unaudited)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
(Net of related income taxes)    2012      2011      2012      2011  

Net Income

   $ 522       $ 840       $ 1,013       $ 1,572   

Other comprehensive income (loss)

           

Net decrease in net unrealized gain on available-for-sale investments(1)

     (256      (97      (134      (368

Reclassification to income of unrealized loss on impaired
available-for-sale investment (Note 3)

     341                 341           

Net actuarial loss on defined benefit plans(2)

     (73              (84        

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

     (2      (13      (15        

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

     13         14         25         28   

Other

     (2      2         (2        

Other Comprehensive Income (Loss)

     21         (94      131         (340

Comprehensive Income

   $ 543       $ 746       $ 1,144       $ 1,232   

 

(1) 

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

 

(2) 

Net of income taxes of $44 (2011 — $NIL) for the three months ended June 30, 2012 and $48 (2011 — $NIL) for the six months ended June 30, 2012.

 

(3) 

Cash flow hedges are comprised of natural gas derivative instruments, and are net of income taxes of $2 (2011 — $8) for the three months ended June 30, 2012 and $10 (2011 — $NIL) for the six months ended June 30, 2012.

 

(4) 

Net of income taxes of $(8) (2011 — $(8)) for the three months ended June 30, 2012 and $(16) (2011 — $(16)) for the six months ended June 30, 2012.

(See Notes to the Condensed Consolidated Financial Statements)

 

3   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Cash Flow

(in millions of US dollars)

(unaudited)

 

     Three Months Ended
June 30
     Six Months Ended
June 30
 
      2012      2011      2012      2011  

Operating Activities

           

Net income

   $ 522       $ 840       $ 1,013       $ 1,572   

Adjustments to reconcile net income to cash provided by operating activities

           

Depreciation and amortization

     157         128         285         252   

Share-based compensation

     2         5         18         19   

Impairment of available-for-sale investment (Note 3)

     341                 341           

Realized excess tax benefit related to share-based compensation

     1         11         3         23   

Provision for deferred income tax

     152         78         204         153   

Net distributed (undistributed) earnings of equity-accounted investees

     57         1         (16      (50

Asset retirement obligations and accrued environmental costs

     23         15         10         18   

Other long-term liabilities and miscellaneous

     19         (8      41         (18

Subtotal of adjustments

     752         230         886         397   

Changes in non-cash operating working capital

           

Receivables

     (43      24         6         (189

Inventories

     18         6         44         (21

Prepaid expenses and other current assets

     (2      12         (16      12   

Payables and accrued charges

     (25      (48      (339      (17

Subtotal of changes in non-cash operating working capital

     (52      (6      (305      (215

Cash provided by operating activities

     1,222         1,064         1,594         1,754   

Investing Activities

           

Additions to property, plant and equipment

     (483      (492      (959      (933

Purchase of non-current investments

                     (1        

Other assets and intangible assets

     6         (3      (13      (3

Cash used in investing activities

     (477      (495      (973      (936

Financing Activities

           

Repayment of long-term debt obligations

     (2      (600      (2      (600

(Repayment of) proceeds from short-term debt obligations

     (552      94         (384      (159

Dividends

     (118      (60      (177      (88

Issuance of common shares

     1         7         3         25   

Cash used in financing activities

     (671      (559      (560      (822

Increase (Decrease) in Cash and Cash Equivalents

     74         10         61         (4

Cash and Cash Equivalents, Beginning of Period

     417         398         430         412   

Cash and Cash Equivalents, End of Period

   $ 491       $ 408       $ 491       $ 408   

Cash and cash equivalents comprised of:

           

Cash

   $ 86       $ 56       $ 86       $ 56   

Short-term investments

     405         352         405         352   
     $ 491       $ 408       $ 491       $ 408   

Supplemental cash flow disclosure

           

Interest paid

   $ 64       $ 92       $ 102       $ 133   

Income taxes paid

   $ 176       $ 149       $ 492       $ 324   

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   4


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Changes in Equity

(in millions of US dollars)

(unaudited)

 

    Equity Attributable to Common Shareholders(1)  
                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
    Net
actuarial
loss on
defined
benefit
plans
    Other     Total
Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Total
Equity
 

Balance — December 31, 2011

  $ 1,483      $ 291      $ 982      $ (168   $ (2)    $ 2      $ 816      $ 5,257      $ 7,847   

Net income

                                                     1,013        1,013   

Other comprehensive income (loss)

                  207        10        (84     (2     131               131   

Effect of share-based compensation

           25                                                  25   

Dividends declared

                                                     (241     (241

Issuance of common shares

    7        (1                                               6   

Transfer of actuarial losses on defined benefit plans

                                84               84        (84       

Balance — June 30, 2012

  $ 1,490      $ 315      $ 1,189      $ (158   $ (2)    $      $ 1,031      $ 5,945      $ 8,781   

 

(1) 

All equity transactions are attributable to common shareholders.

 

(2) 

Any amounts incurred during a period are closed 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(1)  
                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
    Net
actuarial
loss on
defined
benefit
plans
    Other     Total
Accumulated
Other
Comprehensive
Income
    Retained
Earnings
    Total
Equity
 

Balance — December 31, 2010

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

Net income

                                                     1,572        1,572   

Other comprehensive (loss) income

                  (368     28                      (340            (340

Effect of share-based compensation

           34                                                  34   

Dividends declared

                                                     (120     (120

Issuance of common shares

    24                                                         24   

Balance — June 30, 2011

  $ 1,455      $ 342      $ 2,195      $ (149   $ (2)     $ 8      $ 2,054      $ 4,004      $ 7,855   

 

(1) 

All equity transactions are attributable to common shareholders.

 

(2) 

Any amounts incurred during a period are closed 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)

 

5   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


Potash Corporation of Saskatchewan Inc.

Notes to the Condensed Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2012

(in millions of US dollars except share and per-share 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. These unaudited interim condensed consolidated financial statements are based on International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”), and have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting.” The accounting policies used in preparing these unaudited interim condensed consolidated financial statements are consistent with those used in the preparation of the 2011 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 2011 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 1, 2012.

Recent Accounting Pronouncements

The following new standards and amendments or interpretations to existing standards have been published and are mandatory for future periods as noted below:

IFRS 9, Financial Instruments

In November 2009, the IASB issued guidance on 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 net income. In December 2011, the IASB issued amendments which modify the requirements for transition from IAS 39 to IFRS 9. The modifications introduce new disclosure requirements and eliminate the requirement to restate prior periods to reflect the new presentation. The standard is to be applied prospectively and will be effective for periods commencing on or after January 1, 2015, with earlier application permitted. The company is reviewing the standard to determine the potential impact, if any, on its 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 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 reviewing the standard to determine the potential impact, if any, on its consolidated financial statements.

 

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   6


IFRS 12, Disclosure of Interests 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 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 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 reviewing these amendments to determine the potential impact, if any, 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 will require remeasurements (actuarial gains and losses and the actual return on plan assets) to be recognized immediately in OCI and all service cost and interest income (expense) to be recognized immediately in net income. Interest income (expense) will be calculated by applying the discount rate to the net defined benefit asset (liability). 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 reviewing these amendments to determine the potential impact, if any, on its consolidated financial statements.

Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities and IFRS 7, Disclosures

In December 2011, the IASB issued amendments to IAS 32 and IFRS 7 as part of its offsetting project. The amendments clarify certain items regarding offsetting financial assets and financial liabilities and also address common disclosure requirements. The amendments are to be applied retrospectively and will be effective for annual periods commencing on or after January 1, 2013 for IFRS 7 and January 1, 2014 for IAS 32, with earlier application permitted. If IAS 32 is early adopted, the disclosures required by the amendments to IFRS 7 must be provided. The company is reviewing these amendments to determine the potential impact, if any, on its consolidated financial statements.

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

In October 2011, the International Financial Reporting Interpretations Committee (“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 reviewing this interpretation to determine the potential impact, if any, on its consolidated financial statements.

 

2. Inventories

 

      June 30,
2012
     December 31,
2011
 

Finished products

   $ 385       $ 395   

Intermediate products

     91         98   

Raw materials

     88         91   

Materials and supplies

     157         147   
     $ 721       $ 731   

 

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

 

 

7   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


in the fair value of the investment below its cost may be evidence that the asset is impaired. When objective evidence of impairment exists, the impaired amount (i.e., the unrealized loss) is recognized in net income; any subsequent reversals would be recognized in OCI and would not flow back into net income.

At June 30, 2012, the company assessed whether there was objective evidence that its available-for-sale investment in Sinofert Holdings Limited (“Sinofert”) was impaired. The fair value of the investment, recorded in the consolidated statements of financial position, was $238 compared to the cost of $579. Factors considered in assessing impairment included the length of time and extent to which fair value had been below cost.

The company concluded that objective evidence of impairment existed as at June 30, 2012 due to the significance by which fair value was below cost. As a result, the company recognized an impairment loss of $341 in net income for the three and six months ended June 30, 2012 (2011 — $NIL). The recoverable amount was based on fair value less costs to sell which was determined through the value of Sinofert on the Hong Kong Stock Exchange.

 

4. Long-Term Debt

During the first quarter of 2012, the company classified as current the $250 aggregate principal amount of 4.875 percent senior notes due March 1, 2013.

 

 

5. Pension and Other Post-Retirement Benefits

A remeasurement of the defined benefit plan assets and liabilities was performed at June 30, 2012. As a result of a change in the discount rate, the company recorded net actuarial losses on defined benefit plan obligations of $73 in OCI, which was recognized immediately in retained earnings at June 30, 2012. The company’s defined benefit pension and other post-retirement benefit liabilities increased by $117 and deferred income tax liabilities decreased by $44 at June 30, 2012.

The discount rate used to determine the benefit obligation for the company’s significant plans at June 30, 2012 was 4.05 percent (December 31, 2011 — 4.60 percent).

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

 

      June 30,
2012
     December 31,
2011
 

Present value of defined benefit obligations

   $ (1,576    $ (1,417

Fair value of plan assets

     899         887   

Funded status

     (677      (530

Unvested prior service costs not recognized in statements of financial position

     (10      (10

Pension and other post-retirement benefit liabilities

   $ (687    $ (540

Balance comprised of:

     

Other assets

   $ 19       $ 20   

Liabilities

     

Current

     (8      (8

Long-term

     (698      (552

Pension and other post-retirement benefit liabilities

   $ (687    $ (540

 

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, 2011

    858,702,991         $ 1,483   

Issued under option plans

    362,000           4   

Issued for dividend reinvestment plan

    72,369           3   

Balance — June 30, 2012

    859,137,360         $ 1,490   

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   8


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 June 30, 2012  
      Potash      Phosphate      Nitrogen      All Others      Consolidated  

Sales

   $ 1,185       $ 569       $ 642       $       $ 2,396   

Freight, transportation and distribution

     (55      (44      (24              (123

Net sales — third party

     1,130         525         618              

Cost of goods sold

     (329      (429      (316              (1,074

Gross margin

     801         96         302                 1,199   

Depreciation and amortization

     (56      (64      (35      (2      (157

Inter-segment sales

                     50                   

Cash flows for additions to property, plant and equipment

     338         49         82         14         483   

 

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

Sales

   $ 1,121       $ 633       $ 571       $       $ 2,325   

Freight, transportation and distribution

     (70      (40      (22              (132

Net sales — third party

     1,051         593         549              

Cost of goods sold

     (258      (427      (340              (1,025

Gross margin

     793         166         209                 1,168   

Depreciation and amortization

     (37      (57      (32      (2      (128

Inter-segment sales

                     39                   

Cash flows for additions to property, plant and equipment

     398         45         46         3         492   

 

     Six Months Ended June 30, 2012  
      Potash      Phosphate      Nitrogen      All Others      Consolidated  

Sales

   $ 1,768       $ 1,182       $ 1,192       $       $ 4,142   

Freight, transportation and distribution

     (89      (85      (53              (227

Net sales — third party

     1,679         1,097         1,139              

Cost of goods sold

     (551      (849      (618              (2,018

Gross margin

     1,128         248         521                 1,897   

Depreciation and amortization

     (86      (124      (70      (5      (285

Inter-segment sales

                     92                   

Cash flows for additions to property, plant and equipment

     681         99         155         24         959   

 

     Six Months Ended June 30, 2011  
      Potash      Phosphate      Nitrogen      All Others      Consolidated  

Sales

   $ 2,230       $ 1,182       $ 1,117       $       $ 4,529   

Freight, transportation and distribution

     (153      (83      (45              (281

Net sales — third party

     2,077         1,099         1,072              

Cost of goods sold

     (541      (783      (660              (1,984

Gross margin

     1,536         316         412                 2,264   

Depreciation and amortization

     (79      (104      (65      (4      (252

Inter-segment sales

                     77                   

Cash flows for additions to property, plant and equipment

     745         92         64         32         933   

 

 

9   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


8. Share-Based Compensation

On May 17, 2012, the company’s shareholders approved the 2012 Performance Option Plan under which the company may, after February 21, 2012 and before January 1, 2013, grant 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 June 30, 2012, options to purchase a total of 1,499,300 common shares had been granted under the plan. The weighted average fair value of options granted was $16.33 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

   $ 39.36   

Expected dividend per share

   $ 0.56   

Expected volatility

     53%   

Risk-free interest rate

     1.06%   

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 June 30, 2012, the company’s income tax expense was $304 (2011 — $297). For the six months ended June 30, 2012, the company’s income tax expense was $464 (2011 — $540). The actual effective tax rates on ordinary earnings for the three and six months ended June 30, 2012 were 26 percent and 25 percent, respectively (2011 — 26 percent and 27 percent, respectively). The actual effective tax rates including discrete items for the three and six months ended June 30, 2012 were 37 percent and 31 percent, respectively (2011 — 26 percent for both periods). The impairment of the company’s available-for-sale investment in Sinofert is not deductible for tax purposes. Total discrete tax adjustments that impacted the rate in the three months ended June 30, 2012 resulted in an income tax expense of $5. Total discrete tax adjustments that impacted the rate in the six months ended June 30, 2012 resulted in an income tax expense of $3 compared to an income tax recovery of $24 in the same period last year. A significant item recorded in first-quarter 2011 was a current tax recovery of $21 for previously paid withholding taxes.

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

 

Income Tax Assets (Liabilities)    Statements of Financial Position Location    June 30,
2012
     December 31,
2011
 

Current income tax assets:

        

Current

  

Receivables

   $ 109       $ 21   

Non-current

  

Other assets

     121         117   

Deferred income tax assets

  

Other assets

     31         19   

Total income tax assets

        $ 261       $ 157   

Current income tax liabilities:

        

Current

  

Payables and accrued charges

   $ (25    $ (271

Non-current

  

Other non-current liabilities and deferred credits

     (91      (85

Deferred income tax liabilities

  

Deferred income tax liabilities

     (1,222      (1,052

Total income tax liabilities

        $ (1,338    $ (1,408

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   10


10. Net Income per Share

Basic net income per share for the quarter was calculated on the weighted average number of shares issued and outstanding for the three months ended June 30, 2012 of 858,988,000 (2011 — 854,997,000). Basic net income per share for the six months ended June 30, 2012 was calculated based on the weighted average number of shares issued and outstanding for the period of 858,888,000 (2011 — 854,518,000).

Diluted net income per share was calculated based on the weighted average number of shares issued and outstanding during the period. The denominator was: (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 was 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 June 30, 2012 was 875,507,000 (2011 — 876,527,000) and for the six months ended June 30, 2012 was 875,813,000 (2011 — 876,612,000).

Excluded from the calculation of diluted net income per share for the three and six months ended June 30, 2012 were weighted average options outstanding of 2,484,950 relating to the 2011 and 2008 Performance Option Plans, as the options’ exercise prices were greater than the average market price of common shares for the periods.

 

11. Seasonality

The company’s sales of fertilizer can be seasonal. 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 sales can be expected to shift from one quarter to another.

 

12. Contingencies and Other Matters

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 June 30, 2012, 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”) issued in September 2007 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. The soil remediation has been performed and approved by USEPA. A Remedial Design Work Plan for the interim remedy for groundwater has been submitted to USEPA. Although PCS Joint Venture sold the Lakeland property in July 2006, PCS Joint Venture has retained the above-described remediation responsibilities and has indemnified the third-party purchaser for the costs of remediation and certain related items.

 

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. The current owner of the Planters Property filed a complaint against PCS Nitrogen in the United States District Court for the District of South Carolina seeking environmental response costs. 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 has filed a notice of appeal to the United States Court of Appeals for the Fourth Circuit. The ultimate amount of liability for PCS Nitrogen, if any, depends upon the final outcome of the litigation, the amount needed for remedial activities, the ability of other parties to pay and the availability of insurance.

 

 

11   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


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 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 past USEPA costs. The removal activities commenced in August 2007 and are estimated to cost $75. The Settling Parties have initiated CERCLA contribution litigation against PCS Phosphate and more than 100 other entities. PCS Phosphate filed crossclaims, counterclaims and third-party actions seeking cost recovery. In addition to the removal action at the Site, the USEPA has investigated sediments downstream 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 and contribution litigation. On July 10, 2012, the USEPA sent a Special Notice letter to the Settling Parties and to PCS Phosphate seeking the performance and funding of a Remedial Investigation/Feasibility Study at “Operable Unit 2,” which is the former Ward Transformer plant, certain properties surrounding the plant and drainage pathways upgradient of Operable Unit 1. PCS Phosphate is evaluating its response to the Special Notice letter.

 

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 the 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, 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 will implement the approved interim corrective measures but it is unable to estimate with reasonable certainty the total cost of its corrective action obligations under the Order at this time.

 

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. It incurred costs of $17 to address the sinkhole between the time of discovery and completion of remediation in July 2011. In December 2010, the company entered into a consent order with the Florida Department of Environmental Protection (“FDEP”) 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 submitted, and FDEP is reviewing, the Remedial Summary Report for the sinkhole remediation. The company also entered into an order on consent with the USEPA. In May 2011, the USEPA and the company’s 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 is also engaged in ongoing site assessment and/or remediation activities at a number of other facilities and sites. This includes matters related to investigation of potential brine migration at certain of the potash sites. Based on current information, 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 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 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 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 three plants. At this time, it 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, it is unable to evaluate the extent of any exposure it may have in these matters.

 

Ÿ  

The USEPA has 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, it 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 and the Louisiana Department of Environmental Quality have notified the company of various alleged violations of the Clean Air Act at

 

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   12


   

its Geismar, Louisiana plant. The governments have demanded process changes and penalties that would cost approximately $34, but the company denies that it has any liability for the Geismar, Louisiana matter. The company is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be. In May 2012, the USEPA issued to the company’s White Springs, Florida plant a Notice of Violation (“NOV”) alleging that certain specified projects at the sulfuric acid plants were undertaken in violation of the Clean Air Act. The company has met with USEPA to discuss these allegations but, at this time, is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be.

 

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 it to mine the phosphate deposits identified in the Section 401 certification. 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, collectively, the “petitioners”), 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. On April 26, 2012, OAH granted summary judgment to the company and denied all of the claims asserted by the petitioners. The decision becomes final after review by the Environmental Management Commission where the petitioners would have to carry the burden of showing that the decision is clearly contrary to the preponderance of admissible evidence in the record.

 

Ÿ  

There is no certainty as to the scope or timing of any final, effective requirements to control greenhouse gas emissions in the US or Canada. Canada has withdrawn from participation in the Kyoto Protocol, and the Canadian government previously 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. In January 2011, the USEPA began phasing in requirements for projects that result in a significant increase in greenhouse gas emissions at the company’s plants to obtain permits incorporating the “best available control

   

technology.” The company is not aware of any projects at its facilities that would be subject to these requirements. 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 2012. 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 to be discharged from the company’s White Springs, Florida plant. The State of Florida has adopted rules for numeric nutrient criteria, subject to approval by the USEPA, which could substitute for the federal rules. Projected capital costs resulting from the USEPA rule could be in excess of $100 for White Springs, and there is no guarantee that controls can be implemented which are capable of achieving compliance with the revised nutrient standards under all flow conditions. This estimate assumes that the federal rule survives court challenges and that none of the site-specific mechanisms for relief from the revised nutrient criteria are available to the plant. Various judicial challenges to the federal rules have been filed, including one lawsuit against the federal rule by The Fertilizer Institute (“TFI”) and White Springs. In June 2011, TFI, White Springs and additional parties filed a Motion for Summary Judgment seeking, among other things, to vacate the USEPA rule. In September 2011, the USEPA filed its Motion for Summary Judgment seeking to uphold its rule. In February 2012, the United States District Court for the Northern District of Florida (“District Court”) ruled on the summary judgment motions and upheld the USEPA numeric nutrient criteria for Florida’s lakes and springs but rejected the criteria for Florida’s streams and rivers as arbitrary and capricious. The effective date for the USEPA numeric nutrient criteria for lakes and streams is January 6, 2013. The company is evaluating the District Court’s decision and continues to monitor the state rule which has been submitted to the USEPA for approval. The prospects for implementation of either the federal or the state rule and the availability of the site-specific relief mechanisms under either rule are uncertain.

 

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 and/or

 

 

13   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


   

certain states' laws. In June 2009, the company, along with other defendants, filed a motion to dismiss the indirect purchaser plaintiffs’ and the direct purchaser plaintiffs’ amended consolidated complaints. In November 2009, the trial court granted in part and denied in part defendants’ motion to dismiss the indirect purchasers’ amended consolidated complaint. Specifically, the court dismissed the indirect purchasers plaintiffs' federal claim and all state law claims, except those arising out of the state antitrust laws of Michigan and Kansas, and plaintiffs' Iowa unjust enrichment claim. In September 2011, a two-judge panel from the United States Court of Appeals for the Seventh Circuit (the “Seventh Circuit”) vacated the trial court’s order denying the defendants’ motion to dismiss and remanded the case to the trial court with instructions to dismiss the direct plaintiffs’ amended complaint. The plaintiffs petitioned for rehearing en banc, which was granted by the Seventh Circuit. On June 27, 2012, the en banc court affirmed the trial court's order denying defendants' motion to dismiss the direct purchaser plaintiffs' complaint. 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 Canada and the US 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 June 30, 2012 were $668 (2011 — $559) and six months ended June 30, 2012 were $960 (2011 — $1,040). At June 30, 2012, $359 (December 31, 2011 — $291) was owing from Canpotex. Sales to Canpotex are at prevailing market prices and are settled on normal trade terms.

 

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   14


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 August 1, 2012. 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 as amended by our Annual Report on Form 10-K/A (collectively, the 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, 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), phosphate (P) and nitrogen (N). Through our Canadian operations, we are responsible for about 20 percent of global potash capacity. In addition, we hold strategic investments in other potash-related businesses in South America, the Middle East and Asia. We complement our potash assets with focused positions in 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; while 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

We believe that our ability to deliver superior long-term financial returns is the cornerstone of establishing enduring value for all stakeholders. Strong financial performance rewards our shareholders and, at the same time, allows us to focus on our broader social and environmental responsibilities and contribute to the long-term prosperity of our customers, employees, suppliers and communities.

We devise strategies and set priorities in each of our nutrient segments that align with our company-wide goals, focusing on the areas that may best support these goals. While each of our nutrients is important to our success, we believe our unique leverage in potash provides the greatest opportunity for growth in the years ahead.

Our strategic approach in potash is to build on our position whenever value-enhancing opportunities arise and match production to market demand (to reduce downside risk and conserve the long-term value of our potash resources). Our strategic approach in phosphate is to optimize product mix (to maximize gross margin and reduce volatility) and focus on environmental initiatives that preserve habitat and promote natural biodiversity in surrounding areas (in order to support the long-term viability of our operations). Our strategic approach in nitrogen is to enhance gross margin and earnings stability by being a lower delivered cost supplier to the large US nitrogen market, supplemented with an emphasis on sales to industrial customers that value long-term secure supply, and to focus on initiatives to improve energy efficiency.

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 strategy. Most of our recent capital expenditures have gone to investments to expand 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.

 

 

15   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


Key Performance Drivers — Performance Compared to Goals

In all areas of our business, we set goals and design strategies that focus on delivering sustainable value while appropriately balancing stakeholder interests. We demonstrate our accountability by tracking and reporting our progress against targets related to each goal. Our long-term goals and 2012 targets are set out on pages 31 to 42 of our 2011 Annual Report. A summary of our progress against selected goals and representative annual targets is set out below.

 

Goal  

Representative

2012 Annual Target

 

Performance

to June 30, 2012

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 7 percent in the first six months of 2012 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 5 percent.
Be the supplier of choice to the markets we serve.   Reduce the number of product tonnes involved in customer complaints below the prior three-year average.   For the first six months of 2012, product tonnes involved in customer complaints fell 32 percent compared to the prior three-year first-half average.
Attract and retain talented, motivated and productive employees who are committed to our long-term goals.   Maintain an annual employee turnover rate (excluding retirements) of 5 percent or less.   Employee turnover rate (excluding retirements) on an annualized basis for the first six months of 2012 was 4 percent.
Achieve no harm to people.  

Achieve zero life-altering injuries at our sites.

 

Reduce total site severity injury rate by 35 percent from 2008 levels by the end of 2012.

 

Sadly, we had a fatality at our Allan potash facility during the second quarter of 2012.

 

Total site severity injury rate was 52 percent below the 2008 annual level for the first six months of 2012. It was 40 percent below the 2008 annual level for the first six months of 2011 and 44 percent below the 2008 annual level by the end of 2011.

     
    Reduce total site recordable injury rate to 1.30 (per 200,000 hours worked) or lower.   During the first six months of 2012, total site recordable injury rate was 1.15.
Achieve no damage to the environment.   Reduce total reportable incidents (releases, permit excursions and spills) by 10 percent from 2011 levels.   Annualized total reportable incidents were up 71 percent during the first six months of 2012 compared to 2011 annual levels. Compared to the first six months of 2011, total reportable incidents were up 50 percent.

Financial 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 (IFRS), as issued by the International Accounting Standards Board (IASB), 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, the entire document should be read carefully, together with our 2011 Annual Report.

Earnings Guidance — Second Quarter 2012

 

      Company Guidance      Actual Results  

Earnings per share

   $ 0.90 – $1.10       $ 0.60   

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   16


Overview of Actual Results

 

    Three Months Ended June 30     Six Months Ended June 30  
Dollars (millions) — except per-share amounts   2012     2011     Change     % Change     2012     2011     Change     % Change  

Sales

  $ 2,396      $ 2,325      $ 71        3      $ 4,142      $ 4,529      $ (387     (9

Gross Margin

    1,199        1,168        31        3        1,897        2,264        (367     (16

Operating Income

    857        1,175        (318     (27     1,542        2,200        (658     (30

Net Income

    522        840        (318     (38     1,013        1,572        (559     (36

Net Income per Share — Diluted

    0.60        0.96        (0.36     (38     1.16        1.79        (0.63     (35

Other Comprehensive Income (Loss)

    21        (94     115        n/m
       131        (340     471        n/m   

 

n/m = not meaningful

 

Earnings in the second quarter and first half of 2012 were lower than the same periods in 2011 due largely to a $341 million non-tax deductible charge related to the impairment of our investment in Sinofert Holdings Limited (Sinofert) in 2012. Accelerating potash demand, including unprecedented offshore sales volumes, and record contribution from our nitrogen operations in the second quarter resulted in the third-best quarterly total gross margin in our history and slightly exceeded that of the same period last year. The decline in year over year gross margin was the result of declines in potash and phosphate gross margins, partially offset by increased nitrogen gross margin. Second-quarter potash gross margin represented 67 percent of total gross margin (68 percent in the second quarter of 2011) and 59 percent of first six months’ gross margin (68 percent in first-half 2011).

Significant agronomic need and strong crop economics led to increased potash demand during the second quarter. After drawing down existing inventories through the first quarter, all major markets accelerated purchases, with offshore shipments from North American producers setting a new quarterly record. Latin American buyers — most notably in Brazil — moved aggressively to keep pace with record movement to the farm level. Offshore demand was further supported by continued strong engagement from Southeast Asian markets as well as significant shipments to China to satisfy first-half contracted volume commitments. In North America, the spring planting season brought increased demand as dealers responded to immediate customer needs, although they continued to take a cautious approach to inventory management in an effort to end the season with minimal carryover. As a result, North American producer domestic sales volumes were 9 percent below last year’s second quarter, while up 71 percent from first-quarter 2012.

In phosphate, second-quarter shipments of solid fertilizer from US producers declined slightly from the same period last year, as improved North American demand largely offset weaker offshore

shipments. Dealers in North America were motivated by strong spring demand and a late-season push to begin restocking in light of limited inventories and rising benchmark prices. The increased activity pushed North American second-quarter shipments from US producers 12 percent above those of the comparable period in 2011. Despite strong demand from Latin America, offshore shipments from US producers fell 22 percent from the same period last year as shipments to India dropped sharply in response to delayed contract settlements with major suppliers as well as limited product availability. While benchmark prices remained slightly below those of the previous year, tight US producer inventories resulted in upward movement late in the quarter.

Nitrogen demand remained robust throughout the second quarter, driven by near-record corn plantings in the US — the highest acreage since 1937. This strong demand, in addition to reported production issues in key exporting regions and delays in expected new capacity, resulted in limited North American producer inventories. With tightening supply, prices for ammonia and urea remained strong through most of the quarter before urea markets began to reflect the typical seasonal weakness coming out of the North American planting season.

Other comprehensive income for the second quarter of 2012 consisted of the reclassification to income of the unrealized loss on our investment in Sinofert which was impaired as of June 30, 2012, a reduction in the fair value of our investments in Israel Chemicals Ltd. (ICL) and Sinofert and net actuarial losses resulting from a remeasurement of our defined benefit plans. Other comprehensive income for the first half of 2012 was primarily affected by the factors above, except that the fair value of our investment in ICL increased. Other comprehensive loss for the second quarter of 2011 was due to a decline in the fair value of our investment in ICL. The decline in fair value of our investments in ICL and Sinofert during the first half of 2011 led to other comprehensive loss for that period.

 

 

17   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


Balance Sheet

 

LOGO

 

Property, plant and equipment increased primarily (71 percent) due to our previously announced potash capacity expansions and other potash projects. Available-for-sale investments fell due to the lower fair value of our investment in Sinofert, partially offset by a higher fair value for our investment in ICL. Cash provided by operations exceeded cash used to purchase property, plant and equipment, repay commercial paper and pay dividends, resulting in higher cash and cash equivalents. As at June 30, 2012, $405 million (December 31, 2011 — $387 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 fell as the repayment of commercial paper exceeded the increase in current portion of long-term debt (our senior notes due March 1, 2013 were classified as current). Payables and accrued charges were down due to reduced income taxes payable (as a result of payments made during the first six months of 2012 and lower current taxes accrued on earnings), fewer trade payables and lower accrued payroll (employee bonuses accrued at year end were paid out during the first quarter of 2012), all of which was partially offset by a doubling of dividends payable. Deferred income tax liabilities increased primarily due to tax depreciation exceeding accounting depreciation and was partially offset by the tax impact on the remeasurement of our defined benefit plans (see Note 3 to the financial statements in this 10-Q).

Equity was impacted by net income, other comprehensive income (both discussed in more detail above) and dividends declared during the first six months of 2012.

Operating Segment Review

We report our results (including gross margin) in three business segments: potash, phosphate and nitrogen, as described in Note 7 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. Management includes net sales in segment disclosures in the unaudited interim condensed consolidated financial statements pursuant to IFRS, as issued by the IASB, which require 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.

 

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   18


LOGO   LOGO   LOGO

Potash

 

    Three Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2012     2011     % Change     2012     2011     % Change     2012     2011     % Change  

Manufactured product

                 

Net sales

                 

North America

  $ 326      $ 409        (20     651        831        (22   $ 502      $ 492        2   

Offshore

    803        640        25        1,955        1,690        16      $ 411      $ 379        8   
    1,129        1,049        8        2,606        2,521        3      $ 433      $ 416        4   

Cost of goods sold

    (328     (256     28                              $ (125   $ (101     24   

Gross margin

    801        793        1            $ 308      $ 315        (2

Other miscellaneous and purchased product gross margin(2)

                                                                    

Gross Margin

  $ 801      $ 793        1                              $ 308      $ 315        (2

 

(1) 

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

 

(2) 

Comprised of net sales of $1 million (2011 — $2 million) less cost of goods sold of $1 million (2011 — $2 million).

 

    Six Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2012     2011     % Change     2012     2011     % Change     2012     2011     % Change  

Manufactured product

                 

Net sales

                 

North America

  $ 525      $ 875        (40     1,051        1,923        (45   $ 500      $ 455        10   

Offshore

    1,147        1,195        (4     2,804        3,386        (17   $ 409      $ 353        16   
    1,672        2,070        (19     3,855        5,309        (27   $ 434      $ 390        11   

Cost of goods sold

    (546     (536     2                              $ (142   $ (101     41   

Gross margin

    1,126        1,534        (27         $ 292      $ 289        1   

Other miscellaneous and purchased product gross margin(2)

    2        2                                                          

Gross Margin

  $ 1,128      $ 1,536        (27                           $ 293      $ 289        1   

 

(1) 

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

 

(2) 

Comprised of net sales of $7 million (2011 — $7 million) less cost of goods sold of $5 million (2011 — $5 million).

 

19   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


    Three Months Ended June 30     Six Months Ended June 30  
     2012     2011     % Change     2012     2011     % Change  

KCl tonnes produced (thousands)

    2,807        2,570        9        4,382        5,162        (15

Total site severity injury rate

    0.72        0.40        80        0.73        0.58        26   

Environmental incidents

    3        2        50        5        4        25   

During the second quarter of 2012, a new collective agreement was ratified by the union representing employees in Saskatchewan at our Lanigan mine. This collective agreement expires in May 2015.

Potash gross margin variance attributable to:

 

   

Three Months Ended June 30

2012 vs. 2011

    

Six Months Ended June 30

2012 vs. 2011

 
          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

  $ (90   $ 19      $ (14   $ (85    $ (341   $ 47      $ (28   $ (322

Offshore

    53        90        (50     93         (162     157        (81     (86

Change in market mix

    29        (27     (2             39        (36     (3       

Total manufactured product

  $ (8   $ 82      $ (66     8       $ (464   $ 168      $ (112     (408

Other miscellaneous and purchased product

                                                              

Total

                          $ 8                               $ (408

 

LOGO   LOGO

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   20


LOGO   LOGO

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

 

     Three Months Ended June 30      Six Months Ended June 30  
      2012      2011      Change      % Change      2012      2011      Change      % Change  

Asia (excluding China and India)

     36         51         (15      (29      47         48         (1      (2

Latin America

     35         32         3         9         28         30         (2      (7

China

     21         14         7         50         16         15         1         7   

India

     6                 6         n/m         6         3         3         100   

Oceania, Europe and Other

     2         3         (1      (33      3         4         (1      (25
       100         100                           100         100                     

 

n/m = not meaningful

The most significant contributors to the change in total gross margin quarter over quarter were as follows(1):

 

(1) 

Direction of arrows refers to impact on gross margin.

 

  Net Sales Prices     Sales Volumes     Cost of Goods Sold
h   Higher pricing in key contract and spot markets.   h  

Offshore sales volumes reached a record. All markets were active – most notably Latin America – while China and India were more engaged during the quarter and markets in Other Asia continued their strong pace.

 

 

i

 

 

 

i

 

At Esterhazy, brine management costs, other operating costs and depreciation were higher.

 

11 shutdown weeks incurred in 2012 were due to weather-related pond issues at our Patience Lake facility and unplanned maintenance at our Rocanville and Allan facilities (no shutdown weeks taken in 2011 as facilities operated at or near their full capabilities).

 

    i   In North America, sales volumes significantly exceeded the first-quarter 2012 total but trailed the second quarter last year as dealers were determined to exit the planting season with limited inventory.    
        i  

Depreciation costs increased due to higher asset levels associated with our mine expansion activity.

 

        i  

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

 

 

21   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


The change in market mix produced a favorable variance of $29 million related to sales volumes and an unfavorable variance of $27 million in sales prices due to more lower-priced standard product being sold to the offshore market whereas last year, higher-priced granular sales to North America comprised a larger proportion of total sales.

The most significant contributors to the change in total gross margin year over year were as follows(1):

 

(1) 

Direction of arrows refers to impact on gross margin.

 

  Net Sales Prices   Sales Volumes   Cost of Goods Sold
h   Our average realized potash price was up, reflecting price gains in spot and contract markets achieved throughout 2011. Although prices in most major spot markets declined from fourth-quarter 2011, our average realized price moved higher and reflected a lower percentage of sales shipped to offshore contract markets.  

i      Volumes fell as a result of slower movement to all major markets in the first half of 2012, including China, which did not settle its new contract with Canpotex until late March, and India, which delayed shipments of most remaining tonnage on existing contracts until the second quarter of 2012.

 

i      In North America our sales volumes were well below the record first half of 2011 largely because of buyer destocking during the first half of this year.

 

i      40 shutdown weeks incurred in 2012 (at our Lanigan, Rocanville, Allan and Patience Lake facilities) primarily to match supply to demand (no shutdown weeks taken in 2011 as facilities operated at or near their full capabilities). During this downtime, we opted to allocate resources to non-production activities rather than lay off employees, which resulted in higher shutdown costs.

 

i      Depreciation costs increased due to higher asset levels associated with our mine expansion activity.

 

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

     

The change in market mix produced a favorable variance of $39 million related to sales volumes and an unfavorable variance of $36 million in sales prices due to more lower-priced standard product being sold to the offshore market whereas last year, higher-priced granular sales to North America comprised a larger proportion of total sales.

Phosphate

 

    Three Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2012     2011     % Change     2012     2011     % Change     2012     2011     % Change  

Manufactured product

                 

Net sales

                 

Fertilizer

  $ 308      $ 392        (21     619        696        (11   $ 498      $ 562        (11

Feed and Industrial

    208        194        7        317        317             $ 656      $ 611        7   
    516        586        (12     936        1,013        (8   $ 552      $ 578        (4

Cost of goods sold

    (425     (423                                  $ (454   $ (417     9   

Gross margin

    91        163        (44         $ 98      $ 161        (39

Other miscellaneous and purchased product
gross margin
(2)

    5        3        67                                                   

Gross Margin

  $ 96      $ 166        (42                           $ 103      $ 164        (37

 

(1)

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

 

(2)

Comprised of net sales of $9 million (2011 — $7 million) less cost of goods sold of $4 million (2011 — $4 million).

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   22


    Six Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2012     2011     % Change     2012     2011     % Change     2012     2011     % Change  

Manufactured product

                 

Net sales

                 

Fertilizer

  $ 671      $ 719        (7     1,256        1,300        (3   $ 534      $ 553        (3

Feed and Industrial

    409        366        12        610        606        1      $ 670      $ 603        11   
    1,080        1,085               1,866        1,906        (2   $ 579      $ 569        2   

Cost of goods sold

    (841     (776     8                              $ (450   $ (407     11   

Gross margin

    239        309        (23         $ 129      $ 162        (20

Other miscellaneous and purchased product
gross margin
(2)

    9        7        29                                                   

Gross Margin

  $ 248      $ 316        (22                           $ 133      $ 166        (20

 

(1)

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

 

(2)

Comprised of net sales of $17 million (2011 — $14 million) less cost of goods sold of $8 million (2011 — $7 million).

 

    Three Months Ended June 30     Six Months Ended June 30  
     2012     2011     % Change     2012     2011     % Change  

P2O5 tonnes produced (thousands)

    500        552        (9     986        1,084        (9

P2O5 operating rate percentage

    84%        93%        (10     83%        91%        (9

Total site severity injury rate

    0.23        0.99        (77     0.40        1.06        (62

Environmental incidents

    1        1               4        1        300   

Phosphate gross margin variance attributable to:

 

   

Three Months Ended June 30

2012 vs. 2011

    

Six Months Ended June 30

2012 vs. 2011

 
         

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

  $ (21   $ (40   $ (12   $ (73    $ (9   $ (26   $ (38   $ (73

Feed and Industrial

    (2     14        (11     1         (1     41        (37     3   

Change in market mix

           1        (1             (4     4                 

Total manufactured product

  $ (23   $ (25   $ (24     (72    $ (14   $ 19      $ (75     (70

Other miscellaneous and purchased product

                            2                                 2   

Total

                          $ (70                            $ (68

 

23   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


LOGO   LOGO

The most significant contributors to the change in total gross margin quarter over quarter were as follows(1):

 

(1) 

Direction of arrows refers to impact on gross margin.

 

  Net Sales Prices     Sales Volumes     Cost of Goods Sold

i

 

h

 

Our average realized phosphate price reflected lower prices for both solid and liquid fertilizers as a result of key benchmark prices resetting.

 

Feed and industrial products benefitted from more stable pricing.

  i   Phosphate sales volumes were lower than the second quarter last year, due to slightly lower production and timing of vessel loadings.   i   Lower sulfur costs (down 5 percent) were more than offset by costs associated with our Aurora workforce reduction commenced during the second quarter of 2012, higher purchased rock costs at our Geismar facility and a larger negative adjustment to our phosphate asset retirement obligations in the second quarter of 2012 due to a reduction in the relevant discount rates.

The most significant contributors to the change in total gross margin year over year were as follows(1):

 

(1) 

Direction of arrows refers to impact on gross margin.

 

  Net Sales Prices     Sales Volumes     Cost of Goods Sold
h   Results were supported by the typically more stable pricing environment in feed and industrial products, combined with the ability of liquid fertilizer products to attract a premium relative to solid fertilizers and the benefit of a time lag on quarterly contract sales.   i   A larger percentage of sales allocated to meet offshore fertilizer demand, combined with increased feed and industrial volumes, was more than offset by weakness in North American fertilizer markets.   i   Costs were impacted by higher sulfur costs (up 6 percent), increased ammonia costs (up 9 percent), higher purchased rock costs at our Geismar facility and costs associated with our Aurora workforce reduction commenced during the second quarter of 2012.

 

PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   24


Nitrogen

 

    Three Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2012     2011     % Change     2012     2011     % Change     2012     2011     % Change  

Manufactured product

                 

Net sales

                 

Ammonia

  $ 265      $ 280        (5     517        514        1      $ 512      $ 545        (6

Urea

    181        130        39        295        316        (7   $ 613      $ 413        48   

Nitrogen solutions/Nitric acid/Ammonium nitrate

    124        110        13        493        469        5      $ 251      $ 234        7   
    570        520        10        1,305        1,299             $ 436      $ 400        9   

Cost of goods sold

    (290     (322     (10                           $ (222   $ (248     (10

Gross margin

    280        198        41                              $ 214      $ 152        41   

Other miscellaneous and purchased product gross margin(2)

    22        11        100                                                   

Gross Margin

  $ 302      $ 209        44                              $ 231      $ 161        43   

 

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

 

(2)  Comprised of net sales of $48 million (2011 — $29 million) less cost of goods sold of $26 million (2011 — $18 million).

 

     

     

    Six Months Ended June 30  
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
     2012     2011     % Change     2012     2011     % Change     2012     2011     % Change  

Manufactured product

                 

Net sales

                 

Ammonia

  $ 495      $ 524        (6     1,033        1,028             $ 480      $ 510        (6

Urea

    335        268        25        629        647        (3   $ 533      $ 414        29   

Nitrogen solutions/Nitric acid/Ammonium nitrate

    234        222        5        933        964        (3   $ 250      $ 230        9   
    1,064        1,014        5        2,595        2,639        (2   $ 410      $ 384        7   

Cost of goods sold

    (578     (621     (7                           $ (223   $ (235     (5

Gross margin

    486        393        24                              $ 187      $ 149        26   

Other miscellaneous and purchased product gross margin(2)

    35        19        84                                                   

Gross Margin

  $ 521      $ 412        26                              $ 201      $ 156        29   

 

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

 

(2)    Comprised of net sales of $75 million (2011 — $58 million) less cost of goods sold of $40 million (2011 — $39 million).

 

       

       

                      Three Months Ended
June 30
    Six Months Ended June 30  
                          2012     2011     % Change     2012     2011     % Change  

N tonnes produced (thousands)

          697        705        (1     1,378        1,391        (1

Total site severity injury rate

          0.21               n/m        0.16        0.14        14   

Environmental incidents

                            1        2        (50     3        3          

 

n/m = not meaningful

 

25   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


Nitrogen gross margin variance attributable to:

 

   

Three Months Ended June 30

2012 vs. 2011

    

Six Months Ended June 30

2012 vs. 2011

 
         

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

  $ 1      $ (17   $ 22      $ 6       $ 2      $ (31   $ 26      $ (3

Urea

    (4     61        10        67         (4     76        10        82   

Solutions, NA, AN

    2        9        (3     8         (7     19        (3     9   

Hedge

                  1        1                       5        5   

Change in market mix

           (5     5                (7     3        4          

Total manufactured product

  $ (1   $ 48      $ 35        82       $ (16   $ 67      $ 42        93   

Other miscellaneous and purchased product

                            11                                 16   

Total

                          $ 93                               $ 109   

 

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PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q   26


     Three Months Ended June 30      Six Months Ended June 30  
    

Sales Tonnes

(thousands)

     Price per Tonne     

Sales Tonnes

(thousands)

     Price per Tonne  
      2012      2011      2012      2011      2012      2011      2012      2011  

Fertilizer

     432         448       $ 541       $ 428         807         836       $ 481       $ 401   

Industrial and Feed

     873         851       $ 385       $ 386         1,788         1,803       $ 378       $ 376   
       1,305         1,299       $ 436       $ 400         2,595         2,639       $ 410       $ 384   

The most significant contributors to the change in total gross margin quarter over quarter were as follows(1):

 

(1) 

Direction of arrows refers to impact on gross margin.

 

  Net Sales Prices     Cost of Goods Sold
h   Due to tightening supply, urea pricing helped push the average realized price for the second quarter above the same period last year.   h   Average natural gas costs in production, including hedge, decreased 14 percent. Natural gas costs in Trinidad production fell 2 percent (contract price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas used in production decreased 45 percent. Including losses on our hedge position, US gas prices declined 34 percent.

The most significant contributors to the change in total gross margin year over year were as follows(1):

 

(1) 

Direction of arrows refers to impact on gross margin.

 

  Net Sales Prices     Sales Volumes     Cost of Goods Sold

h

 

i

 

Strong demand for urea, nitrogen solutions and nitric acid, combined with limited supply, pushed prices for these products higher.

 

While ammonia prices strengthened towards the end of the first quarter and through the second quarter, key benchmark prices were below that of the first half of last year due to tight global supplies in the first half of 2011.

  i   Sales volumes were slightly below the same period last year, largely as a result of reduced production at Geismar and natural gas limitations at Trinidad impacting our production in 2012.   h   Average natural gas costs in production, including hedge, decreased 16 percent. Natural gas costs in Trinidad production fell 6 percent while our US spot costs for natural gas used in production decreased 38 percent. Including losses on our hedge position, US gas prices declined 31 percent.

 

27   PotashCorp 2012 Second Quarter Quarterly Report on Form 10-Q


Other Expenses and Income

 

     Three Months Ended June 30      Six Months Ended June 30  
Dollars (millions)    2012     2011     Change     % Change      2012     2011     Change     % Change  

Selling and administrative expenses

   $ (56   $ (55   $ (1     2       $ (113   $ (130   $ 17        (13

Provincial mining and other taxes

     (72     (60     (12     20         (100     (94     (6     6   

Share of earnings of equity-accounted investees

     68        66        2        3         143        117        26        22   

Dividend income

     67        53        14        26         67        53        14        26   

Impairment of available-for-sale investment

     (341            (341     n/m         (341            (341     n/m   

Other (expenses) income

     (8     3        (11     n/m         (11     (10     (1     10   

Finance costs

     (31     (38     7        (18      (65     (88     23        (26

Income taxes

     (304     (297     (7     2         (464     (540     76        (14

 

n/m = not meaningful

Selling and administrative expenses were lower year over year due primarily to decreased accruals for our short-term incentive plan and our medium-term incentive plan.

Provincial mining and other taxes are comprised mainly of the Saskatchewan Potash Production Tax (PPT) and a resource surcharge. The PPT is comprised of a base tax per tonne of product sold and an additional tax based on mine profit, which is reduced by an amount based on potash capital expenditures. The resource surcharge is a percentage (3 percent) of the value of the company’s Saskatchewan resource sales. The PPT expense in the second quarter and first six months of 2012 was higher than in the same periods in 2011 as a result of loss carry-forwards used in the prior year. The resource surcharge decreased year over year as a result of lower potash sales revenues in the first half of 2012 compared to the same period in 2011.

Share of earnings of equity-accounted investees, primarily Arab Potash Company and Sociedad Quimica y Minera de Chile S.A., was higher year over year due to increased earnings by these companies. ICL paid higher dividends in the second quarter and first half of 2012 compared to the same periods last year.

At June 30, 2012, we concluded there was objective evidence that our available-for-sale investment in Sinofert was impaired due to the significance by which fair value was below cost. As a result, we recognized a non-tax deductible impairment loss of $341 million in net income for the three and six months ended June 30, 2012. No such losses were recognized in 2011.

Finance costs were lower as a result of the repayment of 10-year senior notes during the second quarter of 2011. Weighted average debt obligations outstanding and the associated interest rates were as follows:

 

    Three Months Ended June 30     Six Months Ended June 30  
Dollars (millions) — except percentage amounts   2012     2011     Change     % Change     2012     2011     Change     % Change  

Long-term debt obligations, including current portion

                 

Weighted average outstanding

  $ 3,757      $ 4,258      $ (501)        (12   $ 3,757      $ 4,308      $ (551)        (13

Weighted average effective interest rate

    5.2%        5.4%        (0.2)%        (4     5.2%        5.5%        (0.3)%        (5

Short-term debt obligations

                 

Weighted average outstanding

  $ 698      $ 954      $ (256)        (27   $ 768      $ 1,029      $ (261)