Listed: TSX, NYSE Symbol: POT SASKATOON, SK, Oct. 25
/PRNewswire-FirstCall/ -- Potash Corporation of Saskatchewan Inc.
(PotashCorp) today announced third-quarter earnings of $145.2
million, or $1.37 per share(1), which is a record for any third
quarter in the company's history. Driven by higher volumes in
potash and phosphate, these earnings surpassed the $130.3 million
($1.17 per share) earned in the same quarter last year and raised
the year-to-date total to $445.8 million ($4.21 per share),
compared to $425.8 million ($3.79 per share) for the first nine
months of 2005. Gross margin for the quarter of $245.8 million was
below the $279.5 million in the same period last year due to lower
North American potash prices, higher offshore potash distribution
costs and lower nitrogen prices. Cash flow prior to working capital
changes(2) of $228.8 million was 12 percent higher than in last
year's third quarter, and raised the year-to-date total to $675.2
million, 1 percent higher than the nine-month total in 2005. Our
guidance assumed a positive impact of approximately $0.20 per share
for a tax and related interest refund in the quarter, while our
actual benefit recorded was only $0.07. In addition to this
$0.13-per-share difference, we had unforecasted writedowns of
certain phosphate assets ($0.04 per share). Investments in Arab
Potash Company Limited (APC), Sociedad Quimica y Minera de Chile
(SQM) and Israel Chemicals Ltd. (ICL) generated $19.6 million
during the quarter and, along with contributions from our
investment in Sinochem Hong Kong Holdings Limited (Sinofert) in
China, raised the year-to- date total to $60.1 million. The total
market value of our interest in these publicly traded companies
equates to approximately $22 per PotashCorp share and exceeds their
book value on our balance sheet by almost $1.4 billion. "This
quarter demonstrated that the need for potash and other fertilizers
can be delayed, but not denied," said PotashCorp President and
Chief Executive Officer Bill Doyle. "The first seven months of the
year provided an opportunity to show how our diverse, high-quality
assets and focused long-term strategies enable PotashCorp to remain
highly profitable, even through a dip in the potash market. As
potash customers returned to the table during the quarter, we
achieved record performance for our shareholders." Market
Conditions After the settlement of potash price contracts with
China and India at the end of July, these large buyers took
significant volumes in August and September, as did other global
customers. Inventories of North American potash producers were
reduced to levels 1 percent over the five-year average by the end
of the quarter. This tightening of supply began to reverse the
weakening domestic spot prices for potash prevalent early in the
quarter, while offshore prices rebounded more quickly. Nitrogen
fertilizer fundamentals remained sound in the United States as
prices fell, following their typical seasonal pattern and in
relation to declining natural gas costs. However, ammonia prices
rose late in the quarter as tight global supply conditions led to a
decoupling from US gas costs. In phosphate, strong markets remained
intact for industrial and feed products. Solid fertilizers were
supported by healthy demand from offshore markets, but North
American demand was weak because buyers lacked confidence in
pricing. Potash Potash gross margin for the period fell to $153.6
million from $167.6 million in last year's third quarter as price
weakening more than offset volume gains. Gross margin as a
percentage of net sales for the quarter fell to 53 percent from 61
percent in the same period last year. However, this lower gross
margin combined with higher potash-related capital expenditures led
to an offsetting $16.3-million decline in provincial mining taxes
in the quarter. For the first nine months, with protracted
negotiations, potash gross margin was $377.2 million compared to
$567.1 million in the same period of 2005. Higher producer
inventories at the start of the quarter contributed to heightened
competitive pressures and lower North American prices. PotashCorp's
North American realized prices were down 4 percent from last year's
same quarter and 7 percent from the second quarter of this year.
Offshore realized prices were relatively flat compared to the
trailing quarter and down 10 percent versus the third quarter last
year. Transportation and distribution costs for Canpotex, the
offshore marketing company for Saskatchewan potash producers, were
negatively impacted by $13 per tonne in the quarter due to lower
volumes relative to fixed costs and higher ocean freight rates. As
volumes returned mid-quarter, PotashCorp's total offshore sales
improved to 1.4 million tonnes from 1.1 million tonnes in the third
quarter last year. Canpotex shipped 2.4 million tonnes, a
46-percent increase from the same quarter last year. This included
roughly 800,000 tonnes shipped to China and India, which were up 70
percent and 6 percent, respectively, from the third quarter of
2005, although volumes to these countries were down 71 percent and
40 percent, respectively, on a year-over-year basis. This movement
ignited shipments to other Asian countries, as Malaysia and
Indonesia combined to take almost 350,000 tonnes in the third
quarter, while Vietnam and Japan had significant growth. Canpotex
also shipped a record 640,000 tonnes to Brazil in the quarter, up
87 percent from the third quarter of 2005. In North America, our
volumes were off 6 percent from the same quarter last year due to a
delayed start to the fall season. Cost of goods sold also rose, due
in part to the increased shutdown weeks as the company remained
true to our strategy of matching production to meet market demand.
We incurred 12.4 plant shutdown weeks during the quarter, up from
8.9 weeks during the same period last year. As a result, we
produced 1.4 million tonnes of potash compared to 1.7 million
tonnes in the third quarter of 2005. PotashCorp's inventories at
the end of the quarter were reduced to 0.7 million tonnes from 1.35
million tonnes at the beginning of the quarter. Nitrogen Nitrogen
gross margin of $62.4 million was down 22 percent from the $79.7
million generated in the same quarter last year, but the
year-to-date total of $233.5 million was only 4 percent below the
first nine months of 2005. The drop reflected a price shift during
the first two months of the quarter resulting from a decrease in US
natural gas prices. Trinidad, where we have lower-cost, long-term
natural gas contracts, continued to prove its value, contributing
$39.4 million, or 63 percent, of nitrogen gross margin in the
quarter. US nitrogen operations generated $7.3 million in gross
margin, while hedging gains added another $15.7 million. Total
hedging gains year to date were $55.8 million, 55 percent higher
than in the same period last year. Realized prices for ammonia and
urea were down 9 percent and 14 percent respectively quarter over
quarter as US gas costs declined. Our average natural gas cost for
the quarter, which includes the benefit of our hedge and our
lower-cost Trinidad gas contracts, was $3.50 per MMBtu, 20 percent
lower than for the same quarter last year and 9 percent lower than
in the second quarter of 2006. Industrial product demand remained
strong, rising 12 percent from the same period last year and
representing 68 percent of nitrogen sales volumes in the quarter.
Ammonia sales volumes increased 17 percent, as demand was strong,
and 65,000 additional tonnes were available after the final stage
of Trinidad debottlenecking was completed in the second quarter.
Fertilizer sales were down 24 percent, including a 22-percent drop
in urea fertilizer volumes, reflecting higher sales last year
caused by concerns over product availability following Hurricane
Katrina. In September 2006, PotashCorp elected to permanently
discontinue ammonia and urea production at our Memphis, TN
facility. The plant had been put into indefinite shutdown mode in
June 2003 due to high natural gas costs eroding nitrogen fertilizer
margins. There was no material financial statement impact in the
quarter resulting from these changes. Phosphate A $6.3-million
writedown of assets at our Geismar, LA facility resulted in
phosphate gross margin falling to $29.8 million this quarter from
$32.2 million in the same period last year. Year to date, phosphate
has generated a $92.0-million gross margin, 29 percent higher than
the $71.3 million in the first nine months of 2005. Higher-margin
feed and industrial products contributed $15.8 million and $10.4
million respectively, while liquid fertilizer added $1.0 million,
net of the $6.3-million writedown. Our strategy to focus on
non-fertilizer products paid dividends as prices for feed products
rose 12 percent from last year's third quarter, while industrial
and liquid prices were each up 8 percent quarter over quarter.
Sulfur prices were 7 percent higher quarter over quarter, while
phosphate rock costs were up 7 percent over the same period last
year due to higher costs for purchased rock at Geismar and higher
processing costs at both our Aurora, NC and White Springs, FL
mines. Liquid sales volumes were 3 percent lower than in the same
quarter last year, but were 40 percent higher than in the second
quarter of 2006 due to stronger offshore demand, primarily in
India. Industrial volumes were 10 percent lower than in last year's
third quarter due to timing of demand. Feed phosphate volumes were
up 13 percent quarter over quarter, as a 49-percent increase in
offshore demand, primarily in Mexico, more than offset an
11-percent decline in other North American volumes. Solid
fertilizer volumes were up 16 percent from last year's third
quarter, as offshore customers, led by India, increased purchases
by 155 percent. North American solid fertilizer sales were off 34
percent from the third quarter of 2005 as customers delayed
purchasing to see if prices would decline. Financial PotashCorp
benefited from $6.6 million in additional income tax refunds plus
$1.8 million in related interest due to the Canadian appeal court
decision in the case of a uranium producer. This was below the
amount we originally expected, but additional amounts are expected
to be received during the fourth quarter of 2006 and possibly the
first quarter of 2007. This refund reduced our income tax rate for
the quarter below our consolidated effective rate of 30 percent. A
foreign currency gain of $4.7 million was realized in the third
quarter, driven primarily by treasury activity and the revaluation
of Canadian net monetary items on our balance sheet at a marginally
weaker Canadian dollar. This compares to a $24.4-million foreign
currency loss in the same quarter last year, caused by substantial
strengthening of the Canadian dollar in that period. During the
third quarter, $133.8 million went to capital expenditures on
property, plant and equipment, compared to $109.0 million in the
same quarter last year. The increase was primarily due to bringing
back idled potash capacity at our Allan, SK and Lanigan, SK
operations. Total capital expenditures for the year to date are
$384.9 million, exceeding the 2005 full- year total of $382.7
million. Outlook Grain prices are improving, driven by projections
that the global stocks- to-use ratio for wheat and coarse grains
will fall to 14.8 percent, the lowest in recorded history. Wheat
has been affected by persistent drought in key growing areas, while
there is a substantial increase in global use of corn for energy
production. By 2008, biofuel production in the US is expected to
consume 3 billion bushels of corn annually, which could exceed the
volumes sent to export markets, even as China could be expected to
substantially increase imports. The rising demand for crops is also
evident offshore, where sugar and corn are used extensively for
ethanol production, while oil- generating crops such as oil palm,
soybeans and canola are used in biodiesel. Increasing production on
existing global agricultural lands will be necessary to meet the
demands of both food and fuel. These conditions encourage planting
and yield maximization, which can be expected to increase world
fertilizer consumption. In the US alone, we anticipate that total
consumption of the three primary nutrients could rebound 10-15
percent during the 2006/07 fertilizer season. Following the
prolonged 2006 potash price negotiations with China and India and
the resulting inventory destocking in most offshore markets, global
potash supply/demand fundamentals have tightened significantly.
External industry consultants expect global demand to grow by 7
percent in 2007 in order to meet this expected consumption growth
and the required inventory restocking. This is expected to make
PotashCorp's excess potash capacity, buoyed by increased production
as a result of debottlenecking projects, extremely valuable.
Canpotex is expected to continue shipping at full capacity through
the end of 2006. Fourth-quarter volumes to China are projected to
be similar to those shipped in the third quarter, providing much
needed product for application but falling short of building
inventories in that country. As a result, we expect Canpotex and
Sinofert to agree on 2007 pricing late in the fourth quarter,
allowing for seamless shipping into the new year. In nitrogen,
continuing high costs for European natural gas and for ammonia
transportation have resulted in production curtailments abroad,
which in turn have created new import demand in Europe. These cost
increases have also helped raise the delivered floor price for
North America. Ammonia from traditional US import sources other
than Trinidad is less competitive on a delivered basis to the US
Gulf. This should allow our company to increase the profitability
of our industrial-focused US nitrogen production, while Trinidad's
increased ammonia production capability and its proximity to the US
will continue to be very advantageous, particularly as North
American gas prices rise ahead of the winter season. Our total
North American 10-year gas hedge position is currently valued in
excess of $150 million, with our remaining 2006 position
representing $14 million. We expect continuing stable phosphate
demand and pricing in liquids, industrial and feed products for the
remainder of the year. Solid phosphate fertilizer supply/demand
fundamentals are reasonably tight as we enter the US fall
fertilizer season, providing an opportunity for price improvements.
As 2006 winds up, capital expenditures are now expected to be $525
million, plus capitalized interest, of which $155 million relates
to sustaining capital. Significant funds continue to be spent on
bringing back idled capacity at Lanigan, while work on new
compaction capacity continues at Allan. Depending on the results of
the ongoing Canadian taxation authority review of previous taxation
years, PotashCorp may receive further income tax refunds in the
fourth quarter of 2006 and first quarter of 2007. PotashCorp is
expecting fourth-quarter net income per share to be in the range of
$1.50-$1.75, based on a $1.12 Canadian dollar. Net income for the
full year is expected to be in the range of $5.70-$6.00 per share.
In the current trading range of the Canadian dollar relative to the
US dollar, each one-cent change in the Canadian dollar will
typically have an impact of approximately $3.0 million on the
foreign-exchange line, or $0.02 per share on an after-tax basis,
although this is primarily a non-cash item. Conclusion "The
fundamentals for our business are favorably aligned, with low grain
stocks, rising crop commodity prices and much tighter potash
inventories going forward," said Doyle. "Our ability to use our
excess capacity to produce more potash to fill rising demand and
capture higher prices on these increased volumes will allow us to
do even more to maximize the value of our company for
shareholders." Notes: ------ 1. All references to per-share amounts
pertain to diluted net income per share. 2. See reconciliation and
description of non-GAAP measures in the attached section titled
"Selected Non-GAAP Financial Measures and Reconciliations." Potash
Corporation of Saskatchewan Inc. is the world's largest fertilizer
enterprise producing the three primary plant nutrients and a
leading supplier to three distinct market categories: agriculture,
with the largest capacity in the world in potash, third largest in
phosphate and fourth largest in nitrogen; animal nutrition, with
the world's largest capacity in phosphate feed ingredients; and
industrial chemicals, as the largest global producer of industrial
nitrogen products and one of only three North American suppliers of
industrial phosphates. This release contains forward-looking
statements. These statements are based on certain factors and
assumptions as set forth in this release, including foreign
exchange rates, expected growth, results of operations, performance
and business prospects and opportunities. While the company
considers these factors and assumptions to be reasonable, based on
information currently available, they may prove to be incorrect. A
number of factors could cause actual results to differ materially
from those in the forward-looking statements, including, but not
limited to: fluctuations in supply and demand in fertilizer,
sulfur, transportation and petrochemical markets; changes in
competitive pressures, including pricing pressures; risks
associated with natural gas and other hedging activities; changes
in capital markets; changes in currency and exchange rates;
unexpected geological or environmental conditions; and government
policy changes. Additional risks and uncertainties can be found in
our 2005 annual report to shareholders and in filings with the U.S.
Securities and Exchange Commission and Canadian provincial
securities commissions. Forward-looking statements are given only
as at the date of this release and the company disclaims any
obligation to update or revise the forward-looking statements,
whether as a result of new information, future events or otherwise.
In the case of guidance, should subsequent events show that the
forward-looking statements released herein may be materially off-
target, the company will evaluate whether to issue and, if
appropriate following such review, issue a news release updating
guidance or explaining reasons for the difference. PotashCorp will
host a conference call on Wednesday, October 25, 2006, at 1:00 p.m.
Eastern Time. To join the call, dial (416) 644-3426 at least 10
minutes prior to the start time. Use reservation ID (number
sign)21181911. Alternatively, visit http://www.potashcorp.com/ for
a live webcast of the conference call in a listen-only mode. This
news release is also available at this same website. Potash
Corporation of Saskatchewan Inc. Condensed Consolidated Statements
of Financial Position (in millions of US dollars except share
amounts) (unaudited) September 30, December 31, 2006 2005
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Assets Current assets Cash and cash equivalents $ 191.4 $ 93.9
Accounts receivable 454.4 453.3 Inventories 491.4 522.5 Prepaid
expenses and other current assets 64.4 41.1
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1,201.6 1,110.8 Property, plant and equipment 3,455.6 3,262.8 Other
assets (Note 2) 985.3 852.8 Intangible assets 30.5 34.5 Goodwill
97.0 97.0
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$ 5,770.0 $ 5,357.9
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Liabilities Current liabilities Short-term debt $ 530.0 $ 252.2
Accounts payable and accrued charges 490.5 842.7 Current portion of
long-term debt 400.7 1.2
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1,421.2 1,096.1 Long-term debt 857.1 1,257.6 Future income tax
liability 575.6 543.3 Accrued pension and other post-retirement
benefits 218.4 213.9 Accrued environmental costs and asset
retirement obligations 102.5 97.3 Other non-current liabilities and
deferred credits 20.2 17.2
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3,195.0 3,225.4
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Shareholders' Equity Share capital 1,397.8 1,379.3 Unlimited
authorization of common shares without par value; issued and
outstanding 103,997,569 and 103,593,792 at September 30, 2006 and
December 31, 2005, respectively Contributed surplus 61.0 36.3
Retained earnings 1,116.2 716.9
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2,575.0 2,132.5
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$ 5,770.0 $ 5,357.9
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc. Condensed Consolidated
Statements of Operations and Retained Earnings (in millions of US
dollars except per-share amounts) (unaudited) Three Months Ended
Nine Months Ended September 30 September 30 2006 2005 2006 2005
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Sales (Note 5) $ 953.5 $ 938.0 $ 2,743.8 $ 2,916.7 Less: Freight
65.6 59.9 182.8 194.5 Transportation and distribution 37.6 29.8
104.6 90.8 Cost of goods sold 604.5 568.8 1,753.7 1,748.6
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Gross Margin 245.8 279.5 702.7 882.8
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Selling and administrative 35.9 31.8 114.6 116.0 Provincial mining
and other taxes 12.5 28.8 41.2 111.4 Foreign exchange (gain) loss
(4.7) 24.4 9.2 12.4 Other income (Note 8) (21.1) (20.4) (72.3)
(54.3)
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22.6 64.6 92.7 185.5
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Operating Income 223.2 214.9 610.0 697.3 Interest Expense 25.2 20.4
69.1 61.7
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Income Before Income Taxes 198.0 194.5 540.9 635.6 Income Taxes
(Note 3) 52.8 64.2 95.1 209.8
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Net Income $ 145.2 $ 130.3 445.8 425.8 ----------------------
---------------------- Retained Earnings, Beginning of Period 716.9
701.5 Repurchase of Common Shares - (182.9) Dividends (46.5) (49.2)
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Retained Earnings, End of Period $ 1,116.2 $ 895.2
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Net Income Per Share (Note 4) Basic $ 1.40 $ 1.20 $ 4.30 $ 3.88
Diluted $ 1.37 $ 1.17 $ 4.21 $ 3.79
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Dividends Per Share $ 0.15 $ 0.15 $ 0.45 $ 0.45
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc. Condensed Consolidated
Statements of Cash Flow (in millions of US dollars) (unaudited)
Three Months Ended Nine Months Ended September 30 September 30 2006
2005 2006 2005
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Operating Activities Net income $ 145.2 $ 130.3 $ 445.8 $ 425.8
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Adjustments to reconcile net income to cash provided by operating
activities Depreciation and amortization 62.2 59.0 181.4 181.0
Stock-based compensation 2.8 1.7 26.8 25.7 (Gain) loss on disposal
of long-term assets (4.2) 0.2 (3.9) 5.7 Provision for plant
shutdowns - phosphate segment 6.3 - 6.3 - Foreign exchange on
future income tax - 14.0 12.1 10.0 Provision for future income tax
17.8 6.4 3.9 21.0 Undistributed earnings of equity investees (10.6)
(10.3) (9.1) (24.7) Other long-term liabilities 9.3 3.6 11.9 22.6
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Subtotal of adjustments 83.6 74.6 229.4 241.3
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Changes in non-cash operating working capital Accounts receivable
(52.6) (42.8) (1.1) (70.8) Inventories 23.3 (43.5) 21.8 (33.9)
Prepaid expenses and other current assets 10.4 (14.7) (23.3) (14.2)
Accounts payable and accrued charges 15.0 200.6 (319.0) 226.3
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Subtotal of changes in non-cash operating working capital (3.9)
99.6 (321.6) 107.4
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Cash provided by operating activities 224.9 304.5 353.6 774.5
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Investing Activities Additions to property, plant and equipment
(133.8) (109.0) (384.9) (246.4) Purchase of long-term investments -
(97.4) (130.0) (190.9) Proceeds from disposal of property, plant
and equipment and long-term investments 7.8 0.6 10.0 11.1 Other
assets and intangible assets (0.7) 4.7 2.3 7.7
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Cash used in investing activities (126.7) (201.1) (502.6) (418.5)
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Cash before financing activities 98.2 103.4 (149.0) 356.0
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Financing Activities Repayment of long-term debt obligations (0.3)
(0.3) (1.0) (0.9) (Repayment of) proceeds from short-term debt
obligations (26.5) 1.4 277.8 1.2 Dividends (15.2) (16.2) (45.7)
(49.4) Repurchase of common shares - (213.5) - (530.9) Issuance of
common shares 5.5 29.9 15.4 93.1
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Cash (used in) provided by financing activities (36.5) (198.7)
246.5 (486.9)
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Increase (decrease) in Cash and Cash Equivalents 61.7 (95.3) 97.5
(130.9) Cash and Cash Equivalents, Beginning of Period 129.7 423.3
93.9 458.9
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Cash and Cash Equivalents, End of Period $ 191.4 $ 328.0 $ 191.4 $
328.0
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Supplemental cash flow disclosure Interest paid $ 24.4 $ 14.1 $
74.5 $ 54.8 Income taxes paid $ 18.7 $ 19.0 $ 243.2 $ 126.4
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc. Notes to the Condensed
Consolidated Financial Statements For the Three and Nine Months
Ended September 30, 2006 (in millions of US dollars except share
and per-share amounts) (unaudited) 1. Significant Accounting
Policies With its subsidiaries, Potash Corporation of Saskatchewan
Inc. ("PCS") - together known as "PotashCorp" or "the company"
except to the extent the context otherwise requires - forms an
integrated fertilizer and related industrial and feed products
company. The company's accounting policies are in accordance with
accounting principles generally accepted in Canada ("Canadian
GAAP"). The accounting policies used in preparing these interim
condensed consolidated financial statements are consistent with
those used in the preparation of the 2005 annual consolidated
financial statements, except as described below. These interim
condensed consolidated financial statements include the accounts of
PCS and its subsidiaries; however, they do not include all
disclosures normally provided in annual consolidated financial
statements and should be read in conjunction with the 2005 annual
consolidated financial statements. In management's opinion, the
unaudited financial statements include all adjustments (consisting
solely of normal recurring adjustments) necessary to present fairly
such information. Interim results are not necessarily indicative of
the results expected for the fiscal year. Implicit Variable
Interests In January 2006, the company adopted Emerging Issues
Committee Abstract No. 157, "Implicit Variable Interests Under
AcG-15" ("EIC-157"). This EIC addresses whether a company has an
implicit variable interest in a variable interest entity ("VIE") or
potential VIE when specific conditions exist. An implicit variable
interest acts the same as an explicit variable interest except that
it involves the absorbing and/or receiving of variability
indirectly from the entity (rather than directly). The
identification of an implicit variable interest is a matter of
judgment that depends on the relevant facts and circumstances. The
implementation of EIC-157 did not have a material impact on the
company's consolidated financial statements. Conditional Asset
Retirement Obligations In April 2006, the company adopted Emerging
Issues Committee Abstract No. 159, "Conditional Asset Retirement
Obligations" ("EIC-159"). This EIC clarifies the accounting
treatment for a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the
control of the entity. Under this EIC, an entity is required to
recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be
reasonably estimated. The implementation of this EIC did not have a
material impact on the company's consolidated financial statements.
2. Other Assets In February 2006, the company acquired an
additional 10.01-percent interest in the ordinary shares of
Sinochem Hong Kong Holdings Limited ("Sinofert") for cash
consideration of $126.3. The purchase price was financed by
short-term debt. The additional investment increased the company's
interest in Sinofert to 20 percent. In April 2006, the company
purchased an additional 220,100 shares of Arab Potash Company Ltd.
("APC") for cash consideration of $3.7. The company's ownership
interest in APC remains at approximately 28 percent. In October
2006, the company acquired an additional 6,086,000 Class B shares
of Sociedad Quimica y Minera de Chile S.A. ("SQM") for cash
consideration of $75.5. The additional investment increases the
company's interest in SQM to 27 percent. 3. Income Taxes The
company's consolidated effective income tax rate for the three
months ended September 30, 2006 is approximately 27 percent (2005 -
33 percent) and for the nine months ended September 30, 2006 is
approximately 18 percent (2005 - 33 percent). The reduction in the
consolidated effective income tax rates was due to the following: -
During the three months ended June 30, 2006, the company reduced
its consolidated effective income tax rate from 33 percent to 30
percent for the 2006 year. The impact of this change on prior
periods, as applicable, was reflected during that quarter. The
change was primarily attributable to two factors. First, during the
three months ended June 30, 2006, the Province of Saskatchewan
enacted changes to the corporation income tax. The corporate income
tax rate will be reduced from 17 percent to 12 percent over the
next three years, with a 3 percentage point reduction (to 14
percent) effective July 1, 2006 and further 1 percentage point
reductions on July 1, 2007 and July 1, 2008. The impact of this
change on the company's future income tax liability was recognized
during the second quarter of 2006. Second, during the three months
ended June 30, 2006, the company revised its estimated allocation
of annual income before income taxes by jurisdiction. - During the
three months ended June 30, 2006, the Government of Canada enacted
changes to the federal corporation income tax and the corporate
surtax. The federal corporate income tax rate will be reduced from
21 percent to 19 percent over the next four years, with a 0.5
percentage point reduction effective January 1, 2008 and January 1,
2009, and a further 1 percentage point reduction on January 1,
2010. The federal corporate surtax will be reduced from 1.12
percent to nil in 2008. The impact of this change on the company's
future income tax liability was recognized during the second
quarter of 2006. - Income tax refunds totaling $22.4 were recorded
relating to a recent Canadian appeals court decision (pertaining to
a uranium producer) which affirmed the deductibility of the
Saskatchewan capital tax resource surcharge. Refunds of $12.3 were
recognized during the three months ended March 31, 2006, a refund
of $3.5 was recognized during the three months ended June 30, 2006,
and a refund of $6.6 was recognized during the three months ended
September 30, 2006 (refunds were for taxation years 1999 and 2001
through 2004). The company also expects further income tax refunds
in respect of previous taxation years. These refunds are currently
under review and have not been reflected in these interim condensed
consolidated financial statements. 4. Net Income Per Share Basic
net income per share for the quarter is calculated on the weighted
average shares issued and outstanding for the three months ended
September 30, 2006 of 103,907,000 (2005 - 108,164,000). Basic net
income per share for the year to date is calculated on the weighted
average shares issued and outstanding for the nine months ended
September 30, 2006 of 103,781,000 (2005 - 109,623,000). Diluted net
income per share is calculated based on the weighted average number
of shares issued and outstanding during the period. The denominator
is: (i) increased by the total of the additional common shares that
would have been issued assuming exercise of all stock options with
exercise prices at or below the average market price for the
period; and (ii) decreased by the number of shares that the company
could have repurchased if it had used the assumed proceeds from the
exercise of stock options to repurchase them on the open market at
the average share price for the period. The weighted average number
of shares outstanding for the diluted net income per share
calculation for the three months ended September 30, 2006 was
106,045,000 (2005 - 111,102,000) and for the nine months ended
September 30, 2006 was 105,934,000 (2005 - 112,460,000). 5. Segment
Information The company has three reportable business segments:
potash, nitrogen and phosphate. These business segments are
differentiated by the chemical nutrient contained in the product
that each produces. Inter-segment sales are made under terms that
approximate market value. The accounting policies of the segments
are the same as those described in Note 1. Three Months Ended
September 30, 2006
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 334.3 $ 292.6 $ 326.6 $ - $ 953.5 Freight 33.6 9.4 22.6 -
65.6 Transportation and distribution 10.5 13.4 13.7 - 37.6 Net
sales - third party 290.2 269.8 290.3 - Cost of goods sold 136.6
207.4 260.5 - 604.5 Gross margin 153.6 62.4 29.8 - 245.8
Depreciation and amortization 16.4 19.5 23.3 3.0 62.2 Inter-segment
sales 0.2 25.4 0.9 - - Three Months Ended September 30, 2005
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 313.4 $ 332.7 $ 291.9 $ - $ 938.0 Freight 30.6 8.9 20.4 -
59.9 Transportation and distribution 8.5 11.0 10.3 - 29.8 Net sales
- third party 274.3 312.8 261.2 - Cost of goods sold 106.7 233.1
229.0 - 568.8 Gross margin 167.6 79.7 32.2 - 279.5 Depreciation and
amortization 14.6 18.1 23.8 2.5 59.0 Inter-segment sales 0.5 26.2
2.5 - - Nine Months Ended September 30, 2006
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 856.5 $ 966.9 $ 920.4 - $ 2,743.8 Freight 91.4 28.1 63.3 -
182.8 Transportation and distribution 28.9 40.3 35.4 - 104.6 Net
sales - third party 736.2 898.5 821.7 - Cost of goods sold 359.0
665.0 729.7 - 1,753.7 Gross margin 377.2 233.5 92.0 - 702.7
Depreciation and amortization 43.2 57.8 70.5 9.9 181.4
Inter-segment sales 5.0 85.8 5.5 - - Nine Months Ended September
30, 2005
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 1,067.1 $ 1,001.9 $ 847.7 $ - $ 2,916.7 Freight 105.3 29.0
60.2 - 194.5 Transportation and distribution 27.1 36.5 27.2 - 90.8
Net sales - third party 934.7 936.4 760.3 - Cost of goods sold
367.6 692.0 689.0 - 1,748.6 Gross margin 567.1 244.4 71.3 - 882.8
Depreciation and amortization 51.0 52.5 70.1 7.4 181.0
Inter-segment sales 4.9 74.7 11.4 - - Provision for Plant Shutdowns
- Phosphate Segment In July 2006, the company indefinitely
suspended production of Super Phosphoric Acid and Poly-N phosphate
products at its Geismar, Louisiana facilities due to higher input
costs and lower product margins for those products at that
facility, compared to the company's other facilities. No employee
positions were terminated. The plants have not been re-started
since that time and company management has determined that there
are no immediate intentions of re-starting the plants. In
connection with the shutdowns, management determined that the
carrying amounts of the long-lived assets related to the production
facilities were not fully recoverable, and an impairment loss of
$6.3, equal to the amount by which the carrying amount of the asset
groups exceeded their respective fair values, was recognized. Fair
values were determined based on an estimate of future cash flows
resulting from the use of the assets and their eventual
disposition. All of the impairment charge related to property,
plant and equipment and is included in cost of goods sold. 6.
Stock-Based Compensation On May 4, 2006, the company's shareholders
approved the 2006 Performance Option Plan under which the company
may, after February 27, 2006 and before January 1, 2007, issue
options to acquire up to 1,400,000 common shares. Under the plan,
the exercise price is the quoted market closing price of the
company's common shares on the last trading day immediately
preceding the date of grant, and an option's maximum term is 10
years. In general, options will vest, if at all, according to a
schedule based on the three-year average excess of the company's
consolidated cash flow return on investment over weighted average
cost of capital. As of September 30, 2006, options to purchase a
total of 894,900 common shares have been granted under the plan.
The weighted average fair value of options granted was $38.53 per
share, estimated as of the date of grant using the
Black-Scholes-Merton option-pricing model with the following
weighted average assumptions: Expected dividend $0.60 Expected
volatility 30% Risk-free interest rate 4.90% Expected life of
options 6.5 years 7. Pension and Other Post-Retirement Expenses
Defined Benefit Three Months Ended Nine Months Ended Pension Plans
September 30 September 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Service cost $ 3.6 $ 3.4 $ 10.8 $ 10.4 Interest cost 8.5 7.8 25.3
23.4 Expected return on plan assets (9.7) (9.5) (28.9) (27.9) Net
amortization 2.9 1.9 8.6 4.9
-------------------------------------------------------------------------
Net expense $ 5.3 $ 3.6 $ 15.8 $ 10.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Post-Retirement Plans Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Service cost $ 1.1 $ 1.4 $ 3.5 $ 4.2 Interest cost 3.2 3.3 9.3 9.9
Net amortization (0.1) 0.4 (0.3) 1.2
-------------------------------------------------------------------------
Net expense $ 4.2 $ 5.1 $ 12.5 $ 15.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended September 30, 2006, the company
contributed $6.2 to its defined benefit pension plans, $3.2 to its
defined contribution pension plans and $2.4 to its other
post-retirement plans. Contributions for the nine months ended
September 30, 2006 were $19.7 to defined benefit pension plans,
$12.1 to defined contribution pension plans and $6.7 to other
post-retirement plans. Total 2006 contributions to these plans are
not expected to differ significantly from the amounts previously
disclosed in the consolidated financial statements for the year
ended December 31, 2005. 8. Other Income Three Months Ended Nine
Months Ended September 30 September 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Share of earnings of equity investees $ 10.6 $ 16.8 $ 39.0 $ 43.3
Dividend income 9.0 6.1 21.1 9.2 Other 1.5 (2.5) 12.2 1.8
-------------------------------------------------------------------------
$ 21.1 $ 20.4 $ 72.3 $ 54.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Comparative Figures Certain of the prior periods' figures have
been reclassified to conform with the current periods'
presentation. Potash Corporation of Saskatchewan Inc. Selected
Operating and Revenue Data (unaudited) Three Months Ended Nine
Months Ended September 30 September 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Potash Operating Data Production (KCl Tonnes - thousands) 1,437
1,698 4,626 6,458 Shutdown weeks 12.4 8.9 60.8 17.9 Sales (tonnes -
thousands) North America 673 714 1,939 2,608 Offshore 1,410 1,075
3,093 3,904
-------------------------------------------------------------------------
2,083 1,789 5,032 6,512
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Net Sales (US $ millions) Sales $334.3 $313.4 $856.5
$1,067.1 Less: Freight 33.6 30.6 91.4 105.3 Transportation and
distribution 10.5 8.5 28.9 27.1
-------------------------------------------------------------------------
Net Sales $290.2 $274.3 $736.2 $934.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America $108.8 $120.6 $329.9 $405.2 Offshore 179.4 151.9
398.6 520.7
-------------------------------------------------------------------------
Potash Subtotal 288.2 272.5 728.5 925.9 Miscellaneous Products 2.0
1.8 7.7 8.8
-------------------------------------------------------------------------
$290.2 $274.3 $736.2 $934.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Average Price per MT North America $161.89 $169.08 $170.13
$155.36 Offshore $127.22 $141.28 $128.88 $133.39
-------------------------------------------------------------------------
$138.42 $152.34 $144.77 $142.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Corporation of Saskatchewan Inc. Selected Operating and
Revenue Data (unaudited) Three Months Ended Nine Months Ended
September 30 September 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Nitrogen Operating Data Production (N Tonnes - thousands) 689 634
1,870 1,946 Average Natural Gas Cost per MMBtu $3.50 $4.40 $3.92
$4.04 Sales (tonnes - thousands) Manufactured Product Ammonia 438
375 1,244 1,263 Urea 290 356 899 1,046 Nitrogen solutions/Nitric
acid/Ammonium nitrate 503 441 1,354 1,370
-------------------------------------------------------------------------
Manufactured Product 1,231 1,172 3,497 3,679 Purchased Product 20
118 89 314
-------------------------------------------------------------------------
1,251 1,290 3,586 3,993
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer sales tonnes 396 524 1,133 1,532 Industrial/Feed sales
tonnes 855 766 2,453 2,461
-------------------------------------------------------------------------
1,251 1,290 3,586 3,993
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Net Sales (US $ millions) Sales $292.6 $332.7 $966.9
$1,001.9 Less: Freight 9.4 8.9 28.1 29.0 Transportation and
distribution 13.4 11.0 40.3 36.5
-------------------------------------------------------------------------
Net Sales $269.8 $312.8 $898.5 $936.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Manufactured Product Ammonia $111.1 $104.6 $369.8 $343.2 Urea 70.8
100.8 239.7 283.6 Nitrogen solutions/Nitric acid/Ammonium nitrate
75.1 66.0 240.0 204.0 Miscellaneous 6.9 7.0 21.5 19.2
-------------------------------------------------------------------------
Net Sales Manufactured Product 263.9 278.4 871.0 850.0 Net Sales
Purchased Product 5.9 34.4 27.5 86.4
-------------------------------------------------------------------------
$269.8 $312.8 $898.5 $936.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer net sales $81.1 $131.5 $275.1 $378.9 Industrial/Feed net
sales 188.7 181.3 623.4 557.5
-------------------------------------------------------------------------
$269.8 $312.8 $898.5 $936.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Average Price per MT Ammonia $253.58 $278.60 $297.26
$271.65 Urea $244.35 $283.04 $266.58 $270.93 Nitrogen
solutions/Nitric acid/Ammonium nitrate $149.41 $149.61 $177.31
$148.91
-------------------------------------------------------------------------
Manufactured Product $214.45 $237.46 $249.10 $230.99 Purchased
Product $284.18 $291.95 $308.59 $275.30
-------------------------------------------------------------------------
$215.59 $242.43 $250.58 $234.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer average price per MT $204.90 $250.88 $242.74 $247.39
Industrial/Feed average price per MT $220.54 $236.65 $254.20
$226.44
-------------------------------------------------------------------------
$215.59 $242.43 $250.58 $234.47
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Corporation of Saskatchewan Inc. Selected Operating and
Revenue Data (unaudited) Three Months Ended Nine Months Ended
September 30 September 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Phosphate Operating Data Production (P2O5 Tonnes - thousands) 509
544 1,493 1,552 P2O5 Operating Rate 90% 87% 88% 83% Sales (tonnes -
thousands) Fertilizer - Liquid phosphates 259 266 704 687
Fertilizer - Solid phosphates 428 369 1,190 1,163 Feed 223 198 585
651 Industrial 156 174 485 505
-------------------------------------------------------------------------
1,066 1,007 2,964 3,006
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Net Sales (US $ millions) Sales $326.6 $291.9 $920.4
$847.7 Less: Freight 22.6 20.4 63.3 60.2 Transportation and
distribution 13.7 10.3 35.4 27.2
-------------------------------------------------------------------------
Net Sales $290.3 $261.2 $821.7 $760.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer - Liquid phosphates $61.1 $58.0 $165.6 $151.0 Fertilizer
- Solid phosphates 101.2 86.3 288.1 260.3 Feed 66.7 52.9 179.0
163.6 Industrial 58.2 60.4 180.1 175.1 Miscellaneous 3.1 3.6 8.9
10.3
-------------------------------------------------------------------------
$290.3 $261.2 $821.7 $760.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Average Price per MT Fertilizer - Liquid phosphates
$235.66 $217.93 $235.17 $219.73 Fertilizer - Solid phosphates
$235.90 $233.77 $242.03 $223.74 Feed $299.07 $266.82 $306.34
$251.36 Industrial $374.60 $347.51 $371.42 $346.91
-------------------------------------------------------------------------
$272.22 $259.35 $277.26 $252.93
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exchange Rate (Cdn$/US$) 2006 2005
-------------------------------------------------------------------------
December 31 1.1659 September 30 1.1153 1.1611 Third-quarter average
conversion rate 1.1204 1.2223 Potash Corporation of Saskatchewan
Inc. Selected Non-GAAP Financial Measures and Reconciliations (in
millions of US dollars) (unaudited) The following information is
included for convenience only. Generally, a non-GAAP financial
measure is a numerical measure of a company's performance,
financial position or cash flows that either excludes or includes
amounts that are not normally excluded or included in the most
directly comparable measure calculated and presented in accordance
with generally accepted accounting principles ("GAAP"). EBITDA,
cash flow prior to working capital changes and free cash flow are
not measures of financial performance (nor do they have
standardized meanings) under either Canadian GAAP or US GAAP. In
evaluating these measures, investors should consider that the
methodology applied in calculating such measures may differ among
companies and analysts. The company uses both GAAP and certain
non-GAAP measures to assess performance. The company's management
believes these non-GAAP measures provide useful supplemental
information to investors in order that they may evaluate
PotashCorp's financial performance using the same measures as
management. PotashCorp's management believes that, as a result, the
investor is afforded greater transparency in assessing the
financial performance of the company. These non-GAAP financial
measures should not be considered as a substitute for, nor superior
to, measures of financial performance prepared in accordance with
GAAP. A. EBITDA ------ Set forth below is a reconciliation of
"EBITDA" to net income, the most directly comparable financial
measure calculated and presented in accordance with Canadian GAAP.
Three Months Ended Nine Months Ended September 30 September 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net income $145.2 $130.3 $445.8 $425.8 Income taxes 52.8 64.2 95.1
209.8 Interest expense 25.2 20.4 69.1 61.7 Depreciation and
amortization 62.2 59.0 181.4 181.0
-------------------------------------------------------------------------
EBITDA $285.4 $273.9 $791.4 $878.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA is calculated as earnings before interest, income taxes,
depreciation and amortization. PotashCorp uses EBITDA as a
supplemental financial measure of its operational performance.
Management believes EBITDA to be an important measure as it
excludes the effects of items which primarily reflect the impact of
long-term investment decisions, rather than the performance of the
company's day-to-day operations. As compared to net income
according to GAAP, this measure is limited in that it does not
reflect the periodic costs of certain capitalized tangible and
intangible assets used in generating revenues in the company's
business. Management evaluates such items through other financial
measures such as capital expenditures and cash flow provided by
operating activities. The company believes that this measurement is
useful to measure a company's ability to service debt and to meet
other payment obligations or as a valuation measurement. Potash
Corporation of Saskatchewan Inc. Selected Non-GAAP Financial
Measures and Reconciliations (in millions of US dollars)
(unaudited) B. CASH FLOW --------- Set forth below is a
reconciliation of "cash flow prior to working capital changes" and
"free cash flow" to cash provided by operating activities, the most
directly comparable financial measure calculated and presented in
accordance with Canadian GAAP. Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash flow prior to working capital changes(1) $228.8 $204.9 $675.2
$667.1
-------------------------------------------------------------------------
Changes in non-cash operating working capital Accounts receivable
(52.6) (42.8) (1.1) (70.8) Inventories 23.3 (43.5) 21.8 (33.9)
Prepaid expenses and other current assets 10.4 (14.7) (23.3) (14.2)
Accounts payable and accrued charges 15.0 200.6 (319.0) 226.3
-------------------------------------------------------------------------
Changes in non-cash operating working capital (3.9) 99.6 (321.6)
107.4
-------------------------------------------------------------------------
Cash provided by operating activities $224.9 $304.5 $353.6 $774.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow(2) $94.3 $100.6 $292.6 $428.4 Additions to property,
plant and equipment 133.8 109.0 384.9 246.4 Other assets and
intangible assets 0.7 (4.7) (2.3) (7.7) Changes in non-cash
operating working capital (3.9) 99.6 (321.6) 107.4
-------------------------------------------------------------------------
Cash provided by operating activities $224.9 $304.5 $353.6 $774.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The company uses cash flow prior to working capital changes as
a supplemental financial measure in its evaluation of liquidity.
Management believes that adjusting principally for the swings in
non-cash working capital items due to seasonality assists
management in making long-term liquidity assessments. The company
also believes that this measurement is useful as a measure of
liquidity or as a valuation measurement. (2) The company uses free
cash flow as a supplemental financial measure in its evaluation of
liquidity and financial strength. Management believes that
adjusting principally for the swings in non-cash operating working
capital items due to seasonality, additions to property, plant and
equipment, and changes to other assets assists management in the
long-term assessment of liquidity and financial strength. The
company also believes that this measurement is useful as an
indicator of the company's ability to service its debt, meet other
payment obligations and make strategic investments. Readers should
be aware that free cash flow does not represent residual cash flow
available for discretionary expenditures. Certain of the prior
periods' figures have been reclassified to conform with the current
periods' presentation. DATASOURCE: Potash Corporation of
Saskatchewan Inc. CONTACT: Betty-Ann Heggie, Senior Vice President,
Corporate Relations, Phone: (306) 933-8521, Fax: (306) 933-8844,
E-mail: , Web Site: http://www.potashcorp.com/
Copyright
