10-Q 1 d426966d10q.htm FORM 10-Q Form 10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 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 October 31, 2012, Potash Corporation of Saskatchewan Inc. had 861,629,386 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    September 30,
2012
     December 31,
2011
 

Assets

     

Current assets

     

Cash and cash equivalents

   $ 461       $ 430   

Receivables

     1,360         1,195   

Inventories (Note 2)

     681         731   

Prepaid expenses and other current assets

     69         52   
     2,571         2,408   

Non-current assets

     

Property, plant and equipment

     10,962         9,922   

Investments in equity-accounted investees

     1,279         1,187   

Available-for-sale investments (Note 3)

     2,435         2,265   

Other assets

     323         360   

Intangible assets

     121         115   

Total Assets

   $ 17,691       $ 16,257   

Liabilities

     

Current liabilities

     

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

   $ 573       $ 832   

Payables and accrued charges

     1,129         1,295   

Current portion of derivative instrument liabilities

     58         67   
     1,760         2,194   

Non-current liabilities

     

Long-term debt (Note 4)

     3,465         3,705   

Derivative instrument liabilities

     178         204   

Deferred income tax liabilities

     1,392         1,052   

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

     612         552   

Asset retirement obligations and accrued environmental costs

     607         615   

Other non-current liabilities and deferred credits

     101         88   

Total Liabilities

     8,115         8,410   

Shareholders’ Equity

     

Share capital (Note 6)

     1,508         1,483   

Contributed surplus

     316         291   

Accumulated other comprehensive income

     1,344         816   

Retained earnings

     6,408         5,257   

Total Shareholders’ Equity

     9,576         7,847   

Total Liabilities and Shareholders’ Equity

   $ 17,691       $ 16,257   

(See Notes to the Condensed Consolidated Financial Statements)

 

1   PotashCorp 2012 Third Quarter Quarterly Report on Form 10-Q


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Income

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

(unaudited)

 

     Three Months Ended
September 30
    

Nine Months Ended

September 30

 
      2012      2011      2012      2011  

Sales (Note 7)

   $ 2,143       $ 2,321       $ 6,285       $ 6,850   

Freight, transportation and distribution

     (154      (129      (381      (410

Cost of goods sold

     (1,062      (1,060      (3,080      (3,044

Gross Margin

     927         1,132         2,824         3,396   

Selling and administrative expenses

     (53      (46      (166      (176

Provincial mining and other taxes

     (62      (53      (162      (147

Share of earnings of equity-accounted investees

     77         68         220         185   

Dividend income

     39         41         106         94   

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

                     (341        

Other expenses

     (10              (21      (10

Operating Income

     918         1,142         2,460         3,342   

Finance costs

     (24      (37      (89      (125

Income Before Income Taxes

     894         1,105         2,371         3,217   

Income taxes (Note 9)

     (249      (279      (713      (819

Net Income

   $ 645       $ 826       $ 1,658       $ 2,398   

Net Income per Share (Note 10)

           

Basic

   $ 0.75       $ 0.96       $ 1.93       $ 2.80   

Diluted

   $ 0.74       $ 0.94       $ 1.89       $ 2.73   

Dividends Declared per Share

   $ 0.21       $ 0.07       $ 0.49       $ 0.21   

(See Notes to the Condensed Consolidated Financial Statements)

 

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


Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in millions of US dollars)

(unaudited)

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
(Net of related income taxes)    2012      2011      2012      2011  

Net Income

   $ 645       $ 826       $ 1,658       $ 2,398   

Other comprehensive income (loss)

           

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

     303         (983      169         (1,351

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

                     341           

Net actuarial loss on defined benefit plans(2)

             (125      (84      (125

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

     (1      (18      (16      (18

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

     11         10         36         38   

Other

             (5      (2      (5

Other Comprehensive Income (Loss)

     313         (1,121      444         (1,461

Comprehensive Income (Loss)

   $ 958       $ (295    $ 2,102       $ 937   

 

(1) 

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

 

(2) 

Net of income taxes of $NIL (2011 — $71) for the three months ended September 30, 2012 and $48 (2011 — $71) for the nine months ended September 30, 2012.

 

(3) 

Cash flow hedges are comprised of natural gas derivative instruments, and are net of income taxes of $1 (2011 — $11) for the three months ended September 30, 2012 and $11 (2011 — $11) for the nine months ended September 30, 2012.

 

(4) 

Net of income taxes of $(8) (2011 — $(7)) for the three months ended September 30, 2012 and $(24) (2011 — $(23)) for the nine months ended September 30, 2012.

(See Notes to the Condensed Consolidated Financial Statements)

 

3   PotashCorp 2012 Third 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
September 30
     Nine Months Ended
September 30
 
      2012      2011      2012      2011  

Operating Activities

           

Net income

   $ 645       $ 826       $ 1,658       $ 2,398   

Adjustments to reconcile net income to cash provided by operating activities

           

Depreciation and amortization

     149         122         434         374   

Share-based compensation

     3         3         21         22   

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

                     341           

Realized excess tax benefit related to share-based compensation

     4         6         7         29   

Provision for deferred income tax

     162         189         366         342   

Net undistributed earnings of equity-accounted investees

     (74      (68      (90      (118

Pension and other post-retirement benefits

     (86      (145      (71      (131

Asset retirement obligations and accrued environmental costs

     (6      22         4         40   

Other long-term liabilities and miscellaneous

     7         9         33         (23

Subtotal of adjustments

     159         138         1,045         535   

Changes in non-cash operating working capital

           

Receivables

     (90      (88      (84      (277

Inventories

     19         7         63         (14

Prepaid expenses and other current assets

     (5              (21      12   

Payables and accrued charges

     31         (18      (308      (35

Subtotal of changes in non-cash operating working capital

     (45      (99      (350      (314

Cash provided by operating activities

     759         865         2,353         2,619   

Investing Activities

           

Additions to property, plant and equipment

     (546      (590      (1,505      (1,523

Other assets and intangible assets

     (23      (8      (37      (11

Cash used in investing activities

     (569      (598      (1,542      (1,534

Financing Activities

           

Repayment of long-term debt obligations

                     (2      (600

Repayment of short-term debt obligations

     (117      (236      (501      (395

Dividends

     (116      (60      (293      (148

Issuance of common shares

     13         15         16         40   

Cash used in financing activities

     (220      (281      (780      (1,103

(Decrease) Increase in Cash and Cash Equivalents

     (30      (14      31         (18

Cash and Cash Equivalents, Beginning of Period

     491         408         430         412   

Cash and Cash Equivalents, End of Period

   $ 461       $ 394       $ 461       $ 394   

Cash and cash equivalents comprised of:

           

Cash

   $ 69       $ 78       $ 69       $ 78   

Short-term investments

     392         316         392         316   
     $ 461       $ 394       $ 461       $ 394   

Supplemental cash flow disclosure

           

Interest paid

   $ 12       $ 35       $ 114       $ 168   

Income taxes paid

   $ 91       $ 91       $ 583       $ 415   

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2012 Third 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

                                                     1,658        1,658   

Other comprehensive income (loss)

                  510        20        (84     (2     444               444   

Effect of share-based compensation

           27                                                  27   

Dividends declared

                                                     (423     (423

Issuance of common shares

    25        (2                                               23   

Transfer of actuarial losses on defined benefit plans

                                84               84        (84       

Balance — September 30, 2012

  $ 1,508      $ 316      $ 1,492      $ (148   $ (2)    $      $ 1,344      $ 6,408      $ 9,576   

 

(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

                                                     2,398        2,398   

Other comprehensive (loss) income

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

Effect of share-based compensation

           (12                                               (12

Dividends declared

                                                     (180     (180

Issuance of common shares

    37                                                         37   

Transfer of actuarial losses on defined benefit plans

                                125               125        (125       

Balance — September 30, 2011

  $ 1,468      $ 296      $ 1,212      $ (157   $ (2)     $ 3      $ 1,058      $ 4,645      $ 7,467   

 

(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 Third Quarter Quarterly Report on Form 10-Q


Potash Corporation of Saskatchewan Inc.

Notes to the Condensed Consolidated Financial Statements

For the Three and Nine Months Ended September 30, 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 October 31, 2012.

Standards, amendments and interpretations not yet effective and not applied

The IASB and International Financial Reporting Interpretations Committee (“IFRIC”) have issued the following standards and amendments or interpretations to existing standards that are not yet effective and not applied. The company does not anticipate early adoption of these standards at this time.

 

Standard    Description    Impact    Effective
date1
Amendments to IAS 1, Presentation of Financial Statements    Amendments require items within other comprehensive income (“OCI”) that may be reclassified to the profit or loss section of the income statement to be grouped together.    The format of the company’s consolidated statements of comprehensive income will change.    July 1, 2012, applied retrospectively.
Amendments to IFRS 7, Financial Instruments: Disclosures    Issued as part of its offsetting project, addresses common disclosure requirements related to financial instruments.    The company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.    January 1, 2013, applied retrospectively.
IFRS 10, Consolidated Financial Statements    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 company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.    January 1, 2013, applied retrospectively, in most circumstances.
IFRS 11, Joint Arrangements    Removes a choice in accounting method and requires equity accounting for participants in joint ventures. Also focuses on the rights and obligations of an arrangement rather than its legal form.    The company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.    January 1, 2013, applied prospectively.

 

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


Standard    Description    Impact    Effective
date1
IFRS 12, Disclosure of Interests in Other Entities    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 company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.    January 1, 2013, applied prospectively.
IFRS 13, Fair Value Measurement    Establishes a single framework for measuring fair value and introduces consistent disclosure requirements on fair value measurements.    The company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.    January 1, 2013, applied prospectively.
Amendments to IAS 19, Employee Benefits    Changes relating to the recognition, measurement, presentation and disclosure of post-employment benefits. The amendment also changes the accounting for termination benefits and short-term employment benefits, along with other minor clarifications.    The company is reviewing the standard to determine the potential impact, if any.    January 1, 2013, applied retrospectively, in most circumstances.
IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine    Clarifies the requirements for accounting for stripping costs in the production phase of a surface mine.    The company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.    January 1, 2013, applied to the earliest period presented.
Amendments to IAS 32, Offsetting Financial Assets and Financial Liabilities    Issued as part of its offsetting project, amendments clarify certain items regarding offsetting financial assets and financial liabilities.    The company is reviewing the standard to determine the potential impact, if any; however, no significant impact is anticipated.    January 1, 2014, applied retrospectively.
IFRS 9, Financial Instruments    Initially issued guidance on the classification and measurement of financial assets. Additional guidance was issued on the classification and measurement of financial liabilities. Further amendments were issued which modify the requirements for transition from IAS 39 to IFRS 9.    The company is reviewing the standard to determine the potential impact, if any.    January 1, 2015, applied prospectively.

 

1 

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

 

2. Inventories

 

      September 30,
2012
     December 31,
2011
 

Finished products

   $ 343       $ 395   

Intermediate products

     83         98   

Raw materials

     89         91   

Materials and supplies

     166         147   
     $ 681       $ 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 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.

 

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


Changes in fair value, and related accounting, for the company’s investment in Sinofert Holdings Limited (“Sinofert”) since December 31, 2011 were as follows:

 

                   Impact of Unrealized Holding Loss on:  
      Fair Value      Unrealized
Holding Loss
     OCI and AOCI      Net Income and
Retained Earnings
 

Balance — December 31, 2011

   $ 439       $ (140    $ (140    $   

Decrease in fair value

     (61      (61      (61        

Balance — March 31, 2012

   $ 378       $ (201    $ (201    $   

Decrease in fair value prior to recognition of impairment

     (140      (140      (140        

Recognition of impairment

                     341         (341

Balance — June 30, 2012

   $ 238       $ (341    $       $ (341

Increase in fair value subsequent to recognition of impairment

     66         66         66           

Balance — September 30, 2012

   $ 304       $ (275    $ 66       $ (341

 

 

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).

 

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

    2,641,154           18   

Issued for dividend reinvestment plan

    162,641           7   

Balance — September 30, 2012

    861,506,786         $ 1,508   

 

PotashCorp 2012 Third 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 September 30, 2012  
      Potash      Phosphate      Nitrogen      All Others      Consolidated  

Sales

   $ 963       $ 568       $ 612       $       $ 2,143   

Freight, transportation and distribution

     (76      (55      (23              (154

Net sales — third party

     887         513         589              

Cost of goods sold

     (333      (391      (338              (1,062

Gross margin

     554         122         251                 927   

Depreciation and amortization

     (49      (64      (33      (3      (149

Inter-segment sales

                     72                   

Cash flows for additions to property, plant and equipment

     348         73         106         19         546   

 

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

Sales

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

Freight, transportation and distribution

     (59      (46      (24              (129

Net sales — third party

     976         644         572              

Cost of goods sold

     (276      (475      (309              (1,060

Gross margin

     700         169         263                 1,132   

Depreciation and amortization

     (33      (55      (32      (2      (122

Inter-segment sales

                     56                   

Cash flows for additions to property, plant and equipment

     493         41         53         3         590   

 

     Nine Months Ended September 30, 2012  
      Potash      Phosphate      Nitrogen      All Others      Consolidated  

Sales

   $ 2,731       $ 1,750       $ 1,804       $       $ 6,285   

Freight, transportation and distribution

     (165      (140      (76              (381

Net sales — third party

     2,566         1,610         1,728              

Cost of goods sold

     (884      (1,240      (956              (3,080

Gross margin

     1,682         370         772                 2,824   

Depreciation and amortization

     (135      (188      (103      (8      (434

Inter-segment sales

                     164                   

Cash flows for additions to property, plant and equipment

     1,029         172         261         43         1,505   

 

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

Sales

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

Freight, transportation and distribution

     (212      (129      (69              (410

Net sales — third party

     3,053         1,743         1,644              

Cost of goods sold

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

Gross margin

     2,236         485         675                 3,396   

Depreciation and amortization

     (112      (159      (97      (6      (374

Inter-segment sales

                     133                   

Cash flows for additions to property, plant and equipment

     1,238         133         117         35         1,523   

 

9   PotashCorp 2012 Third 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 September 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.

 

     Three Months Ended
September 30
     Nine Months Ended
September 30
 
      2012      2011      2012      2011  

Income tax expense

   $ 249       $ 279       $ 713       $ 819   

Actual effective tax rate on ordinary earnings

     26%         26%         26%         26%   

Actual effective tax rate including discrete items

     28%         25%         30%         25%   

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 September 30, 2012 resulted in an income tax expense of $14 compared to an income tax recovery of $5 in the same period last year. Total discrete tax adjustments that impacted the rate in the nine months ended September 30, 2012 resulted in an income tax expense of $17 compared to an income tax recovery of $29 in the same period last year. Significant items recorded included the following:

 

Ÿ  

In the first nine months of 2012, a tax expense of $17 (of which $12 was recorded in the third quarter) to adjust the 2011 tax provision to the income tax returns filed for that year.

 

Ÿ  

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

 

Ÿ  

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

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

 

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

Current income tax assets:

        

Current

  

Receivables

   $ 112       $ 21   

Non-current

  

Other assets

     127         117   

Deferred income tax assets

  

Other assets

     30         19   

Total income tax assets

        $ 269       $ 157   

Current income tax liabilities:

        

Current

  

Payables and accrued charges

   $ (22    $ (271

Non-current

  

Other non-current liabilities and deferred credits

     (99      (85

Deferred income tax liabilities

  

Deferred income tax liabilities

     (1,392      (1,052

Total income tax liabilities

        $ (1,513    $ (1,408

 

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


10. Net Income per Share

Net income per share was calculated on the following weighted average number of shares:

 

    

Three Months Ended

September 30

    

Nine Months Ended

September 30

 
      2012      2011      2012      2011  

Basic

     859,573,000         856,022,000         859,118,000         855,024,000   

Diluted

     876,026,000         876,959,000         875,885,000         876,844,000   

Diluted net income per share was calculated based on the weighted average number of shares issued and outstanding during the period, incorporating the following adjustments. 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.

Excluded from the calculation of diluted net income per share for the three and nine months ended September 30, 2012 were weighted average options outstanding of 2,473,850 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 September 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 for approval and work is expected to commence in the first quarter of 2013. 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

 

 

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


   

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.

 

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. In July 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 (“RI/FS”) at “Operable Unit 2,” which is the former Ward Transformer plant, certain properties surrounding the plant and drainage pathways upgradient of Operable Unit 1. In September 2012, PCS Phosphate and the Settling Parties made a good faith offer to perform the RI/FS subject to mutually agreed upon Administrative Order on Consent.

 

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 is implementing 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 (“CAA”) violation at its Geismar, Louisiana plant. The company has entered into RCRA 3013 Administrative Orders on Consent and has performed certain site assessment activities at all three plants. At this time, it does not know the scope of corrective action, if any, that may be required. As to the alleged RCRA violations the company continues to participate in settlement discussions with the USEPA but is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be. At this time, it is

 

 

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


 

unable to evaluate the extent of any exposure it may have in these matters. As to the alleged CAA violation, the company has entered into separate settlement discussions with USEPA and, subject to negotiation of final documentation, has agreed to pay a penalty of $0.2 to resolve this matter.

 

Ÿ  

The USEPA has begun an initiative to evaluate compliance with the CAA 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 CAA at its Geismar, Louisiana plant. The governments have demanded process changes and penalties that would cost approximately $46, 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 CAA. 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 appeal by the petitioners to the Environmental Management Commission (“Commission”) was heard and, by Order dated October 16, 2012 the Commission upheld the OAH grant of

   

summary judgment for the company. Appeal from the decision of the Commission is to a North Carolina Superior Court.

 

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 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

 

 

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


   

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 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. In June 2012, the en banc court affirmed the trial court’s order denying defendants’ motion to dismiss the direct purchaser plaintiffs’ complaint. The case has been remanded to the trial court and the parties are currently engaged in pre-trial discovery. 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 Saskatchewan. Sales to Canpotex for the three months ended September 30, 2012 were $312 (2011 — $497) and nine months ended September 30, 2012 were $1,272 (2011 — $1,537). At September 30, 2012, $246 (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 Third 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 October 31, 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 Third 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 September 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 6 percent in the first nine months of 2012 compared to our sector’s weighted average return (based on market capitalization) of 23 percent and the DAXglobal Agribusiness Index weighted average return (based on market capitalization) of 10 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 nine months of 2012, product tonnes involved in customer complaints fell 43 percent compared to the average for the first nine months of the prior three years.
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 nine months of 2012 was 6 percent, up from 4 percent in the second quarter of 2012, due mainly to a workforce reduction at Aurora.
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 46 percent below the 2008 annual level for the first nine months of 2012. It was 42 percent below the 2008 annual level for the first nine 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 nine months of 2012, total site recordable injury rate was 1.29.
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 nine months of 2012 compared to 2011 annual levels. Compared to the first nine months of 2011, total reportable incidents were up 64 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 — Third Quarter 2012

 

      Company Guidance      Actual Results  

Earnings per share

   $ 0.70 – $0.90       $ 0.74   

 

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


Overview of Actual Results

 

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

Sales

  $ 2,143      $ 2,321      $ (178     (8   $ 6,285      $ 6,850      $ (565     (8

Gross Margin

    927        1,132        (205     (18     2,824        3,396        (572     (17

Operating Income

    918        1,142        (224     (20     2,460        3,342        (882     (26

Net Income

    645        826        (181     (22     1,658        2,398        (740     (31

Net Income per Share — Diluted

    0.74        0.94        (0.20     (21     1.89        2.73        (0.84     (31

Other Comprehensive Income (Loss)

    313        (1,121     1,434        n/m        444        (1,461     1,905        n/m   

 

n/m = not meaningful

Earnings in the third quarter of 2012 were lower than the third quarter of 2011 due mostly to fewer offshore potash sales volumes and lower potash prices. For the first nine months, 2012 earnings were lower than 2011 due to lower potash sales volumes, partially offset by higher potash prices, and a $341 million non-tax deductible charge related to the impairment of our investment in Sinofert Holdings Limited (Sinofert) in the second quarter of 2012.

Third-quarter potash demand was marked by varying degrees of engagement in key markets around the world. Movement to China and India was limited following the completion of existing supply contracts, while Brazil and North America purchased aggressively to meet robust farmer demand. In North America, fertilizer dealers began to prepare for their fall requirements upon the announcement of new summer-fill pricing programs. This helped push third-quarter shipments from domestic potash producers 26 percent above the same period last year. By the end of the quarter, shipments accelerated as fertilizer dealers responded to previously conservative fall application estimates, especially in regions less severely impacted by drought. Demand was further aided by a rapidly advancing harvest that was expected to create an extended North American fall fertilizer application window. In offshore markets, delays in closing new contracts with buyers in China and India more than offset strong demand from Latin America (especially Brazil) and resulted in a decrease in third-quarter shipments from North American producers to 1.9 million tonnes, 25 percent below the same period last year. As a result, rising competitive pressures in certain offshore markets moved most spot- market prices lower during the quarter.

In phosphate, strong demand and continuing supply challenges in the US kept domestic markets for solid phosphate fertilizer tight. Weaker offshore demand relative to 2011 levels resulted in lower prices on a comparative basis, but tightness in North America caused prices to move up in this market by the end of the quarter.

Nitrogen markets remained robust throughout the third quarter, driven by the expectation of high US corn acreage for the upcoming spring planting season and steady industrial demand. Continued delays in expected new capacity, as well as ongoing production issues in key exporting regions, kept inventories relatively low. The combination of strong demand and tight supply resulted in prices for ammonia at historically high levels, well above those of the same period last year.

Other comprehensive income for the third quarter of 2012 was the result of an increase in the fair value of our investments in Israel Chemicals Ltd (ICL) and Sinofert. Other comprehensive income for the first nine months of 2012 was primarily affected by the reclassification to income of a $341 million unrealized loss on our investment in Sinofert which was impaired in the second quarter of 2012, a remeasurement of our defined benefit plans and an increase in the fair value of our investment in ICL. Other comprehensive loss for the third quarter and first nine months of 2011 was primarily affected by a decline in the fair value of our investments in ICL and Sinofert and a remeasurement of our defined benefit plans.

 

 

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


Balance Sheet

 

LOGO

 

Property, plant and equipment increased primarily (68 percent) due to our previously announced potash capacity expansions and other potash projects. Available-for-sale investments rose due to the higher fair value of our investment in ICL, partially offset by a lower fair value for our investment in Sinofert. Receivables rose mainly as a result of higher trade receivables, due to more sales being booked in the last month of the third quarter of 2012 compared to the fourth quarter of 2011, and increased taxes receivable resulting primarily from the classification of investment tax credits as current and tax installments that were based on higher anticipated earnings. As at September 30, 2012, $401 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 impacted by (1) reduced income taxes payable (as a result of payments made during the first nine months of 2012, partly offset by current taxes accrued on earnings); (2) lower accrued potash production tax and resource surcharge; (3) lower accrued payroll (employee incentives accrued at year end were paid out during the first quarter of 2012); and, (4) a tripling of dividends payable due to announced increases in dividends per share. 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.

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

 

 

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


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.

 

 

 

LOGO

Potash

Financial Performance

 

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

Manufactured product

                 

Net sales

                 

North America

  $ 443      $ 410        8        951        769        24      $ 466      $ 533        (13

Offshore

    441        563        (22     1,107        1,387        (20   $ 398      $ 406        (2
    884        973        (9     2,058        2,156        (5   $ 429      $ 451        (5

Cost of goods sold

    (330     (274     20                              $ (160   $ (127     26   

Gross margin

    554        699        (21         $ 269      $ 324        (17

Other miscellaneous and purchased product gross margin(2)

           1        (100                                                

Gross Margin

  $    554      $    700        (21                           $ 269      $ 325        (17

 

(1) 

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

 

(2) 

Comprised of net sales of $3 million (2011 — $3 million) less cost of goods sold of $3 million (2011 — $2 million).

 

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


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

Manufactured product

                 

Net sales

                 

North America

  $ 968      $ 1,285        (25     2,002        2,692        (26   $ 484      $ 477        1   

Offshore

    1,588        1,758        (10     3,911        4,773        (18   $ 406      $ 368        10   
    2,556        3,043        (16     5,913        7,465        (21   $ 432      $ 408        6   

Cost of goods sold

    (876     (810     8                              $ (148   $ (109     36   

Gross margin

    1,680        2,233        (25         $ 284      $ 299        (5

Other miscellaneous and purchased product gross margin(2)

    2        3        (33                                                

Gross Margin

  $ 1,682      $ 2,236        (25                           $ 284      $ 300        (5

 

(1) 

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

 

(2) 

Comprised of net sales of $10 million (2011 — $10 million) less cost of goods sold of $8 million (2011 — $7 million).

Potash gross margin variance attributable to:

 

   

Three Months Ended September 30

2012 vs. 2011

    

Nine Months Ended September 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

  $ 55      $ (34   $ (28   $ (7    $ (286   $ 13      $ (56   $ (329

Offshore

    (90     (10     (38     (138      (252     147        (119     (224

Change in market mix

    (23     21        2                16        (15     (1       

Total manufactured product

  $ (58   $ (23   $ (64     (145    $ (522   $ 145      $ (176     (553

Other miscellaneous and purchased product

                            (1                              (1

Total

                          $ (146                            $ (554

 

LOGO   LOGO

 

PotashCorp 2012 Third 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 September 30      Nine Months Ended September 30  
      2012      2011      Change      % Change      2012      2011      Change      % Change  

Asia (excluding China and India)

     41         40         1         3         45         45                   

Latin America

     32         26         6         23         29         28         1         4   

China

     12         20         (8      (40      15         17         (2      (12

India

     5         9         (4      (44      6         5         1         20   

Oceania, Europe and Other

     10         5         5         100         5         5                   
       100         100                           100         100                     

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  Our third-quarter average realized potash price was relatively flat compared to second quarter 2012, but declined from the same period last year on softening prices in spot markets.

 

h  Strong demand pushed North American potash sales volumes to a third-quarter record.

 

i  Shipments to Latin America outpaced last year’s third quarter, but strength from this market was more than offset by the decline in Canpotex sales to China and India.

 

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

 

   

i  15 shutdown weeks were taken in 2012 mainly as a result of our strategy to match production with market demand and for expansion-related activities (9 shutdown weeks taken in 2011 mainly for expansion-related activities).

 

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

   

The change in market mix produced an unfavorable variance of $23 million related to sales volumes and a favorable variance of $21 million in sales prices due to more higher-priced granular sales being sold to North America whereas last year, lower-priced standard product to the offshore market comprised a larger proportion of total sales.

 

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


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 in 2012 and 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  Shipments to India declined drastically due to its fertilizer subsidy changes, which led to higher retail prices and reduced demand. Volumes to China were impacted by a 2012 first-half contract that was lower than 2011 and a second-half contract being signed in 2011 but not yet in 2012.

 

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

 

i  55 shutdown weeks incurred in 2012 (at our Lanigan, Rocanville, Allan and Patience Lake facilities) primarily to match production to market demand (9 shutdown weeks were taken in 2011 at Allan, due to expansion-related activities, and Patience Lake). During this downtime in 2012, 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  At Esterhazy, brine management costs, other operating costs and depreciation were higher.

 

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

   

Non-Financial Performance

 

     Three Months Ended September 30      Nine Months Ended September 30  
      2012      2011      % Change      2012      2011      % Change  

KCl tonnes produced (thousands)

     1,579         1,937         (18      5,961         7,099         (16

Total site severity injury rate

     1.28         0.64         100         0.93         0.60         55   

Environmental incidents

     2         2                 7         6         17   

A rise in modified work injuries, partly offset by lower lost-time injuries, caused the increase in the total site severity injury rate for the three and nine months ended September 30, 2012. An external consultant has been retained to help improve safety performance at three sites with the highest number of injuries.

 

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


Phosphate

Financial Performance

 

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

Manufactured product

                 

Net sales

                 

Fertilizer

  $ 333      $ 454        (27     676        780        (13   $ 493      $ 582        (15

Feed and Industrial

    172        182        (5     263        278        (5   $ 654      $ 659        (1
    505        636        (21     939        1,058        (11   $ 537      $ 602        (11

Cost of goods sold

    (388     (471     (18                           $ (413   $ (445     (7

Gross margin

    117        165        (29         $ 124      $ 157        (21

Other miscellaneous and purchased product
gross margin
(2)

    5        4        25                                                   

Gross Margin

  $ 122      $ 169        (28                           $ 130      $ 160        (19

 

(1) 

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

 

(2) 

Comprised of net sales of $8 million (2011 — $8 million) less cost of goods sold of $3 million (2011 — $4 million).

 

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

Manufactured product

                 

Net sales

                 

Fertilizer

  $ 1,004      $ 1,173        (14     1,932        2,080        (7   $ 520      $ 564        (8

Feed and Industrial

    581        548        6        873        884        (1   $ 666      $ 620        7   
    1,585        1,721        (8     2,805        2,964        (5   $ 565      $ 581        (3

Cost of goods sold

    (1,229     (1,247     (1                           $ (438   $ (421     4   

Gross margin

    356        474        (25         $ 127      $ 160        (21

Other miscellaneous and purchased product
gross margin
(2)

    14        11        27                                                   

Gross Margin

  $ 370      $ 485        (24                           $ 132      $ 164        (20

 

(1) 

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

 

(2) 

Comprised of net sales of $25 million (2011 — $22 million) less cost of goods sold of $11 million (2011 — $11 million).

 

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


Phosphate gross margin variance attributable to:

 

   

Three Months Ended September 30

2012 vs. 2011

    

Nine Months Ended September 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

  $ (27   $ (56   $ 37      $ (46    $ (36   $ (82   $ (1   $ (119

Feed and Industrial

    (4            2        (2      (5     41        (35     1   

Change in market mix

    7        (8     1                3        (4     1          

Total manufactured product

  $ (24   $ (64   $ 40        (48    $ (38   $ (45   $ (35     (118

Other miscellaneous and purchased product

                            1                                 3   

Total

                          $ (47                            $ (115

 

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  

Average realized phosphate prices reflected lower prices for solid and liquid fertilizers, although the relative strength of our diversified feed and industrial products – where pricing is typically less volatile than products with agricultural exposure – helped limit the overall decline.

  i  

The impacts of tropical storm Debby, a turnaround at our Geismar facility and challenging mining conditions in a new portion of our Aurora mine limited production during the quarter. As a result, third-quarter sales volumes were below the same quarter last year, reflecting our decision to allocate a larger percentage of our limited phosphoric acid production to higher-margin products.

 

h

 

 

h

 

Sulfur costs were down 16 percent.

 

A small favorable adjustment to our asset retirement obligations was recorded in 2012 due to an increase in relevant discount rates while a larger unfavorable adjustment was recorded in 2011 due to a decrease in the relevant discount rates.

         

 

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


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

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 benefit from a time lag on quarterly contract sales.

  i   Volumes were primarily impacted by our decision to allocate a larger percentage of our limited phosphoric acid production to higher-margin products.   i   Ammonia costs were up 14 percent.
       

 

h

 

 

Negative adjustments to our phosphate asset retirement obligations in 2012 were lower than in 2011.

       

 

i

 

 

Costs associated with our Aurora workforce reduction were incurred during the second quarter of 2012.

Non-Financial Performance

 

     Three Months Ended September 30      Nine Months Ended September 30  
      2012      2011      % Change      2012      2011      % Change  

P2O5 tonnes produced (thousands)

     493         565         (13      1,479         1,649         (10

P2O5 operating rate percentage

     83%         95%         (13      83%         93%         (11

Total site severity injury rate

     0.12         0.57         (79      0.31         0.90         (66

Environmental incidents

     1         1                 5         2         150   

Safety improvement plans implemented in 2012 focused on improving employee and contractor safety, resulting in a reduced total site severity injury rate for the three and nine months ended September 30, 2012.

The rise in environmental incidents year over year was the result of four incidents occurring during or immediately following extreme weather events.

Nitrogen

Financial Performance

 

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

Manufactured product

                 

Net sales

                 

Ammonia

  $ 299      $ 250        20        466        475        (2   $ 641      $ 526        22   

Urea

    121        174        (30     241        325        (26   $ 504      $ 534        (6

Nitrogen solutions/Nitric acid/Ammonium nitrate

    104        124        (16     438        492        (11   $ 238      $ 254        (6
    524        548        (4     1,145        1,292        (11   $ 458      $ 424        8   

Cost of goods sold

    (291     (300     (3                           $ (254   $ (232     9   

Gross margin

    233        248        (6         $ 204      $ 192        6   

Other miscellaneous and purchased product
gross margin
(2)

    18        15        20                                                   

Gross Margin

  $ 251      $ 263        (5                           $ 219      $ 204        7   

 

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

 

(2)   Comprised of net sales of $65 million (2011 — $24 million) less cost of goods sold of $47 million (2011 — $9 million).

      

      

 

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


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

Manufactured product

                 

Net sales

                 

Ammonia

  $ 794      $ 774        3        1,499        1,503             $ 530      $ 515        3   

Urea

    456        442        3        870        972        (10   $ 525      $ 455        15   

Nitrogen solutions/Nitric acid/Ammonium nitrate

    338        346        (2     1,371        1,456        (6   $ 246      $ 238        3   
    1,588        1,562        2        3,740        3,931        (5   $ 425      $ 397        7   

Cost of goods sold

    (869     (921     (6                           $ (233   $ (234       

Gross margin

    719        641        12            $ 192      $ 163        18   

Other miscellaneous and purchased product gross margin(2)

    53        34        56                                                   

Gross Margin

  $ 772      $ 675        14                              $ 206      $ 172        20   

 

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

 

(2)   Comprised of net sales of $140 million (2011 — $82 million) less cost of goods sold of $87 million (2011 — $48 million).

      

      

Nitrogen gross margin variance attributable to:

 

   

Three Months Ended September 30

2012 vs. 2011

    

Nine Months Ended September 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

  $ (4   $ 54      $ (14   $ 36       $ (2   $ 23      $ 12      $ 33   

Urea

    (24     (14     4        (34      (28     62        14        48   

Solutions, NA, AN

    (4     (7     (6     (17      (11     12        (9     (8

Hedge

                                               5        5   

Change in market mix

    (3     4        (1             (10     7        3          

Total manufactured product

  $ (35   $ 37      $ (17     (15    $ (51   $ 104      $ 25        78   

Other miscellaneous and purchased product

                            3                                 19   

Total

                          $ (12                            $ 97   

 

LOGO   LOGO

 

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


 

LOGO

 

     Three Months Ended September 30      Nine Months Ended September 30  
    

Sales Tonnes

(thousands)

     Price per Tonne     

Sales Tonnes

(thousands)

     Price per Tonne  
      2012      2011      2012      2011      2012      2011      2012      2011  

Fertilizer

     301         445       $ 455       $ 469         1,108         1,281       $ 474       $ 425   

Industrial and Feed

     844         847       $ 459       $ 401         2,632         2,650       $ 404       $ 384   
       1,145         1,292       $ 458       $ 424         3,740         3,931       $ 425       $ 397   

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  

Tight ammonia market fundamentals pushed prices higher.

  i  

Gas interruptions in Trinidad and expansion-related downtime at our Augusta facility resulted in sales volumes for the third-quarter declining from the same period last year.

  i   Average natural gas costs in production, including hedge, increased 10 percent. Natural gas costs in Trinidad production rose 22 percent (contract price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas used in production fell 29 percent. Including losses on our hedge position, US gas prices declined 13 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  

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

  i   Sales volumes were 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 8 percent. Natural gas costs in Trinidad production rose 3 percent while our US spot costs for natural gas used in production fell 35 percent. Including losses on our hedge position, US gas prices declined 26 percent.

 

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


Non-Financial Performance

 

    Three Months Ended September 30     Nine Months Ended September 30  
     2012     2011     % Change     2012     2011     % Change  

N tonnes produced (thousands)

    651        724        (10     2,029        2,115        (4

Total site severity injury rate

    0.08        0.13        (38     0.13        0.14        (7

Environmental incidents

    3               n/m        6        3        100   

 

n/m = not meaningful

Other Expenses and Income

 

     Three Months Ended September 30      Nine Months Ended September 30  
Dollars (millions)    2012     2011     Change     % Change      2012     2011     Change     % Change  

Selling and administrative expenses

   $ (53   $ (46   $ (7     15       $ (166   $ (176   $ 10        (6

Provincial mining and other taxes

     (62     (53     (9     17         (162     (147     (15     10   

Share of earnings of equity-accounted investees

     77        68        9        13         220        185        35        19   

Dividend income

     39        41        (2     (5      106        94        12        13   

Impairment of available-for-sale investment

                          n/m         (341            (341     n/m   

Other expenses

     (10            (10     n/m         (21     (10     (11     110   

Finance costs

     (24     (37     13        (35      (89     (125     36        (29

Income taxes

     (249     (279     30        (11      (713     (819     106        (13

 

n/m = not meaningful

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 third quarter and first nine 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 nine months 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 due to increased earnings by these companies. ICL paid higher dividends in the first nine months of 2012 compared to the same periods last year.

In the second quarter of 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 nine months ended September 30, 2012. No such losses were recognized in 2011.

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

 

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

Long-term debt obligations, including current portion

                   

Weighted average outstanding

   $ 3,756      $ 3,757      $ (1)              $ 3,757      $ 4,124      $ (367)        (9

Weighted average effective interest rate

     5.2%        5.2%                       5.2%        5.4%        (0.2)%        (4

Short-term debt obligations

                   

Weighted average outstanding

   $ 330      $ 1,003      $ (673)        (67    $ 621      $ 1,020      $ (399)        (39

Weighted average effective interest rate

     0.4%        0.4%                       0.4%        0.4%                 

 

PotashCorp 2012 Third Quarter Quarterly Report on Form 10-Q   28


Income taxes decreased due to lower income before income taxes. Effective tax rates were as follows:

 

    Three Months Ended
September 30
    Nine Months Ended
September 30
 
     2012     2011     2012     2011  

Actual effective tax rate on ordinary earnings

   </