-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CbQFhRi071BaRGtT7IMOMWqxOGV6suTD5279/yR1VbJcbHwJxfD1MjlLeLZ8wcKd hNu7v6XtYwId2SBZxeNd6g== 0000950150-00-000232.txt : 20000329 0000950150-00-000232.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950150-00-000232 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: POTASH CORPORATION OF SASKATCHEWAN INC CENTRAL INDEX KEY: 0000855931 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10351 FILM NUMBER: 581120 BUSINESS ADDRESS: STREET 1: 122 1ST AVE S, STE 500 STREET 2: SASKATOON CITY: SASKATCHEWAN CANADA STATE: A9 BUSINESS PHONE: 3069338500 10-K 1 10-K FOR PERIOD ENDED 12-31-99 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-10351 ------------------------------------ POTASH CORPORATION OF SASKATCHEWAN INC. (Exact name of the registrant as specified in its charter) SASKATCHEWAN N/A (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.)
122 - 1ST AVENUE SOUTH SASKATOON, SASKATCHEWAN, CANADA S7K 7G3 306-933-8500 (Address and telephone number of the registrant's principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED Common Shares, No Par Value New York Stock Exchange (Including rights under the Shareholder Rights Agreement)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 15, 2000, the registrant had 53,041,972 Common Shares outstanding, and the aggregate market value of the 52,969,028 Common Shares held by non-affiliates of the registrant was approximately $2,413,401,351. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1999 (the "1999 Annual Report") are incorporated by reference into Part II. Portions of the registrant's Proxy Circular for its Annual Meeting of Shareholders to be held on May 11, 2000 (the "2000 Proxy Circular") are incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 PART I ITEMS 1 AND 2. BUSINESS AND PROPERTIES. GENERAL Potash Corporation of Saskatchewan Inc. ("PCS") and its direct and indirect subsidiaries (together with PCS' predecessors, the "Company") is one of the world's largest integrated fertilizer and related industrial and feed products companies. In 1999, the Company's potash production represented an estimated 15% of global potash production. In 1999, the Company had 24% of global potash capacity and an estimated 60% of global excess potash capacity, giving it more available potash capacity than any single company or country other than Canada. The Company is the third largest producer of phosphates worldwide by capacity, currently representing approximately 7% of world phosphoric acid production and 7% of world phosphoric acid capacity. The Company is currently the largest nitrogen producer in the Western Hemisphere. PCS is incorporated under the laws of the Province of Saskatchewan and is the successor to a corporation without share capital established by the Province of Saskatchewan in 1975. Between 1976 and 1990, the Company acquired substantial interests in the Saskatchewan potash industry. It purchased the Cory mine in 1976, the Rocanville and Lanigan mines in 1977, and, by 1990, 100% of the Allan mine when the Company acquired all of the outstanding shares of Saskterra Fertilizers Ltd. In addition, in 1978 the Company acquired reserves at Esterhazy, which are mined by a third party. In November 1989, the Company was privatized by the Province of Saskatchewan. While the Province initially retained an ownership interest in the Company, this interest had been reduced to zero by the end of 1993. In October 1993, the Company acquired from Rio Algom Limited ("Rio") its New Brunswick potash mine and port facilities and its Patience Lake mine in Saskatchewan (the "Rio Acquisition"). In April 1995, the Company purchased all of the outstanding shares of Texasgulf Inc. ("Texasgulf") from Elf Aquitaine, Inc. ("Elf (USA)") and Williams Acquisition Holding Company, Inc. ("Williams"). At the time of the acquisition, the name "Texasgulf Inc." was changed to PCS Phosphate Company, Inc. ("PCS Phosphate"). PCS Phosphate manufactures and sells solid and liquid phosphate fertilizers, animal feed supplements, and purified phosphoric acid which is used in food products and industrial processes. Its facility in Aurora, North Carolina is the largest vertically-integrated phosphate mine and processing plant in the world. Other assets of PCS Phosphate include: animal feed plants in three states; two industrial phosphoric acid plants owned through the joint venture carrying on business as PCS Purified Phosphates, formerly Albright & Wilson Company; an undivided 50% interest in an ammonia storage terminal in Savannah, Georgia; and PCS Phosphate's product distribution infrastructure. In October 1995, the Company purchased all of the outstanding shares of White Springs Agricultural Chemicals, Inc. ("White Springs") from Occidental Chemical Corporation ("OxyChem"). White Springs' primary assets are a phosphate mine and two chemical plant complexes in northern Florida, Swift Creek and Suwannee River. Other assets of White Springs include an animal feed plant in Davenport, Iowa, two additional animal feed plants at the Suwannee River facility, and the remaining undivided 50% interest in the ammonia storage terminal in Savannah, Georgia owned with PCS Phosphate. In March 1997, the Company through its subsidiary PCS Nitrogen, Inc. ("PCS Nitrogen") acquired all of the outstanding shares of Arcadian Corporation ("Arcadian"). PCS Nitrogen produces nitrogen fertilizers and nitrogen chemicals at facilities in Georgia, Louisiana, Ohio and Tennessee in the United States, and has large scale operations in Trinidad. Other assets of PCS Nitrogen include a 50% interest in a joint venture that owns and operates an ammonia storage terminal near Houston, Texas and a 50% joint venture interest in a carbon dioxide processing operation at PCS Nitrogen's plant in Augusta, Georgia. In December 1998, the Company purchased, pursuant to a public offering by the State of Israel, 108,359,925 Ordinary Shares of Israel Chemicals Ltd. ("ICL") for approximately $92 million. This purchase represented 9.03% of the issued and outstanding Ordinary Shares of ICL. ICL, through its subsidiaries, is a potash, phosphate and bromine producer and is also involved in other specialty chemical products. I-1 3 In July 1999, the Company purchased all of the outstanding shares of Minera Yolanda SCM, a Chilean sodium nitrate and potassium nitrate producer for approximately $37 million. At the time of the acquisition, the name was changed to PCS Yumbes SCM ("PCS Yumbes"). See "Potash Operations - Properties". In February 2000, the Company sold its shares in Moab Salt, Inc. to Intrepid Oil & Gas, LLC. The primary asset of Moab Salt, Inc. is a solution potash and salt mine in Moab, Utah. On March 23, 2000, the Company completed a transaction with Rhodia Inc. to acquire the remaining 50% ownership interest in the merchant grade phosphoric acid joint venture company formerly called Albright & Wilson Company for approximately $42 million. Upon closing of the transaction, the joint venture company was renamed PCS Purified Phosphates. The Company and Albright & Wilson Americas Inc. had been operating the business as a 50/50 partnership. With the completion of the transaction, the Company now owns 100% of the purified acid plant and blending plant in Aurora, North Carolina and 100% of the blending plant in Cincinnati, Ohio. Rhodia Inc. retained a polyphosphoric acid production unit in Charleston, South Carolina. PCS has its head office and executive offices at Suite 500, 122 - 1st Avenue South, Saskatoon, Saskatchewan, Canada S7K 7G3. In this Form 10-K, the term "Company" means PCS, its predecessors and its direct and indirect subsidiaries unless the context otherwise indicates. The Company has three principal business segments: potash, phosphate and nitrogen. For information with respect to the net sales revenue, operating income and assets attributable to each segment and to the Company's domestic and international sales, see Note 18 to the Company's audited consolidated financial statements as at December 31, 1999 and 1998 and for each of the three years ended December 31, 1999 (together with the Notes thereto, the "Consolidated Financial Statements"), incorporated by reference under Item 8. The Company presents its financial statements in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). See Note 32 to the Consolidated Financial Statements for a discussion of certain significant differences between Canadian GAAP and accounting principles generally accepted in the United States as they relate to the Company. Unless otherwise specified, dollar amounts are stated in U.S. Dollars. Except for the historical statements and discussions contained herein, statements contained in this report on Form 10-K constitute "forward looking statements" within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. Forward looking statements may include words such as "expect", "estimate", "project", "anticipate", "should", "intend" and similar expressions or variations on such expressions. Any filing of the Company with the U.S. Securities and Exchange Commission may include forward looking statements. In addition, other written or oral statements which constitute forward looking statements have been made and may in the future be made by or on behalf of the Company, including statements concerning future operating and financial performance, the Company's share of new and existing markets, general industry trends and the Company's performance relative thereto and the Company's expectations as to requirements for capital expenditures and environmental matters. These forward looking statements rely on a number of assumptions concerning future events and are subject to a number of uncertainties and other factors, many of which are outside the Company's control, that could cause actual results to differ materially from such statements. These factors include, but are not limited to, fluctuations in supply and demand in fertilizer, sulfur and petrochemical markets, changes in competitive pressures, including pricing pressures, potential higher actual costs incurred in connection with restructuring charges as compared to costs estimated for the purposes of calculating such charges, uncertainty and variations in future undiscounted net cash flows from use together with residual values estimated for purposes of calculating restructuring charges, changes in capital markets, changes in currency and exchange rates, unexpected geological and environmental conditions, imprecision in reserve estimates, the outcome of legal proceedings and changes in government policy and regulation, including environmental regulation. I-2 4 The Company disclaims any obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise. POTASH OPERATIONS The Company's potash operations include the mining and production of potash, which is predominantly used as fertilizer. PROPERTIES The Company controls the right to mine 615,400 acres of land in Saskatchewan. Included in these holdings are mineral rights to 507,000 acres contained in blocks around the six mines in which the Company has an interest, of which acres approximately 36% are owned by the Company, approximately 50% are under lease from the Province of Saskatchewan and approximately 14% are leased from other parties. The majority of the leases are for 21-year terms, renewable at the Company's option. The Company's remaining 108,400 acres are located elsewhere in Saskatchewan. Potash is mined by the Company from two main potash bearing formations in Saskatchewan: the Patience Lake member of the prairie evaporites in the north and the Esterhazy member of the prairie evaporites in the south. The Patience Lake member is mined at the Lanigan, Allan, Patience Lake and Cory mines, and the Esterhazy member is mined at the Rocanville and Esterhazy mines. Under a long-term mining and processing agreement (the "Mining and Processing Agreement") effective through 2026, International Minerals & Chemical (Canada) Limited Partnership ("IMC") mines and processes PCS reserves at the Esterhazy mine. PCS has the option to terminate this agreement every five years. It did not opt to give notice to terminate in December 1995. IMC has the option of abandoning the mine at any time after 2011, thus terminating the Mining and Processing Agreement. In 1998, the Mining and Processing Agreement was amended to provide for the operation of the agreement on a calendar year basis as opposed to a fiscal year ending June 30. In each year the maximum the Company is permitted to take under the Mining and Processing Agreement is 952,500 tonnes and the minimum required amount is 453,600 tonnes. For the year ending December 31, 2000, the Company has notified IMC that it requires 725,700 tonnes of finished product. Water inflow at the Esterhazy mine has continued, to a greater or lesser degree, since December 1985. Substantial pumping capacity has been installed and remedial efforts have been undertaken. The Company's share of water inflow remediation costs for 1999 was $6.9 million. IMC has stated that it will continue conventional mining. PCS has no indication from IMC that solution mining or substitute shafts will be pursued at this time. Potash is also produced by the Company at its New Brunswick mine from the flank of an elongated salt structure. Granular product is also produced by the Company at its Cassidy Lake, New Brunswick facility using standard grade product from certain of the Company's other mine sites. PCS Yumbes, acquired in 1999, holds mining concessions on certain sodium nitrate reserves in the Atacama desert in northern Chile. The production facility is in the development stage and has been designed to produce 300,000 tonnes of sodium nitrate per year at full production. Production is expected to begin in 2000. Sodium nitrate is combined with potassium chloride to produce potassium nitrate, primarily used for intensely cultivated and chloride sensitive crops. PRODUCTION The Company produces potash using both conventional and solution mining methods. In conventional operations, shafts are sunk to the ore body and mining machines cut out the ore, which is lifted to the surface for processing. In solution mining, the potash is dissolved in a warm brine and pumped to the surface for processing. In 1999, the Company's conventional potash operations mined 16.80 million tonnes of ore at an average grade of 23.1% K(2)O. In 1999 the Company's potash produced consisted of 6.39 million tonnes of potash (KCl) with an average grade of 60.98% K(2)O, representing approximately 43% of North American production. I-3 5 The Company's present annual potash production capacity is approximately 12.2 million tonnes KCl, which includes maximum annual production under the Mining and Processing Agreement with IMC of approximately one million tonnes at Esterhazy. In 1999, the Company's production capacity represented approximately 55% of the North American total while its excess capacity was an estimated 80% of North American excess production capacity. The Company allocates production among its mines on the basis of various factors, including the grades of product which can be produced and cost efficiency. The Patience Lake mine, which was originally a conventional underground mine, now employs a solution mining method, while the other Saskatchewan mines which the Company owns or in which it has an interest employ conventional underground mining methods. The New Brunswick mine is a conventional cut and fill mine, while the Moab, Utah mine, which was sold in February 2000, employs a solution mining method. In addition to their potash production, these mines also produced .81 million tonnes of sodium chloride (salt) in 1999. As part of the Rio Acquisition, the Company granted a royalty interest to Rio based upon production and revenue from the New Brunswick and Patience Lake potash mines and mills (the "Royalty"). The terms of the Royalty provide that if production meets specified base production levels or the sales of potash are at prices which meet specified base sales prices, a royalty per tonne is to be paid, calculated on a formula basis. Payments under the Royalty are limited to a term expiring October 7, 2003 and to a maximum aggregate payment of Cdn$50 million. No payments have been made in respect of the Royalty to date. RESERVES The Company estimates that its conventional mines in Saskatchewan contained 4.76 billion tonnes of recoverable ore at an average grade of 22.9% K(2)O as at December 31, 1999, and that such ore will yield 1.5 billion tonnes of finished product (KCl) at an average grade of 60% K(2)O. The Company's ore reserve estimates for its conventional mining operations in Saskatchewan are based on exploration drill hole data, seismic data and actual mining results during the past 25 years. The Company's estimated recoverable ore and the estimated volumes of finished product from such ore are as follows:
RECOVERABLE FINISHED MINE ORE PRODUCT - ---- ----------- -------- (MILLIONS OF TONNES) Allan........................................... 1,390.9 447.9 Cory............................................ 1,050.3 350.7 Esterhazy....................................... 76.8 24.4 Lanigan......................................... 1,554.8 501.8 Rocanville...................................... 683.0 217.5 ------- ------- Total......................................... 4,755.8 1,542.3 ======= =======
The Company believes that, with production rates at full capacity and utilizing current technology, each of the Allan, Cory and Lanigan mines has a reserve life in excess of 100 years, the Rocanville mine has a reserve life in excess of 90 years, and that the Esterhazy mine has a reserve life of at least 20 years. Given the characteristics of the solution mining method employed at the Patience Lake mine, it is not possible to estimate definitively the productive capacity of or the recoverable ore from this operation. However, based on information obtained upon the acquisition of the mine, current technology and the present mining area for this operation, the Company believes that the mine has a reserve life of at least 40 years for the existing mine workings. Different techniques will have to be utilized to mine reserves outside of the existing mine workings. Based on geophysics, exploration drill hole data, definition drilling underground and actual mining results, the Company estimates proven reserves of 48.0 million tonnes of recoverable ore and 16.6 million tonnes of estimated finished product (KCl) at its New Brunswick mine. The Company believes that, based upon its proven reserves, the New Brunswick mine has a reserve life of at least 21 years with production at full I-4 6 capacity. The Company estimates that probable reserves at the New Brunswick mine consist of 200 million tonnes of recoverable ore and 72 million tonnes of estimated finished product (KCl). The Company believes that, based upon its proven and probable reserves, the New Brunswick mine has a reserve life in excess of 100 years at full production capacity and utilizing current technology. PHOSPHATE OPERATIONS The Company mines phosphate ore and manufactures solid and liquid fertilizers, animal feed supplements and purified phosphoric acid which is used in food products and industrial processes. PROPERTIES The Company conducts its phosphate operations primarily at two facilities, one a 35,000-acre facility near Aurora, North Carolina (the "Aurora Facility") and the other a 96,000-acre facility near White Springs in northern Florida (the "White Springs Facility"). The Company believes the Aurora Facility to be the largest integrated phosphate mine and phosphate processing complex at one site in the world. The Aurora Facility, having an annual P(2)O(5) capacity of 1.2 million tonnes, includes a six million tonne per-year mining operation, four sulfuric acid plants, four phosphoric acid plants, a liquid fertilizer (11-37-0) plant, a superphosphoric acid plant, two diammonium phosphate ("DAP") plants and a solid fertilizer plant capable of producing DAP, granular triple superphosphate ("GTSP") or monoammonium phosphate ("MAP"). The Company also holds all outstanding interests in PCS Purified Phosphates (formerly Albright & Wilson Company) which produces high purity phosphoric acid at Aurora. The White Springs Facility is the third largest P(2)O(5) producer, by capacity, in the United States, with an annual capacity of 1.1 million tonnes. The White Springs Facility includes a mine and two production facilities, Suwannee River and Swift Creek, with two sulfuric acid plants, three phosphoric acid plants, two DAP plants, a superphosphoric acid plant, a dicalcium phosphate plant and a deflourinated phosphate rock plant located at the Suwannee River complex and two sulfuric acid plants and a phosphoric acid plant located at the Swift Creek complex. The Company's other properties include animal feed plants in Davenport, Iowa; Kinston, North Carolina; Marseilles, Illinois; and Weeping Water, Nebraska, and bulk terminal facilities at Morehead City, North Carolina. At its Geismar, Louisiana facility ("Geismar Facility"), acquired as part of the Arcadian acquisition, the Company manufactures a variety of phosphate products that are used for agricultural and industrial purposes. The Geismar Facility has a sulfuric acid plant, a phosphoric acid plant, a superphosphoric acid plant, and a liquid fertilizer (11-37-0) plant. A significant portion of the phosphoric acid produced at the Geismar Facility is sold as feedstock to Rhodia, Inc. for use in its neighboring purified acid plant. PRODUCTION The Company extracts phosphate ore using surface mining techniques. At each mine site, the ore is mixed with recycled water to form a slurry, which is pumped from the mine site to the Company's processing facilities. The ore is then screened to remove coarse materials, washed to remove clay and floated to remove sand to produce phosphate "rock". The annual production capacity of the Company's mines is currently 9.6 million tonnes of phosphate rock. During 1999, the Aurora Facility's total production of phosphate rock was 4.4 million tonnes and the White Springs Facility's total production of phosphate rock was 3.6 million tonnes. The Company generally operates its phosphate mine and phosphate processing plants 24 hours a day, seven days a week, using rotating shifts. The sequence for mining portions of the Aurora property has been identified in the permit issued by the U.S. Army Corps of Engineers in 1997. For the near term, the Company expects to be mining in an area of non-optimal mining conditions. The quality and condition of the ore is relatively inferior to ore previously mined at the Aurora Facility. This, combined with the general configuration of the area, does not allow efficient use of the Company's mining equipment and technology. Beginning in late 2000, the Company expects to enter areas believed to hold ore superior in thickness and quality, located closer to the Company's chemical plants, and configured so as to generally allow efficient use of Company mining equipment and technology. I-5 7 Phosphate rock is the major input in the Company's phosphorus processing operations. In addition to phosphate ore, the principal raw materials required by the Company are sulfur, sulfuric acid and ammonia. The production of phosphoric acid requires substantial quantities of sulfur, which the Company purchases from third parties. In December 1997, the Company entered into a ten-year supply contract with an offshore supplier to supply a portion of the Company's sulfur requirements and also committed to build a multipurpose ocean-going vessel to ship such sulfur as well as handle sulfuric acid, phosphoric acid and other chemicals. The Company produces sulfuric acid at the Aurora Facility, White Springs Facility and Geismar Facility and purchases additional sulfuric acid from unaffiliated sellers. The Company also transports surplus production of sulfuric acid at the White Springs Facility to the Aurora Facility as needed. Sulfur and sulfuric acid have been in abundant supply in recent years. However, in 1998, the remaining U.S. Frasch sulfur producer announced the closure of one of its two mines, an action which reduced readily available U.S. supplies of sulfur and increased prices, notwithstanding a world market having excess supplies of sulfur. While sulfur prices rose during the first quarter of 1999, prices declined during the second half of 1999. The Company purchases all of its ammonia from or through PCS Nitrogen and PCS Sales (USA), Inc., wholly owned subsidiaries of the Company. The Company reacts phosphoric acid with ammonia to produce DAP and MAP, as well as liquid fertilizers. In addition, ammonia operations include the purchase, sale and terminalling of anhydrous ammonia. Most of the ammonia that is currently purchased by PCS Nitrogen is produced in Russia and imported through a Company operated ammonia terminal located within the port of Savannah (Garden City, Georgia). Substantially all of the phosphate rock produced by the Company is used internally for the production of phosphoric acid, superphosphoric acid ("SPA"), chemical fertilizers, purified phosphoric acid and animal feed products. A portion of the Company's phosphoric acid production, merchant grade phosphoric acid ("MGA"), is sold in liquid form, mostly to foreign and domestic producers of solid fertilizers. The solid fertilizers produced by the Company are DAP and, to a lesser extent, GTSP and MAP. Over one-half of the Company's DAP is exported, with the balance sold domestically, mostly to large regional dealers that custom blend solid fertilizers. The Company's liquid fertilizer products, 74% of which were sold domestically, consist principally of low-magnesium SPA, which the Company markets under the name "LoMag". The Company believes that it is the largest U.S. producer of SPA. The Company also processes phosphoric acid to produce animal feed supplements for the poultry and livestock markets. The Albright joint venture produces purified phosphoric acid for use in various food products and industrial processes. In addition to nitrogen products, the Company also produces phosphate products at the Geismar plant for which supplies of phosphate rock and sulfur are necessary. PCS Nitrogen purchases phosphate rock from Morocco pursuant to an agreement with a Moroccan government-owned company, the current term of which expires on December 31, 2002, wherein prices are reset annually through negotiation. If no agreement on price is reached, either party may terminate the agreement. Changes in the agreement could affect the stability of the supply of the raw material and the profitability of these phosphate products. RESERVES At December 31, 1999, the Company's Aurora phosphate mine had estimated proven and probable reserves of approximately 380 million tonnes of phosphate rock, at an average grade of 30.7% P(2)O(5). These reserves would permit mining to continue at current rates for about 75 years. The Aurora phosphate mine has an estimated annual capacity of 6.0 million tonnes of phosphate rock and its processing plants have the capacity to produce 1.202 million P(2)O(5) tonnes of phosphoric acid. Prior to the acquisition of Texasgulf by the Company in April 1995, approximately 408 million tonnes of phosphate reserves were transferred by Texasgulf to a newly established company, the common stock of which was transferred to Elf (USA) and Williams. The Company was granted a 20-year right of first refusal (from April 10, 1995) in the event that the newly I-6 8 established company proposes to sell the reserves. In addition, the newly established company and Elf (USA) and Williams agreed, for a period of ten years from April 10, 1995, not to compete, and for the first five years not to make certain preparations to compete, with the Company with respect to those reserves. The White Springs phosphate mine had estimated proven and probable reserves of approximately 53 million tonnes of phosphate rock, at an average grade of 30.7% P(2)O(5). The Company estimates that an additional 9 million tonnes of phosphate rock could be purchased at market rates from nearby owners. Accordingly, the total reserves of 62 million tonnes of phosphate rock at White Springs would sustain the mine for 18 years at a mining rate of 3.6 million tonnes per year. The White Springs mine has an estimated annual capacity of 3.6 million tonnes of phosphate rock and the processing plants have the capacity to produce annually 1.093 million P(2)O(5) tonnes of phosphoric acid. See "Environmental Matters -- Permits and Regulatory Approvals". NITROGEN OPERATIONS The Company's nitrogen operations include production of nitrogen fertilizers and nitrogen chemicals. These products are used for both agricultural and industrial purposes. PROPERTIES PCS Nitrogen manufactures nitrogen products at five facilities, of which four are located in the United States and one is located in Trinidad. The following table sets forth the facility locations and production capabilities:
PLANT LOCATIONS PRODUCTS PRODUCED - --------------- ----------------- Augusta, Georgia..................... Ammonia, urea, nitric acid, ammonium nitrate and nitrogen solutions Geismar, Louisiana................... Ammonia, nitric acid, nitrogen solutions, phosphoric acid, super-phosphoric acid, phosphate solutions and sulfuric acid Lima, Ohio........................... Ammonia, urea, nitric acid and nitrogen solutions Memphis, Tennessee................... Ammonia and urea Point Lisas, Trinidad................ Ammonia and urea
In the third quarter of 1999, in response to market conditions, the Company announced the permanent closure of the Clinton, Iowa plant and the LaPlatte, Nebraska plant. The Clinton plant had a capacity of 238,000 tonnes for ammonia, 79,000 tonnes of ammonia nitrate, and 163,000 tonnes for nitrogen solutions. The LaPlatte plant had a capacity of 182,000 tonnes for ammonia and 436,000 tonnes for nitrogen solutions. On December 31, 1999, the Company announced that its subsidiary, PCS Nitrogen Trinidad Limited, indefinitely shut down its 01 and 02 ammonia plants in Trinidad following expiration of the natural gas supply contract between the National Gas Company ("NGC") of Trinidad and Tobago Limited and PCS Nitrogen Trinidad Limited. The parties had been in negotiation for two years in an attempt to secure a new agreement but were unable to bring the negotiation to an acceptable conclusion. Active discussions with the NGC are continuing and the Company continues to operate its two remaining ammonia plants and one urea plant in Trinidad. PRODUCTION Unlike potash and phosphate, nitrogen is not mined. It is taken from the air and reacted with a hydrogen source, usually natural gas reformed with steam, to produce ammonia. PCS Nitrogen produces ammonia at all domestic plants and in Trinidad. The ammonia is used to produce a full line of upgraded nitrogen products, including urea, ammonium nitrate, nitric acid and nitrogen solutions. SERVICE AGREEMENTS The Geismar plant is integrated with a larger chemical manufacturing complex owned by Honeywell International, Inc. ("Honeywell"). PCS Nitrogen and Honeywell have an agreement to provide certain I-7 9 support services to each other, including the provision of utilities, the discharge of wastewater, security and emergency services, and other essential services. PCS Nitrogen believes that most of the services that PCS Nitrogen requires are available from other sources, if necessary. However, the termination of, or the need to replace, certain of the services provided (such as steam, well water supply and dock services) could, in the aggregate, involve potentially significant capital expenditures, increased operating costs and disruptions to the operations of the Geismar plant. BP Chemicals, Inc. ("BPC") operates the Lima plant on PCS Nitrogen's behalf under an operating agreement that can be terminated by either party with nine months' notice. PCS Nitrogen's payments to BPC under the operating agreement are generally based on BPC's previous cost of operating the Lima plant and are made through the reimbursement of expenses incurred by BPC in providing such operating services. In addition, due to the mutual interdependence of the Lima plant and BPC's operations, PCS Nitrogen and BPC have agreed to provide each other with certain manufacturing support services at cost pursuant to a contract extending for as long as the plants continue to operate and either party is required to provide support services thereunder. PCS Nitrogen uses contract labor personnel provided by Augusta Services Company, Inc., which is owned 50% by PCS Nitrogen and 50% by DSM Chemicals North America, Inc., to provide purchasing, stores and spare parts management, maintenance, repair, shipping and certain other services for the Augusta plant. RAW MATERIALS Natural gas is the primary raw material used for the production of ammonia and, as a result, virtually all of PCS Nitrogen's other nitrogen products. The purchase and transportation of natural gas accounts for approximately 40% of PCS Nitrogen's total domestic production cost. With the Trinidad 01 and 02 plants running, PCS Nitrogen's domestic gas requirements comprise approximately 52% of its total gas requirements (68% with Trinidad's 01 and 02 plants idled). PCS Nitrogen's current natural gas strategy is to purchase approximately one-half of its domestic natural gas in the spot market or on short-term contracts and approximately one-half of its domestic natural gas pursuant to fixed-price physical contracts or forward contracts which fix the price of future deliveries. The remaining approximately 48% of its natural gas (assuming Trinidad 01 and 02 plants are running, 32% if not) is purchased in Trinidad using pricing formulas related to the market price of ammonia. With the exception of the Trinidad facility, PCS Nitrogen purchases nearly all its natural gas from producers or marketers at the point of delivery of the natural gas into the pipeline system, then pays the pipeline company and, where applicable, the local distribution company to transport the natural gas to PCS Nitrogen's facilities. Approximately 85% of PCS Nitrogen's domestic consumption of natural gas is delivered pursuant to firm transportation contracts which do not permit the pipeline or local distribution company to interrupt service to, or divert natural gas from, the plant. PCS JOINT VENTURE The Company indirectly holds all outstanding interests in a limited partnership (the "PCS Joint Venture") doing business in Florida as Florida Favorite Fertilizer and in Georgia and Alabama as Farmer's Favorite Fertilizer. PCS Joint Venture manufactures, processes and distributes fertilizer and other agricultural supplies from plants located in Florida, Alabama and Georgia. I-8 10 MARKETING The following table summarizes the Company's net sales revenue of potash, phosphate and nitrogen products (by nutrient) in the past three calendar years:
1999 1998 1997 -------- -------- -------- (THOUSANDS OF DOLLARS) Potash Canada................................................... $ 21,429 $ 21,885 $ 14,460 United States............................................ 215,993 205,701 195,780 Canpotex................................................. 254,711 252,464 229,666 Other.................................................... 71,163 65,441 64,261 Phosphates Canada................................................... 24,010 25,386 24,268 United States............................................ 594,183 688,198 632,616 PhosChem................................................. 186,494 262,168 261,502 Other.................................................... 39,153 35,237 35,223 Nitrogen Canada................................................... 5,284 4,422 2,879 United States............................................ 480,213 585,672 694,566 Other.................................................... 168,431 161,189 170,708 Florida Favorite Fertilizer................................ 52,850 55,344 57,156
The following table summarizes the Company's net sales revenue from products, by category:
1999 1998 1997 -------- -------- -------- (THOUSANDS OF DOLLARS) Potash..................................................... $563,296 $545,491 $504,167 Florida Favorite Fertilizer................................ 52,850 55,344 57,156 Phosphates Liquid Fertilizers....................................... 268,903 331,672 283,110 Solid Fertilizers (DAP, MAP, GTSP)....................... 283,455 374,525 362,625 Animal Feed.............................................. 176,783 187,557 191,016 Phosphate Rock, Industrial Products...................... 114,699 116,544 116,858 Nitrogen Ammonia.................................................. 244,719 258,387 376,972 Urea..................................................... 180,545 200,103 209,825 Nitrogen Solutions....................................... 111,080 163,018 162,885 Other.................................................... 117,584 129,775 118,472
For further financial information about the Company's business segments and domestic and international sales, see Note 18 to the Consolidated Financial Statements. The Company has a diversified customer base, and apart from sales to Canpotex Limited ("Canpotex") and Phosphate Chemicals Export Association, Inc. ("PhosChem"), no one customer accounted for more than 10% of the Company's sales in 1999. Potash from the Company's Saskatchewan mines produced for use outside North America is sold exclusively to Canpotex. PCS Sales (Canada) Inc. executes offshore marketing and sales for the Company's New Brunswick potash and executes marketing and sales for the Company's potash, phosphate and nitrogen products in Canada. PCS Sales (USA), Inc. executes marketing and sales for the Company's potash, phosphate and nitrogen products in the United States. PhosChem, an association formed under the U.S. Webb-Pomerene Act, is the principal vehicle through which the Company executes offshore marketing and sales for its phosphate fertilizers. See "Offshore Marketing". I-9 11 Ammonia, urea, ammonium nitrate and nitrogen solutions are sold as fertilizers to agricultural customers and to industrial customers for various applications, while nitric acid is sold to industrial customers as an intermediate chemical feedstock. In the past, fertilizer prices have been volatile. No assurance can therefore be given that the average market prices for the Company's fertilizer products will continue at current levels. NORTH AMERICAN MARKETING In 1999, North American net sales revenue from potash products represented 12% of the Company's total net sales revenue, substantially all of which was attributable to potash customers in the United States. Typically, North American potash sales of the Company are greatest in the second calendar quarter. The vast majority of sales are made on the spot market with the balance made under short-term contracts. The Company has no material contractual obligations in connection with North American sales to sell potash in the future at a fixed price. In 1999, North American net sales revenue from phosphate products represented 30% of the Company's total net sales revenue, substantially all of which was attributable to phosphate customers in the United States. Typically, North American phosphate product sales are greatest in the first and second calendar quarters. In 1999, the majority of PCS Phosphate's phosphate product sales were made on the spot market, with the balance made under short-term contracts (generally on an annual basis) and a limited number of sales made pursuant to multi-year contracts. The Company has no material contractual obligations in connection with North American sales to sell phosphate in the future at a fixed price. In 1999, North American net sales revenue from nitrogen products represented 29% of the Company's total net sales revenue and PCS Nitrogen's non-fertilizer products accounted for approximately 47% of PCS Nitrogen's nitrogen revenue. Typically, North American nitrogen fertilizer sales are greatest in the second calendar quarter. In 1999, the majority of PCS Nitrogen's nitrogen product sales were made on the spot market, with the balance made under short-term and multi-year contracts. The Company has no material contractual obligations in connection with North American sales to sell nitrogen in the future at a fixed price. Ammonia purchased by PCS Nitrogen is used in the Company's operations and is sold to third party customers by PCS Sales (USA), Inc. The primary customers for fertilizer products are retailers, dealers, cooperatives, distributors and other fertilizer producers. Such retailers, dealers and cooperatives have both distribution and application capabilities. The primary customers for industrial products are chemical product manufacturers. At December 31, 1999, the Company's North American sales functions were handled by 78 employees in Chicago, Illinois and various other locations in the United States, and 17 employees in Saskatoon, Saskatchewan. OFFSHORE MARKETING Potash produced by the Company in Saskatchewan for sale outside North America is sold to Canpotex, which is owned in equal shares by the three potash producers in the Province of Saskatchewan (including the Company). Canpotex, which was incorporated in 1970 and commenced operations in 1972, acts as an export company and as a unified marketing force for all Saskatchewan potash production in the offshore marketplace. Each shareholder of Canpotex has an equal voting interest as a shareholder and through its nominees on the board of directors. The Company and the other shareholders of Canpotex have agreed that, as long as they are members of Canpotex, and with respect to potash produced in Canada, they will not make offshore sales independently. The Company's production from its New Brunswick mine has been exempted from this requirement by the members of Canpotex. Any member may terminate its membership in Canpotex at specified times of the year on six months notice. In general, Canpotex sales are allocated among the producers based on production capacity. If a shareholder cannot satisfy demand for potash by Canpotex, the remaining shareholders are entitled to satisfy I-10 12 the demand pro rata based on their allotted production capacity. The Company currently supplies 55.65% of Canpotex's requirements. Canpotex sells potash to government agencies and private firms pursuant to six-month contracts at negotiated prices or by spot sales. The following table sets forth the percentage of sales by Canpotex for the past three calendar years in the various geographical regions:
1999 1998 1997 ---- ---- ---- Asia........................................................ 75% 69% 72% Latin America............................................... 13 17 14 Oceania..................................................... 8 9 9 Europe...................................................... 4 5 5 ---- ---- ---- Total....................................................... 100% 100% 100% ==== ==== ====
For 1999, sales to Canpotex represented 12% of the total net sales of the Company and net sales revenue from offshore sales of potash from the New Brunswick mine, through PCS Sales (Canada) Inc., represented 3% of the total net sales of the Company. Since 1975, PhosChem has been the principal vehicle for United States exports of phosphate fertilizers. Currently, the members of PhosChem are PCS Phosphate, IMC-Agrico Company ("IMC-Agrico"), a joint venture between IMC Global Inc. and Phosphate Resource Partners LLP, Mississippi Phosphates Corporation ("MissChem") and Mulberry Corporation. The PhosChem members have agreed to export their fertilizer products exclusively through PhosChem, except for exports to Canada, any member state of the European Union or the European Economic Area, and sales through the U.S. Agency for International Development Tenders and sales to certain buyers affiliated with members. Historically, PhosChem negotiated prices and other terms for the export sale of fertilizer products. According to the terms of a PhosChem agreement effective January 1, 1995, IMC-Agrico is responsible for the marketing of solid fertilizers (DAP, MAP and GTSP), and PCS Phosphate, or its sales affiliate (PCS Sales (USA), Inc.), is responsible for the marketing of liquid fertilizer products (MGA) to export countries. Total sales for 1999 were apportioned as follows: 62% to IMC-Agrico, 20% to PCS Phosphate, 8% to MissChem, and 10% to Mulberry Corporation. The PhosChem agreement is currently in effect through December 31, 2000, and subject to renewal thereafter. If the PhosChem agreement is not renewed, the Company does not believe the disbanding of PhosChem would materially affect the Company's sales of fertilizer, but there can be no assurance that, if PhosChem were to be disbanded, the Company would be able to find alternative outlets for its products or sell its products at prices or on terms similar to those expected to be obtained by PhosChem. The Company's estimated 2000 PhosChem allocation is 22.56%. Revenue from sales to PhosChem accounted for 9% of the Company's total net sales in 1999. Other offshore phosphate sales accounted for 2% of the Company's total net sales in 1999. All of the Company's phosphate sales to China and India were made through PhosChem. Most of the Company's sales of phosphate products to China are made to the central purchasing authority of the Chinese government. Sales in India were made through the Fertilizer Association of India to many independent buyers. The following table sets forth the percentage of sales of PhosChem for the past three calendar years in the various geographical regions:
1999 1998 1997 ---- ---- ---- Asia........................................................ 81% 77% 75% Latin America............................................... 11 14 15 Mid East.................................................... -- 1 2 Oceania..................................................... 8 8 8 ---- ---- ---- Total....................................................... 100% 100% 100% ==== ==== ====
I-11 13 With respect to offshore sales of nitrogen, ammonia and urea sales predominate and originate primarily from Trinidad, with other sales coming from purchased product locations. For 1999, net sales revenue from offshore sales of nitrogen represented 3% of the net sales revenue of the Company. Offshore sales are subject to those risks customarily encountered in foreign operations, including (i) fluctuations in foreign currency exchange rates, (ii) changes in currency and exchange controls, (iii) the availability of foreign exchange, (iv) laws, policies and actions affecting foreign trade and (v) other economic, political and regulatory policies of foreign governments. DISTRIBUTION AND TRANSPORTATION The Company has an extensive infrastructure and distribution system to transport and store its products. Other than storage facilities located at production plants, in 1999 the Company used 147 locations to store and handle its products in the field. The Company owns or net leases 2,003 railcars and full service leases an additional 3,634 railcars. Transportation costs add significantly to the total amounts paid by purchasers of potash. Producers have a definite advantage in markets close to their sources of supply (e.g., Saskatchewan producers in the Midwestern United States, New Brunswick producers on the U.S. Eastern Seaboard and New Mexico producers in the Southern and Western United States). International shipping cost variances permit offshore producers (including those in the former Soviet Union ("FSU"), Germany, Israel and Jordan) to compete effectively in some of the Company's traditional markets. Most of the Company's potash for North American customers is shipped by rail. Shipments are also made by rail from each of the Company's Saskatchewan mines to Thunder Bay, Ontario, for shipment by lake vessel to the Company's warehouses and storage facilities in Canada and the United States. Potash from the New Brunswick mine is shipped primarily by ocean-going vessel from the Port of Saint John, although truck and rail transport are also used for North American customers. In the case of the Company's sales to Canpotex, potash is transported by rail principally to Vancouver, British Columbia, where port facilities exist for storage pending shipment overseas. The Company has an equity interest in Canpotex Bulk Terminals Limited, which is a part owner of these port facilities. The Company, through Canpotex, also has an interest in a port facility located in Portland, Oregon. With respect to phosphates, the Company has long-term leases on shipping terminals in Morehead City and Beaufort, North Carolina, through which it receives and stores raw materials for, as well as the products manufactured by, the Aurora Facility. The Company owns nine barges (four used for solid products, two for phosphoric acid, one for sulfuric acid and two for sulfur) and three tug boats, which are used to transport materials between its Aurora Facility and Morehead City. Raw materials and products are also transported to and from the Aurora Facility by rail. The Company transports sulfur it purchases from Canada in large, dedicated unit trains. Both CSX Corporation and Norfolk Southern Corporation serve the Aurora Facility. The Company believes that its location and diversified transportation and terminalling capabilities put it in a comparable position to most of its Florida competitors in purchasing sulfur. In December 1997, the Company entered into a ten-year supply contract with an offshore supplier to supply a portion of the Company's sulfur requirements and also committed to build a multipurpose ocean-going vessel to ship such sulfur as well as handle sulfuric acid, phosphoric acid and other chemicals. The vessel is expected to be in service in the first half of 2000. The Company receives ammonia for its phosphate operations at Aurora through its ammonia terminal in Savannah, Georgia; the ammonia is shipped by rail from Savannah to the Aurora Facility. Sulfur is delivered to the White Springs Facility by unit trains from Canada and by rail from multiple domestic sources. The Company receives ammonia for its phosphate operations at White Springs through its ammonia terminal in Savannah, Georgia; ammonia is shipped by rail from Savannah to the White Springs Facility. Until 1999 the Norfolk Southern Corporation was the only railroad providing service for the White Springs Facility. However, a nearby transload facility at Lake City, Florida, which became operational in 1999, is serviced by the CSX Corporation. Most of the phosphoric acid and chemical fertilizers produced at the White Springs Facility are shipped to domestic destinations by rail. The Company also ships some of its I-12 14 phosphoric acid, chemical fertilizers and animal feed products, produced at the White Springs Facility, through the bulk terminal located in Morehead City, North Carolina, for offshore sales. This latter option allowed the Company to close the more costly Jacksonville, Florida terminal. The Company makes domestic deliveries of animal feed products (bulk and bagged) by rail or truck from its manufacturing facilities and from several warehouses supplied from its manufacturing facilities. The Company distributes its nitrogen products by barge, railcar, truck, and direct pipeline to its customers and through its strategically located storage terminals in high consumption areas. The Company leases or owns approximately 50 nitrogen terminal facilities with an aggregate storage capacity of approximately 600,000 tons of product. The terminals provide off-season storage and also serve local dealers during the peak seasonal demand period. The Company distributes products from the Trinidad plant to markets in Latin America and Europe in addition to the United States. The Company's distribution operations in Trinidad employ two long-term chartered ocean-going vessels and utilize spot charters as necessary for the transportation of ammonia. All bulk urea production is shipped through third-party carriers. COMPETITION The markets for potash, both domestic and foreign, are highly competitive. Since potash is a commodity, producers must compete based on price and service (e.g., delivery time and ability to supply all grades). Apart from competitive pricing, the Company's principal method of competition is the quality of service it provides to customers. Among other things, the Company provides quality service by maintaining warehouses and leasing railcars to enhance its delivery capability. The high cost of transporting potash limits competition in various areas. The Company's potash competition includes three North American producers and potash producers located outside North America in the FSU, Israel, Jordan, Germany and France. Because of the high capital cost and lead time required to construct a new mine, the Company's principal competition is expected to continue to come from the owners of existing operations. Most phosphate products, particularly solid fertilizers, are commodities, with little or no product differentiation, and thus trade on the basis of prices determined in highly competitive markets. The vast majority of the U.S. phosphate rock not mined by the Company is produced in central Florida, southeast of Tampa, and most of the U.S. phosphate processing capacity, other than at Aurora, is located in Florida and along the coast of the Gulf of Mexico. The Company's principal advantage at Aurora in competing with other producers is that it operates integrated phosphate mine and phosphate processing complexes while most of its competitors are required to ship phosphate rock by rail or truck from their mines to their chemical processing plants, thus incurring substantially higher transportation costs. As a result of its location in North Carolina and the relatively high cost of transportation, the Company's U.S. phosphate sales from Aurora have a natural advantage in the Northeast, mid-Atlantic and eastern Midwest regions, while White Springs and other Florida producers have a natural advantage in the South, and Gulf coast producers have a natural advantage in areas of the Midwest accessible to barge traffic up the Mississippi River. The Company also competes with governmental enterprises and independent phosphate producers in important exporting countries, including Morocco, Tunisia, Jordan and South Africa. Although there has been extensive consolidation and privatization worldwide, substantial competition exists in the nitrogen industry. The Company competes domestically with a broad range of companies in the production and sale of nitrogen products, including subsidiaries of larger chemical companies, farm cooperatives, integrated energy companies and independent fertilizer companies. Because fertilizer is a commodity, competition takes place largely on the basis of price and delivery. The relative cost of, and I-13 15 availability of transportation for, raw materials and finished products to manufacturing facilities and markets are important competitive factors. The Company also competes with foreign companies whose nitrogen products are imported into the United States. Although diminishing in number, various foreign competitors receive subsidies from their governments. Some countries also have natural gas supplies that are surplus to domestic demand. This surplus natural gas may have a low alternative value and, when used as feedstock for the manufacture of ammonia and urea, can result in low-cost production. These low-cost products are being imported into the U.S. and compete with domestically manufactured nitrogen fertilizers, including the Company's. In addition, other importers subsidized by their governments may import products into the U.S. for reasons not related to U.S. fertilizer market conditions, such as a need to obtain U.S. dollars. Pursuant to the Uruguay Round Agreements Act, on March 1, 1999, the U.S. Department of Commerce and the U.S. International Trade Commission commenced a "sunset" review of antidumping orders restricting exports of urea from the FSU and Romania into the United States in order to determine whether such orders should be terminated or should remain in effect. Effective October 1999, those agencies determined that the antidumping orders should remain in effect for Romania and substantially all relevant FSU states. The Company's nitrogen production capability is currently the largest in the Western Hemisphere. The Company's domestic nitrogen plants serve agricultural markets with a diversified crop base that spans a lengthy growing season and chemical industrial manufacturers located throughout the U.S. Those plants are strategically located in agricultural as well as industrial end-use markets in the Southeast, Midwest and Gulf Coast regions. The Company believes that it is more economical to transport natural gas, the primary raw material in the production of nitrogen fertilizers and chemicals, to plants situated in the product markets than to transport such products over long distances. Several of the Company's domestic nitrogen plants are located closer to their primary customers than are their competitors. The Company concentrates its nitrogen marketing efforts on these nearby markets where lower transportation costs offer the potential for better margins. The Company believes that its product mix diversity and the number and geographic diversity of its nitrogen plants provide competitive advantages in manufacturing, distribution, marketing, customer service and other areas when compared to competitors controlling only a few facilities. In addition, the industrial demand for nitrogen products is typically less volatile and follows different demand cycles than agricultural demand for fertilizer. The Company believes that its industrial sales add a measure of stability to its revenue and are a desirable complement to agricultural demand. EMPLOYEES At December 31, 1999, the Company actively employed 5,506 persons, of whom 1,899 were salaried and 3,607 were hourly paid. Of these employees, the Company's potash operations employed 1,736 people, the phosphate operations employed 2,615 people, the nitrogen operations employed 966. The corporate office had a staff of 94 and 95 people were employed in the Company's sales group. The Company has entered into nine collective bargaining agreements with labor organizations representing employees. The collective bargaining agreements at the Allan, Cory and Patience Lake divisions expire on April 30, 2000. The Lanigan agreement expires on January 31, 2001. The Company and the Rocanville Potash Employees Association have a contract that expires on May 31, 2001. The agreement between IMC and the union representing the employees at the Esterhazy mine expires on January 31, 2001. The union agreement at PCS Cassidy Lake expired December 31, 1998 and negotiations are continuing. The Company's Sussex, New Brunswick and Aurora operations are non-union. The collective bargaining agreement with the union representing employees at the White Springs plant expires on December 1, 2000 and the agreement with the employees at the Jacksonville terminal expires September 30, 2001. PCS Nitrogen has three locations with collective bargaining agreements: Clinton, which contract expired July 31, 1999 but has been extended to May 1, 2000; Memphis, which contract expires September 17, 2000; and LaPlatte, with a contract that expires January 31, 2003. Clinton and LaPlatte were permanently closed in the third quarter of 1999. In addition, the agreement between BPC and the union representing employees at the Lima plant expires February 16, 2002. The Company believes its relations with its employees to be good. I-14 16 ROYALTIES AND CERTAIN TAXES Saskatchewan potash production is taxed at the provincial level under The Mineral Taxation Act, 1983 (Saskatchewan). This tax consists of a base payment and a profit tax. In addition to the Potash Production Tax, rental fees, taxes and royalties are payable to the Province of Saskatchewan and municipalities by potash producers in respect of potash reserves or production of potash in the Province of Saskatchewan. The Company's taxes, fees and royalty expenses were $72.7 million in 1999. The Company is subject to capital tax on its paid-up capital (as defined in The Corporation Capital Tax Act of Saskatchewan) and its taxable capital (as defined in the New Brunswick Income Tax Act). In addition, a resource corporation in the Province of Saskatchewan pays a corporate capital tax surtax based on the value of Saskatchewan resource sales. This surtax is only payable to the extent that it exceeds the regular capital tax. In 1999, the Company paid capital tax of $3.8 million and surtax of $15.3 million. The Company pays royalties to the New Brunswick government on the basis of production from its New Brunswick mine. In addition, the Company pays municipal taxes. The Company's expenses for such royalties and municipal taxes were $5.0 million in 1999. The Company does not make royalty payments in connection with its phosphate and nitrogen operations. INCOME TAXES PCS and certain subsidiaries are subject to federal income taxes (which includes the Large Corporations Tax) and provincial income taxes in Canada. During 1999, the Company began accruing cash income taxes by virtue of having fully utilized non-capital losses carried forward. The subsidiaries of the Company which operate in the United States are subject to U.S. federal and state income taxes. These subsidiaries are not currently subject to federal cash income taxes by virtue of net operating losses incurred. The Company's nitrogen subsidiaries operating in Trinidad are subject to Trinidad taxes. The effective consolidated tax rate for 1999 was 30% (1998 -- 31%) of income before income taxes (exclusive of the goodwill impairment charges recorded in the third quarter of 1999). The reduction in total income tax expense was principally due to a deferred tax recovery of $48.6 million relating to the plant closures and impairment charge and lower income before income taxes. RESEARCH AND DEVELOPMENT The Company maintains potash research and development facilities located in Saskatoon, Saskatchewan, employing approximately 30 persons who concentrate on improving efficiency in mine operations and product quality. Research continues on the use of three-dimensional seismic methods and other geophysical tools to detect geological disturbances in potash ore bodies. The Company is also proceeding with automation of mining machines and improving process control in mills. Other research includes new product development and measures to maintain and enhance product quality in transit and at offsite storage facilities. The Company funds research in agronomy through Potash & Phosphate Institute programs. The Company continues to evaluate ways to more fully automate its phosphate production facilities, including improvements to its beneficiation (mill), sulfuric acid and phosphoric acid plants. The Company is also exploring ways of further debottlenecking its phosphate and nitrogen production facilities, selectively adding capacity and otherwise enhancing production and process efficiencies through technological enhancements. The Aurora Facility has increased direct blending of gypsum and clays which the Company expects should reduce long-term gypsum handling and reclamation costs. ENVIRONMENTAL MATTERS Certain environmental matters which are the subject of investigation or litigation are discussed under the heading "Legal Proceedings". The Company's operations are subject to numerous environmental requirements under Canadian, U.S., Chilean and Trinidad and Tobago federal, provincial, state and local laws I-15 17 and regulations. Such laws and regulations govern, among other matters, air emissions, waste water discharges, land use and reclamation and solid and hazardous waste management. Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. In particular, Trinidad and Tobago governmental authorities are considering measures providing for the increased regulation of environmental matters, including the potential implementation of more stringent wastewater effluent standards which may require PCS Nitrogen to take certain actions to maintain compliance. Nonetheless, PCS Nitrogen does not currently expect that such legislation or regulations will have a material adverse effect on the Company's financial condition or results of operations. The Company believes that it is currently in material compliance with applicable environmental laws and regulations. The Company believes that it is well positioned to meet anticipated requirements under the applicable environmental laws and regulations. Although significant capital expenditures and operating costs have been incurred and will continue to be incurred on account of environmental laws and regulations, the Company does not believe, except as otherwise set out herein, that such environmental laws and regulations have had, or will have, a material adverse effect on its business. However, the Company cannot predict the impact of new or changed laws or regulations or permit requirements, including the recently-enacted potash decommissioning regulations discussed below or changes in the ways that such laws and regulations are administered or interpreted. The Company anticipates that its routine expenditures related to environmental regulatory matters in 2000 will not differ materially from the previous year. The Company and its facilities are also subject to a range of environmental statutes and programs focused on site reclamation and restoration and on investigation and, where necessary, remediation of contaminated properties. The Company's obligations and potential liabilities under these programs have been and can be expected to continue to be significant. The Company does not believe, except as set out herein, that such obligations and potential liabilities have had, or will have, a material adverse effect on its business. However, it is often difficult to estimate and predict the potential costs and liabilities associated with these programs and there is no guarantee that the Company will not in the future be identified as potentially responsible for additional costs under these programs, either as a result of changes in existing laws and regulations or as a result of the identification of additional matters or properties covered by these programs. ENVIRONMENTAL EXPENDITURES Reclamation and Restoration Costs Site restoration and reclamation costs have been accrued for various sites. At December 31, 1999, the Company had accrued the following amounts for site reclamation and restoration: $28.5 million for the Aurora Facility, $55.8 million for the White Springs, Florida Facility, $27.4 million for the Moab, Utah Facility, $0.6 million for various idle sulfur facilities, $18.4 million for certain Florida Favorite Fertilizer facilities, and $4.3 million for the Cassidy Lake Facility. The idle sulfur facilities were part of the acquisition of Texasgulf and are undergoing dismantlement and environmental restoration efforts. The current portion of restoration and reclamation costs accrued in 1999 totaled $22.7 million. These amounts represent the Company's current estimate of potential site restoration and reclamation costs as last assessed in December 1999. The expenditures are generally incurred over an extended period of time. Annual environmental expenditures for reclamation and restoration during the year ended December 31, 1999 were $79.3 million. Of this amount, $70.3 million was charged to operations, $3.1 million was capitalized and $5.9 million was charged against accrued reclamation costs. Capping of By-product Gypsum Stacks In 1993, the State of Florida passed certain legislation requiring companies to reduce the potential environmental hazards associated with accumulations of by-product gypsum (gypsum stacks). The regulations implementing this legislation require companies to "cap" the gypsum stacks in order to reduce seepage into groundwater when such stacks reach their design capacity (for the Company, in approximately 35 years), or after March 25, 2001 if groundwater standards are not being met. At December 31, 1999, a balance of $35.4 million was included in accrued reclamation costs for this gypsum stack capping requirement. I-16 18 The obligations of White Springs regarding the gypsum stacks are guaranteed by PCS (see "Permits and Regulatory Approvals"). In North Carolina, on exhaustion of the mine's phosphate reserves, disposition of the remaining gypsum must comply with the laws in effect at that time. Other Environmental Costs The Company's operating expenses, other than reclamation and restoration and gypsum stack capping, relating to compliance with environmental laws and regulations governing ongoing operations were approximately $20.2 million for the year ended December 31, 1999 as compared to $20.5 million for the year ended December 31, 1998. Capital Expenditures The Company routinely undertakes capital projects to improve pollution control facilities. In 1999, a total of approximately $5.1 million in capital expenditures (exclusive of capitalized reclamation expenditures) was spent to meet the Company's environmental control objectives as compared to $9.9 million in 1998. The Company expects that its capital requirements for environmental projects may increase in the future due to increasingly stringent environmental regulations arising from current and future requirements of law. With respect to air emissions, the Company anticipates that additional expenditures may be required to meet increasingly stringent U.S. federal and state regulatory and permit requirements. These requirements include existing and anticipated regulations under the U.S. federal Clean Air Act, particularly the 1990 amendments thereto, and under state law. In particular, both federal and state regulation of hazardous air pollutants (including ammonia in certain states) are expected to require additional air emission control equipment and increased operating expenditures at some U.S. facilities. Further, the U.S. Environmental Protection Agency ("EPA") has published new National Ambient Air Quality Standards for both ozone and particulate matter which are more stringent than existing standards and has issued a number of regulations establishing requirements to reduce nitrogen oxide (NOx) emissions. The Company continues to monitor developments in these various programs and to assess their potential impact on the Company's operations. The federal Clean Air Act operating permit program is expected to require the addition of enhanced emissions monitoring equipment at some facilities, as well as the imposition of permit fees based upon facility air pollutant emissions. If the Company undertakes facility expansion at its U.S. plants, a federal Prevention of Significant Deterioration or New Source Review Permit may need to be obtained prior to any such expansion of these facilities. Such permits would impose certain restrictions on air pollutant emissions from the expanded portions of such plants and compliance with those restrictions would likely require installation and use of additional pollution control devices. SITE ASSESSMENT AND REMEDIATION In addition to environmental regulation of its present operations, the Company also may incur costs and liabilities in connection with its and its predecessors' past and present waste disposal practices and ownership and operation of real property and facilities, as well as its mining activities. The U.S. federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA") and other U.S. federal and state laws impose liability on, among others, past and present owners and operators of properties or facilities at which hazardous substances have been released into the environment and persons who arrange for disposal of hazardous substances that are released into the environment. Liability under these laws may be imposed jointly and severally and without regard to fault or the legality of the original actions, although such liability may be divided or apportioned according to various equitable and other factors. In the course of its present and former operations, including those of divested businesses, PCS Phosphate, White Springs and PCS Nitrogen have generated and the Company will generate wastes that could result in liability for the Company under these laws. I-17 19 During the past ten years, EPA officials or EPA contractors have conducted and completed independent, limited site assessments at Aurora, Marseilles and Saltville facilities. The Company has no information indicating that any cleanup required in connection with the Aurora, Marseilles and Saltville sites will have a material adverse effect upon the Company's financial condition or results of operation. Further, the Company believes that if it has any material liability for such costs, it would have claims against third parties in connection with such liability. Any such claims would be based on statutory and/or common law causes of action against third parties, such as former owners, occupiers or disposers. PCS Phosphate was initially named as a potentially responsible party in two cleanup matters involving the Colorado School of Mines Research Institute ("CSMRI") in connection with hazardous substances allegedly generated at some of the former operations of CSMRI. During May, 1995, Elf (USA) advised EPA that Elf (USA) was handling the matter on behalf of Texasgulf and another former Elf (USA) subsidiary, Texasgulf Metals and Minerals Co. On January 28, 1997, EPA issued a notice that the required cleanup work at one of the sites had been completed. To date, PCS Phosphate has had no further involvement with these matters. PCS Joint Venture and its general partner, Potash Corporation of Saskatchewan (Florida) Inc. ("PCS Florida"), a wholly-owned subsidiary of the Company, are subject to various environmental laws of the federal and local governments in the United States, and from time to time investigations relating to such laws. Currently, the Florida Department of Environmental Protection ("FDEP") is conducting an investigation into soil and ground water contamination of a PCS Joint Venture fertilizer plant located in Lakeland, Florida and certain adjoining property. Assessment of the contamination of the plant site and of certain adjoining property is continuing. On April 8, 1997, FDEP filed a Complaint and Petition for Enforcement against PCS Joint Venture and others. The Company filed an Answer, Affirmative Defenses and Cross Claims on May 12, 1997. Discovery is still continuing in this litigation. On October 30, 1998, EPA notified the Company of potential liability under Section 107(a) of CERCLA. On December 1, 1998, the Company replied to EPA's Initial Information Request. By letter dated February 8, 1999, the EPA notified PCS Joint Venture that the EPA was initiating a period for negotiations to assist in the preparation of an Administrative Order on Consent and a Remedial Investigation and Feasibility Study ("RI/FS") Work Plan. On October 13, 1999, PCS Joint Venture submitted to the EPA Phase I of a work plan to conduct a RI/FS of certain releases to the soil and groundwater of the PCS Joint Venture facility in Lakeland, Florida and other area properties (the "Landia Site"). On October 21, 1999, PCS Joint Venture signed an Administrative Order by Consent under which PCS Joint Venture agreed to conduct the RI/FS work. PCS Joint Venture is in the process of implementing the agreed upon RI/FS work plan. Starting in September 1999, the EPA conducted additional investigations of environmental conditions at focused areas of the Landia site. In February 2000, the EPA notified PCS Joint Venture and two other entities of the Agency's intent to undertake interim site response activities at specific areas of the Landia Site. The Notice letter also advised PCS Joint Venture of an opportunity to negotiate with the EPA regarding a commitment to conduct these site response activities pursuant to a proposed Administrative Order on Consent. On March 17, 2000 PCS Joint Venture and another entity advised the EPA that they had reached an agreement in principle between themselves and were willing, subject to the negotiation of an acceptable scope of work and Administrative Order on Consent, to undertake certain of the interim response activities at the Landia Site. PCS Joint Venture intends to defend itself vigorously in all legal proceedings while also continuing to work to assess and evaluate the nature and extent of the impacts at the Site. No final determination has yet been made of the nature, timing, or cost of remedial action that may be needed, and PCS Joint Venture is unable at present to determine whether and to what extent it may be able to recover any costs incurred from third parties. In June 1994, the Georgia Department of Natural Resources, Environmental Protection Division ("GEPD") wrote to PCS Joint Venture seeking certain environmental information regarding its Moultrie, Georgia location. In October 1994, an additional request for information was received from the EPA pursuant to Section 104(e) of CERCLA. Responses to both requests have been provided by PCS Joint Venture. Preliminary investigations have confirmed the presence of lead-contaminated soil at the site. The initial assessment is that this lead contamination is attributable to former operations at the site, the facilities of which were dismantled some time ago. However, a complete assessment of the site has not yet been completed, and I-18 20 the full nature and extent of the contamination cannot be quantified at this time. On September 30, 1997, the GEPD requested that Farmers Favorite Fertilizer submit a Compliance Status Report ("CSR") by March 30, 1998, pursuant to the applicable state site remediation program. A consultant prepared and submitted the CSR for Farmers Favorite Fertilizer. On September 22, 1998, GEPD requested that a revised CSR be prepared and submitted by December 31, 1998. On December 15, 1998, a Request for Extension to File the revised CSR was submitted to GEPD, seeking an extension to complete needed field work and correspondingly revise the CSR. GEPD and Farmers Favorite Fertilizer executed a Consent Order authorizing the extension. The revised CSR was submitted during March 1999. At the request of GEPD, Florida Favorite Fertilizer had prepared and had filed during July 1999 a Corrective Action Plan. No recommended course of action has yet been approved by GEPD. PCS Joint Venture is co-operating with regulatory authorities in their investigations of the Lakeland and Moultrie sites. It is also attempting to determine the number and location of other parties who may be liable for remediation of these sites. However, because site assessments are ongoing and because other parties may be liable for some or all costs of remediation, the ultimate liability of PCS Joint Venture has not yet been determined. The Company received a request for information dated August 28, 1998, from the United States Department of Agriculture Forest Service ("USDA Forest Service") alleging that a subsidiary of Texasgulf, dissolved over forty-five years ago, may have contributed to environmental impacts in the Klamath National Forest in northern California. In a letter dated November 2, 1998, a representative of the Washoe Tribe of Nevada and California invited the Company to evaluate its potential liability and to participate in an assessment of natural resource damages in connection with the Leviathan mine in Northern California. The Company has advised the USDA Forest Service that the Company does not believe it is a potentially responsible party with respect to the alleged impacts. The Company has advised the Washoe Tribe that the Company did not wish to participate in the assessment. In February 1996, the North Carolina Department of Environment, Health and Natural Resources notified PCS Nitrogen that the Navassa, North Carolina terminal site had been included on the state's Inactive Hazardous Waste Sites Priority List. Listed sites normally are subject to detailed assessment of the environmental condition of concern and the feasible remediation options. PCS Nitrogen nonetheless currently expects that the cost and liability, if any, associated with the Navassa terminal site will not have a material adverse effect on the Company's financial condition or results of operations. PCS Nitrogen, in 1991, voluntarily installed a remediation system at the Memphis plant to address certain contaminants found in the groundwater. In 1993, the Tennessee Department of Environment and Conservation ("TDEC") proposed to include the Memphis plant on the state's list of Inactive Hazardous Substance Sites, potentially requiring further assessment and remedial actions. In response to that proposal, PCS Nitrogen in 1994 entered into a consent agreement with the TDEC providing instead for its oversight and possible modification of PCS Nitrogen's current remedial action. While there can be no assurance that the Memphis plant will not be listed in the future, PCS Nitrogen does not expect that costs associated with such listing would have a material adverse effect on the Company's financial condition or results of operations. Since 1990, pursuant to ongoing negotiations with the Iowa Department of Natural Resources ("IDNR") PCS Nitrogen has administered a voluntary program to assess, and where necessary, remediate nitrates in groundwater at its now idled Clinton facility. As part of that program, PCS Nitrogen, with IDNR's approval, is currently addressing the presence of nitrates by: (i) participating in the creation of adjacent wetlands; (ii) phytoremediation (planting of trees to absorb nitrates); (iii) operation of a groundwater recovery trench with discharge through an existing water effluent outfall; and (iv) restoring approximately 100 acres of farmland to its natural state of grasses and woodlands. Although IDNR may require PCS Nitrogen to take further action in the future, PCS Nitrogen does not currently expect that the cost of such actions or the current program will have a material adverse effect on the Company's financial condition or results of operations. DSM, which conducts manufacturing operations immediately adjacent to the Augusta plant, is subject to certain corrective action requirements under its Resource Conservation and Recovery Act ("RCRA") I-19 21 hazardous waste management permit. Pursuant to these requirements, the GEPD identified a number of solid waste management units on DSM's property, including several on property formerly leased from DSM by PCS Nitrogen, for assessment and potential remediation. During 1996, PCS Nitrogen purchased the formerly leased land and the GEPD required PCS Nitrogen to enter into a corrective action consent order for the performance of the assessment and remediation actions which would have been required of DSM with respect to the purchased land under its RCRA permit. In November 1999, PCS Nitrogen submitted an amendment to its draft remediation investigation work plan to provide for the assessment of another area of contamination suspected to be present at a location along the PCS Nitrogen/DSM property boundary. Although GEPD has yet to approve the plan, PCS Nitrogen does not expect to incur material costs in connection with its implementation. PERMITS AND REGULATORY APPROVALS Many of the Company's operations and facilities are required by federal, provincial, state and local environmental laws to obtain and operate in compliance with a range of permits and regulatory approvals. Such permits and approvals typically have to be renewed or reissued periodically. The Company may also become subject to new laws or regulations that require it to obtain new or additional permits or approvals. The Company believes that it is in material compliance with its current permits and regulatory approvals. However, there can be no assurance that such permits or approvals will issue in the ordinary course. Further, the terms and conditions of future permits and approvals may be more stringent and may require increased expenditures on the part of the Company. A significant portion of the Company's phosphate reserves in Aurora, North Carolina is located in wetlands and, under the U.S. federal Clean Water Act, a permit must be obtained from the U.S. Army Corps of Engineers (the "Corps") before mining activity that will disturb the wetlands may occur. As part of the permit process for PCS Phosphate, the Corps issued a draft Environmental Impact Statement in January 1994 which was supplemented in May 1995. In 1997, PCS Phosphate received its required authorizations from the State of North Carolina and on August 14, 1997, the Corps issued a permit granting approval to mine certain areas described in the Environmental Impact Statement through 2017. The permit contains a section on wetlands mitigation approach and methods regarding wetland impacts associated with mining covered by the permit. The Company has acquired additional land adjacent to its Aurora, North Carolina facilities for mitigation purposes. In order to demonstrate the feasibility of such activities, as of December 31, 1999, the Company had created or restored 2,904 acres of wetlands. On May 6, 1999, the Southern Environmental Law Center ("SELC") and the Pamlico-Tar River Foundation ("PTRF") gave notice to the EPA and the Department of the Army of their intent to file a civil action under the citizens suit provisions of the Clean Water Act. To date, no such action has been filed. The notice letter asserts that the Army Corps of Engineers failed to comply with certain provisions of the Clean Water Act when it issued a permit to PCS Phosphate in August 1997. The notice letter also requests revocation of the permit. PCS Phosphate believes that the permit was properly issued. PCS Phosphate intends to monitor the status of this matter and take any steps needed to protect its ability to continue the operations authorized by the permit. In addition to the wetlands permit from the Corps, the Company also needs additional authorizations from agencies of the State of North Carolina to continue its mining activities in North Carolina. The Company is required to have State mining permits that contain bonding and reclamation requirements. The Company has a State mining permit for the areas presently being mined by the Company that is effective through 2003, but this permit must be amended periodically to add additional acreage during this period. The Company also holds another mining permit from the State for the area of the property that contains the wetlands covered by the permit issued by the Corps. This State permit has been renewed until 2005. Gypsum is a byproduct of the production of phosphoric acid. Gypsum is normally placed in above-ground storage areas called gypsum stacks. The gypsum stacks at the White Springs Facility will continue to be used and when closed will be covered or capped to the extent required under applicable regulations. The Florida Phosphogypsum Rule permits the use of existing gypsum stacks until they reach capacity, if groundwater I-20 22 standards are met as of and after March 25, 2001. The Company's management believes that it will be in compliance with such Rule and as such should be allowed to continue using its three gypsum stacks for their useful lives of approximately 35 years; however, until a final determination is made by Florida environmental authorities, it is not certain how long White Springs will be allowed to continue using its gypsum stacks beyond the year 2001. A regulatory prohibition on use of existing stacks would result in a closure/new stack construction cost currently estimated in excess of $100 million. Lands mined by White Springs after July 1, 1975 and unmined lands used in the mining operations after July 1, 1984 are subject to mandatory reclamation requirements of the State of Florida. Wetlands must be reclaimed on an acre-for-acre basis under the rules of the State of Florida Department of Environmental Protection ("FDEP") unless otherwise provided in, or pursuant to, a Memorandum of Agreement ("MOA"), dated February 1, 1995, between OxyChem and FDEP (which agreement was later assigned to the Company). The MOA established alternate procedures for the Company to follow. The cost of reclamation of mandatory lands is borne solely by White Springs. The current practice of White Springs is to return most upland areas to commercial pine plantation, which is the predominant pre-operation land use. Reclaimed lands include uplands, wetlands and lakes. Land reclamation at White Springs is currently performed pursuant to federal, state, and local regulatory approvals granted in 1996 and 1997 to implement the 1995 MOA between OxyChem and FDEP. The MOA provides for mitigation of mining impacts, particularly impacts to wetlands, to be done through funding of public acquisition of environmentally sensitive lands in the region. Land reclamation continues to be done on-site but is undertaken using the alternate standards of the MOA which do not require the on-site reclamation of wetlands and which allow for the construction of lands that are expected to be of greater future utility. The Company's contributions for the land acquisition program through 1999 totaled $4.2 million. White Springs has initiated a process for securing an additional federal permit and ancillary modifications of state and local regulatory approvals needed for continuation of mining operations beyond the expiration of its current federal permit in 2002. The process involves environmental studies of potential mining areas and evaluation of mine plan and reclamation alternatives. All affected regulatory authorities, various commenting agencies, and interested outside parties are participating in the process and completion of the process is targeted approximately for the conclusion of the year 2000. Applications covering an interim area to allow orderly continuation of operations were submitted to the federal and local authorities in 1999. Favorable action on those applications is anticipated in the first half of 2000. Selection of mine plan and reclamation alternatives and the results of the environmental studies could result in changes to reclamation and mitigation practices with higher costs and changes to mining areas with reserve impacts. The magnitude of such cost impacts cannot be estimated until the studies and evaluations are completed. Failure to secure the required approvals for continuation of the mining operations under any reclamation or mitigation alternative would negatively affect reserves and costs. The local government, with jurisdiction over the White Springs operations, is Hamilton County, Florida. In 1999, Hamilton County adopted extensive revisions to its mining and reclamation regulations. The Company participated in the development of these revisions, which would be applicable to future local approvals. The revisions principally address information and procedural requirements and are not expected to materially affect operating conditions or costs for White Springs. The Lima plant discharges wastewater to the Ottawa River under a National Pollutant Discharge Elimination System permit issued by the Ohio Environmental Protection Agency ("OEPA"). When the permit was renewed in 1989, the OEPA initially proposed to impose substantial limitations on certain substances present in the wastewater, based on concerns over the already impaired quality of the river water as a result of industrial or municipal discharges. The OEPA later agreed in an administrative settlement to a five year permit for the Lima plant with discharge conditions that were more acceptable to the Lima plant's prior owner, BP Chemicals Inc. The permit expired in 1994 and was administratively extended and renewed by the OEPA in July 1996, for a shorter than customary term ending October 31, 1997. In July 1999, the OEPA granted PCS Nitrogen's permit renewal application for a term ending March 31, 2004, without substantial additional discharge limitations. Nonetheless, the OEPA may again seek to impose discharge reductions in the I-21 23 future which may require the installation of improved treatment technology, the cost of which will depend on the limitations ultimately imposed. POTASH DECOMMISSIONING REGULATIONS The environmental regulatory authority in the Province of Saskatchewan has adopted regulations which require owners or operators of potash mines to produce decommissioning and reclamation plans including provisions for financial assurance. These plans, which are subject to the approval of the responsible Minister, require that a financial assurance plan be established within one year following approval of the decommissioning and reclamation plans. Pursuant to the regulations, the Company filed decommissioning plans for each of the Company's Saskatchewan mines with the responsible Minister in the spring of 1997. In February 1998, the Company was advised that, although the technical aspects of the plans were acceptable, the regulatory authority does not accept the schedule proposed in the plans for decommissioning the waste salt piles. Following discussions between the provincial potash industry and the regulatory agency, it was agreed to establish a joint government-industry task force to produce a mutually acceptable, cost-benefit analysis of the available decommissioning options. Because of the uncertainty regarding the final nature of the decommissioning plan, the timing of its implementation and the structure of the financial assurance mechanism, the Company is unable, at this time, to accurately estimate the financial implications to the Company. GOVERNMENT REGULATIONS In September 1987, legislation was adopted in Saskatchewan that authorized the government to control production at potash mines located in the Province of Saskatchewan. The legislation, which has not taken effect but which can be brought into effect by proclamation of the Cabinet of Saskatchewan, permits the Cabinet, and the Potash Resources Board which would be created under such legislation, to prescribe rates of potash production in Saskatchewan and to allocate production among individual mines. In determining rates for individual mines, the Potash Resources Board would take into account a mine's productive capacity, the rate of production from the mine, the present and future inventory and stockpile requirements for the mine, the portion of demand for potash that has been fulfilled by the primary production of potash from the mine and any additional factors that may be prescribed by regulation. Increases in production capacity would be subject to the approval of the government of Saskatchewan. The Company cannot predict at this time if or when the legislation will be proclaimed or its effects on the Company's financial condition or results of operations. EXECUTIVE OFFICERS OF THE COMPANY The name, age, period of service and position held for each of the executive officers of the Company as at March 24, 2000 are as follows:
SERVED NAME AGE SINCE POSITION HELD - ---- --- ------ ------------- CHARLES E. CHILDERS.................... 67 1987 Chairman of the Board WILLIAM J. DOYLE....................... 49 1987 President and Chief Executive Officer WAYNE R. BROWNLEE...................... 47 1988 Senior Vice President, Finance and Treasurer and Chief Financial Officer JOHN GUGULYN........................... 64 1987 Senior Vice President, Administration JOHN L.M. HAMPTON...................... 46 1988 Senior Vice President, General Counsel and Secretary BARRY E. HUMPHREYS..................... 56 1976 Senior Vice President, Chief Information Officer BETTY-ANN L. HEGGIE.................... 46 1981 Senior Vice President, Corporate Relations THOMAS J. REGAN........................ 55 1995 President, PCS Phosphate GARTH W. MOORE......................... 51 1982 President, PCS Potash JAMES F. DIETZ......................... 53 1997 President, PCS Nitrogen G. DAVID DELANEY....................... 39 1997 President, PCS Sales DENIS A. SIROIS........................ 44 1978 Vice President and Corporate Controller
I-22 24 All of the officers have had the principal occupation indicated for the previous five years except as follows: Mr. Childers retired as Chief Executive Officer of the Company on June 30, 1999; Mr. Doyle was President and Chief Operating Officer of the Company from July 1, 1998 to July 1, 1999; was President PCS Sales from March 1997 to July 1998 and Executive Vice President, Potash and Sales, of the Company from 1995 until March 1997. On April 27, 1995, Mr. Hampton, Mr. Brownlee, and Ms. Heggie were promoted from Vice President to Senior Vice President. Prior to March 1997, Mr. Moore was Senior Vice President, Technical Services of the Company and prior to April 1995, he was Vice President, Technical Services. Mr. Dietz was Vice President, Manufacturing of Arcadian Corporation from 1993 to March 1997 and Executive Vice President of PCS Nitrogen from March 1997 to July 1998. Mr. Sirois was Controller of the Company prior to 1997. Mr. Regan was Executive Vice President of PCS Phosphate from March 1997 to July 1999, and Vice President, Administration from 1995 to 1997. Prior to 1995, he was Vice President, Phosphate Production -- Aurora and Vice President International Marketing & Raw Material Purchasing for Texasgulf. On July 12, 1999, Mr. Brownlee was appointed to Senior Vice President Finance and Treasurer and Chief Financial Officer. Mr. Brownlee was Senior Vice President Expansion and Development from May 1995 to July 1999. On July 12, 1999, Mr. Humphreys was appointed Senior Vice President and Chief Information Officer. Mr. Humphreys was Senior Vice President Finance and Treasurer and Chief Financial Officer from December 1989 to July 1999. Mr. Delaney was appointed President, PCS Sales on March 24, 2000. Mr. Delaney was Vice President, Industrial Sales of PCS Sales from March 1997 to March 24, 2000 and was Vice President Agricultural Sales East for Arcadian Corporation prior to March 1997. The terms and conditions of Mr. Childers' employment with the Company are governed by an employment agreement, the current term of which expires June 30, 2002 and pursuant to which Mr. Childers served as Chairman of the Board and Chief Executive Officer of the Company until June 30, 1999 and shall continue to serve as Chairman of the Board and as a special advisor to the Company to June 30, 2002. ITEM 3. LEGAL PROCEEDINGS. AGREEMENT SUSPENDING POTASH DUMPING INVESTIGATION In March 1987, the U.S. International Trade Commission made a preliminary determination that there was a reasonable indication that the U.S. potash producers had been injured by imports of Canadian potash, assuming that Canadian potash had been "dumped" into the U.S. market at less than "fair value". On August 26, 1987, the U.S. Department of Commerce ("Commerce") determined on a preliminary basis that Canadian potash was, or was likely to be, sold in the United States at less than "fair value". On January 8, 1988, Commerce signed a suspension agreement with all of the potash producers in Canada, suspending the dumping investigation by Commerce. The agreement stipulated that each producer's minimum price for potash sold in the United States was based upon a formula determined by Commerce for each producer that was designed to limit any dumping by that producer in the future. Compliance with the agreement was monitored by Commerce. In accordance with procedures established by the Uruguay Round Agreements Act, Commerce and the U.S. International Trade Commission initiated a "sunset" review of the suspended investigation on April 1, 1999. Since no domestic interested party filed a notice of intent to participate in the review within the deadline provided in its regulations, Commerce issued a notice automatically terminating the suspended dumping investigation effective January 1, 2000. The suspended investigation and the suspension agreement both terminated on that date. CIVIL ANTITRUST COMPLAINTS In June 1993, PCS and PCS Sales (Canada) Inc. ("PCS Sales (Canada)") were served with a complaint relating to a suit filed in the United States District Court for Minnesota against most North American potash producers, including the Company. The complaint alleged a conspiracy among the defendants to fix the price of potash purchased by the plaintiffs as well as potash purchased by the members of a class of certain purchasers proposed by the plaintiffs. Similar complaints were filed in the United States District Courts for the Northern District of Illinois and the Western District of Virginia. On motion of the I-23 25 defendants, all of the complaints were transferred and consolidated for pre-trial purposes in the United States District Court for Minnesota. The complaint sought treble damages and other relief. PCS and PCS Sales filed a motion for summary judgment on December 22, 1995. On January 2, 1997, Judge Richard H. Kyle issued an order granting the defendants' motions for summary judgment and dismissing the lawsuit. The plaintiffs appealed that order to the United States Court of Appeals for the Eighth Circuit. On February 17, 2000, the Eighth Circuit, en banc, affirmed Judge Kyle's summary judgment ruling. The plaintiffs have indicated that they intend to file a petition requesting the United States Supreme Court to review the decision of the Eighth Circuit. That petition must be filed by May 17, 2000. Additional complaints were filed in the California and Illinois state courts on behalf of purported classes of indirect purchasers of potash in those states. PCS moved to dismiss the California State Court lawsuits for lack of personal jurisdiction and the court ruled that it does not have personal jurisdiction over PCS but that it does have personal jurisdiction over PCS Sales. Following Judge Kyle's summary judgment decision, the California litigation was stayed and the case remains at an early stage: no merits discovery has taken place. The Illinois State Court complaint was dismissed for failure to state a cause of action and that decision is final and not subject to appeal. Insofar as the allegations of wrongdoing in the litigation relate to the Company, management of the Company, having consulted with legal counsel, believes that the allegations are without merit, that the Company has valid legal defenses and that the lawsuit will not have a material adverse effect on the Company. However, management of the Company cannot predict with certainty the outcome of the litigation. FORMER ARCADIAN EXECUTIVE PROCEEDINGS On May 7, 1997, J. Douglas Campbell, Alfred L. Williams, Peter H. Kesser, and David Alyea, former officers of Arcadian, filed lawsuits against the Company in the United States District Court for the Western District of Tennessee. The complaints allege that the Company breached employment agreements between Arcadian and the officers and breached the related assumption agreement among the Company, PCS Nitrogen, and Arcadian. In addition, Mr. Alyea's complaint names Charles Childers, John Gugulyn, and John Hampton as additional defendants and alleges that the defendants interfered with and conspired to interfere with his employment agreement, and did not accurately state their intentions in entering into the assumption agreement. The complaints of Mr. Campbell, Mr. Williams, Mr. Kesser, and Mr. Alyea seek damages in excess of $22.2 million, $6.2 million, $3.7 million, and $4.2 million, respectively. In addition, on October 14, 1997, Charles Lance, a former officer of Arcadian Corporation, filed a lawsuit in the same court against the Company also alleging breaches of his employment agreement and the related assumption agreement. Mr. Lance seeks damages in an amount exceeding $3.0 million. Each complaint also seeks certain additional unspecified damages. On August 11, 1998, the Court ruled that the Company had assumed the obligations of the employment agreements and that equitable claims and defenses asserted against the executives for breaches of fiduciary duties, corporate waste, and self-dealing should be asserted by PCS Nitrogen in the state court action described below. Trial with respect to the claims of Mr. Campbell, Mr. Williams and Mr. Kesser commenced on August 17, 1998 and concluded on August 25, 1998. On December 1, 1998 the court entered judgments in the amounts of $12.7 million, $3.2 million, and $2.6 million in favor of Mr. Campbell, Mr. Williams and Mr. Kesser, subject to additional amounts sufficient to offset the impact of certain excise taxes, if applicable. These judgments have been appealed to the United States Court of Appeals for the Sixth Circuit, where oral argument was heard on March 9, 2000. The Company has settled the claim of Mr. Alyea for $700,000 and $50,000 of attorneys fees (subject to the application for additional fees) and the claim of Mr. Lance for a total amount of $600,000. The District Court, on August 13, 1999, awarded plaintiffs a total of $2,410,254 for legal expenses. On September 15, 1997, the Company and PCS Nitrogen filed an action in the Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis against J. Douglas Campbell, Peter H. Kesser, Alfred L. Williams, Charles W. Lance, Jr., and David L. Alyea, for declaratory relief and damages. The Company and PCS Nitrogen alleged that the defendants, all former executives of Arcadian, committed breaches of their fiduciary duties in the negotiation of, obtaining approval for, and execution of the employment agreements each of them had with Arcadian. In addition, the Company and PCS Nitrogen also I-24 26 sought a declaratory judgment with respect to the unenforceability of the employment agreements. On October 14, 1997, the defendants removed this action from the Circuit Court of Tennessee to the United States District Court for the Western District of Tennessee. On October 21, 1997, the five defendants filed counterclaims: (i) under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), against PCS Nitrogen, (ii) alleging that the Company and PCS Nitrogen unlawfully interfered with their attainment of benefits under their employment agreements, and (iii) incorporating by reference all claims asserted in their individually filed complaints. The damages sought by the defendants in these counterclaims appear substantially equivalent to the damages sought in their individually filed suits as plaintiffs. On July 20, 1998 the federal court dismissed all of the former executives' claims under ERISA and remanded the case to state court, where it remains pending. Pursuant to the settlements with Mr. Alyea and Mr. Lance, the claims and counterclaims as they concern these individuals have been non-suited. Management of the Company, having consulted with legal counsel, believes that the lawsuits will not have a material adverse effect on the Company's financial condition or results of operations. GEISMAR FACILITY INVESTIGATION On May 11 and May 12, 1999, representatives of the EPA, Federal Bureau of Investigation, and other state and local agencies ("governmental agencies") executed a search warrant issued by the United States District Court for the Middle District of Louisiana on the Company's Geismar facility ("Geismar Facility") in connection with a grand jury investigation. In executing the search warrant, the governmental agencies seized documents and electronic media, performed environmental sampling, and interviewed Geismar Facility employees and contract employees. In addition, the governmental agencies have contacted former Geismar Facility employees in connection with the investigation. The Company has also been served with grand jury subpoenas requesting documents and other information from the Geismar Facility and PCS Nitrogen's headquarters in Memphis, Tennessee. The grand jury investigation is continuing. The Company is also conducting its own internal investigation. The Company cannot predict at this time what may result from the governments' investigation or whether any such result would have a material adverse effect on the Company. LAKELAND, FLORIDA PROCEEDING On September 23, 1999, an action was served on PCS Joint Venture and eight other defendants on behalf of a class of persons living in the vicinity of the site who claim to have suffered damages as a result of releases from the PCS Joint Venture facility in Lakeland, Florida and other area properties (the "Landia Site"). PCS Joint Venture intends to defend itself vigorously in this action, while also continuing to work to assess and evaluate the nature and extent of the impacts at the site. ENVIRONMENTAL PROCEEDINGS For a description of certain environmental proceedings involving the Company, see "Environmental Matters". ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. I-25 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information under "Common Share Prices and Volumes", "Shareholder Information -- Ownership" and "10-Year Report" in the registrant's 1999 Annual Report is incorporated herein by reference. Dividends paid to U.S. holders of Common Shares, who do not use the shares in carrying on a business in Canada, will be subject to a Canadian withholding tax under the Income Tax Act. Under the Canada-U.S. Income Tax Convention (1980) (the "Convention"), the rate of withholding is generally reduced to 15 percent. Subject to certain limitations, the Canadian withholding tax will be treated as a foreign income tax that can generally be claimed as a deduction from income or as a credit against the U.S. income tax liability of the holder. Holders will generally not be subject to tax under the Income Tax Act with respect to any gain realized from a disposition of Common Shares. ITEM 6. SELECTED FINANCIAL DATA. The information under "10-Year Report" in the registrant's 1999 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the registrant's 1999 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements contained in the registrant's 1999 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. II-1 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information under "Election of Directors" in the 2000 Proxy Circular is incorporated herein by reference. Information concerning executive officers is set forth under "Executive Officers of the Company" in Part I. ITEM 11. EXECUTIVE COMPENSATION. The information under "Executive Compensation" in the 2000 Proxy Circular is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information under "Ownership of Shares" and "Election of Directors" in the 2000 Proxy Circular is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information under "Election of Directors" and "Executive Compensation" in the 2000 Proxy Circular is incorporated herein by reference. III-1 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) List of Documents Filed as Part of this Report 1. Consolidated Financial Statements in Annual Report Auditors' Report............................................ 44 Consolidated Statements of Financial Position............... 45 Consolidated Statements of Income and Retained Earnings..... 46 Consolidated Statements of Cash Flow........................ 47 Notes to the Consolidated Financial Statements.............. 48-63
2. Schedules All Schedules are omitted because the required information is inapplicable or it is presented in the Consolidated Financial Statements. 3. Exhibits
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 2 Agreement and Plan of Merger dated September 2, 1996, as amended, by and among the registrant, Arcadian Corporation and PCS Nitrogen, Inc., incorporated by reference to Exhibit 2(a) to Amendment Number 2 to the registrant's Form S-4 (File No. 333-17841). 3(a) Restated Articles of Incorporation of the registrant dated October 31, 1989, as amended May 11, 1995, incorporated by reference to Exhibit 3(i) to the registrant's report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). 3(b) Bylaws of the registrant dated March 2, 1995, incorporated by reference to Exhibit 3(ii) to the 1995 Form 10-K. 4(a) Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated October 4, 1996, incorporated by reference to Exhibit 4(b) to the registrant's Form S-4 (File No. 333-17841). 4(b) First Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated November 6, 1997, incorporated by reference to Exhibit 4(b) to the registrant's report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). 4(c) Second Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated December 15, 1997, incorporated by reference to Exhibit 4(c) to the 1997 Form 10-K. 4(d) Third Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated October 2, 1998, incorporated by reference to Exhibit 4(d) to the registrant's report on Form 10-Q for the quarterly period ended September 30, 1998. 4(e) Fourth Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated September 30, 1999, incorporated by reference to exhibit 4(e) to the registrant's report on Form 10-Q for the quarterly period ended September 30, 1999 (the "Third Quarter 1999 Form 10-Q"). 4(f) Indenture dated as of June 16, 1997, between the registrant and The Bank of Nova Scotia Trust Company of New York, incorporated by reference to Exhibit 4(a) to the registrant's report on Form 8-K dated June 18, 1997.
IV-1 30 The registrant hereby undertakes to file with the Securities and Exchange Commission, upon request, copies of any constituent instruments defining the rights of holders of long-term debt of the registrant or its subsidiaries that have not been filed herewith because the amounts represented thereby are less than 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10(a) Suspension Agreement concerning Potassium Chloride from Canada dated January 7, 1988, among U.S. Department of Commerce, the registrant, International Minerals and Chemical (Canada) Limited, Noranda, Inc. (Central Canada Potash Co.), Potash Company of America, a Division of Rio Algom Limited, S & P Canada, II (Kalium Chemicals), Cominco Ltd., Potash Company of Canada Limited, Agent for Denison-Potacan Potash Co. and Saskterra Fertilizers Ltd., incorporated by reference to Exhibit 10(a) to the registrant's registration statement on Form F-1 (File No. 33-31303) (the "F-1 Registration Statement"). 10(b) Sixth Voting Agreement dated April 22, 1978, between Central Canada Potash, Division of Noranda, Inc., Cominco Ltd., International Minerals and Chemical Corporation (Canada) Limited, PCS Sales and Texasgulf Inc., incorporated by reference to Exhibit 10(f) to the F-1 Registration Statement. 10(c) Canpotex Limited Shareholders Seventh Memorandum of Agreement effective April 21, 1978, between Central Canada Potash, Division of Noranda Inc., Cominco Ltd., International Minerals and Chemical Corporation (Canada) Limited, PCS Sales, Texasgulf Inc. and Canpotex Limited as amended by Canpotex S & P amending agreement dated November 4, 1987, incorporated by reference to Exhibit 10(g) to the F-1 Registration Statement. 10(d) Producer Agreement dated April 21, 1978, between Canpotex Limited and PCS Sales, incorporated by reference to Exhibit 10(h) to the F-1 Registration Statement. 10(e) Agreement of Limited Partnership of Arcadian Fertilizer, L.P. dated as of March 3, 1992 (form), and the related Certificate of Limited Partnership of Arcadian Fertilizer, L.P., filed with the Secretary of State of the State of Delaware on March 3, 1992 (incorporated by reference to Exhibits 3.1 and 3.2 to Arcadian Partners L.P.'s Registration Statement on Form S-1 (File No. 33-45828)). 10(f) Amendment to Agreement of Limited Partnership of Arcadian Fertilizer, L.P. and related Certificates of Limited Partnership of Arcadian Fertilizer, L.P. filed with the Secretary of State of the State of Delaware on March 6, 1997 and November 26, 1997, incorporated by reference to Exhibit 10(f) to the registrant's report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K"). 10(g) Geismar Complex Services Agreement dated June 4, 1984, between Honeywell International, Inc. and Arcadian Corporation, incorporated by reference to Exhibit 10.4 to Arcadian Corporation's Registration Statement on Form S-1 (File No. 33-34357). 10(h) Canpotex/PCS Amending Agreement, dated with effect October 1, 1992, incorporated by reference to Exhibit 10(f) to the 1995 Form 10-K. 10(i) Canpotex PCA Collateral Withdrawing/PCS Amending Agreement, dated with effect October 7, 1993, incorporated by reference to Exhibit 10(g) to the 1995 Form 10-K. 10(j) Esterhazy Restated Mining and Processing Agreement dated January 31, 1978, between International Minerals and Chemical Corporation (Canada) Limited and the registrant's predecessor, incorporated by reference to Exhibit 10(e) to the F-1 Registration Statement. 10(k) Agreement dated December 21, 1990, between International Minerals & Chemical Corporation (Canada) Limited and the registrant, amending the Esterhazy Restated Mining and Processing Agreement dated January 31, 1978, incorporated by reference to Exhibit 10(p) to the registrant's report on Form 10-K for the year ended December 31, 1990.
IV-2 31
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10(l) Agreement effective August 27, 1998, between International Minerals & Chemical (Canada) Global Limited and the registrant, amending the Esterhazy Restated Mining and Processing Agreement dated January 31, 1978 (as amended), incorporated by reference to Exhibit 10(l) to the 1998 Form 10-K. 10(m) Agreement effective August 31, 1998, among International Minerals & Chemical (Canada) Global Limited, International Minerals & Chemical (Canada) Limited Partnership and the registrant assigning the interest in the Esterhazy Restated Mining and Processing Agreement dated January 31, 1978 (as amended) held by International Minerals & Chemical (Canada) Global Limited to International Minerals & Chemical (Canada) Limited Partnership, incorporated by reference to Exhibit 10(m) to the 1998 Form 10-K. 10(n) Operating Agreement dated May 11, 1993, between BP Chemicals Inc. and Arcadian Ohio, L.P., as amended by the First Amendment to the Operating Agreement dated as of November 20, 1995, between BP Chemicals Inc. and Arcadian Ohio, L.P. ("First Amendment"), incorporated by reference to Exhibit 10.2 to Arcadian Partners L.P.'s current report on Form 8-K for the report event dated May 11, 1993, except for the First Amendment which is incorporated by reference to Arcadian Corporation's report on Form 10-K for the year ended December 31, 1995. 10(o) Second Amendment to Operating Agreement between BP Chemicals, Inc. and Arcadian Ohio, L.P., dated as of November 25, 1996, incorporated by reference to Exhibit 10(k) to the 1997 Form 10-K. 10(p) Manufacturing Support Agreement dated May 11, 1993, between BP Chemicals Inc. and Arcadian Ohio, L.P., incorporated by reference to Exhibit 10.3 to Arcadian Partners L.P.'s current report on Form 8-K for the report event dated May 11, 1993. 10(q) First Amendment to Manufacturing Support Agreement between BP Chemicals, Inc. and Arcadian Ohio, L.P., dated as of November 25, 1996, incorporated by reference to Exhibit 10(l) to the 1997 Form 10-K. 10(r) Amended and Restated Agreement for Lease dated as of May 16, 1997, between Trinidad Ammonia Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(n) to the registrant's report on Form 10-Q for the quarterly period ended June 30, 1997 (the "Second Quarter 1997 Form 10-Q"). 10(s) Amended and Restated Lease Agreement dated as of May 16, 1997, between Trinidad Ammonia Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(o) to the Second Quarter 1997 Form 10-Q. 10(t) Amended and Restated Agreement for Lease dated as of May 16, 1997, between Nitrogen Leasing Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(p) to the Second Quarter 1997 Form 10-Q. 10(u) Amended and Restated Lease Agreement dated as of May 16, 1997, between Nitrogen Leasing Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(q) to the Second Quarter 1997 Form 10-Q. 10(v) Amended and Restated Purchase Option Agreement dated as of May 16, 1997, between Nitrogen Leasing Company, Limited Partnership, and PCS Nitrogen Fertilizer Operations, Inc., incorporated by reference to Exhibit 10(r) to the Second Quarter 1997 Form 10-Q. 10(w) Amended and Restated Purchase Option Agreement dated as of May 16, 1997, between Trinidad Ammonia Company, Limited Partnership and PCS Nitrogen Fertilizer Operations, Inc., incorporated by reference to Exhibit 10(s) to the Second Quarter 1997 Form 10-Q. 10(x) Agreement dated January 1, 1997 between the registrant and Charles E. Childers, incorporated by reference to Exhibit 10(s) to the 1997 Form 10-K.
IV-3 32
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------- ----------------------- 10(y) Potash Corporation of Saskatchewan Inc. Stock Option Plan - Directors, as amended November 3, 1999, incorporated by reference to Exhibit 10(y) to the Third Quarter 1999 Form 10-Q. 10(z) Potash Corporation of Saskatchewan Inc. Stock Option Plan - Officers and Key Employees, as amended November 3, 1999, incorporated by reference to Exhibit 10(z) to the Third Quarter 1999 Form 10-Q. 10(aa) Short-Term Incentive Plan of the registrant, as amended May 7, 1997, incorporated by reference to Exhibit 10(w) to the Second Quarter 1997 Form 10-Q. 10(bb) Long-Term Incentive Plan of the registrant, as amended May 7, 1997, incorporated by reference to Exhibit 10(x) to the Second Quarter 1997 Form 10-Q. 10(cc) Resolution and Forms of Agreement for Supplemental Retirement Income Plan, for officers and key employees of the registrant, incorporated by reference to Exhibit 10(o) to the 1995 Form 10-K. 10(dd) Forms of Agreement dated December 30, 1994, between the registrant and certain officers of the registrant, concerning a change in control of the registrant, incorporated by reference to Exhibit 10(p) to the 1995 Form 10-K. 10(ee) Form of Agreement of Indemnification dated August 8, 1995, between the registrant and certain officers and directors of the registrant, incorporated by reference to Exhibit 10(q) to the 1995 Form 10-K. 10(ff) Supplemental Retirement Benefits Plan, for eligible employees of PCS Phosphate Company, Inc., incorporated by reference to Exhibit 10(s) to the 1995 Form 10-K. 10(gg) Second Amended and Restated Membership Agreement dated January 1, 1995, among Phosphate Chemicals Export Association, Inc. and members of such association, including Texasgulf Inc., incorporated by reference to Exhibit 10(t) to the 1995 Form 10-K. 10(hh) International Agency Agreement dated January 1, 1995, between Phosphate Chemicals Export Association, Inc. and Texasgulf Inc. establishing Texasgulf Inc. as exclusive marketing agent for such association's wet phosphatic materials, incorporated by reference to Exhibit 10(u) to the 1995 Form 10-K. 10(ii) General Partnership Agreement forming Albright & Wilson Company, dated July 29, 1988 and amended January 31, 1995, between Texasgulf Inc. and Albright & Wilson Americas Inc., incorporated by reference to Exhibit 10(v) to the 1995 Form 10-K. 10(jj) Amendment to the Albright & Wilson Company General Partnership agreement dated March 23, 2000. 10(kk) Royalty Agreement dated October 7, 1993, by and between the registrant and Rio Algom Limited, incorporated by reference to Exhibit 10(x) to the 1995 Form 10-K. 10(ll) Amending Resolution and revised forms of agreement regarding Supplemental Retirement Income Plan of the registrant, incorporated by reference to Exhibit 10(x) to the registrant's report on Form 10-Q for the quarterly period ended June 30, 1996. 10(mm) Shareholder Rights Agreement as amended and restated on March 2, 1998, incorporated by reference to Schedule B to the registrant's proxy circular for the annual and special meeting of shareholders held on May 7, 1998. 11 Statement re Computation of Per Share Earnings. 13 1999 Annual Report 21 Subsidiaries of the Registrant 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule.
IV-4 33 (b) Reports on Form 8-K On October 22, 1999, the registrant filed a report on Form 8-K regarding a press release issued on October 21, 1999 announcing certain one-time corporate charges and plant closures. Copies of Exhibits to the Form 10-K may be obtained upon request from the Corporate Secretary, Potash Corporation of Saskatchewan Inc., Suite 500, 122 First Avenue South, Saskatoon, Saskatchewan S7K 7G3, Canada. The Company reserves the right to recover its reasonable expenses in providing copies of the Exhibits, such expenses not to exceed $.25 per page. IV-5 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. POTASH CORPORATION OF SASKATCHEWAN INC. By: /s/ WILLIAM J. DOYLE ----------------------------------------- William J. Doyle President & Chief Executive Officer March 27, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ CHARLES E. CHILDERS Chairman of the Board March 27, 2000 - ------------------------------------------ Charles E. Childers /s/ WAYNE R. BROWNLEE Senior Vice President, Finance and March 27, 2000 - ------------------------------------------ Treasurer and Chief Financial Officer Wayne R. Brownlee /s/ WILLIAM J. DOYLE President and Chief Executive Officer March 27, 2000 - ------------------------------------------ William J. Doyle /s/ ISABEL B. ANDERSON Director March 27, 2000 - ------------------------------------------ Isabel B. Anderson /s/ DOUGLAS J. BOURNE Director March 27, 2000 - ------------------------------------------ Douglas J. Bourne /s/ HON. WILLARD Z. ESTEY, Q.C. Director March 27, 2000 - ------------------------------------------ Hon. Willard Z. Estey, Q.C /s/ DALLAS J. HOWE Director March 27, 2000 - ------------------------------------------ Dallas J. Howe /s/ DONALD E. PHILLIPS Director March 27, 2000 - ------------------------------------------ Donald E. Phillips /s/ PAUL J. SCHOENHALS Director March 27, 2000 - ------------------------------------------ Paul J. Schoenhals
35
SIGNATURE TITLE DATE --------- ----- ---- /s/ DARYL K. SEAMAN Director March 27, 2000 - ------------------------------------------ Daryl K. Seaman /s/ E. ROBERT STROMBERG, Q.C. Director March 27, 2000 - ------------------------------------------ E. Robert Stromberg, Q.C /s/ JACK G. VICQ Director March 27, 2000 - ------------------------------------------ Jack G. Vicq /s/ BARRIE A. WIGMORE Director March 27, 2000 - ------------------------------------------ Barrie A. Wigmore /s/ PAUL S. WISE Director March 27, 2000 - ------------------------------------------ Paul S. Wise /s/ THOMAS J. WRIGHT Director March 27, 2000 - ------------------------------------------ Thomas J. Wright
36
EXHIBIT INDEX ------------- 2 Agreement and Plan of Merger dated September 2, 1996, as amended, by and among the registrant, Arcadian Corporation and PCS Nitrogen, Inc., incorporated by reference to Exhibit 2(a) to Amendment Number 2 to the registrant's Form S-4 (File No. 333-17841). 3(a) Restated Articles of Incorporation of the registrant dated October 31, 1989, as amended May 11, 1995, incorporated by reference to Exhibit 3(i) to the registrant's report on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). 3(b) Bylaws of the registrant dated March 2, 1995, incorporated by reference to Exhibit 3(ii) to the 1995 Form 10-K. 4(a) Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated October 4, 1996, incorporated by reference to Exhibit 4(b) to the registrant's Form S-4 (File No. 333-17841). 4(b) First Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated November 6, 1997, incorporated by reference to Exhibit 4(b) to the registrant's report on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"). 4(c) Second Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated December 15, 1997, incorporated by reference to Exhibit 4(c) to the 1997 Form 10-K. 4(d) Third Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated October 2, 1998, incorporated by reference to Exhibit 4(d) to the registrant's report on Form 10-Q for the quarterly period ended September 30, 1998. 4(e) Fourth Amending Agreement to Term Credit Agreement between The Bank of Nova Scotia and other financial institutions and the registrant dated September 30, 1999, incorporated by reference to exhibit 4(e) to the registrant's report on Form 10-Q for the quarterly period ended September 30, 1999 (the "Third Quarter 1999 Form 10-Q"). 4(f) Indenture dated as of June 16, 1997, between the registrant and The Bank of Nova Scotia Trust Company of New York, incorporated by reference to Exhibit 4(a) to the registrant's report on Form 8-K dated June 18, 1997.
37
EXHIBIT INDEX ------------- 10(a) Suspension Agreement concerning Potassium Chloride from Canada dated January 7, 1988, among U.S. Department of Commerce, the registrant, International Minerals and Chemical (Canada) Limited, Noranda, Inc. (Central Canada Potash Co.), Potash Company of America, a Division of Rio Algom Limited, S & P Canada, II (Kalium Chemicals), Cominco Ltd., Potash Company of Canada Limited, Agent for Denison-Potacan Potash Co. and Saskterra Fertilizers Ltd., incorporated by reference to Exhibit 10(a) to the registrant's registration statement on Form F-1 (File No. 33-31303) (the "F-1 Registration Statement"). 10(b) Sixth Voting Agreement dated April 22, 1978, between Central Canada Potash, Division of Noranda, Inc., Cominco Ltd., International Minerals and Chemical Corporation (Canada) Limited, PCS Sales and Texasgulf Inc., incorporated by reference to Exhibit 10(f) to the F-1 Registration Statement. 10(c) Canpotex Limited Shareholders Seventh Memorandum of Agreement effective April 21, 1978, between Central Canada Potash, Division of Noranda Inc., Cominco Ltd., International Minerals and Chemical Corporation (Canada) Limited, PCS Sales, Texasgulf Inc. and Canpotex Limited as amended by Canpotex S & P amending agreement dated November 4, 1987, incorporated by reference to Exhibit 10(g) to the F-1 Registration Statement. 10(d) Producer Agreement dated April 21, 1978, between Canpotex Limited and PCS Sales, incorporated by reference to Exhibit 10(h) to the F-1 Registration Statement. 10(e) Agreement of Limited Partnership of Arcadian Fertilizer, L.P. dated as of March 3, 1992 (form), and the related Certificate of Limited Partnership of Arcadian Fertilizer, L.P., filed with the Secretary of State of the State of Delaware on March 3, 1992 (incorporated by reference to Exhibits 3.1 and 3.2 to Arcadian Partners L.P.'s Registration Statement on Form S-1 (File No. 33-45828)). 10(f) Amendment to Agreement of Limited Partnership of Arcadian Fertilizer, L.P. and related Certificates of Limited Partnership of Arcadian Fertilizer, L.P. filed with the Secretary of State of the State of Delaware on March 6, 1997 and November 26, 1997, incorporated by reference to Exhibit 10(f) to the registrant's report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K"). 10(g) Geismar Complex Services Agreement dated June 4, 1984, between Honeywell International, Inc. and Arcadian Corporation, incorporated by reference to Exhibit 10.4 to Arcadian Corporation's Registration Statement on Form S-1 (File No. 33-34357). 10(h) Canpotex/PCS Amending Agreement, dated with effect October 1, 1992, incorporated by reference to Exhibit 10(f) to the 1995 Form 10-K. 10(i) Canpotex PCA Collateral Withdrawing/PCS Amending Agreement, dated with effect October 7, 1993, incorporated by reference to Exhibit 10(g) to the 1995 Form 10-K. 10(j) Esterhazy Restated Mining and Processing Agreement dated January 31, 1978, between International Minerals and Chemical Corporation (Canada) Limited and the registrant's predecessor, incorporated by reference to Exhibit 10(e) to the F-1 Registration Statement. 10(k) Agreement dated December 21, 1990, between International Minerals & Chemical Corporation (Canada) Limited and the registrant, amending the Esterhazy Restated Mining and Processing Agreement dated January 31, 1978, incorporated by reference to Exhibit 10(p) to the registrant's report on Form 10-K for the year ended December 31, 1990.
38
EXHIBIT INDEX ------------- 10(l) Agreement effective August 27, 1998, between International Minerals & Chemical (Canada) Global Limited and the registrant, amending the Esterhazy Restated Mining and Processing Agreement dated January 31, 1978 (as amended), incorporated by reference to Exhibit 10(l) to the 1998 Form 10-K. 10(m) Agreement effective August 31, 1998, among International Minerals & Chemical (Canada) Global Limited, International Minerals & Chemical (Canada) Limited Partnership and the registrant assigning the interest in the Esterhazy Restated Mining and Processing Agreement dated January 31, 1978 (as amended) held by International Minerals & Chemical (Canada) Global Limited to International Minerals & Chemical (Canada) Limited Partnership, incorporated by reference to Exhibit 10(m) to the 1998 Form 10-K. 10(n) Operating Agreement dated May 11, 1993, between BP Chemicals Inc. and Arcadian Ohio, L.P., as amended by the First Amendment to the Operating Agreement dated as of November 20, 1995, between BP Chemicals Inc. and Arcadian Ohio, L.P. ("First Amendment"), incorporated by reference to Exhibit 10.2 to Arcadian Partners L.P.'s current report on Form 8-K for the report event dated May 11, 1993, except for the First Amendment which is incorporated by reference to Arcadian Corporation's report on Form 10-K for the year ended December 31, 1995. 10(o) Second Amendment to Operating Agreement between BP Chemicals, Inc. and Arcadian Ohio, L.P., dated as of November 25, 1996, incorporated by reference to Exhibit 10(k) to the 1997 Form 10-K. 10(p) Manufacturing Support Agreement dated May 11, 1993, between BP Chemicals Inc. and Arcadian Ohio, L.P., incorporated by reference to Exhibit 10.3 to Arcadian Partners L.P.'s current report on Form 8-K for the report event dated May 11, 1993. 10(q) First Amendment to Manufacturing Support Agreement between BP Chemicals, Inc. and Arcadian Ohio, L.P., dated as of November 25, 1996, incorporated by reference to Exhibit 10(l) to the 1997 Form 10-K. 10(r) Amended and Restated Agreement for Lease dated as of May 16, 1997, between Trinidad Ammonia Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(n) to the registrant's report on Form 10-Q for the quarterly period ended June 30, 1997 (the "Second Quarter 1997 Form 10-Q"). 10(s) Amended and Restated Lease Agreement dated as of May 16, 1997, between Trinidad Ammonia Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(o) to the Second Quarter 1997 Form 10-Q. 10(t) Amended and Restated Agreement for Lease dated as of May 16, 1997, between Nitrogen Leasing Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(p) to the Second Quarter 1997 Form 10-Q. 10(u) Amended and Restated Lease Agreement dated as of May 16, 1997, between Nitrogen Leasing Company, Limited Partnership, and PCS Nitrogen Fertilizer, L.P., incorporated by reference to Exhibit 10(q) to the Second Quarter 1997 Form 10-Q. 10(v) Amended and Restated Purchase Option Agreement dated as of May 16, 1997, between Nitrogen Leasing Company, Limited Partnership, and PCS Nitrogen Fertilizer Operations, Inc., incorporated by reference to Exhibit 10(r) to the Second Quarter 1997 Form 10-Q. 10(w) Amended and Restated Purchase Option Agreement dated as of May 16, 1997, between Trinidad Ammonia Company, Limited Partnership and PCS Nitrogen Fertilizer Operations, Inc., incorporated by reference to Exhibit 10(s) to the Second Quarter 1997 Form 10-Q. 10(x) Agreement dated January 1, 1997 between the registrant and Charles E. Childers, incorporated by reference to Exhibit 10(s) to the 1997 Form 10-K.
39
EXHIBIT INDEX ------------- 10(y) Potash Corporation of Saskatchewan Inc. Stock Option Plan - Directors, as amended November 3, 1999, incorporated by reference to Exhibit 10(y) to the Third Quarter 1999 Form 10-Q. 10(z) Potash Corporation of Saskatchewan Inc. Stock Option Plan - Officers and Key Employees, as amended November 3, 1999, incorporated by reference to Exhibit 10(z) to the Third Quarter 1999 Form 10-Q. 10(aa) Short-Term Incentive Plan of the registrant, as amended May 7, 1997, incorporated by reference to Exhibit 10(w) to the Second Quarter 1997 Form 10-Q. 10(bb) Long-Term Incentive Plan of the registrant, as amended May 7, 1997, incorporated by reference to Exhibit 10(x) to the Second Quarter 1997 Form 10-Q. 10(cc) Resolution and Forms of Agreement for Supplemental Retirement Income Plan, for officers and key employees of the registrant, incorporated by reference to Exhibit 10(o) to the 1995 Form 10-K. 10(dd) Forms of Agreement dated December 30, 1994, between the registrant and certain officers of the registrant, concerning a change in control of the registrant, incorporated by reference to Exhibit 10(p) to the 1995 Form 10-K. 10(ee) Form of Agreement of Indemnification dated August 8, 1995, between the registrant and certain officers and directors of the registrant, incorporated by reference to Exhibit 10(q) to the 1995 Form 10-K. 10(ff) Supplemental Retirement Benefits Plan, for eligible employees of PCS Phosphate Company, Inc., incorporated by reference to Exhibit 10(s) to the 1995 Form 10-K. 10(gg) Second Amended and Restated Membership Agreement dated January 1, 1995, among Phosphate Chemicals Export Association, Inc. and members of such association, including Texasgulf Inc., incorporated by reference to Exhibit 10(t) to the 1995 Form 10-K. 10(hh) International Agency Agreement dated January 1, 1995, between Phosphate Chemicals Export Association, Inc. and Texasgulf Inc. establishing Texasgulf Inc. as exclusive marketing agent for such association's wet phosphatic materials, incorporated by reference to Exhibit 10(u) to the 1995 Form 10-K. 10(ii) General Partnership Agreement forming Albright & Wilson Company, dated July 29, 1988 and amended January 31, 1995, between Texasgulf Inc. and Albright & Wilson Americas Inc., incorporated by reference to Exhibit 10(v) to the 1995 Form 10-K. 10(jj) Amendment to the Albright & Wilson Company General Partnership agreement dated March 23, 2000. 10(kk) Royalty Agreement dated October 7, 1993, by and between the registrant and Rio Algom Limited, incorporated by reference to Exhibit 10(x) to the 1995 Form 10-K. 10(ll) Amending Resolution and revised forms of agreement regarding Supplemental Retirement Income Plan of the registrant, incorporated by reference to Exhibit 10(x) to the registrant's report on Form 10-Q for the quarterly period ended June 30, 1996. 10(mm) Shareholder Rights Agreement as amended and restated on March 2, 1998, incorporated by reference to Schedule B to the registrant's proxy circular for the annual and special meeting of shareholders held on May 7, 1998. 11 Statement re Computation of Per Share Earnings. 13 1999 Annual Report 21 Subsidiaries of the Registrant 23 Consent of Deloitte & Touche LLP. 27 Financial Data Schedule.
EX-10.(JJ) 2 AMENDMENT TO GENERAL PARTNERSHIP AGREEMENT 1 Exhibit 10(jj) ANNEX A AMENDMENT TO ALBRIGHT & WILSON COMPANY GENERAL PARTNERSHIP AGREEMENT This Agreement amending the Albright & Wilson Company General Partnership Agreement (as amended, the "PARTNERSHIP AGREEMENT") is entered into as of March 23, 2000, between Albright & Wilson Americas Inc., a Delaware corporation ("A&W INC."), PCS Phosphate Company, Inc., a Delaware corporation ("PCSP") and PCS Industrial Products, Inc., a Delaware corporation ("NEW PARTNER"). WHEREAS, A&W Inc. and PCSP are parties to the Partnership Agreement, which created Albright & Wilson Company ("A&W CO.") as a Virginia general partnership; WHEREAS, A&W Inc. and PCSP believe it is in the best interests of A&W Co. to admit New Partner as a general partner of A&W Co. with a percentage interest equal to the percentage interest set forth next to New Partner's name on Schedule 1 attached hereto; WHEREAS, the New Partner desires to become a general partner of A&W Co. and to have all the rights and be subject to all the obligations of a general partner under the Partnership Agreement; WHEREAS, A&W Inc. and PCSP desire to make certain amendments to the Partnership Agreement to provide for the admission of the New Partner as a general partner; WHEREAS, A&W Inc. and PCSP wish to amend the Partnership Agreement in order to establish the rights and obligations of an A&W Co. member after its partnership interest has been transferred; WHEREAS, A&W Inc. and PCSP also believe that it is in the best interest of A&W Co. to provide for distributions by A&W Co. to Partners other than in accordance with Section 5.02 of the Partnership Agreement, which provides for distributions on a "pro rata" basis in accordance with the Partner's respective Shares as of that time, so long as such alternative method of distribution is agreed to by vote of the Partners; WHEREAS, A&W Inc. and PCSP wish to amend the Partnership Agreement in order to provide for agreement among Partners with regard to distributions which are other than "pro rata" in accordance with Share ownership; and WHEREAS, A&W Inc. and PCSP desire to change the name of A&W Co. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein set forth, the parties agree as follows: 2 1. Definitions. Unless otherwise defined herein, all defined terms used in this Agreement shall have the same definitions as contained in the Partnership Agreement. 2. Amendments to Partnership Agreement. A. Unless otherwise provided in this Agreement, throughout the entirety of the Partnership Agreement, each usage of A&W Co. shall be replaced with "PCS Purified Phosphates." B. Section 2.02. Section 2.02 (Shares) of the Partnership Agreement is hereby amended in its entirety to read as follows: "2.02 Shares. Except as otherwise provided in Article VIII or IX of this Agreement, the percentage interest of each Partner in PCS Purified Phosphates shall be as set forth on Schedule 1 attached hereto." C. Section 4.01. Section 4.01 (Capital Contributions) of the Partnership Agreement is hereby amended by adding the following paragraph (d) to the end of Section 4.01: "(d) On March 23, 2000, PCS Industrial Products, Inc. shall contribute to PCS Purified Phosphates the amount of $450,000 which will represent the capital contribution of PCS Industrial Products, Inc. to PCS Purified Phosphates and will entitle PCS Industrial Products, Inc. to the percentage interest in PCS Purified Phosphates set forth next to PCS Industrial Product, Inc.'s name on Schedule 1 attached hereto." D. Sub-section 1.01(s). Sub-section 1.01(s) (Definitions; Partner) is hereby amended in its entirety to read as follows: "(s) "Partner" shall mean PCS Phosphate Company, Inc., Albright and Wilson Americas Inc., or PCS Industrial Products, Inc., as the case may be, and the term "Partners" shall mean all of the Partners." E. Section 6.02. Section 6.02 (Distributions) of the Partnership Agreement is hereby amended by placing the phrase "as otherwise agreed by unanimous vote of the Partners or" after the word "Except" in the first sentence. F. Article VIII. Article VIII (Transfer of Interest) is hereby amended by adding the following new Section 8.03 after existing Section 8.02: "8.03 Dissociation. ------------ (a) Upon the transfer by a Partner of its entire interest in PCS Purified Phosphates pursuant to Section 8.01 hereof, the 2 3 remaining non-transferring Partners (the "CONTINUING PARTNERS") shall dissociate the transferring Partner (the "DISSOCIATED PARTNER") from PCS Purified Phosphates by filing a statement of dissociation with the Virginia State Corporation Commission. (b) Effective upon the filing of the notice of dissociation pursuant to Section 8.03(a) hereof: (i) PCS Purified Phosphates shall not be dissolved under the Act and shall continue in existence as a Virginia general partnership; (ii) The Dissociated Partner will cease to be a general partner in PCS Purified Phosphates, and shall have no further rights, no partnership interests, no obligations, no liabilities and no duties under this Agreement, including, but not limited to, (A) any and all rights in PCS Purified Phosphates partnership property, (B) any and all partnership interests in PCS Purified Phosphates, including, but not limited to, profits and losses, and (C) any and all management rights with respect to PCS Purified Phosphates, including but not limited to, the right to appoint members to the PCS Purified Phosphates Management Committee pursuant to Section 3.01 hereof; (iii) The Dissociated Partner shall not be entitled to indemnification as provided in Section 50-73.112 of the Act; (iv) The Dissociated Partner shall not have any duties under the New Chapter, including the duties of care and loyalty set forth under Section 50-73.102 of the New Chapter; and (v) The Dissociated Partner waives any entitlement it may have to a buyout price of its shares under Section 50-73-112 of the New Chapter. In lieu thereof, the Dissociated Partner and the Continuing Partners may fix a method or formula for determining the buyout price and all other terms and conditions of the buyout right of the Dissociated Partner's partnership interest whether in connection with a transfer under Section 8.01 hereof or otherwise to the fullest extent permitted under the law of the Commonwealth of Virginia. 3 4 (c) In connection with any transfer under Section 8.01 hereof, PCS Purified Phosphates, the Continuing Partners and the Dissociated Partner shall agree to all liabilities and obligations of each of PCS Purified Phosphates, the Continuing Partners and the Dissociated Partner with respect to one another, in a written agreement, for the periods prior to and after the dissociation of the Dissociated Partner (the "CONTINUING OBLIGATIONS"). Notwithstanding anything in this Agreement to the contrary, except for those Continuing Obligations expressly agreed to by the Partners, (A) the Dissociated Partner shall not have any other Continuing Obligations, and shall not have any other liabilities or obligations, to PCS Purified Phosphates and the Continuing Partners, and (B) PCS Purified Phosphates and the Continuing Partners shall have no other Continuing Obligations to the Dissociated Partner. 3. Acceptance and Acknowledgment of New Partner. New Partner acknowledges receipt of the Partnership Agreement and all amendments thereto, a copy of which is attached hereto as Exhibit A, and hereby specifically accepts, adopts, and agrees to each and every provision of the Partnership Agreement. By execution of this Amendment, New Partner agrees that it shall be deemed to have executed the Partnership Agreement. 4. Removal of References to A&W Inc. Effective immediately upon the dissociation of the Selling Partner (as defined in the Distribution and Sale Agreement dated as of March 23, 2000 by and among A&W Inc., PCSP, New Partner, PCS Purified Phosphates and Rhodia Inc., a Delaware corporation), PCSP and New Partner shall amend and restate the Partnership Agreement in its entirety (the "AMENDED AND RESTATED PARTNERSHIP AGREEMENT"). PCSP and New Partner hereby covenant that the Amended and Restated Partnership Agreement shall not contain any references to A&W Inc. (including, without limitation, all references to Albright & Wilson Americas Inc.) or any corresponding references to rights, interests, obligations, liabilities, duties and responsibilities of A&W Inc. 5. Reaffirmation. Except as specifically amended herein, all terms and conditions of the Partnership Agreement in effect prior to this Agreement thereto remain in full force and effect. * * * * * 4 5 (SIGNATURE PAGE FOR AMENDMENT TO ALBRIGHT & WILSON COMPANY GENERAL PARTNERSHIP AGREEMENT) IN WITNESS WHEREOF, the Partners hereto have executed this Agreement as of the day and year first above written. ALBRIGHT & WILSON AMERICAS INC. By: /s/ L. WORK -------------------------------------- Name: Lyall Work Title: President PCS PHOSPHATE COMPANY, INC. By: /s/ T.J. REGAN, JR. -------------------------------------- Name: Thomas J. Regan, Jr. Title: President PCS INDUSTRIAL PRODUCTS, INC. By: /s/ T.J. REGAN, JR. -------------------------------------- Name: Thomas J. Regan, Jr. Title: President 6 (SIGNATURE PAGE FOR AMENDMENT TO ALBRIGHT & WILSON COMPANY GENERAL PARTNERSHIP AGREEMENT, PAGE 2) ALBRIGHT & WILSON COMPANY By: ALBRIGHT & WILSON AMERICAS INC., a General Partner By: /s/ L. WORK ------------------------------------- Name: Lyall Work Title: President By: PCS PHOSPHATE COMPANY, INC., a General Partner By: /s/ T.J. REGAN, JR. ------------------------------------- Name: Thomas J. Regan, Jr. Title: President By: PCS INDUSTRIAL PRODUCTS, INC., a General Partner By: /s/ T.J. REGAN, JR. ------------------------------------- Name: Thomas J. Regan, Jr. Title: President 7 SCHEDULE 1 NAME PERCENTAGE INTEREST IN PCS PURIFIED - ---- PHOSPHATES ----------------------------------- Albright & Wilson Americas, Inc. 49.75% PCS Phosphate Company, Inc. 49.75% PCS Industrial Products, Inc. 0.5% 8 EXHIBIT A A&W CO. GENERAL PARTNERSHIP AGREEMENT AND AMENDMENTS [AS SEPARATELY PROVIDED] EX-11 3 COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 POTASH CORPORATION OF SASKATCHEWAN INC. COMPUTATION OF PER SHARE EARNINGS FOR THE YEAR ENDED DECEMBER, 1999 (Figures and amounts expressed in thousands, except per share and per option amounts)
1999 1998 ----------------------------------------- A Net income as reported, Canadian GAAP $ (411,994) $ 261,003 B Items adjusting net income $ (170,588) - C Net income, US GAAP (A+B) $ (582,582) $ 261,003 D Weighted average number of shares outstanding....................... 54,230 54,177 E Options outstanding to purchase equivalent shares................... 3,804 2,947 F Average exercise price per option................................... $ 43.69 $ 70.35 G Average market price per share...................................... $ 54.37 $ 74.65 H Period end market price per share................................... $ 48.19 $ 63.88 I Rate of Return available on option proceeds 5.00% 5.00% CANADIAN GAAP Basic earnings per share (A/D) $(7.60) $4.82 Fully diluted earnings per share J Imputed earnings on options proceeds (E*F*I) - $7,912 Fully diluted earnings per share ((A+J)/(D+E))...................... $(7.60) $ 4.77 UNITED STATES GAAP Basic earnings per share (C/D) $(10.74) $4.82 Fully diluted earnings per share K Net additional shares issuable (E-(E*F/G)) - 170 Fully diluted earnings per share (C/(D+K)).......................... $(10.74) $ 4.80
EX-13 4 ANNUAL REPORT 1 [POTASH CORP. LOGO] Exhibit 13 RESOURCEFUL 1999 ANNUAL REPORT 2 BECAME A ACQUIRED BEGAN HANDLING PURCHASED THE PCS PUBLICLY-TRADED EXPORT-ORIENTED [PHOTO] OFFSHORE POTASH POTASH ASSETS OF COMPANY IN POTASH PRODUCER SALES FOR NEW POTASH COMPANY NOVEMBER SASKTERRA MEXICO PRODUCERS OF AMERICA 1989 1990 1991 1992 1993 PERESTROIKA OCCURS, GERMANY REUNIFIES, GULF WAR AFFECTS INDIA SLASHES RECORD MIDWESTERN INDUSTRY BERLIN WALL FALLS, FIRST CLOSURES OF MIDDLE EAST POTASH FERTILIZER SUBSIDIES, FLOODS CUT US FARM TIENANMEN SQUARE EAST GERMAN SHIPMENTS; USSR POTASH SALES DROP; PRODUCTION; CHINA CLAMPDOWN IN CHINA: POTASH MINES DISINTEGRATES, RUSSIAN FOOD CONCERNS GROW, REMOVES SUBSIDIES ALL PRECIPITATE FIVE- POTASH DISRUPTS LEADING TO SUBSIDY ON FARM INPUTS; YEAR DECLINE IN WORLD WESTERN MARKETS REINSTATEMENT POTASH CONSUMPTION FERTILIZER CONSUMPTION IN 1993 BOTTOMS OUT
RECHARGED
TABLE OF CONTENTS Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Report to Shareholders . . . . . . . . . . . . . . . . . . 3 Production . . . . . . . . . . . . . . . . . . . . . . . . . 6 Potash . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Phosphate . . . . . . . . . . . . . . . . . . . . . . . . 9 Nitrogen . . . . . . . . . . . . . . . . . . . . . . . . . 12 Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Stewardship . . . . . . . . . . . . . . . . . . . . . . . . 25 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . 32 10-Year Report . . . . . . . . . . . . . . . . . . . . . . . 43 Management's Responsibility . . . . . . . . . . . . . . . . 44 Auditors' Report . . . . . . . . . . . . . . . . . . . . . . 44 Consolidated Financial Statements . . . . . . . . . . . . . 45 Shareholder Information . . . . . . . . . . . . . . . . . . 64 Corporate Information . . . . . . . . . . . . . . . . . . . back Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . back
All financial data are stated in US dollars. 3 EXPANDED INTO PHOSPHATE EXPANDED INTO PURCHASED POTASH PURCHASED [PHOTO] BY PURCHASING TEXASGULF [PHOTO] NITROGEN BY COMPANY OF CANADA POTASSIUM NITRATE AND THE PHOSPHATE ACQUIRING ARCADIAN PROPERTY IN NEW PROPERTY IN CHILE BUSINESS OF OCCIDENTAL CORPORATION BRUNSWICK AND SHARES CHEMICALS IN ISRAEL CHEMICALS 1994 1995 1996 1997 1998 1999 BRAZIL REFORMS EU REFORMS US ELIMINATES CHINA EXITS UREA ECONOMIC PROBLEMS HIGH GRAIN STOCKS, AGRICULTURE; AGRICULTURE; WORLD SETASIDES, FREES TRADE; FINANCIAL IN LATIN AMERICA; LOW PRICES; EU PUTS DUTIES ON POTASH AND PHOSPHATE FARMERS; RECORD CRISIS SWEEPS ASIA RUSSIA DEVALUES CYCLONE IN INDIA RUSSIAN POTASH; CONSUMPTION UP CORN AND WHEAT CURRENCY, MOVES TO POSTPONES NEW PRICES RISE SHARPLY; GRAIN STOCKS PRICES NON-MARKET PRICING DAP CAPACITY AT ALL-TIME LOW IN NITROGEN
REVIEW IN NOVEMBER 1999, POTASH CORPORATION OF SASKATCHEWAN INC. PASSED ITS 10-YEAR MILESTONE AS A PUBLICLY-TRADED COMPANY. IN THOSE 10 YEARS OF RESOURCEFUL GROWTH AND THOUGHTFUL CHANGE, IT HAS REFORGED ITSELF INTO THE WORLD'S LARGEST MANUFACTURER OF THE THREE PRIMARY NUTRIENTS. DESPITE WEATHER, POLITICS AND ECONOMIC SPIRALS, AMID CHANGES IN SUBSIDY LEVELS, APPLICATION RATES AND METHODS, ACREAGE PLANTED AND FARM PROSPECTS, IT HAS RESILIENTLY OUTPERFORMED THE FERTILIZER SECTOR. IN THE 10 FULL YEARS IT HAS BEEN PUBLICLY TRADED, IT HAS MATCHED THE PERFORMANCE OF THE DOW, RETURNING A CUMULATIVE 316 PERCENT TO SHAREHOLDERS. Potash Corporation of Saskatchewan Inc. (commonly known as PCS or PotashCorp) is a leading supplier of potash (K), phosphate (P) and nitrogen (N) to three distinct market categories: agriculture, as the world's largest and lowest-cost producer of fertilizer products; animal nutrition, as the world's largest producer of phosphate feed ingredients; and industrial chemicals, as the world's largest producer of industrial nitrogen products. PCS is the world's largest potash company by capacity, with vast excess capacity upon which to draw as markets grow. It is the third largest phosphate company in the world, with large, low-cost reserves and the industry's most diversified product line. It ranks in the top three in nitrogen, producing a wide range of upgraded products. Products from the 18 PCS facilities spread throughout North America and Trinidad are sold worldwide. PCS owns 9 percent of Israel Chemicals, and is developing a facility in Chile producing sodium nitrate and potassium nitrate. Under the symbol POT, PotashCorp shares trade on the Toronto and New York stock exchanges. At the end of 1999, 53.7 million shares were outstanding. 1 4 POTASH CORPORATION OF SASKATCHEWAN ACHIEVED ITS LEADERSHIP POSITION BY REDEFINING HOW PROFITS CAN BE OPTIMIZED IN A COMMODITY BUSINESS. IT HAS CONCENTRATED ON ITS STRENGTHS AND DEVELOPED A STRATEGY FOR LONG-TERM PROFITABILITY IN EACH OF ITS NUTRIENTS. REFOCUSED In potash, PCS matches supply to demand to minimize inventory overhang and grow earnings. In phosphate, it stresses product diversification to maximize production of those products with a market premium. In nitrogen, it emphasizes industrial sales. In every case, the goal is to benefit from the fertilizer market on the upside and shield earnings on the downside, to generate premium shareholder value. The Company is determined to remain a low-cost supplier of potash and phosphate to global customers and of nitrogen domestically. Reinforcing and strengthening this goal is its long-term business strategy of focusing on the acquisition of quality assets that will build on its strengths, complement it logistically and add strategic value. In all its products, PotashCorp is striving to become more customer-focused and responsive to customer needs. With confidence in these strategies, its quality products and its management vision, PCS moves resourcefully into its second decade, anticipating continuing leadership of the world fertilizer industry. 2 5 REPORT TO SHAREHOLDERS [PHOTOGRAPH] William J. Doyle PRESIDENT and CEO It is my privilege to report to you on your Company's assets and our management of its day-to-day operations in 1999, our tenth year as a publicly-traded company. In that decade, a fledgling Saskatchewan potash producer built itself into a world leader in fertilizers, animal nutrition and industrial products. Its assets, over that 10-year period, have quadrupled and its market capitalization has almost quintupled. Net income on a sustaining basis has increased eightfold while sales have multiplied 11 times. Our tenth year was a difficult one, full of challenges, but your management used it to address our problems and rejuvenate your Company for the long term. The pages that follow will give you a detailed report on 1999, so I will touch only on the major developments. A YEAR OF MIXED RESULTS Up front, we must acknowledge that 1999 was a poor year in fertilizer, principally because of North American markets. The spring season disappointed us, as farmers cut costs by putting off fertilizer purchases, and high grain stocks and low grain prices pressured sales throughout the year. Nitrogen was a poor performer in 1999, phosphate weakened through the second half of the year, and only potash held its own. Our feed and industrial businesses were relatively stable, but fertilizer still represents 70 percent of our business. We know agriculture will recover, but we are using the opportunity provided by this downturn to reorient the Company. Our 1999 sales would have produced earnings of $2.49 per share (1998: $4.82) except for our writedown of our nitrogen assets. Part of that one-time charge was for closing two high-cost nitrogen plants, but most related to a review of the nitrogen goodwill. As a result, PotashCorp recorded a loss of $7.60 per share. The writedown followed an examination of our nitrogen assets with our auditors. We had done a thorough analysis before we bought those assets in 1997, and anticipated lower prices. But we did not anticipate such extreme external events as China withdrawing from the world urea market and Russian exporters' continued non-market pricing. Nitrogen prices deteriorated rapidly, and we see no basis to expect substantial sustained improvement in the near future. It seemed prudent to address the problem, and we took the writedown in the third quarter of 1999. We also cut costs by permanently closing two 3 6 YOUR COMPANY'S IMMEDIATE GOALS 1 INCREASE 2 IMPROVE OUR 3 EXPAND OUR RETURN ON CAPITAL COST POSITIONS IN PRODUCT LINE AND ALL THREE NUTRIENTS CUSTOMER BASE BY BUILDING ON OUR NEWEST ACQUISITIONS 4 INCREASE 5 INCREASE THE 6 STEADILY POTASH PRICES PERCENTAGE OF NON- INCREASE OUR WHILE BRINGING ON FERTILIZER BUSINESS NITROGEN INDUSTRIAL EXCESS CAPACITY IN OUR PHOSPHATE SALES PRODUCT MIX
nitrogen plants and shutting down some phosphate production. In potash, we took more inventory control shutdowns, using the downtime at our Allan mine for a major shaft maintenance project. We continue to look at ways to reduce spending, and have made this goal part of our permanent approach to business. Our share price has not performed well this year, and it is small consolation that our peers suffered similar or greater declines, all as a result of the drop in fertilizer prices. Shareholders had long urged us to institute a share repurchase program, and we have begun a 5-percent buyback. By November 18, 2000, we plan to buy and cancel up to 2.7 million shares. We had bought 630,000 shares by December 31, 1999, at an average price of US$46.45. You asked us to take this step to strengthen the value of your PCS holdings, and we responded. A major highlight in 1999 was the increase in the Company's impressive collection of safety records, which gives all of us at PCS a real sense of pride and reaffirms our constant emphasis on safety. We expanded into the specialty fertilizer area with our purchase of Minera Yolanda in Chile, now called PCS Yumbes, which produces sodium nitrate and potassium nitrate. Late in the year, we signed a memo to purchase a feed phosphate plant in Brazil, and we continue to evaluate acquisition opportunities around the world. In February 2000, we sold our potash mine at Moab, Utah to Intrepid Oil & Gas, LLC of Denver, Colorado, but PCS will continue to market its potash. CHANGES IN MANAGEMENT Changes also took place in senior management. Chuck Childers, whose experience and wisdom guided PCS for its first decade and made it an industry leader, retired on June 30, and I was honored to be selected by the Board as the new CEO. Able support has been provided by the management team that is one of your Company's most valuable assets, though you won't find it on our balance sheet. I took up this position on July 1, and our team - .300 hitters and strong fielders, every one - immediately began the refocusing and cost-cutting demanded by the difficult fertilizer situation. We have begun to consolidate our US administrative operations into one office in Chicago, improving efficiency and effectiveness and ending management duplication. And we have taken steps towards our goal of having every task dealt with at the lowest possible level of the Company, to build the strongest group of managers possible throughout PotashCorp. We were saddened by the death in November of Denis Cote, a veteran member of our Board who made an important contribution to the Company over its formative years. We need to recognize the 4 7 YOUR COMPANY'S CONTINUING GOALS 1 REMAIN THE 2 CONTINUE TO 3 REINFORCE 4 BE THE LEADER AND THE OUTPERFORM OUR OUR UNIQUE INDUSTRY'S LOW-COST PREFERRED SUPPLIER PEER GROUP IN STRENGTHS THROUGH SUPPLIER IN THE WORLD SHAREHOLDER RETURN ACQUISITIONS FERTILIZER INDUSTRY 5 CONSTANTLY 6 TAKE SERIOUSLY 7 ESTABLISH EXPLICIT STRESS SAFETY AND OUR RESPONSIBILITIES GOVERNANCE PRACTICES CARE FOR THE TO OUR EMPLOYEES TO SAFEGUARD ENVIRONMENT AT AND OUR COMMUNITIES SHAREHOLDERS' OUR OPERATIONS INTERESTS
contributions of Jim Lardner, who retired at the 1999 annual meeting, and Paul Wise, who has announced that he will not seek re-election in 2000. Both joined the Board in 1989 and the Company has benefited from their valuable counsel. WHAT CAN YOU EXPECT IN 2000? We think 2000 will continue to offer challenges in fertilizer, though offshore potash sales should be solid. New capacity in both DAP and nitrogen will maintain pricing pressure on those businesses. Though the horizon shows few definite signs of improvement, things can change quickly in fertilizer. Capacity shutdowns, consolidation and rising grain prices have triggered a rebound in fertilizer earnings in the past, and we expect them to do so again. We assure you that PCS will use its many strengths wisely to deal with the situation. We continue to identify and support new fertilizer demand in developing nations, where the growth in consumption will come. In 2000, we will produce our first specialty fertilizers from our Chilean property, for crops that cannot use chloride-based products. Our operations will continue to develop and put to work the kind of new technologies that have made us a leader in potash mining automation. And one of our most important initiatives will be to keep growing our industrial and animal feed businesses, always more stable than fertilizer. My background in sales has taught me that customer service must be our No. 1 driver. We are working to enhance our established ability to meet customer demand in each of our nutrients with quality products in a timely fashion, with value-added products, services and relationships that will truly differentiate us from our competitors worldwide. We have reaffirmed our belief that excellent customer service is the best link to long-term shareholder value. Above, you can see our short-term and long-term goals for your Company. We expect to be held accountable to these goals, which we consider attainable. You will remember that when the bottom fell out of the market for potash, and then for other fertilizers, in the wake of perestroika and the collapse of the Soviet Union, your Company persevered and profited. We are determined to do so now and in the future, for the benefit of our shareholders, our customers, our employees and all who depend on PotashCorp. /s/ William J. Doyle - -------------------------------------- William J. Doyle President and Chief Executive Officer March 1, 2000 5 8 RELIABLE PRODUCTION 1 POTASH 2 PHOSPHATE 3 NITROGEN World Leadership Product Diversification Industrial Strength Million Tonnes Product Basis Percentage P205 Million Tonnes N (1999 Estimates) (North America) [CHART] [CHART] [CHART]
COMPARED TO ITS COMPETITORS, PCS HAS MORE EXCESS CAPACITY IN POTASH, MORE PRODUCT DIVERSIFICATION IN PHOSPHATE AND MORE INDUSTRIAL SALES IN NITROGEN. 6 9 PRODUCTION REPORT [PHOTO] PCS HAS 24% OF ANNUAL WORLD POTASH CAPACITY OF APPROXIMATELY 51 MILLION TONNES. PRODUCTION COSTS ($/tonne KCI) ITS ALREADY LOW PRODUCTION COSTS WILL ONLY GO LOWER AS PCS BRINGS ON ITS EXCESS POTASH CAPACITY. [CHART] PCS CAN MINE FOR 100 YEARS FROM ITS CURRENT SHAFTS. [PHOTO] POTASH At seven mines in Canada, six of which it owns and operates, PCS produces high-quality potash required by farmers around the world. With well over half of the world's excess capacity, it can increase production as markets grow, further reducing its already low costs per tonne. It makes more than half its annual sales offshore and is an important supplier to developing nations where demand for potash keeps growing. There is no substitute for this vital fertilizer. PCS produces about 20 grades to suit its many markets. Its agricultural product, guaranteed to have at least 60 percent K2O (95 percent KCl), is particularly important for corn, soybeans, rice, cotton, bananas and coffee, but all crops require potassium for ultimate growth, health and yield. At Yumbes, the new sodium nitrate mine it is developing in Chile, PotashCorp will produce specialty nutrients for use on chloride-sensitive crops. Sodium nitrate is used on cotton, sugar beets and other such specialty crops and, combined with potash into potassium nitrate, it benefits tobacco and high-value horticultural and greenhouse crops. PCS Yumbes will begin production in 2000. [Photo] POTASH PRODUCTION
1999 1998 -------------------------- ------------------- World 41.7 MILLION TONNES (EST.) 41.8 MILLION TONNES PCS 6.4 MILLION TONNES 7.0 MILLION TONNES PCS Share 15% 17%
PCS POTASH STRENGTHS 1 EXCESS CAPACITY 2 LEADING GLOBAL PLAYER 3 CAPABLE OF PRODUCING MORE POTASH THAN OTHER WORLD COMPANIES AT LOWER COST 7 10 HOW IS POTASH USED? PRODUCTS PRIMARY END USES FERTILIZER Agriculture INDUSTRIAL TV/computer screens, water softeners, soaps, perfumes, de-icers FEED SUPPLEMENTS Livestock and poultry
[PHOTO] POTASH FACT POTASH IS THE MAJOR SOURCE OF POTASSIUM, NEEDED BY PLANTS TO RAISE YIELDS AND FOOD VALUE, BUILD DISEASE RESISTANCE AND IMPROVE SHIPPING, HANDLING AND STORAGE QUALITIES, AND BY ANIMALS TO HELP GROWTH, MAINTENANCE AND MILK PRODUCTION. 1999 IN REVIEW Entering 1999 with its inventories high, and faced with weak North American demand but solid world demand and more Russian product on the market, PCS adhered to its strategy of matching production to demand and produced 9 percent less potash than in 1998. Its production was 6.388 million tonnes, and its mines operated at 52 percent of capacity with a combined 58 weeks of shutdown time, almost twice the 1998 number. This increased production costs, but lowered inventories going into 2000. Allan extended the shutdown period to replace a section of concrete shaft lining with ductile iron tubbing backed by 408 tonnes of high-strength grout. PotashCorp agreed in February 2000 to sell its only potash mine in the United States, at Moab, Utah, to Intrepid Oil & Gas, LLC of Denver, Colorado, but will continue marketing its potash. In addition to potash, Moab and New Brunswick produced 0.812 million tonnes of sodium chloride (salt), used to de-ice winter roads and make various products. Cory and Patience Lake set productivity records. [PHOTO] Caption: ONE BANANA PROVIDES A PERSON'S ENTIRE DAILY NEED FOR POTASSIUM, WHICH IS ESSENTIAL FOR HEALTHY FUNCTIONING OF THE NERVOUS SYSTEM AND BOOSTS ENERGY. POTASH NUTRIENTS IMPROVE THE BENEFITS BANANAS PROVIDE TO PEOPLE. 1999 PRODUCTION (million tonnes KCl)
ANNUAL CAPACITY 1999 PRODUCTION 1998 PRODUCTION MINE SITE EMPLOYEES --------------- --------------- --------------- ------------------- (active) Lanigan SK 3.828 1.594 1.656 330 Rocanville SK 2.295 1.709 1.882 320 Allan SK 1.885 .676 1.142 271 Cory SK 1.361 .674 .676 152 Patience Lake SK 1.033 .260 .254 64 Esterhazy SK1 .951 .726 .543 2 New Brunswick .785 .693 .783 322 Moab UT .059 .056 .059 49 ------ ----- ----- ----- TOTAL 12.197 6.388 6.995 1,510
1 Production at Esterhazy is mined from PCS reserves by International Minerals and Chemical (Canada) Limited Partnership under a long-term agreement. For calendar year 2000, the PCS allocation is 0.726 million tonnes. 8 11 [PHOTO] PCS HAS AN ESTIMATED 60% OF WORLD EXCESS POTASH CAPACITY. PCS IS THE POTASH LEADER IN SASKATCHEWAN, WHICH HAS RESERVES FOR ABOUT 1000 YEARS OF PRODUCTION. IF IT USED ALL ITS CAPACITY, PCS COULD SUPPLY 30% OF ANNUAL WORLD POTASH CONSUMPTION. [PHOTO] POTASH FACT [PHOTO] POTASH IS MINED FROM ORE DEEP UNDERGROUND OR EXTRACTED FROM BRINE, AND MILLED ON THE SURFACE. POTASH FACT POTASH PRODUCTION COSTS ARE AFFECTED BY: ORE THICKNESS, CONSISTENCY AND CONTINUITY; ORE DEPTH, GEOLOGICAL CONDITIONS AND K2O GRADE; MILL RECOVERY ACHIEVABLE, OPERATIONAL CAPACITY, DEGREE OF AUTOMATION. PCS Cassidy Lake in New Brunswick has an annual milling capacity of 1.3 million tonnes and a compaction capacity of 1.0 million tonnes of granular product. In 1999, its 31 employees upgraded and compacted 0.197 million tonnes of standard potash from Rocanville for markets in the eastern US and Canada. A small brine inflow continued at PCS New Brunswick throughout 1999, controlled at 400 gallons per minute. A grout curtain wall is being constructed above the mine to seal off the inflow. Potash production was maintained without interruption during the year. PCS PHOSPHATE STRENGTHS 1 DIVERSIFIED AND LOW-COST PRODUCTION 2 LONG-TERM ROCK RESERVES PHOSPHATE From the high-quality phosphoric acid produced at its three US phosphate facilities, PotashCorp makes solid and liquid fertilizers, industrial phosphoric acid and feed supplements for livestock and poultry. Great flexibility enables it to switch production among products to maximize its margins. Together, its phosphate facilities at Aurora, North Carolina, White Springs, Florida and Geismar, Louisiana make PCS one of the world's lowest-cost P2O5 producers. Abundant, high-quality phosphate rock reserves at Aurora and White Springs mean its average costs will decline while competitors pay to transport lower-quality rock to their plants. PCS has multi-year permits to draw on its reserves. Among its unique strengths in phosphate, PCS produces purer acid than its competitors to upgrade into high-quality industrial acid. Its production of superphosphoric acid at all three locations makes it the world's leading supplier of this fertilizer intermediate geared to the conservation tillage systems increasingly popular with North American farmers. At six plants strategically located across the United States, it produces the feed products Dical and Monocal for swine and cattle, primarily, and DFP for poultry. Its use of black SPA from White Springs lowered the cost position and increased the capacity of its feed plants, enabling it to easily grow its feed business. The convenience to tidewater that has made Aurora the Company's main phosphate export location also benefits transportation logistics. 1999 IN REVIEW Demand for phosphate fertilizers fell in 1999 and, in response, PCS cut its production of phosphoric acid at Aurora and Geismar in the third quarter and curtailed 18 percent of capacity at White Springs. Its total production of 2.124 million tonnes P2O5 was 10 percent lower than in 1998, and represents 85 percent of total capacity at the three facilities. In a year of lower domestic demand for the major solid fertilizer DAP, the phosphoric acid curtailment at White Springs was the equivalent of 22 percent of PotashCorp's DAP capacity. Total 1999 DAP production was 1.737 million tonnes, 10 percent less than in 1998. Production of the liquids MGA 9 12 and SPA was also down, by 8 percent and 6 percent respectively, and 81 percent and 67 percent of their capacity was used. [PHOTO] PCS, THE WORLD'S LARGEST MANUFACTURER OF PHOSPHATE FEED SUPPLEMENTS FOR LIVESTOCK AND POULTRY, HAS NEARLY 50% OF US CAPACITY. POTASHCORP IS ONE OF THE LOWEST-COST P2O5 PRODUCERS IN THE WORLD. PHOSPHATE ROCK COSTS $/MT PCS AVERAGE ROCK COSTS WILL BE STEADILY LESS THAN THE INCREASING COSTS OF ITS LARGE FLORIDA COMPETITORS. [CHART] SOURCE: TFI, CRU, PCS PHOSPHATE FACT PHOSPHATE IS FOUND IN UNDERGROUND ORE DEPOSITS WHICH YIELD PHOSPHATE ROCK TO MAKE PHOSPHORIC ACID, FEEDSTOCK FOR OTHER PRODUCTS. Aurora surmounted unique challenges in 1999. It was hit by four hurricanes, resulting in substantial downtime and close to $1 million in damage. Mining the western edge of its ore deposit presented difficult conditions and produced less ore, raising costs significantly. Mining of this difficult ore body is almost completed and the first steps were taken in 1999 to develop the NCPC property, Aurora's most attractive phosphate rock reserve. Beginning in 2001, it will provide the lowest-cost rock in North America, with the first production occurring late in 2000. White Springs had record production of phosphate rock in 1999. Its Swift Creek plant continued to operate as a single product producer of black SPA, confirming its position as one of the lowest-cost plants in the industry. It produced 12 percent more P2O5 and 5 percent more black SPA, setting an annual SPA record, while cutting production costs of black SPA. Significant freight savings were achieved on inbound sulphur and all outbound products after the Lake City Transload Facility started up in July, providing access to the CSX railroad from White Springs. The facility is designed to transload 0.310 million tonnes of sulphur per year from rail to truck, and the same amount of superphosphoric acid from truck to rail. PHOSPHATE FACT PHOSPHATE IS THE MAJOR SOURCE OF PHOSPHORUS, THE ENERGIZER OF PLANT PRODUCTION, CRUCIAL TO PHOTOSYNTHESIS AND REPRODUCTION AND OTHER YIELD-DEVELOPING PROCESSES, AND NEEDED BY ANIMALS FOR GENERAL NUTRITION AND NORMAL BODY GROWTH, MAINTENANCE AND REPAIR. [PHOTO] 10 13
PRODUCTS PRIMARY END USES HOW IS PHOSPHATE USED? MGA Feedstock for other phosphate products DAP Agriculture SPA, LOMAG, POLY-N Liquid fertilizers, feed, industrial products FEED SUPPLEMENTS Livestock and poultry INDUSTRIAL ACID Soft drinks, food products, industrial detergents, metal treating, water treatment
[PHOTO] With the idling of the PCS export terminal at Jacksonville, Florida, White Springs now exports through the port facility at Morehead City, North Carolina used by Aurora. This consolidation helped reduce distribution costs and improve services. PHOSPHATE FEED PRODUCTION The world's largest manufacturer of phosphate feed supplements for livestock and poultry, PotashCorp produced 0.709 million tonnes of Dical, Monocal and DFP in 1999, nearly 40 percent of total US feed phosphate production. Company production was down 3 percent from 1998. Weeping Water, Kinston, Marseilles, Davenport and one White Springs facility produced Dical and Monocal. DFP was produced at White Springs and at Saltville, until the latter was permanently closed on September 1. Saltville had consistently higher production costs than the White Springs DFP plant, where a new product processing method increased recovery by 3 to 5 percent. 1999 ROCK AND ACID PRODUCTION
PHOSPHATE ROCK (million tonnes) PHOSPHORIC ACID (million tonnes P2O5) ---------------------------------- --------------------------------------------------- ANNUAL 1999 1998 ANNUAL 1999 1998 EMPLOYEES CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION (active) -------- ---------- ---------- -------- ---------- ---------- --------- Aurora NC 6.0 4.451 4.738 1.202 1.070 1.193 1,193 White Springs FL 3.6 3.594 3.393 1.093 .858 .956 1,047 Geismar LA - - - .202 .196 .214 45 --- ----- ----- ----- ----- ----- ----- TOTAL 9.6 8.045 8.131 2.497 2.124 2.363 2,285
1999 PHOSPHATE PRODUCTION (million tonnes product)
AURORA WHITE SPRINGS GEISMAR -------------------------------- -------------------------------- ---------------------------------- ANNUAL 1999 1998 ANNUAL 1999 1998 ANNUAL 1999 1998 CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- Liquids: MGA1 1.835 1.607 1.789 1.908 1.343 1.456 .337 .356 .357 SPA .676 .398 .437 1.138 .815 .822 .196 .134 .180 Solids DAP 1.247 1.152 1.225 .710 .585 .700 - - -
1 A substantial portion is consumed internally in the production of downstream products. The balance is exported to phosphate fertilizer producers and sold domestically to dealers that custom-mix liquid fertilizer. 1999 PHOSPHATE FEED PRODUCTION (million tonnes)
ANNUAL CAPACITY 1999 PRODUCTION 1998 PRODUCTION EMPLOYEES --------------- --------------- --------------- --------- (active) Davenport IA .280 .088 .094 25 Marseilles IL .278 .164 .175 36 White Springs FL (D/M) .218 .122 .096 24 Weeping Water NE .209 .149 .154 42 Kinston NC .141 .066 .059 21 White Springs FL (DFP) .100 .079 .086 41 Saltville VA* .078 .041 .068 4 ----- ---- ---- --- TOTAL 1.304 .709 .732 193
* Ceased production August 31, 1999. 11 14 PHOSPHORIC ACID PRODUCTION
1999 1998 World 28.2 MILLION TONNES P2O5 (EST.) 27.9 MILLION TONNES P2O5 PCS 2.1 MILLION TONNES P2O5 2.4 MILLION TONNES P2O5 PCS Share 7% 9%
[PHOTO] PCS built a potash storage dome at the Marseilles feed plant, which receives unit trains of potash for loading into trucks for shipment to customers. The dome is the first phase of a warehousing complex that could ultimately offer all three nutrients and produce cost-saving synergies by reducing overall distribution costs. PURIFIED ACID The purified acid plant at Aurora produced 0.117 million tonnes P2O5 for industrial use, operating at 87 percent of its rated capacity of 0.135 million tonnes. PHOSPHATE FACT: PHOSPHATE ROCK PRODUCTION COSTS ARE AFFECTED BY ORE THICKNESS, CONSISTENCY AND CONTINUITY, DEPTH, GEOLOGICAL CONDITIONS AND CONCENTRATION RATIO (TONNES OF ORE REMOVED PER TONNE OF PHOSPHATE ROCK). PCS NITROGEN STRENGTHS 1 LARGE PERCENTAGE OF INDUSTRIAL SALES 2 AMMONIA PRODUCTION IN TRINIDAD WITH LOWER-COST GAS NITROGEN At four plants in the United States and a large complex in Trinidad, PCS makes upgraded nitrogen products for agriculture and industry. The most diversified producer, it makes all the nitrogen fertilizers plus industrial products used in the manufacture of essential and familiar products for home, car, building and pharmaceuticals. Its micro prilled urea is used as a supplement to help build protein in beef and dairy cattle, and in horticulture. Competitive production of nitrogen products depends on adequate supplies of natural gas. PotashCorp has the advantage of producing much of its ammonia at low cost in Trinidad, where the natural gas price is indexed to ammonia prices in the Caribbean; this will become increasingly important as gas prices rise elsewhere. For its US production, it purchases half its natural gas at fixed prices and half from the market, often at reduced prices due to its hedging practice. Florida DAP producers buy much of the PCS ammonia produced in Trinidad. Half its US production goes to industrial 12 15 [PHOTO] PCS DIVIDES ITS NITROGEN PRODUCTION ALMOST 50-50 BETWEEN AGRICULTURE AND INDUSTRY. WESTERN HEMISPHERE MAJOR AMMONIA PRODUCERS (Million Tonnes Ammonia) HALF OF THE PCS AMMONIA CAPACITY IS IN TRINIDAD, WHERE IT BENEFITS FROM LOW-COST NATURAL GAS. [GRAPH] PCS BENEFITS FROM ITS STRATEGIC PLANT LOCATIONS IN THE US, WHICH HAVE A $25 PER TONNE TRANSPORTATION ADVANTAGE OVER GULF COAST COMPETITORS.
AMMONIA PRODUCTION 1999 1998 World 131.3 MILLION TONNES (EST.) 126.7 MILLION TONNES PCS 3.8 MILLION TONNES 3.8 MILLION TONNES PCS Share 3% 3%
customers as ammonia or upgraded products, and it can use 38 percent of the remaining ammonia for its own DAP production. Its agricultural nitrogen business benefits from strategic plant locations in the US Midwest, close to customers and profiting from a positive price differential with the Gulf. 1999 IN REVIEW With continued pressure on world nitrogen prices, PotashCorp produced more of its ammonia - the raw material for value-added nitrogen products - at its low-cost Trinidad plants and closed two high-cost plants in the United States. Operating at 93 percent of capacity, the highly efficient Trinidad plants produced 45 percent of the Company's 3.827 million tonnes of ammonia, up from 37 percent in 1998. In total, PCS produced slightly more ammonia than in 1998, using 89 percent of capacity. With its new Train 5 nitric acid plant on stream, Geismar produced record volumes of that product earmarked for industrial production. Augusta had record production of nitric acid and ammonium nitrate, and Lima set a record for urea. Production at Clinton and LaPlatte ceased on August 12, following a thorough review of current and future market conditions which convinced the Company that neither plant could be operated competitively. On December 31, Trinidad's 01 and 02 ammonia plants were shut down by the Company following expiration of its natural gas supply contract. Two years of negotiations with the National Gas Company of Trinidad were unable to secure a new agreement. These two plants represent about half the Company's total Trinidad ammonia capacity. Negotiations are continuing. NITROGEN FACT: NITROGEN IS REQUIRED BY EVERY LIVING CELL AND IS PART OF THE GENETIC BLUEPRINTS RNA AND DNA. [PHOTO] CAPTION: LESS THAN 5 PERCENT OF THE NITROGEN THAT FERTILIZES SOILS COMES FROM LIGHTNING FLASHING THROUGH MOIST AIR; WORLD FOOD PRODUCTION DEPENDS ON MANUFACTURED NITROGEN. 13 16 \
PRODUCTS PRIMARY END USES -------- ---------------- HOW IS AMMONIA Fertilizer for agriculture; feedstock for industrial and other nitrogen products NITROGEN UREA Agriculture, pharmaceuticals, plastics, resins, adhesives, dyes, pool chemicals, USED? humulin for diabetics; feed supplements for livestock NITRIC ACID Carpets, photography, batteries, lacquers and paints, tires, ammonium nitrate AMMONIUM NITRATE Agriculture, explosives for mining, construction and road work NITROGEN SOLUTIONS Agriculture
[PHOTO] INDUSTRIAL PRODUCTION Many PCS products have widespread industrial uses. More than 73 percent of ammonia produced and sold by the Company in the US in 1999 went to industry, along with 67 percent of urea, 70 percent of ammonium nitrate and all nitric acid. PotashCorp also produced 0.109 million tonnes of micro prilled urea for feed and industrial purposes at Memphis, 18 percent more than in 1998. NITROGEN FACT: NITROGEN PRODUCTS ARE MANUFACTURED FROM FEEDSTOCK AMMONIA SYNTHESIZED FROM NATURAL GAS, STEAM AND AIR; AMMONIA IS ALSO THE MOST CONCENTRATED NITROGEN FERTILIZER. UREA IS THE MAJOR FERTILIZER SOURCE OF NITROGEN. SOLID FERTILIZER AMMONIUM NITRATE IS MADE FROM NITRIC ACID. LIQUID FORMS OF UREA AND AMMONIUM NITRATE ARE COMBINED INTO NITROGEN SOLUTIONS. 1999 PRODUCTION (million tonnes)
AMMONIA 1 NITRIC ACID 1 2 UREA SOLIDS -------------------------------- -------------------------------- -------------------------------- ANNUAL 1999 1998 ANNUAL 1999 1998 ANNUAL 1999 1998 CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION -------- ---------- ---------- -------- ---------- ---------- -------- ---------- ---------- Trinidad 1.833 1.705 1.399 - - - .602 .589 .512 Augusta GA .653 .651 .666 .522 .512 .511 .363 .335 .348 Lima OH .542 .550 .481 .097 .098 .103 .370 .327 .260 Geismar LA .483 .396 .473 .844 .566 .517 - - - Memphis TN .371 .325 .373 - - - .409 .354 .395 Clinton IA4 .238 .107 .226 .126 .038 .122 - - - LaPlatte NE4 .182 .093 .188 .178 .059 .158 - - - ----- ----- ----- ----- ----- ----- ----- ----- ----- TOTAL 4.302 3.827 3.806 1.767* 1.273 1.411* 1.744 1.605 1.515
AMMONIUM NITRATE SOLIDS NITROGEN SOLUTIONS 3 - -------------------------------- ------------------------------------------- ANNUAL 1999 1998 ANNUAL 1999 1998 EMPLOYEES CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION (ACTIVE) - -------- ---------- ---------- -------- ---------- ---------- --------- - - - - - - 376 .442 .412 .410 .581 .403 .467 125 - - - .227 .131 .157 45 - - - 1.028 .695 .955 144 - - - - - - 137 .079 .030 .078 .163 .026 .081 29 - - - .436 .163 .436 33 ---- ---- ---- ----- ----- ----- --- .521 .442 .488 2.435* 1.418 2.096* 848 6
* Totals do not include the Wilmington NC plant which closed in June 1998. 1 A substantial portion of ammonia and nitric acid is upgraded to other products. 2 HNO3 tonnes. 3 Capacity and production are based on 32% N content. 4 Ceased production August 12, 1999. 5 BP Chemicals operates the Lima facility under an operational agreement with PCS Nitrogen. 6 460 contract employees work at the nitrogen plants, for a total active workforce of 1,308. [PHOTO] NITROGEN FACT: NITROGEN IS NEEDED BY ANIMALS FOR PROPER NUTRITION AND MATURATION, AND IS THE FUNDAMENTAL BUILDING BLOCK OF PLANT PROTEINS, IMPROVING YIELD AND QUALITY. [PHOTO] CAPTION: QUALITY AND CHOICE IN PAINTS HAVE ENCOURAGED THEIR WIDESPREAD USE IN HOME DECORATING. UPGRADED NITROGEN PRODUCTS ARE NEEDED IN PAINT PRODUCTION. 14 17 RESPONSIVE SALES
1 POTASH 2 PHOSPHATE 3 NITROGEN RISING SALES STABLE NON-FERTILIZER PRICES INDUSTRIAL GROWTH PCS REVENUE $ MILLIONS $/MT PERCENTAGE OF PCS VOLUMES [CHART] [CHART] [CHART]
INCREASING WORLD DEMAND IN POTASH, INCREASING SALES IN THE MORE STABLE PHOSPHATE PRODUCTS AND INCREASING INDUSTRIAL SALES IN NITROGEN WILL CONTRIBUTE TO THE POTASHCORP SUCCESS. 15 18 SALES REPORT [PHOTO] WORLD POPULATION, RISING BY 75 MILLION A YEAR, REACHED 6 BILLION IN OCTOBER 1999, AND AN EXTRA 20 MILLION TONNES OF GRAIN ARE NEEDED ANNUALLY TO FEED IT. [PHOTO] ALMOST 75% OF CHINA'S CULTIVATED FARMLAND IS DEFICIENT IN PHOSPHORUS, AND IT NEEDS TO USE 2 TIMES AS MUCH POTASH TO GET BALANCED NUTRITION IN ITS SOILS. PCS HAS 6 TIMES AS MANY FERTILIZER CUSTOMERS AS WHEN IT PRODUCED ONLY POTASH. [PHOTO] In 1999, the world's farmers again used more fertilizer, and total sales of nitrogen, phosphate and potash exceeded 1998 levels by approximately 2 percent. Asia, which consumes large quantities of fertilizer, recovered impressively from its economic problems, with almost the entire region enjoying economic growth. Domestic sales of all three fertilizers were down because low grain prices discouraged North American farmers from fertilizer inputs, but export demand pulled overall sales of nitrogen up by 3 percent, potash by 2 percent and phosphate by 1 percent. Through its efficient transportation network of railways, trucks, river barges and ocean-going bulk carriers, plus its strategically located warehouses, PCS served its 2,000 customers swiftly and smoothly. It is a reliable supplier able to provide the just-in-time delivery the markets want. A 1999 focus group of fertilizer dealers in the US Midwest rated PotashCorp the most trustworthy of the major fertilizer suppliers, and the most friendly, modern, helpful, prepared and on-time. Customers for PCS industrial products found it the most reliable of all industrial suppliers, noting its knowledge and expertise. PCS was the first fertilizer company to receive the Supplier of the Year award from The Scotts Company, the world's leading producer and marketer of products for the do-it-yourself lawn and garden business, professional turf business and horticulture industry. It is one of the Company's largest urea customers. The United States is the major fertilizer market for PCS. In 1999, the Company supplied about 30 percent of the potash used in this market, which is the world's largest consumer of potash. The US is also a big user of phosphate fertilizers and PCS has nearly one-fifth of the DAP market and about half the growing market for liquid fertilizers, as well as nearly 40 percent of the market for phosphate feed products for livestock and poultry. PCS is a significant supplier of ammonia and urea used in agriculture and industry in the US, which is a major producer and consumer in both areas. It had approximately 30 percent of the US industrial nitrogen market and one-sixth of the total North American nitrogen market. PCS is an important supplier of potash and phosphate to offshore markets. The majority of its offshore potash sales are PCS MARKET STRENGTHS 1 MULTIPLE PRODUCT LOCATIONS 2 EFFICIENT TRANSPORTATION NETWORK 3 ONE-STOP SHOPPING CONVENIENCE MARKET FACT: THE UNITED STATES: MATURE MARKET WITH RELATIVELY STABLE ANNUAL CONSUMPTION AFFECTED MAINLY BY ACREAGE PLANTED AND APPLICATION RATES PER ACRE. 16 19 handled by Canpotex, the export sales agency for Saskatchewan producers. PhosChem, an association for US exports of phosphate fertilizers, is responsible for the Company's offshore phosphate sales. PCS Sales handles liquid phosphate exports for PhosChem, plus offshore sales of the Company's New Brunswick potash and Mississippi Chemical's potash from New Mexico, and all sales of PCS nitrogen products. MARKET FACT: CHINA: WORLD'S LARGEST CONSUMER OF FERTILIZER, A MAJOR POTASH AND PHOSPHATE IMPORTER EVOLVING FROM CENTRALIZED PURCHASING TO A MULTIPLE CUSTOMER SYSTEM. [PHOTO] MARKET FACT: INDIA: IMPORTANT POTASH, PHOSPHATE AND UREA MARKET WHERE PURCHASES ARE AFFECTED BY SUBSIDY LEVELS. The major offshore fertilizer markets are China, Brazil and India. [PHOTO] MARKET FACT: BRAZIL: LARGEST AGRICULTURAL PRODUCER IN LATIN AMERICA, APPLIES FERTILIZER TO CASH CROPS IT GROWS FOR EXPORT, PARTICULARLY SOYBEANS, COFFEE AND SUGAR CANE. China, with limited arable land to feed 22 percent of world population, is relying on the use of more fertilizer. Its potash consumption has risen by an average of 9 percent a year over the last decade, and PCS is a major supplier. China is the world's largest DAP importer, and PhosChem supplies about 60 percent of its imports. China was the world's largest importer of urea until 1997, when it suddenly halted imports, affecting markets for both ammonia and urea. As the largest country and the largest agricultural producer in South America, Brazil is a major potash consumer and an important market for PotashCorp. It is the largest single market for product from the Company's New Brunswick facility, which is ideally located to serve Latin America and Europe. India is not usually a major potash market for PCS, but its purchases support prices and absorb tonnage that would otherwise compete with the Company's potash. India is a leading phosphate importer, getting most of its DAP from the US and its MGA from Morocco. It buys DAP, or it buys MGA to make DAP, depending on price. [PHOTO] CAPTION: 400 BILLION CUPS OF COFFEE ARE ENJOYED EVERY YEAR AROUND THE WORLD, AND 35 PERCENT OF THAT COFFEE IS GROWN IN BRAZIL, A MAJOR POTASH IMPORTER. 17 20 [PHOTO] CHINA'S FOREIGN EXCHANGE RESERVES ARE AROUND $155 BILLION, AND RESERVES AND FERTILIZER IMPORTS USUALLY TRACK EACH OTHER. POTASH FERTILIZER CONSUMPTION IN LATIN AMERICA MILLION TONNES K2O COUNTRIES IN LATIN AMERICA ARE SHARPLY INCREASING THEIR USE OF POTASH. [GRAPH] SOURCE: FAO, IFA, FERTECON 1/3 OF US CROP YIELD IS DUE TO APPLICATION OF FERTILIZER. [PHOTO] 1999 SALES POTASH World demand for potash grew by an estimated 2 percent in 1999, but high inventories and weak domestic demand early in the year encouraged much of the industry to institute plant shutdowns, easing supply and sustaining prices. No new supply came on stream. World sales are estimated at 41.5 million tonnes, and PCS sold almost 16 percent of that, 6.474 million tonnes split 56-44 percent offshore and domestic. Total sales were 3 percent higher than in 1998 and just 2 percent below the 1997 record. DOMESTIC In 1999, PotashCorp sold 2.871 million tonnes of potash domestically, meeting 31 percent of North American demand. This was 6 percent higher than in 1998 and within 5 percent of the 1997 record; it includes 0.261 million tonnes from the Cassidy Lake mill in New Brunswick. The United States market took 90 percent of PCS domestic sales, with large agricultural co-ops and national firms the major customers. First-quarter sales topped 1998 by 13 percent, setting a new first-quarter record. Second-quarter sales volumes were 11 percent higher than in 1998. Third-quarter sales were down, but fourth-quarter sales rose significantly with good fall application. Domestic prices in the first half were the strongest in more than a decade, though an increase planned for March did not go through. Prices fell back sharply in the third quarter, reflecting aggressive selling by a competitor, but increases took effect in November. [PHOTO] Caption: RICE IS THE STAPLE FOOD OF HALF THE WORLD'S POPULATION, AND USES 13 PERCENT OF MINERAL FERTILIZERS CONSUMED WORLDWIDE. 18 21 [PHOTO] Caption: OIL PALM, WIDELY GROWN IN SOUTHEAST ASIA AND A MAJOR POTASH USER, PRODUCES 22 PERCENT OF THE WORLD'S VEGETABLE OIL, FOR FOOD, FEEDSTUFFS AND INDUSTRIAL USES. WORLD FERTILIZER TRADE MORE THAN 150 COUNTRIES USE POTASH BUT THERE ARE ONLY 7 MAJOR PRODUCERS; NEARLY 80 PERCENT OF WORLD PRODUCTION MOVES ACROSS BORDERS. OFFSHORE Export markets bought 3.603 million tonnes of PCS potash in 1999, 1 percent more than in 1998 and almost equal to 1997. The Company's biggest markets were again China, which purchased 24 percent of total offshore sales by PotashCorp, and Brazil, which made a powerful comeback after a slow start. The emerging markets of Thailand and Vietnam were strong, and Indonesia increased its imports after cutting back for financial reasons; together these three markets took 10 percent of total sales. Canpotex set a sales record of 5.30 million tonnes; much of that success was due to continued strong sales to improving economies in Southeast Asia, particularly South Korea, Indonesia and the Philippines. Malaysia, Thailand and Vietnam were solid purchasers. Though India is not usually a major market for Canadian potash, it bought 0.25 million tonnes from Canpotex in 1999. Sales to China were maintained at 1.56 million tonnes despite Former Soviet Union (FSU) competition, amounting to 29 percent of all potash sold by Canpotex. The export agency ended the year by announcing the biggest single potash sale in Canadian history, 1.60 million tonnes to China to be delivered in the first half of 2000. It means that Canpotex sales to China in the first six months of 2000 will equal or slightly exceed the previous annual record. Despite credit and financial problems in the first half of 1999 after its currency, the real, was devalued in January, Brazil bought 9 percent of the potash sold by Canpotex. It was the single biggest market for PCS product from New Brunswick, taking 0.406 million tonnes, or 58 percent of the division's total sales. Price increases were achieved with China, Japan, South Korea and Australia for the first half of 1999, but Canpotex was unable to negotiate higher prices in the second half. Increases in Malaysia finally brought prices there into line with other markets in Southeast Asia. NON-FERTILIZER More than 7 percent of 1999 potash sales were industrial, sold to customers who refine it further or use it for manufacture of other products. At 0.471 million tonnes, sales were 7 percent higher than in 1998; two-thirds went offshore, where Japan, South Korea and China are important customers. Prices were up by 1 percent. A small amount of PCS potash is sold for animal feed supplements, 0.034 million tonnes in 1999, 24 percent more than the previous year. All non-fertilizer sales are included in domestic and offshore totals. [PHOTO] Caption: NEARLY 3 MILLION TONNES OF COCOA BEANS ARE GROWN EACH YEAR WITH SUBSTANTIAL APPLICATION OF POTASH AND NITROGEN FERTILIZERS, AND ONE-QUARTER OF THOSE ARE USED TO MAKE CHOCOLATES AND CONFECTIONERIES. 19 22 [PHOTO] Caption: ORANGE TREES FERTILIZED WITH PHOSPHATE HAVE SWEETER AND JUICIER FRUIT. PHOSPHATES World demand for phosphates, particularly fertilizers, climbed in 1999, despite sharply-reduced demand in the United States due to weather and low grain prices. World trade in phosphate fertilizers increased by more than 1 percent, on top of 2 percent the previous year. The solid fertilizer DAP was the phosphate fertilizer of choice, despite lower US demand. World DAP production and consumption rose by about 6 percent, double the 1998 increase. India was a major importer, taking 70 percent more DAP than in 1998, and China imported about 5.1 million tonnes. World MGA production and consumption rose by more than 1 percent. Again, India was the largest single importer of MGA, which it uses to make DAP, and its purchases in 1999 amounted to more than half of international trade. The second largest importer was Western Europe, with 30 percent of international trade; most is used to produce upgraded fertilizer products. In 1999, PotashCorp sold 4.016 million tonnes of phosphate products, 13 percent below its 1998 record. Two-thirds of sales were domestic, amounting to 22 percent of North American phosphate sales, including one-third of all non-fertilizer phosphate sales. [PHOTO] Caption: THE INCREASING NUMBER OF PETS WORLDWIDE CAN RELY ON PCS ANIMAL FEED SUPPLEMENTS FOR GOOD NUTRITION. PHOSPHATE PRODUCTS Two-thirds of the solid and liquid phosphates sold by PCS went into fertilizers. Feed supplements for livestock and poultry made up 22 percent, and industrial and purified product comprised the remainder. The Company's decision to reduce its phosphate production resulted in lower sales of solid and liquid phosphates. WORLD FERTILIZER TRADE ABOUT 60 COUNTRIES PRODUCE PHOSPHATE PRODUCTS, AND NEARLY 40 PERCENT OF WORLD PRODUCTION IS TRADED. SOLID PHOSPHATES: DAP is the most significant solid phosphate fertilizer, and in 1999 PCS sold 1.673 million tonnes, 15 percent below 1998. More than half went offshore through PhosChem, whose DAP sales approximately equalled the 4.91 million tonnes of 1998. PCS supplied nearly one-fifth of that total, but the Company's offshore sales were down 17 percent due to its decision in March to stress domestic sales and a decline in fourth-quarter purchases by China. Nonetheless, China was by far the Company's largest purchaser; India was second. Pakistan and New Zealand were other major purchasers. After a strong first quarter, offshore prices declined. Domestic sales totalled 0.775 million tonnes, 46 percent of total DAP sales and 12 percent below 1998 levels. Prices, strong in the first half, fell thereafter. LIQUID PHOSPHATES: Sales of liquid phosphates fell in 1999 to 1.261 million tonnes, 18 percent below the 1998 record. Domestic sales of 0.948 million tonnes made up 75 percent of the total. LoMag, a superphosphoric acid used in conservation tillage systems, was the major domestic product 20 23 [PHOTO] Caption: MORE THAN 30,000 TONNES OF PHOSPHORIC ACID ARE USED EACH YEAR TO MEET THE WORLD'S DEMAND FOR SOFT DRINKS. at 41 percent of liquid sales. Domestic prices were changeable but were highest in the first quarter. Offshore sales of 0.313 million tonnes were 27 percent less than in 1998; amber MGA was the major product. PCS sells liquids offshore through PhosChem, and supplied 81 percent of the association's sales of 0.39 million tonnes. India was the single biggest market, followed by Australia. Pricing was down throughout 1999. FEED SUPPLEMENTS: In 1999, PotashCorp sold 0.721 million tonnes of phosphate feed supplements, 4 percent less than in 1998. More than half was Monocal, with Dical comprising 24 percent, DFP 19 percent and MAP/DAP 2 percent. Domestic sales made up 82 percent. Offshore sales rose to 18 percent of the total. The first sales were made to Argentina, Bahamas, Jamaica, Panama and Paraguay, and sales to Brazil, Thailand and the Dominican Republic were up. Asian markets were stable, with some growth. Average prices fell 2 percent on a year-over-year basis. INDUSTRIAL PRODUCTS: In 1999, Aurora produced food-grade phosphoric acid and technical grade for industrial processes and products in a joint venture with Albright & Wilson. Product sales totalled 0.200 million tonnes. Geismar sold 0.161 million tonnes of phosphoric acid product under contract to Rhodia, Inc. as a feedstock for its adjacent food-grade acid purification plant. Sales volumes of all phosphates sold for industrial use were almost identical to 1998, and all sales were domestic. Average prices were flat on a year-over-year basis. WORLD FERTILIZER TRADE MORE THAN 75 COUNTRIES PRODUCE AMMONIA AND MOST USE THEIR PRODUCTION INTERNALLY, SO CROSS-BORDER TRADE IS LIMITED, AVERAGING ABOUT 11 PERCENT ANNUALLY. NITROGEN In 1999, the world nitrogen industry continued to be plagued by over-capacity which led to over-production and large inventories that depressed prices. By early summer, US producers instituted permanent and temporary shutdowns which cut production. At year-end, with normal producer inventories and low non-producer inventories, all non-permanent US curtailments had been rescinded. In these uncertain circumstances, world consumption of ammonia for agriculture and industry rose by 3 percent. It was up in Russia, India, China, Ukraine, Egypt, Indonesia, Pakistan and Central Europe, and down in the United States and Western Europe. Production rose in Russia (where Gazprom continued to provide producers with low-cost natural gas, a major input into ammonia production), India, Trinidad, China, Ukraine and Egypt, and fell in Western Europe and the US. World sales of nitrogen fertilizer products were up 3 percent, but sales in the United States were much like 1998. China remained out of the urea market, while increasing its domestic production. While the over-supply of ammonia had a detrimental effect on prices, PCS was aided by its industrial product sales. NITROGEN PRODUCTS In 1999, PCS sold 7.951 million tonnes of nitrogen products, manufactured and purchased; nearly 50 percent were non-fertilizer products. Total sales rose by 2 percent and domestic markets took 88 percent. Sales of manufactured product rose 3 percent, while resale of purchased product fell by 22 percent, continuing the 1998 decline. Most purchased product was ammonia bought from a Russian producer under contract. PCS decreased ammonia purchases from all sources by 12 percent, compared to 1998, by using its own ammonia. Sales of ammonia as fertilizer and as feedstock for other nitrogen products totalled 1.915 million tonnes, 28 percent more than in 1998. Ninety percent was domestic. 21 24 [PHOTO] Caption: PRODUCING 1 POUND OF BEEF REQUIRES 7 POUNDS OF GRAIN; PORK REQUIRES 4 POUNDS AND CHICKEN 2 POUNDS. AMMONIA FARM PRICE VS. LDAN PRICE [GRAPH] Caption: PRICES FOR LOW DENSITY AMMONIUM NITRATE, USED EXCLUSIVELY FOR INDUSTRIAL PURPOSES, ARE FAR MORE STABLE THAN AMMONIA PRICES. SOURCE: USDA, NASS, CRU Urea sales were up 13 percent, to 1.614 million tonnes. PotashCorp exported 17 percent of its urea, its largest export nitrogen product; all of that was from Trinidad. Since it shut down one-quarter of its nitrogen solutions capacity with closure of its LaPlatte and Clinton plants in August, PCS sold 22 percent less of this multi-purpose liquid fertilizer. Sales, all domestic, totalled 1.681 million tonnes. Sales of ammonium nitrate totalled 0.414 million tonnes, 11 percent less than in 1998, while at 0.647 million tonnes, nitric acid sales were up 55 percent. Other manufactured nitrogen products sold totalled 1.246 million tonnes. The large majority of these sales were domestic. Sales to industrial customers are found in the above product categories. These higher-margin sales are mostly domestic and totalled 3.766 million tonnes in 1999, up 11 percent. They include sales of carbon dioxide, now classified by the Company as an industrial product; 1998 figures have been adjusted accordingly. Industrial sales of ammonia represented 23 percent of the US industrial market for ammonia, sales of urea were 47 percent, ammonium nitrate 12 percent and nitric acid 41 percent. Also included in total 1999 sales were nitrogen feed sales of 0.097 million tonnes, a 30-percent increase over 1998. Ninety-four percent was urea prills and the rest urea solutions. Almost all sales were domestic. Average prices for ammonia and urea, the key internationally traded nitrogen products, were both down 20 percent from 1998 due to the continued effects of world over-capacity. Fertilizer prices were hardest hit, but moved up moderately with the seasonal demand peaks at spring and fall planting. Prices softened after the spring peak, and several world and US producers curtailed production. After strengthening during the fall season, prices maintained that position and ended the year close to their 1999 high. Industrial prices were less affected but also declined, from 12 percent for ammonium nitrate to 19 percent for urea. Feed prices strengthened toward the end of the year. [PHOTO] Caption: 60 YEARS AFTER SWIMMING WAS ACCEPTED INTO THE OLYMPICS, THE FIRST BUTTERFLY COMPETITION WAS HELD. NITROGEN AND POTASH ARE USED IN SWIMMING POOL CHEMICALS, WHILE PHOSPHATE IS IMPORTANT IN WATER TREATMENT. 22 25 WORLD FERTILIZER TRADE
2000 (FORECAST) 1999 (ESTIMATE) 1998 --------------- --------------- ---- POTASH 33.5 MILLION TONNES 32.6 MILLION TONNES 31.4 MILLION TONNES PHOSPHORIC ACID 4.4 MILLION TONNES P2O5 4.2 MILLION TONNES P2O5 4.2 MILLION TONNES P2O5 AMMONIA 14.4 MILLION TONNES 13.9 MILLION TONNES 13.9 MILLION TONNES
[PHOTO] Bottom Caption: TAIWAN, WITH ITS INTENSIVE AGRICULTURE, PRODUCES 5 CROPS A YEAR. REFLECTIONS on 2000 AND BEYOND The long-term fertilizer scenario is richly promising, for rising world population and economic growth push demand for food, which drives fertilizer demand. With its wealth of low-cost potash and phosphate reserves and its efficient nitrogen production, PCS is in an ideal position to provide that fertilizer. In potash and phosphate, particularly, its accessibility to markets, reliability and quality of product make it a supplier of choice to developing nations, the regions of rising population and food requirements, and the engines of growth in fertilizer demand. In the short term, uncertainty hangs over fertilizer. In 2000, the industry could begin to move out of the trough and start up the foothills as demand continues to rise, but in all three nutrients, supply is the crux. In potash, most excess capacity is in PotashCorp hands, and no major new capacity is planned in 2000. New phosphate and nitrogen production is scheduled to come on stream; its effect will depend on how much comes on and how quickly, and how efficiently the market restructures to deal with it. In concert with supply, world trade affects fertilizer prices. In 2000, trade in both potash and phosphoric acid is expected to continue to increase. Trade in DAP, the major phosphate fertilizer, may be below 1999 levels as new plants displace exports. In nitrogen, ammonia trade, which represents a small percentage of production, is expected to rise somewhat as new export supply comes on stream. Trade in the upgraded nitrogen product urea, which is easier to transport and traded extensively, is likely to continue the recovery begun in 1999 after two years of decline. Nitrogen consumption around the world continues to rise, but 5 million tonnes of new ammonia capacity is planned worldwide in 2000. This expansion is really a response to cheap natural gas, as many countries try to monetize their gas reserves. Plant shutdowns in the United States in 1999 temporarily eased over-capacity, but most of these plants are back up and running. For inefficient 30-year-old North American plants that use outdated technology and are too small to benefit from economies of scale, the gas price problem is a looming cloud. New capacity in South America is expected to come on stream in the second half of 2000, but Mexico has shut down much of its urea capacity and some ammonia plants, and could be a market for some of that new product. China has given no indication of plans to return to the urea market, although its inventories are down. It continues to support its costly local nitrogen production. Russian exports could be the wild card in nitrogen; Russia previously supplied urea to South America and Mexico and, displaced from those markets by new production, its producers may cut prices to reap other international sales. Only when world supply realigns with demand will nitrogen move sustainably into a profitable position. Phosphate faces a year of adjustment. Demand has risen steadily since 1993 and is expected to rise again. The shutdown of 2.8 million tonnes of North American DAP capacity in late 1999 helped the supply/demand situation, as will the expected 23 26 PROJECTED WORLD GROWTH IN CONSUMPTION
FERTILIZER MEAT INDUSTRIAL MILLION TONNES NUTRIENT MILLION TONNES MILLION TONNES NUTRIENT [GRAPH] [GRAPH] [GRAPH] SOURCE: FERTECON SOURCE: IFPRI SOURCE: FERTECON
OUTSIDE INDUSTRY CONSULTANTS PROJECT 3 PERCENT AVERAGE ANNUAL GROWTH IN FERTILIZER CONSUMPTION OVER THE NEXT FIVE YEARS, 4 PERCENT ANNUAL GROWTH IN INDUSTRIAL NITROGEN DEMAND, 2 PERCENT IN INDUSTRIAL PHOSPHATE AND 4 PERCENT IN FEED PRODUCTS. INDICATORS TO WATCH FERTILIZER o INDUSTRY CONSOLIDATION o CAPACITY SHUTDOWNS o CHANGES IN CORN PRICES o US ACREAGE PLANTED o FSU FERTILIZER EXPORTS o RATE AND TIMING OF CAPACITY ADDITIONS closure of some phosphoric acid capacity in Europe in 2000. Together with rising demand and expectations for production, these shutdowns should be sufficient to balance the new DAP production coming on stream in India, Australia and China. Offshore, China has worked to draw down its DAP inventories and proposes to import raw materials to make NPK fertilizer rather than import NPKs. Together with the new DAP production, this will make it hard for phosphate prices to climb substantially from their current low levels. On the flip side, if India's new Oswal plant does not begin production as planned - for greenfield plants often have start-up problems - a tighter DAP market with better prices could result. Just as in 1999, potash will likely outperform phosphate and nitrogen in 2000. Production shutdowns have occurred regularly for more than a decade, based on the premise that the market can absorb only so much potash. Such shutdowns result in lower inventories, while higher inventories have a downward effect on price. Offshore, the new Chinese potash contract could lead to an annual record, and Brazil's improved financial position is expected to support its imports. Potash prices are expected to be similar to 1999, driven by continued strong export demand that helps offset the competitive North American market. INDICATORS TO WATCH NON-FERTILIZER O GDP GROWTH IN THE UNITED STATES O ASIAN ECONOMIC GROWTH O GROWTH IN MEAT CONSUMPTION WORLDWIDE O US MEAT PRODUCTION In all three nutrients, domestic demand is likely to resemble 1999, although nitrogen imports could be up slightly. Farmers need to rebuild their soil nutrients but continue to face low grain prices. History shows that unexpected events can affect the fertilizer business. Perestroika turned the Former Soviet Union into a major fertilizer exporter, a situation that has lasted longer than most in the industry expected. Potash was hit first and hardest; more recently, DAP exports have increased. The problem is exacerbated in nitrogen by Russia continuing its non-market pricing. However, efforts by Gazprom to make a profit and rising transportation costs could be limiting factors in sustaining these exports. Such factors are impossible to predict, and underscore the determination of PotashCorp to continue building its industrial markets and its sales of animal feed supplements. Outside consultants forecast solid growth over the next five years in demand for industrial products, which receive a premium compared to fertilizer products. With world demand for poultry and dairy products surging, and the surprising demand for pet foods as pet ownership climbs around the world, demand for feed products should continue to rise. Forecasts suggest a small decline in meat production in the important US market in 2000, with declining beef and pork production offsetting rising poultry production. After 2000, outside consultants predict, US meat production will reach record highs, increasing demand for feed supplements. Pricing for non-fertilizer products should be supported by the healthy US economy and growing world demand. 24 27 RESPONSIBLE STEWARDSHIP ENVIRONMENTAL EXPENDITURES LONG-SERVICE AWARDS MILLION HOURS WORKED SAFELY $ MILLIONS NUMBER OF RECIPIENTS NUMBER OF AWARDS [GRAPH] [GRAPH] [GRAPH]
Caption: RISING ENVIRONMENTAL EXPENDITURES AND THE PRESENTATION OF MORE LONG- SERVICE AND SAFETY AWARDS DEMONSTRATE THE COMMITMENT OF PCS AND ITS EMPLOYEES TO THEIR CONTINUED WELL-BEING. 25 28 STEWARDSHIP 215 SCHOLARSHIPS FOR POST-SECONDARY STUDY HAVE BEEN AWARDED BY THE COMPANY IN THE LAST 5 YEARS TO THE SONS AND DAUGHTERS OF EMPLOYEES, INCLUDING 71 IN 1999. THERE WERE 74,436 USER SESSIONS ON THE PCS WEBSITE IN 1999, AVERAGING 17+ MINUTES. PCS FACT THE PCS PAYROLL WAS APPROXIMATELY $236 MILLION IN 1999. PCS FACT THE WIDESPREAD PCS WORKFORCE TOTALLED 5,498 AT DECEMBER 31, 1999, WITH 60 PERCENT IN THE UNITED STATES, 30 PERCENT IN CANADA, 7 PERCENT IN TRINIDAD AND 3 PERCENT IN CHILE. SUPPORTING ITS COMMUNITY PCS supports a wide range of causes in the communities in which it operates, and individual operations support their local communities with money and employee participation in many activities. Through its Matching Gift Program, the Company matches employees' personal donations to their favorite charities. The Company makes financial pledges to a wide range of Saskatoon agencies, particularly in education and health. Corporate office employees and those at many PCS divisions contribute significantly to their local United Way. In 1999, corporate head office, with Allan, Cory and Patience Lake, was the first recipient of the Saskatoon United Way's new Campaign Superstar Award, specially created for corporations donating more than CDN$25,000. Operations support charities from the Salvation Army (Aurora), the Memphis Zoo (Memphis), MainStreet Hamilton County (White Springs) to school programs (Augusta, Lima, Geismar), and many more. PCS Phosphate was a supporter sponsor of the 1999 Special Olympics World Summer Games in Raleigh, North Carolina. After Hurricane Floyd, employees at Aurora pitched into the recovery effort, volunteering in churches and relief centers and community fire and rescue departments, and with the Company donated to relief funds. White Springs partnered with Hamilton County in installing a "ring-down" emergency message system, and sold the county 29 acres for an industrial park at a nominal price. It donated 15 acres to the City of White Springs as the site for its new waste- water treatment plant. The Salvation Army and the American Cancer Society recognized Aurora employees with awards, and the Marseilles feed plant was recognized for its support of the local YMCA's "Partners in Youth" program. White Springs received a unique Florida MainStreet Award for outstanding support of the MainStreet program, and the Florida Commissioner of Education Business Recognition Award for supporting education in its three-county area. CORPORATE GOVERNANCE The Board of Directors of PCS is ultimately responsible for the governance and stewardship of the Company, with the goal of ensuring sustained growth in shareholder value. As PotashCorp has grown into an important national and international role in its industry, the Board has developed and widened its corporate governance practices to ensure they are open, effective and accountable. It accepts the responsibility of constantly reviewing, evaluating and, where necessary, altering its governance practices to keep them effective and pertinent and to fulfil its responsibility to protect shareholders and ensure they are treated equally and heard within the Company. In 1999, it reformulated its corporate governance committee with a mandate that includes the development of policies and procedures for maintaining confidence in the attention paid to the differing interests of the Company's stakeholders, and for ensuring effective director and executive performance. PCS FACT WHITE SPRINGS' SWIFT CREEK MINE IS RANKED 4TH IN SAFETY IN THE UNITED STATES, AND THE MINE SAFETY AND HEALTH ADMINISTRATION FILMED A SAFETY VIDEO AT WHITE SPRINGS. 26 29 Its responsibilities to shareholders require the Board to monitor the principal risks of the Company's business and operations. Each year, it reviews and approves management's strategic plan for the Company, its corporate budget and forecast and significant capital investments outside the budget and forecast. It also reviews management decisions that may significantly affect the Company and its employees or other stakeholders. It has developed and applies comprehensive accountability measures of the Company's performance, comparing it to peers within the industry. PCS FACT THE 10 SENIOR MANAGEMENT PERSONNEL AT PCS TOGETHER HAVE 197 YEARS OF EXPERIENCE IN FERTILIZER AND AGRICULTURE. Annually, the directors and management meet to review the Company's business results over the previous year and its plans and expectations for the coming year. All senior managers review the strategies they follow in their various sections of the Company, and report to the Board on strategic planning and risk management and control. The Board of Directors is made up of 14 members, 12 of whom are outside directors. No significant shareholders are represented. BOARD OF DIRECTORS ISABEL B. ANDERSON, of Calgary, Alberta, a former University of Saskatchewan economics professor and a specialist in international economics and Canadian public policy, is President and Chief Executive Officer of A&L Information Brokers. She joined the PCS Board in 1989. DOUGLAS J. BOURNE, of Houston, Texas, is former Chairman and CEO of Battle Mountain Gold Company and of Duval Corporation, the mining subsidiary of Pennzoil Company, and held many positions in various fertilizer and mining associations. He was elected to the PCS Board in 1990. CHARLES E. CHILDERS, of Tucson, Arizona, CEO of Potash Corporation of Saskatchewan from 1987 until his retirement June 30, 1999, joined its Board in 1989 and became Chairman in 1990. He has held many positions with fertilizer associations, including the presidency of the International Fertilizer Industry Association. WILLIAM J. DOYLE, President and CEO of Potash Corporation of Saskatchewan Inc., has served on the Board since 1989. He became President of PCS Sales in 1987, after a career with International Minerals and Chemical Corporation. Active in fertilizer industry associations, he was elected chairman of the Potash & Phosphate Institute in 1999. THE HONOURABLE WILLARD Z. ESTEY, Q.C., of Toronto, Ontario, is a former Chief Justice of Ontario and Justice of the Supreme Court of Canada and was named Companion, Order of Canada, in 1991. He is a director of Canwest Global Communications Corporation and CamVec Corporation. He joined the PCS board in 1990. DALLAS J. HOWE, of Calgary, Alberta, is President and CEO of Advanced DataSystems Ltd. and BDM Information Systems Group of Companies. President, CEO and founder of high technology information and data systems companies over 25 years, he served on the Board of the PCS Crown corporation from 1982 to 1989 and on the PCS Inc. Board since 1991. DONALD E. PHILLIPS, of Brandon, Mississippi, former President and CEO of Pitman-Moore Inc., joined the PCS Board in 1991. He is Chairman of the board of directors of Synbiotics Inc., San Diego, California, and a director of Great Lakes REIT Inc., Oak Brook, Illinois. PAUL J. SCHOENHALS, of Calgary, Alberta, President of Petroleum Industry Training Service, was Chairman of Potash Corporation of Saskatchewan, the Crown corporation, from 1987 to 1989. He joined the PCS Inc. Board in 1992. He is a former Member of the Legislative Assembly and Cabinet Minister in Saskatchewan. DARYL K. SEAMAN, Chairman and President of Dox Investments Inc. in Calgary, Alberta, joined the PCS Board in 1989. Former Chairman and CEO of Bow Valley Industries Ltd., he is a director of many mining and energy companies, and co-owner and director of the Calgary Flames Hockey Club. E. ROBERT STROMBERG, Q.C., a Partner in the Saskatchewan law firm Robertson Stromberg, was elected to the PCS Board in 1991. He is a member of the boards of NorSask Forest Products Inc. and Hitachi Canadian Industries Ltd., a member of the Provincial Court Commission and Chairman of the Saskatoon Airport Authority. JACK G. VICQ, a Professor in the College of Commerce, University of Saskatchewan, was formerly Associate Dean and responsible for the Centre for International Business Studies. He sits on committees of the Saskatchewan and Canadian Institutes of Chartered Accountants. He joined the PCS Board in 1989. BARRIE A. WIGMORE, a Retired Partner with New York investment banking firm Goldman, Sachs Group, Inc., headed its corporate finance activities in the electric, gas, pipelines and telecommunications industries. He writes on financial history and current financial markets. He joined the PCS Board in 1989. PAUL S. WISE, of Scottsdale, Arizona, is a past President and CEO of the Alliance of American Insurers and has been active in many aspects and associations of the American insurance industry. He became a member of the PCS Board of Directors in 1989. THOMAS J. WRIGHT, of Raleigh, North Carolina, was elected to the PCS Board in May 1999 and retired as President of PCS Phosphate on June 30. Formerly President and CEO of Texasgulf Inc., the predecessor to PCS Phosphate, he has been active in many fertilizer industry associations. 27 30 COMMITTEES OF THE BOARD OF DIRECTORS Each of the Board's five committees plays a significant role in the discharge of Board duties and obligations. With the exception of the executive committee, each committee is composed entirely of outside directors. Each is empowered to retain outside advisors, and individual directors may engage outside advisors at the Company's expense upon authorization of the executive committee. The executive committee is currently composed of four directors. Between meetings of the Board it has such powers as are, from time to time, vested in it by the Board. Charles Childers (chair), Isabel Anderson, William Doyle and Robert Stromberg currently comprise the committee. The audit committee is composed of three directors, none of whom may be an officer or employee. It meets with the Company's financial management personnel, internal auditor and external auditor at least once each quarter to review financial reporting practices and procedures and authorize the release of unaudited quarterly financial statements, and reviews the annual financial statements before their submission to the Board for approval. The committee also recommends to the Board the external auditors to be proposed to the shareholders for appointment at the annual meeting. Its current members are Jack Vicq (chair), Willard Estey and Dallas Howe. The compensation committee, currently composed of three non-employee directors, formulates and makes recommendations to the Board on compensation issues relating to directors and senior management of the Company and on corporate salary and benefits policy. It reviews and approves, annually, the salary administration program, and is responsible for the annual report on executive compensation. In consultation with the CEO, the committee considers and reports to the Board on corporate succession matters. At present, members are Donald Phillips (chair), Daryl Seaman and Barrie Wigmore. ENVIRONMENT FACT WHITE SPRINGS RECLAIMED APPROXIMATELY 850 ACRES IN 1999, MORE THAN IT MINED. The corporate governance and nominating committee is responsible for examining and reporting to the Board on matters relating to governance, and for recommending nominees for election or appointment as directors. Its members are Willard Estey (chair), Dallas Howe, Daryl Seaman, Barrie Wigmore and Thomas Wright. PCS FACT 4 PCS FACILITIES HAVE ACHIEVED THE COVETED STAR SAFETY STATUS, THE PINNACLE OF SAFETY PERFORMANCE IN THE UNITED STATES: THE DAVENPORT FEED PLANT, THE LIMA NITROGEN PLANT, THE SAVANNAH AMMONIA TERMINAL AND, NEW IN 1999, THE AURORA PHOSPHATE COMPLEX. The environmental affairs committee, composed of four directors, works to ensure that the Company fulfils its commitment to the protection of the environment. It routinely receives environmental audit reports for review and discussion with senior management, and monitors environmental issues in other areas of corporate activity such as off-site transportation, distribution and storage of product. Douglas Bourne (chair), Paul Schoenhals, Paul Wise and Thomas Wright currently comprise this committee. Shareholder questions, comments and concerns about corporate governance may be directed to the Senior Vice President, Corporate Relations, who is responsible for implementing the disclosure policy, the Corporate Secretary or the Company's transfer agent. ENVIRONMENT FACT THE PCS PHOSPHATE FACILITIES IN NORTH CAROLINA AND FLORIDA HAVE RECLAIMED AND RESTORED 14,000 ACRES OF MINED LAND. 28 31 WHEN 1 KG OF NITROGEN FERTILIZER IS APPLIED TO SOIL, UP TO 8 KG OF CARBON - A KEY COMPONENT OF THE GREENHOUSE GAS CARBON DIOXIDE - CAN BE KEPT IN THE SOIL'S STRUCTURE. [PHOTO] IN A RESEARCH PROJECT IN CHINA, BALANCED FERTILIZATION PRACTICES REDUCED SOIL EROSION FROM 50 TONNES PER HECTARE PER YEAR TO 15 TONNES. ENVIRONMENT FACT A US FEDERAL COURT HAS RULED THAT PHOSPHORIC ACID, AN IMPORTANT AND BENEFICIAL FERTILIZER, DID NOT MEET THE LISTING STANDARDS OF A TOXIC CHEMICAL AND SHOULD BE REMOVED FROM THE US ENVIRONMENTAL PROTECTION AGENCY'S LIST OF REPORTABLE TOXIC CHEMICALS. THIS WOULD REDUCE PCS REPORTED EMISSIONS BY APPROXIMATELY 80 PERCENT. ENVIRONMENT About 12 percent of the earth's land surface grows the crops that feed the world. Much of the rest is inhospitable to humans, buried under cities and highways, too poor for planting - or devoted to forest, pasture, wetlands and recreation areas. High-yielding seed, modern farming methods and fertilizer make it possible for that 12 percent to feed the rising world population. In the US alone, maintaining crop yields without fertilizer would require much wild land to be plowed up and seeded. Wild lands are areas of serenity in a hectic world, and their variety of plant and animal life helps to maintain vital genetic diversity. The rising world population can be fed, and fed well, without destroying those vital lands, thanks to modern knowledge about fertilization and good farming. The fertilizer industry contributes to that knowledge. The Canadian Fertilizer Institute has been leading research into the problem of lost soil organic matter on Saskatchewan fields due to summerfallowing. Agricultural soils can be rebuilt and made less vulnerable to wind and water erosion, researchers have found, and provide a major sink for carbon. The Potash & Phosphate Institute of Canada works with Chinese researchers to demonstrate that balanced fertilization practices reduce soil erosion there. In its vital partnership with farmers around the world, the fertilizer industry is working to keep the earth's limited arable land fertile and conserve its water resources. Conservation tillage, widely used in the United States, is being applied in other countries. In Brazil, where soils have generally poor structure and low organic levels, conservation tillage may soon be the system of choice. PotashCorp is a major producer of the liquid phosphate fertilizers that are ideal for these systems, and a strong supporter of the research being done around the world. At home, PCS takes very seriously its responsibility to fulfil the terms of the environmental permits and applicable federal, provincial, state and local laws governing air emissions, waste water discharges, land use and solid and hazardous waste management at its operations. Corporate environmental policy requires it to manage its operations responsibly to safeguard the natural resources related to or affected by its activities. Each of its production units must work diligently to minimize potential risks to the environment and to comply with environmental legislation and regulations. The Company spent $105 million in 1999 on environmental compliance. The Board's environmental affairs committee reviews all audit reports. In 1999, PCS faced two environmental issues of particular significance. In May, representatives of the Federal Bureau of Investigation and the EPA executed a search warrant at its Geismar facility and interviewed employees in connection with an environmental investigation. To date, government officials have provided the Company with only limited details regarding the investigation. PCS is complying, as required, with requests for information and is also conducting its own internal investigation. ENVIRONMENT FACT ABOUT 1,000 ACRES OF UNTOUCHED NATIVE GRASSLAND AT ROCANVILLE BECAME PART OF SASKATCHEWAN'S REPRESENTATIVE AREA NETWORK IN 1999, AS AN EXAMPLE OF AN UNTOUCHED ECOSYSTEM. PCS Joint Venture, a Florida general partnership, has operated a fertilizer and distribution center in Lakeland, Florida since 1992. Releases of hazardous substances from adjoining property have had an impact on the partnership's property. Federal and state authorities are investigating the condition of soil and groundwater on the partnership property and surrounding properties. The Company is co-operating in these investigations and in the search for appropriate solutions. Its website at www.potashcorp.com provides in-depth information on PCS environmental activities. POTASH AND ITS ENVIRONMENT All potash divisions were audited in 1999 by the Director, Safety, Health, Environment and found substantially in compliance with all statutory environmental requirements. Where areas requiring improvements were noted, divisions 29 32 had addressed them or were doing so before the audit. In the year since Cassidy Lake became part of the Company, its environmental performance has been brought up to the high standard of other potash divisions. As part of the PCS policy of maintaining or creating wildlife habitat on its properties where this can be done without interfering with production, an agreement was reached with Ducks Unlimited for it to manage a waterfowl marsh on the undeveloped Bredenbury property in southeastern Saskatchewan. The potash industry and the Saskatchewan Department of Environment and Resource Management agreed in 1999 to establish a joint government-industry task force to conduct a mutually agreeable cost-benefit analysis of the available options for decommissioning potash mines. The results will be used to revise the decommissioning plans filed by producers, and to determine the amount and type of financial assurance required. ENVIRONMENTAL ACHIEVEMENT NEW BRUNSWICK WON THE AWARD FOR LARGE ENERGY USERS IN CANADA'S FIRST NATIONAL ENERGY EFFICIENCY AWARDS FOR ITS PROJECT TO RECOVER AND RE-USE HEAT FROM ITS CRYSTALLIZERS, WHICH SUBSTANTIALLY IMPROVED ENERGY EFFICIENCY AND REDUCED ENERGY CONSUMPTION PER UNIT OF OUTPUT BY 30 PERCENT. PHOSPHATE AND ITS ENVIRONMENT Internal audits were conducted at all phosphate facilities, and all identified issues were addressed. Major capital projects at Aurora and White Springs upgraded aspects of water management, drainage and spill prevention/containment. The Governor's Council for Sustainable Florida recognized White Springs' work in developing Sustainable Florida standards for business. In January 2000, the division led a public workshop on implementation of those standards which used its operations as an example of "best practices." Its Director of Environment, Health and Safety was a key participant for the phosphate industry in the development of new state regulations for managing phosphogypsum. [PHOTO] Caption: FARMERS IN SOUTHEAST ASIA HABITUALLY BURN CROP RESIDUES TO OBTAIN NUTRIENT-BEARING ASH, AND SOMETIMES THE SMOKE OBLITERATES THE SUN. THE POTASH & PHOSPHATE INSTITUTE IS HELPING TO EDUCATE FARMERS ON THE BENEFITS OF USING FERTILIZER INSTEAD OF THIS ENVIRONMENTALLY DAMAGING PRACTICE. ENVIRONMENTAL ACHIEVEMENT WHITE SPRINGS RECEIVED THE FLORIDA DEPARTMENT OF ENVIRONMENTAL PROTECTION'S OUTSTANDING ECOSYSTEM PROJECT AWARD IN 1999 FOR A 1,100-ACRE RECLAMATION PROJECT. White Springs is engaged in an innovative permitting process for long-term future mining operations in which federal, state and local authorities are collaborating. Technical studies of environmental impact and mitigation developed for this process were expected to be complete early in 2000. Aurora is unique among phosphate plants for blending its byproduct gypsum and clays into a neutralized solid for land reclamation. In September, the US Army Corps of Engineers agreed that 944 acres of its restored wetlands had met the success criteria and could be used for mitigation against future wetland impacts. NITROGEN AND ITS ENVIRONMENT Internal audits were conducted at three facilities in 1999 and all were found to be in compliance with all applicable environmental requirements. Four product terminals were audited with no significant deviations found. Capital projects to improve environmental performance at Geismar included drainage projects in both nitrogen and phosphate areas, new nitric acid containment and new 16-inch stormwater tiles. Augusta installed an in-line real time nitrate monitor for water effluent, the first of its kind in the United States. It reduced nitrate TRI emissions by 20 percent. 30 33 SAFETY With safety a constant focus at all PCS operations, safety records constantly improve. In 1999, the nearly 1,200 employees at Aurora achieved 7 million hours without a lost-time injury; its outside contractors exceeded 1 million hours. Employees at the Davenport feed plant have worked 20 years without a lost-time injury. All such major safety achievements are recognized in special ceremonies with senior management presenting awards. RECENT PHOSPHATE SAFETY MILESTONES TIME WITHOUT A LOST-TIME INJURY
AURORA NC 5 MILLION HOURS ON MARCH 4, 1999; 6 MILLION HOURS ON JULY 29; 7 MILLION HOURS ON DECEMBER 20 WHITE SPRINGS FL 1 MILLION HOURS ON JANUARY 18, 1999; 2 MILLION HOURS ON JUNE 2; 3 MILLION HOURS ON OCTOBER 20 DAVENPORT IA 20 YEARS ON SEPTEMBER 13, 1999
There is a considerable flow of outside recognition of the PotashCorp safety standards, too. White Springs achieved an Occupational Safety and Health Administration (OSHA) incidence rate of 1.24, which placed it well ahead of the industry in safety performance and equal to the top performers in the overall chemical industry. Its Swift Creek mine employees received the Sentinels of Safety Certificate of Achievement from the Mine Safety and Health Administration (MSHA) for its outstanding safety performance in 1998. PCS Phosphate as a whole received two prestigious awards for safe shipping. For 1999, it won its third Burlington Northern Santa Fe Stewardship Award, which is presented to shippers with an outstanding safety record. It also received the Thoroughbred Chemical Safety Award from Norfolk Southern Corporation in 1999 for shipping more than 1,000 carloads of hazardous materials in 1998 without a shipper-caused incident. White Springs received awards from Norfolk Southern, Union Pacific and Burlington Northern railroads for shipping hazardous materials during 1998 without an incident. RECENT NITROGEN SAFETY MILESTONES TIME WITHOUT A LOST-TIME INJURY
TRINIDAD 2 MILLION HOURS ON JANUARY 11, 1999; 3 MILLION HOURS ON FEBRUARY 4, 2000 AUGUSTA GA 1 MILLION HOURS ON JULY 20, 1999 MEMPHIS TN 1 MILLION HOURS ON SEPTEMBER 21, 1999
The Weeping Water feed plant was recognized for the fourth straight year with an award of honor with distinction from the Greater Omaha Safety and Health Council, for safe production in 1998. Its incident rate remains significantly below the national average. In potash, New Brunswick received the 1998 John T. Ryan Regional Trophy for select mines in Eastern Canada for achieving the lowest reportable injury rate. Cory and Patience Lake came out tops in the Saskatchewan Emergency Response Competition. Cory achieved its first overall victory for underground soft rock mines, with Allan as runner-up, and Patience Lake tied for first for surface mines. Lanigan won the 19th annual PCS Fireman's Rodeo involving all PCS mines and fire departments in three nearby communities, which competed in six events demanding a range of firefighting skills. Rocanville was runner-up. RECENT POTASH SAFETY MILESTONES TIME WITHOUT A LOST-TIME INJURY
LANIGAN SK 2 MILLION HOURS ON FEBRUARY 28, 1999 NEW BRUNSWICK 3 MILLION HOURS ON JANUARY 12, 1999
31 34 RESULTS FINANCIALS
NET SALES GROSS MARGIN CASH FLOW FROM OPERATIONS $ MILLIONS $ MILLIONS $ MILLIONS [GRAPH] [GRAPH] [GRAPH]
Caption: THE SECOND HIGHEST POTASH SALES VOLUMES ON RECORD WERE MORE THAN OFFSET BY LOWER PHOSPHATE VOLUMES AND PHOSPHATE AND NITROGEN PRICES, DECREASING 1999 EARNINGS. 32 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1999 VS 1998 OVERVIEW ($ Millions)
% OF % OF NET NET 1999 SALES 1998 SALES % CHANGE ---- ----- ---- ----- -------- Net Sales North American $1,463.2 71 $1,641.4 71 (11) Offshore 597.9 29 666.4 29 (10) $2,061.1 100 $2,307.8 100 (11) Gross Margin $ 408.3 20 $ 609.3 26 (33) Provision for Plant Closures and Office Consolidation $ 65.0 3 -- -- -- Provision for Asset Impairment $ 526.6 26 -- -- -- Operating (Loss) Income $ (350.7) (17) $ 446.1 19 (179) Net (Loss) Income $ (412.0) (20) $ 261.0 11 (258) (Loss) Earnings per Share (dollars) $ (7.60) -- $ 4.82 -- (258) Gross Margin by Nutrient (1) Potash $ 301.9 54 $ 316.3 58 (5) Phosphate $ 127.8 15 $ 228.2 23 (44) Nitrogen $ (21.4) (3) $ 64.8 9 (133)
(1) Based on net sales by nutrient. GROSS MARGIN BY QUARTER $ MILLIONS [GRAPH] Caption: APPROXIMATELY 60 PERCENT OF GROSS MARGIN USUALLY FALLS IN THE FIRST HALF OF THE YEAR; IN 2000, THAT FIGURE IS LIKELY TO BE HIGHER. 1999 net income was negatively affected by two primary factors. The first was several charges for goodwill impairment, asset impairment and plant closures and office consolidation. The second was a reduction in gross margin principally due to reduced phosphate and nitrogen prices. PLANT CLOSURES AND OFFICE CONSOLIDATION In the third quarter of 1999, the Board of Directors of the Company approved a plan to close nitrogen plants at Clinton, IA and LaPlatte, NE; a phosphate feed plant at Saltville, VA; and a phosphate terminal at Jacksonville, FL. The charges associated with these closures totalled $55.7 million, of which $37.1 million relates to the non-cash writedown of inventory and property, plant and equipment. The closure of the nitrogen plants will result in an annualized reduction in production capacity of 420,000 tonnes of ammonia, 79,000 tonnes of ammonium nitrate and 599,000 tonnes of nitrogen solutions. The annual pre-tax savings associated with these closures (based on 1999 results) is expected to be approximately $20.0 million. The Company is also proceeding with a consolidation of its Raleigh, NC and Memphis, TN administrative offices with the Company's office in Chicago, IL. As a result of the consolidation, 115 salaried employees will be terminated, with termination dates ranging from March 31, 2000 through to September 30, 2000. Terminated employees are entitled to severance pay equal to two weeks' salary for each year of service (to a maximum of 52 weeks) and, providing they stay until their termination date, an additional payment equal to 35 percent of their annual salary pro-rated for the number of months from October 1, 1999 to their termination. The Company has contractual commitments relating to current office leases at all three locations. The charges associated with the office consolidation are $9.3 million The estimated annual pre-tax savings from the office consolidation are $5.5 million, which will not be fully realized until 2001 due to transition costs in 2000. Refer to Note 20 to the Consolidated Financial Statements for more detailed information on the plant closures and office consolidation. PROVISION FOR ASSET IMPAIRMENT In the third quarter of 1999, the Company assessed the recoverability of the tangible and intangible assets of the nitrogen operations (due to operating losses primarily caused by reduced product prices and increased gas costs relative to certain current and expected future competition) and Florida Favorite Fertilizer operations due to continuing operating losses. Based on these assessments, the Company recorded a provision for asset impairment relating to goodwill, property, plant and equipment and other assets in the amount of $526.6 million. See Note 21 to the consolidated financial statements for more detailed information on the provision for asset impairment. 33 36 POTASH REVENUE
1999 SALES 1998 SALES % CHANGE ------------------------------ ---------------------------- ------------------------ REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE ($ MILLIONS) (000'S) PRICE ($ MILLIONS) (000'S) PRICE PRICE PER MT PER MT PER MT ------------ ------- ------- ------------ ------- ------- ------- ------ ------- North American $237.4 2,871 $82.71 $227.6 2,702 $84.24 4 6 (2) Offshore 325.9 3,603 $90.42 317.9 3,581 $88.78 3 1 2 ------ ----- ------ ------ ----- ------ --- --- --- TOTAL $563.3 6,474 $87.00 $545.5 6,283 $86.82 3 3 - ====== ===== ====== ====== ===== ====== === === ===
POTASH NET SALES REVENUE BY MARKET $ MILLIONS [GRAPH] Caption: THE MAJORITY OF POTASH EARNINGS TEND TO BE IN THE FIRST HALF OF THE YEAR BECAUSE OF SPRING SEASON REQUIREMENTS. Potash performance was highlighted by sales volumes that were the second highest on record. Net sales revenue from potash increased primarily due to an increase in North American sales volumes and, to a lesser extent, an increase in offshore sales prices. North American potash prices increased in the first half of 1999 (following price list increases that were introduced in the first quarter of 1999) then decreased in the third quarter (following disappointing spring season application rates and lower prices posted by a competitor), ending the year 2 percent lower on a year-over-year basis. North American sales volumes increased primarily due to a strong fall season (US farmers received government subsidies and had good fall application weather) and the purchase of the Cassidy Lake mill with its accessible customer base. Potash prices in the offshore market rose during the first three quarters of the year primarily due to higher contract prices with Japan, South Korea and China. Realized prices fell in the fourth quarter due to product and country mix and higher ocean freight costs. Canpotex sales volumes to Asia increased by 13 percent from 1998 due to increased sales to India, Indonesia and South Korea. This increase was partially offset by a 22 percent decrease in sales to Latin America (primarily Brazil due to the currency devaluation and credit conditions). Overall, offshore sales volumes ended the year up marginally from 1998. In the offshore market, 82 percent of sales volumes (1998 - 83 percent) were sold through Canpotex. Potash gross margin represented 74 percent (1998 - 52 percent) of consolidated gross margin. PHOSPHATE REVENUE
1999 SALES 1998 SALES % CHANGE ------------------------------ ---------------------------- ------------------------ REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE ($ MILLIONS) (000'S) PRICE ($ MILLIONS) (000'S) PRICE PRICE PER MT PER MT PER MT ------------ ------- ------- ------------ ------- ------- ------- ------ ------- NORTH AMERICAN Liquids $219.8 948 $231.83 $ 261.6 1,114 $234.86 (16) (15) (1) Solids 135.9 775 $175.35 169.0 884 $191.18 (19) (12) (8) Feed 147.9 588 $251.62 166.5 653 $255.09 (11) (10) (1) Industrial 114.6 361 $316.69 116.5 369 $315.62 (2) (2) - ------ ----- ------- -------- ----- ------- ---- ---- --- 618.2 2,672 $231.34 713.6 3,020 $236.32 (13) (12) (2) ------ ----- ------- -------- ----- ------- ---- ---- --- OFFSHORE Solids 147.6 898 $164.41 206.3 1,087 $189.79 (28) (17) (13) Other 78.0 446 $174.89 91.1 520 $175.19 (14) (14) - ------ ----- ------- -------- ----- ------- ---- ---- ---- 225.6 1,344 $167.92 297.4 1,607 $184.97 (24) (16) (9) ------ ----- ------- -------- ----- ------- ---- ---- ---- TOTAL $843.8 4,016 $210.12 $1,011.0 4,627 $218.48 (17) (13) (4) ====== ===== ======= ======== ===== ======= ==== ==== ====
PHOSPHATE NET SALES REVENUE BY PRODUCT $ MILLIONS [GRAPH] Caption: PHOSPHATE EARNINGS ARE FAIRLY EVENLY DISTRIBUTED OVER THE YEAR. Phosphate net sales revenue decreased primarily due to lower volumes in both North American and offshore markets and, to a lesser extent, to lower prices. In the domestic market, weak spring fertilizer demand resulted in higher than usual North American inventories, which placed downward pressure on phosphate prices, especially DAP. Feed supplement prices increased in the first half of the year and then fell in the third quarter (due to increased competition) to end the year down marginally from 1998. Industrial product prices were stable in the first half of 1999, fell in the third quarter due to higher US imports, and then recovered in the fourth quarter to end the year flat as compared to 1998. Weak domestic demand also led to decreased liquid and solid phosphate sales volumes. Feed supplement sales volumes were down primarily due to increased competition in the industry. In the offshore markets, weak domestic spring fertilizer demand combined with large North American inventories stimulated additional US exports from suppliers outside of PhosChem. Prices were also affected by the anticipation of additional capacity in India and Australia. These factors resulted 34 37 in lower offshore prices for solid phosphates, and liquids followed, but not to the same degree. However, North American production cutbacks in the second half of the year reduced inventories and stabilized prices. The currency devaluation and credit conditions in Brazil resulted in lower sales volumes of liquid phosphates there. Offshore feed supplement sales volumes increased in 1999 primarily due to improved sales volumes in Brazil, the Caribbean and Venezuela. In 1999, 41 percent (1998 - 36 percent) of total phosphate net sales revenue was earned from non-fertilizer products which represented 33 percent (1998 - 30 percent) of phosphate sales volumes. Phosphate gross margin represented 31 percent (1998 - 37 percent) of consolidated gross margin. NITROGEN REVENUE
1999 SALES 1998 SALES % CHANGE ---------------------------- ----------------------------- -------------------------- REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE ($ MILLIONS) (000'S) PRICE ($ MILLIONS) (000'S) PRICE PRICE PER MT PER MT PER MT ---------- ------- ------- ----------- ------- ------- ------- ------ ------- NORTH AMERICAN Urea $154.8 1,340 $115.50 $168.1 1,167 $144.13 (8) 15 (20) Ammonia 180.1 1,718 $104.85 176.5 1,337 $132.04 2 29 (21) Solutions 110.3 1,681 $ 65.64 163.0 2,164 $ 75.32 (32) (22) (13) Other (1) 115.1 1,833 $ 62.79 127.6 1,708 $ 74.71 (10) 7 (16) ------ ----- ------- ------ ----- ------- ---- ---- ---- 560.3 6,572 $ 85.26 635.2 6,376 $ 99.63 (12) 3 (14) OFFSHORE 46.4 945 $ 49.05 51.1 895 $ 57.07 (9) 6 (14) PURCHASED 47.3 434 $108.83 65.0 554 $117.35 (27) (22) (7) ------ ----- ------- ------ ----- ------- ---- ---- ---- TOTAL $654.0 7,951 $ 82.25 $751.3 7,825 $ 96.02 (13) 2 (14) ====== ===== ======= ====== ===== ======= ==== ==== ====
(1) Sales volumes of Other nitrogen products include tonnes for the byproduct carbon dioxide. MANUFACTURED NITROGEN NET SALES REVENUE BY PRODUCT $ MILLIONS (GRAPH) Caption: NITROGEN IS MORE HEAVILY WEIGHTED TO THE NORTH AMERICAN MARKET, SO THE THIRD QUARTER IS SEASONALLY WEAK. Nitrogen net sales revenue decreased primarily due to lower sales prices in the North American market which were partially offset by increased sales volumes. Weak spring demand combined with non-market pricing from Former Soviet Union ("FSU") producers and high North American inventories continued to put pressure on both domestic and offshore prices. North American production shutdowns in the second half of the year reduced inventories, and prices rose by year-end. North American sales volumes for urea and other nitrogen products were up primarily due to growth in the industrial market. Ammonia sales volumes increased due to a full year of production from the new plant in Trinidad, increased industrial demand and increased consumption by the US DAP sector. Sales volumes for nitrogen solutions were down due primarily to the combination of fewer acres planted to corn and more to soybeans, favorable weather for use of other nitrogen products and the permanent shutdown of 25 percent of the Company's UAN capacity in the second half of the year. The Company continued to sell a large portion of its North American nitrogen production to the more stable and higher margin industrial market. Non-fertilizer products grew to 49 percent (1998 - 44 percent) of nitrogen sales volumes and 47 percent (1998 - 44 percent) of net sales revenue. COST OF GOODS SOLD
1999 1998 % CHANGE ---- ---- -------- Potash production (KCL) tonnage (000's) 6,388 6,995 (9) Phosphate production (P205) tonnage (000's) 2,124 2,363 (10) Nitrogen production (N) tonnage (000's) 3,138 3,121 1 Potash unit cost of sales (dollars) $ 40.37 $ 36.49 11 Phosphate unit cost of sales (dollars) $178.31 $169.15 5 Manufactured nitrogen unit cost of sales (dollars) $ 83.97 $ 85.22 (1) Depreciation and amortization ($ Millions) $ 191.1 $ 190.9 -
Potash unit cost of sales increased due primarily to lower production volumes, 25 more shutdown weeks, increased gas costs and a stronger Canadian dollar. Phosphate unit cost of sales increased due primarily to lower production volumes caused by phosphate rock sourcing problems at Aurora and shutdowns in the second half of the year. The per unit cost of sulphur was flat compared to 1998 while the per unit cost of ammonia decreased by 17 percent. 35 38 \ PCS Nitrogen reduced its per unit natural gas cost by 6 percent compared to 1998 primarily due to its natural gas hedging policy in North America and certain of its natural gas contracts in Trinidad. This decrease was partially offset by higher per unit production costs due to plant shutdown costs and reduced production in the third and fourth quarters of 1999. EXPENSES ($ Millions)
1999 1998 % CHANGE ---- ---- -------- Selling and Administrative $116.3 $116.0 - Provincial Mining and Other Taxes 77.1 80.1 (4) Interest 53.8 67.6 (20) Income Taxes 7.5 117.5 (94)
The decrease in provincial mining and other taxes relates to the Potash Production Tax, which was lower primarily due to higher per unit production costs and lower Canadian dollar equivalent prices caused in part by a stronger Canadian dollar. Various other payments to the Province of Saskatchewan in the form of royalties and taxes totalled $14.6 million in 1999 (1998 - $13.2 million), and are included in cost of goods sold. Interest expense on long-term debt decreased by $21.4 million due to a reduction of the weighted average long-term debt outstanding from $980.8 million in 1998 to $637.2 million in 1999. The weighted average interest rate on the long-term debt outstanding was 6.0 percent (1998 - 6.2 percent). The reduction in interest expense on long-term debt was partially offset by an increase in interest expense on short-term debt of $7.6 million due to borrowing under a commercial paper program. The decrease in income taxes was principally due to a deferred tax recovery of $48.6 million relating to the plant closures and asset impairment charge and lower income. PCS and certain subsidiaries are subject to federal income taxes (which includes the Large Corporations Tax) and provincial income taxes in Canada. During 1999, the Company began accruing cash income taxes by virtue of having fully utilized non-capital losses carried forward. The Company's subsidiaries which operate in the United States are subject to US federal and state income taxes. These subsidiaries are not currently subject to federal cash income tax by virtue of net operating losses incurred. The Company's nitrogen subsidiaries which operate in Trinidad are subject to Trinidad taxes. The effective consolidated tax rate for 1999 was 30 percent (1998 - 31 percent) of (loss) income before income taxes (exclusive of the goodwill impairment).
PCS POTASH PRICES PCS DAP PRICES PCS AMMONIA PRICES $/MT $/MT $/MT [GRAPH] [GRAPH] [GRAPH]
Caption: STRONG OFFSHORE VOLUMES SUPPORTED POTASH PRICES WHILE HIGH INVENTORIES IN PHOSPHATE AND NITROGEN PLAGUED PRICES FOR THOSE PRODUCTS THROUGHOUT THE YEAR, THOUGH BOTH ROSE BY YEAR-END. 36 39 1998 VS 1997 OVERVIEW ($ Millions)
1998 % OF NET SALES 1997 % OF NET SALES %CHANGE ---- -------------- ---- -------------- ------- Net Sales North American $1,641.4 71 $1,665.1 72 (1) Offshore 666.4 29 660.8 28 1 -------- --- -------- --- --- $2,307.8 100 $2,325.9 100 (1) Gross Margin $ 609.3 26 $ 585.2 25 4 Operating Income $ 446.1 19 $ 447.6 19 - Net Income $ 261.0 11 $ 297.1 13 (12) Earnings per Share (dollars) $ 4.82 $ 5.68 (15) Gross Margin by Nutrient (1) Potash $ 316.3 58 $ 257.6 51 23 Phosphate $ 228.2 23 $ 194.4 20 17 Nitrogen $ 64.8 9 $ 133.2 15 (51)
(1) Based on net sales by nutrient. With the exception of purchased product, nitrogen data for 1997 are only for the period subsequent to the acquisition of Arcadian on March 6, 1997. Phosphate data for 1997 and 1998 include phosphate produced by the acquired Geismar operation. Higher net sales revenue in potash and phosphate was more than offset by lower nitrogen sales revenue which resulted in reduced net sales revenue on a consolidated basis. The decrease in net income of $36.1 million compared to 1997 was attributable to: increases in selling and administrative expenses ($16.3 million), provincial mining and other taxes ($9.8 million) and income taxes ($48.4 million) which were partially offset by a $24.2 million increase in gross margin and a $13.8 million reduction in interest expense. POTASH REVENUE
1998 SALES 1997 SALES % CHANGE ------------------------------ ---------------------------- ------------------------ REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE ($ MILLIONS) (000'S) PRICE ($ MILLIONS) (000'S) PRICE PRICE PER MT PER MT PER MT ------------ ------- ------- ------------ ------- ------- ------- ------ ------- North American $227.6 2,702 $84.24 $210.1 3,016 $69.70 8 (10) 21 Offshore 317.9 3,581 $88.78 294.0 3,623 $81.12 8 (1) 9 ------------ ------- ------- ------------ ------- ------- ------- ------ ------- TOTAL $545.5 6,283 $86.82 $504.1 6,639 $75.93 8 (5) 14 ============ ======= ======= ============ ======= ======= ======= ====== =======
In potash, increased sales prices more than offset reductions in sales volumes resulting in higher net sales revenue. North American potash prices increased in the last half of 1997 and first half of 1998 due to tighter supply, then stabilized in the last two quarters. North American sales volumes declined from 1997 levels, primarily due to abnormally high sales volumes in the last half of that year. Potash prices in the offshore market rose early in the year with increased contract prices, and then stabilized and rose again in the last half. The higher prices realized were primarily due to higher contract prices with Japan, South Korea and Australia and increased prices in China and Brazil. The currency devaluations and financial difficulties in Asian countries did not significantly affect offshore potash sales volumes. Canpotex sales volumes to Asia decreased by 6 percent from 1997, which was partially offset by a 21 percent increase in sales to Latin America (primarily Brazil). Overall, offshore sales volumes ended the year down only marginally from 1997. In the offshore market, 83 percent of sales volumes were sold through Canpotex (1997 - 82 percent). Gross margin for potash products was 52 percent (1997 - 44 percent) of consolidated gross margin. PHOSPHATE REVENUE
1998 SALES 1997 SALES % CHANGE ------------------------------ ---------------------------- ------------------------ REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE ($ MILLIONS) (000'S) PRICE ($ MILLIONS) (000'S) PRICE PRICE PER MT PER MT PER MT ------------ ------- ------- ------------ ------- ------- ------- ------ ------- NORTH AMERICAN Liquids $ 261.6 1,114 $234.86 $216.7 958 $226.20 21 16 4 Solids 169.0 884 $191.18 156.5 814 $192.17 8 9 - Feed 166.5 653 $255.09 168.2 658 $255.47 (1) (1) - Industrial 116.5 369 $315.62 115.5 339 $341.00 - 9 (7) ------------ ------- ------- ------------ ------- ------- ------- ------ ------- 713.6 3,020 $236.32 656.9 2,769 $237.19 9 9 - ============ ======= ======= ============ ======= ======= ======= ====== ======= OFFSHORE Solids 206.3 1,087 $189.79 207.5 1,139 $182.17 - (5) 4 Other 91.1 520 $175.19 89.2 526 $169.58 (2) (1) 3 ------------ ------- ------- ------------ ------- ------- ------- ------ ------- 297.4 1,607 $184.97 296.7 1,665 $178.21 - (3) 4 ------------ ------- ------- ------------ ------- ------- ------- ------ ------- TOTAL $1,011.0 4,627 $218.48 $953.6 4,434 $215.05 6 4 2 ============ ======= ======= ============ ======= ======= ======= ====== =======
37 40 Phosphate net sales revenue increased primarily due to higher sales volumes and, to a lesser extent, higher prices. With the exception of industrial products, phosphate prices in the domestic market increased or remained constant compared to 1997. Phosphate prices in the offshore markets (except for feed supplements) improved during 1998. Liquid phosphate prices were up 7 percent on a year-over-year basis and solid phosphate prices increased by 4 percent. These price increases were partially due to higher prices realized in Brazil. The price of feed supplements, affected by the currency devaluations and financial difficulties in Asian countries, decreased by 9 percent on a year-over-year basis. Offshore phosphate sales volumes declined on an overall basis as the Company chose to orient its P2O5 production to the North American market where margins were better. PhosChem had good sales volumes in 1998; sales volumes to Asia increased by 13 percent and to Latin America by 12 percent. In 1998, 36 percent (1997 - 37 percent) of total phosphate net sales revenue was earned from non-fertilizer products which represented 30 percent (1997 - 30 percent) of its phosphate sales volumes. Phosphate gross margin represented 37 percent (1997 - 33 percent) of consolidated gross margin. NITROGEN REVENUE
1998 SALES 1997 SALES % CHANGE ---------------------- -------------------------------- ------------------------------------ REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE REVENUE TONNES AVERAGE ($ MILLIONS) (000'S) PRICE ($ MILLIONS) (000'S) PRICE PRICE PER MT PER MT PER MT ------------ ------- ------- ------------ ------- ------- ------- ------ ------- NORTH AMERICAN Urea $168.1 1,167 $144.13 $150.0 865 $173.41 12 35 (17) Ammonia 176.5 1,337 $132.04 169.0 957 $176.63 4 40 (25) Solutions 163.0 2,164 $ 75.32 159.0 1,690 $ 94.08 3 28 (20) Other (1) 127.6 1,708 $ 74.71 118.4 1,343 $ 88.16 8 27 (15) ------ ----- ------- ------ ----- ------- --- --- --- 635.2 6,376 $ 99.63 596.4 4,855 $122.84 7 31 (19) OFFSHORE 51.1 895 $ 57.07 70.1 781 $ 89.76 (27) 15 (36) PURCHASED 65.0 554 $117.35 201.7 1,139 $177.09 (68) (51) (34) ------ ----- ------- ------ ----- ------- --- --- --- TOTAL $751.3 7,825 $ 96.02 $868.2 6,775 $128.16 (13) 15 (25)
(1) Sales volumes of Other nitrogen products include tonnes for the byproduct carbon dioxide. Net sales revenue for nitrogen decreased due to lower sales prices which were partially offset by higher sales volumes. The continued absence of China from offshore urea markets and reduced cash production costs for FSU producers due to lower gas prices and currency weakness in the FSU countries led to significant declines in offshore prices. Overall, urea prices were down 18 percent and ammonia prices down 22 percent when compared to 1997. The Company's offshore sales volumes of ammonia increased primarily due to a full year of operation in 1998 as compared to 10 months in 1997 and the addition of the new plant in Trinidad. Offshore sales volumes of urea declined as the Company chose to focus its sales on the North American market where prices were stronger. Falling offshore nitrogen prices resulted in lower North American prices as well. In North America, sales of ammonia for fertilizer were slow but the strong DAP market supported healthy ammonia sales to DAP producers as ammonia is a key input for DAP. This contributed to an increase in manufactured ammonia sales volumes. When the new PCS facility in Trinidad came on stream, these tonnes replaced product purchased by the Company, reducing total ammonia sales volumes (purchased and manufactured) by 5 percent. The Company continued to sell a large portion of its North American nitrogen production to the more stable industrial market. On a year-over-year basis, nitrogen industrial prices fell by 14 percent compared to a 28 percent decline for fertilizer. Non-fertilizer products represented 44 percent (1997 - 38 percent) of nitrogen sales volumes and 44 percent (1997 - 34 percent) of net sales revenue. Gross margin for nitrogen represented 11 percent (1997 - 23 percent) of consolidated gross margin. COST OF GOODS SOLD
1998 1997 % CHANGE ------- -------- -------- Potash production (KCL) tonnage (000's) 6,995 6,483 8 Phosphate production (P205) tonnage (000's) 2,363 2,282 4 Nitrogen production (N) tonnage (000's) 3,121 2,349 33 Potash unit cost of sales (dollars) $ 36.49 $ 37.14 (2) Phosphate unit cost of sales (dollars) $169.15 $171.23 (1) Manufactured nitrogen unit cost of sales (dollars) $ 85.22 $ 95.04 (10) Depreciation and amortization ($ Millions) $ 190.9 $ 170.0 12
38 41 Potash unit cost of sales decreased due primarily to higher production volumes and eight fewer shutdown weeks, which were partially offset by water management costs at the New Brunswick division and costs to transport Saskatchewan product to Cassidy Lake for processing. Overall, phosphate unit cost of sales decreased due primarily to lower input costs for ammonia. The unit cost of sulphur decreased by 2 percent compared to 1997. PCS Nitrogen reduced its per unit natural gas cost by 12 percent compared to 1997 primarily due to its gas contracts in Trinidad. Overall, the per unit cost of sales of manufactured product declined primarily due to reduced gas costs and the opening of an efficient new plant in Trinidad. The increase in depreciation and amortization expense for 1998 was largely attributable to $17.7 million additional depreciation and amortization due to a full year of nitrogen operations. EXPENSES ($ Millions)
1998 1997 % CHANGE ---- ---- -------- Selling and Administrative $116.0 $99.7 16 Provincial Mining and Other Taxes 80.1 70.3 14 Interest 67.6 81.4 (17) Income Taxes 117.5 69.1 70
The increase in selling and administrative expenses was attributable to general increases in compensation and benefits, a full year of amortization of the goodwill relating to the nitrogen acquisition, an increase in bad debt expense, an increase in franchise taxes and a Revenue Canada employee benefits assessment. The increase in Saskatchewan provincial mining and other taxes primarily relates to the Potash Production Tax. The higher potash prices and the resulting increased profit per tonne (which was partially due to the strengthening of the US dollar as compared to the Canadian dollar), combined with the full utilization of certain provincial resource tax deductions carried forward from previous years, resulted in most Saskatchewan mines reaching the top marginal profits tax rate of 35 percent in 1998. Various other payments to the Province of Saskatchewan in the form of royalties and taxes totalled $13.2 million in 1998 and $12.4 million in 1997, and are included in cost of goods sold. Interest expense decreased due to a reduction of the weighted average long-term debt outstanding from $1.1 billion in 1997 to $980.8 million in 1998. The weighted average interest rate on the long-term debt outstanding was 6.2 percent (1997 - 6.1 percent). The increase in income taxes reflects the impact of prior utilization of non-capital loss carry-forwards. Provincial taxes and royalties are non-deductible for federal income tax purposes. The effective consolidated tax rate for 1998 was 31 percent (1997 - 19 percent) of income before income taxes, of which 5 percentage points (1997 - 13 percentage points) represented cash income taxes and 26 percentage points (1997 - - 6 percentage points) represented deferred income taxes. The reduction in the cash component of the provision was largely due to a reduction in the amount of US withholding taxes on certain payments received from the Company's US subsidiaries. ANALYSIS OF FINANCIAL CONDITION AND CASH FLOW The following table summarizes certain of the Company's financial ratios and cash flow data as calculated from the consolidated financial statements (see financial terms listed on inside of back cover):
Year Ended December 31 ---------------------- 1999 1998 % change ---- ---- -------- Quick Ratio .38 .83 (54) Current Ratio .87 1.74 (50) Shareholders' Equity to Total Assets .50 .54 (7) Return on Shareholders' Equity (21)% 11% (291) Book Value per Share $36.55 $45.24 (19) Asset Turnover 53% 51% 4 Return on Investment (11)% 9% (222) Long-term Debt to Equity .22:1 .38:1 (42) Return on Capital Employed 5% 8% (38) Cash Flow Return 8% 13% (38) Cash provided by operating activities ($ Millions) $343.6 $578.0 (41) Cash used in investing activities ($ Millions) $177.7 $243.3 (27) Cash used in financing activities ($ Millions) $189.8 $275.5 (31)
39 42 The decrease in cash provided by operating activities was primarily due to a reduction of net income, a reduction in deferred income taxes of $104.4 million and a reduction of cash flow from operating working capital of $22.0 million. Cash used in investing activities decreased as 1999 additions to property, plant and equipment decreased by $71.3 million (1998 includes the Geismar expansion and higher sulphur vessel costs) and additions to other assets decreased by $61.2 million (1998 includes the purchase of shares in Israel Chemicals Ltd.). These reductions in investing activities were partially offset by the $36.9 million purchase of Minera Yolanda S.C.M. and reduced proceeds from the disposal of property, plant and equipment (primarily related to the 1998 sale/leaseback of railcars). During the year, the Company repaid the Syndicated Credit Facility in the amount of $488.0 million, substituting net borrowing of $379.6 million under a commercial paper program in order to lower interest costs. The Company paid dividends of $53.3 million in 1999 (1998 - $51.7 million) and paid $29.3 million to repurchase shares under the open market repurchase program. The Company is authorized to repurchase an additional 2.1 million shares under the open market repurchase program by November 18, 2000. The Company has a Syndicated Credit Facility which provides for unsecured advances of up to $778.0 million (less the amount of commercial paper outstanding), none of which was outstanding at December 31, 1999. In addition, the Company has short-term lines of credit for up to $292.0 million in borrowing (less letters of credit of $26.2 million), of which $70.0 million was outstanding at December 31, 1999. The Company is authorized to borrow up to a maximum of $500.0 million under the commercial paper program of which $401.6 million is outstanding at December 31, 1999. The Company may also issue up to an additional $600.0 million in unsecured debt securities under its existing shelf registration statement. The Company believes that internally generated cash flow, as supplemented by borrowing from existing financing sources, will be sufficient to meet its anticipated capital expenditures and other cash requirements, exclusive of any possible acquisitions, in 2000. RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS The Company's nitrogen operations are significantly affected by the price of natural gas. The Company employs derivative commodity instruments related to a portion of its natural gas requirements (primarily futures, swaps and options) for the purpose of managing its exposure to commodity price risk in the purchase of natural gas. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. Gains or losses arising from settled hedging transactions are deferred as a component of inventory until the product containing the hedged item is sold. Changes in the market value of open hedging transactions are not recognized as they generally relate to changes in the spot price of anticipated natural gas purchases. A sensitivity analysis has been prepared to estimate the Company's market risk exposure arising from derivative commodity instruments. The fair value of such instruments is calculated by valuing each position using quoted market prices. Market risk is estimated as the potential loss in fair value resulting from a hypothetical 10 percent adverse change in such prices. The results of this analysis indicate that as of December 31, 1999, the Company's estimated derivative commodity instruments market risk exposure was $26.6 million (1998 - $34.7 million). Actual results may differ from the estimate. Changes in the fair value of such derivative instruments, with maturities in 2000 through 2004, will generally relate to changes in the spot price of anticipated natural gas purchases. The Company also enters into forward foreign exchange contracts for the sole purpose of limiting its exposure to exchange rate fluctuations relating to certain trade accounts. Gains or losses resulting from foreign exchange contracts are recognized at the time the contracts are entered into and are included in other income. ENVIRONMENTAL The Company is subject to various environmental laws and regulations throughout the United States, Canada, Trinidad and Chile. Expenditures relating to compliance with these environmental laws are considered to be part of the normal course of business. Future laws and regulations or changes to existing laws and their impact cannot be predicted. Capital expenditures in the environmental area in 1999 totalled $8.2 million (1998 - $14.0 million; 1997 - $15.4 million) while $90.5 million (1998 - $83.4 million; 1997 - $66.9 million) was incurred as environmental operating expense. Expenditures in 2000 are expected to be of a similar magnitude for existing operations. 40 43 YEAR 2000 The Company's computer systems and facilities are operating normally. The Company's business and operations have not been affected to date by any computer problems related to the date changeover to the year 2000, either internally or externally. OUTLOOK The rising world population and the demand for more food and better diets, with meat as a protein source, will continue to drive consumption of fertilizers over the long term. While the consumption trend line is expected to continue to climb, there will be, at times, fluctuations in demand caused both by economic factors and political factors in those countries where governments are involved in importation. North American fertilizer demand is generally considered mature but is expected to fluctuate from year to year, as a function of acres planted and application rates per acre, which are influenced by crop prices and weather. While world grain stocks are not excessive, North American stocks are up after three consecutive years of good harvests. This has resulted in the lowest corn prices in a decade. Historically, fertilizer prices track the US corn price fairly closely. In potash, prices have been more stable than the corn price as supply has generally tracked demand. In phosphate, DAP prices appear to be more tied to the US corn price than potash. Nitrogen prices track the price very closely. If there should be weather problems, US grain inventories would quickly diminish. Furthermore, when grain becomes as inexpensive as it is now, farmers generally use more of it for feed. In January 2000, the United States Department of Agriculture ("USDA") lowered its US corn production estimate and raised its forecasts of domestic corn demand and corn exports. As a result, the USDA is projecting lower US ending stocks and higher prices for corn. The Company sells a significant amount of potash and phosphate in offshore markets, where countries purchase fertilizer to grow cash crops for export and food for internal use. The Company also sells product in the non-fertilizer markets which are affected by North American economic growth, which is expected to be more than three percent next year. Outside consultants forecast four percent annual growth in demand for industrial nitrogen products for the next five years and two percent growth for industrial phosphates. CORN PRICES VS NUTRIENT EXPENDITURES [CHART] SOURCE: USDA, AAPFCO & TFI, PCS Caption: TOTAL NUTRIENT EXPENDITURES IN THE LAST 30 YEARS HAVE CLOSELY FOLLOWED CORN PRICES AND INFLUENCED FERTILIZER PRICES. The positive effect of any increase in demand for fertilizer and non-fertilizer products may be offset to the degree that additional production capacity comes on stream. Domestic potash sales volumes are expected to approximate 1999 levels while offshore sales volumes are expected to increase modestly, resulting in slightly larger overall volumes compared to 1999. In late December 1999, Canpotex announced the largest ever sales contract with China. The contract provides for sales in the first half of 2000 of 1.6 million tonnes, which is 25 percent higher than the first half 1999 level. Domestically, the combination of continued matching of supply to demand and higher export sales is expected to tighten product availability. Prices in both the domestic and offshore markets are expected to be flat as compared to 1999. PCS continues to operate its potash mines by matching production to anticipated sales demand. Shutdowns at potash mines for inventory correction will influence potash production costs on a quarter-over-quarter comparative basis. It is expected that the number of such shutdowns in 2000 will be less than the 58 weeks of shutdown incurred in 1999. Natural gas costs are increasing in Western Canada. Higher Canadian gas costs and possible continued strengthening of the Canadian dollar are expected to more than offset fewer shutdown weeks. The combination of these factors is expected to increase production costs somewhat. Lower sulphur costs are expected to more than offset any increase in ammonia costs, resulting in phosphate production costs that are similar to 1999. PCS can use up to one-quarter of the ammonia it produces and sells as ammonia at its own phosphate plants. WORLD POTASH OUTLOOK MILLION TONNES K2O [CHART] SOURCE: FAO, IFA, NRCANADA, FERTECON, PCS Caption: PCS, WITH AN ESTIMATED 60 PERCENT OF WORLD EXCESS CAPACITY, IS IDEALLY POSITIONED TO MEET THE GROWING DEMAND IN DEVELOPING NATIONS. 41 44 WORLD'S LARGEST FERTILIZER COMPANIES PRIMARY PRODUCT CAPACITY MILLION TONNES [CHART] SOURCE: FERTECON, PCS Caption: PCS EXPECTS CONTINUING CONSOLIDATION WILL RESULT IN JUST A HANDFUL OF NPK PRODUCERS AROUND THE WORLD AND WILL STRIVE TO BE FIRST AMONG THEM. In the near term, prices for liquid and solid phosphates are expected to firm slightly as domestic plant shutdowns and unplanned outages have brought supply and demand into closer balance. Prices could come under pressure in the second half of the year depending on how fast and at what rate new capacity comes on stream. Sales volumes in 2000 are expected to be flat as compared to 1999. Prices for industrial products and feed supplements are also expected to be flat in comparison to 1999. The impact of substantially lower phosphate prices for all of 2000 is expected to reduce gross margin for phosphate. Market prices for nitrogen products in the near term are expected to be supported by several plant shutdowns, lower inventories and the generally stronger spring season. These prices are expected to weaken in the second half of 2000 as new capacity in Venezuela and Argentina comes on stream. Gross margin in 2000 is expected to improve but still be negative. The urea market is influenced by China which, early in 1997, stopped importing urea, thereby having a negative effect on prices. Chinese buyers remain inactive and there are no indications as to when they will return to the market. The Company manages its natural gas costs through a combination of fixed price contracts, hedges and the Trinidad gas contracts. As a flexible producer, PCS will continue to allocate its nitrogen and phosphate feedstock to production of the products with the best margins. On December 31, 1999, the Company indefinitely shut down two of its four ammonia plants in Trinidad following the expiration of the natural gas supply contract for those two plants with the National Gas Company ("NGC") of Trinidad. Discussions with NGC are ongoing as the Company attempts to achieve competitive gas pricing. Management believes that this interim shutdown will not have a material adverse effect on the Company's financial condition or results of operations. Total capital expenditures in 2000 for property, plant and equipment are expected to be approximately $150.0 million. This spending includes costs associated with the development of Aurora's mining block known as the NCPC property and new capital for PCS Yumbes. Just as in 1999, potash is expected to outperform phosphate and nitrogen in 2000. New world phosphate and nitrogen capacity is scheduled to come on stream and the impact may lead to lower profitability for 2000 compared to 1999. However, lower than expected production from anticipated new capacity in phosphate and nitrogen or improved demand from key countries such as Brazil, China or India could improve this outlook. The effective consolidated income tax rate for 2000 is expected to be approximately 30 percent. The split between current and deferred taxes is variable, highly sensitive to the source of income and ultimately affects cash flow. If most of the Company's income is from potash, the current tax portion could approach 80 percent of the tax liability. Alternatively, if potash earnings account for two-thirds of total profitability, the current tax portion could approximate 50 percent. Stronger nitrogen and phosphate earnings could reduce this current tax ratio. The narrative included under this Management's Discussion and Analysis of Financial Condition and Results of Operations has been prepared on a nutrient basis (the phosphate products produced at Geismar are included with phosphate data rather than nitrogen) rather than a subsidiary or business segment basis and with reference to the consolidated financial statements reported under accounting principles generally accepted in Canada. FORWARD-LOOKING STATEMENTS Certain statements in this annual report and this Management's Discussion and Analysis of Financial Condition and Results of Operations, including those in the "Outlook" section, relating to the period after December 31, 1999, are forward-looking statements subject to significant uncertainties. A number of factors could cause actual results to differ materially from those expressed in the forward-looking statements, including, but not limited to: fluctuation in supply and demand in fertilizer, sulphur and petrochemical markets; changes in competitive pressures, including pricing pressures; potential higher costs incurred in connection with restructuring charges as compared to costs estimated for purposes of calculating such charges; uncertainty and variations in future discounted and undiscounted net cash flows from use together with residual values estimated for purposes of calculating asset impairment; changes in capital markets; changes in currency and exchange rates; unexpected geological or environmental conditions; imprecision in reserve estimates; the outcome of legal proceedings; and changes in government policy. The Company sells to a diverse group of customers both by geography and by end product. Market conditions will vary on a year-over-year basis and sales can be expected to shift from one period to another. 42 45 10 YEAR REPORT For the Years Ended December 31
FINANCIAL DATA ($ Millions) 1999 1998 1997(4) 1996 1995(3) 1994(2) 1993(1) 1992 1991 1990 ---- ---- ------- ---- ------- ------- ------- ---- ---- ---- Net Sales 2,061.1 2,307.8 2,325.9 1,403.9 856.1 363.1 212.2 214.1 206.8 189.9 Operating (Loss) Income (350.7) 446.1 447.6 299.5 224.2 98.5 56.9 50.6 39.1 34.6 Net (Loss) Income (412.0) 261.0 297.1 209.0 159.5 91.2 44.7 39.8 31.3 17.3 Net (Loss) Income per Share (dollars) (7.60) 4.82 5.68 4.59 3.68 2.12 1.13 1.03 0.81 0.47 Dividends per Share (dollars) 0.99 0.96 1.03 1.06 1.06 0.77 0.53 0.51 0.51 0.51 Cash Provided by Operating Activities 343.6 578.0 467.8 296.2 233.5 150.7 49.8 57.4 53.8 66.1 Working Capital (104.8) 329.2 281.7 278.8 136.1 103.3 37.0 70.9 47.4 25.7 Total Assets 3,916.8 4,534.3 4,427.6 2,494.4 2,581.8 1,027.8 1,036.4 915.0 898.8 914.8 Total Long-Term Debt 437.0 933.3 1,130.0 620.0 714.5 2.0 20.1 48.9 54.4 62.6 Shareholders' Equity 1,962.4 2,453.8 2,227.9 1,405.5 1,241.9 964.3 903.7 809.5 788.9 777.3 OPERATING DATA (Thousands) EMPLOYEES AT YEAR-END (Actual Numbers) 5,498 5,744 5,751 4,490 4,579 1,781 1,818 1,415 1,227 1,242 POTASH PRODUCTION (KCl) Tonnage 6,388 6,995 6,483 5,782 6,071 5,298 3,902 3,850 4,030 3,464 PHOSPHATE PRODUCTION (P2O5) Tonnage 2,124 2,363 2,282 2,096 1,008 - - - - - NITROGEN PRODUCTION (N) Tonnage 3,138 3,121 2,349 - - - - - - - POTASH SALES - KCl Tonnes 6,474 6,283 6,640 5,612 5,848 5,569 3,795 3,737 3,909 3,725 PHOSPHATE SALES - Product Tonnes 4,016 4,627 4,434 4,305 2,206 - - - - - NITROGEN SALES - Product Tonnes 7,951 7,825 6,775 535 115 - - - - - INTERCOMPANY SALES Ammonia - Product Tonnes 404 488 120 - - - - - - - Potash - KCl Tonnes 106 126 129 120 108 99 99 91 - - NET SALES ($ Millions) POTASH 563.3 545.5 504.2 403.2 421.0 363.1 212.2 214.1 206.8 189.9 PHOSPHATE 843.8 1,011.0 953.6 892.0 412.1 - - - - - NITROGEN 654.0 751.3 868.1 108.7 23.0 - - - - - ------- ------- ------- ------- ----- ----- ----- ----- ----- ----- TOTAL NET SALES 2,061.1 2,307.8 2,325.9 1,403.9 856.1 363.1 212.2 214.1 206.8 189.9 ======= ======= ======= ======= ===== ===== ===== ===== ===== =====
(1) Data for 1993 and thereafter reflect the acquisition of Potash Company of America assets on October 7, 1993. (2) The financial statements of the Company for 1994 and prior years have been restated to US dollars in accordance with accounting principles generally accepted in Canada using the Translation of Convenience Method. The Canadian dollar amounts for these periods have been converted to US dollars at the exchange rate of US$1.00 = CDN$1.4028. (3) Data for 1995 and thereafter reflect the acquisition of Texasgulf Inc. on April 10, 1995 and the acquisition of White Springs Agricultural Chemicals, Inc. on October 31, 1995. (4) Data for 1997 and thereafter reflect the acquisition of Arcadian Corporation on March 6, 1997. The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada. These principles differ in some respects from those applicable in the United States (see Note 32 to the Company's consolidated financial statements). NOTES TO SELECTED TEN-YEAR DATA: 1. There were no extraordinary items nor were there any discontinued operations in any of the accounting periods. 2. Fully diluted net (loss) income per share did not differ materially from net (loss) income per share in any of the accounting periods. ADDITIONAL INFORMATION Data for 1999 include the effects of charges for plant closures and office consolidation and asset impairments of $591.5 million. 43 46 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The accompanying consolidated financial statements and related financial information are the responsibility of PCS management and have been prepared in accordance with accounting principles generally accepted in Canada and include amounts based on estimates and judgments. Financial information included elsewhere in this report is consistent with the consolidated financial statements. To meet management's responsibility for financial reporting and to obtain reasonable assurance for the integrity and reliability of the financial reports, the Company's accounting and internal control systems are designed to safeguard assets and to properly record transactions and events. Policies and procedures are maintained to support the accounting and internal control systems. Our independent auditors, Deloitte & Touche LLP, provide an objective, independent audit of the consolidated financial statements. Their report for 1999 is included. The Board of Directors, through the audit committee composed exclusively of outside directors, meets regularly with the independent auditors - both jointly and separately - to review significant accounting, reporting and internal control matters. The audit committee also recommends to the Board the independent auditors to be proposed to the shareholders for appointment at the annual meeting. Interim consolidated financial statements are reviewed by the audit committee prior to release to shareholders. The consolidated financial statements are approved by the Board of Directors on the recommendation of the audit committee. /s/ W. Doyle /s/ W. Brownlee - ---------------------- ------------------------- W. Doyle W. Brownlee President and Senior Vice President and Chief Executive Officer Chief Financial Officer February 9, 2000 AUDITORS' REPORT TO THE SHAREHOLDERS OF POTASH CORPORATION OF SASKATCHEWAN INC. We have audited the consolidated statements of financial position of Potash Corporation of Saskatchewan Inc. as at December 31, 1999 and 1998 and the consolidated statements of income and retained earnings and of cash flow for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Canada. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in accordance with accounting principles generally accepted in Canada. Saskatoon, Saskatchewan /s/ Deloitte & Touche LLP February 9, 2000 (except as to Note 33 ------------------------- which is as of February 22, 2000) Chartered Accountants 44 47 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION As at December 31 (in thousands of US dollars)
1999 1998 ----------- ----------- ASSETS Current Assets Cash and cash equivalents $ 44,037 $ 67,971 Accounts receivable (Note 5) 269,264 302,974 Inventories (Note 6) 377,232 364,397 Prepaid expenses 35,702 38,839 ---------- ---------- 726,235 774,181 Property, plant and equipment (Note 7) 2,877,060 3,003,443 Goodwill (Note 8) 109,378 559,621 Other assets (Note 9) 204,157 197,012 ---------- ---------- $3,916,830 $4,534,257 ========== ========== LIABILITIES Current Liabilities Short-term debt (Note 10) $ 474,504 $ 94,940 Accounts payable and accrued charges (Note 11) 349,062 349,684 Current portion of long-term debt (Note 12) 7,437 386 ---------- ---------- 831,003 445,010 Long-term debt (Note 12) 437,020 933,294 Deferred income tax liability (Note 23) 409,371 417,853 Accrued post-retirement/post-employment benefits (Note 14) 148,409 131,179 Accrued reclamation costs (Note 15) 112,175 129,399 Other non-current liabilities and deferred credits 16,466 23,761 ---------- ---------- 1,954,444 2,080,496 ========== ========== CONTINGENCIES (NOTE 27) SHAREHOLDERS' EQUITY Share Capital (Note 16) 1,216,533 1,227,599 Unlimited authorization of common shares without par value; issued and outstanding 53,694,209 and 54,243,795 shares in 1999 and 1998, respectively Unlimited authorization of first preferred shares; none outstanding Contributed Surplus (Note 17) 321,494 336,486 Retained Earnings 424,359 889,676 ---------- ---------- 1,962,386 2,453,761 ---------- ---------- $3,916,830 $4,534,257 ========== ==========
(See Notes to the Consolidated Financial Statements) Approved by the Board, /s/ D. Howe /s/ E.R. Stromberg -------------------- -------------------- Director Director 45 48 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Years Ended December 31 (in thousands of US dollars)
1999 1998 1997 ---------- ---------- ---------- Net sales (Note 18) $2,061,064 $2,307,763 $2,325,929 Cost of goods sold 1,652,793 1,698,416 1,740,758 ---------- ---------- ---------- Gross Margin 408,271 609,347 585,171 ---------- ---------- ---------- Selling and administrative 116,294 116,012 99,663 Provincial mining and other taxes (Note 19) 77,085 80,088 70,312 Provision for plant closures and office consolidation (Note 20 ) 64,950 - - Provision for asset impairment (Note 21) 526,567 - - Other income (25,924) (32,809) (32,444) ---------- ---------- ---------- 758,972 163,291 137,531 ---------- ---------- ---------- OPERATING (LOSS) INCOME (350,701) 446,056 447,640 INTEREST EXPENSE (NOTE 22) 53,824 67,574 81,439 ---------- ---------- ---------- (LOSS) INCOME BEFORE INCOME TAXES (404,525) 378,482 366,201 INCOME TAXES (NOTE 23) 7,469 117,479 69,063 ---------- ---------- ---------- NET (LOSS) INCOME (411,994) 261,003 297,138 RETAINED EARNINGS, BEGINNING OF YEAR 889,676 680,356 438,526 DIVIDENDS (53,323) (51,683) (55,308) ---------- ---------- ---------- RETAINED EARNINGS, END OF YEAR $ 424,359 $ 889,676 $ 680,356 ---------- ---------- ---------- NET (LOSS) INCOME PER SHARE (NOTE 24) $ (7.60) $ 4.82 $ 5.68 ---------- ---------- ---------- DIVIDENDS PER SHARE (NOTE 25) $ 0.99 $ 0.96 $ 1.03 ---------- ---------- ----------
(See Notes to the Consolidated Financial Statements) 46 49 CONSOLIDATED STATEMENTS OF CASH FLOW For the Years Ended December 31 (in thousands of US dollars)
1999 1998 1997 ---- ---- ---- OPERATING ACTIVITIES Net (loss) income $ (411,994) $ 261,003 $ 297,138 Items not affecting cash Depreciation and amortization 191,106 190,880 170,002 Loss (gain) on disposal of property, plant and equipment 459 (99) (4,739) Provision for deferred income tax (7,155) 97,203 34,491 Provision for plant closures and office consolidation 37,132 - - Provision for asset impairment 526,567 - - Provision for post-retirement/post-employment benefits 7,381 6,848 6,166 ---------- --------- ---------- 343,496 555,835 503,058 CHANGES IN NON-CASH OPERATING WORKING CAPITAL Accounts receivable 33,779 48,751 23,470 Inventories (16,067) (7,859) 19,873 Prepaid expenses 3,175 (16,603) 3,736 Accounts payable and accrued charges (5,024) 1,301 (72,006) Current income taxes 8,107 (3,778) 3,383 Accrued reclamation costs (20,680) (7,436) (7,407) Other non-current liabilities and deferred credits (3,177) 7,749 (6,286) ---------- --------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES 343,609 577,960 467,821 ---------- --------- ---------- INVESTING ACTIVITIES Additions to property, plant and equipment (118,846) (190,155) (160,337) Acquisition of Minera Yolanda S.C.M. (Note 4) (36,943) - - Acquisition of Arcadian Corporation - - (474,985) Proceeds from disposal of property, plant and equipment 1,873 31,926 15,276 Additions to other assets (23,832) (85,066) (22,091) ---------- --------- ---------- CASH USED IN INVESTING ACTIVITIES (177,748) (243,295) (642,137) ---------- --------- ---------- CASH (DEFICIENCY) BEFORE FINANCING ACTIVITIES 165,861 334,665 (174,316) ---------- --------- ---------- FINANCING ACTIVITIES Proceeds from long-term obligations - 143,000 1,210,000 Repayment of long-term obligations (489,978) (376,329) (699,979) Proceeds from short-term debt 379,564 215,000 210,000 Repayment of short-term debt - (221,988) (108,072) Repayment of Senior Notes - - (374,526) Dividends (53,323) (51,683) (55,308) Repurchase of shares (29,262) - - Issuance of shares 3,204 16,550 7,287 ---------- --------- ---------- CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (189,795) (275,450) 189,402 ---------- --------- ---------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (23,934) 59,215 15,086 CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS), BEGINNING OF YEAR 67,971 8,756 (6,330) ---------- --------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 44,037 $ 67,971 $ 8,756 ========== ========= ========== Supplemental cash flow disclosure Interest paid $ 57,713 $ 68,419 $ 84,365 Income taxes paid $ 5,767 $ 19,228 $ 41,252 ---------- --------- ----------
(See Notes to the Consolidated Financial Statements) 47 50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 1. DESCRIPTION OF BUSINESS Potash Corporation of Saskatchewan Inc. ("PCS") and its operating subsidiaries (the "Company" except to the extent the context otherwise requires) form an integrated fertilizer and related industrial and feed products company. The Company's potash producing assets include five mines and mills and mining rights to potash reserves at a sixth location all in the Province of Saskatchewan, one mine and two mills located in the Province of New Brunswick and one mine and mill in the State of Utah. The Company's phosphate producing assets include a vertically-integrated phosphate mine and processing plant located in the State of North Carolina, phosphate feed plants in five states, two industrial phosphoric acid plants owned in a joint venture carrying on business as Albright & Wilson Company, a mine and processing plant complexes in the State of Florida and a processing plant complex in the State of Louisiana. The Company's nitrogen producing assets include four domestic plants located in the states of Georgia, Louisiana, Ohio and Tennessee and large-scale operations in Trinidad. The Company has a plant in Chile that will produce sodium nitrate and potassium nitrate. The Company owns or leases in excess of 130 terminal and warehouse facilities strategically located in Canada and the United States, and services customers with a fleet of approximately 5,000 rail cars. The Company sells potash from its Saskatchewan mines for use outside North America exclusively to Canpotex Limited ("Canpotex"). Canpotex, a potash export, sales and marketing company owned in equal shares by the three potash producers in the Province of Saskatchewan (including the Company), resells potash to offshore customers. PCS Sales (Canada) Inc. and PCS Sales (USA), Inc., wholly- owned subsidiaries of PCS, execute marketing and sales for the Company's potash, phosphate and nitrogen products in North America. PCS Sales (Canada) Inc. executes offshore marketing and sales for the Company's New Brunswick potash. PCS Sales (USA), Inc. executes offshore marketing and sales for the Company's nitrogen products. Phosphate Chemicals Export Association, Inc. ("PhosChem"), an unrelated phosphate export association established under United States law, is the principal vehicle through which the Company executes offshore marketing and sales for its phosphate fertilizers. 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company's accounting policies are in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"). These policies are consistent with accounting principles generally accepted in the United States ("US GAAP") in all material respects except as outlined in Note 32. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following policies are considered to be significant: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of PCS and its operating subsidiaries: o PCS Sales (Canada) Inc. - PCS Sales (Iowa), Inc. - PCS Sales (Indiana), Inc. - PCS Joint Venture, LP o PCS Sales (USA), Inc. o Potash Corporation of Saskatchewan Transport Limited o PCS Phosphate Company, Inc. - Albright & Wilson Company (proportionately consolidated) o White Springs Agricultural Chemicals, Inc. ("White Springs") o PCS Nitrogen, Inc. - PCS Nitrogen Fertilizer, L.P. - PCS Nitrogen Ohio, L.P. - PCS Nitrogen Limited - PCS Nitrogen Fertilizer Limited - PCS Nitrogen Trinidad Limited o PCS Cassidy Lake Company ("PCS Cassidy Lake") o PCS Yumbes S.C.M. All significant intercompany balances and transactions have been eliminated. CASH EQUIVALENTS Highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. INVENTORIES Inventories of finished product, raw materials and work in process are valued at the lower of cost and net realizable value. Cost for substantially all finished product, raw materials and work in process inventories is determined using the first in, first out (FIFO) method. Certain inventories of materials and supplies are valued at the lower of average cost and replacement cost and certain inventories of materials and supplies are valued at the lower of cost and market. PREPAID EXPENSES Prepaid expenses include prepaid freight relating to product inventory stored at warehouse and terminal facilities which is invoiced to customers at the time of sale of the inventory. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment (which includes mine development costs) are carried at cost, except for mineral properties, which are carried at the lower of cost or fair value. Costs of additions, betterments, renewals and interest during construction are capitalized. The Company periodically reviews property, plant and equipment for indicators of potential impairment. Impairment would be measured by comparing book value against the estimated undiscounted future cash flows and any such impairment loss is included in the statement of income. Maintenance and repair expenditures which do not improve or extend productive life are expensed as incurred. DEPRECIATION AND AMORTIZATION Depreciation and amortization are provided for on a basis and at rates calculated to amortize the cost of the property, plant and equipment over their estimated useful lives. Depreciation and amortization rates for all mine assets (including mine development costs) and potash mills are determined using the units of production method based on estimates of proven and probable reserves. Other asset classes are depreciated or amortized on a straight-line basis as follows: land improvements 5 to 30 years, buildings and improvements 6 to 30 years and machinery and equipment 5 to 25 years. GOODWILL Goodwill represents the excess of the purchase price and related costs over the value assigned to the net tangible assets of businesses acquired and is carried at cost. Goodwill is being amortized on a straight-line basis over a period of forty years. The Company assesses the recoverability of this intangible asset based on estimated undiscounted future cash flows. Impairment is measured by comparing book value against the estimated undiscounted future cash flows and any such impairment is included in the statement of income. 48 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) OTHER ASSETS Issue costs of long-term obligations are capitalized to deferred charges and are amortized to interest expense over the term of the related liability. Preproduction costs are capitalized to deferred charges and represent costs incurred prior to obtaining commercial production at new milling facilities, net of revenue earned, and are amortized on a straight-line basis over ten years. The costs of constructing bases for gypsum stacks and settling ponds are capitalized to deferred charges and are amortized on a straight-line basis over their estimated useful lives of three to five years. Land held for sale is stated at the lower of cost or net realizable value. Investments in which the Company exercises significant influence (but does not control) are accounted for using the equity method. Other investments are stated at cost. Rotational plant maintenance costs, which consist primarily of planned major maintenance projects (also known as "turnarounds"), are capitalized when incurred and are amortized over the anticipated periods until the next scheduled rotational plant maintenance which ranges from two to four years. LEASES Leases entered into are classified as either capital or operating leases. Leases that transfer substantially all of the benefits and risks of ownership of property to the Company are accounted for as capital leases. At the time a capital lease is entered into, an asset is recorded together with the related long-term obligation. Equipment acquired under capital leases is being depreciated on the same basis as other property, plant and equipment. Gains or losses resulting from sale-leaseback transactions are deferred and amortized in proportion to the amortization of the leased asset. Rental payments under operating leases are charged to expense as incurred. POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS Accrual of the costs of the Company's defined benefit pension plans are recorded monthly and adjusted annually based on actuaries' reports. Pension expense includes the net of management's best estimate of the cost of benefits provided, interest cost of projected benefits, return on pension plan assets and amortization of experience gains or losses and plan amendments. Adjustments arising from plan amendments, experience gains or losses and changes in assumptions are amortized on a straight-line basis over the expected average remaining service life of the employee group covered by the plan. Pension fund assets are valued at market values. Accrual of the costs of providing certain post-retirement benefits, including medical and life insurance coverage, during the active service period of the employee is recorded monthly and adjusted annually as actuaries' reports become available. Accrual during periods of active employment, for the expected cost of certain benefits payable to former or inactive employees, is also recorded monthly and adjusted annually. These benefits include long-term disability income payments and related medical and insurance costs. ENVIRONMENTAL COSTS Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to existing conditions caused by past operations and that do not contribute to current or future revenue generation are expensed. Provisions for estimated costs are recorded when environmental remedial efforts are likely and the costs can be reasonably estimated. In determining the provisions, the Company uses the most current information available, including similar past experiences, available technology, regulations in effect, the timing of remediation and cost-sharing arrangements. STOCK-BASED COMPENSATION PLANS The Company has two stock-based compensation plans which are described in Note 16. No compensation expense is recognized for these plans when stock options are issued as the exercise price is the quoted market closing price of the Company's common shares on the last trading day immediately preceding the date of the grant. Any consideration paid on exercise of stock options is credited to share capital. FOREIGN EXCHANGE TRANSACTIONS PCS and its operating subsidiaries have the US dollar as their functional currency. Canadian dollar operating transactions are translated to US dollars at the average exchange rate of the previous month. Trinidadian dollar operating transactions are translated to US dollars at the average exchange rate for the period. Monetary assets and liabilities are translated at period-end exchange rates. Non-monetary assets owned at December 31, 1994 have been translated under the Translation of Convenience Method at the December 31, 1994 year-end exchange rate of US $1.00 = CDN $1.4028. Additions subsequent to December 31, 1994 are translated at the exchange rate prevailing at the time of the transaction. Foreign exchange gains or losses are included in other income. FINANCIAL INSTRUMENTS The Company enters into forward exchange contracts and natural gas futures, swaps and option agreements to manage its exposure to exchange rate and commodity price fluctuations. These activities have been designated as hedging activities by the Company. Gains or losses on foreign currency exchange contracts are recognized at the time that the contracts are entered into and are included in other income. Gains or losses resulting from changes in the fair value of natural gas hedging transactions which have not yet been settled are not recognized as they generally relate to changes in the spot price of anticipated natural gas purchases. Gains or losses arising from settled hedging transactions are deferred as a component of inventory until the product containing the hedged item is sold, at which time both the natural gas purchase cost and the related hedging deferral are recorded as cost of sales. The Company regularly evaluates its unrecognized or deferred gains and losses on these derivatives from a net realizable value of inventory perspective and establishes appropriate provisions, if necessary. REVENUE RECOGNITION Sales revenue is recognized when the product is shipped or a service is performed. Revenue is recorded based on the F.O.B. mine, plant, warehouse or terminal price. Transportation costs are recovered from the customer through sales pricing. 3. CHANGE IN ACCOUNTING POLICY The Company has adopted the provisions of section 1540 of the Canadian Institute of Chartered Accountants Handbook "Cash Flow Statements". Under this accounting policy, cash flows are classified as either operating, investing or financing activities. Major classes of gross cash receipts and gross cash payments arising from investing and financing activities are separately disclosed. Investing and financing transactions that do not require the use of cash or cash equivalents are excluded from the cash flow statement and disclosed supplementally. The effect of this change on the current and prior period cash flow 49 52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 3. CHANGE IN ACCOUNTING POLICY (CONTINUED) statements was to reduce the amount reported as an investing activity for the acquisition of Arcadian Corporation in 1997 and reduce the amount reported as a financing activity for the issuance of shares related to the acquisition. These non-cash activities have been disclosed supplementally in Note 29. In addition, the proceeds from and repayment of long-term obligations and short-term debt have been disclosed separately rather than as a net amount. 4. ACQUISITION OF MINERA YOLANDA S.C.M. On July 1, 1999, the Company acquired all of the outstanding shares of Minera Yolanda S.C.M. for cash of $37,000 (which was funded from operations). Minera Yolanda S.C.M. is a Chilean sodium nitrate and potassium nitrate producer which holds mining concessions on certain sodium nitrate reserves in the Atacama Desert in northern Chile. Subsequent to the acquisition, the name Minera Yolanda S.C.M. was changed to PCS Yumbes S.C.M. ("PCS Yumbes"). The acquisition has been accounted for by the purchase method of accounting and, accordingly, the results of operations of PCS Yumbes have been included in the consolidated financial statements from July 1, 1999.
Net assets acquired were: Working capital $ 282 Property, plant and equipment and other assets 31,990 Deferred tax asset 6,370 ------- 38,642 Long-term liabilities 1,642 ------- Net assets acquired 37,000 Less: cash acquired 57 ------- Net cash acquisition cost $36,943 =======
Due to the fact that PCS Yumbes was not in full commercial production prior to the acquisition, no pro forma information is being provided. 5. ACCOUNTS RECEIVABLE
1999 1998 -------- -------- Trade accounts - Canpotex $ 37,603 $ 30,738 - Other 215,037 247,956 Non-trade accounts 23,646 30,055 -------- -------- 276,286 308,749 Less allowance for doubtful accounts 7,022 5,775 -------- -------- $269,264 $302,974 ======== ========
6. INVENTORIES
1999 1998 -------- -------- Finished product $165,301 $176,908 Materials and supplies 110,615 106,797 Raw materials 53,329 58,471 Work in process 47,987 22,221 -------- -------- $377,232 $364,397 ======== ========
7. PROPERTY, PLANT AND EQUIPMENT
1999 ------------------------------------------ ACCUMULATED DEPRECIATION AND NET BOOK COST AMORTIZATION VALUE ----------- ---------------- ---------- Land and improvements $ 213,374 $ 26,209 $ 187,165 Buildings and improvements 446,889 127,499 319,390 Machinery and equipment 3,035,816 754,108 2,281,708 Mine development costs 132,018 43,221 88,797 ---------- -------- ---------- $3,828,097 $951,037 $2,877,060 ========== ======== ==========
1998 ------------------------------------------ ACCUMULATED DEPRECIATION AND NET BOOK COST AMORTIZATION VALUE ----------- ---------------- ---------- Land and improvements $ 206,230 $ 23,318 $ 182,912 Buildings and improvements 449,096 117,037 332,059 Machinery and equipment 3,034,648 631,476 2,403,172 Mine development costs 125,908 40,608 85,300 ---------- -------- ---------- $3,815,882 $812,439 $3,003,443 ========== ======== ==========
Depreciation and amortization of property, plant and equipment included in Cost of Goods Sold and in Selling and Administrative was $161,045 (1998 - $154,215; 1997 - $141,241). During the year the Company recorded an impairment charge of $85,862 relating to certain of the assets (see Note 21). 8. GOODWILL
1999 1998 -------- -------- Cost $110,718 $586,987 Accumulated amortization 1,340 27,366 -------- -------- $109,378 $559,621 ======== ========
Amortization of goodwill included in Selling and Administrative was $11,745 (1998 - $14,675; 1997 - $12,238). During the year the Company recorded an impairment charge of $438,498 (see Note 21). 9. OTHER ASSETS
1999 1998 -------- -------- Deferred charges - net of accumulated amortization $ 49,723 $ 41,268 Prepaid pension costs 14,399 11,169 Land held for sale 3,490 3,490 Investments, at equity 21,890 23,961 Investment, at cost 92,832 92,151 Rotational plant maintenance costs -- net of accumulated amortization 16,087 21,103 Other 5,736 3,870 -------- -------- $204,157 $197,012 ======== ========
Amortization of deferred charges and rotational plant maintenance costs included in Cost of Goods Sold and in Selling and Administrative was $18,316 (1998 - $21,990; 1997 - $16,523). 10. SHORT-TERM DEBT Short-term debt was $474,504 at December 31, 1999 (1998 -$94,940). The weighted average interest rate on this debt was 6.02% (1998 - 6.00%). The Company had available lines of credit for short-term financing (net of letters of credit of $26,242) in the amount of $195,721 at December 31, 1999 (1998 - $177,451). The lines of credit are unsecured. In addition, the Company is authorized to borrow a further $98,407 under the commercial paper program. 50 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 11. ACCOUNTS PAYABLE AND ACCRUED CHARGES
1999 1998 -------- -------- Trade accounts $231,767 $265,300 Accrued reclamation 22,707 7,731 Accrued interest 5,436 6,758 Accrued payroll 11,873 14,429 Accrued integration 40,502 42,702 Accrued plant closure and office consolidation 20,603 - Income taxes 2,511 - Dividends 13,663 12,764 -------- -------- $349,062 $349,684 ======== ========
During the year the Company paid severance, relocation and other related costs in the amount of $2,200 (1998 - $1,832) which were charged against accrued integration. 12. LONG-TERM DEBT
1999 1998 -------- -------- SYNDICATED FACILITIES LED BY THE BANK OF NOVA SCOTIA $ - $488,000 The Credit Facility provides for aggregate unsecured advances of $778 million (less the amount of commercial paper outstanding) at an interest rate of LIBOR plus a maximum of 0.75% (actual at December 31, 1998 was 0.40%) or Base Rate Canada Loans, payable throughout the term of the Credit Facility. The actual weighted average interest rate at December 31, 1998 was 5.66%. The Credit Facility is renewable every 364 days with the consent of the lenders. No principal payments are required during the revolving period. If the Credit Facility is not renewed, it converts to a five-year term facility repayable in twenty quarterly instalments each equal to 1% of the principal outstanding on the conversion date and a final payment of the remaining principal amount due on the fifth anniversary of the conversion date. INDUSTRIAL REVENUE AND POLLUTION CONTROL OBLIGATIONS 43,343 44,266 Adjustable Rate Industrial Revenue and Pollution Control Obligations with varying interest rates and with maturity dates ranging from 2000 to 2012. No sinking fund requirements prior to maturity. The Adjustable Rate Industrial Revenue and Pollution Control Obligations bear interest at rates ranging from 3.75% to 4.30%. The average interest rate on these obligations was 3.53% in 1999 (1998 - 3.67%). These loans are secured by bank letters of credit. NOTES PAYABLE 400,000 400,000 7.125% notes payable June 15, 2007. No sinking fund requirements prior to maturity. These notes were issued under a shelf registration statement covering up to $1,000,000 of debt securities. The notes are unsecured. OBLIGATIONS UNDER CAPITAL LEASES 911 823 OTHER 203 591 -------- -------- 444,457 933,680 Less current maturities 7,437 386 -------- -------- $437,020 $933,294 ======== ========
The fair values of all long-term obligations (except the Notes Payable whose approximate fair value at December 31, 1999 was $367,112) are approximated by their face values. Long-term debt at December 31, 1999 will mature as follows:
2000 $ 7,437 2001 677 2002 221 2003 2,637 2004 253 Subsequent years 433,232 -------- $444,457 ========
13. COMMITMENTS LEASE COMMITMENTS The Company has long-term lease agreements for buildings, port facilities, certain ammonia plants in Trinidad, equipment, ocean-going transportation vessels and rail cars, the latest of which expires in 2020 (excluding mineral leases). The Company has lease agreements with unaffiliated entities with respect to two ammonia plants constructed in Trinidad. The minimum annual lease payments under these agreements are approximately $27,000. The initial terms of the leases (five years and seven years) are renewable for additional five-year terms subject to certain conditions. If the leases are not renewed or are otherwise terminated, the Company may be required to make residual termination payments of approximately 85% of the estimated $384,000 costs of construction. The Company has an option to purchase the plants during the terms of the leases for prices approximating their fair market values at the date of exercise. 51 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 13. COMMITMENTS (CONTINUED) Future minimum lease payments under these operating leases will be approximately as follows:
2000 $ 93,613 2001 84,842 2002 80,675 2003 53,336 2004 41,397 Subsequent years 248,468
Rental expense for operating leases for the years ended December 31, 1999, 1998 and 1997 was $94,062, $86,633 and $65,252, respectively. OTHER COMMITMENTS The Company has entered into raw material purchase commitments based upon market rates at the time of delivery through 2008 in the amount of approximately $122,413, of which approximately $55,984 relates to 2000. The Company has entered into an agreement for the construction of a vessel for ocean-going transportation of raw materials and finished products in the amount of $37,000. In addition, the Company has entered into an agreement for the construction of six barges for the transportation of raw materials in the amount of $13,060. The balance of the progress payments of $15,200 relating to these agreements is required in 2000. Two of the Company's Trinidad subsidiaries have entered into long-term natural gas contracts with a gas company in Trinidad. The contracts provide for prices which vary with ammonia market prices, escalating floor prices and minimum purchase quantities. The third Trinidad subsidiary is currently negotiating a long-term natural gas contract. 14. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS CANADA Substantially all employees of the Company are participants in either a defined contribution or a defined benefit pension plan. The Company's obligations under the defined contribution plans are limited to making regular payments to the plan to match contributions made by the employees for current services (to a maximum of 5.5% of salary). The Company has established a supplemental retirement income plan for senior management which is unfunded and non-contributory and provides a supplementary pension benefit. The plan is provided for by charges to earnings sufficient to meet the projected benefit obligation. UNITED STATES The Company has defined benefit pension plans that cover a substantial majority of its employees. Benefits are based on a combination of years of service and compensation levels, depending on the plan. Generally, contributions to the US plans are made to meet minimum funding requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). Assets of both US funded plans consist mainly of corporate equity, US government and corporate debt securities and units of participation in a collective short-term investment fund. TRINIDAD The Company has contributory defined benefit pension plans that cover a substantial majority of its employees. Benefits are based on service. The plans' assets consist mainly of local government and other bonds, local mortgage and mortgage-backed securities, fixed income deposits and cash. ALL PENSION PLANS The components of net pension expense for the Company's pension plans, computed actuarially, were as follows:
1999 1998 1997 -------- -------- -------- Service cost for benefits earned during the year $ 13,743 $ 11,669 $ 9,827 Interest cost on projected benefit obligations 23,318 22,019 19,566 Expected return on plan assets (35,928) (29,900) (25,234) Net amortization and deferral 2,485 1,730 31 ------- ------- -------- Net pension expense $ 3,618 $ 5,518 $ 4,190 ======= ======= ========
Significant actuarial assumptions used in calculating the net pension expense for the Company's funded plans were as follows:
1999 1998 1997 ---- ---- ---- Discount rate 7.75% 6.75% 7.50% Long-term rate of return on assets 9.00% 9.00% 9.00% Rate of increase in compensation levels 5.00% 5.00% 5.00%
OTHER POST-RETIREMENT PLANS The Company provides certain contributory health care plans and non-contributory life insurance benefits for retired employees. These plans contain certain cost-sharing features such as deductibles and coinsurance, and are unfunded with benefits subject to change. Although the Company prepares its financial statements under Canadian GAAP, it has continued to apply the treatment prescribed by SFAS No. 106 under US GAAP "Employers' Accounting for Postretirement Benefits Other Than Pensions" and SFAS No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits". These statements require the accrual of the cost of providing other post-retirement benefits, including medical and life insurance coverage, during the active service period of the employee, and prescribe certain disclosure requirements. The components of this expense, computed actuarially, were as follows:
1999 1998 1997 ------- ------- ------- Service cost for benefits earned during the year $ 3,870 $ 2,903 $ 2,701 Interest cost on projected benefit obligations 9,334 8,025 7,816 Net amortization and deferral 5 2 - ------- ------- ------- Net post-retirement expense $13,209 $10,930 $10,517 ======= ======= =======
The significant actuarial assumptions used in determining post-retirement benefit expense were as follows: Discount rate 7.75% 6.80% 7.50% Health care cost trend rate 6.00% 10.00% 10.80%
If the health care cost trend rate was increased by 1.0 percent, the accumulated post-retirement benefit obligation and the aggregate of service and interest cost would have increased as follows:
1999 1998 1997 ------- ------- ------- Accumulated post-retirement benefit obligation $15,488 $ 6,325 $ 4,722 Aggregate of service and interest cost 2,910 573 490
If the health care cost trend rate was decreased by 1.0 percent, the accumulated post-retirement benefit obligation and the aggregate of service and interest cost would have decreased as follows: 52 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 14. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS (CONTINUED)
1999 1998 1997 ---- ---- ---- Accumulated post-retirement benefit obligation $19,389 $2,848 $2,599 Aggregate of service and interest cost 3,852 263 370
The Company has applied Canadian GAAP to prepare its financial statements but continues to apply SFAS No. 112 under US GAAP "Employers' Accounting for Postemployment Benefits". This statement requires the Company to accrue, during periods of active employment, the expected cost of certain benefits payable to former or inactive employees. These benefits include long-term disability income payments and related medical and insurance costs. The effect of these costs on income before income taxes and the recorded liability for these costs was not significant for any of the years presented. All of the Company's US employees may participate in defined contribution savings plans. These plans are subject to US federal tax limitations and provide for voluntary employee salary deduction contributions of up to 15 percent of salary and Company matching contributions of up to 5 percent of salary. The Company's matching contributions were $3,506 and $3,844 for 1999 and 1998, respectively. All of the Company's Canadian salaried employees participate in the PCS Inc. Savings Plan which was effective January 1, 1999. The Company contributes 5 percent of salary to the plan and employees may make voluntary contributions. The Company's contributions were $1,318 in 1999. The change in benefit obligations and change in plan assets for the above pension and post-retirement/post-employment plans were as follows:
POST-RETIREMENT/ PENSION POST-EMPLOYMENT -------------------------- ------------------------- 1999 1998 1999 1998 -------- -------- --------- --------- Change in Benefit Obligations Balance, beginning of year $ 360,102 $306,948 $ 136,326 $ 119,701 Acquisitions - 849 - - Canadian benefit obligations - 11,156 - - Service cost 13,743 11,669 3,870 2,903 Interest cost 23,318 22,019 9,334 8,025 Participants' contributions 369 384 - 88 Actuarial (loss) gain (35,676) 20,936 (368) 10,421 Amendments - - (9,490) - Benefits paid (14,637) (13,859) (4,388) (4,812) -------- -------- --------- ---------- Balance, end of year 347,219 360,102 135,284 136,326 -------- -------- --------- ---------- Change in Plan Assets Fair value, beginning of year 368,727 333,020 - - Canadian plan assets - 11,156 - - Actual return on plan assets 11,737 34,130 - - Employer contributions 8,438 4,080 3,569 4,092 Participants' contributions 369 1,110 819 720 Valuation allowance (1,634) (910) - - Benefits paid (14,637) (13,859) (4,388) (4,812) -------- -------- --------- ---------- Fair value, end of year 373,000 368,727 - - -------- -------- --------- ---------- Funded Status 25,781 8,625 (135,284) (136,326) Unrecognized Net (Loss) Gain (26,085) (11,244) 6,867 11,908 Unrecognized Prior Service Cost 1,215 2,270 (10,209) - -------- -------- --------- ---------- Prepaid (Accrued) Benefit Cost 911 (349) (138,626) (124,418) Less current portion - 2,187 3,705 3,630 -------- -------- --------- ---------- 911 1,838 (134,921) (120,788) Add SFAS 112 liability - - - (1,060) -------- -------- --------- ---------- Prepaid (Accrued) Post-retirement/Post-employment Benefits $ 911 $ 1,838 $(134,921) $(121,848) -------- -------- --------- ---------- Amounts recognized in the statements of financial position consist of: Long-term liability $ (13,488) $ (9,331) $(134,921) $(121,848) Prepaid pension costs 14,399 11,169 - - --------- -------- --------- ---------- $ 911 $ 1,838 $(134,921) $(121,848) --------- -------- --------- ----------
The aggregate pension accumulated benefit obligations and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets are as follows:
POST-RETIREMENT/ PENSION POST-EMPLOYMENT --------------------- -------------------------- 1999 1998 1999 1998 --------------------- -------------------------- Accumulated benefit obligation $84,390 $100,213 $ 134,921 $ 121,848 Fair value of plan assets $72,224 $ 76,698 - -
15. ENVIRONMENTAL COST RECLAMATION AND RESTORATION COSTS Site restoration and reclamation costs have been accrued for various sites. At December 31, 1999, the Company has accrued $28,524 (1998 - $29,078) for the Aurora, North Carolina facility, $55,755 (1998 - $66,412) for the White Springs, Florida facility, $27,377 (1998 - $27,377) for 53 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 15. ENVIRONMENTAL COST (CONTINUED) the Moab, Utah facility, $552 (1998 - $9,225) for various sulphur facilities, $18,401 (1998 - $nil) for certain Florida Favorite Fertilizer facilities and $4,273 (1998 - $5,038) for the Cassidy Lake facility. The idle sulphur facilities were part of the acquisition of Texasgulf Inc. and are undergoing dismantlement and environmental restoration efforts. The current portion of restoration and reclamation accrued in 1999 totalled $22,707 (1998 - $7,731). These amounts represent the Company's current estimate of potential site restoration and reclamation costs which were last assessed in December 1999. These expenditures are generally incurred over an extended period of time. Annual environmental expenditures for reclamation and restoration during the years ended December 31, 1999, 1998 and 1997 were $79,293, $71,887 and $66,972 respectively. Of the 1999 amount, $70,303 (1998 - $62,958; 1997 - $51,421) was charged to operations, $3,074 (1998 - $4,059; 1997 - $4,948) was capitalized and $5,916 (1998 - $4,870; 1997 - $10,603) was charged against accrued reclamation costs. Certain reclamation obligations are currently secured by a surety bond of approximately $13,000. CAPPING OF BYPRODUCT GYPSUM STACKS In 1993, the State of Florida passed certain legislation requiring companies to reduce the potential environmental hazards associated with accumulations of byproduct gypsum (gypsum stacks). The regulations implementing this legislation require companies to "cap" the gypsum stacks in order to reduce seepage into the groundwater, when such stacks reach their design capacity (for the Company, in approximately 35 years), or after March 25, 2001 if groundwater standards are not being met. At December 31, 1999, a balance of $35,350 (1998 - $35,350) was included in accrued reclamation costs for this gypsum stack capping requirement. The obligation of White Springs regarding the gypsum stacks is guaranteed by PCS. In North Carolina, on expiry of the mine's phosphate reserves, capping of the remaining gypsum stacks must comply with the laws in place at that time. OTHER ENVIRONMENTAL COSTS Other than reclamation, restoration and gypsum stack capping costs discussed above, no significant costs relating to existing conditions caused by past operations were incurred by the Company during 1999. At December 31, 1999, environmental provisions recorded by the Company, other than those related to reclamation, restoration and gypsum stack capping, as discussed above, were approximately $2,582. The Company's estimated operating expenses, other than reclamation, restoration and gypsum stack capping, relating to compliance with environmental laws and regulations governing ongoing operations were approximately $20,232 for the year ended December 31, 1999 (1998 - $20,473; 1997 - $15,520). In addition, capital expenditures for other environmental compliance were approximately $5,108 for the year ended December 31, 1999 (1998 - $9,926; 1997 - $10,464). 16. 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 first preferred shares may be issued in one or more series with rights and conditions to be determined by the Board of Directors. ISSUED:
1999 1998 1997 CONSIDERATION CONSIDERATION CONSIDERATION ------------- ------------- ------------- Issued, beginning of year $1,227,599 $1,211,049 $630,484 Shares issued under option 1,356 15,414 5,826 Shares issued to purchase Arcadian Corporation - - 573,278 Shares issued for dividend reinvestment plan 1,848 1,136 1,461 Shares repurchased (14,270) - - ---------- ---------- ---------- Issued, end of year $1,216,533 $1,227,599 $1,211,049 ========== ========== ==========
ISSUED: 1999 1998 1997 NUMBER OF NUMBER OF NUMBER OF COMMON COMMON COMMON SHARES SHARES SHARES ---------- --------- --------- Issued, beginning of year 54,243,795 53,896,186 45,581,864 Shares issued under option 46,450 332,800 267,350 Shares issued to purchase Arcadian Corporation - - 8,029,092 Shares issued for dividend reinvestment plan 33,964 14,809 17,880 Shares repurchased (630,000) - - ---------- ---------- ---------- Issued, end of year 53,694,209 54,243,795 53,896,186 ========== ========== ==========
STOCK OPTIONS The Company has two option plans. Under the Officers and Key Employees Plan, the Company may, after February 3, 1998, issue up to 6,926,125 common shares pursuant to the exercise of options. Under the Directors Plan, the Company may, after January 24, 1995, issue up to 456,000 common shares pursuant to the exercise of options. Under both plans, the exercise price is the quoted market closing price of the Company's common shares on the last trading day immediately preceding the date of the grant and an option's maximum term is ten years. All options granted to date have provided that one-half of the options granted in a year will vest one year from the date of the grant, with the other half of the options vesting the following year. A summary of the status of the plans as of December 31, 1999, 1998 and 1997 and changes during the years ending on those dates is presented below:
NUMBER OF SHARES SUBJECT TO OPTION 1999 1998 1997 --------- ---------- --------- Outstanding, beginning of year 2,947,075 2,461,125 1,845,475 Granted 857,100 824,000 889,750 Exercised (46,450) (332,800) (267,350) Cancelled (11,750) (5,250) (6,750) --------- --------- --------- Outstanding, end of year 3,745,975 2,947,075 2,461,125 ========= ========= =========
WEIGHTED AVERAGE EXERCISE PRICE 1999 1998 1997 ------ ------ ------ Outstanding, beginning of year $70.35 $68.11 $52.90 Granted 43.69 67.88 86.11 Exercised 30.34 47.45 23.12 Cancelled 77.62 82.61 78.44 Outstanding, end of year 64.72 70.35 68.11
The weighted-average grant-date fair value of options granted during the year was $11,622 (1998 - $18,665; 1997 -$23,712). The following table summarizes information about stock options outstanding at December 31, 1999: 54 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 16. SHARE CAPITAL (CONTINUED)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------------- ------------------------------------ RANGE OF EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE - ----------------- ----------- ---------------- ---------------- -------- ---------------- $12.00 to $18.38 11,750 2 years $16.88 11,750 $16.88 $20.00 to $25.38 121,850 4 years 21.75 121,850 21.75 $32.25 145,950 5 years 32.25 145,950 32.25 $43.69 857,100 10 years 43.69 - - $67.88 820,000 9 years 67.88 410,000 67.88 $70.38 to $74.75 914,075 7 years 72.43 914,075 72.43 $81.75 to $86.75 875,250 8 years 86.35 875,250 86.35
The foregoing options have expiry dates ranging from November 8, 2000 to November 9, 2009. SHAREHOLDER RIGHTS PLAN The Board of Directors of the Company adopted a shareholder rights plan ("the Plan") on November 10, 1994. The Plan was amended by the Board of Directors on March 28, 1995 and May 4, 1995 and approved by the shareholders on May 11, 1995. Under the Plan, the Board of Directors declared a dividend distribution of one right for each common share to holders of record. The rights are not currently exercisable and only become exercisable upon the occurrence of certain events as specified in the Plan. The Plan was renewed in 1998 and now expires following the Company's annual meeting in 2001, unless otherwise renewed or extended. SHARE REPURCHASE PLAN The Board of Directors of the Company approved an open market repurchase program with respect to the Company's common shares on November 3, 1999. Under this program, the Company is permitted to repurchase up to 2,700,000 of its outstanding common shares by November 18, 2000. The Company plans to cancel shares purchased under the program. 17. CONTRIBUTED SURPLUS Contributed surplus has been charged with the excess of the cost of purchasing the common shares under the open market repurchase program over the stated value of the shares as follows:
1999 1998 1997 -------- -------- -------- Balance, beginning of year $336,486 $336,486 $336,486 Excess of cost of common shares repurchased over their stated value (14,992) - - -------- -------- -------- Balance, end of year $321,494 $336,486 $336,486 -------- -------- --------
18. SEGMENT INFORMATION The Company has three reportable business segments: potash, phosphate and nitrogen. All three segments produce fertilizers for sale to agricultural customers. In addition, approximately 47 percent of nitrogen and 41 percent of phosphate net sales revenue is from non-fertilizer products. These business segments are differentiated by the chemical nutrient contained in the product that each produces, with the exception of phosphate products produced at Geismar, which are included in the nitrogen business segment. Inter-segment net sales are made under terms which approximate market value. Each of the phosphate and nitrogen business segments was acquired as a unit.
1999 -------------------------------------------------------------------------- POTASH PHOSPHATE NITROGEN ALL OTHERS CONSOLIDATED ---------- ---------- --------- ---------- ------------ Net sales - third party $ 563,296 $ 754,045 $ 743,723 $ - $2,061,064 Inter-segment net sales 8,711 1,591 47,744 - - Gross margin 301,929 115,810 (9,468) - 408,271 Other income 3,084 5,225 10,480 7,135 25,924 Depreciation and amortization 37,243 61,826 83,486 8,551 191,106 Provision for plant closures 1,254 8,232 55,464 - 64,950 Provision for asset impairment - 7,615 518,952 - 526,567 Operating income (loss) 221,381 94,665 (604,000) (62,747) (350,701) Assets 1,036,901 1,388,453 1,324,544 166,932 3,916,830 Expenditures for segment capital assets 41,100 41,739 30,276 5,731 118,846
1998 -------------------------------------------------------------------------- POTASH PHOSPHATE NITROGEN ALL OTHERS CONSOLIDATED ---------- ---------- ---------- ---------- ------------ Net sales - third party $ 545,491 $ 914,197 $ 848,075 $ - $2,307,763 Inter-segment net sales 10,342 1,319 66,705 - - Gross margin 316,267 210,373 82,707 - 609,347 Other income 2,101 6,463 10,610 13,635 32,809 Depreciation and amortization 36,242 59,084 86,708 8,846 190,880 Operating income 231,269 207,503 60,757 (53,473) 446,056 Assets 1,037,328 1,359,288 1,931,326 206,315 4,534,257 Expenditures for segment capital assets 43,158 66,958 80,039 - 190,155
55 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 18. SEGMENT INFORMATION (CONTINUED)
1997 POTASH PHOSPHATE NITROGEN ALL OTHERS CONSOLIDATED ---------- ---------- ---------- ---------- ------------ Net sales - third party $ 504,167 $ 926,490 $ 895,272 $ - $2,325,929 Inter-segment net sales 9,017 1,460 18,132 - - Gross margin 257,606 184,199 143,366 - 585,171 Other income 6,010 4,863 9,959 11,612 32,444 Depreciation and amortization 39,605 55,102 68,996 6,299 170,002 Operating income 187,226 181,062 125,651 (46,299) 447,640 Assets 1,005,910 1,406,717 1,957,292 57,673 4,427,592 Expenditures for segment capital assets 42,836 47,979 69,522 - 160,337
FINANCIAL INFORMATION BY GEOGRAPHIC AREA IS SUMMARIZED IN THE FOLLOWING TABLE: CANADA UNITED STATES TRINIDAD OTHER CONSOLIDATED --------- ------------- -------- -------- ------------ 1999 Net sales to customers outside the Company Canada $ 21,429 $ 29,294 $ - $ - $ 50,723 United States 209,693 1,080,696 122,076 - 1,412,465 PhosChem - 186,494 - - 186,494 Canpotex 254,711 - - - 254,711 Other 71,163 39,153 46,355 - 156,671 -------- ---------- -------- ------- ---------- $556,996 $1,335,637 $168,431 $ - $2,061,064 -------- ---------- -------- ------- ---------- Operating income (loss) $179,121 $ (511,852) $(17,970) $ - $ (350,701) -------- ---------- -------- ------- ---------- Capital assets and goodwill $796,576 $1,871,664 $301,669 $32,616 $3,002,525 -------- ---------- -------- ------- ---------- 1998 Net sales to customers outside the Company Canada $ 21,885 $ 29,808 $ - $ - $ 51,693 United States 199,956 1,279,615 110,112 - 1,589,683 PhosChem - 262,168 - - 262,168 Canpotex 252,464 - - - 252,464 Other 65,441 35,237 51,077 - 151,755 -------- ---------- -------- ------- ---------- $539,746 $1,606,828 $161,189 $ - $2,307,763 -------- ---------- -------- ------- ---------- Operating income $209,783 $ 220,221 $ 16,052 $ - $ 446,056 -------- ---------- -------- ------- ---------- Capital assets and goodwill $823,827 $2,448,587 $316,025 $ - $3,588,439 -------- ---------- -------- ------- ---------- 1997 Net sales to customers outside the Company Canada $ 14,460 $ 27,147 $ - $ - $ 41,607 United States 188,416 1,334,672 100,466 - 1,623,554 PhosChem - 261,502 - - 261,502 Canpotex 229,666 - - - 229,666 Other 64,261 35,097 70,242 - 169,600 -------- ---------- -------- ------- ---------- $496,803 $1,658,418 $170,708 $ - $2,325,929 -------- ---------- -------- ------- ---------- Operating income $163,620 $ 257,528 $ 26,492 $ - $ 447,640 -------- ---------- -------- ------- ---------- Capital assets and goodwill $811,135 $2,463,546 $335,745 $ - $3,610,426 -------- ---------- -------- ------- ----------
19. PROVINCIAL MINING AND OTHER TAXES Provincial mining taxes and other taxes consist of: 1999 1998 1997 ------- ------- -------- Potash Production Tax $57,997 $61,639 $53,453 Saskatchewan corporate capital taxes 19,088 18,449 16,859 ------- ------- ------- $77,085 $80,088 $70,312 ======= ======= =======
20. PROVISION FOR PLANT CLOSURES AND OFFICE CONSOLIDATION In the third quarter of 1999, the Board of Directors of the Company approved a plan to close nitrogen plants at Clinton, Iowa and LaPlatte, Nebraska; a phosphate feed plant at Saltville, Virginia; and a phosphate terminal at Jacksonville, Florida. The Clinton and LaPlatte closures result from these plants being high-cost producers due to their size and technology employed. Due to the high production costs, these plants are unprofitable at both current and projected future prices. The closure of the Saltville plant is primarily due to higher transportation costs for raw materials and waste products which make this plant a high-cost production facility. The terminal at Jacksonville is being closed as the Company intends to solely utilize the more efficient terminal at Morehead City, North Carolina. 56 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 20. PROVISION FOR PLANT CLOSURES AND OFFICE CONSOLIDATION (CONTINUED) The plants at Clinton and LaPlatte were indefinitely shut down effective August 12, 1999. The decision to permanently close both facilities was made and announced on August 31, 1999. Substantially all on-site product inventory has been sold and the Company is now in the process of decommissioning the ammonia storage tanks, which it expects will be completed in the first quarter of 2000. The Company plans to contract out the demolition of these facilities. The demolition activity is expected to start near the end of the first quarter of 2000 and be completed by the end of 2000. Environmental procedures have commenced but cannot be completed until the dismantling of the plants is complete. These procedures principally include the cleaning of dismantled equipment and asbestos removal. Subsequent to the dismantling, the Company will attempt to sell the plant sites. Annual expenditures for site security and other maintenance costs will approximate $400 until such time as the sites are disposed of. There are outstanding contractual commitments that relate to natural gas and hydrogen purchase contracts and electricity. The number of employees terminated as a result of these closures will be 155 hourly and 75 salaried, of which 168 have left the Company as of December 31, 1999. The majority of the remaining employees are expected to leave the Company during the first quarter of 2000. Eligible hourly employees will receive severance of two hundred dollars per year of service up to a maximum of 30 years of service and the salaried employees will receive severance based on number of years of service. From January 1, 1999 to the date of closure, these plants incurred operating losses of approximately $12,000 (including depreciation and amortization of approximately $3,000). The phosphate feed plant at Saltville was closed effective September 1, 1999. This property may be sold or may be turned over to the municipal authorities. Annual expenditures for plant security and other maintenance costs until such time will approximate $154. The number of employees terminated as a result of this closure will be 49, of which 45 have left the Company as of December 31, 1999. The remaining 4 employees are expected to leave or transfer to other facilities in first quarter 2000. The employees were entitled to severance based on number of years of service. The severance payments ranged from one to seven months' salary. From January 1, 1999 to the date of closure, this plant incurred operating losses of approximately $6,000 (including depreciation and amortization of approximately $400). The phosphate terminal at Jacksonville was closed effective August 15, 1999. Environmental remediation procedures are expected to be completed in the first quarter of 2000, at which time the Company will attempt to sell the terminal. The number of employees affected as a result of this closure will be nine, of which three have transferred to other facilities as of December 31, 1999. Three employees will transfer to other facilities in February 2000 and the remaining employees are expected to leave at this time. From January 1, 1999 to the date of closure, this terminal incurred operating losses of approximately $2,000 (including depreciation and amortization of approximately $800). The decision to close these facilities triggered an assessment of the fair value of these assets, with fair value being determined based on estimated sales proceeds less costs to sell. The Company is proceeding with a consolidation of its Raleigh, North Carolina and Memphis, Tennessee administrative offices with the Company's office in Chicago, Illinois. As a result of the consolidation, 115 salaried employees will be terminated, with termination dates ranging from March 31, 2000 through to September 30, 2000. Terminated employees are entitled to severance pay equal to two weeks' salary for each completed year of service (to a maximum of 52 weeks) and provided they stay until their termination date, an additional payment equal to 35 percent of their annual salary pro-rated for the number of months from October 1, 1999 to their termination. The Company has contractual commitments relating to current office leases at all three locations. Charges associated with these closures and office consolidation are as follows:
AMOUNT RESERVE BALANCE PROVISION PAID UTILIZED AT DEC. 31 --------- ------ -------- ---------- PLANT CLOSURES Severance $ 5,386 $2,652 $ - $ 2,734 Decommissioning 3,629 3,345 - 284 Environmental remediation 2,000 92 - 1,908 Contractual commitments 7,588 1,126 - 6,462 Non-cash parts inventory writedown 8,198 - 13 8,185 Non-cash writedown of property, plant and equipment 28,934 - 1,856 27,078 ------ ------ ----- ------ 55,735 7,215 1,869 46,651 OFFICE CONSOLIDATION Severance 6,215 - - 6,215 Contractual commitments 3,000 - - 3,000 ------- ------ ------ ------- $64,950 $7,215 $1,869 $55,866 ======= ====== ====== =======
Of the $64,950 provision, $55,464 pertains to the nitrogen business segment, $8,232 pertains to the phosphate business segment and $1,254 relates to the potash business segment. After the writedown of the assets, the carrying amount of the remaining assets affected by the closures is $5,604. The plant closures and office consolidation will require cash expenditures of approximately $27,818, all of which is expected to be funded from operations. The majority of these expenditures are expected to be made by the end of 2000. 21. PROVISION FOR ASSET IMPAIRMENT Due to operating losses primarily caused by reduced product prices and increased gas costs relative to certain current and expected future competition, the Company assessed the recoverability of the tangible and intangible assets related to the nitrogen operations. The Company projected the undiscounted future net cash flows from use together with the residual value of these assets and determined that in certain cases they were less than the carrying amount. Third party forecasts of future nitrogen prices indicate that they will not reach the levels experienced in 1997 when the nitrogen operations were purchased. These circumstances are the primary cause of a permanent impairment in the value of certain nitrogen assets. Accordingly, the Company recorded a provision for asset impairment of $518,952, of which $438,498 relates to goodwill, $79,489 relates to property, plant and equipment at the Memphis, Tennessee plant and $965 relates to other assets. The provision for asset impairment for the nitrogen operations was calculated as the difference between the carrying amount and the undiscounted future net cash flows from use together with residual values. Estimates of such undiscounted future net cash flows from use together with residual values are subject to significant uncertainties and assumptions. Accordingly, actual results could vary significantly from such estimates. Due to a history of operating losses and a projection of continuing operating losses, the Company assessed the recoverability of the tangible and intangible assets related to the Florida Favorite Fertilizer ("FFF") operations. The Company estimated the undiscounted future net cash flows from use together with the residual value of these assets and determined that in certain cases 57 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 21. PROVISION FOR ASSET IMPAIRMENT (CONTINUED) they were less than the carrying amount. Accordingly, the Company recorded a provision for asset impairment of $7,615, of which $6,373 relates to property, plant and equipment primarily at the Lakeland, Florida and Moultrie, Georgia locations and $1,242 relates to intangibles. The provision for asset impairment for the FFF operations was calculated as the difference between third party sales offers and the carrying amount of the various properties. This provision relates to the phosphate business segment. These writedowns will result in a reduction of amortization expense of approximately $11,700 and a reduction of depreciation expense of approximately $4,900 on an annualized basis. 22. INTEREST EXPENSE
1999 1998 1997 ------- ------- ------- Interest on Short-term debt $10,591 $ 2,942 $ 2,351 Long-term debt 43,233 64,632 79,088 ------- ------- ------- $53,824 $67,574 $81,439 ======= ======= =======
23. INCOME TAXES As the Company operates in a specialized industry and in several tax jurisdictions, its income is subject to various rates of taxation. The provision for income taxes differs from the amount that would have resulted from applying the Canadian statutory income tax rates to income (loss) before income taxes as follows:
1999 1998 1997 --------- -------- -------- Income (loss) before income taxes Canada $ 126,208 $122,490 $ 67,606 United States (509,038) 243,275 272,520 Trinidad (21,695) 12,717 26,075 --------- -------- -------- $(404,525) $378,482 $366,201 ========= ======== ======== Federal and Provincial Statutory tax rates 46.12% 46.12% 46.12% Tax at statutory rates $(186,567) $174,556 $168,892 Adjusted for the effect of: Net non-deductible provincial taxes and royalties and resource allowances 20,593 19,327 (7,025) Additional tax deductions (43,603) (63,330) (73,631) Difference between Canadian rate and rates applicable to subsidiaries in other countries 5,207 (14,071) (24,662) Goodwill impairment 207,652 - - Other 4,187 997 5,489 --------- -------- -------- Income tax expense $ 7,469 $117,479 $ 69,063 ========= ======== ========
Details of income tax expense are as follows:
Canada Current $ 9,359 $ 2,351 $ 1,024 Deferred 68,446 75,405 2,146 United States - Federal Current 3,352 6,177 31,888 Deferred (70,761) 10,683 25,063 United States - State Current 1,137 4,963 - Deferred 2,741 14,561 (716) Trinidad Current 776 5,808 13,564 Deferred (7,581) (2,469) (3,906) -------- -------- ------- Income tax expense $ 7,469 $117,479 $69,063 ======== ======== =======
The tax effects of temporary differences that give rise to significant portions of the net deferred income tax liability are:
1999 1998 -------- -------- Deferred income tax assets: Loss and credit carryforwards $246,379 $127,653 Post-retirement/post-employment benefits 50,608 50,161 Accrued reclamation costs 40,349 44,555 Other 2,843 11,312 -------- -------- Total deferred income tax assets 340,179 233,681 ======== ======== Deferred income tax liabilities: Basis difference in fixed assets 724,485 628,551 Other 25,065 22,983 -------- -------- Total deferred income tax liabilities 749,550 651,534 -------- -------- Net deferred income tax liability $409,371 $417,853 ======== ========
At December 31, 1999, the Company has income tax losses carried forward of approximately $646,000 which will begin to expire in 2010. The benefit relating to these loss carryforwards has been recognized by reducing deferred income tax liabilities. In addition, the Company has alternative minimum tax credits of approximately $20,000 which carry forward indefinitely. 24. NET (LOSS) INCOME PER SHARE Net (loss) income per share was calculated on the weighted average number of shares issued and outstanding during the twelve months ended December 31, 1999 of 54,230,000 (1998 -54,177,000; 1997 - 52,275,000). Fully diluted net (loss) income per share for the year ended December 31, 1999 was $(7.60) (1998 - -$4.77; 1997 - $5.61). 25. DIVIDENDS PER SHARE Prior to June 30, 1999, the Company declared its dividends in Canadian dollars. Subsequent to that date, the Company declared its dividends in US dollars. 26. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company uses financial instruments, including forward exchange contracts, futures, swaps and option agreements, to hedge foreign exchange and commodity price risk. The Company does not hold or issue financial instruments for trading purposes. At December 31, 1999, the Company had commitments in the form of foreign exchange contracts to sell US dollars in the amount of $36,000 (1998 - $0). 58 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 26. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (CONTINUED) The Company's exposure to interest rate risk is limited to its long-term debt. The effective interest rate on the long-term debt approximates the stated rate because there are no significant premiums or discounts. In addition to physical spot and term purchases, the Company at times employs futures, swaps and option agreements to establish the cost on a portion of its natural gas requirements. These instruments are intended to hedge the future cost of the committed and anticipated natural gas purchases for its US nitrogen plants. Under these arrangements, the Company receives or makes payments based on the differential between a specified price and the actual spot price of natural gas. The Company has certain available lines of credit which are utilized to reduce cash margin requirements to maintain the derivatives. Cash margin requirements which have been advanced as at December 31, 1999 totalled $4,382 (1998 - $16,199) and are included in inventory. As at December 31, 1999, the Company had derivatives qualifying for deferral in the form of futures and swaps. The futures represented a notional amount of 13.9 million MMBtus of natural gas with maturities in 2000 through 2002. The swaps represented a notional amount of 86.4 million MMBtus with maturities in 2000 through 2004. As at December 31, 1999, net gains arising from settled hedging transactions which are included as a component of finished goods inventory were not material. The Company is exposed to credit related losses in the event of non-performance by counterparties to derivative financial instruments. The Company anticipates, however, that counterparties will be able to fully satisfy their obligations under the contracts. The major concentration of credit risk arises from the Company's receivables. A majority of the Company's sales are in North America and are primarily for use in the agricultural industry. The Company seeks to manage the credit risk relating to these sales through a credit management program. Internationally, the Company's products are sold primarily through two export associations whose accounts receivable are either insured or secured by letters of credit. The carrying amount of the Company's cash and cash equivalents, accounts receivable, short-term debt and accounts payable and accrued charges approximates fair values because of short-term maturities. The carrying amount of the Company's long-term debt (except the Notes Payable whose approximate fair value at December 31, 1999 was $367,112) approximates estimated fair value because the stated interest rates approximate the market rate. 27. CONTINGENCIES GENERAL PCS is a shareholder in Canpotex which markets potash offshore. Should any operating losses or other liabilities be incurred by Canpotex, the shareholders have contractually agreed to reimburse Canpotex for such losses or liabilities in proportion to their productive capacity. There were no such operating losses or other liabilities in 1999. In common with other companies in the industry, the Company is unable to acquire insurance for underground assets. In June 1993, the Company was served with a complaint relating to a suit filed in the United States District Court for Minnesota against most North American potash producers, including the Company. The complaint alleged a conspiracy among the defendants to fix the price of potash purchased by the plaintiffs as well as potash purchased by the members of a class of certain purchasers proposed by the plaintiffs. The complaint sought treble damages and other relief. The complaint was originally dismissed but this decision was reversed by a three-judge panel on appeal. The defendants were granted a rehearing of the appeal en banc, which was heard on September 13, 1999 (see Note 33a). Management of the Company, having consulted with legal counsel, believes that the allegations are without merit, that the Company has valid legal defences and that the lawsuit will not have a material adverse effect on the Company. However, management cannot predict with certainty the outcome of the litigation. Additional complaints were filed in the California and Illinois State Courts on behalf of purported classes of indirect purchasers of potash in those states. The parties in the California lawsuit have agreed to stay proceedings pending the outcome of the appeal to the United States Court of Appeals for the Eighth Circuit. The Illinois State Court complaint has been dismissed for failure to state a cause of action. In 1997, five former officers of Arcadian Corporation filed lawsuits against PCS in the United States District Court for the Western District of Tennessee. The complaints allege that PCS breached employment agreements between Arcadian and the officers and breached the related assumption agreement among PCS, PCS Nitrogen and Arcadian. The complainants sought damages in excess of $39,300. Each complaint also seeks additional unspecified damages. On December 1, 1998, the court entered judgments in the amount of $18,500 with respect to three of the claims. The Company has filed Notices of Appeal with respect to these judgments. In 1998, the Company settled the other two claims for the total amount of $1,400. Management of the Company, having consulted with legal counsel, believes that the lawsuits will not have a material adverse effect on the Company's financial condition or results of operations. On May 11 and 12, 1999, representatives of the United States Environmental Protection Agency ("EPA"), Federal Bureau of Investigation and other state and local agencies executed a search warrant on the Company's Geismar facility in connection with a grand jury investigation. The grand jury investigation is continuing. The Company cannot predict at this time what may result from the government's investigation or whether any such result would have a material adverse effect on the Company. On October 13, 1999, PCS Joint Venture submitted to the EPA Phase I of a work plan to conduct a Remedial Investigation and Feasibility Study ("RI/FS") of certain releases to the soil and groundwater of the PCS Joint Venture facility in Lakeland, Florida and other area properties. On October 21, 1999, PCS Joint Venture signed an Administrative Order by Consent under which PCS Joint Venture agreed to conduct the RI/FS. These soil and groundwater releases have also been the subject of an investigation by the Florida Department of Environmental Protection ("FDEP") and the subject of a Complaint filed by the FDEP against PCS Joint Venture and a number of other defendants. Discovery is still continuing in that proceeding. On September 23, 1999, an action was served on PCS Joint Venture and eight other defendants on behalf of a class of persons living in the vicinity of the site who claim to have suffered damages as a result of releases from the site. PCS Joint Venture intends to defend itself vigorously in both actions, while also continuing to work to assess and evaluate the nature and extent of the impacts at the site. No final determination has yet been made of the nature, timing or cost of remedial action that may be needed nor to what extent costs incurred may be recoverable from third parties. Various other claims and lawsuits are pending against the Company. While it is not possible to determine the ultimate outcome of such actions at this time, it is management's opinion that the ultimate resolution of such items, including those pertaining to environmental matters, will not have a material effect on the Company's financial condition or results of operations. 59 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 27. CONTINGENCIES (CONTINUED) UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The Year 2000 Issue arises because many computerized systems use two digits rather than four to identify a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. Although the change in date has occurred, it is not possible to conclude that all aspects of the Year 2000 Issue that may affect the Company, including those related to the efforts of customers, suppliers or other third parties, have been fully resolved. 28. RELATED PARTY TRANSACTIONS The Company has a one-third interest in Canpotex which markets potash offshore. Sales to Canpotex are at prevailing market prices. Sales for the year ended December 31, 1999 were $254,711 (1998 - $252,464; 1997 - $229,666). Account balances resulting from the Canpotex transactions are included in the Consolidated Statements of Financial Position and settled on normal trade terms. 29. SUPPLEMENTAL CASH FLOW INFORMATION In March 1997, the Company issued common shares valued at $573,278 in exchange for shares of Arcadian Corporation. There have been no other significant non-cash transactions. 30. QUARTERLY RESULTS (UNAUDITED) The following quarterly information in management's opinion includes all adjustments (consisting solely of normal recurring adjustments) necessary for fair presentation.
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- --------- -------- 1999 Net sales $549,341 $564,483 $ 453,578 $493,662 Gross Margin $122,041 $140,719 $ 66,343 $ 79,168 Provision for plant closures and office consolidation $ - $ - $ 55,403 $ 9,547 Provision for asset impairment $ - $ - $ 525,118 $ 1,449 Operating Income (Loss) $ 74,977 $ 96,903 $(551,926) $ 29,345 Net Income (Loss) $ 39,517 $ 61,790 $(524,244) $ 10,943 Net Income (Loss) per Share $ 0.73 $ 1.14 $ (9.66) $ 0.20
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER -------- -------- -------- -------- 1998 Net sales $583,812 $660,442 $521,368 $542,141 Gross Margin $150,673 $186,631 $140,188 $131,855 Operating Income $109,790 $146,909 $ 95,575 $ 93,782 Net Income $ 63,009 $ 89,117 $ 54,704 $ 54,173 Net Income per Share $ 1.17 $ 1.64 $ 1.01 $ 1.00
Net Income (Loss) per Share for each quarter has been computed based on the weighted average number of shares issued and outstanding during the respective quarter; therefore, quarterly amounts may not add to the annual total. 31. COMPARATIVE FIGURES Certain of the prior years' figures have been reclassified to conform with the current year's presentation. 32. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES A description of certain significant differences between Canadian GAAP and US GAAP follows: MARKETABLE SECURITIES: The Company's investment in Israel Chemicals Ltd. ("ICL") is stated at cost. US GAAP would require that this investment be classified as available-for-sale and be stated at market value. FOREIGN CURRENCY TRANSLATION ADJUSTMENT: The foreign currency translation adjustment results from the restatement of prior periods so that all periods presented are in the same reporting currency. US GAAP requires that the comparative Consolidated Statements of Income and the Consolidated Statements of Cash Flow be translated using weighted average exchange rates for the applicable periods. In contrast, the Consolidated Statements of Financial Position are translated using the exchange rates at the end of the applicable periods in accordance with Canadian GAAP. The difference in these exchange rates is what gives rise to the foreign currency translation adjustment. NET SALES: Sales are recorded net of freight costs (less related revenues) and transportation and distribution expenses. US GAAP would require that net freight costs be included in cost of sales and transportation and distribution expenses be reported as an operating expense. COMPREHENSIVE INCOME: Comprehensive income is not recognized under Canadian GAAP. US GAAP would require the recognition of comprehensive income. PROVISION FOR ASSET IMPAIRMENT: The provision for asset impairment under Canadian GAAP is measured based on the undiscounted cash flow from use together with the residual value of the asset. US GAAP would require that the provision for asset impairment be measured based on fair value, which resulted in additional writedowns of property, plant and equipment and goodwill for US GAAP purposes. PROVISION FOR PLANT CLOSURES: The provision for plant closures under Canadian GAAP includes the non-cash parts inventory writedown. US GAAP would require that this writedown be included in selling and administrative expenses. PRE-OPERATING COSTS: Operating costs incurred during the start-up phase of new projects are deferred until commercial production levels are reached, at which time they are amortized over the estimated life of the project. US GAAP would require that these costs be expensed as incurred. STOCK-BASED COMPENSATION: In 1995, the Financial Accounting Standards Board issued SFAS No.123 "Accounting for Stock-Based Compensation". The Company has decided to continue to apply APB Opinion 25 ("APB 25") for measurement of compensation of employees. THE APPLICATION OF US GAAP, AS DESCRIBED ABOVE, WOULD HAVE HAD THE FOLLOWING APPROXIMATE EFFECTS ON NET (LOSS) INCOME, NET (LOSS) INCOME PER SHARE, TOTAL ASSETS AND SHAREHOLDERS' EQUITY: 60 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 32. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED)
1999 1998 1997 ----------- ----------- ------------ Net (loss) income as reported - Canadian GAAP $ (411,994) $ 261,003 $ 297,138 Items (increasing) decreasing reported net (loss) income Provision for asset impairment (217,953) - - Pre-operating costs (4,605) - - Deferred income taxes 51,970 - 11,382 ----------- ----------- ------------ Approximate net (loss) income - US GAAP $ (582,582) $ 261,003 $ 285,756 ----------- ----------- ------------ Weighted average shares outstanding - US GAAP 54,230,000 54,177,000 52,275,000 ----------- ----------- ------------ Approximate net (loss) income per share - US GAAP $ (10.74) $ 4.82 $ 5.47 ----------- ----------- ------------ Total assets as reported - Canadian GAAP $ 3,916,830 $ 4,534,257 $ 4,427,592 Items increasing (decreasing) reported total assets Available-for-sale security (unrealized holding gain) 26,212 14,906 - Property, plant and equipment (168,632) - - Pre-operating costs (4,605) - - Goodwill (49,321) - - ----------- ----------- ------------ Approximate total assets - US GAAP $ 3,720,484 $ 4,549,163 $ 4,427,592 ----------- ----------- ------------ Total shareholders' equity as reported - Canadian GAAP $ 1,962,386 $ 2,453,761 $ 2,227,891 Items increasing (decreasing) reported shareholders' equity Other comprehensive income, net of tax 16,858 8,944 - Provision for asset impairment (217,953) - - Pre-operating costs (4,605) - - Deferred income taxes 51,970 - - ----------- ----------- ------------ Approximate shareholders' equity - US GAAP $ 1,808,656 $ 2,462,705 $ 2,227,891 ----------- ----------- ------------
SUPPLEMENTAL US GAAP DISCLOSURE AVAILABLE-FOR-SALE SECURITY The Company's investment in ICL is classified as available-for-sale. The fair market value of this investment at December 31, 1999 was $119,044 and the unrealized holding gain was $26,212. NEW ACCOUNTING PRONOUNCEMENTS During 1999, the Financial Accounting Standards Board ("FASB") issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise", SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical Corrections", and SFAS No. 136 "Transfers of Assets to a Not-for-Profit Organization or Charitable Trust That Raises or Holds Contributions for Others". None of these pronouncements will have an impact on the Company's consolidated financial statements. FASB also issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No.133". This pronouncement deferred the implementation of SFAS No. 133 for the Company until the first quarter of 2001. The impact of the adoption of SFAS No. 133 on the Company's consolidated financial statements is not presently determinable. STOCK COMPENSATION PLANS The Company has two stock-based compensation plans which are described in Note 16. The Company applies APB 25 and related interpretations in accounting for its plans. No compensation cost has been recognized under APB 25 as the exercise price is the quoted market closing price of the Company's common shares on the last trading day immediately preceding the date of the grant. Had compensation cost for the Company's plans been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS No. 123, the Company's net (loss) income and net (loss) income per share for the years ending December 31, 1999, 1998 and 1997 would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 --------------------------- ------------------------- --------------------------- AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA ----------- --------- ----------- --------- ----------- --------- Net (loss) income $(582,582) $(602,509) $261,003 $239,667 $285,756 $271,497 Net (loss) income per share $ (10.74) $ (11.11) $ 4.82 $ 4.42 $ 5.47 $ 5.19
In calculating the foregoing pro forma amounts, the fair value of each option grant was estimated as of the date of grant using the Modified Black-Scholes option-pricing model with the following weighted average assumptions:
1999 1998 1997 ---- ---- ---- Expected dividend $0.99 $0.92 $1.03 Expected volatility 28% 30% 26% Risk-free interest rate 6.03% 4.83% 5.80% Expected life of option 8 YEARS 10 years 10 years Expected forfeitures 10% 26% 26%
The following supplemental schedules present the Consolidated Financial Position, Income and Retained Earnings, Cash Flow and Comprehensive Income in accordance with US GAAP as adjusted for the GAAP differences described in this note. 61 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 32. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) SUPPLEMENTAL SCHEDULE OF CONSOLIDATED FINANCIAL POSITION As at December 31
1999 1998 ---------- ---------- ASSETS Current Assets Cash and cash equivalents $ 44,037 $ 67,971 Accounts receivable 269,264 302,974 Inventories 377,232 364,397 Prepaid expenses 35,702 38,839 ---------- ---------- 726,235 774,181 Property, plant and equipment 2,708,428 3,003,443 Goodwill 60,057 559,621 Other assets 225,764 211,918 ---------- ---------- $3,720,484 $4,549,163 ---------- ---------- LIABILITIES Current Liabilities Short-term debt $ 474,504 $ 94,940 Accounts payable and accrued charges 349,062 349,684 Current portion of long-term debt 7,437 386 ---------- ---------- 831,003 445,010 Long-term debt 437,020 933,294 Deferred income tax liability 366,755 423,815 Accrued post-retirement/post-employment benefits 148,409 131,179 Accrued reclamation costs 112,175 129,399 Other non-current liabilities and deferred credits 16,466 23,761 ---------- ---------- 1,911,828 2,086,458 ---------- ---------- SHAREHOLDERS' EQUITY Share Capital 1,216,533 1,227,599 Contributed Surplus 321,494 336,486 Retained Earnings 274,700 910,605 Foreign Currency Translation Adjustment (20,929) (20,929) Other Comprehensive Income 16,858 8,944 ---------- ---------- 1,808,656 2,462,705 ---------- ---------- $3,720,484 $4,549,163 ---------- ----------
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED INCOME AND RETAINED EARNINGS For the Years Ended December 31 1999 1998 1997 ---------- ---------- ---------- Net sales $2,350,124 $2,601,697 $2,610,346 Cost of goods sold 1,869,709 1,914,757 1,963,565 ---------- ---------- ---------- GROSS MARGIN 480,415 686,940 646,781 ---------- ---------- ---------- Selling, distribution and administrative 201,241 193,605 161,273 Provincial mining and other taxes 77,085 80,088 70,312 Provision for plant closures and office consolidation 56,752 - - Provision for asset impairment 744,520 - - Other income (25,924) (32,809) (32,444) ---------- ---------- ---------- 1,053,674 240,884 199,141 ---------- ---------- ---------- OPERATING (LOSS) INCOME (573,259) 446,056 447,640 INTEREST EXPENSE 53,824 67,574 81,439 ---------- ---------- ---------- (LOSS) INCOME BEFORE INCOME TAXES (627,083) 378,482 366,201 INCOME TAXES (RECOVERY) (44,501) 117,479 80,445 ---------- ---------- ---------- NET (LOSS) INCOME (582,582) 261,003 285,756 RETAINED EARNINGS, BEGINNING OF YEAR 910,605 701,285 470,837 DIVIDENDS (53,323) (51,683) (55,308) ---------- ---------- ---------- RETAINED EARNINGS, END OF YEAR $ 274,700 $ 910,605 $ 701,285 ---------- ---------- ---------- NET (LOSS) INCOME PER SHARE - BASIC $ (10.74) $ 4.82 $ 5.47 ---------- ---------- ---------- NET (LOSS) INCOME PER SHARE - FULLY DILUTED $ (10.74) $ 4.80 $ 5.42 ---------- ---------- ---------- DIVIDENDS PER SHARE $ 0.99 $ 0.96 $ 1.03 ---------- ---------- ----------
62 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS IN THOUSANDS OF US DOLLARS 32. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (CONTINUED) SUPPLEMENTAL SCHEDULE OF CONSOLIDATED CASH FLOW For the Years Ended December 31
1999 1998 1997 --------- ---------- ---------- OPERATING ACTIVITIES Net (loss) income $ (582,582) $ 261,003 $ 285,756 Items not affecting cash Depreciation and amortization 191,106 190,880 170,002 Loss (gain) on disposal of property, plant and equipment 459 (99) (4,739) Provision for plant closures and office consolidation 37,132 - - Provision for asset impairment 744,520 - - Provision for deferred income tax (59,125) 97,203 45,873 Provision for post-retirement/post-employment benefits 7,381 6,848 6,166 CHANGES IN NON-CASH OPERATING WORKING CAPITAL Accounts receivable 33,779 48,751 23,470 Inventories (16,067) (7,859) 19,873 Prepaid expenses 3,175 (16,603) 3,736 Accounts payable and accrued charges (5,024) 1,301 (72,006) Current income taxes 8,107 (3,778) 3,383 Accrued reclamation costs (20,680) (7,436) (7,407) Other non-current liabilities and deferred credits (3,177) 7,749 (6,286) ---------- ---------- ---------- CASH PROVIDED BY OPERATING ACTIVITIES 339,004 577,960 467,821 ---------- ---------- ---------- INVESTING ACTIVITIES Additions to property, plant and equipment (118,846) (190,155) (160,337) Acquisition of Minera Yolanda S.C.M. (Note 4) (36,943) - - Acquisition of Arcadian Corporation - - (474,985) Proceeds from disposal of property, plant and equipment 1,873 31,926 15,276 Additions to other assets (19,227) (85,066) (22,091) ---------- ---------- ---------- CASH USED IN INVESTING ACTIVITIES (173,143) (243,295) (642,137) ---------- ---------- ---------- FINANCING ACTIVITIES Proceeds from long-term obligations - 143,000 1,210,000 Repayment of long-term obligations (489,978) (376,329) (699,979) Proceeds from short-term debt 379,564 215,000 210,000 Repayment of short-term debt - (221,988) (108,072) Repayment of Senior Notes - - (374,526) Dividends (53,323) (51,683) (55,308) Repurchase of shares (29,262) - - Issuance of shares 3,204 16,550 7,287 ---------- ---------- ---------- CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (189,795) (275,450) 189,402 ---------- ---------- ---------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (23,934) 59,215 15,086 CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS), BEGINNING OF YEAR 67,971 8,756 (6,330) ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 44,037 $ 67,971 $ 8,756 ---------- ---------- ----------
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED COMPREHENSIVE INCOME For the Years Ended December 31 1999 1998 1997 ---------- ------- -------- Net (loss) income $ (582,582) $261,003 $285,756 ---------- ---------- ---------- Other comprehensive income Change in unrealized holding gain on available-for-sale security 11,306 14,906 - Deferred income tax expense related to other comprehensive income (3,392) (5,962) - Other comprehensive income, net of tax 7,914 8,944 - ---------- ---------- ---------- Comprehensive (loss) income $ (574,668) $269,947 $285,756 ---------- ---------- ----------
33. SUBSEQUENT EVENTS a. On February 17, 2000, the decision to dismiss the complaint against the Company relating to an alleged conspiracy to fix the price of potash was affirmed on appeal. The plaintiffs have the right to seek review of this opinion by the US Supreme Court. b. On February 22, 2000, the Company sold all of the shares of Moab Salt, Inc. for net proceeds of $2,000 which will result in a gain of approximately $6,000. 63 66 POTASH CORPORATION OF SASKATCHEWAN INC. SHAREHOLDER INFORMATION ANNUAL MEETING The Annual Shareholders Meeting will be held at 10:30 a.m. Central Standard Time May 11, 2000 in the Adam Ballroom, Delta Bessborough Hotel, 601 Spadina Crescent East, Saskatoon, Saskatchewan. Holders of common shares as of March 23, 2000 are entitled to vote at the meeting and are encouraged to participate. DIVIDEND REINVESTMENT POLICY Registered shareholders can have dividends reinvested in newly-issued common shares of PCS at prevailing market rates. INFORMATION FOR SHAREHOLDERS OUTSIDE CANADA Dividends paid to residents in countries with which Canada has bilateral tax treaties are generally subject to the 15-percent Canadian non-resident withholding tax. There is no Canadian tax on gains from the sale of shares or debt instruments owned by non-residents not carrying on business in Canada. No government in Canada levies estate taxes or succession duties. INVESTOR INQUIRIES Betty-Ann Heggie, Senior Vice President, Corporate Relations TOLL-FREE LINES: Canada: (800) 667-0403 US: (800) 667-3930 WEBSITE: www.potashcorp.com INTERIM REPORTS, NEWS RELEASES AND FORM 10-K Non-registered shareholders who wish to receive quarterly reports should contact the Corporate Relations department. News releases are available via fax and e-mail. Copies of the Company's most recent Form 10-K are available upon request. SHARES LISTED Toronto Stock Exchange New York Stock Exchange 1999 PCS SHARE PRICE -- NYSE, Average Weekly Price ($ Actual) [CHART] OWNERSHIP On March 1, 2000, there were 2,658 holders of record of the Company's common shares. COMMON SHARE TRANSFER AGENT IN CANADA: CIBC Mellon Trust Company 1080 - 2002 Victoria Avenue Regina, Saskatchewan S4P 0R7 Phone: (306) 751-7550 (800) 387-0825 WEBSITE: www.cibcmellon.com IN THE UNITED STATES: ChaseMellon Shareholder Services, L.L.C. 85 Challenger Road, Overpeck Center Ridgefield Park, New Jersey 07660 Phone: (800) 526-0801 WEBSITE: www.chasemellon.com Inquiries about shareholdings, share transfer requirements, direct deposit of dividends, elimination of duplicate mailings, address changes or lost certificates should be directed to CIBC Mellon Trust or to the Corporate Secretary, PCS, Suite 500, 122 First Avenue South, Saskatoon, Saskatchewan S7K 7G3. COMMON SHARE PRICES AND VOLUMES THE ADJACENT TABLE SETS FORTH THE HIGH AND LOW PRICES, AS WELL AS THE VOLUMES, OF THE COMPANY'S COMMON SHARES AS TRADED ON THE TORONTO STOCK EXCHANGE AND THE NEW YORK STOCK EXCHANGE (COMPOSITE TRANSACTIONS) ON A QUARTERLY BASIS. POTASH CORPORATION OF SASKATCHEWAN INC. IS ON THE S&P/TSE 60 INDEX AND THE TSE 100. 1 TRADING PRICES ARE IN CDN$
TORONTO STOCK EXCHANGE(1) NEW YORK STOCK EXCHANGE ------------------------------ ---------------------------- High Low Volume High Low Volume ------- ------ --------- ------ ------ ---------- 1999 First Quarter 112.500 80.250 4,585,148 74.188 53.250 11,222,700 Second Quarter 95.500 73.750 5,915,180 64.188 50.188 8,975,500 Third Quarter 91.000 74.950 7,576,043 61.250 50.000 9,953,400 Fourth Quarter 76.750 62.000 6,459,241 52.125 42.563 8,098,200 ------- ------- ---------- ------ ------ ---------- YEAR 1999 112.500 62.000 24,535,612 74.188 42.563 38,249,800 ------- ------- ---------- ------ ------ ---------- 1998 First Quarter 138.200 112.000 5,456,109 97.188 78.500 13,056,600 Second Quarter 132.000 108.500 3,618,117 92.938 73.250 7,033,200 Third Quarter 114.700 75.000 5,090,801 77.375 48.375 11,262,400 Fourth Quarter 109.000 75.000 4,021,223 70.875 50.563 12,011,600 ------- ------- ---------- ------ ------ ---------- YEAR 1998 138.200 75.000 18,186,250 97.188 48.375 43,363,800 ------- ------- ---------- ------ ------ ---------- 1997 First Quarter 122.700 98.650 3,212,708 89.875 71.500 17,412,400 Second Quarter 117.000 99.850 2,986,406 85.000 71.000 15,201,200 Third Quarter 111.500 98.500 3,854,717 81.125 71.688 17,970,600 Fourth Quarter 122.200 108.750 8,222,508 87.500 78.000 14,982,100 ------- ------- ---------- ------ ------ ---------- YEAR 1997 122.700 98.500 18,276,339 89.875 71.000 65,566,300 ------- ------- ---------- ------ ------ ----------
64 67 CORPORATE INFORMATION CORPORATE OFFICERS AND KEY MANAGEMENT POTASH CORPORATION OF SASKATCHEWAN INC. WILLIAM J. DOYLE President and Chief Executive Officer WAYNE R. BROWNLEE Senior Vice President, Treasurer and Chief Financial Officer JOHN GUGULYN Senior Vice President, Administration JOHN L. M. HAMPTON Senior Vice President, General Counsel and Secretary BETTY-ANN L. HEGGIE Senior Vice President, Corporate Relations BARRY E. HUMPHREYS Senior Vice President and Chief Information Officer PCS SALES GARY E. CARLSON, President PCS POTASH GARTH W. MOORE, President PCS PHOSPHATE THOMAS J. REGAN, JR., President PCS NITROGEN JAMES F. DIETZ, President CORPORATE OFFICES POTASH CORPORATION OF SASKATCHEWAN INC. Suite 500, 122 - 1st Avenue South Saskatoon, SK S7K 7G3 Phone: (306) 933-8500 PCS SALES Suite 440, 5750 Old Orchard Road Skokie, IL 60077 Phone: (800) 241-6908 (847) 583-4400 EFFECTIVE JUNE 1, 2000 All US subsidiaries, including PCS Sales, will be located at new offices: POTASHCorp 1101 SKOKIE BOULEVARD NORTHBROOK, IL 60062 Glossary FERTILIZER TONNES METRIC TONNE 2204.6 pounds, used for offshore sales; to convert to short tons, multiply by 1.1023 SHORT TON 2000 pounds, used for sales in the United States; to convert to metric tonnes, divide by 1.1023 K2O TONNE Measures the potassium content of fertilizers having different chemical analyses; to convert to a KCl tonne, divide by 0.61 P2O5 TONNE Measures the phosphorus content of fertilizers having different chemical analyses N TONNE Measures the nitrogen content of fertilizers having different chemical analyses NUTRIENT TONNE Measures the nutrient weight of potassium, phosphate and nitrogen fertilizers; consists of K2O tonnes, P2O5 tonnes and N tonnes PRODUCT TONNE Standard measure of the weights of all types of potash, phosphate and nitrogen products SCIENTIFIC TERMS POTASH KCL potassium chloride K2O potassium oxide PHOSPHATE P2O5 phosphoric acid MGA merchant grade acid, 54% P2O5 (liquid) DAP diammonium phosphate, 46% P2O5 (solid) MAP monammonium phosphate, 52% P2O5 (solid) SPA superphosphoric acid, 70% P2O5 (liquid) NITROGEN NH3 anhydrous ammonia, 82% N (gas, liquid) HNO3 nitric acid (liquid) NH4NO3 ammonium nitrate, 34% N (solid, liquid) CO(NH2)2 urea, 46% N (solid) UAN SOLUTION nitrogen solution, 28-32% N (liquid) NITROGEN PRODUCTION FACTORS TO PRODUCE 1 SHORT TON OF: REQUIRES: Ammonia 34.5 million BTU of natural gas Urea solution 0.58 tons of ammonia 0.78 tons of carbon dioxide (CO2) Urea prills (46% N) 1.01 tons of urea solution Nitric acid (22% N) 0.29 tons of ammonia Ammonium nitrate solution 0.80 tons of nitric acid 0.22 tons of ammonia UAN solution (32% N) 0.45 tons of ammonium nitrate solution 0.35 tons of urea solution FINANCIAL TERMS ASSET TURNOVER = SALES / TOTAL ASSETS LONG-TERM DEBT TO EQUITY = LONG-TERM DEBT / SHAREHOLDERS' EQUITY RETURN ON INVESTMENT = NET INCOME PLUS INTEREST EXPENSE / AVERAGE INVESTED CAPITAL RETURN ON SHAREHOLDERS' EQUITY = NET INCOME / SHAREHOLDERS' EQUITY SHAREHOLDERS' EQUITY TO TOTAL ASSETS = SHAREHOLDERS' EQUITY / TOTAL ASSETS EBITDA represents Earnings (net income) Before Interest, Taxes, Depreciation and Amortization. FREE CASH FLOW is the cash, exclusive of the change in working capital, which is provided by operations less disbursements for sustaining capital, capitalized turnarounds and dividends. RETURN ON CAPITAL EMPLOYED = (NET INCOME + AFTER-TAX INTEREST EXPENSE + UNUSUAL ITEMS [NET OF TAX]) / AVERAGE (LONG-TERM LIABILITIES + SHAREHOLDERS' EQUITY) CASH FLOW RETURN = (OPERATING INCOME - CASH TAXES + DEPRECIATION AND AMORTIZATION + UNUSUAL NON-CASH ITEMS) / WEIGHTED AVERAGE (ASSETS + ACCUMULATED DEPRECIATION AND AMORTIZATION - NON-INTEREST BEARING CURRENT LIABILITIES) [RECYCLE LOGO] It is the policy of PCS to manage its operations responsibly in order to safeguard those natural resources related to or affected by its activities. In keeping with this policy, the Annual Report uses paper containing at least 10% post-consumer recycled fiber and is recyclable. 68 RESPONSIVE RELIABLE RESILIENT PCS VS. REST OF FERTILIZER INDUSTRY % CUMULATIVE TOTAL SHAREHOLDER RETURN [CHART] PCS HAS OUTPERFORMED THE FERTILIZER SECTOR AMID THE CHALLENGES OF WEATHER, POLITICS, ECONOMIC SPIRALS AND CHANGES IN FARM ACREAGE AND PROSPECTS. [POTASH CORPORATION OF SASKATCHEWAN INC. LOGO] Suite 500, 122 - 1st Avenue South Saskatoon Saskatchewan Canada S7K 7G3 www.potashcorp.com EX-21 5 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF POTASH CORPORATION OF SASKATCHEWAN INC.
JURISDICTION OF INCORPORATION NAME OF ENTITY OR FORMATION - ------------------------------------------------------------------------------- Potash Corporation of Saskatchewan Transport Limited..... Saskatchewan Canpotex Bulk Terminals Ltd.............................. Canada PCS Sales (Canada) Inc................................... Saskatchewan Potash Corporation of Saskatchewan (Florida) Inc. ....... Florida PCS Sales (Iowa), Inc.................................... Iowa PCS Joint Venture, LP.................................... Florida PCS Sales (Indiana), Inc................................. Indiana 609430 Saskatchewan Ltd.................................. Saskatchewan Potash Holding Company, Inc.............................. Delaware PCS Sales (USA), Inc..................................... Delaware PCS Administration (USA), Inc............................ Delaware Phosphate Holding Company, Inc........................... Delaware White Springs Agricultural Chemicals, Inc................ Delaware PCS Phosphate Company, Inc............................... Delaware Texasgulf Export Corporation............................. Delaware Texasgulf Aircraft Inc................................... Delaware Tg Corporation........................................... Delaware PCS Industrial Products Inc. ............................ Delaware PCS Purified Phosphates.................................. Virginia PCS Nitrogen, Inc........................................ Delaware PCS Finance Luxembourg S.a.r.l........................... Luxembourg PCS Nitrogen Payroll Corporation......................... Delaware PCS Nitrogen Amm Term Corp II............................ Delaware PCS Nitrogen Amm Term Corp I............................. Texas Houston Ammonia Terminal, L.P............................ Delaware AA Sulfuric Corp......................................... Louisiana PCS Nitrogen Trinidad Fertilizer Corporation............. Delaware PCS Nitrogen Fertilizer Limited.......................... Trinidad
2
JURISDICTION OF INCORPORATION NAME OF ENTITY OR FORMATION - ------------------------------------------------------------------------------- PCS Nitrogen Holding Company............................. Delaware PCS Nitrogen Limited..................................... Trinidad Augusta Service Company Inc.............................. Delaware PCS L.P. Inc............................................. Delaware PCS Nitrogen Fertilizer Operations, Inc.................. Delaware PCS Nitrogen Ohio, L.P................................... Delaware PCS Nitrogen Fertilizer, L.P............................. Delaware PCS Nitrogen LCD Corporation............................. Delaware AC Industries............................................ Delaware PCS Nitrogen Trinidad Corporation........................ Delaware PCS Nitrogen Cayman Limited.............................. Cayman PCS Nitrogen Trinidad Limited............................ Trinidad PCS Nitrogen Trinidad Finance Ltd........................ United Kingdom PCS Cassidy Lake Company................................. Ontario Chilkap Resources Ltd ................................... Yukon 628550 Saskatchewan Ltd. ................................ Saskatchewan PCS (Barbados) Shipping Ltd. ............................ Barbados Minera Saskatchewan Limitada ............................ Chile Inversiones PCS Chile Limitada .......................... Chile PCS Yumbes S.C.M. ....................................... Chile PCS Fosfatos do Brasil Ltda. ............................ Brazil
EX-23 6 CONSENT 1 Exhibit 23 CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS POTASH CORPORATION OF SASKATCHEWAN INC. We hereby consent to the incorporation of our report dated February 9, 2000 (except as to Note 33 which is as of February 22, 2000) into this Annual Report on Form 10-K for the year ended December 31, 1999 and into the following Registration Statements: Registration Statement No. 33-37855 on Form S-8 Registration Statement No. 333-19215 on Form S-8 Registration Statement No. 333-93773 on Form S-8 Registration Statement No. 33-57920 on Form S-3DPOS [signature] DELOITTE & TOUCHE LLP CHARTERED ACCOUNTANTS Saskatoon, Saskatchewan, Canada March 27, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 44,037 0 276,286 (7,022) 377,232 726,235 3,828,097 (951,037) 3,916,830 831,003 400,000 0 0 1,216,533 745,853 3,916,830 2,061,064 2,061,064 1,652,793 1,652,793 167,455 591,517 53,824 (404,525) 7,469 (411,994) 0 0 0 (411,994) (7.60) (7.60)
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