EX-99.2 3 d498770dex992.htm EX-99.2 EX-99.2

Exhibit 99.2 LOGO

 


Contents

 

Management’s Discussion  & Analysis

        

Financial & Operational Highlights

     1  

Business & Operating Environment

     2  

Strategic Performance

     6  

Nutrient Performance

  

Industry

     10  

Potash

     11  

Nitrogen

     16  

Phosphate

     20  

2017 Earnings per Share

     24  

Other Expenses and Income

     25  

Other Non-Financial Information

     27  

Quarterly Results

     28  

Financial Condition Review

     30  

Liquidity and Capital Resources

     31  

Capital Structure and Management

     34  

Other Financial Information

     36  

Controls and Procedures

     37  

2018 Nutrien Guidance

     38  

Nutrien Pro Forma Earnings and Balance Sheet

     39  

Forward-Looking Statements

     44  

Non-IFRS Financial Measures in MD&A

     45  

11 Year Data

     46  

Financials & Notes

     54  

Other Information

  

Appendix

     128  

Terms and Measures

     129  

To learn more, watch for the following icons:

 

 

 AIF 

 

 

Annual Information Form

 

 FS 

 

Financial Statements

 

Financial data in this report are stated in US dollars unless

otherwise noted.

Management’s Discussion & Analysis

of Financial Conditions and Results of Operations (in US dollars)

On January 1, 2018, PotashCorp and Agrium completed a merger of equals creating the world’s largest provider of crop inputs and services (the “Merger”). The new company, Nutrien Ltd. (“Nutrien”), will play a critical role in helping growers increase food production in a sustainable manner.

This report primarily focuses on PotashCorp’s historical results and includes certain information on Nutrien, including Nutrien financial guidance and certain pro forma financial information.

The following discussion and analysis is the responsibility of management and is as of February 20, 2018. The Board of Directors of PotashCorp carries out its responsibility for review of this disclosure principally through its audit committee, comprised exclusively of independent directors. The audit committee reviews this disclosure and recommends its approval by the Board of Directors. The term “PCS” refers to Potash Corporation of Saskatchewan Inc. and the terms “we,” “us,” “our,” “PotashCorp” and “the company” refer to PCS and, as applicable, PCS and its direct and indirect subsidiaries as a group. Additional information relating to PotashCorp (which is not incorporated by reference herein) can be found in our regulatory filings on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.

All references to per-share amounts pertain to diluted net income per share (EPS) as described in Note 9 to the consolidated financial statements.

As a foreign private issuer, beginning January 1, 2018, we changed from an SEC voluntary filer on Form 10-K to an SEC filer on Form 40-F to align with the Nutrien expected filing format. Readers are directed to the company’s Annual Information Form, including the discussion of risk factors therein, for more information.

PotashCorp applies International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). PotashCorp is considered the acquirer and continuing reporting entity for accounting purposes resulting from the Merger and, as a result, the financial statements and related notes of Nutrien for 2017 and prior will reflect the operations of PotashCorp. Readers are cautioned that the historical financial results herein are of PotashCorp only and they are not indicative of the expected future operating performance of Nutrien. A pro forma statement of earnings and balance sheet of Nutrien is provided on pages 40 and 42, respectively.

For a description of risk factors that may affect the company, see “Risk Factors” in our most recent Annual Information Form on file with the SEC and Canadian provincial securities regulatory authorities. Also see the cautionary statement on forward-looking information on Page 44.

 


FINANCIAL & OPERATIONAL HIGHLIGHTS

Years ended December 31

 

(millions unless otherwise noted)    2017      2016      2015      2014      2013  
                                              

FINANCIAL

              

Sales

     4,547        4,456        6,279        7,115        7,305  

Gross Margin

     675        830        2,269        2,647        2,790  

Net Income from Continuing Operations 1

     154        199        1,115        1,349        1,534  

Net Income per Share from Continuing Operations 1

              

Basic

     0.18        0.24        1.34        1.61        1.77  

Diluted

     0.18        0.24        1.34        1.60        1.76  

Net Income 2

     327        323        1,270        1,536        1,785  

Net Income per Share 2

              

Basic

     0.39        0.39        1.52        1.83        2.06  

Diluted

     0.39        0.38        1.52        1.82        2.04  

Cash Provided by Operating Activities

     1,225        1,260        2,338        2,614        3,212  

Total Assets

     16,998        17,255        17,469        17,724        17,958  

Total Non-Current Financial Liabilities

     3,746        3,763        3,819        3,328        3,099  

Dividends Declared per Share

     0.40        0.70        1.52        1.40        1.33  
                                              

POTASH

              

Sales Volumes (thousand tonnes product)

     9,297        8,644        8,772        9,346        8,100  

Average Realized Price (per tonne)

     175        158        263        269        332  

Cost of Goods Sold (per tonne)

     (89      (105      (111      (113      (136

Gross Margin (per tonne)

     86        53        152        156        196  
                                              

NITROGEN 3

              

Sales Volumes (thousand tonnes product)

     6,317        6,373        5,926        6,352        5,896  

Average Realized Price (per tonne)

     207        217        322        374        377  

Cost of Goods Sold (per tonne)

     (169      (163      (206      (218      (225

Gross Margin (per tonne)

     38        54        116        156        152  
                                              

PHOSPHATE

              

Sales Volumes (thousand tonnes product)

     2,811        2,713        2,850        3,142        3,680  

Average Realized Price (per tonne)

     393        439        545        510        497  

Cost of Goods Sold (per tonne)

     (523      (428      (463      (448      (415

Gross Margin (per tonne)

     (130      11        82        62        82  
                                              

1 Prior year amounts have been reclassified as a result of discontinued operations as described in Note 19 to the consolidated financial statements

2 From continuing and discontinued operations

3 Includes inter-segment ammonia sales

Note: all amounts listed under Potash, Nitrogen and Phosphate exclude the impact of other miscellaneous and purchased products.

 

PotashCorp 2017 Annual Report   1


 

 

 

 

BUSINESS & OPERATING ENVIRONMENT

PotashCorp’s crop nutrients are vital to maintaining healthy and productive soils and are essential to produce nutritious food for a growing population. Demand for our products is closely tied to agricultural and macroeconomic factors, most notably population growth and rising incomes in developing countries.

 

 

    2017  

OUR OPERATIONS

AND ASSETS

 

OUR PRODUCTS

AND MARKETS

  NUMBER OF EMPLOYEES *     

K

  POTASH  

 

•  Five large-scale, lower-cost potash mines and several decades of high-quality reserves in Saskatchewan; positioned to remain one of the lowest cost producers globally

 

•  One potash mine in New Brunswick currently in care-and-maintenance mode

 

•  Investment in Canpotex, the world’s premier potash exporter

 

 

•  Produce nine different products; vast majority of production is granular and standard fertilizer

 

•  Product sold offshore by Canpotex, using more than 5,000 railcars, three shipping terminals in British Columbia, Oregon and New Brunswick and a state-of-the-art railcar maintenance facility

 

•  Product sold within North America by PCS Sales, using approximately 4,500 railcars and more than 200 owned or leased distribution points

 

 

 

2,241

 

   

 

N

 


NITROGEN

 

 

•  Three US production facilities near key customers, with access to lower-cost natural gas

 

•  One large-scale production facility in Trinidad with four ammonia plants and one urea plant

 

 

•  Produce ammonia, urea, nitric acid, ammonium nitrate and nitrogen solutions, with a focus on industrial customers

 

•  Majority of product is sold in North America; offshore sales sourced primarily from Trinidad

 

•  Fleet of ammonia vessels with long-term leases enable us to service customers efficiently; Trinidad is ideally located to service import demand needs in the US, Brazil, North Africa and Northwest Europe cost-effectively

 

 

 

856

 

   

P

  PHOSPHATE  

•  Two large, integrated mining and processing facilities and five smaller upgrading plants in the US

 

•  Long-term permits in place at Aurora for decades of mining; life-of-mine permit at White Springs

 

•  High-quality rock allows us to produce the most diversified portfolio of products among our peers, including feed, industrial and fertilizers

 

•  Majority of product is sold in North America; proximity to customers allows us to minimize freight costs

 

 

1,559

 

   

* Includes employees within individual nutrient segments on December 31, 2017

 

2   PotashCorp 2017 Annual Report


POTASH OPERATING ENVIRONMENT

 

    USES         NUMBER OF MAJOR PRODUCING COUNTRIES*

 

Fertilizer

Improves root and stem strength, water
utilization and disease resistance; enhances
taste, color and texture of food

    

 

Feed

Aids in animal growth and
milk production

    

 

Industrial

Used in soaps, water softeners,

de-icers, drilling muds
and food products

  

 

 10

 

            
                         

* Countries producing more than 500,000 tonnes annually

 

INDUSTRY OVERVIEW

 

Economically mineable deposits are geographically concentrated

   Regions that have historically under-applied potash expected to drive growth in demand   

New capacity requires significant investment of time and money

•  Securing an economically mineable deposit in a country that has both political stability and available infrastructure presents significant challenges.

 

•  Producers in Canada and the FSU account for approximately 40 percent and 30 percent of world capacity, respectively.

  

•  Crop production requirements and improving soil fertility practices – particularly in emerging markets where potash has been under-applied and crop yields lag – are expected to drive strong growth in potash demand.

 

•  Economic conditions and government policies in consuming regions can create variability in growth.

  

•  Entry into the potash business is challenging because building new capacity is costly and time-consuming.

 

•  Brownfield projects, especially those already completed, have a significant per-tonne capital cost advantage over greenfield projects.

LOGO

   LOGO    LOGO

 

 

Competitive Advantage

   Competitive Advantage    Competitive Advantage

We have access to decades of high-quality, permitted potash reserves in a politically stable region with well-established infrastructure.

  

Canpotex is well-positioned to efficiently supply its customers in approximately 40 countries around the world.

 

With a lower fixed-cost profile, we can cost-effectively adjust production to respond to variability in demand.

   With our expansions completed at a cost well below that of greenfield, we are the largest potash producer in the world by capacity, and have a lower-cost growth platform that is paid for.

 

PotashCorp 2017 Annual Report   3


NITROGEN OPERATING ENVIRONMENT

 

      

 

         USES

 

         

 

NUMBER OF MAJOR PRODUCING COUNTRIES

 

 

Fertilizer

Essential for protein synthesis;
speeds plant growth

    

Feed

Plays a key role in animal growth

and development

    

Industrial

Used in plastics, resins, adhesives

and emission controls

   ~65   
                    
            

 

    INDUSTRY OVERVIEW

 

Lower-cost energy is essential to success    Proximity to end markets provides advantages    Pricing can be volatile

•  Natural gas can make up 70-85 percent of the cash cost of producing a tonne of ammonia.

 

•  With lower-cost natural gas, North America, Russia, North Africa and the Middle East are major producing regions.

 

•  Producers in China and Europe are typically higher-cost suppliers and play a significant role in determining global nitrogen prices.

  

•  The need for expensive, specialized transportation vessels is an obstacle to economical transportation of ammonia over long distances.

 

•  Global ammonia trade has historically been limited compared to urea, which can be more easily transported.

  

•  With natural gas feedstock widely available, the nitrogen industry is highly fragmented and regionalized.

 

•  Geopolitical events and the influence of Chinese urea and Russian ammonia exports can impact global trade.

 

•  These factors typically make nitrogen markets more volatile than other fertilizer markets.

LOGO

   LOGO    LOGO

 

 

Competitive Advantage    Competitive Advantage    Competitive Advantage
Significant supply of lower-priced shale gas provides an advantaged cost position for our US nitrogen production. In Trinidad, our gas costs are indexed to Tampa ammonia prices, sheltering margins.    Our production facilities in the US and Trinidad are well- positioned to serve the key domestic and international consuming regions.    We produce a broad range of nitrogen products and have a relatively stable industrial customer base. Sales to industrial customers make up almost 60 percent of our total nitrogen sales volumes.

 

4   PotashCorp 2017 Annual Report


 

PHOSPHATE OPERATING ENVIRONMENT

 

USES    

 

               NUMBER OF MAJOR PRODUCING COUNTRIES             

 

   
                

 

Fertilizer

Required for energy storage and transfer; speeds crop maturity

    

 

Feed

Assists in muscle repair and

skeletal development of animals

    

 

Industrial

Used in soft drinks, food additives
and metal treatments

  

 

    ~40  

 
                

 

INDUSTRY OVERVIEW

 

High-quality, lower-cost rock is critical
to long-term success

   Raw material cost changes
affect profitability
   Changes in global trade impact
market fundamentals

•  Phosphate rock is geographically concentrated: China, Morocco and the US together produce approximately 70 percent of the world’s supply.

 

•  Approximately one-third of global producers are non-integrated and rely on purchased rock; those with direct access to a high-quality, lower-cost rock supply have a significant competitive advantage.

  

•  Changing prices for raw material inputs – sulfur and ammonia – have historically resulted in production cost volatility.

 

•  Phosphate prices have historically reflected changes in the costs of these inputs, along with rock costs.

  

•  With limited indigenous rock supply, India is the largest importer of phosphate in the world, and its demand can have a significant impact on global markets.

 

•  Increased export supply from Morocco, Saudi Arabia and China has lowered US exports of solid fertilizers.

 

•  US producers rely more on trade with Latin America and production of specialty phosphate products.

LOGO

   LOGO    LOGO

 

 

Competitive Advantage

   Competitive Advantage    Competitive Advantage

 

We are an integrated producer with access to many years of high-quality, permitted phosphate reserves.

  

 

We sell liquid phosphate fertilizer, feed and industrial phosphate products that require little to no ammonia as a raw material input.

  

 

We have the most diversified product offering in the industry with approximately 80 percent of our sales in North America.

 

PotashCorp 2017 Annual Report   5


STRATEGIC PERFORMANCE

 

Historically, our seven strategic priorities determined where we focused our efforts to create long-term value for all those associated with our business. Our 2017 results are as follows:


PORTFOLIO & RETURN OPTIMIZATION

Maximize returns for our assets and explore other value-creation opportunities

 

     LOGO   Achieved   LOGO   Not achieved   LOGO   On track  

 

TARGET        RESULT        DISCUSSION     
                  
Exceed TSR performance for our sector* and the DXAG     

 

LOGO

    

 

•  PotashCorp’s TSR of 17.3 percent was primarily impacted by improved potash fundamentals, including record global potash demand and higher prices.

 

•  Our TSR was below the performance for our sector and the DXAG. The sector return was elevated by certain non-fertilizer related factors for one of our peers.

  
                  
Exceed CFR 1 for our sector*     

 

LOGO

    

•  Our 2017 CFR of 5.5 percent was below the sector average.

  
                  

 

* Sector: weighted average (based on market capitalization) for Agrium, APC, CF Industries, ICL, Intrepid, K+S, Mosaic, SQM and Yara

 

1  See reconciliation and description of this non-IFRS measure on Page 45. Sector CFR based on four most recent fiscal quarters available

OPERATIONAL EXCELLENCE

Improve our competitive position through reliability, productivity and flexibility

 

TARGET          RESULT          DISCUSSION       
                  
Achieve potash cash cost savings of $20-$30 per tonne from 2013 levels by 2017 (excluding foreign exchange and royalties)     

 

LOGO

    

•  We achieved our target in 2017 with potash cash cost savings (excluding foreign exchange and royalties) of $26 per tonne from 2013 levels. Our portfolio optimization efforts, including the ramp-up of our Rocanville expansion, were fundamental to meeting our target.

  
                  
Capture direct and indirect annualized procurement savings of $170 million from 2014 levels by the end of 2017     

 

LOGO

    

•  Our center-led approach to procurement helped us succeed in capturing $175 million in direct and indirect annualized procurement savings since 2014.

  
                  
Achieve a 95 percent ammonia reliability rate for our nitrogen division     

 

LOGO

    

•  Our 2017 ammonia reliability rate of 93 percent for our nitrogen division was lower than target, mainly due to unplanned outages at two of our US plants.

  
                  

 

 


LOGO

 

LOGO

 

 

6   PotashCorp 2017 Annual Report


CUSTOMER & MARKET DEVELOPMENT

Encourage product demand and support customer growth

 

     N/A  Not Applicable    LOGO   Achieved   LOGO   Not achieved   LOGO   On track  

 

TARGET       RESULT       DISCUSSION    
               
Outperform competitor groups on quality, reliability and service as measured by customer surveys     N/A    

•  Due to the Merger, we did not administer customer surveys in 2017.

 
               
Support development of existing and new markets with enhancements in education, sales and the supply chain     LOGO    

•  During the year our agronomists provided 25 customer education programs, which focused on crop nutrition, soil sampling and nutrient management.

 
               

STAKEHOLDER COMMUNICATIONS & ENGAGEMENT

Earn stakeholder trust through strong communications and engagement

 

TARGET       RESULT       DISCUSSION    
               
Achieve 4 (performing well) out of 5 on surveys of community leaders     N/A    

•  Due to the Merger, we did not administer community leader surveys in 2017.

 
               
Outperform competitor group on quality of communications and responsiveness as measured by investor surveys     N/A    

•  Due to the Merger, we did not administer investor surveys in 2017.

 
               

 

PotashCorp 2017 Annual Report   7


PEOPLE DEVELOPMENT

Attract, develop and retain engaged employees

 

     LOGO   Achieved   LOGO   Not achieved   LOGO   On track

 

TARGET         RESULT            DISCUSSION      
                    
Have 95 percent of salaried staff submit and review business goals and individual development plans through our new performance management process       LOGO       

•  We achieved our targeted participation with over 95 percent of salaried staff completing their annual performance management process.

 
                    
Maintain an annual employee turnover rate of 5 percent or less       LOGO       

•  Our 2017 annual employee turnover rate was 3 percent.

 
                    
Achieve progress toward our diversity priorities of increasing the representation of women in management to 25 percent or more by 2025 and becoming representative of Aboriginal people in our Canadian operations by 2020    

 

 

 

LOGO

 

 

    

•  In 2017, we launched a Women in Leadership Development Mentorship Program that provides mentorship, guided coaching and other resources for our senior female staff. During the year, 46 female leaders participated in the program.

 

•  We continued facilitating our Aboriginal Internship Program, which provides internship opportunities in the areas of engineering, business, and information technology. Since 2015, the program has provided opportunities to 49 participants.

 
                    

GOOD GOVERNANCE

Foster a culture of accountability, fairness and transparency

 

TARGET         RESULT            DISCUSSION      
                    
Remain in the top quartile of governance practices as measured by external reviews    

 

 

 

LOGO

 

 

    

•  We ranked in the top quartile of governance practices in The Globe and Mail’s Board Games 2017.

 

•  Our governance practices were highly ranked by the Dow Jones Sustainability Index and the FTSE4Good Index in 2017.

 

•  Our 2016 Annual Integrated Report was one of only three – out of ~300 reports judged worldwide – to receive an A+ rating from reportwatch.com. It also received a gold award at the 2017 Awards of Excellence in Corporate Reporting by CPA Canada.

 
                    

 

 

LOGO

 


LOGO

 

 

8   PotashCorp 2017 Annual Report


SAFETY, HEALTH & ENVIRONMENTAL EXCELLENCE

Be relentless in pursuit of the safety of our people and protection of the environment

 

     LOGO   Achieved   LOGO   Not achieved   LOGO   On track  

 

TARGET      RESULT      DISCUSSION  
                 
Achieve zero life-altering injuries at our sites     

 

LOGO

    

•  There were no life-altering injuries at our sites in 2017. Our efforts focused on effective execution of our four key safety priorities, which include preventing serious injuries and fatalities (SIF) through implementation of our international award-winning SIF Prevention Program.

 

 
                 
Reduce total recordable injury rate to 0.75 or lower     

 

LOGO

    

•  Our total recordable injury rate of 0.85 in 2017 was our lowest on record; however, we fell short of our target.

 

 
                 
Reduce total lost-time injury rate to 0.07 or lower     

 

LOGO

    

•  Our total lost-time injury rate for the year was 0.11, which did not meet our target.

 

 
                 
By 2018, reduce GHG emissions per tonne of nitrogen product by 5 percent from 2014 levels     

 

LOGO

    

•  Our GHG emissions per tonne of nitrogen product decreased by 8 percent compared to 2014 levels. This was mainly the result of our previously installed enhanced emission controls at our largest nitric acid plant and less CO2 vented to the atmosphere.

 

 
                 
By 2018, reduce environmental incidents by 40 percent from 2014 levels     

 

LOGO

    

•  In 2017, we had nine environmental incidents, our lowest total on record and a 63 percent decrease from 2014 levels. This demonstrates our attention to sharing best practices across our operations, observing our leading indicators and effectively executing our four key environmental priorities.

 

•  Those four key environmental priorities are: environmental job hazard assessments, work pausing to reassess hazards, serious incident prevention and environmental leadership.

 

 
                 
By 2018, reduce water consumption per tonne of phosphate product by 10 percent from 2014 levels     

 

LOGO

    

•  Water consumption has decreased by 8 percent compared to 2014 levels. Our Eagle Creek water recycling project at White Springs, which became operational in the fourth quarter of 2016, is helping us reduce our consumption.

 

 
                 

 

 

LOGO

 

LOGO

 

 

PotashCorp 2017 Annual Report   9


NUTRIENT PERFORMANCE

INDUSTRY PERFORMANCE

POTASH

Global potash demand was supported by strong growth in consumption in most major markets and consistent customer engagement throughout the year. As a result, global potash shipments rose to a record of approximately 64 million tonnes in 2017, an increase of 6 percent compared to 2016.

In China, consumption growth was supported by affordability and a move to high-value, nutrient-intensive crops. Good monsoon rains supported crop plantings and potash demand in India, while supportive palm oil prices and improved weather benefited potash demand in Other Asian countries. Demand in Latin America was boosted by favorable barter ratios and crop acreage expansion. In North America, demand remained healthy in response to strong affordability and a significant need to replenish soil nutrients.

New supply from producers in Canada and the FSU was outpaced by growth in demand, resulting in tighter supply/demand fundamentals compared to 2016. As a result, potash prices increased in all major markets. In Brazil and North America, spot market prices increased by 21 percent and 7 percent, respectively, compared to the end of 2016.

NITROGEN

Global nitrogen markets were volatile as the start-up of new capacity, including the ramp-up of projects in the US, impacted trade flows. Trade patterns started shifting, including a 30 percent reduction in US nitrogen net imports, a 20 percent reduction in Black Sea ammonia exports and a 50 percent decline in Chinese urea exports.

As this supply transition unfolded, prices for many nitrogen products reached multi-year lows during the first half of 2017 before partially recovering in the second half due to strong consumption and global production outages.

PHOSPHATE

Global phosphate markets remained subdued in 2017, largely due to increased supply and lower shipments to India. Phosphate fertilizer prices increased late in the year due to tightening supply and higher raw material costs. US feed and industrial phosphate prices were well below prior-year levels, due primarily to increased supply from offshore producers.

 

LOGO

 

LOGO

 

 

10   PotashCorp 2017 Annual Report


POTASH FINANCIAL PERFORMANCE

 

    Dollars (millions)     % Change     Tonnes (thousands)     % Change     Average per Tonne 1     % Change  
                                                                                                                         
    2017     2016     2015     2017     2016     2017     2016     2015     2017     2016     2017     2016     2015     2017     2016  
                                                                                                                         

Manufactured product

                             

Net sales

                             

North America

    $    639       $      589       $       825       8       (29     3,201       3,367       2,591       (5     30       $     200       $     175       $     318       14       (45

Offshore

    989       781       1,487       27       (47     6,096       5,277       6,181       16       (15     $     162       $     148       $     241       9       (39
                                                                                                                         
    1,628       1,370       2,312       19       (41     9,297       8,644       8,772       8       (1     $     175       $     158       $     263       11       (40

Cost of goods sold

    (824     (913     (977     (10     (7               $      (89     $    (105     $    (111     (15     (5
                                                                                                                         

Gross margin

    804       457       1,335       76       (66               $       86       $       53       $     152       62       (65

Other miscellaneous and purchased product gross margin 2

    (19     (20     (13     (5     54                      
                                                                                                                         

Gross Margin

    $    785       $      437       $    1,322       80       (67               $       84       $       51       $     151       65       (66
                                                                                                                         

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

2 Comprised of net sales $5 million (2016 – $10 million, 2015 – $17 million) less cost of goods sold $24 million (2016 – $30 million, 2015 – $30 million).

 

 FS 

      Note 3

 

LOGO

 

     2017 vs 2016      2016 vs 2015  
                                                                    
    

         Change in Prices/Costs        

    

        Change in Prices/Costs        

 
Dollars (millions)   

Change in

Sales Volumes

    Net Sales    

Cost of

Goods Sold

     Total     

Change in

Sales Volumes

    Net Sales    

Cost of

Goods Sold

    Total  
                                                                    

Manufactured product

                  

North America

     $         (15     $          79       $          90        $        154        $        161       $        (481     $          (23     $        (343

Offshore

     41       88       64        193        (134     (489     88       (535

Change in market mix

     8       (11     3               (64     63       1        
                                                                    

Total manufactured product

     $           34       $        156       $        157        $        347        $        (37     $        (907     $            66       $        (878

Other miscellaneous and purchased product

            1              (7
                                                                    

Total

            $        348              $        (885
                                                                    

 

PotashCorp 2017 Annual Report   11


Sales to major offshore markets were as follows:

 

      By Canpotex      From New Brunswick  
          Percentage of Annual Sales Volumes      % Change      Percentage of Annual Sales Volumes      % Change  
      2017      2016      2015      2017      2016      2017 2      2016 2      2015      2017 2      2016  

Other Asian markets 1

     33        36        34        (8      6                     

Latin America

     30        33        30        (9      10              100        

China

     18        16        20        13        (20                   

India

     12        9        9        33                            

Other markets

     7        6        7        17        (14                                           
       100        100        100                                            100                    

1 All Asian markets except China and India.

2 Our international customers were served by New Brunswick through 2015 and have since been served by Canpotex.

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

 

     Sales Volumes   Net Sales Prices   Cost of Goods Sold
2017 vs 2016  

Ù

 

 

 

 

Ú

 

Offshore volumes were higher due mainly to affordability of potash fertilizer relative to crop prices, and agronomic need.

 

North American volumes were slightly lower than the near-record volumes in 2016.

 

Ù

 

 

 

 

Ù

 

Prices were higher due to strong demand supporting a continued recovery in most global markets.

 

Offshore prices were also higher due to 2016 results reflecting the impact of our share of Canpotex’s project exit costs following its decision not to proceed with development of an export terminal in Prince Rupert, British Columbia.

 

Ù

 

 

 

Ù

 

 

Ù

 

Costs were lower in 2017 due to our portfolio optimization effort, including a greater share of production coming from our lower-cost mines, particularly Rocanville.

 

Costs were also lower in 2017 as the first quarter of 2016 included costs associated with the indefinite suspension of potash operations at Picadilly.

 

Offshore cost of goods sold variance was less positive than North America as a relatively higher percentage of products sold was produced at higher-cost mines.

           
           

 

12   PotashCorp 2017 Annual Report


     Sales Volumes   Net Sales Prices   Cost of Goods Sold
2016 vs 2015  

Ù

 

 

 

Ú

 

Stronger North American demand was driven by affordability of potash fertilizer relative to crop prices, as well as agronomic need.

 

Offshore volumes were down largely due to the absence of contracts in China and India in the first half of 2016.

 

Ú

 

 

 

 

Ú

 

Prices declined through the first half of 2016 mainly as a result of weaker demand and increased competitive pressures.

 

Our average offshore realized price was also impacted by lower realized prices from Canpotex, including the impact of its decision not to proceed with development of an export terminal in Prince Rupert, British Columbia.

 

Ù

 

Ú

 

 

Ù

 

Ú

 

 

Ù

 

The Canadian dollar weakened relative to the US dollar.

 

North American cost of goods sold variance was negative due to the indefinite suspension of potash operations at Picadilly in the first quarter of 2016.

 

Royalty costs declined due to lower average North American listed sales prices per tonne.

 

Higher unfavorable adjustments to our asset retirement obligations in 2016 were largely due to lower discount rates.

 

Offshore cost of goods sold variance was positive as a relatively higher percentage of products sold was produced at lower-cost mines.

        The change in market mix produced an unfavorable variance of $64 million related to sales volumes and a favorable variance of $63 million in net sales prices due primarily to more higher-priced granular product being sold.        

North America typically consumes more higher-priced granular product than standard product.

 

LOGO

 

PotashCorp 2017 Annual Report   13


POTASH NON-FINANCIAL PERFORMANCE

 

LOGO

 

Production increased in 2017 in response to stronger demand, the completion of the Rocanville expansion and ramp-up, and an increase in our Canpotex sales entitlement.

 

Production was down in 2016 due to the indefinite suspension of our Picadilly operations, in response to decreased offshore demand.

 

In 2017, there were 46 recordable injuries and five lost-time injuries. In 2016, there were 47 recordable injuries and two lost-time injuries. The increase in the total recordable injury rate was primarily due to fewer hours worked in 2017 compared to 2016.

 

In 2016, the total recordable injury rate and total lost-time injury rate decreased mainly due to 47 recordable injuries and two lost-time injuries occurring compared to 77 recordable injuries and five lost-time injuries in 2015. The decrease in injury rates was partially offset by fewer hours worked in 2016 compared to 2015.

 

There were no life-altering injuries from 2015 to 2017.

 

There were no significant changes from 2016 to 2017. Based on the company’s definition of employee turnover rate, announced workforce reductions are excluded. In 2016, we suspended our Picadilly operations, impacting 443 employees. Changes announced at Cory in late 2016 impacted approximately 140 employees, starting in 2017.

 

New collective bargaining agreements at our Allan, Cory, Lanigan and Patience Lake sites were signed in the fourth quarter of 2015. The Lanigan agreement extended through January 2018 and is under negotiation while the remaining agreements extend through April 2019. The Rocanville agreement expires in May 2018.

 

In 2017, nearly all employees benefited from enhancements to technical training, supported by a new learning management system and strategy to create consistency in training across all sites. Leadership training on our core competencies and safety engagement continued to be a focus for more than 500 employees in 2017, 2016 and 2015.

 

In 2017, we experienced four environmental incidents, consisting of two potash spills and two brine spills. In 2016, we experienced six incidents: two potash spills, a brine spill, an oil spill, a release of suspended solids into a river, and a non-compliance for partially filling a wetland. In 2015, environmental incidents included brine spills and a minor propane gas release.

 

2017 vs 2016 – more waste was produced during manufacturing due to higher potash production.

 

2016 vs 2015 – less waste was produced during manufacturing due to lower potash production.

 

 

COMMUNITY HIGHLIGHTS

In 2017, 2016 and 2015, we continued our career information efforts and reached more than 30,000 Aboriginal people. In 2017, more than 11 percent of new employees were self-identified Aboriginal applicants (2016 – 15 percent and 2015 – 6 percent). We continue to leverage our community investments to support programs and services that benefit Aboriginal people in Saskatchewan.

 

 

MINERAL RESERVES 1

(millions of tonnes of estimated recoverable ore) 2

All Potash Locations 3   Proven     Probable     Total    

Years of Remaining

Mine Life

 
                                 

As at December 31, 2017

    633 4       1,182       1,815       52 – 81  
                                 

 

1  For a more complete discussion of important information related to our potash reserves, see “Mineral Projects” in our Annual Information Form for the year ended December 31, 2017. Craig Funk, P.Eng., P.Geo., Director, Earth Science – Engineering, Technology and Captial, an employee of the company, prepared the following technical reports, each dated effective December 31, 2017: (i) National Instrument 43-101 Technical Report on Allan Potash Deposit (KL 112R A), Saskatchewan, Canada; (ii) National Instrument 43-101 Technical Report on Cory Potash Deposit (KL 103B), Saskatchewan, Canada; (iii) National Instrument 43-101 Technical Report on Lanigan Potash Deposit (KLSA 001B), Saskatchewan, Canada; (iv) National Instrument 43-101 Technical Report on Rocanville Potash Deposit (KLSA 002B & KL 249), Saskatchewan, Canada. Mr. Funk is a qualified person under National Instrument 43-101 – Standards of Disclosure for Mineral Projects and has reviewed and approved the scientific and technical information herein relating to the company’s Allan, Cory, Lanigan and Rocanville potash operations.

 

2  Average grade % K2O equivalent of 20.3-24.8.

 

3  Given the characteristics of the solution mining method at Patience Lake, those results are excluded from the above table as it is not possible to estimate reliably the recoverable ore reserve.
4  Includes 159 million tonnes at New Brunswick.

 

14   PotashCorp 2017 Annual Report


POTASH PRODUCTION

(million tonnes KCl)

 

   

Nameplate

Capacity 1

    

Operational

Capability (2017) 2

           Production

 

           

Employees

(December 31, 2017)

 
            2017       2016     2015         
                                                                     

Lanigan SK

    3.8        2.0          1.82         2.03       1.83            426  

Rocanville SK

    6.5        5.0          4.86         2.72       2.48            762  

Allan SK

    4.0        2.0          1.83         2.38       2.38            575  

Cory SK 3

    3.0        0.8          0.99         1.24       1.51            367  

Patience Lake SK

    0.3        0.3          0.30         0.23       0.26            76  

New Brunswick 4

    2.0                 –               0.65            35  
                                                                     

Total

    19.6        10.1          9.80         8.60       9.11            2,241  
                                                                     

 

1  Represents estimates of capacity as at December 31, 2017. Estimates based on capacity as per design specifications or Canpotex entitlements once determined. In the case of New Brunswick, nameplate capacity represents design specifications for the Picadilly mine, which is currently in care-and-maintenance mode. In the case of Patience Lake, estimate reflects current operational capability. Estimates for all other facilities do not necessarily represent operational capability.

 

2  Estimated annual achievable production level at current staffing and operational readiness (estimated at beginning of year). Estimate does not include inventory-related shutdowns and unplanned downtime.

 

3  In November 2016, the company announced operational changes at Cory to produce only white potash, with an expected operational capability of approximately 0.8 million tonnes per year; these operational changes were completed in the third quarter of 2017. Potential exists to reach previous operational capability with increased staffing and operational ramp-up, although timing is uncertain.

 

4  In 2015, the Penobsquis, New Brunswick mine was permanently closed. In 2016, the company indefinitely suspended its Picadilly, New Brunswick potash operations, which are currently in care-and-maintenance mode.

 

 

LOGO

 

PotashCorp 2017 Annual Report   15


NITROGEN FINANCIAL PERFORMANCE

 

    Dollars (millions)     % Change     Tonnes (thousands)     % Change     Average per Tonne 1     % Change  
                                                                                                                         
    2017     2016     2015     2017     2016     2017     2016     2015     2017     2016     2017     2016     2015     2017     2016  
                                                                                                                         

Manufactured product 2

                             

Net sales

                             

Ammonia

  $ 584     $     612     $ 978       (5     (37     2,205       2,197       2,228             (1   $   265     $ 278     $ 439       (5     (37

Urea

    302       297       362       2       (18     1,166       1,161       1,048             11     $ 259     $ 256     $ 346       1       (26

Solutions, nitric acid, ammonium nitrate

    421       477       567       (12     (16     2,946       3,015       2,650       (2     14     $ 143     $ 158     $ 214       (9     (26
                                                                                                                         
    1,307       1,386       1,907       (6     (27     6,317       6,373       5,926       (1     8     $ 207     $   217     $   322       (5     (33

Cost of goods sold

    (1,066     (1,041     (1,219     2       (15             $ (169   $ (163   $ (206     4       (21
                                                                                                                         

Gross margin

    241       345       688       (30     (50             $ 38     $ 54     $ 116       (30     (53

Other miscellaneous and purchased product
gross margin 3

    15       16       18       (6     (11                    
                                                                                                                         

Gross Margin

  $ 256     $ 361     $ 706       (29     (49             $ 41     $ 57     $ 119       (28     (52
                                                                                                                         

 

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

 

2  Includes inter-segment ammonia sales, comprised of net sales $73 million, cost of goods sold $38 million and 191,000 sales tonnes (2016 – net sales $61 million, cost of goods sold $30 million and 160,000 sales tonnes, 2015 – net sales $86 million, cost of goods sold $30 million and 161,000 sales tonnes). Inter-segment profits are eliminated on consolidation.

 

3  Comprised of third-party and inter-segment sales, including third-party net sales $32 million less cost of goods sold $18 million (2016 – net sales $20 million less cost of goods sold $5 million, 2015 – net sales $38 million less cost of goods sold $21 million) and inter-segment net sales $1 million less cost of goods sold $NIL (2016 – net sales $1 million less cost of goods sold $NIL, 2015 – net sales $1 million less cost of goods sold $NIL). Inter-segment profits are eliminated on consolidation.

 

 FS 

      Note 3

 

 

 

LOGO

 

16   PotashCorp 2017 Annual Report


 

    2017 vs 2016      2016 vs 2015  
                                                                       
   

         Change in Prices/Costs        

    

        Change in Prices/Costs        

 
Dollars (millions)  

Change in

Sales Volumes

    Net Sales     

Cost of

Goods Sold

     Total     

Change in

Sales Volumes

     Net Sales     

Cost of

Goods Sold

     Total  
                                                                       

Manufactured product

                     

Ammonia

  $         1     $         (29    $         11      $         (17    $         (5    $         (353    $         155      $         (203

Urea

          3        (9      (6      12        (103      40        (51

Solutions, nitric acid, ammonium nitrate

    (1     (46      (56      (103      29        (161      32        (100

Hedge

                 22        22                      11        11  

Change in product mix

    (4     6        (2             48        (48              
                                                                       

Total manufactured product

  $       (4   $         (66    $      (34    $   (104    $         84      $         (665    $         238      $         (343

Other miscellaneous and purchased product

            (1               (2
                                                                       

Total

          $       (105             $         (345
                                                                       

 

     Sales Tonnes (thousands)      % Change      Average Net Sales Price per Tonne      % Change  
                                                                                                 
     2017      2016      2015      2017        2016      2017        2016        2015      2017      2016  
                                                                                                 

Fertilizer

     2,564        2,455        1,989        4          23      $         215        $         216        $         321               (33

Industrial and feed

     3,753        3,918        3,937        (4             $ 201        $ 218        $ 323        (8      (33
                                                                                                 
     6,317        6,373        5,926        (1        8      $ 207        $ 217        $ 322        (5      (33
                                                                                                 

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

 

     Sales Volumes   Net Sales Prices   Cost of Goods Sold
2017 vs 2016      There were no significant changes.  

Ú

 

Ù

  

Our average realized price was impacted by lower benchmark pricing as a result of increased global supply.

 

Pricing for urea increased slightly due to tighter supply and demand fundamentals relative to the other products.

 

Ú

 

Ù

  

Average costs, including our hedge position, for natural gas used as feedstock in production increased 4 percent. Costs for natural gas used as feedstock in Trinidad production increased 1 percent (contract price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas increased 23 percent. Including losses on our hedge position, our US gas prices increased 8 percent.

 

Ammonia cost of goods sold variance was mainly positive due to the sale of inventory containing lower-cost natural gas used as feedstock in production and higher production at lower-cost plants.

                            
2016 vs 2015   Ù    Volumes grew due to additional production at our recently expanded Lima facility. Total ammonia sales declined modestly due to additional ammonia being directed to downstream products. In 2015, volumes were impacted by weaker fertilizer demand and downtime at Lima.   Ú    Our average realized price declined due to lower global energy costs and new nitrogen supply that pressured prices for all products.   Ù    Average costs, including our hedge position, for natural gas used as feedstock in production decreased 31 percent. Costs for natural gas used as feedstock in Trinidad production fell 44 percent (contract price indexed primarily to Tampa ammonia prices) while our US spot costs for natural gas decreased 8 percent. Including losses on our hedge position, our US gas prices fell 14 percent.
     The change in product mix produced favorable variances of $48 million related to sales volumes and an unfavorable variance of $48 million in sales prices due to increased sales of urea and solutions.     
                            

 

PotashCorp 2017 Annual Report   17


 

LOGO

NITROGEN NON-FINANCIAL PERFORMANCE

 

LOGO

Changes to nitrogen production and ammonia operating rate are not considered significant.  

There were 14 recordable injuries, including two lost-time injuries, in 2017 compared to 11 recordable injuries and three lost-time injuries in 2016.

 

In 2016, there were 11 recordable injuries compared to 14 in 2015. The total lost-time injury rate increased from 2015 to 2016 mainly due to three lost-time injuries occurring in 2016 compared to two in 2015.

 

There were no life-altering injuries from 2015 to 2017.

 

In 2017, employee turnover increased as a result of 31 departures in 2017 compared to 21 in 2016. Based on the company’s definition of employee turnover rate, announced workforce reductions are excluded.

 

In 2017, nearly all employees benefited from enhancements to technical training, supported by a new learning management system and strategy to create consistency in training across all sites. Leadership training on our core competencies and safety engagement continued to be a focus for nearly 500 employees in 2017 (2016 – more than 250 employees; 2015 – more than 200 employees).

 

In 2017, we had five environmental incidents, consisting of four ammonia releases and one nitrogen permit exceedance. The seven incidents in 2016 consisted of four ammonia releases, a urea release, a hydrogen fluoride release exceedance and a NOx/nitric acid release.

 

There were no significant changes in environmental incidents from 2015 to 2016.

 

There were no significant changes in greenhouse gas emissions from 2015 to 2017.

 

18   PotashCorp 2017 Annual Report


NITROGEN PRODUCTION

(million tonnes product)

 

     Ammonia      Urea      Solutions, Nitric Acid, Ammonium Nitrate        
                                                                                                                     
     Annual
Capacity
     2017      Production
2016
     2015      Annual
Capacity
     2017      Production
2016
     2015      Annual
Capacity
     2017      Production
2016
     2015     Employees
(December 31, 2017)
 
                                                                                                                     

Trinidad

     2.2        1.94        1.96        2.01        0.7        0.55        0.61        0.55                                   369  

Augusta GA

     0.8        0.60        0.69        0.78        0.5        0.29        0.27        0.31        3.0        1.96        2.15        2.18       172  

Lima OH

     0.7        0.65        0.65        0.47        0.4        0.32        0.34        0.26        0.9        0.77        0.81        0.63       171  

Geismar LA

     0.5        0.47        0.53        0.49                                    2.5        1.88        1.94        1.61       144  
                                                                                                                     

Total

     4.2        3.66        3.83        3.75        1.6        1.16        1.22        1.12        6.4        4.61        4.90        4.42       856  
                                                                                                                     

 

LOGO

 

PotashCorp 2017 Annual Report   19


PHOSPHATE FINANCIAL PERFORMANCE

 

    Dollars (millions)     % Change     Tonnes (thousands)     % Change     Average per Tonne 1     % Change  
                                                                                                                         
    2017     2016     2015     2017     2016     2017     2016     2015     2017     2016     2017     2016     2015     2017     2016  
                                                                                                                         

Manufactured product

                             

Net sales

                             

Fertilizer

  $ 609     $ 622     $ 827       (2     (25     1,809       1,720       1,713       5           $ 337     $ 362     $ 483       (7     (25

Feed and industrial

    494       569       727       (13     (22     1,002       993       1,137       1       (13   $ 493     $ 573     $ 640       (14     (10
                                                                                                                         
    1,103       1,191       1,554       (7     (23     2,811       2,713       2,850       4       (5   $   393     $   439     $   545       (10     (19

Cost of goods sold

    (1,471     (1,161     (1,320     27       (12             $ (523   $ (428   $ (463     22       (8
                                                                                                                         

Gross margin

    (368     30       234       n/m       (87             $ (130   $ 11     $ 82       n/m       (87

Other miscellaneous and purchased product gross margin 2

    2       2       7             (71                    
                                                                                                                         

Gross Margin

  $ (366   $ 32     $ 241       n/m       (87             $ (130   $ 12     $ 85       n/m       (86
                                                                                                                         

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

2 Comprised of net sales $8 million (2016 – $5 million, 2015 – $49 million) less cost of goods sold $6 million (2016 – $3 million, 2015 – $42 million).

n/m = not meaningful

 

 FS 

      Note 3

 

 

 

LOGO

 

     2017 vs 2016      2016 vs 2015  
                                                                         
    

         Change in Prices/Costs        

    

        Change in Prices/Costs        

 
Dollars (millions)   

Change in

Sales Volumes

     Net Sales     

Cost of

Goods Sold

     Total     

Change in

Sales Volumes

     Net Sales     

Cost of

Goods Sold

     Total  
                                                                         

Manufactured product

                       

Fertilizer

   $ 2      $ (45    $ (286    $ (329    $ 1      $ (208    $ 114      $ (93

Feed and industrial

     1        (82      12        (69      (19      (72      (20      (111

Change in product mix

     2        (5      3               3        (8      5         
                                                                         

Total manufactured product

   $             5      $         (132    $         (271    $ (398    $         (15    $         (288    $           99      $ (204

Other miscellaneous and purchased product

                              (5
                                                                         

Total

            $         (398             $         (209
                                                                         

 

20   PotashCorp 2017 Annual Report


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

 

     Sales Volumes   Net Sales Prices   Cost of Goods Sold
2017 vs 2016      There were no significant changes.   Ú    Our average realized price was down due to increased competitive supply and lower input costs.   Ú   

Fertilizer cost of goods sold variance was significantly more negative as the result of an impairment of White Springs assets due to sustained negative performance and the write-off of other assets that are no longer used. There were no such impairments impacting fertilizer cost of goods sold in 2016. FS    Note 13

 

            Ù    Feed and industrial was positive as the increase in asset retirement obligations due to discount rate adjustments was lower than in 2016, which more than offset a slight increase in impairments (2017 – related to feed plants and a product that will no longer be produced, 2016 – related to an industrial product we no longer produce and sustained losses on a contract).  FS    Note 13
                        
2016 vs 2015   Ú    Volumes fell for feed primarily as a result of slightly lower demand and increased competitor supply.   Ú    Our average realized price was down, most notably for fertilizer products, as a result of lower input costs and increased competitive pressures.   Ù   

Cost of goods sold fell primarily due to a 38 percent decrease in the average cost for sulfur and a 29 percent decrease in the average cost for ammonia.

 

            Ú   

Impairments related to a product that the company will no longer produce and sustained losses in a contract more than offset the impact of the above in feed and industrial.  FS   Note 13

 

           

 

  

Lower provisions for asset retirement obligations, due to higher discount rates, decreased cost of goods sold in 2016 and 2015.

 

                            

 

LOGO

 

PotashCorp 2017 Annual Report   21


PHOSPHATE NON-FINANCIAL PERFORMANCE

 

LOGO

 

Changes to phosphate production and P2O5 operating rate are not considered significant.  

There were 18 recordable injuries, including three lost-time injuries, in 2017 compared to 28 recordable injuries and three lost-time injuries in 2016.

 

Sadly, a workplace accident resulted in a fatality at our White Springs operation during the first quarter of 2015.

 

The total lost-time injury rate decreased from 2015 to 2016 mainly due to three lost-time injuries occurring in 2016 compared to five in 2015. The lost-time injury rate change from 2016 to 2017 is not considered significant.

 

 

There were no significant changes from 2015 to 2017. Based on the company’s definition of employee turnover rate, announced workforce reductions are excluded.

 

In 2017, nearly all employees benefited from enhancements to technical training, supported by a new learning management system and strategy to create consistency in training across all sites. Leadership training on our core competencies and safety engagement continued to be a focus for nearly 400 employees in 2017 (2016 and 2015 – nearly 300 employees).

 

In 2017, we experienced no environmental incidents.

 

Environmental incidents in 2016 included a total suspended solids release to waste water, an ammonia release, exceedance of a mercury air emission limit, and a pH exceedance. Environmental incidents in 2015 primarily related to permit exceedances for total suspended solids in water and air emission stack test exceedances.

 

Water consumption fell from 2016 to 2017 due to increased rainfall at our White Springs facility, which recycles rainwater into the process, and the impact of a water recycling project that began operating in late 2016.

 

Water consumption rose from 2015 to 2016 due in large part to drought affecting our White Springs facility.

 

 

 

PHOSPHATE ROCK RESERVES

(millions of estimated tonnes – stated average grade 30.66% P2O5)

As at December 31, 2017   Proven      Probable      Total     

Average Estimated

Years of Remaining

Mine Life

 
                                    

Aurora NC 1

    92.6        39.7        132.3        31  

White Springs FL 2

    23.0               23.0        13  
                                    

Total

    115.6        39.7        155.3     
                              

 

 

 

1  The reserves set forth for Aurora would support mining to continue at annual production rates for about 31 years, based on an average annual production rate of approximately 4.31 million tonnes of 30.66% concentrate over the three-year period ended December 31, 2017. The reserve evaluation was updated in 2017 based on mine advance and a drilling program completed in 2016.

 

2  The reserves set forth for White Springs would support mining to continue at annual production rates for about 13 years, based on an average annual production rate of approximately 1.73 million tonnes of 30.66% concentrate over the three-year period ended December 31, 2017.
 

 

22   PotashCorp 2017 Annual Report


PHOSPHATE PRODUCTION

 

(million tonnes)

 

     Phosphate Rock     Phosphoric Acid (P2O5)     Liquid Products     Solid Fertilizer Products         
     Annual
Capacity
    2017     Production
2016
    2015     Annual
Capacity
    2017     Production
2016
    2015     Annual
Capacity
    2017     Production
2016
    2015     Annual
Capacity
    2017     Production
2016
    2015     Employees
(December 31, 2017)
 

Aurora NC

    5.4       4.78       4.92       5.04       1.2       1.03       1.05       1.05       2.7  2      2.04       2.01       1.81       0.8       0.79       0.73       0.71       852  

White Springs FL

    2.0  1      1.55       1.73       1.90       0.5       0.42       0.37       0.46       0.7  3      0.57       0.49       0.63       0.4  4      0.13       0.01             567  

Geismar LA

                            0.2       0.09       0.09       0.10       0.3  5      0.15       0.14       0.18                               32  

Total

    7.4       6.33       6.65       6.94       1.9       1.54       1.51       1.61                                                                          

 

1 Revised capacity estimates based on review of mining operations completed in 2017. Prior capacity was 3.6 million tonnes. Mill capacity continues to be 3.6 million tonnes.

2 A substantial portion is consumed internally in the production of downstream products. The balance is exported to phosphate fertilizer producers or sold domestically to dealers who custom-mix liquid fertilizer. Capacity comprised of 2.0 million tonnes merchant grade acid and 0.7 million tonnes superphosphoric acid.

3 Represents annual superphosphoric acid capacity. 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 who custom-mix liquid fertilizer.

4 Restarted monoammonium phosphate plant during 2016, which had been closed in 2014.

5 Production primarily relates to industrial.

 

 

PURIFIED ACID AND PHOSPHATE FEED PRODUCTION

 

(million tonnes)

 

      Annual
Capacity
    2017      Production
2016
     2015      Employees
(December 31, 2017)
 

Purified acid (P2O5)

     0.3       0.23        0.23        0.23        n/a  

Phosphate feed production

     0.8       0.28        0.31        0.39        97  1 

 

1 19 of these employees are located at Aurora NC.

n/a = not applicable as employees are already included in above employee numbers.

In addition to the above employees at December 31, 2017, 10 employees were located at Cincinnati OH and one at Newgulf TX.

 

 

LOGO

 

PotashCorp 2017 Annual Report   23


2017 EARNINGS PER SHARE

 

We report our results (including gross margin) in three business segments: potash, nitrogen and phosphate – reflecting how we manage our business, plan our operations and measure performance.

Net sales 1 (and the related per-tonne amounts), as a component of gross margin, are:

 

  the primary revenue measures we use and review to make decisions about operating matters;

 

  included in assessments of potash, nitrogen and phosphate performance and the resources to be allocated to these segments;

 

  used for business planning and monthly forecasting;

 

  calculated as sales revenues less freight, transportation and distribution expenses; and

 

  also referred to as realized prices.

 

 FS 

  Note 3 for our operating segments

 

 

 

1   Included in our segment disclosures in the consolidated financial statements in accordance with IFRS, which require segmentation based upon our internal organization and reporting of revenue and profit measures.

 

The direction of the arrows in the table below refers to effect on earnings per share (EPS).

 

       Effect on EPS  
                  
    

2017 EPS Compared

to Initial Guidance

   

2017 EPS Compared

to 2016 Actual

 
                  

Initial midpoint estimate for 2017 EPS 1

         $       0.45    

EPS for 2016

           $       0.38  
                  

Potash realized prices

     0.05       0.17  

Potash sales volumes

     0.02       0.03  

Share of Canpotex’s Prince Rupert exit costs

           0.02  

Termination benefit costs

           0.03  

Discount rate changes to asset retirement obligations

           0.02  

Provincial mining taxes 2

     (0.02     (0.03

Other

     0.02       0.08  
                  

Subtotal potash

   Ù 0.07     Ù 0.32  
                  

Nitrogen realized prices

     0.06       (0.07

Nitrogen sales volumes

     (0.02      

Natural gas costs

     (0.03     (0.03

Hedge loss and other nitrogen costs

     (0.02     (0.01
                  

Subtotal nitrogen

   Ú (0.01 )    Ú (0.11 ) 
                  

Phosphate realized prices

     0.01       (0.13

Impairment of property, plant and equipment

     (0.32     (0.29

Other phosphate costs

     (0.04     0.02  
                  

Subtotal phosphate

   Ú (0.35 )    Ú (0.40 ) 
                  

Discontinued operations

     0.03       0.07  

Transaction costs

     (0.03     (0.07

Other

     (0.02     (0.03
                  

Subtotal other

   Ú (0.02 )    Ú (0.03 ) 
                  

Subtotal of the above

     (0.31     (0.22

Income tax rate on ordinary income

     0.02       0.03  

Discrete items impacting income taxes

     0.23       0.20  
                  

Total variance

   Ú (0.06 )    Ù 0.01  
                  

EPS from continuing and discontinued operations for 2017

         $       0.39           $       0.39  
                  

1 Based on outlook and assumptions described in our 2016 Annual Integrated Report.

2 Although provincial mining taxes are not part of the potash segment, the effect on EPS is included within potash as these taxes pertain to potash.

 

24   PotashCorp 2017 Annual Report


OTHER EXPENSES AND INCOME

 

                          % Change  
                                              
Dollars (millions), except percentage amounts   2017        2016 1      2015 1     2017      2016  
                                              

Selling and administrative expenses

  $         (214        $        (212)        $        (239)       1        (11

Provincial mining and other taxes

    (151        (124      (310     22        (60

Transaction costs

    (84        (18            367        n/m  

Other (expenses) income

    (17        (17      33              n/m  

Finance costs

    (238        (216      (192     10        13  

Income tax recovery (expense)

    183          (44      (446     n/m        (90

Net income from discontinued operations

    173          124        155       40        (20
                                              
1    Certain amounts have been reclassified from share of earnings of equity-accounted investees, dividend income and income taxes to net income from discontinued operations as the related assets were classified as held for sale in 2017. Other (expenses) income amounts have been reclassified to conform to the current year’s presentation. The variance explanations below for 2016 vs 2015 have been revised for these changes.

n/m = not meaningful

PERFORMANCE

The most significant contributors to the change in other expenses and income results were as follows:

 

     2017 vs 2016    2016 vs 2015

Provincial Mining and

Other Taxes

 

  FS  Note 5

 

  Under Saskatchewan provincial legislation, the company is subject to resource taxes, including the potash production tax and the resource surcharge. Provincial mining and other taxes increased primarily due to stronger potash prices.    Provincial mining and other taxes decreased primarily due to weaker potash prices.

Transaction Costs

 

 FS  Note 32

 

  Transaction costs pertained to the Merger. Costs increased in late 2017 due to preparation for completion of the Merger on January 1, 2018.    Transaction costs pertained to the Merger.

Other (Expenses) Income

 

 FS  Note 6

 

  There were no significant changes.    Other expenses in 2016 were primarily the result of foreign exchange losses and the impairment of our available-for-sale investment in Sinofert. Other income in 2015 mainly consisted of foreign exchange gains.

 

PotashCorp 2017 Annual Report   25


          2017 vs 2016   2016 vs 2015      

 

LOGO

Finance Costs

 

 FS  Note 7

    There were no significant changes.   There were no significant changes.    
         
         
         
         
         
         
         
         
                 

Income Tax

Recovery (Expense)

 

 FS  Note 8   

   

Income taxes decreased due to substantially lower earnings in the United States, partially offset by higher earnings in Canada and Trinidad.

 

Significant items to note include the following:

 

• In 2017, a deferred tax recovery of $187 million was recorded as a result of a federal income tax rate decrease pursuant to US tax reform legislation.

 

• In 2016, a current tax recovery of $16 million was recorded to adjust accruals after tax authority examinations.

 

In 2017, due to a loss before taxes realized for accounting purposes and different weightings between jurisdictions, the split between current and deferred income taxes is not meaningful. In 2016, 125 percent of the effective tax rate on the year’s ordinary earnings pertained to current income taxes and (25) percent related to deferred income taxes.

 

    

 

Income taxes decreased due to significantly lower earnings in higher tax jurisdictions.

 

Significant items to note include the following:

 

• In 2016, a current tax recovery of $16 million was recorded to adjust accruals after tax authority examinations.

 

• In 2015, a current tax recovery of $17 million was recorded upon the conclusion of a tax authority audit.

 

In 2016, 125 percent of the effective tax rate on the year’s ordinary earnings pertained to current income taxes (2015 – 57 percent) and (25) percent related to deferred income taxes (2015 – 43 percent). The decrease in the deferred portion was due to the substantial reduction in Canadian earnings.

 

       

 

EFFECTIVE TAX RATES AND DISCRETE ITEMS

 

Dollars (millions), except percentage amounts

 

    2017   2016 1   2015 1    
                 

Actual effective tax rate on ordinary earnings

  (7)%   24%   29%  

Actual effective tax rate including discrete items

  n/m   18%   29%  

Discrete tax adjustments that impacted the rate

  $    185   $      17   $      7  
                 

n/m = not meaningful

1 Rates have been adjusted as a result of our investments in SQM, APC and ICL being classified as discontinued operations in 2017.

 

Net Income From Discontinued Operations

 

 FS   Note 19

      Increases related primarily to higher earnings related to the investments in SQM and APC more than offsetting lower dividend income from our available-for-sale investment in ICL.       Decreases were due to lower earnings related to APC and lower dividends from our investment in ICL, partially offset by higher earnings related to SQM.  

 

26   PotashCorp 2017 Annual Report


 

FOREIGN EXCHANGE

 

We incur costs and expenses in foreign currencies other than the US dollar, which vary from year to year. In Canada, our revenue is predominantly earned and received in US dollars while the cost base for our potash operations is predominantly in Canadian dollars. We are also affected by the period-end change in foreign exchange rate on the translation of our monetary net assets and liabilities, and on treasury activities. The table at right shows whether and to what extent net income would have increased or decreased, if the current year exchange rate had remained at the prior year-end exchange rate.

 

IMPACT OF FOREIGN EXCHANGE ON NET INCOME

 

Dollars (millions), except per-share amounts

                  
                                    Increase (Decrease) in Net Income  
                                                      
                                    2017      2016  
                                                      
 

Impact on:

                  
 

Operating costs before income taxes

                $ 33      $ 46  
 

Conversion of balance sheet and treasury activities before income taxes

                  21        9  
                                                      
 

Net income before income taxes

                  54        55  
 

Net income after income taxes

                  39        46  
 

Diluted EPS after income taxes

                  0.05        0.05  
                                                      
                       2017                  2016      2015  
                                                      
 

Year-end exchange rates

             1.2545          1.3427        1.3840  
                                                      
                    

OTHER NON-FINANCIAL INFORMATION

 

                                                    % Change  
                                                      
Dollars (millions), except percentage amounts    2017      2016                    2015                          2017      2016  
                                                      

Taxes and royalties (Refer to Page 53 for definition)

     (335)        (256)                    (654)                      31        (61
                                                      

 

     2017 vs 2016   2016 vs 2015
Taxes and Royalties   Taxes and royalties increased primarily due to higher current income taxes and provincial mining and other taxes. Current income tax recoveries were recorded in 2016 due to an anticipated tax loss carryback and to adjust accruals after tax authority examinations. No such amounts were recorded in 2017. Provincial mining and other taxes increased primarily as a result of stronger potash prices in 2017 as compared to 2016.   Taxes and royalties declined due to the decreases in provincial mining and other taxes (as a result of weaker potash prices) and in current income taxes. The reduction in current income taxes was primarily due to significantly lower earnings in 2016 compared to 2015.

 

PotashCorp 2017 Annual Report   27


QUARTERLY RESULTS

QUARTERLY RESULTS AND REVIEW OF FOURTH-QUARTER PERFORMANCE

(in millions of US dollars except as otherwise noted)

          2017     2016  
                                                                                         
          Q1 1     Q2 1     Q3 1     Q4     Total     Q1 1     Q2 1     Q3 1     Q4 1     Total 1  
                                                                                         

Financial Results

                     

Sales

    $     1,112     $     1,120     $     1,234     $     1,081     $     4,547     $     1,209     $     1,053     $     1,136     $     1,058     $     4,456  

Freight, transportation and distribution

      (133     (116     (172     (116     (537     (133     (118     (154     (130     (535

Cost of goods sold

      (711     (749     (832     (1,043     (3,335     (842     (692     (792     (765     (3,091

Gross margin

      268       255       230       (78     675       234       243       190       163       830  

Operating income (loss)

      175       149       100       (215     209       138       156       107       58       459  

Net income (loss) from continuing operations

      106       152       16       (120     154       55       78       53       13       199  

Net income (loss) 2

      149       201       53       (76     327       75       121       81       46       323  

Other comprehensive income (loss)

      39       69       42       (54     96       11       (184     21       193       41  

Net income (loss) per share from continuing operations 3

      0.13       0.18       0.02       (0.14     0.18       0.07       0.09       0.06       0.02       0.24  

Net income (loss) per share 2, 3

      0.18       0.24       0.06       (0.09     0.39       0.09       0.14       0.10       0.05       0.38  

Cash provided by operating activities

      223       328       293       381       1,225       188       424       295       353       1,260  

Non-Financial Results

                     

Production (KCl tonnes – thousands)

      2,429       2,813       2,134       2,419       9,795       2,230       2,273       1,557       2,544       8,604  

Production (N tonnes – thousands)

      771       728       749       765       3,013       771       789       799       788       3,147  

Production (P2O5 tonnes – thousands)

      365       349       392       435       1,541       411       297       399       397       1,504  

PotashCorp’s total shareholder return percentage

      (5     (4     19       8       17       2       (3     2       12       12  

Product tonnes involved in customer complaints (thousands)

      14       17       1       26       58       25       37       21       23       106  

Taxes and royalties

    $ 94     $ 80     $ 92     $ 69     $ 335     $ 78     $ 81     $ 40     $ 57     $ 256  

Employee turnover rate (percentage)

      4       4       4       2       3       3       4       3       3       3  

Total recordable injury rate

      0.95       0.85       0.77       0.79       0.85       1.15       0.69       0.92       0.74       0.87  

Total lost-time injury rate

      0.05       0.04       0.21       0.08       0.11       0.20       0.04             0.04       0.08  

Environmental incidents

      2       3       1       3       9       9       3       5       1       18  
                                                                                         

1 Certain amounts have been reclassified as a result of discontinued operations discussed in Note 19 of the consolidated financial statements.

2 From continuing and discontinued operations.

3 Basic and diluted net income 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. Per-share calculations are based on   dollar and share amounts each rounded to the nearest thousand.

The company’s sales of fertilizer can be seasonal. Typically, fertilizer sales are highest in the second quarter of the year, due to the Northern Hemisphere’s spring planting season. However, planting conditions and the timing of customer purchases will vary each year, and fertilizer sales can be expected to shift from one quarter to another. Feed and industrial sales are more evenly distributed throughout the year.

 

Highlights of our 2017 fourth quarter compared to the same quarter in 2016 include (direction of arrows refers to impact on comprehensive income):

 

K 

Potash

 

Ù Potash gross margin increased primarily due to higher prices and reduced per-tonne costs.

 

Ú Sales volumes were lower as North America shipments fell, while offshore shipments also decreased. The majority of Canpotex’s shipments were to China (28 percent) and Other Asian markets outside of China and India (28 percent), while Latin America and India accounted for 25 percent and 11 percent, respectively.

 

Ù Our average realized potash price increased, as strong customer engagement in all key markets continued to support prices.

 

Ù Average per-tonne manufactured cost of goods sold was lower primarily due to an unfavorable adjustment to asset retirement obligations recorded in 2016.
 

 

28   PotashCorp 2017 Annual Report


 

N 

Nitrogen

 

Ù Gross margin increased as stronger prices more than offset higher per-tonne costs.

 

Ú Total sales volumes were down primarily due to lower availability of product related to a turnaround at our Augusta facility.

 

Ù Our average realized price was up primarily due to global pricing support from lower Chinese urea exports and ammonia production curtailments in key exporting regions.

 

Ú Cost of goods sold was up, primarily as a result of higher natural gas costs in Trinidad.

 

P 

Phosphate

 

Ú Negative gross margin was lower primarily due to non-cash impairment charges.

 

Ù Sales volumes increased, mainly due to higher availability of our fertilizer products.

 

Ú Our average realized phosphate price per tonne was down as higher prices for fertilizer products were more than offset by lower realizations for our feed and industrial products.

 

Ú Cost of goods sold was significantly higher, predominantly due to impairment charges at our White Springs and feed plant facilities.  FS   Note 13
     Sales Tonnes (thousands)      Average Net Sales Price per MT     
                                                    
Three months ended December 31    2017         2016       % Change      2017          2016     % Change  
                                                    

Potash

              

Manufactured Product

              

North America

     568       720       (21    $         214      $         176       22  

Offshore

     1,340       1,489       (10    $ 169      $ 148       14  
                                                    

Manufactured Product

     1,908       2,209       (14    $ 182      $ 157       16  
                                                    

Nitrogen

              

Manufactured Product

              

Ammonia

     505       477       6      $ 270      $ 213       27  

Urea

     283       304       (7    $ 288      $ 245       18  

Solutions, nitric acid, ammonium nitrate

     795       855       (7    $ 138      $ 142       (3
                                                    

Manufactured Product

     1,583       1,636       (3    $ 207      $ 182       14  
                                                    

Phosphate

              

Manufactured Product

              

Fertilizer

     534       472       13      $ 342      $ 328       4  

Feed and Industrial

     239       243       (2    $ 483      $ 551       (12
                                                    

Manufactured Product

     773       715       8      $ 385      $ 404       (5
                                                    

 

LOGO

Other Financial Results

Transaction costs during the fourth quarter of 2017 were $51 million (2016 – $10 million).

The actual effective tax rate, including discrete items, was 56 percent (2016 – not meaningful). Compared to the same period last year, earnings were significantly lower in the United States and only slightly offset by increased earnings in Trinidad. Discrete tax recoveries were $118 million in the fourth quarter of 2017 compared to $6 million in the fourth quarter of 2016.

Other comprehensive loss in the fourth quarter of 2017 was mainly the result of decreases in the fair value of our investments in ICL and Sinofert exceeding net actuarial gains from a remeasurement of our defined benefit plans. Other comprehensive income in the fourth quarter of 2016 was mainly the result of a remeasurement of our defined benefit plans and an increase in the fair value of our investments in ICL and Sinofert.

 
 

 

PotashCorp 2017 Annual Report   29


FINANCIAL CONDITION REVIEW

STATEMENT OF FINANCIAL POSITION ANALYSIS

 

LOGO

As at December 31, 2017, total assets decreased 1 percent while total liabilities decreased 4 percent and total equity increased 1 percent compared to December 31, 2016. The most significant contributors to the changes in our statements of financial position were as follows (direction of arrows refers to increase or decrease):

 

Assets   Liabilities

Ù

 

Ú

 

Ú

 

Assets held for sale consisted primarily of our investments in SQM, ICL and APC, which were presented as investments in the prior year.

 

Property, plant and equipment decreased as impairment charges to phosphate assets and depreciation exceeded additions. FS   Note 13

 

Investments were impacted primarily by the reclassification of SQM, ICL and APC to held for sale. This was partially offset by the higher fair value of our investment in Sinofert.

  Ú      

Short-term debt and current portion of long-term debt decreased primarily due to the repayment of our senior notes due December 1, 2017, partially offset by an increase in outstanding commercial paper.

 

    Ú       Deferred income tax liabilities decreased primarily due to a discrete deferred tax recovery as a result of a federal income tax rate decrease pursuant to US tax reform legislation.
         
                 
Equity     FS     Statements of Changes in Shareholders’ Equity               

Ù

 

  Retained earnings were higher as a result of net income and transfer of net actuarial gain on defined benefit plans from Accumulated Other Comprehensive Income (“AOCI”) exceeding dividends declared. Accumulated other comprehensive loss changed to accumulated other comprehensive income primarily as a result of increases in the fair values of our available-for-sale financial instruments and net hedging losses that were reclassified to net income. There were also significant net actuarial gains on defined benefit plans that were reported in AOCI and subsequently closed out to retained earnings at the end of each reporting period.

As at December 31, 2017, $104 million (2016 – $21 million) of our cash and cash equivalents was held in certain foreign subsidiaries. There are no current plans to repatriate the funds at December 31, 2017 in a manner that results in tax consequences. A repatriation of funds totaling $37 million was completed in 2017 with $NIL tax consequences (2016 – $150 million with $NIL tax consequences).

On January 24, 2018, the company sold all its equity interests in ICL for proceeds of $685 million.  FS   Note 19

Readers are cautioned the statement of financial position will change significantly as a result of the completion of the Merger on January 1, 2018 and are referred to page 42 for a pro forma balance sheet as at December 31, 2017. Financial condition is not expected to be adversely affected by the Merger.

 

30   PotashCorp 2017 Annual Report


LIQUIDITY AND CAPITAL RESOURCES

The following section explains how we manage our cash and capital resources to carry out our strategy and deliver results.

Liquidity risk arises from our general funding needs and in the management of our assets, liabilities and capital structure. We manage liquidity risk to maintain sufficient liquid financial resources to fund our financial position and meet our commitments and obligations in a cost-effective manner.

 

Liquidity needs can be met through a variety of sources, excluding the effects of the Merger, including:

 

  

Our primary uses of funds are:

 

  

•  operational expenses;

•  cash generated from operations;

  

•  sustaining and opportunity capital spending;

•  drawdowns under our revolving credit facility;

  

•  intercorporate investments;

•  issuances of commercial paper;

  

•  dividends and interest;

•  short-term borrowings under our line of credit; and

  

•  principal payments on our debt securities; and

•  proceeds from sales of investments.

  

•  share repurchases.

We expect Nutrien’s liquidity needs will continue to be met through similar sources and that its primary uses of funds will be similar to our historical uses, although no assurances can be provided. Based on a forecasted exchange rate of 1.26 Canadian dollars per US dollar in 2018, Nutrien expects to incur capital expenditures, including capitalized interest, of approximately $1,055 to sustain operations at existing levels and for major repairs and maintenance (including plant turnarounds). Nutrien has announced plans for a growing and sustainable dividend of 40-60 percent of its free cash flow, depending on the agricultural cycle.


CASH REQUIREMENTS

The following aggregated information about our contractual obligations and other commitments summarizes certain of our liquidity and capital resource requirements as of December 31, 2017. The information presented in the table below does not include obligations that have original maturities of less than one year, planned (but not legally committed) capital expenditures, or potential share repurchases, nor does it give effect to any matters that may be impacted as a result of the completion of the Merger.

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

Dollars (millions) at December 31, 2017

          Payments Due by Period  
     FS      Total     Within 1 Year     1 to 3 Years     3 to 5 Years     Over 5 Years  
                                                 

Long-term debt obligations 1

    Note 21     $ 3,750        $        $ 1,000        $        $ 2,750  

Estimated interest payments on long-term debt obligations

      1,792       178       295       242       1,077  

Operating leases

    Note 24       501       85       129       105       182  

Purchase commitments 2

    Note 24       303       303                    

Capital commitments

    Note 24       41       18       13       10        

Other commitments

    Note 24       159       44       49       42       24  

Asset retirement obligations and environmental costs 3

    Note 18       723       72       152       103       396  

Other long-term liabilities 4

    Notes 8, 17, 26       2,846       79       71       85       2,611  
                                                 

Total

    $   10,115        $ 779        $ 1,709        $ 587        $ 7,040  
                                                 

1 Long-term debt consists of $3,750 million of senior notes that were issued under US shelf registration statements. The estimated interest payments on long-term debt in the above table include our cumulative scheduled interest payments on fixed and variable rate long-term debt. Interest on variable rate debt is based on interest rates prevailing at December 31, 2017.

2 Purchase commitments include $94 million of natural gas contracts in Trinidad that will expire in 2018. As new contracts for future operations have not yet been completed, there are no commitments presented beyond one year at this time.

3 Commitments associated with our asset retirement obligations are expected to occur principally over the next 85 years for phosphate (with the majority taking place over the next 35 years) and between 40 and 360 years for potash. Environmental costs consist of restoration obligations, which are expected to occur through 2031.

4 Other long-term liabilities consist primarily of pension and other post-retirement benefits, derivative instruments, income taxes and deferred income taxes. Deferred income tax liabilities may vary according to changes in tax laws, tax rates and the operating results of the company. Since it is impractical to determine whether there will be a cash impact in any particular year, all deferred income tax liabilities have been reflected as other long-term liabilities in the Over 5 Years category.

 

PotashCorp 2017 Annual Report   31


SOURCES AND USES OF CASH

The company’s cash flows from operating, investing and financing activities are summarized in the following table:

 

                                             % Change  
                                                                       
Dollars (millions), except percentage amounts   2017             2016            2015             2017      2016  
                                                                       

Cash provided by operating activities

  $     1,225         $     1,260        $     2,338           (3      (46

Cash used in investing activities

    (652         (895        (1,284         (27      (30

Cash used in financing activities

    (489         (424        (1,178         15        (64
                                                                       

Increase (decrease) in cash and cash equivalents

  $ 84         $ (59      $ (124         n/m        (52
                                                                       

n/m = not meaningful

 

LOGO

 

32   PotashCorp 2017 Annual Report


The most significant contributors to the changes in cash flows were as follows:

 

      2017 vs 2016    2016 vs 2015

 

Cash Provided by Operating Activities

  

 

Cash provided by operating activities was impacted by:

  

 

Cash provided by operating activities was impacted by:

  

 

• Higher impairment of property, plant and equipment in 2017;

  

 

• Lower net income in 2016;

  

 

• A higher deferred income tax recovery in 2017;

 

• Net undistributed earnings of equity-accounted investees in 2017 compared to distributed earnings of equity-accounted investees in 2016;

  

 

• A lower non-cash provision for deferred income taxes;

 

• Lower cash inflows from receivables in 2016; and

    

 

• Lower cash inflows from receivables in 2017; and

 

• Cash inflows from payables and accrued charges in 2017 compared to outflows in 2016.

 

Cash inflows above related to discontinued operations totaled $176 in 2017.  FS   Note 19

 

  

 

 

• Net distributed earnings of equity-accounted investees in 2016, when an additional dividend was received from SQM, compared to net undistributed earnings of equity-accounted investees in 2015.

 

 

Cash inflows above related to discontinued operations totaled $195 in 2016.  FS   Note 19

 

Cash Used in Investing Activities

 

  

 

Cash used in investing activities was primarily for additions to property, plant and equipment.

 

  

 

Cash used in investing activities was primarily for additions to property, plant and equipment.

 

 

Cash Used in Financing Activities

 

  

 

Cash used in financing activities in 2017 was largely the result of repayment of senior notes and dividends paid more than offsetting issuances of commercial paper. Cash used in financing activities in 2016 was largely the result of dividends paid and repayment of commercial paper more than offsetting proceeds from the issuance of senior notes.

 

  

 

Cash used in financing activities in 2016 was largely the result of dividends paid and repayment of commercial paper more than offsetting proceeds from the issuance of senior notes. Cash used in financing activities in 2015 was primarily due to dividends paid, repayment of senior notes and repayment of commercial paper exceeding proceeds from senior notes.

 

We believe that internally generated cash flow, supplemented by available borrowings under our existing financing sources, if necessary, will be sufficient to meet anticipated capital expenditures and other cash requirements for at least the next 12 months, inclusive of requirements relating to the Merger and Nutrien’s pending purchase of Agrichem, excluding cash flow from discontinued operations, or any other possible acquisitions. At this time, we do not reasonably expect any presently known trend or uncertainty to affect our ability to access our historical sources of liquidity, except that, as a wholly-owned subsidiary of Nutrien, we do not expect that we would offer our equity or debt securities for sale. We had positive working capital of $1.72 billion and a working capital ratio of 2.07 in 2017. Excluding assets held for sale and deferred income tax liabilities on assets held for sale, we had negative working capital of $101 million and a working capital ratio of 0.94, which has been remedied through the sale of our equity interests in ICL. Cash flows are not expected to be adversely affected as a result of the Merger.

 

 

LOGO

 

PotashCorp 2017 Annual Report   33


CAPITAL STRUCTURE AND MANAGEMENT

We manage our capital structure in order for our balance sheet to be considered sound by focusing on maintaining an investment-grade credit rating.

PRINCIPAL DEBT INSTRUMENTS

 

We use a combination of cash generated from operations and short-term and long-term debt to finance our operations. We typically pay floating rates of interest on our short-term debt and credit facility, and fixed rates on our senior notes. As at December 31, 2017, interest rates on outstanding commercial paper ranged from 1.5 percent to 2.0 percent.

Without giving effect to any capital structure changes contemplated in connection with the completion of the Merger, we have the following instruments available to finance operations:

 

  $3.5 billion syndicated credit facility;1

 

  $75 million unsecured line of credit 2 available through August 2018; and

 

  $100 million uncommitted letter of credit facility 2 due on demand.

The credit facility and line of credit have financial tests and other covenants with which we must comply at each quarter-end. Non-compliance with any such covenants could result in accelerated payment of amounts borrowed and termination of lenders’ further funding obligations under the credit facility and line of credit. We were in compliance with all covenants as at December 31, 2017 and at this time anticipate being in compliance with such covenants in 2018.

 

 

 FS 

   Notes 20 and 21

 

 

 

1  Provides for unsecured advances up to the total facility amount less direct borrowings and amounts committed in respect of commercial paper outstanding.

 

2  Amounts available are reduced by direct borrowings and outstanding letters of credit.

 

LOGO

For additional information on our capital structure and management:

 

 

 FS 

   Notes 23 for capital structure
   Notes 9 and 22 for outstanding share data

The accompanying table summarizes the limits and results of certain covenants.

 

DEBT COVENANTS AT DECEMBER 31                 

Dollars (millions), except ratio amounts

 

       Limit       2017  
                      

Debt-to-capital ratio 1

   £     0.65       0.35  

Debt of subsidiaries

   <   $  1,000     $  

Net book value of disposed assets

   <   $ 4,314  2    $ 2  
                      

1 Debt-to-capital ratio = debt (short-term debt and current portion of long-term debt + long-term debt) / (debt + shareholders’ equity). This non-IFRS financial measure is a requirement of our debt covenants and should not be considered as a substitute for, nor superior to, measures of financial performance prepared in accordance with IFRS.

2 Limit is 25 percent of the prior year’s year-end total assets.

 

 

34   PotashCorp 2017 Annual Report


Our ability to access reasonably priced debt in the capital markets is dependent, in part, on the quality of our credit ratings. We continue to maintain investment-grade credit ratings for our long-term debt. A downgrade of the credit rating of our long-term debt would increase the interest rates applicable to borrowings under our credit facility and our line of credit.

Commercial paper markets are normally a source of same-day cash for the company. Our access to the US commercial paper market primarily depends on maintaining our current short-term credit ratings as well as general conditions in the money markets.

 

    Long-Term Debt   Short-Term Debt  
                         
    Rating (Outlook)   Rating  
                         

At December 31

  2017   2016     2017       2016  
                         

Moody’s

  Baa1 (negative) 1   Baa1 (negative)     P-2       P-2  

Standard & Poor’s

  BBB+ (negative)      BBB+ (stable)     A-2  2      A-2  2 
                         

1 Subsequent to December 31,2017, Moody’s assigned a Baa2 (stable) rating.

2 S&P assigned a global commercial paper rating of A-2, but rated our commercial paper A-1 (low) on a Canadian scale.

A security rating is not a recommendation to buy, sell or hold securities. Such ratings may be subject to revision or withdrawal at any time by the respective credit rating agency and each rating should be evaluated independently of any other rating.

Our $3,750 million of senior notes were issued under US shelf registration statements. A downgrade in the company’s credit ratings below investment-grade following the Merger or other transaction involving a change in control within a certain period of time following the change in control could trigger a change in control offer under existing debt securities, except for the notes issued in 2016, and the company could be required to make an offer to purchase all, or any part, of the senior notes at 101 percent of the $3,250 million outstanding principal amount of the notes to be repurchased, plus accrued and unpaid interest.

For 2017, our weighted average cost of capital was 6.6 percent (2016 – 7.3 percent), of which 76 percent represented the cost of equity (2016 – 75 percent).

OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of operations, PotashCorp engages in a variety of transactions that, under IFRS, are either not recorded on our consolidated statements of financial position or are recorded at amounts that differ from the full contract amounts. Principal off-balance sheet activities include operating leases, agreement to reimburse losses of Canpotex, issuance of guarantee contracts, certain derivative instruments and long-term contracts. We do not reasonably expect any presently known trend or uncertainty to affect our ability to continue using these arrangements, which are discussed below and exclude the impact of the Merger.

Derivative Instruments

We use derivative financial instruments to manage exposure to commodity price and exchange rate fluctuations. Except for certain non-financial derivatives that were entered into and continued to be held for the purpose of the receipt or delivery of a non-financial item in accordance with expected purchase, sale or usage requirements, derivatives are recorded on the consolidated statements of financial position at fair value and marked-to-market each reporting period regardless of whether they are designated as hedges for IFRS purposes.

 

 FS        Note 17

Leases and Long-Term Contracts

Certain of our long-term raw materials agreements contain fixed price and/or volume components. Our significant agreements, and the related obligations under such agreements, are discussed in Cash Requirements on Page 31.

Additional information about our off-balance sheet arrangements:

 

 FS        Note 25 for guarantee contracts
      Note 30 for contingencies related to Canpotex
 

 

PotashCorp 2017 Annual Report   35


OTHER FINANCIAL INFORMATION

Excluding the impact of the Merger.

 

MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS

Market risk is the potential for loss from adverse changes in the market value of financial instruments. The level of market risk to which we are exposed varies depending on the composition of our derivative instrument portfolio, as well as current and expected market conditions.

 

 FS        Note 29 for financial risks, including relevant risk sensitivities

 

 AIF 

      Page 20 – Risk Factors

CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with IFRS.

Our significant accounting policies and accounting estimates are contained in the consolidated financial statements. Certain of these policies, such as long-lived asset impairment, reclassification of investments as held for sale and discontinued operations, derivative instruments, provisions and contingencies for asset retirement, environmental and other obligations, and capitalization and depreciation of property, plant and equipment, involve critical accounting estimates because they require us to make subjective or complex judgments about matters that are inherently uncertain and because of the likelihood that materially different amounts could be reported under different conditions or using different assumptions.

The company identified indicators of potential impairment in its operations in the fourth quarter of 2017. See Note 13 to the consolidated financial statements for impairments recorded during 2017.

The following table highlights sensitivities to recoverable amounts which could result in additional impairment losses or reversals of previously recorded losses across cash-generating units (“CGUs”) within the phosphate segment that had impairment indicators for which significant judgment and estimates were required:

 

IMPAIRMENT SENSITIVITIES 1

 

At December 31, 2017

 

Dollars (millions), except as noted

 

 

Potential

Change

   

Increase (Decrease)
to

Recoverable Amount

 
                          

Phosphate sales prices

     ± 1% 2    ± $  21  

Discount rate

     ± 0.5%     ± $    5  

Ammonia costs

     ± $  20/tonne     ± $    3  
                          

 

1    These sensitivities are hypothetical, should be used with caution and cannot be extrapolated because the relationship of the change in assumption to the change in amounts may not be linear. The sensitivities have been calculated independently of changes in other key variables. Changes in one factor may result in changes in another, which could amplify or reduce certain sensitivities.

 

2    Distributed evenly over all periods.

We have discussed the development, selection and application of our key accounting policies, and the critical accounting estimates and assumptions they involve, with the audit committee of the Board.

Refer to Note 31 to the consolidated financial statements for recent accounting changes and effective dates. The company is in the process of finalizing its implementation plan of IFRS 15, Revenue from Contracts with Customers, which will be adopted using the modified retrospective method. We expect revenue recognition to remain largely unchanged and do not anticipate any significant impacts in our underlying profitability trends. Key areas are undergoing final review and we do not expect any significant changes as a result. Our key areas include: principal versus agent relationships, variable priced contracts, shipping as a separate performance obligation, required disclosures and documentation and implementation of changes to key controls.

The company expects to complete scoping of the IFRS 16 Leases implementation in 2018. The company has a number of operating leases that are not currently recorded on the statement of financial position and we expect, upon implementation of IFRS 16, additional assets and liabilities will be recorded. In addition, we expect a component of lease-related costs to move from cost of goods sold to interest expense on the statement of operations.

 

 FS 

      Notes 2 and 31 for accounting policies, estimates and judgments

Additional financial information:

 

 FS        Note 31 for recent accounting changes and effective dates
      Note 28 for related party transactions
 

 

36   PotashCorp 2017 Annual Report


CONTROLS AND PROCEDURES

 

DISCLOSURE CONTROLS AND PROCEDURES

As of December 31, 2017, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon that evaluation and as of December 31, 2017, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports the company files and submits under securities legislation is recorded, processed, summarized and reported as and when required and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

INTERNAL CONTROL OVER FINANCIAL REPORTING

See “Management’s Report on Internal Control Over Financial Reporting” and the “Reports of Independent Registered Public Accounting Firm” contained on pages 55 and 56 in our consolidated financial statements for the year ended December 31, 2017.

 

 

PotashCorp 2017 Annual Report   37


2018 NUTRIEN GUIDANCE

 

ESTIMATED EARNINGS PER SHARE, EBITDA AND RELATED SENSITIVITIES

 

     2018 Nutrien Guidance  
          

Earnings per share

     $2.10-$2.60 1  
          

1 Based on outlook and assumptions as at February 5, 2018 described herein, excluding incremental depreciation and amortization related to purchase price allocation.

 

LOGO

Key factors affecting estimated earnings of Nutrien and the approximate anticipated effect on EPS, based on assumptions used in estimating 2018 EPS, are as follows:

 

Input Cost Sensitivities        

Effect

on EPS

NYMEX natural gas price increases by $1/MMBTu   Nitrogen    -0.19
  Potash    -0.01

Canadian to US dollar strengthens

by $0.02

 

Canadian operating expenses net of

provincial taxes and translation

gain/loss

   0.01

 

Price and Volume Sensitivities 1   

Effect

on EPS

Price   Potash changes by $20/tonne    ±0.24
  Ammonia changes by $20/tonne    ±0.07
  Urea changes by $20/tonne    ±0.09
  DAP/MAP changes by $20/tonne    ±0.05
Volume   Potash changes by 100,000 tonnes    ±0.02
  Nitrogen changes by 50,000 N tonnes    ±0.02
    Phosphate changes by 50,000 P2O5 tonnes    ±0.03

1 Retail sensitivities are not included due to the expected stable nature of Nutrien’s retail business.

 

 

 

38   PotashCorp 2017 Annual Report


NUTRIEN PRO FORMA EARNINGS AND BALANCE SHEET

 

Management prepared a non-IFRS pro forma statement of earnings to show 2017 earnings information had the Merger taken place on January 1, 2017, and a non-IFRS pro forma balance sheet to show 2017 figures had the Merger taken place on December 31,2017. The balance sheet has not been adjusted for the earnings impacts presented in the pro forma statement of earnings. This pro forma information is expected to be used by management to evaluate the earnings performance of Nutrien. Historical financial statements of PotashCorp and Agrium, both prepared under IFRS, were combined and then adjusted to eliminate intercompany transactions, reclassify line items in accordance with Nutrien’s expected method of presentation and remove transactions directly attributable to the Merger, including required divestitures. The pro forma financial statements are presented for illustrative purposes only and do not include, among other things, estimated cost synergies, adjustments related to restructuring or integration activities, further acquisitions or disposals, or impacts of Merger-related change in control provisions that are currently not factually supportable and/or probable of occurring.

Generally, IFRS requires statements of earnings, comprehensive income, cash flows, shareholders’ equity, balance sheet and associated notes with relevant comparative figures.

In evaluating these figures, investors should consider that the methodology applied in presenting such information may differ among companies and analysts. For additional information regarding preparation of these pro forma financial statements, see appendix A to Nutrien’s business acquisition report dated February 20, 2018.

Management believes the 2017 pro forma earnings and balance sheet information for Nutrien provides useful supplemental information to investors to evaluate financial performance using the same measures as management. Management believes that, as a result, the investor is afforded greater transparency in assessing the financial performance of Nutrien. These amounts have not been audited and should not be considered as substitute for, nor superior to, financial statements prepared in accordance with IFRS. The preparation of pro forma financial information necessarily requires estimates, assumptions and judgments.

No assurances can be provided that actual results or financial condition will not differ materially from the pro forma amounts set forth herein.

 

 FS 

 

 

    Note 32 Merger of Equals with Agrium

 

 

 

PotashCorp 2017 Annual Report   39


NUTRIEN PRO FORMA CONDENSED COMBINED STATEMENT OF EARNINGS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2017

 

           

Historical

PotashCorp

    

Historical

Agrium

     Divestitures 1      Pro forma
Adjustments
   

Combined

Pro forma

 
                                                      

Sales

      $ 4,547      $ 13,766      $                 –      $ (71 2    $ 18,242  

Freight, transportation and distribution

        (537      (346                   (883

Cost of goods sold

        (3,335      (9,994                         68  2      (13,261
                                                      

Gross Margin

        675        3,426               (3     4,098  

Selling expenses

        (30      (2,014                   (2,044

General and administrative expenses

        (184      (316             1  3, 7      (499

Provincial mining and other taxes

        (151      (13                   (164

Earnings of equity-accounted investees

        7        39                     46  

Other expenses

        (108      (141             178  4      (71
                                                      

Earnings before Finance Costs and Income Taxes

        209        981               176       1,366  

Finance costs

        (238      (276             44  5      (470
                                                      

(Loss) Earnings before Income Taxes

        (29      705               220       896  

Income tax recovery (expense)

        183        (203             (60 6      (80
                                                      

Earnings from Continuing Operations

        154        502               160       816  

Net earnings (loss) from discontinued operations

        173        (187      14               
                                                      

Net Earnings

      $ 327      $ 315      $ 14      $ 160     $ 816  
                                                      

Net Earnings per Share

                

Basic

                 $ 1.27  

Diluted

                 $             1.27  

Weighted average shares outstanding for basic EPS

                   644,150,000  

Weighted average shares outstanding for diluted EPS

                   644,420,000  
                                                      

1 Net earnings (loss) from discontinued operations was adjusted as if the required divestitures of SQM, APC, ICL and the Conda Idaho phosphate production facility and adjacent phosphate mineral rights, resulting from the Merger, had taken place on January 1, 2017.

2 Intercompany sales and related costs were eliminated.

3 Change in control payments for Agrium executives were eliminated.

4 Transaction costs related directly to the Merger were eliminated.

5 Finance costs were reduced as a result of amortizing the change in carrying amount of Agrium’s debt using the effective interest rate method.

6 Taxes were adjusted to reflect the impact of the above noted items.

7 General and administrative expenses were adjusted to reflect expenses incurred directly by Nutrien.

 

40   PotashCorp 2017 Annual Report


POTASHCORP STATEMENT OF INCOME RECLASSIFICATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2017

 

     PotashCorp Before
Reclassifications
    

Reclassification

Amounts

     PotashCorp After
Reclassifications
 
                            

Sales

   $               4,547      $                 –      $               4,547  

Freight, transportation and distribution

     (537             (537

Cost of goods sold

     (3,335             (3,335
                            

Gross Margin

     675               675  

Selling and administrative expenses

     (214      214  2        

Selling expenses

            (30 2       (30

General and administrative expenses

            (184 2       (184

Provincial mining and other taxes

     (151             (151

Earnings of equity-accounted investees

            7  3       7  

Transaction costs

     (84      84  4        

Other expenses

     (17      (91 3, 4       (108
                            

Operating Income

     209               209  

Finance costs

     (238             (238
                            

Loss before Income Taxes

     (29             (29

Income tax recovery

     183               183  
                            

Net Income from Continuing Operations

     154               154  

Net income from discontinued operations

     173               173  
                            

Net Income 1

   $ 327      $      $ 327  
                            

1 Nutrien uses the terminology “Net Earnings”.

2 Selling expenses and general and administrative expenses were disaggregated from selling and administrative expenses.

3 Earnings of equity-accounted investees was disaggregated from other expenses.

4 Transaction costs relating to the Merger were aggregated with other expenses.

AGRIUM STATEMENT OF OPERATIONS RECLASSIFICATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2017

 

     Agrium Before
Reclassifications
    

Reclassification

Amounts

    Agrium After
Reclassifications
 
                           

Sales

   $             13,766      $                  –     $             13,766  

Freight, transportation and distribution

            (346 5      (346

Cost of product sold

     (10,340      346  5      (9,994
                           

Gross Margin

     3,426              3,426  

Selling

     (2,014            (2,014

General and administrative

     (247      (69 7      (316

Provincial, mining and other taxes

            (13 6      (13

Other expenses

     (119      (22 6, 9      (141

Earnings from associates and joint ventures

     39              39  

Share-based payments

     (69      69  7       
                           

Earnings before Finance Costs and Income Taxes

     1,016        (35     981  

Finance costs

     (101      (175 8, 9      (276

Finance costs related to long-term debt

     (210      210  8       
                           

Earnings before Income Taxes

     705              705  

Income tax expense

     (203            (203
                           

Net Earnings from Continuing Operations

     502              502  

Net loss from discontinued operations

     (187            (187
                           

Net Earnings

   $ 315      $     $ 315  
                           

5 Freight, transportation and distribution was disaggregated from cost of goods sold.

6 Provincial, mining and other taxes was disaggregated from other expenses.

7 Share-based payments was reclassified to general and administrative expenses.

8 Finance costs related to long-term debt was reclassified to finance costs.

9 Interest expense related to customer prepayments was reclassified from finance costs to other expenses.

 

 

PotashCorp 2017 Annual Report   41


 

NUTRIEN PRO FORMA CONDENSED COMBINED BALANCE SHEET AS AT DECEMBER 31, 2017

 

     Historical
PotashCorp
     Historical
Agrium
     Divestitures 1      Pro forma
Adjustments
     Combined
Pro forma
 
                                              

Assets

              

Current assets

              

Cash and cash equivalents

   $ 116      $ 466      $ 4,822      $ (3 ) 6     $ 5,401  

Receivables

     489        2,424               (1 ) 2       2,912  

Inventories

     788        3,321               (3 ) 3       4,106  

Prepaid expenses and other current assets

     72        1,124                      1,196  
                                              
     1,465        7,335        4,822        (7      13,615  

Assets held for sale

     1,858        105        (1,963              
                                              
     3,323        7,440        2,859        (7      13,615  

Non-current assets

              

Property, plant and equipment

     12,971        7,091                      20,062  

Goodwill

     97        2,228               10,264  4       12,589  

Other intangible assets

     69        518                      587  

Investments

     292        522                      814  

Other assets

     246        143                      389  
                                              

Total Assets

   $         16,998      $         17,942      $           2,859      $         10,257      $         48,056  
                                              

Liabilities

              

Current liabilities

              

Short-term debt

   $ 730      $ 867      $                 –      $                 –      $ 1,597  

Current portion of long-term debt

            11                      11  

Payables and accrued charges

     836        5,296               2, 7       6,132  
                                              
     1,566        6,174                      7,740  

Deferred income tax liabilities on assets held for sale

     36               (36              
                                              
     1,602        6,174        (36             7,740  

Non-current liabilities

              

Long-term debt

     3,711        4,397               533 4       8,641  

Deferred income tax liabilities

     2,205        473               (144 ) 5       2,534  

Pension and other post-retirement benefit liabilities

     440        142                      582  

Asset retirement obligations and accrued environmental costs

     651        517                      1,168  

Other non-current liabilities

     86        118                      204  
                                              

Total Liabilities

     8,695        11,821        (36      389        20,869  
                                              

Shareholders’ Equity

              

Share capital

     1,806        1,776               14,122 4, 6       17,704  

Contributed surplus

     230                             230  

Accumulated other comprehensive income (loss)

     25        (1,116             1,116 6       25  

Retained earnings

     6,242        5,461        2,895        (5,370 ) 6       9,228  
                                              

Total Shareholders’ Equity

     8,303        6,121        2,895        9,868            27,187  
                                              

Total Liabilities and Shareholders’ Equity

   $         16,998      $         17,942      $ 2,859      $ 10,257      $ 48,056  
                                              

1 To adjust for the estimated proceeds net of taxes for the required divestitures of SQM, APC, ICL and Agrium’s Conda Idaho phosphate production facility and adjacent phosphate mineral rights had the divestitures taken place on December 31, 2017.

2 To eliminate intercompany receivables and payables.

3 To eliminate intercompany profit remaining in inventory.

4 The fair values of Agrium’s identifiable assets and liabilities to be assumed and the full impact of applying acquisition accounting have not been fully determined. After reflecting the pro forma adjustments made herein, the excess of the purchase consideration over the fair value of Agrium’s net assets was presented as goodwill. Once detailed valuations and related calculations are completed in 2018, a material portion of the amount allocated to goodwill will be attributable to property, plant and equipment, other intangible assets, other assets, other liabilities, and the related deferred income tax balances. Some property, plant and equipment and intangible assets are expected to be finite-lived, and accordingly subject to depreciation and amortization. Depreciation and amortization of the actual amounts assigned to the fair values of the identifiable assets and liabilities acquired will result in changes to earnings in periods subsequent to the completion of the Arrangement, and those changes are expected to be material. We estimate the incremental depreciation and amortization related to fair value increases could range between $150 and $300.

5 To record the tax impact of the fair value adjustments.

6 To record and eliminate Agrium’s equity balances and the issuance of share capital related to Agrium’s vested share-based payment awards.

7 To record the liabilities incurred directly by Nutrien.

 

42   PotashCorp 2017 Annual Report


POTASHCORP STATEMENT OF FINANCIAL POSITION RECLASSIFICATIONS AS AT DECEMBER 31, 2017

 

     PotashCorp Before
Reclassifications
     Reclassification
Amounts
     PotashCorp After
Reclassifications
 
                            

Assets

        

Current assets

        

Cash and cash equivalents

   $ 116      $      $ 116  

Receivables

     489               489  

Inventories

     788               788  

Prepaid expenses and other current assets

     72               72  
                            
     1,465               1,465  

Assets held for sale

     1,858               1,858  
                            
     3,323               3,323  

Non-current assets

        

Property, plant and equipment

     12,971               12,971  

Goodwill

            97 1       97  

Investments

            292 2       292  

Investments in equity-accounted investees

     30        (30 ) 2        

Available-for-sale investments

     262        (262 ) 2        

Other assets

     246               246  

Intangible assets

     166        (97 ) 1       69  
                            

Total Assets

   $           16,998      $                   –      $              16,998  
                            

Liabilities

        

Current liabilities

        

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

   $ 730      $ (730 ) 3     $  

Short-term debt

            730 3       730  

Payables and accrued charges

     807        29 4       836  

Current portion of derivative instrument liabilities

     29        (29 ) 4        
                            
     1,566               1,566  

Deferred income tax liabilities on assets held for sale

     36               36  
                            
     1,602               1,602  

Non-current liabilities

        

Long-term debt

     3,711               3,711  

Derivative instrument liabilities

     35        (35 ) 4        

Deferred income tax liabilities

     2,205               2,205  

Pension and other post-retirement benefit liabilities

     440               440  

Asset retirement obligations and accrued environmental costs

     651               651  

Other non-current liabilities and deferred credits

     51        35 4       86  
                            

Total Liabilities

     8,695               8,695  
                            

Shareholders’ Equity

        

Share capital

     1,806               1,806  

Contributed surplus

     230               230  

Accumulated other comprehensive income

     25               25  

Retained earnings

     6,242               6,242  
                            

Total Shareholders’ Equity

     8,303               8,303  
                            

Total Liabilities and Shareholders’ Equity

   $ 16,998      $      $ 16,998  
                            

1 Goodwill was disaggregated from other intangible assets.

2 Available-for-sale investments and investments in equity-accounted investees were aggregated.

3 Short-term debt and current portion of long-term debt were disaggregated.

4 Derivative instrument liabilities were reclassified to payables and accrued charges, and other non-current liabilities and deferred credits.

AGRIUM BALANCE SHEET RECLASSIFICATIONS AS AT DECEMBER 31, 2017

 

     Agrium
Before
Reclassifications
    

Reclassification

Amounts

     Agrium After
Reclassifications
 
                            

Assets

        

Current assets

        

Cash and cash equivalents

   $                    466      $                    –      $                        466  

Receivables

     2,406        18  5       2,424  

Income taxes receivable

     18        (18 ) 5        

Inventories

     3,321               3,321  

Prepaid expenses and other current assets

     1,004        120  6       1,124  

Other current assets

     120        (120 ) 6        

Assets held for sale

     105               105  
                            
     7,440               7,440  

Non-current assets

        

Property, plant and equipment

     7,091               7,091  

Other intangible assets

     518               518  

Goodwill

     2,228               2,228  

Investments

     522               522  

Other assets

     58        85  7       143  

Deferred income tax assets

     85        (85 ) 7        
                            

Total Assets

   $ 17,942      $      $ 17,942  
                            

Liabilities

        

Current liabilities

        

Short-term debt

   $ 867      $      $ 867  

Payables and accrued charges

     5,206        90  8       5,296  

Income taxes payable

     27        (27 ) 8        

Current portion of long-term debt

     11               11  

Current portion of other provisions

     63        (63 ) 8        
                            
     6,174               6,174  

Non-current liabilities

        

Long-term debt

     4,397               4,397  

Deferred income tax liabilities

     473               473  

Pension and other post-retirement benefit liabilities

     142               142  

Asset retirement obligations and accrued environmental costs

            517  9       517  

Other provisions

     522        (522 ) 9        

Other non-current liabilities

     106        12  9,10       118  
                            

Total Liabilities

     11,814        7        11,821  
                            

Shareholders’ Equity

        

Share capital

     1,776               1,776  

Accumulated other comprehensive income loss

     (1,116             (1,116

Retained earnings

     5,461               5,461  

Non-controlling interest

     7        (7 ) 10        
                            

Total Shareholders’ Equity

     6,128        (7      6,121  
                            

Total Liabilities and Shareholders’ Equity

   $ 17,942      $      $ 17,942  
                            

 

5  Income taxes receivable was reclassified to receivables.

 

6  Other current assets were reclassified to prepaid expenses and other current assets.

 

7  Deferred income tax assets were reclassified to other assets.

 

8  Income taxes payable and current portion of other provisions were reclassified to payables and accrued charges.

 

9  Other provisions was reclassified to asset retirement obligations and accrued environmental costs, and non-current liabilities.

 

10  Non-controlling interest was reclassified to other non-current liabilities.
 

 

PotashCorp 2017 Annual Report   43


FORWARD-LOOKING STATEMENTS

 

This 2017 Annual Report, including the “Financial Outlook” section of “Management’s Discussion & Analysis of Financial Condition and Results of Operations,” contains and incorporates by reference forward-looking statements or forward-looking information (within the meaning of the US Private Securities Litigation Reform Act of 1995, and other US federal securities laws and applicable Canadian securities laws) (“forward-looking statements”) that relate to future events or our future financial performance. These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements often contain words such as “should,” “could,” “expect,” “may,” “anticipate,” “forecast,” “believe,” “intend,” “estimates,” “plans” and similar expressions. These statements are based on certain factors and assumptions as set forth in this 2017 Annual Report, including with respect to: foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, the effect of the completion of the Merger and effective tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are subject to risks and uncertainties that are difficult to predict. The results or events set forth in forward-looking statements may differ materially from actual results or events. Several factors could cause actual results or events to differ materially from those expressed in forward-looking statements, including, but not limited to, the following: a number of matters relating to the Merger including the failure to realize the anticipated benefits of the Merger and to successfully

integrate PotashCorp and Agrium, certain costs that we may incur as a result of the Merger, the ability to retain personnel as a result of the Merger and the effect of the Merger on our business and operations generally; risks related to diversion of management time from ongoing business operations due to the Merger; the risk that our credit ratings may be downgraded or there may be adverse conditions in the credit markets; any significant impairment of the carrying amount of certain of our assets; variations from our assumptions with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates; fluctuations in supply and demand in the fertilizer, sulfur and petrochemical markets; changes in competitive pressures, including pricing pressures; risks and uncertainties related to any operating and workforce changes made in response to our industry and the markets we serve, including mine and inventory shutdowns; adverse or uncertain economic conditions and changes in credit and financial markets; economic and political uncertainty around the world; changes in capital markets; the results of sales contract negotiations; unexpected or adverse weather conditions; changes in currency and exchange rates; risks related to reputational loss; the occurrence of a major safety incident; inadequate insurance coverage for a significant liability; inability to obtain relevant permits for our operations; catastrophic events or malicious acts, including terrorism; certain complications that may arise in our mining process, including water inflows; risks and uncertainties related to our international operations and assets; our ownership of non-controlling equity interests in other companies; our

prospects to reinvest capital in strategic opportunities and acquisitions; risks associated with natural gas and other hedging activities; security risks related to our information technology systems; imprecision in reserve estimates; costs and availability of transportation and distribution for our raw materials and products, including railcars and ocean freight; changes in, and the effects of, government policies and regulations; earnings and the decisions of taxing authorities which could affect our effective tax rates; increases in the price or reduced availability of the raw materials that we use; our ability to attract, develop, engage and retain skilled employees; strikes or other forms of work stoppage or slowdowns; rates of return on, and the risks associated with, our investments and capital expenditures; timing and impact of capital expenditures; the impact of further innovation; adverse developments in new and pending legal proceedings or government investigations; and violations of our governance and compliance policies. These risks and uncertainties and additional risks and uncertainties can be found in our Annual Information Form for the fiscal year ended December 31, 2017 under the captions “Forward-Looking Statements” and “Risk Factors” and in our filings with the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forward-looking statements in or incorporated into this report are given only as at the date of this report or the document incorporated into this report and the company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

 

 

44   PotashCorp 2017 Annual Report


NON-IFRS FINANCIAL MEASURES IN MD&A

 

PotashCorp uses cash flow and cash flow return (both non-IFRS financial measures) as supplemental measures to evaluate the performance of the company’s assets in terms of the cash flow they have generated. Calculated on the total cost basis of the company’s assets rather than on the depreciated value, these measures reflect cash returned on the total investment outlay. The company believes these measures are valuable to assess shareholder value.

Generally, these measures are a numerical measure of a company’s performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with IFRS. Cash flow and cash flow return are not measures of financial

performance (nor do they have standardized meanings) under IFRS. In evaluating these measures, investors should consider that the methodology applied in calculating such measures may differ among companies and analysts.

The company uses both IFRS and certain non-IFRS measures to assess performance. Management believes the non-IFRS measures provide useful supplemental information to investors in order that they may evaluate PotashCorp’s financial performance using the same measures as management. Management believes that, as a result, the investor is afforded greater transparency in assessing the financial performance of the company. These non-IFRS financial measures should not be considered as a substitute for, nor superior to, measures of financial performance prepared in accordance with IFRS.

 

 

                              IFRS                                Previous Canadian GAAP  
                                                                                                      
(in millions of US dollars except percentage amounts)    2017      2016     2015     2014     2013     2012      2011      2010            2009     2008     2007  
                                                                                                      

Net income

     327        323       1,270       1,536       1,785       2,079        3,081        1,775            981       3,466       1,104  

Total assets

     16,998        17,255       17,469       17,724       17,958       18,206        16,257        15,547            12,922       10,249       9,717  
                                                                                                      

Return on assets 1

     1.9%        1.9%       7.3%       8.7%       9.9%       11.4%        19.0%        11.4%            7.6%       33.8%       11.4%  
                                                                                                      

Net income

     327        323       1,270       1,536       1,785       2,079        3,081        1,775            981       3,466       1,104  

Income taxes from continuing and discontinued operations

     (181      43       451       628       687       826        1,066        701            79       1,060       417  

Change in unrealized loss (gain) on derivatives included in net income

     3        (3     (3     5       4       3        1                   (56     69       (17

Finance costs

     238        216       192       184       144       114        159        121            121       63       69  

Current income taxes 2

     (92      (65     (244     (356     (272     (404      (700      (479          120       (995     (297

Depreciation and amortization

     692        695       685       701       666       578        489        449            312       328       291  

Impairment of available-for-sale investment

            10             38             341                                       

Impairment of property, plant and equipment

     305        47                                                               
                                                                                                      

Cash flow 3

     1,292        1,266       2,351       2,736       3,014       3,537        4,096        2,567            1,557       3,991       1,567  
                                                                                                      

Total assets

     16,998        17,255       17,469       17,724       17,958       18,206        16,257        15,547            12,922       10,249       9,717  

Cash and cash equivalents

     (116      (32     (91     (215     (628     (562      (430      (412          (385     (277     (720

Fair value of derivative assets

     (10      (6     (9     (7     (8     (10      (10      (5          (9     (18     (135

Accumulated depreciation of property, plant and equipment

     7,171        6,408       5,871       5,276       4,668       4,176        3,653        3,171            2,712       2,527       2,281  

Net unrealized loss (gain) on available-for-sale investments

     316        346       302       (244     (439     (1,197      (982      (2,563          (1,900     (886     (2,284

Accumulated amortization of other assets and intangible assets

     157        131       105       129       121       104        93        76            57       81       66  

Payables and accrued charges

     (807      (772     (1,146     (1,086     (1,104     (1,188      (1,295      (1,198          (798     (1,191     (912

Impairment of property, plant and equipment

     305        47                                                               
                                                                                                      

Adjusted assets

     24,014        23,377       22,501       21,577       20,568       19,529        17,286        14,616            12,599       10,485       8,013  
                                                                                                      

Average adjusted assets

     23,696        22,939       22,039       21,073       20,049       18,408        15,951        13,627  5           11,542       9,249       7,757  
                                                                                                      

Cash flow return 4

     5.5%        5.5%       10.7%       13.0%       15.0%       19.2%        25.7%        18.8%            13.5%       43.2%       20.2%  
                                                                                                      

 

1  Return on assets = net income / total assets.

 

2  Current income taxes = current income tax expense from continuing and discontinued operations (which was already reduced by the realized excess tax benefit related to share-based compensation under previous Canadian GAAP) – realized excess tax benefit related to share-based compensation (under IFRS).

 

3  Cash flow = net income + income taxes from continuing and discontinued operations + change in unrealized loss (gain) on derivatives included in net income + finance costs – current income taxes + depreciation and amortization + impairment of available-for-sale investment + impairment of property, plant and equipment.

 

4  Cash flow return = cash flow / average adjusted assets (total assets – cash and cash equivalents – fair value of derivative assets + accumulated depreciation and amortization + impairment of property, plant and equipment – net unrealized loss (gain) on available-for-sale investments – payables and accrued charges).

 

5  Based on adjusted assets as at January 1, 2010 of $12,637, which was calculated similarly to 2009 under previous Canadian GAAP except the following IFRS amounts were used: total assets of $12,842, accumulated depreciation of property, plant and equipment of $2,850 and payables and accrued charges of $(817).

 

PotashCorp 2017 Annual Report   45


FINANCIAL TERMS

 

Adjusted EBITDA

EBITDA + exit costs + termination benefit costs + impairment charges/recoveries + Transaction costs + takeover response costs – loss (gain) on sale of assets + plant shutdown and closure and workforce reduction costs

Adjusted EBITDA margin

Adjusted EBITDA / net sales

Average adjusted assets

Simple average of the current year’s adjusted assets and the previous year’s adjusted assets, except when a material acquisition occurred, in which case the weighted average rather than the simple average is calculated

Cash flow

Net income + income taxes from continuing and discontinued operations + change in unrealized loss (gain) on derivatives included in net income + finance costs – current income taxes + depreciation and amortization + impairment of available-for-sale investment + impairment of property, plant and equipment

Cash flow return

Cash flow / average (total assets – cash and cash equivalents – fair value of derivative assets + accumulated depreciation and amortization + impairment of property, plant and equipment – net unrealized (gain) loss on available-for-sale investments – payables and accrued charges)

Current income taxes

Current income tax expense from continuing and discontinued operations (which was already reduced by the realized excess tax benefit related to share-based compensation under previous Canadian GAAP) – realized excess tax benefit related to share-based compensation (under IFRS)

EBITDA

Earnings from continuing operations (net income from continuing operations) before finance costs, income taxes, depreciation and amortization

Free cash flow

Cash provided by operating activities – cash additions to property, plant and equipment – other assets and intangible assets – dividends from discontinued operations – changes in non-cash operating working capital

Market value of total capital

Market value of total debt – cash and cash equivalents + market value of equity

Net debt to capital

(Total debt – cash and cash equivalents) / (total debt – cash and cash equivalents + total shareholders’ equity)

Net debt to EBITDA

(Total debt – cash and cash equivalents) / EBITDA

Net sales

Sales – freight, transportation and distribution

Previous Canadian GAAP

As we adopted IFRS with effect from January 1, 2010, our 2007 to 2009 annual information is presented on a previous Canadian generally accepted accounting principles (GAAP) basis and, to the extent such information constitutes Canadian non-GAAP measures, is reconciled to the most directly comparable measure calculated in accordance with previous Canadian GAAP. Accordingly, our information for 2007 to 2009 may not be comparable to the periods 2010 to 2017.

Return on assets

Net income / total assets

Total debt to capital

Total debt / (total debt + total shareholders’ equity)

Total debt to net income

Total debt / net income

Total shareholder return

Return on investment in PotashCorp stock from the time the investment is made based on two components: (1) growth in share price and (2) return from reinvested dividend income on the shares

Weighted average cost of capital

Simple monthly average of ((market value of total debt – cash and cash equivalents) / market value of total capital x after-tax cost of debt + market value of equity / market value of total capital x cost of equity)

 

 

52   PotashCorp 2017 Annual Report


APPENDIX

MARKET AND INDUSTRY DATA STATEMENT

Some of the market and industry data contained in this Annual Report and this Management’s Discussion & Analysis of Financial Condition and Results of Operations are based on

internal surveys, market research, independent industry publications or other publicly available information. Although we believe that the independent sources we use are reliable, we have not independently verified and cannot guarantee the accuracy or completeness of this information. Similarly, we believe our internal research is reliable, but such research has not been verified by any independent sources.

Information in the preparation of this Annual Report is based on statistical data and other material available at February 20, 2018.

ABBREVIATED COMPANY NAMES AND SOURCES*

 

Name   Source
Agrium   Agrium Inc., Canada
APC   Arab Potash Company (Amman: ARPT), Jordan
Bloomberg   Bloomberg L.P., USA
Canpotex   Canpotex Limited, Canada
CF Industries   CF Industries Holdings, Inc. (NYSE: CF), USA
CRU   CRU International Limited, UK
Fertecon   Fertecon Limited, UK
ICL   Israel Chemicals Ltd. (Tel Aviv: ICL), Israel
Intrepid   Intrepid Potash, Inc. (NYSE: IPI), USA
K+S   K+S Group (Xetra: SDF), Germany
Moody’s   Moody’s Corporation (NYSE: MCO), USA
Name   Source
Mosaic   The Mosaic Company (NYSE: MOS), USA
Nutrien   Nutrien Ltd. (TSX and NYSE: NTR), Canada
NYMEX   New York Mercantile Exchange, USA
NYSE   New York Stock Exchange, USA
OCI   OCI N.V., (NYSE Euronext: OCI), The Netherlands
Sinofert   Sinofert Holdings Limited (HKSE: 0297.HK), China
SQM   Sociedad Química y Minera de Chile S.A. (Santiago Bolsa de Comercio Exchange, NYSE: SQM), Chile
S&P   Standard & Poor’s Financial Services LLC, USA
TSX   Toronto Stock Exchange, Canada
Yara   Yara International ASA (Oslo: YAR), Norway
 

 

* Where PotashCorp is listed as a source in conjunction with external sources, we have supplemented the external data with internal analysis.

 

128   PotashCorp 2017 Annual Report


TERMS AND MEASURES

 

Scientific Terms           
Nitrogen   NH3    ammonia (anhydrous), 82.2% N
    HNO3    nitric acid, 22% N (liquid)
    UAN    nitrogen solutions, 28-32% N (liquid)
Phosphate   MGA    merchant grade acid, 54% P2 O5 (liquid)
    DAP    diammonium phosphate, 46% P2 O5 (solid)
    MAP    monoammonium phosphate, 52% P2 O5 (solid)
    SPA    superphosphoric acid, 70% P2 O5 (liquid)
    Monocal    monocalcium phosphate, 48.1% P2 O5 (solid)
    Dical    dicalcium phosphate, 42.4% P2 O5 (solid)
    DFP    defluorinated phosphate, 41.2% P2 O5 (solid)
    STF    silicon tetrafluoride
Potash   KCI    potassium chloride, 60-63.2% K2 O (solid)

 

Product Measures

    

 

K2 O tonne

  Measures the potassium content of products having different
chemical analyses

 

N tonne

  Measures the nitrogen content of products having different chemical analyses

 

P2 O5 tonne

  Measures the phosphorus content of products having different chemical analyses

 

Product tonne

  Standard measure of the weights of all types of potash, nitrogen and phosphate products

 

Currency Abbreviations

CDN   Canadian dollar
USD   United States dollar

 

Exchange Rates

    
    CDN per USD at December 31, 2017 – 1.2545
General Terms     
2017E   2017 estimated
Brownfield capacity   Increase in operational capability at existing operation
CAGR   Compound annual growth rate
CAPEX   Capital expenditure
Canpotex   An export company owned by all Saskatchewan producers of potash
Consumption vs demand   Product applied vs product purchased
FOB   Free on Board – cost of goods on board at point of shipment
FSU   Former Soviet Union
GDP   Gross Domestic Product
Greenfield capacity   New operation built on undeveloped site
Latin America   South America, Central America, Caribbean and Mexico
LNG   Liquefied natural gas
MMBtu   Million British thermal units
MMT   Million metric tonnes
Nameplate capacity   Estimated theoretical capacity based on design specifications or Canpotex entitlements – does not necessarily represent operational capability
North America   The North American market includes Canada and the US
Offshore   Offshore markets include all markets except Canada and the US

Operational

capability

  Estimated annual achievable production level
PotashCorp   Potash Corporation of Saskatchewan Inc. (PCS) and its direct or indirect subsidiaries, individually or in any combination, as applicable
Yuzhnyy   A port situated in Ukraine
 

 

PotashCorp 2017 Annual Report   129