Listed: TSX, NYSE Symbol: POT SASKATOON, SK, July 27
/PRNewswire-FirstCall/ -- Potash Corporation of Saskatchewan Inc.
(PotashCorp) today announced record quarterly earnings of $175.1
million, or $1.65 per diluted share, as a result of continued
strong nitrogen and phosphate performance, significant
contributions from offshore investments and favorable changes to
Canadian federal and provincial income tax rates. This exceeded the
previous record of $164.2 million ($1.46 per share) set in the
second quarter of 2005 and raised earnings for the first six months
of 2006 to a record $300.6 million ($2.84 per share), compared to
$295.5 million ($2.61 per share) in the same period last year.
Second-quarter gross margin was $253.4 million, compared to $344.8
million in last year's second quarter, with the decline driven
entirely by a shortfall in potash sales volume. Despite this, cash
flow prior to working capital changes(1) for the quarter remained
strong, declining only 5 percent from the second quarter of 2005,
to $257.0 million. The strengthening of the Canadian dollar in the
second quarter of 2006 negatively affected earnings, increasing our
primarily non-cash foreign- exchange loss by $0.14 per share and
raising potash production costs by the equivalent of $0.05 per
share compared to the second quarter of 2005. Results were also
impacted by a non-cash charge for stock-option expense ($0.15 per
share) and cash costs related to potash mine shutdowns ($0.05 per
share). Investments in Arab Potash Company Ltd. (APC) in Jordan,
Sociedad Quimica y Minera de Chile (SQM) in Chile and Sinochem Hong
Kong Holdings Limited (Sinofert) in China contributed $19.0 million
during the three-month period, up 42 percent over the second
quarter of 2005. The total market value of our investments in these
publicly traded companies, along with our stake in Israel Chemicals
Ltd. (ICL) in Israel, now equates to almost $19 per PotashCorp
share. "This quarter demonstrated the importance of our nitrogen
and phosphate operations, as well as the effectiveness of our
potash strategy as prices remained strong and we achieved record
net income even without potash shipments to China," said PotashCorp
President and Chief Executive Officer Bill Doyle. "We matched our
potash production to meet demand during a period of short-term
disruption, even as we prepared our operations to meet the
increasing longer-term needs of global potash customers. We know
these customers must replenish their supplies of this essential
nutrient and we will be ready." Market Conditions Potash shipments
continued to be constrained through the second quarter as pricing
in China and India was unresolved. These negotiations had a far-
reaching impact, as several markets in Southeast Asia and Latin
America (including Brazil) pulled product from internal
inventories, delaying purchases while they monitored potash
pricing. Sales in the North American market were also weakened
through the spring season by low crop commodity prices and fewer
corn acres planted. As a result, it is estimated that North
American consumption was off 10-15 percent for the 2005/2006
fertilizer year ending June 30. Compounding this was the effort of
fertilizer dealers to finish the season without inventories, which
further reduced potash shipments. In nitrogen and phosphate, the
desire by dealers to end the fertilizer year with empty bins also
had an impact on North American volumes, as direct- application
demand for ammonia, urea and DAP/MAP was below average. The North
American price for natural gas, a key input, continued its expected
seasonal decline throughout the quarter. As well, natural gas in
storage in the US is at a historical high. Tight supply/demand
fundamentals in Eastern and Western Europe - driven by continuing
high gas prices and producer curtailments in those markets - set a
floor for nitrogen prices in North America. Potash Second-quarter
2006 potash gross margin of $132.8 million was $90.5 million lower
than in the same period last year. This reduction was tempered by a
$29.7-million decrease in provincial mining taxes. The major
factors contributing to the potash gross margin decline were lower
sales volumes ($75.1 million) and higher cost of goods sold ($15.2
million). Gross margin for the first six months was $223.6 million
compared to $399.5 million in the first half of 2005. Offshore
sales volumes were down 33 percent quarter over quarter as many
customers delayed purchasing ahead of a 2006 price settlement in
China. Canpotex, the offshore marketing company for Saskatchewan
potash producers, shipped 0.24 million tonnes to its major markets
(China, India and Brazil) in the second quarter of the year,
compared to 1.3 million tonnes in the same period in 2005. At the
same time, the slowdown in North America led to a 24-percent
reduction in sales volumes quarter over quarter. Despite lower
volumes, North American realized prices were up 9 percent from last
year's second quarter and flat with the trailing quarter. Realized
prices from offshore customers were down roughly 7 percent quarter
over quarter, due primarily to reduced volumes raising Canpotex's
fixed inland distribution costs by roughly $10 per tonne. Following
our strategy of producing to meet market demand increased our costs
in the second quarter. We took 16.7 mine shutdown weeks compared to
nine weeks in the second quarter of 2005. As a result, we produced
1.9 million tonnes, 20 percent less than the 2.4 million tonnes in
the same period last year. Potash inventories at the end of June
were 1.35 million tonnes, up from 1.14 million tonnes at the end of
2005. Nitrogen Quarterly nitrogen gross margin of $91.7 million was
the second highest in our history, trailing only the $99.4 million
in last year's second quarter. The $7.7-million decline from the
same period last year was due to lower sales volumes and higher
cost of goods sold, which negatively impacted segment gross margin
by $11.4 million and $16.8 million, respectively, although this was
partially offset by sales price gains totaling $20.5 million.
First-half 2006 nitrogen gross margin was $171.1 million, 4 percent
higher than in the record first half of 2005. Our operations in
Trinidad, where we have long-term, lower- cost natural gas
contracts, delivered $44.6 million, or 49 percent, of nitrogen
gross margin for the quarter. Our US operations contributed $27.9
million in gross margin and we gained $19.2 million from our
natural gas hedges. Total realized nitrogen prices were up 4
percent from last year's second quarter, with ammonia up 6 percent
but urea down 5 percent from the high levels of one year ago.
Compared to the first quarter, ammonia and urea prices dropped 9
percent and 8 percent, respectively, as related natural gas prices
fell. Our average gas cost, including our Trinidad contracts and
the benefits of our US hedge, was $3.86 per MMBtu, 4 percent lower
than in the second quarter of 2005 and down 11 percent from the
trailing quarter. Total nitrogen sales volumes were down 10 percent
quarter over quarter due to the continued softness in the North
American fertilizer market. Industrial volumes remained strong and
were down only 1 percent from the second quarter of 2005 and up 10
percent from the first quarter of this year. In total, 66 percent
of our nitrogen volumes went to this stable industrial customer
base. Costs were higher during the second quarter versus the same
period last year as we took down production at our Trinidad 01 and
02 plants to finish the last of our debottlenecks at that facility.
This completes the addition of 300,000 tonnes of low-cost
incremental ammonia capacity with a payback period of approximately
two years. Our Lima, OH nitrogen facility encountered mechanical
difficulties, limiting its production through most of June.
Phosphate Phosphate had its best second quarter since 1999,
generating $28.9 million in gross margin compared to $22.1 million
in the same quarter last year. The $6.8-million increase was due to
higher prices, which added $27.0 million to gross margin. This gain
was partially offset by $8.8 million in reduced sales volumes and
$11.4 million from higher cost of goods sold. Gross margin for the
first half of 2006 of $62.2 million was 59 percent higher than the
$39.1 million generated in the first half of 2005. The feed and
industrial segments once again proved their value as stable,
higher-margin phosphate businesses. Feed phosphate was the largest
contributor in this segment during the quarter, generating gross
margin of $14.9 million as prices jumped 22 percent quarter over
quarter and more than offset an 11-percent decrease in volumes
caused by increased competition. Industrial products continued on a
steady course, generating $13.9 million in gross margin, almost
entirely from purified phosphoric acid. Industrial volumes were
down 11 percent from the same period last year due to higher
imports, while prices were up 11 percent. Our new purified acid
plant at Aurora, NC was completed and brought online during the
quarter. Challenged by the same customer buying patterns that
affected other nutrients and by the continued slow-down in Brazil,
solid phosphate fertilizer volumes were off 18 percent from last
year's second quarter. Prices were up 11 percent quarter over
quarter, but higher sulfur and ammonia costs - up 15 percent and 12
percent, respectively, from the second quarter of 2005 - squeezed
margins. Liquid phosphate volumes were up 8 percent from the second
quarter of last year, with realized prices down slightly due to a
shift in market mix. Supply/demand fundamentals for this product
remained strong, as PhosChem recently signed a new sales contract
with India, at higher prices. Turnarounds at three production
plants in June reduced volumes and increased unit costs, negatively
impacting margins. Financial During the second quarter, we reduced
our 2006 consolidated effective income tax rate from 33 percent to
30 percent, which decreased our income tax expense by $10.3 million
on a year-to-date basis. The change for this year was due primarily
to two factors. First, the Province of Saskatchewan enacted changes
to the corporate income tax, reducing the rate from 17 percent to
12 percent over the next three years. Second, we revised our
estimated allocation of annual income before taxes by jurisdiction
as a result of a decrease in expected potash operating income in
Canada. In addition, the Government of Canada enacted reductions to
both the federal corporate income tax rate and corporate surtax in
the second quarter. This, along with the above-mentioned provincial
changes, permanently reduced our future income tax liability by
$44.8 million ($0.42 per share). Our revised 30 percent effective
consolidated income tax rate should be sustainable into 2007 and
2008 as the federal and provincial income tax rate reductions are
phased in. Further, we received a $3.5 million income tax refund
during the quarter ($15.8 million for the first six months) related
to a Canadian appeals court decision in the case of a uranium
producer. This affirmed the deductibility of the Saskatchewan
capital tax resource surcharge. The effect of all of these items
resulted in a consolidated effective income tax rate of
approximately negative 1 percent in the second quarter and
approximately 12 percent for the first six months of 2006. The
Canadian dollar, which gained strength against the US dollar during
the second quarter, opened at $1.1671 but ended the quarter at
$1.1150. Our Canadian-dollar potash cost of goods sold was
negatively impacted by approximately $8 million, pre-tax, due to
the strengthening of our average exchange rate quarter over
quarter. PotashCorp recognized a $21.1-million non-cash pre-tax
expense associated with performance stock options granted to
employees in the second quarter, compared to $22.0 million
recognized in the second quarter of 2005. Of the 2006 total, $17.1
million was recorded in selling and administrative expenses. In
accordance with accounting standards, compensation expense was
recognized on the grant date for stock options granted to currently
active employees who were eligible to retire at that date. An
additional $131.1 million was invested during the quarter for
capital expenditures on property, plant and equipment. The majority
of this was used to bring back idled potash capacity and to
complete our Trinidad 01 and 02 plant debottlenecks and our
purified acid plant expansion at Aurora. Outlook Negotiations for
2006 potash shipments from Canpotex to Sinofert are nearing
conclusion. While a $25-per-tonne price increase has been agreed
to, logistical matters, which we expect to be resolved shortly,
remain outstanding. This price settlement is expected to restart
potash momentum as global customers begin to catch up following
several months of drawing from inventories. While producers'
inventories increased during this period, reports indicate that
approximately 5 million tonnes of potash were not produced globally
on a year-to-date basis. In Brazil, the real remains strong against
the US dollar, farmers and distributors continue to face credit
problems and new government support programs have been slow to roll
out. However, at the same time, potash spot prices have increased
$10-$15 per tonne since 2006 Chinese potash pricing was concluded,
and the first half of this year saw record agricultural exports
from Brazil. We expect 2006 potash shipments to Brazil to be flat
in comparison to 2005 levels. The growing need for crop commodities
as an energy source is expected to increase the demand for potash.
This was evident in the second quarter when Malaysia - Canpotex's
largest customer in the first half of 2006 - doubled its potash
purchases as palm oil prices strengthened with the announcement of
plans for 32 new biodiesel plants in the next two years. With oil
prices at record levels, the demand for ethanol and other biofuels
is expected to grow. These products are made from crops that are
intensive potash users. This demand competes for crops that are
also necessary for human and animal consumption, adding to the need
for increased production. Global crop fundamentals continue to
strengthen as farmers capitalize on this situation. That should
require more potash, which must be pulled from existing capacity.
In North America, consumption of all three nutrients is expected to
return to average levels or better, which would mean an increase of
10-15 percent in 2007. We expect the greatest impact to be in
potash, the cornerstone of our business. In addition to the
resumption of shipments to China, India is expected to return to
the market. Its 2005 purchases from Canpotex were 53 percent higher
than those in the previous year, but it has remained on the
sidelines throughout the Chinese negotiation and drawn down its
inventories. We believe India now has very little potash inventory
and, with resolution of China's pricing and a limited window for
planting this year, should sign its own price and volume contract
very soon. Nitrogen and phosphate volumes are expected to rebound
after unsustainable inventory reductions during the past fertilizer
year. In nitrogen, natural gas prices are in their seasonal
decline, levels of gas in storage are high, and gas is now trading
on futures markets between $7 and $11 per MMBtu over the next 12
months. Global ammonia transportation costs to the US Gulf remain
high, making the proximity of our Trinidad operation a competitive
advantage. We expect these factors to contribute heavily to the
continued strong financial performance of our newly expanded
Trinidad asset. Our North American 10-year gas hedge position is
currently valued at more than $200 million. The phosphate segment
is expected to continue improving through 2006, driven by healthy
contributions from liquids, feed and industrial products, as well
as anticipation of a strong fall season for phosphate fertilizers.
Solid phosphate fertilizer supply/demand fundamentals should remain
reasonably balanced. Our capital expenditures for 2006 are expected
to be $535 million, of which $165 million will relate to sustaining
capital. We continue to invest our opportunity capital to bring
back idled potash capacity, add granulation capacity at Allan and
Lanigan and wrap up the Trinidad debottlenecks and expansion at
Aurora. In addition, PotashCorp expects to receive approximately
$20 million in further income tax refunds in the third quarter,
depending on the results of the ongoing Canadian taxation authority
review of taxation years prior to 2002. Based on a $1.12 Canadian
dollar, we expect third-quarter net income per share to be in the
range of $1.25 - $1.50 per diluted share and net income for the
full year should be in the range of $5.25 - $6.25 per diluted
share. In the current trading range of the Canadian dollar relative
to the US dollar, each one-cent change in the Canadian dollar will
typically have an impact of approximately $3 million on the
foreign-exchange line, or $0.02 per share on an after-tax basis,
although this is primarily a non-cash item. Conclusion "The second
quarter of 2006 is our springboard for 2007," said Doyle. "With low
customer potash inventories around the world, we're looking forward
to ramping up our capacity not only to meet expected increases in
global consumption, but also to restock the depleted pipeline."
Notes: ------ 1. See reconciliation and description of non-GAAP
measures in the attached section titled "Selected Non-GAAP Measures
and Reconciliations." Potash Corporation of Saskatchewan Inc. is
the world's largest fertilizer enterprise producing the three
primary plant nutrients and a leading supplier to three distinct
market categories: agriculture, with the largest capacity in the
world in potash, third largest in phosphate and fourth largest in
nitrogen; animal nutrition, with the world's largest capacity in
phosphate feed ingredients; and industrial chemicals, as the
largest global producer of industrial nitrogen products and one of
only three North American suppliers of industrial phosphates. This
release contains forward-looking statements. These statements are
based on certain factors and assumptions as set forth in this
release, including foreign exchange rates, expected growth, results
of operations, performance and business prospects and
opportunities. While the company considers these factors and
assumptions to be reasonable, based on information currently
available, they may prove to be incorrect. A number of factors
could cause actual results to differ materially from those in the
forward-looking statements, including, but not limited to:
fluctuations in supply and demand in fertilizer, sulfur,
transportation and petrochemical markets; changes in competitive
pressures, including pricing pressures; risks associated with
natural gas and other hedging activities; changes in capital
markets; changes in currency and exchange rates; unexpected
geological or environmental conditions; and government policy
changes. Additional risks and uncertainties can be found in our
2005 annual report to shareholders and in filings with the U.S.
Securities and Exchange Commission and Canadian provincial
securities commissions. Forward-looking statements are given only
as at the date of this release and the company disclaims any
obligation to update or revise the forward-looking statements,
whether as a result of new information, future events or otherwise.
In the case of guidance, should subsequent events show that the
forward-looking statements released herein may be materially off-
target, the company will evaluate whether to issue and, if
appropriate following such review, issue a news release updating
guidance or explaining reasons for the difference.
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PotashCorp will host a conference call on Thursday, July 27, 2006,
at 1:00 p.m. Eastern Time. To join the call, dial (416) 644-3426 at
least 10 minutes prior to the start time. Alternatively, visit
http://www.potashcorp.com/ for a live webcast of the conference
call in a listen-only mode. This news release is also available at
this same website. Potash Corporation of Saskatchewan Inc.
Condensed Consolidated Statements of Financial Position (in
millions of US dollars except share amounts) (unaudited) June 30,
December 31, 2006 2005
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Assets Current assets Cash and cash equivalents $ 129.7 $ 93.9
Accounts receivable 401.8 453.3 Inventories 517.7 522.5 Prepaid
expenses and other current assets 74.8 41.1
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1,124.0 1,110.8 Property, plant and equipment 3,397.7 3,262.8 Other
assets (Note 2) 976.6 852.8 Intangible assets 32.1 34.5 Goodwill
97.0 97.0
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$ 5,627.4 $ 5,357.9
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Liabilities Current liabilities Short-term debt $ 556.5 $ 252.2
Accounts payable and accrued charges 489.9 842.7 Current portion of
long-term debt 401.0 1.2
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1,447.4 1,096.1 Long-term debt 857.1 1,257.6 Future income tax
liability 555.7 543.3 Accrued pension and other post-retirement
benefits 215.6 213.9 Accrued environmental costs and asset
retirement obligations 101.6 97.3 Other non-current liabilities and
deferred credits 13.4 17.2
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3,190.8 3,225.4
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Shareholders' Equity Share capital 1,390.9 1,379.3 Unlimited
authorization of common shares without par value; issued and
outstanding 103,873,947 and 103,593,792 at June 30, 2006 and
December 31, 2005, respectively Contributed surplus 59.1 36.3
Retained earnings 986.6 716.9
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2,436.6 2,132.5
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$ 5,627.4 $ 5,357.9
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc. Condensed Consolidated
Statements of Operations and Retained Earnings (in millions of US
dollars except per-share amounts) (unaudited) Three Months Ended
Six Months Ended June 30 June 30 2006 2005 2006 2005
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Sales (Note 5) $ 928.7 $ 1,057.3 $ 1,790.3 $ 1,978.7 Less: Freight
62.3 67.4 117.2 134.6 Transportation and distribution 35.8 32.1
67.0 61.0 Cost of goods sold 577.2 613.0 1,149.2 1,179.8
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Gross Margin 253.4 344.8 456.9 603.3
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Selling and administrative 47.9 54.9 78.7 84.2 Provincial mining
and other taxes 14.5 44.2 28.7 82.6 Foreign exchange loss (gain)
16.3 (6.1) 13.9 (12.0) Other income (Note 8) (20.0) (13.9) (51.2)
(33.9)
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58.7 79.1 70.1 120.9
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Operating Income 194.7 265.7 386.8 482.4 Interest Expense 20.7 20.6
43.9 41.3
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Income Before Income Taxes 174.0 245.1 342.9 441.1 Income Taxes
(Note 3) (1.1) 80.9 42.3 145.6
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Net Income $ 175.1 $ 164.2 300.6 295.5 -----------------------
----------------------- Retained Earnings, Beginning of Period
716.9 701.5 Dividends (30.9) (33.5)
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Retained Earnings, End of Period $ 986.6 $ 963.5
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Net Income Per Share (Note 4) Basic $ 1.69 $ 1.50 $ 2.90 $ 2.68
Diluted $ 1.65 $ 1.46 $ 2.84 $ 2.61
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Dividends Per Share $ 0.15 $ 0.15 $ 0.30 $ 0.30
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc. Condensed Consolidated
Statements of Cash Flow (in millions of US dollars) (unaudited)
Three Months Ended Six Months Ended June 30 June 30 2006 2005 2006
2005
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Operating Activities Net income $ 175.1 $ 164.2 $ 300.6 $ 295.5
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Adjustments to reconcile net income to cash provided by operating
activities Depreciation and amortization 60.4 62.4 119.2 122.0
Stock-based compensation 22.5 23.0 24.0 24.0 Loss on disposal of
long-term assets - 3.5 0.3 5.5 Foreign exchange on future income
tax 12.3 (2.8) 12.1 (4.0) (Recovery of) provision for future income
tax (27.8) 8.1 (13.9) 14.6 Undistributed earnings of equity
investees 13.9 (1.3) 1.5 (14.4) Other long-term liabilities 0.6
13.8 2.6 19.0
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Subtotal of adjustments 81.9 106.7 145.8 166.7
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Changes in non-cash operating working capital Accounts receivable
(11.8) 35.5 51.5 (28.0) Inventories (10.4) 11.3 (1.5) 9.6 Prepaid
expenses and other current assets (6.7) 6.7 (33.7) 0.5 Accounts
payable and accrued charges (86.9) 23.9 (334.0) 25.7
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Subtotal of changes in non-cash operating working capital (115.8)
77.4 (317.7) 7.8
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Cash provided by operating activities 141.2 348.3 128.7 470.0
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Investing Activities Additions to property, plant and equipment
(131.1) (74.4) (251.1) (137.4) Purchase of long-term investments
(3.7) (93.5) (130.0) (93.5) Proceeds from disposal of property,
plant and equipment and long-term investments 0.2 0.9 2.2 10.5
Other assets and intangible assets 7.5 - 3.0 3.0
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Cash used in investing activities (127.1) (167.0) (375.9) (217.4)
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Cash before financing activities 14.1 181.3 (247.2) 252.6
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Financing Activities Repayment of long-term debt obligations (0.4)
(0.4) (0.7) (0.6) (Repayment of) proceeds from short-term debt
obligations (48.4) (1.0) 304.3 (0.2) Dividends (15.2) (16.7) (30.5)
(33.2) Repurchase of common shares - (235.1) - (317.4) Issuance of
common shares 6.9 16.2 9.9 63.2
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Cash (used in) provided by financing activities (57.1) (237.0)
283.0 (288.2)
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(Decrease) Increase in Cash and Cash Equivalents (43.0) (55.7) 35.8
(35.6) Cash and Cash Equivalents, Beginning of Period 172.7 479.0
93.9 458.9
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Cash and Cash Equivalents, End of Period $ 129.7 $ 423.3 $ 129.7 $
423.3
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Supplemental cash flow disclosure Interest paid $ 33.8 $ 29.5 $
50.1 $ 40.7 Income taxes paid $ 82.5 $ 31.9 $ 224.5 $ 107.4
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(See Notes to the Condensed Consolidated Financial Statements)
Potash Corporation of Saskatchewan Inc. Notes to the Condensed
Consolidated Financial Statements For the Three and Six Months
Ended June 30, 2006 (in millions of US dollars except share and
per-share amounts) (unaudited) 1. Significant Accounting Policies
With its subsidiaries, Potash Corporation of Saskatchewan Inc.
("PCS") - together known as "PotashCorp" or "the company" except to
the extent the context otherwise requires - forms an integrated
fertilizer and related industrial and feed products company. The
company's accounting policies are in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"). The
accounting policies used in preparing these interim condensed
consolidated financial statements are consistent with those used in
the preparation of the 2005 annual consolidated financial
statements, except as described below. These interim condensed
consolidated financial statements include the accounts of PCS and
its subsidiaries; however, they do not include all disclosures
normally provided in annual consolidated financial statements and
should be read in conjunction with the 2005 annual consolidated
financial statements. In management's opinion, the unaudited
financial statements include all adjustments (consisting solely of
normal recurring adjustments) necessary to present fairly such
information. Interim results are not necessarily indicative of the
results expected for the fiscal year. Implicit Variable Interests
In January 2006, the company adopted Emerging Issues Committee
Abstract No. 157, "Implicit Variable Interests Under AcG-15"
("EIC-157"). This EIC addresses whether a company has an implicit
variable interest in a variable interest entity ("VIE") or
potential VIE when specific conditions exist. An implicit variable
interest acts the same as an explicit variable interest except that
it involves the absorbing and/or receiving of variability
indirectly from the entity (rather than directly). The
identification of an implicit variable interest is a matter of
judgment that depends on the relevant facts and circumstances. The
implementation of EIC-157 did not have a material impact on the
company's consolidated financial statements. Conditional Asset
Retirement Obligations In April 2006, the company adopted Emerging
Issues Committee Abstract No. 159, "Conditional Asset Retirement
Obligations" ("EIC-159"). This EIC clarifies the accounting
treatment for a legal obligation to perform an asset retirement
activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the
control of the entity. Under this EIC, an entity is required to
recognize a liability for the fair value of a conditional asset
retirement obligation if the fair value of the liability can be
reasonably estimated. The implementation of this EIC did not have a
material impact on the company's consolidated financial statements.
2. Other Assets In February 2006, the company acquired an
additional 10.01-percent interest in the ordinary shares of
Sinochem Hong Kong Holdings Limited ("Sinofert") for cash
consideration of $126.3. The purchase price was financed by
short-term debt. The additional investment increased the company's
interest in Sinofert to 20 percent. In April 2006, the company
purchased an additional 220,100 shares of Arab Potash Company Ltd.
("APC") for cash consideration of $3.7. The company's ownership
interest in APC remains at approximately 28 percent. 3. Income
Taxes The company's consolidated effective income tax rate for the
three month period ended June 30, 2006 is approximately negative 1
percent (2005 - 33 percent) and for the six months ended June 30,
2006 is approximately 12 percent (2005 - 33 percent). The reduction
in the consolidated effective income tax rates was due to the
following: - During the quarter ended June 30, 2006, the company
reduced its consolidated effective income tax rate from 33 percent
to 30 percent for the 2006 year. The impact of this change on prior
periods, as applicable, was reflected during the quarter. The
change was primarily attributable to two factors. First, during the
quarter ended June 30, 2006 the Province of Saskatchewan enacted
changes to the corporation income tax. The corporate income tax
rate will be reduced from 17 percent to 12 percent over the next
three years, with a 3 percentage point reduction (to 14 percent)
effective July 1, 2006 and further 1 percentage point reductions on
July 1, 2007 and July 1, 2008. The impact of this change on the
company's future income tax liability was recognized during the
second quarter of 2006. Second, during the three months ended June
30, 2006, the company revised its estimated allocation of annual
income before income taxes by jurisdiction. - During the quarter
ended June 30, 2006, the Government of Canada enacted changes to
the federal corporation income tax and the corporate surtax. The
federal corporate income tax rate will be reduced from 21 percent
to 19 percent over the next four years, with a 0.5 percentage point
reduction effective January 1, 2008 and January 1, 2009, and a
further 1 percentage point reduction on January 1, 2010. The
federal corporate surtax will be reduced from 1.12 percent to nil
in 2008. The impact of this change on the company's future income
tax liability was recognized during the second quarter of 2006. -
Income tax refunds totaling $15.8 were recorded relating to a
recent Canadian appeals court decision (pertaining to a uranium
producer) which affirmed the deductibility of the Saskatchewan
capital tax resource surcharge. Refunds related to the 2002-2004
taxation years were recognized during the three months ended March
31, 2006 and a refund in connection with the 2001 taxation year was
recognized during the three months ended June 30, 2006. The company
also expects income tax refunds in connection with the 1999-2000
taxation years, and a further refund in respect of the 2001
taxation year. These refunds are currently under review and have
not been reflected in these interim condensed consolidated
financial statements. 4. Net Income Per Share Basic net income per
share for the quarter is calculated on the weighted average shares
issued and outstanding for the three months ended June 30, 2006 of
103,794,000 (2005 - 109,636,000). Basic net income per share for
the year to date is calculated on the weighted average shares
issued and outstanding for the six months ended June 30, 2006 of
103,718,000 (2005 - 110,365,000). Diluted net income per share is
calculated based on the weighted average number of shares issued
and outstanding during the period. The denominator is: (i)
increased by the total of the additional common shares that would
have been issued assuming exercise of all stock options with
exercise prices at or below the average market price for the
period; and (ii) decreased by the number of shares that the company
could have repurchased if it had used the assumed proceeds from the
exercise of stock options to repurchase them on the open market at
the average share price for the period. The weighted average number
of shares outstanding for the diluted net income per share
calculation for the three months ended June 30, 2006 was
105,920,000 (2005 - 112,436,000) and for the six months ended June
30, 2006 was 105,879,000 (2005 - 113,406,000). 5. Segment
Information The company has three reportable business segments:
potash, nitrogen and phosphate. These business segments are
differentiated by the chemical nutrient contained in the product
that each produces. Inter-segment sales are made under terms that
approximate market value. The accounting policies of the segments
are the same as those described in Note 1. Three Months Ended June
30, 2006
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 296.4 $ 342.4 $ 289.9 $ - $ 928.7 Freight 32.8 9.1 20.4 -
62.3 Transportation and distribution 11.0 13.6 11.2 - 35.8 Net
sales - third party 252.6 319.7 258.3 - Cost of goods sold 119.8
228.0 229.4 - 577.2 Gross margin 132.8 91.7 28.9 - 253.4
Depreciation and amortization 15.0 19.0 22.9 3.5 60.4 Inter-segment
sales 0.8 28.5 2.4 - - Three Months Ended June 30, 2005
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 401.6 $ 364.4 $ 291.3 $ - $ 1,057.3 Freight 37.5 9.9 20.0 -
67.4 Transportation and distribution 9.5 13.8 8.8 - 32.1 Net sales
- third party 354.6 340.7 262.5 - Cost of goods sold 131.3 241.3
240.4 - 613.0 Gross margin 223.3 99.4 22.1 - 344.8 Depreciation and
amortization 18.3 17.5 24.0 2.6 62.4 Inter-segment sales 2.4 28.7
4.7 - - Six Months Ended June 30, 2006
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 522.2 $ 674.3 $ 593.8 $ - $ 1,790.3 Freight 57.8 18.7 40.7
- 117.2 Transportation and distribution 18.4 26.9 21.7 - 67.0 Net
sales - third party 446.0 628.7 531.4 - Cost of goods sold 222.4
457.6 469.2 - 1,149.2 Gross margin 223.6 171.1 62.2 - 456.9
Depreciation and amortization 26.8 38.3 47.2 6.9 119.2
Inter-segment sales 4.8 60.4 4.6 - - Six Months Ended June 30, 2005
-------------------------------------------------------------------------
Consol- Potash Nitrogen Phosphate All Others idated
-------------------------------------------------------------------------
Sales $ 753.7 $ 669.2 $ 555.8 $ - $ 1,978.7 Freight 74.7 20.1 39.8
- 134.6 Transportation and distribution 18.6 25.5 16.9 - 61.0 Net
sales - third party 660.4 623.6 499.1 - Cost of goods sold 260.9
458.9 460.0 - 1,179.8 Gross margin 399.5 164.7 39.1 - 603.3
Depreciation and amortization 36.4 34.4 46.3 4.9 122.0
Inter-segment sales 4.4 48.5 8.9 - - 6. Stock-Based Compensation On
May 4, 2006, the company's shareholders approved the 2006
Performance Option Plan under which the company may, after February
27, 2006 and before January 1, 2007, issue options to acquire up to
1,400,000 common shares. Under the plan, the exercise price is the
quoted market closing price of the company's common shares on the
last trading day immediately preceding the date of grant, and an
option's maximum term is 10 years. In general, options will vest,
if at all, according to a schedule based on the three-year average
excess of the company's consolidated cash flow return on investment
over weighted average cost of capital. As of June 30, 2006, options
to purchase a total of 894,900 common shares have been granted
under the plan. The weighted average fair value of options granted
was $38.53 per share, estimated as of the date of grant using the
Black-Scholes-Merton option-pricing model with the following
weighted average assumptions: Expected dividend $0.60 Expected
volatility 30% Risk-free interest rate 4.90% Expected life of
options 6.5 years 7. Pension and Other Post-Retirement Expenses
Defined Benefit Three Months Ended Six Months Ended Pension Plans
June 30 June 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Service cost $ 3.6 $ 3.4 $ 7.2 $ 7.0 Interest cost 8.4 7.8 16.8
15.6 Expected return on plan assets (9.6) (9.5) (19.2) (18.4) Net
amortization 2.8 1.3 5.7 3.0
-------------------------------------------------------------------------
Net expense $ 5.2 $ 3.0 $ 10.5 $ 7.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Other Post-Retirement Plans Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Service cost $ 1.2 $ 1.4 $ 2.4 $ 2.8 Interest cost 3.1 3.3 6.1 6.6
Net amortization (0.1) 0.4 (0.2) 0.8
-------------------------------------------------------------------------
Net expense $ 4.2 $ 5.1 $ 8.3 $ 10.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
For the three months ended June 30, 2006, the company contributed
$6.7 to its defined benefit pension plans, $2.9 to its defined
contribution pension plans and $2.2 to its other post-retirement
plans. Contributions for the six months ended June 30, 2006 were
$13.5 to defined benefit pension plans, $8.9 to defined
contribution pension plans and $4.3 to other post-retirement plans.
Total 2006 contributions to these plans are not expected to differ
significantly from the amounts previously disclosed in the
consolidated financial statements for the year ended December 31,
2005. 8. Other Income Three Months Ended Six Months Ended June 30
June 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Share of earnings of equity investees $ 16.0 $ 13.4 $ 28.4 $ 26.5
Dividend income 3.0 - 12.1 3.1 Other 1.0 0.5 10.7 4.3
-------------------------------------------------------------------------
$ 20.0 $ 13.9 $ 51.2 $ 33.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
9. Comparative Figures Certain of the prior periods' figures have
been reclassified to conform with the current periods'
presentation. Potash Corporation of Saskatchewan Inc. Selected
Operating and Revenue Data (unaudited) Three Months Ended Six
Months Ended June 30 June 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Potash Operating Data Production (KCl Tonnes - thousands) 1,894
2,372 3,189 4,761 Shutdown weeks 16.7 9.0 48.4 9.0 Sales (tonnes -
thousands) North America 739 973 1,266 1,895 Offshore 951 1,427
1,683 2,828
-------------------------------------------------------------------------
1,690 2,400 2,949 4,723
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Net Sales (US $ millions) Sales $296.4 $401.6 $522.2 $753.7
Less: Freight 32.8 37.5 57.8 74.7 Transportation and distribution
11.0 9.5 18.4 18.6
-------------------------------------------------------------------------
Net Sales $252.6 $354.6 $446.0 $660.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
North America $129.2 $155.7 $221.1 $284.6 Offshore 122.0 196.0
219.2 368.8
-------------------------------------------------------------------------
Potash Subtotal 251.2 351.7 440.3 653.4 Miscellaneous products 1.4
2.9 5.7 7.0
-------------------------------------------------------------------------
$252.6 $354.6 $446.0 $660.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Average Net Sales Price per MT North America $174.65 $159.98
$174.51 $150.19 Offshore $128.24 $137.31 $130.27 $130.40
-------------------------------------------------------------------------
$148.54 $146.54 $149.27 $138.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Corporation of Saskatchewan Inc. Selected Operating and
Revenue Data (unaudited) Three Months Ended Six Months Ended June
30 June 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Nitrogen Operating Data Production (N Tonnes - thousands) 622 674
1,181 1,312 Average Natural Gas Cost per MMBtu $3.86 $4.02 $4.08
$3.87 Sales (tonnes - thousands) Manufactured Product Ammonia 442
482 806 888 Urea 328 331 609 690 Nitrogen solutions/Nitric
acid/Ammonium nitrate 468 479 850 929
-------------------------------------------------------------------------
Manufactured Product 1,238 1,292 2,265 2,507 Purchased Product 15
103 69 196
-------------------------------------------------------------------------
1,253 1,395 2,334 2,703
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer sales tonnes 415 545 737 1,008 Industrial/Feed sales
tonnes 838 850 1,597 1,695
-------------------------------------------------------------------------
1,253 1,395 2,334 2,703
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Net Sales (US $ millions) Sales $342.4 $364.4 $674.3
$669.2 Less: Freight 9.1 9.9 18.7 20.1 Transportation and
distribution 13.6 13.8 26.9 25.5
-------------------------------------------------------------------------
Net Sales $319.7 $340.7 $628.7 $623.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Manufactured Product Ammonia $135.7 $139.6 $258.7 $238.5 Urea 87.4
92.4 168.8 182.8 Nitrogen solutions/Nitric acid/Ammonium nitrate
83.9 72.8 164.9 138.0 Miscellaneous 8.1 7.0 14.7 12.2
-------------------------------------------------------------------------
Manufactured Product 315.1 311.8 607.1 571.5 Purchased Product 4.6
28.9 21.6 52.1
-------------------------------------------------------------------------
$319.7 $340.7 $628.7 $623.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer net sales $105.9 $141.6 $194.0 $247.4 Industrial/Feed
net sales 213.8 199.1 434.7 376.2
-------------------------------------------------------------------------
$319.7 $340.7 $628.7 $623.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nitrogen Average Net Sales Price per MT Ammonia $307.27 $289.70
$321.02 $268.71 Urea $266.34 $279.05 $277.16 $264.68 Nitrogen
solutions/Nitric acid/Ammonium nitrate $178.98 $152.17 $193.80
$148.58
-------------------------------------------------------------------------
Manufactured Product $254.41 $241.39 $267.91 $227.96 Purchased
Product $312.29 $278.40 $315.86 $265.32
-------------------------------------------------------------------------
$255.10 $244.14 $269.32 $230.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer average price per MT $254.82 $259.76 $263.05 $245.57
Industrial/Feed average price per MT $255.23 $234.12 $272.22
$221.82
-------------------------------------------------------------------------
$255.10 $244.14 $269.32 $230.68
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Potash Corporation of Saskatchewan Inc. Selected Operating and
Revenue Data (unaudited) Three Months Ended Six Months Ended June
30 June 30 2006 2005 2006 2005
-------------------------------------------------------------------------
Phosphate Operating Data Production (P2O5 Tonnes - thousands) 471
506 984 1,008 P2O5 Operating Rate 83% 81% 87% 81% Sales (tonnes -
thousands) Fertilizer - Liquid phosphates 185 171 445 421
Fertilizer - Solid phosphates 385 467 762 794 Feed 197 222 362 452
Industrial 156 176 329 331
-------------------------------------------------------------------------
923 1,036 1,898 1,998
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Net Sales (US $ millions) Sales $289.9 $291.3 $593.8
$555.8 Less: Freight 20.4 20.0 40.7 39.8 Transportation and
distribution 11.2 8.8 21.7 16.9
-------------------------------------------------------------------------
Net Sales $258.3 $262.5 $531.4 $499.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fertilizer - Liquid phosphates $42.6 $40.4 $104.5 $93.0 Fertilizer
- Solid phosphates 93.8 102.7 186.9 174.0 Feed 60.0 55.6 112.3
110.7 Industrial 58.7 60.0 121.9 114.7 Miscellaneous 3.2 3.8 5.8
6.7
-------------------------------------------------------------------------
$258.3 $262.5 $531.4 $499.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Phosphate Average Net Sales Price per MT Fertilizer - Liquid
phosphates $230.34 $235.83 $234.89 $220.87 Fertilizer - Solid
phosphates $244.11 $219.91 $245.47 $219.08 Feed $305.46 $250.13
$310.82 $244.59 Industrial $376.46 $340.61 $369.92 $346.60
-------------------------------------------------------------------------
$280.25 $253.23 $280.09 $249.69
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Exchange Rate (Cdn$/US$) 2006 2005
-------------------------------------------------------------------------
December 31 1.1659 June 30 1.1150 1.2256 Second-quarter average
conversion rate 1.1369 1.2359 Potash Corporation of Saskatchewan
Inc. Selected Non-GAAP Financial Measures and Reconciliations (in
millions of US dollars) (unaudited) The following information is
included for convenience only. Generally, a non-GAAP financial
measure is a numerical measure of a company's performance,
financial position or cash flows that either excludes or includes
amounts that are not normally excluded or included in the most
directly comparable measure calculated and presented in accordance
with generally accepted accounting principles ("GAAP"). EBITDA,
cash flow prior to working capital changes and free cash flow are
not measures of financial performance (nor do they have
standardized meanings) under either Canadian GAAP or US GAAP. In
evaluating these measures, investors should consider that the
methodology applied in calculating such measures may differ among
companies and analysts. The company uses both GAAP and certain
non-GAAP measures to assess performance. The company's management
believes these non-GAAP measures provide useful supplemental
information to investors in order that they may evaluate
PotashCorp's financial performance using the same measures as
management. PotashCorp's management believes that, as a result, the
investor is afforded greater transparency in assessing the
financial performance of the company. These non-GAAP financial
measures should not be considered as a substitute for, nor superior
to, measures of financial performance prepared in accordance with
GAAP. A. EBITDA ------ Set forth below is a reconciliation of
"EBITDA" to net income, the most directly comparable financial
measure calculated and presented in accordance with Canadian GAAP.
Three Months Ended Six Months Ended June 30 June 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Net income $ 175.1 $ 164.2 $ 300.6 $ 295.5 Income taxes (1.1) 80.9
42.3 145.6 Interest expense 20.7 20.6 43.9 41.3 Depreciation and
amortization 60.4 62.4 119.2 122.0
-------------------------------------------------------------------------
EBITDA $ 255.1 $ 328.1 $ 506.0 $ 604.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
EBITDA is calculated as earnings before interest, income taxes,
depreciation and amortization. PotashCorp uses EBITDA as a
supplemental financial measure of its operational performance.
Management believes EBITDA to be an important measure as it
excludes the effects of items which primarily reflect the impact of
long-term investment decisions, rather than the performance of the
company's day-to-day operations. As compared to net income
according to GAAP, this measure is limited in that it does not
reflect the periodic costs of certain capitalized tangible and
intangible assets used in generating revenues in the company's
business. Management evaluates such items through other financial
measures such as capital expenditures and cash flow provided by
operating activities. The company believes that this measurement is
useful to measure a company's ability to service debt and to meet
other payment obligations or as a valuation measurement. Potash
Corporation of Saskatchewan Inc. Selected Non-GAAP Financial
Measures and Reconciliations (in millions of US dollars)
(unaudited) B. CASH FLOW --------- Set forth below is a
reconciliation of "cash flow prior to working capital changes" and
"free cash flow" to cash provided by operating activities, the most
directly comparable financial measure calculated and presented in
accordance with Canadian GAAP. Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------------------------
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash flow prior to working capital changes(1) $ 257.0 $ 270.9 $
446.4 $ 462.2
-------------------------------------------------------------------------
Changes in non-cash operating working capital Accounts receivable
(11.8) 35.5 51.5 (28.0) Inventories (10.4) 11.3 (1.5) 9.6 Prepaid
expenses and other current assets (6.7) 6.7 (33.7) 0.5 Accounts
payable and accrued charges (86.9) 23.9 (334.0) 25.7
-------------------------------------------------------------------------
Changes in non-cash operating working capital (115.8) 77.4 (317.7)
7.8
-------------------------------------------------------------------------
Cash provided by operating activities $ 141.2 $ 348.3 $ 128.7 $
470.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Free cash flow(2) $ 133.4 $ 196.5 $ 198.3 $ 327.8 Additions to
property, plant and equipment 131.1 74.4 251.1 137.4 Other assets
and intangible assets (7.5) - (3.0) (3.0) Changes in non-cash
operating working capital (115.8) 77.4 (317.7) 7.8
-------------------------------------------------------------------------
Cash provided by operating activities $ 141.2 $ 348.3 $ 128.7 $
470.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(1) The company uses cash flow prior to working capital changes as
a supplemental financial measure in its evaluation of liquidity.
Management believes that adjusting principally for the swings in
non-cash working capital items due to seasonality assists
management in making long-term liquidity assessments. The company
also believes that this measurement is useful as a measure of
liquidity or as a valuation measurement. (2) The company uses free
cash flow as a supplemental financial measure in its evaluation of
liquidity and financial strength. Management believes that
adjusting principally for the swings in non-cash operating working
capital items due to seasonality, additions to property, plant and
equipment, and changes to other assets assists management in the
long-term assessment of liquidity and financial strength. The
company also believes that this measurement is useful as an
indicator of the company's ability to service its debt, meet other
payment obligations and make strategic investments. Readers should
be aware that free cash flow does not represent residual cash flow
available for discretionary expenditures. Certain of the prior
periods' figures have been reclassified to conform with the current
periods' presentation. DATASOURCE: Potash Corporation of
Saskatchewan Inc. CONTACT: Betty-Ann Heggie, Senior Vice President,
Corporate Relations, Phone: (306) 933-8521, Fax: (306) 933-8844,
E-mail: , Web Site: http://www.potashcorp.com/
Copyright