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POTASH CORP OF SASKATCHEWAN INC 10-Q 2010
10-Q
Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
FORM 10-Q
 
 
     
     
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the Quarterly Period Ended September 30, 2010
 
OR
     
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number 1-10351
 
 
 
POTASH CORPORATION OF SASKATCHEWAN INC.
(Exact name of registrant as specified in its charter)
 
 
 
     
Canada   N/A
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
122 – 1st Avenue South
Saskatoon, Saskatchewan, Canada
(Address of principal executive offices)
  S7K 7G3
(Zip Code)
 
 
306-933-8500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES þ     NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
YES o     NO o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
             
Large accelerated filer þ
  Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
 
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).
 
YES o     NO þ
 
As at October 31, 2010, Potash Corporation of Saskatchewan Inc. had 297,686,739 Common Shares outstanding.
 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Financial Position
Condensed Consolidated Statements of Operations and Retained Earnings
Condensed Consolidated Statements of Cash Flow
Condensed Consolidated Statements of Comprehensive Income
Condensed Consolidated Statements of Accumulated Other Comprehensive Income
Notes to the Condensed Consolidated Financial Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
SIGNATURES
EXHIBIT INDEX
EX-11
EX-31.A
EX-31.B
EX-32


Table of Contents

 
PART I.  FINANCIAL INFORMATION
 
ITEM 1.   FINANCIAL STATEMENTS
 
Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Financial Position
(in millions of US dollars except share amounts)
(unaudited)
 
                 
    September 30,
    December 31,
 
    2010     2009(1)  
   
 
Assets
               
Current assets
               
Cash and cash equivalents
  $ 359.8     $ 385.4  
Receivables (Note 2)
    975.1       1,137.9  
Inventories (Note 3)
    507.8       623.5  
Prepaid expenses and other current assets
    132.3       124.9  
 
 
      1,975.0       2,271.7  
Property, plant and equipment
    7,579.7       6,413.3  
Investments
    4,459.5       3,760.3  
Other assets
    402.3       359.9  
Intangible assets
    18.5       20.0  
Goodwill
    97.0       97.0  
 
 
    $ 14,532.0     $ 12,922.2  
 
 
Liabilities
               
Current liabilities
               
Short-term debt and current portion of long-term debt
  $ 993.4     $ 728.8  
Payables and accrued charges
    1,114.7       796.8  
Current portion of derivative instrument liabilities
    92.1       51.8  
 
 
      2,200.2       1,577.4  
Long-term debt (Note 4)
    2,721.6       3,319.3  
Derivative instrument liabilities
    223.6       123.2  
Future income tax liability
    967.7       962.4  
Accrued pension and other post-retirement benefits
    295.0       280.8  
Accrued environmental costs and asset retirement obligations
    267.8       215.1  
Other non-current liabilities and deferred credits
    5.6       4.2  
 
 
      6,681.5       6,482.4  
 
 
Contingencies and Guarantees (Notes 15 and 16, respectively)
               
Shareholders’ Equity (Note 7)
               
Share capital
    1,481.6       1,430.3  
Unlimited authorization of common shares without par value; issued and outstanding 297,559,913 and 295,975,550 at September 30, 2010 and December 31, 2009, respectively
               
Unlimited authorization of first preferred shares; none outstanding
               
Contributed surplus
    160.1       149.5  
Accumulated other comprehensive income
    1,762.9       1,648.8  
Retained earnings
    4,445.9       3,211.2  
 
 
      7,850.5       6,439.8  
 
 
    $ 14,532.0     $ 12,922.2  
 
 
 
(1) Corrected as described in Note 18.
 
(See Notes to the Condensed Consolidated Financial Statements)


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Table of Contents

Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Operations and Retained Earnings
(in millions of US dollars except per-share amounts)
(unaudited)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30     September 30  
    2010     2009(1)     2010     2009(1)  
   
 
Sales (Note 6)
  $ 1,575.0     $ 1,099.1     $ 4,726.4     $ 2,877.6  
Less: Freight
    81.1       53.7       250.4       130.2  
         Transportation and distribution
    37.9       36.3       122.8       101.0  
         Cost of goods sold
    892.7       664.4       2,491.2       1,904.5  
 
 
Gross Margin
    563.3       344.7       1,862.0       741.9  
 
 
Selling and administrative
    75.2       35.9       169.7       132.7  
Provincial mining and other taxes
    16.2       2.1       55.9       17.0  
Foreign exchange (gain) loss
    (1.7 )     (9.0 )     7.2       (1.3 )
Other income (Note 9)
    (65.6 )     (41.2 )     (241.1 )     (264.6 )
 
 
      24.1       (12.2 )     (8.3 )     (116.2 )
 
 
Operating Income
    539.2       356.9       1,870.3       858.1  
Interest Expense (Note 10)
    16.5       31.1       69.7       80.8  
 
 
Income Before Income Taxes
    522.7       325.8       1,800.6       777.3  
Income Taxes (Note 11)
    120.0       77.9       476.7       35.8  
 
 
Net Income
  $ 402.7     $ 247.9       1,323.9       741.5  
                     
                     
Retained Earnings, Beginning of Period
                    3,211.2       2,348.5  
Dividends
                    (89.2 )     (88.7 )
 
 
Retained Earnings, End of Period
                  $ 4,445.9     $ 3,001.3  
 
 
Net Income Per Share (Note 12)
                               
Basic
  $ 1.36     $ 0.84     $ 4.47     $ 2.51  
Diluted
  $ 1.32     $ 0.82     $ 4.34     $ 2.44  
 
 
Dividends Per Share
  $ 0.10     $ 0.10     $ 0.30     $ 0.30  
 
 
 
(1) Corrected as described in Note 18.
 
(See Notes to the Condensed Consolidated Financial Statements)


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Table of Contents

Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Cash Flow
(in millions of US dollars)
(unaudited)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30     September 30  
    2010     2009(1)     2010     2009(1)  
   
 
Operating Activities
                               
Net income
  $ 402.7     $ 247.9     $ 1,323.9     $ 741.5  
 
 
Adjustments to reconcile net income to cash provided by operating activities
                               
Depreciation and amortization
    96.4       83.4       297.4       227.5  
Stock-based compensation
    3.0       3.6       21.6       26.2  
Loss (gain) on disposal of property, plant and equipment
                               
and long-term investments
    0.2       7.0       3.5       (106.9 )
Foreign exchange on future income tax and miscellaneous items
    (0.4 )     1.1       1.7       (1.0 )
(Recovery of) provision for future income tax
    (10.8 )     140.3       50.0       64.0  
Undistributed earnings of equity investees
    (51.0 )     (32.5 )     (78.5 )     (1.3 )
Derivative instruments
    (9.3 )     (28.2 )     4.2       (70.0 )
Other long-term liabilities
    (31.2 )     (62.8 )     6.0       (32.6 )
 
 
Subtotal of adjustments
    (3.1 )     111.9       305.9       105.9  
 
 
Changes in non-cash operating working capital
                               
Receivables
    (174.8 )     (139.0 )     174.6       52.9  
Inventories
    146.8       9.4       117.1       70.5  
Prepaid expenses and other current assets
    (12.8 )     44.4       (44.7 )     (9.2 )
Payables and accrued charges
    145.0       46.2       322.3       (605.8 )
 
 
Subtotal of changes in non-cash operating working capital
    104.2       (39.0 )     569.3       (491.6 )
 
 
Cash provided by operating activities
    503.8       320.8       2,199.1       355.8  
 
 
Investing Activities
                               
Additions to property, plant and equipment
    (504.6 )     (424.5 )     (1,394.1 )     (1,190.2 )
Purchase of long-term investments
    -       -       (422.3 )     -  
Proceeds from disposal of property, plant and equipment and long-term investments
    0.2       0.1       0.5       148.4  
Other assets and intangible assets
    (2.2 )     (25.6 )     (27.7 )     (36.1 )
 
 
Cash used in investing activities
    (506.6 )     (450.0 )     (1,843.6 )     (1,077.9 )
 
 
Cash before financing activities
    (2.8 )     (129.2 )     355.5       (722.1 )
 
 
Financing Activities
                               
Proceeds from long-term debt obligations
    -       1,478.7       400.0       4,033.7  
Repayment of and finance costs on long-term debt obligations
    -       (1,062.2 )     (400.4 )     (3,291.4 )
Proceeds from (repayment of) short-term debt obligations
    0.4       (246.2 )     (332.0 )     165.3  
Dividends
    (29.8 )     (29.2 )     (89.0 )     (87.9 )
Issuance of common shares
    25.3       8.0       40.3       16.8  
 
 
Cash (used in) provided by financing activities
    (4.1 )     149.1       (381.1 )     836.5  
 
 
(Decrease) Increase in Cash and Cash Equivalents
    (6.9 )     19.9       (25.6 )     114.4  
Cash and Cash Equivalents, Beginning of Period
    366.7       371.3       385.4       276.8  
 
 
Cash and Cash Equivalents, End of Period
  $ 359.8     $ 391.2     $ 359.8     $ 391.2  
 
 
Cash and cash equivalents comprised of:
                               
Cash
  $ 91.1     $ 98.5     $ 91.1     $ 98.5  
Short-term investments
    268.7       292.7       268.7       292.7  
 
 
    $ 359.8     $ 391.2     $ 359.8     $ 391.2  
 
 
Supplemental cash flow disclosure
                               
Interest paid
  $ 1.2     $ 10.1     $ 54.9     $ 56.1  
Income taxes paid (recovered)
  $ 64.3     $ 3.0     $ (76.0 )   $ 739.2  
 
 
 
(1) Corrected as described in Note 18.
 
(See Notes to the Condensed Consolidated Financial Statements)


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Table of Contents

Potash Corporation of Saskatchewan Inc.

Condensed Consolidated Statements of Comprehensive Income
(in millions of US dollars)
(unaudited)
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30     September 30  
(Net of related income taxes)   2010     2009(1)     2010     2009(1)  
   
 
Net Income
  $ 402.7     $ 247.9     $ 1,323.9     $ 741.5  
 
 
Other comprehensive income
                               
Net increase in unrealized gains on available-for-sale securities(2)
    924.1       115.8       202.1       553.4  
Net losses on derivatives designated as cash flow hedges(3)
    (60.9 )     (11.1 )     (124.8 )     (39.9 )
Reclassification to income of net losses on cash flow hedges(4)
    12.5       14.5       36.1       39.9  
Unrealized foreign exchange gains on translation of self-sustaining foreign operations
    1.5       4.7       0.1       12.0  
Share of other comprehensive income of equity investees
    3.0       -       0.6       -  
 
 
Other Comprehensive Income
    880.2       123.9       114.1       565.4  
 
 
Comprehensive Income
  $ 1,282.9     $ 371.8     $ 1,438.0     $ 1,306.9  
 
 
 
(1) Corrected as described in Note 18.
 
(2) Available-for-sale securities are comprised of shares in Israel Chemicals Ltd. and Sinofert Holdings Limited and investments in auction rate securities. The amounts are net of income taxes of $NIL (2009 — $NIL) for the three months ended September 30, 2010 and $NIL (2009 — $26.5) for the nine months ended September 30, 2010.
 
(3) Cash flow hedges are comprised of natural gas derivative instruments, and are net of income taxes of $(36.8) (2009 — $(6.8)) for the three months ended September 30, 2010 and $(75.5) (2009 — $(24.3)) for the nine months ended September 30, 2010.
 
(4) Net of income taxes of $7.5 (2009 — $8.9) for the three months ended September 30, 2010 and $21.8 (2009 — $24.3) for the nine months ended September 30, 2010.
 
Condensed Consolidated Statements of Accumulated Other Comprehensive Income
(in millions of US dollars)
(unaudited)
 
                 
    September 30,
    December 31,
 
(Net of related income taxes)   2010     2009(1)  
   
 
Unrealized gains on available-for-sale securities(2)
  $ 1,952.5     $ 1,750.4  
Net unrealized losses on derivatives designated as cash flow hedges(3)
    (200.1 )     (111.4 )
Unrealized foreign exchange gains on self-sustaining foreign operations(4)
    9.9       9.8  
Share of other comprehensive income of equity investees(5)
    0.6       -  
 
 
Accumulated other comprehensive income
    1,762.9       1,648.8  
Retained earnings
    4,445.9       3,211.2  
 
 
Accumulated Other Comprehensive Income and Retained Earnings
  $ 6,208.8     $ 4,860.0  
 
 
 
(1) Corrected as described in Note 18.
 
(2) $2,102.9 before income taxes (2009 — $1,900.8).
 
(3) $(320.0) before income taxes (2009 — $(177.6)).
 
(4) $9.9 before income taxes (2009 — $9.8).
 
(5) $0.6 before income taxes (2009 — $NIL).
 
(See Notes to the Condensed Consolidated Financial Statements)


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Table of Contents

 
Potash Corporation of Saskatchewan Inc.

Notes to the Condensed Consolidated Financial Statements
For the Three and Nine Months Ended September 30, 2010
(in millions of US dollars except share, per-share, percentage and ratio amounts)
(unaudited)
 
1.   Significant Accounting Policies
 
Basis of Presentation
 
With its subsidiaries, Potash Corporation of Saskatchewan Inc. (“PCS”) — together known as “PotashCorp” or “the company” except to the extent the context otherwise requires — forms an integrated fertilizer and related industrial and feed products company. The company’s accounting policies are in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). These policies are consistent with accounting principles generally accepted in the United States (“US GAAP”) in all material respects except as outlined in Note 17. The accounting policies used in preparing these unaudited interim condensed consolidated financial statements are consistent with those used in the preparation of the 2009 annual consolidated financial statements.
 
These unaudited interim condensed consolidated financial statements include the accounts of PCS and its subsidiaries; however, they do not include all disclosures normally provided in annual consolidated financial statements and should be read in conjunction with the 2009 annual consolidated financial statements. In management’s opinion, the unaudited interim condensed consolidated 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.
 
Recent Accounting Pronouncements
 
IFRSs
 
International Financial Reporting Standards (“IFRSs”) have been incorporated into the CICA Accounting Handbook effective for interim and annual financial statements relating to fiscal years beginning on or after January 1, 2011. At this date, publicly accountable enterprises in Canada will be required to prepare financial statements in accordance with IFRSs. Incorporation of IFRSs into the CICA Accounting Handbook makes possible the early adoption of IFRSs by Canadian entities. The company is currently reviewing the standards to determine the potential impact on its consolidated financial statements.
 
2.   Receivables
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
 
Trade accounts — Canpotex Limited (“Canpotex”)
  $ 183.1     $ 164.3  
          — Other
    502.0       264.4  
Less allowance for doubtful accounts
    (8.4 )     (8.4 )
 
 
      676.7       420.3  
Margin deposits on derivative instruments
    224.1       108.9  
Income taxes receivable
    27.2       287.4  
Provincial mining and other taxes receivable
    -       234.6  
Other non-trade accounts
    47.1       86.7  
 
 
    $   975.1     $ 1,137.9  
 
 


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Table of Contents

 
3.   Inventories
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
 
Finished products
  $ 184.6     $ 303.1  
Intermediate products
    141.9       158.9  
Raw materials
    58.4       50.6  
Materials and supplies
    122.9       110.9  
 
 
    $   507.8     $   623.5  
 
 
 
                                 
    Three Months Ended
    Nine Months Ended
 
    September 30     September 30  
Items affecting cost of goods sold   2010     2009     2010     2009  
   
 
Expensed inventories
  $ 826.9     $ 579.5     $ 2,313.3     $ 1,581.3  
Writedowns of finished products
    -       5.0       4.5       45.2  
Writedowns of intermediate products
    -       4.7       0.3       4.7  
Writedowns of raw materials
    -       1.4       -       1.4  
Reserves for obsolete materials and supplies
    0.5       0.5       1.5       1.8  
Reversals of writedowns
    (0.4 )     (1.7 )     (2.1 )     (7.3 )
 
 
    $   827.0     $   589.4     $  2,317.5     $  1,627.1  
 
 
 
The carrying amount of inventory recorded at net realizable value was $0.6 at September 30, 2010 and $33.5 at December 31, 2009 with the remaining inventory recorded at cost.
 
4.   Long-Term Debt
 
During the three months ended September 30, 2010, the company did not receive any proceeds nor make any repayments under its long-term credit facilities. During the nine months ended September 30, 2010, the company received proceeds from its long-term credit facilities of $400.0, and made repayments of $400.0 under these facilities.
 
During the second quarter of 2010, the company classified the $600.0 aggregate principal amount of 7.750 percent senior notes due May 31, 2011 as current.
 
5.   Capital Management
 
The company’s objectives when managing its capital are to maintain financial flexibility while managing its cost of, and optimizing access to, capital. In order to achieve these objectives, its strategy, which was unchanged from 2009, was to maintain its investment grade credit rating.
 
The company includes net debt and adjusted shareholders’ equity as components of its capital structure. The calculation of net debt, adjusted shareholders’ equity and adjusted capital are set out in the following table:
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
 
Short-term debt and current portion of long-term debt
  $ 993.4     $ 728.8  
Long-term debt
    2,721.6       3,319.3  
 
 
Total debt
    3,715.0       4,048.1  
Less: cash and cash equivalents
    359.8       385.4  
 
 
Net debt
    3,355.2       3,662.7  
 
 
                 
Shareholders’ equity
    7,850.5       6,439.8  
Less: accumulated other comprehensive income
    1,762.9       1,648.8  
 
 
Adjusted shareholders’ equity
    6,087.6       4,791.0  
 
 
                 
Adjusted capital(1)
  $ 9,442.8     $ 8,453.7  
 
 
 
(1) Adjusted capital = (total debt – cash and cash equivalents) + (shareholders’ equity – accumulated other comprehensive income).


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The company monitors capital on the basis of a number of factors, including the ratios of: earnings before interest expense, income taxes, depreciation and amortization, and gain on disposal of auction rate securities (“adjusted EBITDA”) to adjusted interest expense; net debt to adjusted EBITDA and net debt to adjusted capital. Adjusted EBITDA to adjusted interest expense and net debt to adjusted EBITDA are calculated utilizing 12-month trailing adjusted EBITDA and adjusted interest expense.
 
                 
    As At or For the
 
    12 Months Ended  
    September 30,
    December 31,
 
    2010     2009  
   
 
Components of ratios
               
Adjusted EBITDA (12 months ended)
  $ 2,575.0     $ 1,377.6  
Net debt
  $ 3,355.2     $ 3,662.7  
Adjusted interest expense (12 months ended)
  $ 219.2     $ 189.1  
Adjusted capital
  $ 9,442.8     $ 8,453.7  
Ratios
               
Adjusted EBITDA to adjusted interest expense(1)
    11.7       7.3  
Net debt to adjusted EBITDA(2)
    1.3       2.7  
Net debt to adjusted capital(3)
    35.5%       43.3%  
 
(1) Adjusted EBITDA to adjusted interest expense = adjusted EBITDA (12 months ended) / adjusted interest expense (12 months ended).
 
(2) Net debt to adjusted EBITDA = (total debt – cash and cash equivalents) / adjusted EBITDA (12 months ended).
 
(3) Net debt to adjusted capital = (total debt – cash and cash equivalents) / (total debt – cash and cash equivalents + shareholders’ equity – accumulated other comprehensive income).
 
The company monitors its capital structure and, based on changes in economic conditions, may adjust the structure through adjustments to the amount of dividends paid to shareholders, repurchase of shares, issuance of new shares or issuance of new debt.
 
The increase in adjusted EBITDA to adjusted interest expense is a result of adjusted EBITDA increasing more than the increase in adjusted interest expense. The net-debt-to-adjusted-EBITDA ratio decreased as net debt decreased and adjusted EBITDA increased. Net-debt-to-adjusted-capital ratio decreased as net debt decreased and adjusted capital increased.
 
The calculations of the twelve-month trailing net income, adjusted EBITDA, interest expense and adjusted interest expense are set out in the following tables:
 
                                                 
    Twelve
                            Twelve
 
    Months Ended
    Three Months Ended     Months Ended
 
    September 30,
    September 30,
    June 30,
    March 31,
    December 31,
    December 31,
 
    2010     2010     2010     2010     2009     2009  
   
 
Net income
  $  1,563.1     $  402.7     $  472.0     $  449.2     $  239.2     $  980.7  
Income taxes
    520.1       120.0       174.3       182.4       43.4       79.2  
Interest expense
    109.8       16.5       22.7       30.5       40.1       120.9  
Depreciation and amortization
    382.0       96.4       99.9       101.1       84.6       312.1  
Gain on disposal of auction rate securities
    -       -       -       -       -       (115.3 )
 
 
Adjusted EBITDA
  $ 2,575.0     $ 635.6     $ 768.9     $ 763.2     $ 407.3     $ 1,377.6  
 
 
 


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    Twelve
                            Twelve
 
    Months Ended
    Three Months Ended     Months Ended
 
    September 30,
    September 30,
    June 30,
    March 31,
    December 31,
    December 31,
 
    2010     2010     2010     2010     2009     2009  
   
 
Interest expense
  $ 109.8     $ 16.5     $ 22.7     $ 30.5     $ 40.1     $ 120.9  
Interest capitalized to property, plant and equipment
    109.4       37.0       30.3       20.7       21.4       68.2  
 
 
Adjusted interest expense
  $   219.2     $   53.5     $   53.0     $   51.2     $   61.5     $   189.1  
 
 
 
6.   Segment Information
 
The company has three reportable business segments: potash, phosphate and nitrogen. These business segments are differentiated by the chemical nutrient contained in the product that each produces. Inter-segment sales are made under terms that approximate market value. The accounting policies of the segments are the same as those described in Note 1.
 
                                         
    Three Months Ended September 30, 2010  
   
    Potash     Phosphate     Nitrogen     All Others     Consolidated  
   
 
Sales
  $   637.2     $   536.0     $   401.8     $       -     $  1,575.0  
Freight
    40.1       30.6       10.4       -       81.1  
Transportation and distribution
    15.0       13.5       9.4       -       37.9  
Net sales — third party
    582.1       491.9       382.0       -          
Cost of goods sold
    218.6       392.4       281.7       -       892.7  
Gross margin
    363.5       99.5       100.3       -       563.3  
Depreciation and amortization
    26.8       46.1       21.1       2.4       96.4  
Inter-segment sales
    -       -       27.6       -       -  
 
                                         
    Three Months Ended September 30, 2009  
   
    Potash     Phosphate     Nitrogen     All Others     Consolidated  
   
 
Sales
  $   423.4     $   357.4     $   318.3     $       -     $  1,099.1  
Freight
    16.8       24.3       12.6       -       53.7  
Transportation and distribution
    9.2       13.9       13.2       -       36.3  
Net sales — third party
    397.4       319.2       292.5       -          
Cost of goods sold
    146.0       276.5       241.9       -       664.4  
Gross margin
    251.4       42.7       50.6       -       344.7  
Depreciation and amortization
    13.2       43.1       25.1       2.0       83.4  
Inter-segment sales
    -       -       23.3       -       -  
 
                                         
    Nine Months Ended September 30, 2010  
   
    Potash     Phosphate     Nitrogen     All Others     Consolidated  
   
 
Sales
  $  2,170.4     $  1,300.8     $  1,255.2     $       -     $  4,726.4  
Freight
    142.9       75.2       32.3       -       250.4  
Transportation and distribution
    59.5       31.3       32.0       -       122.8  
Net sales — third party
    1,968.0       1,194.3       1,190.9       -          
Cost of goods sold
    691.5       966.7       833.0       -       2,491.2  
Gross margin
    1,276.5       227.6       357.9       -       1,862.0  
Depreciation and amortization
    84.4       136.5       70.1       6.4       297.4  
Inter-segment sales
    -       -       81.1       -       -  
 

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    Nine Months Ended September 30, 2009  
   
    Potash     Phosphate     Nitrogen     All Others     Consolidated  
   
 
Sales
  $    903.3     $  1,012.0     $    962.3     $        -     $  2,877.6  
Freight
    34.1       58.3       37.8       -       130.2  
Transportation and distribution
    24.4       34.8       41.8       -       101.0  
Net sales — third party
    844.8       918.9       882.7       -          
Cost of goods sold
    320.6       849.9       734.0       -       1,904.5  
Gross margin
    524.2       69.0       148.7       -       741.9  
Depreciation and amortization
    26.6       120.0       74.3       6.6       227.5  
Inter-segment sales
    -       -       44.1       -       -  
 
                                         
Assets   Potash     Phosphate     Nitrogen     All Others     Consolidated  
   
 
Assets at September 30, 2010
  $  5,346.9     $  2,479.0     $  1,834.6     $  4,871.5     $  14,532.0  
Assets at December 31, 2009
    4,708.3       2,356.8       1,688.6       4,168.5       12,922.2  
Change in assets
    638.6       122.2       146.0       703.0       1,609.8  
Additions to property, plant and equipment
    1,167.8       138.2       65.7       22.4       1,394.1  
 
In January and February 2010, the company purchased additional shares in Israel Chemicals Ltd. (“ICL”) for cash consideration of $420.1, increasing its ownership percentage to 14 percent. In conjunction with this purchase, the company incurred a loss of $2.2 on a foreign exchange contract.
 
7.   Shareholders’ Equity
 
Shareholder Rights Plan
 
During the third quarter of 2010, the Board of Directors adopted a Shareholder Rights Plan (the “Rights Plan”). In connection with the adoption of the Rights Plan, the Board of Directors authorized the issuance of one share purchase right in respect of each common share of PotashCorp outstanding as of the close of business on August 16, 2010 (and each share issued thereafter, subject to the limitations set out in the Rights Plan). Under the terms of the Rights Plan, the rights will become exercisable if a person, together with its affiliates, associates and joint actors, acquires or announces an intention to acquire beneficial ownership of shares which, when aggregated with its current holdings, total 20 percent or more of PotashCorp’s outstanding common shares, subject to the ability of the Board of Directors to defer the time at which the rights become exercisable and to waive the application of the Rights Plan.
 
Following the acquisition of more than 20 percent of the outstanding common shares by any person (and its affiliates, associates and joint actors), each right held by a person other than the acquiring person (and its affiliates, associates and joint actors) would, upon exercise, entitle the holder to purchase common shares at a substantial discount to the then prevailing market price. The Rights Plan permits the acquisition of control of PotashCorp through a “permitted bid”, a “competing permitted bid” or a negotiated transaction. A permitted bid is one that, among other things, is made to all holders of shares, is open for a minimum of 90 days and is conditioned on more than 50% of the outstanding common shares of the company held by Independent Shareholders (as defined in the Rights Plan) being deposited to the bid and a further 10 business day extension of the bid should this condition be met.
 
Stock-Based Compensation
 
On May 6, 2010, the company’s shareholders approved the 2010 Performance Option Plan under which the company may, after February 19, 2010 and before January 1, 2011, issue options to acquire up to 1,000,000 common shares. Under the plan, the exercise price shall not be less than the quoted market closing price of the company’s common shares on the last trading day immediately preceding the date of the grant, and an option’s maximum term is 10 years. In general, options will vest, if at all, according to a schedule based on the three-year average excess of the company’s consolidated cash flow return on investment over weighted average cost of capital.

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As of September 30, 2010, options to purchase a total of 444,700 common shares had been granted under the plan. The weighted average fair value of options granted was $47.88 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
  $ 0.40  
Expected volatility
    50%  
Risk-free interest rate
    2.61%  
Expected life of options
    5.9 years  
 
8.   Pension and Other Post-Retirement Expenses
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
Defined Benefit Pension Plans   2010     2009     2010     2009  
   
 
Service cost
  $ 5.0     $ 4.3     $ 15.0     $ 12.9  
Interest cost
    11.7       11.1       35.1       33.3  
Expected return on plan assets
    (11.6 )     (9.6 )     (34.8 )     (28.8 )
Net amortization and change in valuation allowance
    6.3       7.2       18.7       21.6  
 
 
Net expense
  $ 11.4     $ 13.0     $ 34.0     $ 39.0  
 
 
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
Other Post-Retirement Plans   2010     2009     2010     2009  
   
 
Service cost
  $ 1.7     $ 1.5     $ 5.2     $ 4.6  
Interest cost
    4.1       4.1       12.1       12.4  
Net amortization
    (0.6 )     0.2       (1.6 )     0.5  
 
 
Net expense
  $ 5.2     $ 5.8     $ 15.7     $ 17.5  
 
 
 
For the three months ended September 30, 2010, the company contributed $46.6 to its defined benefit pension plans, $6.2 to its defined contribution pension plans and $2.9 to its other post-retirement plans. Contributions for the nine months ended September 30, 2010 were $50.8 to its defined benefit pension plans, $18.3 to its defined contribution pension plans and $6.5 to its other post-retirement plans. Total 2010 contributions to these plans are not expected to differ significantly from the amounts previously disclosed in Note 15 to the consolidated financial statements in the company’s 2009 financial review annual report.
 
9.   Other Income
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2010     2009     2010     2009  
   
 
Share of earnings of equity investees
  $ 51.0     $ 32.5     $ 121.6     $ 100.2  
Dividend income
    24.6       11.4       139.0       51.8  
Gain on disposal of auction rate securities
    -       -       -       115.3  
Other
    (10.0 )     (2.7 )     (19.5 )     (2.7 )
 
 
    $ 65.6     $ 41.2     $ 241.1     $ 264.6  
 
 
 
Included in other are financial advisory, legal and other fees incurred during the quarter ended September 30, 2010 relating to PotashCorp’s response actions to the commencement by BHP Billiton Development 2 (Canada) Limited, a wholly owned indirect subsidiary of BHP Billiton Plc (“BHP”), of an unsolicited offer to purchase all of PotashCorp’s outstanding common shares (the “BHP Offer”). The company will be required to pay additional fees to its financial advisors in connection with the BHP Offer. A significant portion of the fees payable to each of the company’s financial advisors in connection with their respective engagements is payable on consummation of certain transactions with one or more third parties, including upon consummation of the BHP Offer, in the event the


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company does not consummate the BHP Offer and/or if certain other transactions with any party occur before a certain date.
 
10.   Interest Expense
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2010     2009     2010     2009  
   
 
Interest expense on
                               
Short-term debt
  $ 1.9     $ 3.6     $ 5.8     $ 17.3  
Long-term debt
    52.8       46.0       158.4       119.8  
Interest capitalized to property, plant and equipment
    (37.0 )     (16.8 )     (88.0 )     (46.8 )
Interest income
    (1.2 )     (1.7 )     (6.5 )     (9.5 )
 
 
    $ 16.5     $ 31.1     $ 69.7     $ 80.8  
 
 
 
11.   Income Taxes
 
For the three months ended September 30, 2010, the company’s income tax expense was $120.0. This compared to an expense of $77.9 for the same period last year. For the nine months ended September 30, 2010, the company’s income tax expense was $476.7 (2009 — $35.8). The actual effective tax rate, including discrete items, for the three and nine months ended September 30, 2010 was 23 percent and 26 percent, respectively, compared to 24 percent and 5 percent for the three and nine months ended September 30, 2009.
 
The income tax expense for the nine months ended September 30, 2010 included the following discrete items:
 
  •  To adjust the 2009 income tax provision to the income tax returns filed, an income tax expense of $18.2, $8.5 and $7.3 was recorded in the first, second, and third quarters, respectively.
 
  •  A future income tax expense of $6.3 as a result of US legislative changes to Medicare Part D adopted during the first quarter.
 
  •  A current income tax expense of $8.2 for international tax issues pertaining to transfer pricing during the second quarter.
 
  •  A future income tax recovery of $4.1 related to a second-quarter functional currency tax election by a subsidiary company for Canadian income tax purposes.
 
The income tax expense for the nine months ended September 30, 2009 included the following discrete items:
 
  •  A future income tax recovery of $119.2 for a tax rate reduction resulting from an internal restructuring during the first quarter.
 
  •  A current income tax recovery of $47.6 recorded in the first quarter that related to an increase in permanent deductions in the US from prior years, which had a positive impact on cash.
 
  •  A future income tax expense of $24.4 related to a second-quarter functional currency tax election by the parent company for Canadian income tax purposes.
 
  •  The benefit of a lower proportion of consolidated income earned in the higher-tax jurisdictions.
 
12.   Net Income Per Share
 
Basic net income per share for the quarter is calculated based on the weighted average shares issued and outstanding for the three months ended September 30, 2010 of 296,971,000 (2009 — 295,721,000). Basic net income per share for the nine months ended September 30, 2010 is calculated based on the weighted average shares issued and outstanding for the period of 296,492,000 (2009 — 295,467,000).
 
Diluted net income per share is calculated based on the weighted average number of shares issued and outstanding during the period. The denominator is: (1) increased by the total of the additional common shares that


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would have been issued assuming the exercise of all stock options with exercise prices at or below the average market price for the period; and (2) decreased by the number of shares that the company could have repurchased if it had used the assumed proceeds from the exercise of stock options to repurchase them on the open market at the average share price for the period. For performance-based stock option plans, the number of contingently issuable common shares included in the calculation is based on the number of shares that would be issuable based on period-to-date (rather than anticipated) performance, if the effect is dilutive. The weighted average number of shares outstanding for the diluted net income per share calculation for the three months ended September 30, 2010 was 305,231,000 (2009 — 303,927,000) and for the nine months ended September 30, 2010 was 304,816,000 (2009 — 303,802,000).
 
13.   Financial Instruments and Related Risk Management
 
Financial Risks
 
The company is exposed in varying degrees to a variety of financial risks from its use of financial instruments: credit risk, liquidity risk and market risk. The source of risk exposure and how each is managed is described in Note 26 to the consolidated financial statements in the company’s 2009 financial review annual report.
 
Credit Risk
 
The company is exposed to credit risk on its cash and cash equivalents, receivables, and derivative instrument assets. The maximum exposure to credit risk, as represented by the carrying amount of the financial assets, was:
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
 
Cash and cash equivalents
  $   359.8     $   385.4  
Receivables
    947.9       615.9  
Derivative instrument assets
    2.8       9.0  
 
The aging of trade receivables that were past due but not impaired was as follows:
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
 
1 — 30 days
  $ 20.4     $ 20.1  
31 — 60 days
    -       0.7  
Greater than 60 days
    1.0       0.7  
 
 
    $   21.4     $   21.5  
 
 
 
A reconciliation of the receivables allowance for doubtful accounts is as follows:
 
                 
    As At and For the
    As At and For the
 
    Nine Months Ended
    Year Ended
 
    September 30,
    December 31,
 
    2010     2009  
   
 
Balance, beginning of period
  $   8.4     $   7.7  
Provision for receivables impairment
    0.1       1.3  
Receivables written off during the period as uncollectible
    (0.1 )     (0.6 )
 
 
Balance, end of period
  $ 8.4     $ 8.4  
 
 
 
The company sells potash from its Saskatchewan mines for use outside Canada and the US exclusively to Canpotex. Sales to Canpotex are at prevailing market prices and are settled on normal trade terms. There were no amounts past due or impaired relating to amounts owing to the company from Canpotex or the non-trade receivables.


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Liquidity Risk
 
Liquidity risk arises from the company’s general funding needs and in the management of its assets, liabilities and capital structure. It manages its liquidity risk to maintain sufficient liquid financial resources to fund its operations and meet its commitments and obligations in a cost-effective manner. In managing its liquidity risk, the company has access to a range of funding options. The table below outlines the company’s available debt facilities:
 
                         
    September 30, 2010  
    Total
    Amount Outstanding
    Amount
 
    Amount     and Committed     Available  
   
 
Credit facilities(1)
  $  3,250.0     $  394.8     $  2,855.2  
Line of credit
    75.0       35.3 (2)     39.7  
 
(1) The company increased the amount available under its commercial paper program from $750.0 to $1,500.0 in the second quarter of 2010. The amount available under the commercial paper program is limited to the availability of backup funds under the credit facilities. Included in the amount outstanding and committed is $394.8 of commercial paper. Per the terms of the agreements, the commercial paper outstanding and committed, as applicable, is based on the US dollar balance or equivalent thereof in lawful money of other currencies at the time of issue; therefore, subsequent changes in the exchange rate applicable to Canadian dollar denominated commercial paper have no impact on this balance.
 
(2) Letters of credit committed.
 
During the second quarter of 2010, the company entered into an uncommitted $30.0 letter of credit facility. No letters of credit were outstanding under this facility as at September 30, 2010.
 
Certain of the company’s derivative instruments contain provisions that require its debt to maintain specified credit ratings from two of the major credit rating agencies. If the company’s debt were to fall below the specified ratings, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit risk-related contingent features that were in a liability position on September 30, 2010 was $315.7, for which the company has posted collateral of $224.1 in the normal course of business. If the credit risk-related contingent features underlying these agreements were triggered on September 30, 2010, the company would have been required to post an additional $89.7 of collateral to its counterparties.
 
The table below presents a maturity analysis of the company’s financial liabilities and gross settled derivative contracts based on the expected cash flows from the date of the balance sheet to the contractual maturity date. The amounts are the contractual undiscounted cash flows.
 
                                                 
    Carrying
                               
    Amount at
                               
    September 30,
    Contractual
    Within
                Over
 
    2010     Cash Flows     1 year     1 to 3 years     3 to 5 years     5 years  
   
 
Short-term debt obligations(1)
  $ 395.0     $ 395.2     $ 395.2     $ -     $ -     $ -  
Payables and accrued charges(2)
    720.0       720.0       720.0       -       -       -  
Long-term debt obligations(1)
    3,357.7       4,948.2       795.6       542.9       1,237.5       2,372.2  
Foreign currency derivatives
    (2.8 )                                        
Outflow
            100.0       100.0       -       -       -  
Inflow
            (102.8 )     (102.8 )     -       -       -  
Natural gas derivative liabilities(3)
    315.7       327.2       91.5       90.0       65.3       80.4  
 
 
    $  4,785.6     $  6,387.8     $  1,999.5     $  632.9     $  1,302.8     $  2,452.6  
 
 
 
(1) Contractual cash flows include contractual interest payments related to debt obligations. Interest rates on variable rate debt are based on prevailing rates at September 30, 2010.
 
(2) Excludes taxes, accrued interest, deferred revenues and current portions of accrued environmental costs and asset retirement obligations and accrued pension and other post-retirement benefits. This also excludes derivative financial instrument liabilities which have been presented separately.
 
(3) Natural gas derivatives are subject to master netting agreements. Each counterparty has margin requirements that may require the company to post collateral against liability balances.


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Market Risk
 
Market risk is the risk that financial instrument fair values will fluctuate due to changes in market prices. The market risks to which the company is exposed are foreign exchange risk, interest rate risk and price risk (related to commodity and equity securities).
 
Foreign Exchange Risk
 
The following table shows the company’s significant exposure to exchange risk and the pre-tax effects on income and OCI of reasonably possible changes in the relevant foreign currency. The company has no significant foreign currency exposure related to cash and cash equivalents and receivables. This analysis assumes all other variables remain constant.
 
                                         
          Foreign Exchange Risk  
          5% increase in
    5% decrease in
 
    Carrying Amount
    US$     US$  
    of Asset (Liability)     Income     OCI     Income     OCI  
   
 
September 30, 2010
                                       
Available-for-sale investments
                                       
Israel Chemicals Ltd. (New Israeli shekels)
  $ 2,490.7     $ -     $ (124.5 )   $ -     $ 124.5  
Sinofert Holdings Limited (Hong Kong dollars)
    891.4       -       (44.6 )     -       44.6  
Short-term debt (CDN)
    (20.0 )     1.0       -       (1.0 )     -  
Payables (CDN)
    (144.9 )     7.2       -       (7.2 )     -  
Foreign currency derivatives
    2.8       (5.1 )     -       5.1       -  
                                         
December 31, 2009
                                       
Available-for-sale investments
                                       
Israel Chemicals Ltd. (New Israeli shekels)
      1,895.7       -         (94.8 )     -         94.8  
Sinofert Holdings Limited (Hong Kong dollars)
    864.2       -       (43.2 )     -       43.2  
Short-term debt (CDN)
    (262.5 )     13.1       -         (13.1 )     -  
Payables (CDN)
    (167.2 )     8.4       -       (8.4 )     -  
Foreign currency derivatives
    5.0         (20.4 )     -       20.4       -  
 
At September 30, 2010, the company had entered into foreign currency forward contracts to sell US dollars and receive Canadian dollars in the notional amount of $80.0 (December 31, 2009 — $140.0) at an average exchange rate of 1.0625 (December 31, 2009 — 1.0681) per US dollar. Maturity dates for all forward contracts were within 2010.
 
At September 30, 2010, the company had foreign currency swaps to sell US dollars and receive Canadian dollars in the notional amount of $20.0 (December 31, 2009 — $262.5) at an average exchange rate of 1.0401 (December 31, 2009 — 1.0551) per US dollar. Maturity dates for all swaps were within 2010.
 
Interest Rate Risk
 
The company does not have significant exposure to interest rate risk at September 30, 2010 and December 31, 2009. The only financial assets bearing any variable interest rate exposure are cash and cash equivalents. As for financial liabilities, the company only has an insignificant exposure related to a long-term loan that is subject to variable rates. Short-term debt, related to commercial paper, is excluded from interest rate risk as the interest rates are fixed for the stated period of the debt. The company would only be exposed to variable interest rate risk on the issuance of new commercial paper. The company does not measure any fixed-rate debt at fair value. Therefore, changes in interest rates will not affect income or OCI as there is no change in the carrying value of fixed-rate debt and interest payments are fixed. This analysis assumes all other variables remain constant.


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Price Risk
 
The following table shows the company’s exposure to price risk and the pre-tax effects on net income and OCI of reasonably possible changes in the relevant commodity or securities prices. This analysis assumes all other variables remain constant.
 
                                                 
                Price Risk  
    Carrying Amount
    Effect of 10% decrease
    Effect of 10% increase
 
    of Asset (Liability)     in prices on OCI     in prices on OCI  
    September 30,
    December 31,
    September 30,
    December 31,
    September 30,
    December 31,
 
    2010     2009     2010     2009     2010     2009  
   
 
Natural gas derivatives
  $ (315.7 )   $ (171.0 )   $ (49.9 )   $ (72.6 )   $ 49.9     $ 72.8  
Available-for-sale investments
    3,382.1       2,759.9       (338.2 )     (276.0 )     338.2       276.0  
 
At September 30, 2010, the company had natural gas derivatives qualifying for hedge accounting in the form of swaps for which it has price risk exposure; which derivatives represented a notional amount of 104.5 million MMBtu with maturities in 2010 through 2019. At December 31, 2009, the notional amount of swaps was 123.0 million MMBtu with maturities in 2010 through 2019.
 
Fair Value
 
Fair value represents point-in-time estimates that may change in subsequent reporting periods due to market conditions or other factors.
 
Presented below is a comparison of the fair value of each financial instrument to its carrying value.
 
                                 
    September 30, 2010     December 31, 2009  
    Carrying
          Carrying
       
    Amount
    Fair Value
    Amount
    Fair Value
 
    of Asset
    of Asset
    of Asset
    of Asset
 
    (Liability)     (Liability)     (Liability)     (Liability)  
   
 
Derivative instrument assets
                               
Natural gas derivatives
  $ -     $ -     $ 3.7     $ 3.7  
Foreign currency derivatives
    2.8       2.8       5.3       5.3  
Available-for-sale investments
    3,382.1       3,382.1       2,759.9       2,759.9  
Derivative instrument liabilities
                               
Natural gas derivatives
    (315.7 )     (315.7 )     (174.7 )     (174.7 )
Foreign currency derivatives
    -       -       (0.3 )     (0.3 )
Long-term debt
                               
Senior notes
    (3,350.0 )     (3,583.4 )     (3,350.0 )     (3,505.6 )
Other
    (7.7 )     (7.7 )     (8.0 )     (8.0 )
 
Due to their short-term nature, the fair value of cash and cash equivalents, receivables, short-term debt, and payables and accrued charges is assumed to approximate carrying value. The fair value of the company’s senior notes at September 30, 2010 reflected the yield valuation based on observed market prices. Yields on senior notes ranged from 1.34 percent to 5.71 percent (December 31, 2009 — 1.73 percent to 5.83 percent).
 
Interest rates used to discount estimated cash flows related to derivative instruments that were not traded in an active market at September 30, 2010 were between 0.65 percent and 3.89 percent (December 31, 2009 — between 0.23 percent and 4.67 percent) depending on the settlement date.


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The following table presents the company’s fair value hierarchy for those financial assets and financial liabilities carried at fair value at September 30, 2010. During the quarter ended September 30, 2010, there were no transfers between Level 1 and Level 2 and no transfers into or out of Level 3.
 
                                 
    Carrying
    Fair Value Measurements at Reporting Date Using  
    Amount of
    Quoted Prices in
    Significant Other
    Significant
 
    Asset (Liability)
    Active Markets for
    Observable
    Unobservable
 
    at September 30,
    Identical Assets
    Inputs
    Inputs
 
Description   2010     (Level 1)     (Level 2)     (Level 3)  
   
 
Derivative instrument assets
                               
Foreign currency derivatives
  $ 2.8     $ -     $ 2.8     $ -  
Available-for-sale investments
     3,382.1        3,382.1       -       -  
Derivative instrument liabilities
                               
Natural gas derivatives
    (315.7 )     -        (59.4 )      (256.3 )
 
                                 
    Carrying
    Fair Value Measurements at Reporting Date Using  
    Amount of
    Quoted Prices in
    Significant Other
    Significant
 
    Asset (Liability)
    Active Markets for
    Observable
    Unobservable
 
    at December 31,
    Identical Assets
    Inputs
    Inputs
 
Description   2009     (Level 1)     (Level 2)     (Level 3)  
   
 
Derivative instrument assets
                               
Natural gas derivatives
  $ 3.7     $ -     $ 1.2     $ 2.5  
Foreign currency derivatives
    5.3       -       5.3       -  
Available-for-sale investments
     2,759.9        2,759.9       -       -  
Derivative instrument liabilities
                               
Natural gas derivatives
    (174.7 )      -        (53.2 )     (121.5 )
Foreign currency derivatives
    (0.3 )     -       (0.3 )     -  
 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
                 
    Natural Gas Derivatives  
    September 30,
    December 31,
 
    2010     2009  
   
 
Balance, beginning of period
  $ (119.0 )   $ (110.8 )
Total losses (realized and unrealized) before income taxes
               
Included in earnings
    (25.1 )     (48.6 )
Included in other comprehensive income
    (144.4 )     (49.4 )
Other
    -       -  
Purchases
    -       -  
Sales
    -       -  
Issues
    -       -  
Settlements
    32.2       66.0  
Transfer out of Level 3
    -       23.8  
 
 
Balance, end of period
  $ (256.3 )   $ (119.0 )
 
 
 
                 
    Nine
    Twelve
 
    Months
    Months
 
    Ended
    Ended
 
    September 30,
    December 31,
 
    2010     2009  
   
 
Amount of total losses for the period included in earnings attributable to the change in unrealized gains or losses relating to instruments still held at the reporting date
  $ -     $ (0.4 )
 
 
Losses, realized and unrealized, included in earnings for the period, reported in cost of goods sold
  $   (25.1 )   $   (48.6 )
 
 
 
For the year ended December 31, 2009, auction rate securities considered to be a Level 3 measurement had a beginning balance of $17.2; a gain of $115.3 was included in earnings for the period reported in other income


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related to the disposal of such securities for the full face amount of $132.5, resulting in an end of year balance of $NIL.
 
14.   Seasonality
 
The company’s sales of fertilizer can be seasonal. Typically, the second quarter of the year is when fertilizer sales will be highest, due to the North American spring planting season. However, planting conditions and the timing of customer purchases will vary each year and sales can be expected to shift from one quarter to another.
 
15.   Contingencies
 
Canpotex
 
PCS is a shareholder in Canpotex, which markets potash offshore. Should any operating losses or other liabilities be incurred by Canpotex, the shareholders have contractually agreed to reimburse Canpotex for such losses or liabilities in proportion to their productive capacity. Through September 30, 2010, there were no such operating losses or other liabilities.
 
Mining Risk
 
In common with other companies in the industry, the company is unable to acquire insurance for underground assets.
 
Legal and Other Matters
 
Significant environmental site assessment and/or remediation matters of note include the following:
 
  •  The company, along with other parties, has been notified by the US Environmental Protection Agency (“USEPA”) of potential liability under the US Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) with respect to certain soil and groundwater conditions at a PCS Joint Venture blending facility in Lakeland, Florida and a certain adjoining former property. A Record of Decision (“ROD”) was issued on September 27, 2007 and provides for a remedy that requires excavation of impacted soils and interim treatment of groundwater. The total remedy cost is estimated in the ROD to be $8.5. In September 2010, the USEPA approved the Remedial Design Report to address the soil contamination.
 
  •  The USEPA has identified PCS Nitrogen, Inc. (“PCS Nitrogen”) as a potentially responsible party with respect to a former fertilizer blending operation in Charleston, South Carolina, known as the Planters Property or Columbia Nitrogen site, formerly owned by a company from which PCS Nitrogen acquired certain other assets. The USEPA has requested reimbursement of approximately $3.0 of previously incurred response costs and the performance or financing of future site investigation and response activities from PCS Nitrogen and other named potentially responsible parties. In September 2005, Ashley II of Charleston, L.L.C., the current owner of the Planters Property, filed a complaint in the United States District Court for the District of South Carolina seeking a declaratory judgment that PCS Nitrogen is liable to pay environmental response costs that Ashley II of Charleston, L.L.C. alleges it has incurred and will incur in connection with response activities at the site. After the Phase II trial, the district court allocated 30 percent of the liability for response costs at the site to PCS Nitrogen, as well as a proportional share of any costs that cannot be recovered from another responsible party. PCS has filed a motion for amendment of this decision. If that request is denied, the decision may be appealed, along with a previous decision imposing successor liability on PCS. The ultimate amount of liability for PCS depends upon the amount needed for remedial activities, the ability of other parties to pay, and on the availability of insurance.
 
  •  PCS Phosphate has agreed to participate, on a non-joint and several basis, with parties to an Administrative Settlement Agreement with the USEPA (“Settling Parties”) in the performance of a removal action and the payment of certain other costs associated with PCB soil contamination at the Ward Superfund Site in Raleigh, North Carolina (“Site”), including reimbursement of the USEPA’s past costs. The removal activities commenced at the Site in August 2007. The cost of performing the removal action at the Site is


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  estimated at $70.0. The Settling Parties have initiated CERCLA cost recovery litigation against PCS Phosphate and more than 100 other entities. PCS Phosphate filed crossclaims and counterclaims seeking cost recovery. In addition to the removal action at the Site, investigation of sediments downstream of the Site in what is called “Operable Unit 1” has occurred. In September 2008, the USEPA issued a final remedy for Operable Unit 1, with an estimated cost of $6.1. In response to a special notice letter from the USEPA, PCS Phosphate and the Settling Parties made a good-faith offer to perform and/or pay for certain actions described in the special notice letter. At this time, the company is unable to evaluate the extent of any exposure that it may have for the matters addressed in the special notice letter.
 
  •  Pursuant to the 1996 Corrective Action Consent Order (the “Order”) executed between PCS Nitrogen Fertilizer, L.P., formerly known as Arcadian Fertilizer, L.P. (“PCS Nitrogen Fertilizer”) and Georgia Department of Natural Resources, Environmental Protection Division (“GEPD”) in conjunction with PCS Nitrogen Fertilizer’s purchase of real property located in Augusta, Georgia, PCS Nitrogen Fertilizer agreed to perform certain activities including a facility investigation and, if necessary, a corrective action. PCS Nitrogen Fertilizer has performed an investigation of environmental site conditions, has documented its findings in several successive facility investigation reports submitted to GEPD and has conducted a pilot study to evaluate the viability of in-situ bioremediation of groundwater at the site. In May 2009, PCS Nitrogen Fertilizer submitted a Corrective Action Plan (“CAP”) to GEPD proposing to utilize in-situ bioremediation of groundwater at the site. In the event GEPD approves the CAP, a full-scale bioremediation remedy will be implemented.
 
  •  In December 2009, during a routine inspection of a gypsum stack at the White Springs, Florida facility a sinkhole was discovered that resulted in the loss of approximately 84 million gallons of water from the stack. The company is sampling production and monitoring wells on its property and drinking water wells on neighboring property to assess impacts. The company incurred costs of $3.3 to address the sinkhole between the time of discovery and the end of the second quarter of 2010. The Florida Department of Environmental Protection (“FDEP”) issued a notice to the company stating that the release may constitute an unauthorized discharge. The company is negotiating an order with the FDEP in an effort to address the situation. The company entered into an order on consent with the USEPA that requires the company to complete a study of available feasible measures to reduce the possibility and impacts of any future sinkholes. Depending on the outcome of this study, the order will require the implementation of certain mitigation measures, although the scope and timing for the implementation of any such measures cannot be ascertained at the current time. The company is unable at this time to estimate with certainty the total costs that may be incurred to address this matter.
 
The company is also engaged in ongoing site assessment and/or remediation activities at a number of other facilities and sites. Based on current information, it does not believe that its future obligations with respect to these facilities and sites are reasonably likely to have a material adverse effect on its consolidated financial position or results of operations.
 
Other significant matters of note include the following:
 
  •  The USEPA has notified the company of various alleged violations of the US Resource Conservation and Recovery Act (“RCRA”) at its Aurora, North Carolina, White Springs, Florida and Geismar, Louisiana plants. The company has entered into RCRA 3013 Administrative Orders on Consent and has performed certain site assessment activities at its White Springs, Aurora and Geismar plants. The company is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be. At this time, the company is unable to evaluate the extent of any exposure that it may have in these matters.
 
  •  The USEPA has notified the company of various alleged violations of the Clean Air Act at its Geismar, Louisiana plant. The government has demanded process changes and penalties that would cost a total of approximately $27.0, but the company denies that it has any liability for the Geismar matter. Although the company is proceeding with planning and permitting for the process changes demanded by the government, the company is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be. In July 2010, without alleging any specific violation of the Clean Air Act, the


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  USEPA requested that the company meet and demonstrate compliance with the Clean Air Act for specified projects undertaken at the White Springs’ sulfuric acid plants. The company participated in such meeting but, at this time, is unable to evaluate if it has any exposure.
 
  •  Significant portions of the company’s phosphate reserves in Aurora, North Carolina are located in wetlands. Under the Clean Water Act, the company must obtain a permit from the US Army Corps of Engineers (the “Corps”) before mining in the wetlands. On January 15, 2009, the Division of Water Quality of the North Carolina Department of Natural Resources issued a certification under Section 401 of the Clean Water Act, that mining of phosphate in excess of thirty years from lands owned or controlled by the company, including some wetlands, would not degrade water quality. Thereafter, on June 10, 2009, the Corps issued the company a permit that will allow the company to mine the phosphate deposits identified in the 401 certification. USEPA decided not to seek additional review of the permit. On March 12, 2009, four environmental organizations (Pamlico-Tar River Foundation, North Carolina Coastal Federation, Environmental Defense Fund and Sierra Club) filed a Petition for a Contested Case Hearing before the North Carolina Office of Administrative Hearings (“OAH”) challenging the 401 certification. The company has intervened in this proceeding. Petitioners filed a motion for partial summary judgment on February 5, 2010 and the company filed a response and cross-motion for summary judgment on March 18, 2010. The Division of Water Quality also filed a response to Petitioner’s motion for partial summary judgment on March 18, 2010. In August 2010, the parties argued these motions before the OAH. At this time, the company is unable to evaluate the extent of any exposure that it may have in this matter.
 
  •  In May 2009, the Canadian government announced that its new industrial greenhouse gas emissions policies will be coordinated with policies that may be implemented in the US. In July 2009, the Canadian government adopted rules requiring the reporting of specified greenhouse gas emissions from sources that emit more than 50,000 tons of carbon dioxide equivalents. In September 2009, the USEPA promulgated rules requiring the reporting of greenhouse gas emissions for all fuel combustion sources emitting more than 25,000 tons of carbon dioxide equivalents and certain other listed sources. The company does not believe that compliance with these emission reporting regulations will have a material adverse effect on its consolidated financial position. In December 2009, the USEPA issued a finding that greenhouse gas emissions from mobile sources endanger public health and welfare. In 2010, the USEPA issued rules regulating greenhouse gas emissions from model year 2012 vehicles sold after January 2, 2011. On that date, the USEPA also will begin phasing in requirements for all new “stationary sources,” such as power plants, that emit 100,000 tons of greenhouse gases per year or modified sources that increase emissions by 75,000 tons per year to obtain permits incorporating the “best available control technology” for such emissions. The company is not currently aware of any projects at its facilities that would be subject to these requirements when they become effective. The company is monitoring these developments and, except as indicated above, their effect on its operations cannot be determined with certainty at this time.
 
  •  On January 26, 2010, the USEPA proposed nutrient criteria for Florida lakes and flowing waters. These criteria are currently scheduled to be promulgated in November 2010. The criteria will become part of Florida’s water quality standards sixty days after the final criteria are issued. The company, along with other phosphate companies, is participating in the USEPA rulemaking process. If the USEPA rule is adopted as proposed, projected capital costs resulting from the rule could be in excess of $100.0 for the company’s White Springs plant, and there is no guarantee that controls can be implemented that are capable of achieving compliance with the proposed rule under all flow conditions. This assumes that the rule is adopted as proposed and that none of the site specific criteria mechanisms are available to the White Springs plant. There has been significant comment on the proposed rule by government and industry groups. The prospects for a rule to be adopted and become enforceable without significant change from the proposal are uncertain. The company is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be.
 
  •  The company, having been unable to agree with Mosaic Potash Esterhazy Limited Partnership (“Mosaic”) on the remaining amount of potash that the company is entitled to receive from Mosaic pursuant to the mining and processing agreement in respect of the company’s rights at the Esterhazy mine, issued a Statement of Claim in the Saskatchewan Court of Queen’s Bench against Mosaic on May 27, 2009. In the


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Statement of Claim, the company has asserted that it has the right under the mining and processing agreement to receive potash from Mosaic until at least 2012, and seeks an order from the Court declaring the amount of potash which the company has the right to receive. Mosaic in its Statement of Defence dated June 16, 2009 asserts that at a delivery rate of 1.24 million tons of product per year, the company’s entitlement to receive potash under the mining and processing agreement will terminate by August 30, 2010. Also, on June 16, 2009, Mosaic commenced a counterclaim against the company asserting that the company has breached the mining and processing agreement due to its refusal to take delivery of potash product under the agreement based on an event of force majeure. Based on a contention that the force majeure is not valid, and that any tons not taken during such period are somehow forfeited, Mosaic has indicated that it may begin to temporarily suspend delivery of product as early as November 15, 2010. If that should occur, or occurs subsequently, the Company intends to take all necessary steps to enforce its right under the agreements, pending determination of the matters currently in issue before the Court.
 
The company will continue to assert its position in these proceedings vigorously and it denies liability to Mosaic in connection with its counterclaim.
 
  •  Between September 11 and October 2, 2008, the company and PCS Sales (USA), Inc. were named as defendants in eight very similar antitrust complaints filed in federal courts. Other potash producers are also defendants in these cases. Each of the separate complaints alleges conspiracy to fix potash prices, to divide markets, to restrict supply and to fraudulently conceal the conspiracy, all in violation of Section 1 of the Sherman Act. The company and PCS Sales (USA), Inc. believe each of these eight private antitrust law lawsuits is without merit and intend to defend them vigorously.
 
  •  On August 20, 2010, BHP commenced the BHP Offer, being an unsolicited offer to purchase all of the company’s issued and outstanding common shares for US$130 per common share. The BHP Offer, unless extended, is open for acceptance until November 18, 2010. After carefully considering the BHP Offer, with the benefit of advice from its independent financial and legal advisors, PotashCorp’s Board of Directors unanimously determined that the BHP Offer is not in the best interests of the company, its shareholders or other stakeholders. The Board of Directors has unanimously recommended that shareholders reject the BHP Offer and not tender their common shares to the BHP Offer. For more information, see PotashCorp’s Directors’ Circular and Solicitation/Recommendation Statement on Schedule 14D-9 filed with the US Securities and Exchange Commission and Canadian provincial securities commissions.
 
In addition, various other claims and lawsuits are pending against the company in the ordinary course of business. While it is not possible to determine the ultimate outcome of such actions at this time, and there exist inherent uncertainties in predicting such outcomes, it is the company’s belief that the ultimate resolution of such actions is not reasonably likely to have a material adverse effect on its consolidated financial position or results of operations.
 
The breadth of the company’s operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating the taxes it will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, provincial, state and local tax audits. The resolution of these uncertainties and the associated final taxes may result in adjustments to the company’s tax assets and tax liabilities.
 
The company owns facilities which have been either permanently or indefinitely shut down. It expects to incur nominal annual expenditures for site security and other maintenance costs at certain of these facilities. Should the facilities be dismantled, certain other shutdown-related costs may be incurred. Such costs are not expected to have a material adverse effect on the company’s consolidated financial position or results of operations and would be recognized and recorded in the period in which they are incurred.
 
16.   Guarantees
 
In the normal course of operations, the company provides indemnifications, that are often standard contractual terms, to counterparties in transactions such as purchase and sale contracts, service agreements, director/officer contracts and leasing transactions. These indemnification agreements may require the company to compensate the


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counterparties for costs incurred as a result of various events, including environmental liabilities and changes in (or in the interpretation of) laws and regulations, or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. The terms of these indemnification agreements will vary based upon the contract, the nature of which prevents the company from making a reasonable estimate of the maximum potential amount that it could be required to pay to counterparties. Historically, the company has not made any significant payments under such indemnifications and no amounts have been accrued in the accompanying unaudited interim condensed consolidated financial statements with respect to these indemnification guarantees (apart from any appropriate accruals relating to the underlying potential liabilities).
 
The company enters into agreements in the normal course of business that may contain features that meet the definition of a guarantee. Various debt obligations (such as overdrafts, lines of credit with counterparties for derivatives and back-to-back loan arrangements) and other commitments (such as railcar leases) related to certain subsidiaries and investees have been directly guaranteed by the company under such agreements with third parties. The company would be required to perform on these guarantees in the event of default by the guaranteed parties. No material loss is anticipated by reason of such agreements and guarantees. At September 30, 2010, the maximum potential amount of future (undiscounted) payments under significant guarantees provided to third parties approximated $557.5. It is unlikely that these guarantees will be drawn upon and the maximum potential amount of future payments does not consider the possibility of recovery under recourse or collateral provisions; this amount is not indicative of future cash requirements or the company’s expected losses from these arrangements. At September 30, 2010, no subsidiary balances subject to guarantees were outstanding in connection with the company’s cash management facilities, and it had no liabilities recorded for other obligations other than subsidiary bank borrowings of approximately $5.9.
 
The company has guaranteed the gypsum stack capping, closure and post-closure obligations of White Springs and PCS Nitrogen in Florida and Louisiana, respectively, pursuant to the financial assurance regulatory requirements in those states. In addition, the company has guaranteed the performance of certain remediation obligations of PCS Joint Venture and PCS Nitrogen at the Lakeland, Florida and Augusta, Georgia sites respectively. The USEPA has announced that it plans to adopt rules requiring financial assurance from a variety of mining operations, including phosphate rock mining. It is too early in the rulemaking process to determine what the impact, if any, on the company’s facilities will be when these rules are issued.
 
The environmental regulations of the Province of Saskatchewan require each potash mine to have decommissioning and reclamation plans. Financial assurances for these plans must be established within one year following their approval by the responsible provincial minister. The Minister of the Environment for Saskatchewan (“MOE”) has approved the plans. The company had previously provided a CDN $2.0 irrevocable letter of credit and in the second quarter of 2010 finalized all matters regarding the financial assurances for the 2006 review, including the payment of CDN $2.8 into the agreed upon trust fund. Under the regulations, the decommissioning and reclamation plans and financial assurances are to be reviewed at least once every five years, or sooner as required by the MOE. The next scheduled review for the decommissioning and reclamation plans and financial assurances is in 2011 and discussions regarding these financial assurances have commenced. The MOE has indicated it is seeking an increase of the amount paid into the trust fund by the company. Based on current information, the company does not believe that its financial assurance requirements or future obligations with respect to this matter are reasonably likely to have a material impact on its consolidated financial position or results of operations.
 
The company has met its financial assurance responsibilities as of September 30, 2010. Costs associated with the retirement of long-lived tangible assets have been accrued in the accompanying unaudited interim condensed consolidated financial statements to the extent that a legal liability to retire such assets exists.
 
During the period, the company entered into various other commercial letters of credit in the normal course of operations. As at September 30, 2010, $35.3 of letters of credit were outstanding.
 
The company expects that it will be able to satisfy all applicable credit support requirements without disrupting normal business operations.


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17.   Reconciliation of Canadian and United States Generally Accepted Accounting Principles
 
Canadian GAAP varies in certain significant respects from US GAAP. As required by the United States Securities and Exchange Commission, the effect of these principal differences on the company’s unaudited interim condensed consolidated financial statements is described and quantified below. For a complete discussion of US and Canadian GAAP differences, see Note 31 to the consolidated financial statements in the company’s 2009 financial review annual report.
 
(a) Inventory valuation: Under Canadian GAAP, when the circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in net realizable value because of changed economic circumstances, the amount of the write-down is reversed. The reversal is limited to the amount of the original writedown. Under US GAAP, the reversal of a writedown is not permitted unless the reversal relates to a writedown recorded in a prior interim period during the same fiscal year.
 
(b) Long-term investments: Certain of the company’s investments in international entities are accounted for under the equity method. Accounting principles generally accepted in those foreign jurisdictions may vary in certain important respects from Canadian GAAP and in certain other respects from US GAAP. The company’s share of earnings of these equity investees under Canadian GAAP has been adjusted for the significant effects of conforming to US GAAP.
 
In addition, the company’s interest in a foreign joint venture is accounted for using proportionate consolidation under Canadian GAAP. US GAAP requires joint ventures to be accounted for using the equity accounting method. As a result, an adjustment is recorded to reflect the company’s interest in the joint venture under the equity method of accounting.
 
(c) Property, plant and equipment and goodwill: The net book value of property, plant and equipment and goodwill under Canadian GAAP is higher than under US GAAP, as past provisions for asset impairment under Canadian GAAP were measured based on the undiscounted cash flow from use together with the residual value of the assets. Under US GAAP, they were measured based on fair value, which was lower than the undiscounted cash flow from use together with the residual value of the assets. Fair value for this purpose is determined based on discounted expected future net cash flows. In certain cases, US GAAP requires that writedowns be based on discounted cash flows, a prescribed discount rate and the un-weighted average first-day-of-the-month resource prices for the prior twelve months; whereas Canadian GAAP requires undiscounted cash flows using estimated future resource prices based on the best information available to the company.
 
(d) Depreciation and amortization: Depreciation and amortization under Canadian GAAP is higher than under US GAAP, as a result of differences in the carrying amounts of property, plant and equipment under Canadian and US GAAP.
 
(e) Exploration costs: Under Canadian GAAP, capitalized exploration costs are classified under property, plant and equipment. For US GAAP, these costs are generally expensed until such time as a final feasibility study has confirmed the existence of a commercially mineable deposit.
 
(f) Pension and other post-retirement benefits: Under US GAAP, the company is required to recognize the difference between the benefit obligation and the fair value of plan assets in the Consolidated Statements of Financial Position with the offset to OCI. No similar requirement currently exists under Canadian GAAP.
 
In addition, under Canadian GAAP when a defined benefit plan gives rise to an accrued benefit asset, a company must recognize a valuation allowance for the excess of the adjusted benefit asset over the expected future benefit to be realized from the plan asset. Changes in the pension valuation allowance are recognized in income. US GAAP does not specifically address pension valuation allowances, and the US regulators have interpreted this to be a difference between Canadian and US GAAP. In light of this, a difference between Canadian and US GAAP has been recorded for the effects of recognizing a pension valuation allowance and the changes therein under Canadian GAAP.
 
(g) Foreign currency translation adjustment: The company adopted the US dollar as its functional and reporting currency on January 1, 1995. At that time, the consolidated financial statements were translated into US dollars at the December 31, 1994 year-end exchange rate using the translation of convenience method under


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Canadian GAAP. This translation method was not permitted under US GAAP. US GAAP required the comparative Consolidated Statements of Operations and Consolidated Statements of Cash Flow to be translated at applicable weighted-average exchange rates, whereas the Consolidated Statements of Financial Position were permitted to be translated at the December 31, 1994 year-end exchange rate. The use of disparate exchange rates under US GAAP gave rise to a foreign currency translation adjustment. Under US GAAP, this adjustment is reported as a component of accumulated OCI.
 
(h) Offsetting of certain amounts: US GAAP requires an entity to adopt a policy of either offsetting or not offsetting fair value amounts recognized for derivative instruments and for the right to reclaim cash collateral or the obligation to return cash collateral against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement. The company adopted a policy to offset such amounts. Under Canadian GAAP, offsetting of the margin deposits is not permitted.
 
(i) Stock-based compensation: Under Canadian GAAP, the company’s stock-based compensation plan awards classified as liabilities are measured at intrinsic value at each reporting period. US GAAP requires that these liability awards be measured at fair value at each reporting period. The company uses a Monte Carlo simulation model to estimate the fair value of its performance unit incentive plan liability for US GAAP purposes.
 
Under Canadian GAAP, stock options are recognized over the service period, which for PotashCorp is established by the option performance period. Effective January 1, 2006, under US GAAP, stock options are recognized over the requisite service period, which does not commence until the option plan is approved by the company’s shareholders and options are granted thereunder.
 
                 
    Service Period Commenced  
Performance Option Plan Year   Canadian GAAP     US GAAP  
   
 
2007
    January 1, 2007       May 3, 2007  
2008
    January 1, 2008       May 8, 2008  
2009
    January 1, 2009       May 7, 2009  
2010
    January 1, 2010       May 6, 2010  
 
This difference impacts the stock-based compensation cost recorded and may impact diluted earnings per share.
 
(j) Stripping costs: Under Canadian GAAP, the company capitalizes and amortizes costs associated with the activity of removing overburden and other mine waste minerals in the production phase. US GAAP requires such stripping costs to be attributed to ore produced in that period as a component of inventory and recognized in cost of sales in the same period as related revenue.
 
(k) Income taxes related to the above adjustments: The income tax adjustment reflects the impact on income taxes of the US GAAP adjustments described above. Accounting for income taxes under Canadian and US GAAP is similar, except that income tax rates of enacted or substantively enacted tax law must be used to calculate future income tax assets and liabilities under Canadian GAAP, whereas only income tax rates of enacted tax law can be used under US GAAP.
 
(l) Income tax consequences of stock-based employee compensation: Under Canadian GAAP, the income tax benefit attributable to stock-based compensation that is deductible in computing taxable income but is not recorded in the consolidated financial statements as an expense of any period (the “excess benefit”) is considered to be a permanent difference. Accordingly, such amount is treated as an item that reconciles the statutory income tax rate to the company’s effective income tax rate. Under US GAAP, the excess benefit is recognized as additional paid-in capital.
 
(m) Income taxes related to uncertain income tax positions: US GAAP prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its consolidated financial statements uncertain income tax positions that it has taken or expects to take on a tax return (including a decision whether to file or not to file a return in a particular jurisdiction). Canadian GAAP has no similar requirements related to uncertain income tax positions.


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(n) Cash flow statements: US GAAP requires the disclosure of income taxes paid. Canadian GAAP requires the disclosure of income tax cash flows, which would include any income taxes recovered during the period. For the three months ended September 30, 2010, income taxes paid under US GAAP were $74.3 (2009 — $3.6) and for the nine months ended September 30, 2010, income taxes paid under US GAAP were $145.1 (2009 — $740.4).
 
The application of US GAAP, as described above, would have had the following effects on net income, net income per share, total assets and shareholders’ equity.
 
                                 
    Three Months
    Nine Months
 
    Ended September 30     Ended September 30  
    2010     2009(1)     2010     2009(1)  
   
 
Net income as reported — Canadian GAAP
  $ 402.7     $ 247.9     $ 1,323.9     $ 741.5  
Items increasing (decreasing) reported net income
                               
Inventory valuation (a)
    -       (1.4 )     1.2       (1.7 )
Share of earnings of equity investees (b)
    (0.6 )     (0.6 )     (0.3 )     (0.6 )
Asset write-down (c)
    -       -       (32.8 )     -  
Depreciation and amortization (d)
    2.1       2.1       6.3       6.3  
Exploration costs (e)
    (0.4 )     (0.3 )     (1.0 )     (0.3 )
Pension and other post-retirement benefits (f)
    -       0.3       -       0.9  
Stock-based compensation (i)
    2.9       (3.6 )     2.2       0.5  
Stripping costs (j)
    (1.5 )     (3.0 )     (16.4 )     (5.8 )
Deferred income taxes relating to the above adjustments (k)
    (0.6 )     1.4       10.5       2.8  
Income taxes related to US GAAP effective income tax rate (k, m)
    2.6       12.9       4.5       12.9  
Income taxes related to stock-based compensation (l)
    (33.5 )     (1.2 )     (41.5 )     (5.6 )
Income taxes related to uncertain income tax positions (m)
    (11.2 )     (4.5 )     5.0       (8.4 )
 
 
Net income — US GAAP
  $ 362.5     $ 250.0     $ 1,261.6     $ 742.5  
 
 
Basic weighted average shares outstanding — US GAAP
    296,971,000       295,721,000       296,492,000       295,467,000  
 
 
Diluted weighted average shares outstanding — US GAAP (i)
    305,219,000       303,927,000       304,803,000       303,801,000  
 
 
Basic net income per share — US GAAP
  $ 1.22     $ 0.85     $ 4.26     $ 2.51  
 
 
Diluted net income per share — US GAAP
  $ 1.19     $ 0.82     $ 4.14     $ 2.44  
 
 
 
(1) Corrected as described in Note 18.
 
                 
    September 30,
    December 31,
 
    2010     2009  
   
 
Total assets as reported — Canadian GAAP
  $ 14,532.0     $ 12,922.2  
Items increasing (decreasing) reported total assets
               
Inventory (a)
    (0.5 )     (1.7 )
Investment in equity investees (b)
    (7.3 )     (4.0 )
Property, plant and equipment (c, d)
    (110.9 )     (84.4 )
Goodwill (c)
    (46.7 )     (46.7 )
Exploration costs (e)
    (14.4 )     (13.4 )
Pension and other post-retirement benefits (f)
    (165.0 )     (180.9 )
Margin deposits associated with derivative instruments (h)
    (224.1 )     (108.9 )
Stripping costs (j)
    (63.5 )     (47.1 )
Income tax asset related to uncertain income tax positions (m)
    2.0       33.7  
 
 
Total assets — US GAAP
  $ 13,901.6     $ 12,468.8  
 
 
 


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    September 30,
    December 31,
 
    2010     2009(1)  
   
 
Total shareholders’ equity as reported — Canadian GAAP
  $ 7,850.5     $ 6,439.8  
Items increasing (decreasing) reported shareholders’ equity
               
Accumulated other comprehensive income
               
Share of accumulated other comprehensive income of equity investees (b)
    (2.1 )     (1.9 )
Pension and other post-retirement benefits (f)
    (218.4 )     (229.7 )
Foreign currency translation adjustment (g)
    (20.9 )     (20.9 )
Income taxes related to uncertain income tax positions (m)
    (1.2 )     (1.2 )
Inventory valuation (a)
    (0.5 )     (1.7 )
Share of other comprehensive income of equity investees (b)
    (0.2 )     0.1  
Provision for asset impairment and asset write-down (c)
    (250.8 )     (218.0 )
Depreciation and amortization (d)
    93.2       86.9  
Exploration costs (e)
    (14.4 )     (13.4 )
Foreign currency translation adjustment (g)
    20.9       20.9  
Stock-based compensation (i)
    4.6       2.4  
Stripping costs (j)
    (63.5 )     (47.1 )
Deferred income taxes relating to the above adjustments (k)
    49.7       39.2  
Income taxes related to US GAAP effective income tax rate (k, m)
    (55.7 )     (60.2 )
Income taxes related to uncertain income tax positions (m)
    94.8       89.8  
 
 
Shareholders’ equity — US GAAP
  $ 7,486.0     $ 6,085.0  
 
 
 
(1) Corrected as described in Note 18.
 
Supplemental US GAAP Disclosures
 
Disclosures About Derivative Instruments and Hedging Activities
 
Fair Values of Derivative Instruments in the Consolidated Statements of Financial Position
 
                     
        September 30,
    December 31,
 
Derivative instrument assets (liabilities)(1)   Balance Sheet Location   2010     2009  
   
 
Derivatives designated as hedging instruments
               
Natural gas derivatives
  Prepaid expenses and other current assets   $ -     $ 0.5  
Natural gas derivatives
  Other assets     -       3.2  
Natural gas derivatives
  Current portion of derivative instrument liabilities     (92.1 )     (51.5 )
Natural gas derivatives
  Derivative instrument liabilities     (223.6 )     (123.2 )
 
 
Total derivatives designated as hedging instruments
    (315.7 )     (171.0 )
 
 
                 
Derivatives not designated as hedging instruments
               
Foreign currency derivatives
  Prepaid expenses and other current assets     2.8       5.3  
Foreign currency derivatives
  Current portion of derivative instrument liabilities     -       (0.3 )
 
 
Total derivatives not designated as hedging instruments
  $ 2.8     $ 5.0  
 
 
 
(1) All fair value amounts are gross and exclude netted cash collateral balances.

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The Effect of Derivative Instruments on the Consolidated Statements of Operations for the Three Months Ended September 30
                                                         
                                    Amount of Loss
 
                                    Recognized in
 
                    Amount of Loss
        Income
 
                    Reclassified from
    Location of Loss
  (Ineffective
 
                    Accumulated
    Recognized in
  Portion and
 
    Amount of Loss
    Location of Loss
  OCI
    Income (Ineffective
  Amount
 
    Recognized
    Reclassified
  into Income
    Portion and Amount
  Excluded from
 
    in OCI
    from Accumulated
  (Effective
    Excluded from
  Effectiveness
 
Derivatives in Cash
  (Effective Portion)     OCI into Income
  Portion)     Effectiveness
  Testing)  
Flow Hedging Relationships   2010     2009     (Effective Portion)   2010     2009     Testing)   2010     2009  
   
 
Natural gas derivatives
  $   (97.3 )   $  (17.9 )   Cost of goods sold   $  (19.6 )   $  (23.4 )   Cost of goods sold   $  (0.4 )   $     -  
 
 
 
                     
        Amount of
 
        Gain Recognized
 
Derivatives Not Designated
      in Income  
as Hedging Instruments   Location of Gain Recognized in Income   2010     2009  
   
 
Foreign currency derivatives
  Foreign exchange   $   9.4     $   18.2  
 
 
 
The Effect of Derivative Instruments on the Consolidated Statements of Operations for the Nine Months Ended September 30
                                                         
                                    Amount of Loss
 
                                    Recognized in
 
                    Amount of Loss
        Income
 
                    Reclassified from
    Location of Loss
  (Ineffective
 
                    Accumulated
    Recognized in
  Portion and
 
    Amount of Loss
    Location of Loss
  OCI
    Income (Ineffective
  Amount
 
    Recognized
    Reclassified
  into Income
    Portion and Amount
  Excluded from
 
    in OCI
    from Accumulated
  (Effective
    Excluded from
  Effectiveness
 
Derivatives in Cash
  (Effective Portion)     OCI into Income
  Portion)     Effectiveness
  Testing)  
Flow Hedging Relationships   2010     2009     (Effective Portion)   2010     2009     Testing)   2010     2009  
   
 
Natural gas derivatives
  $  (199.9 )   $  (64.0 )   Cost of goods sold   $  (57.5 )   $  (64.0 )   Cost of goods sold   $  (0.4 )   $  (0.2 )
 
 
 
                     
        Amount of Gain
 
        (Loss) Recognized
 
Derivatives Not Designated
      in Income  
as Hedging Instruments   Location of Gain (Loss) Recognized in Income   2010     2009  
   
 
Foreign currency derivatives
  Foreign exchange   $   0.7     $  (4.3 )
Natural gas derivatives
  Cost of goods sold     (0.2 )     1.1  
 
 
 
Uncertainty in Income Taxes
 
During the three and nine months ended September 30, 2010, unrecognized tax benefits increased $4.3 and decreased $17.1, respectively. It is reasonably possible that a reduction in a range of $17.0 to $19.0 of unrecognized income tax benefits may occur within 12 months as a result of projected resolutions of worldwide income tax disputes.
 
Recent Accounting Pronouncements
 
Variable Interest Entities
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued a revised accounting standard to improve financial reporting by enterprises involved with variable interest entities. The standard replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and: (i) the obligation to absorb losses of the entity; or (ii) the right to receive benefits from the entity. The implementation of this guidance prospectively effective January 1, 2010 did not have a material impact on the company’s consolidated financial statements.


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Fair Value Disclosures
 
In January 2010, the FASB issued a new accounting standard aimed at improving disclosures about fair value measurements. As of January 1, 2010, the company is required to disclose information on significant transfers in and out of Levels 1 and 2 and the reasons for those transfers. The implementation of this guidance did not have a material impact on the company’s consolidated financial statements. Additional disclosures related to details of activity in Level 3 will be required effective January 1, 2011. The company is currently reviewing the impact, if any, on its consolidated financial statements.
 
Compensation
 
In April 2010, the FASB issued an accounting standard update to clarify the classification of an employee share-based payment award with an exercise price denominated in the currency of a market in which the underlying equity security trades. The update clarifies that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update will be effective for the first fiscal quarter beginning after December 15, 2010, with early adoption permitted. The company is currently reviewing the impact, if any, on its consolidated financial statements.
 
18.   Comparative Figures
 
During the quarter ended March 31, 2010, prior period non-cash errors were identified pertaining to the computation of asset retirement obligations for the phosphate segment, specifically relating to mine reclamation capping costs. The impact of the errors on annual financial statement components, as originally stated and as corrected, is as follows:
 
                                                                                                 
    2006     2007     2008     2009  
    As
                As
                As
                As
             
    Previously
          As
    Previously
          As
    Previously
          As
    Previously
          As
 
    Reported     Adjustment     Corrected     Reported     Adjustment     Corrected     Reported     Adjustment     Corrected     Reported     Adjustment     Corrected  
   
 
Consolidated Statements of Financial Position and Accumulated Other Comprehensive Income and Retained Earnings (as applicable)
At December 31:
                                                                                               
Payables and accrued charges
    545.2       -       545.2       911.7       -       911.7       1,183.6       7.6       1,191.2       779.3       17.5       796.8  
Accrued environmental costs and
asset retirement obligations
    110.3       40.7       151.0       121.0       39.8       160.8       133.4       78.8       212.2       134.8       80.3       215.1  
Future income tax liability
    632.1       (15.8 )     616.3       988.1       (15.3 )     972.8       794.2       (32.6 )     761.6       999.3       (36.9 )     962.4  
Retained earnings
    1,286.4       (24.9 )     1,261.5       2,279.6       (24.5 )     2,255.1       2,402.3       (53.8 )     2,348.5       3,272.1       (60.9 )     3,211.2  
Accumulated other comprehensive income and retained earnings
    n/a       n/a       n/a       4,458.5       (24.5 )     4,434.0       3,060.2       (53.8 )     3,006.4       4,920.9       (60.9 )     4,860.0  
                                                                                                 
Consolidated Statements of Operations and Retained Earnings and Comprehensive Income (as applicable)
For the Year Ended December 31:
                                                                                               
Cost of goods sold
    2,374.8       40.7       2,415.5       2,882.8       (0.9 )     2,881.9       4,081.8       46.6       4,128.4       2,631.6       11.4       2,643.0  
Income taxes
    158.1       (15.8 )     142.3       416.2       0.5       416.7       1,077.1       (17.3 )     1,059.8       83.5       (4.3 )     79.2  
Net income
    631.8       (24.9 )     606.9       1,103.6       0.4       1,104.0       3,495.2       (29.3 )     3,465.9       987.8       (7.1 )     980.7  
Net income per share — basic
    2.03       (0.08 )     1.95       3.50       -       3.50       11.37       (0.10 )     11.27       3.34       (0.02 )     3.32  
Net income per share — diluted
    1.98       (0.08 )     1.90       3.40       -       3.40       11.01       (0.09 )     10.92       3.25       (0.02 )     3.23  
Comprehensive income
    n/a       n/a       n/a       2,413.5       0.4       2,413.9       1,974.2       (29.3 )     1,944.9       1,978.7       (7.1 )     1,971.6  
                                                                                                 
Consolidated Statements of Cash Flow
                                                                                               
For the Year Ended December 31:
                                                                                               
Net income
    631.8       (24.9 )     606.9       1,103.6       0.4       1,104.0       3,495.2       (29.3 )     3,465.9       987.8       (7.1 )     980.7  
Provision for future income tax
    50.0       (15.8 )     34.2       119.6       0.5       120.1       82.2       (17.3 )     64.9       203.2       (4.3 )     198.9  
Other long-term liabilities
    13.4       40.7       54.1       (57.9 )     (0.9 )     (58.8 )     2.3       46.6       48.9       (8.0 )     11.4       3.4  
Cash provided by operating activities
    696.8       -       696.8       1,688.9       -       1,688.9       3,013.2       -       3,013.2       923.9       -       923.9  
 
 
n/a = not applicable since the company did not begin to report accumulated other comprehensive income and comprehensive income for Canadian GAAP purposes until 2007
 
The adjustments are not material to the periods to which they relate. However, as correcting the errors in the first quarter of 2010 would have materially distorted net income for the first quarter, the company has corrected them by revising the impacted balances in the relevant periods, with an adjustment to the opening balance recorded to retained earnings in the first period presented. The impact on the comparative figures presented in the condensed consolidated statements of financial position at December 31, 2009 was as described above.


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The impact on the comparative figures presented in the company’s unaudited interim condensed consolidated financial statements for the three months ended September 30, 2009 was as follows:
 
  •  Statements of operations and retained earnings: increase cost of goods sold by $1.5, reduce income tax expense by $0.6; there was no impact on basic or diluted earnings per share.
 
  •  Statements of cash flow: reduce net income by $0.9, increase adjustments to reconcile net income to cash provided by operating activities through reduction in provision for future income tax of $0.6 and increase in other long-term liabilities of $1.5; there was no net impact on cash flow for the period.
 
  •  Statements of comprehensive income: reduce net income and comprehensive income by $0.9.
 
The impact on the comparative figures presented in the company’s unaudited interim condensed consolidated financial statements for the nine months ended September 30, 2009 was as follows:
 
  •  Statements of operations and retained earnings: increase cost of goods sold by $4.5, reduce income tax expense by $1.8, reduce opening retained earnings by $53.8; basic and diluted earnings per share were reduced $0.01.
 
  •  Statements of cash flow: reduce net income by $2.7, increase adjustments to reconcile net income to cash provided by operating activities through reduction in provision for future income tax of $1.8 and increase in other long-term liabilities of $4.5; there was no net impact on cash flow for the period.
 
  •  Statements of comprehensive income: reduce net income and comprehensive income by $2.7.


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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis is the responsibility of management and is as of November 5, 2010. The Board of Directors carries out its responsibility for review of this disclosure principally through its audit committee, comprised exclusively of independent directors. The audit committee reviews, and prior to its publication, approves, pursuant to the authority delegated to it by the Board of Directors, this disclosure. The term “PCS” refers to Potash Corporation of Saskatchewan Inc. and the terms “we”, “us”, “our”, “PotashCorp” and the “company” refer to PCS and, as applicable, PCS and its direct and indirect subsidiaries as a group. Additional information relating to the company, including our Annual Report on Form 10-K, can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov/edgar.shtml.
 
POTASHCORP AND OUR BUSINESS ENVIRONMENT
 
PotashCorp is an integrated producer of fertilizer, industrial and animal feed products. We are the world’s largest fertilizer enterprise by capacity, producing the three primary plant nutrients: potash, phosphate and nitrogen. We sell fertilizer to North American retailers, cooperatives and distributors that provide storage and application services to farmers, the end users. Offshore customers supplied by PotashCorp or Canpotex Limited (“Canpotex”, the offshore marketing company for Saskatchewan potash producers) are government agencies and private importers who buy under contract and on the spot market; spot sales are more prevalent in North America, South America and Southeast Asia. Fertilizers are sold primarily for spring and fall application in both Northern and Southern Hemispheres.
 
Transportation is an important part of the final purchase price for fertilizer so producers usually sell to the closest customers. In North America, we sell mainly on a delivered basis via rail, barge, truck and pipeline. Offshore customers purchase product either at the port where it is loaded or delivered with freight included.
 
Potash, phosphate and nitrogen are also used as inputs for the production of animal feed and industrial products. Most feed and industrial sales are by contract and are more evenly distributed throughout the year than fertilizer sales.
 
CORPORATE DEVELOPMENTS
 
On August 20, 2010, BHP Billiton Development 2 (Canada) Limited, a wholly owned indirect subsidiary of BHP Billiton Plc (“BHP”), commenced an unsolicited offer to purchase all of the company’s issued and outstanding common shares for US$130 per common share (the “BHP Offer”). The BHP Offer, unless extended, is open for acceptance until November 18, 2010.
 
After carefully considering the BHP Offer, with the benefit of advice from its independent financial and legal advisors, the Board of Directors unanimously determined that the BHP Offer is not in the best interests of the company, its shareholders or other stakeholders. The Board of Directors has unanimously recommended that shareholders reject the BHP Offer and not tender their common shares to the BHP Offer. For more information, see PotashCorp’s Directors’ Circular and Solicitation/Recommendation Statement on Schedule 14D-9 filed with the US Securities and Exchange Commission (“SEC”) and Canadian provincial securities commissions.
 
As events unfold in connection with the BHP Offer, PotashCorp’s outlook may vary materially from the narrative in this Management’s Discussion and Analysis (“MD&A”) and it is impossible to predict whether the BHP Offer or any alternative transaction will be consummated. Statements regarding the BHP Offer, PotashCorp’s response and the pursuit of strategic alternatives are subject to various risks and assumptions. See Forward-Looking Statements.
 
POTASHCORP STRATEGY
 
To provide our stakeholders with long-term value, our strategy focuses on generating growth while striving to minimize fluctuations in an upward-trending earnings line. This value proposition has given our stakeholders superior value for many years. We apply this strategy by concentrating on our highest margin products. Such analysis dictates our Potash First strategy, focusing our capital — internally and through investments — to build on


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our world-class potash assets and meet the rising global demand for this vital nutrient. By investing in potash capacity while producing to meet market demand, we create the opportunity for significant growth while limiting downside risk. We complement our potash operations with focused phosphate and nitrogen businesses that emphasize the production of higher-margin products with stable and sustainable earnings potential.
 
We strive to grow PotashCorp by enhancing our position as supplier of choice to our customers, delivering the highest quality products at market prices when they are needed. We seek to be the preferred supplier to high-volume, high-margin customers with the lowest credit risk. It is critical that our customers recognize our ability to create value for them based on the price they pay for our products.
 
As we plan our future, we carefully weigh our choices for our cash flow. We base all investment decisions on cash flow return materially exceeding cost of capital, evaluating the best return on any investment that matches our Potash First strategy. Most of our recent capital expenditures have gone to investments in our own potash capacity, and we look to increase our existing offshore potash investments and seek other merger and acquisition opportunities in this nutrient. We also consider share repurchases and increased dividends as ways to maximize shareholder value over the long term.
 
KEY PERFORMANCE DRIVERS — PERFORMANCE COMPARED TO GOALS
 
Each year we set targets to advance our long-term goals and drive results. Our long-term goals and 2010 targets are set out on pages 39 to 43 of our 2009 financial review annual report. A summary of our progress against selected goals and representative annual targets is set out below.
 
 
             
      Representative
    Performance
Goal     2010 Annual Target     to September 30, 2010
Achieve no harm to people.     Reduce total site severity injury rate by 35 percent from 2008 levels by the end of 2012.     Total site severity injury rate was 61 percent below the 2008 annual level for the first nine months of 2010. The total site severity injury rate was 22 percent below the 2008 annual level for the first nine months of 2009 and 25 percent below the 2008 annual level by the end of 2009.
             
Achieve no damage to the environment.     Reduce total reportable releases, permit excursions and spills by 30 percent from 2009 levels.     Reportable release rate on an annualized basis decreased 11 percent, annualized permit excursions were down 24 percent and annualized spills were down 26 percent during the first nine months of 2010 compared to 2009 annual levels. There were five spills, four permit excursions and four reportable releases in the first nine months of 2010 compared to seven spills, four permit excursions and four reportable releases for the same period in 2009.
             
Maximize long-term shareholder value.     Exceed total shareholder return for our sector and companies on the DAXglobal Agribusiness Index for 2010.     PotashCorp’s total shareholder return was 33 percent in the first nine months of 2010 compared to our sector weighted average return (based on market capitalization) of 8 percent and the DAXglobal Agribusiness Index weighted average return (based on market capitalization) of 4 percent.
             
 
FINANCIAL OVERVIEW
 
This discussion and analysis is based on the company’s unaudited interim condensed consolidated financial statements reported under generally accepted accounting principles in Canada (“Canadian GAAP”). These principles differ in certain significant respects from accounting principles generally accepted in the United States. These differences are described and quantified in Note 17 to the unaudited interim condensed consolidated financial


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statements included in Item 1 of this Quarterly Report on Form 10-Q. All references to per-share amounts pertain to diluted net income per share.
 
For an understanding of trends, events, uncertainties and the effect of critical accounting estimates on our results and financial condition, the entire document should be read carefully together with our 2009 financial review annual report.
 
Earnings Guidance — Third Quarter 2010
 
         
    Company Guidance   Actual Results
 
 
Earnings per share
  $0.80 - $1.20   $1.32
Effective tax rate, including discrete items
  25%   23%
 
Overview of Actual Results
 
Operations
 
                                                                 
    Three Months Ended September 30     Nine Months Ended September 30  
   
                      %
                      %
 
Dollars (millions) — except per-share amounts   2010     2009     Change     Change     2010     2009     Change     Change  
   
 
Sales
  $ 1,575.0     $ 1,099.1     $ 475.9       43     $ 4,726.4     $ 2,877.6     $ 1,848.8       64  
Gross Margin
    563.3       344.7       218.6       63       1,862.0       741.9       1,120.1       151  
Operating Income
    539.2       356.9       182.3       51       1,870.3       858.1       1,012.2       118  
Net Income
    402.7       247.9       154.8       62       1,323.9       741.5       582.4       79  
Net Income Per Share — Diluted
    1.32       0.82       0.50       61       4.34       2.44       1.90       78  
Other Comprehensive Income
    880.2       123.9       756.3       610       114.1       565.4       (451.3 )     (80 )
 
 
 
Earnings in the third quarter and first nine months of 2010 were higher than the same periods of 2009 as buyers returned to the market and purchased more of all three nutrients following an unprecedented decline in fertilizer demand in 2009. In 2010, potash represented 65 percent of total third-quarter gross margin (73 percent in 2009) and 69 percent of first nine months gross margin (71 percent in 2009). Sales prices for phosphate fertilizer products and all nitrogen products increased significantly during the third quarter and first nine months of 2010 compared to the same periods in 2009.
 
The continuing challenge of meeting increases in food demand became more pronounced through the third quarter. Added strain from crop production issues in key producing regions — exacerbated by recent under-application of nutrients — reduced global grain inventories and drove crop prices higher. The positive impact of this on grower economics has historically been a powerful driver for the fertilizer sector, and that was the case again in this quarter. Improving agricultural fundamentals established a firm foundation for continuing growth in demand for nutrients and ongoing pricing momentum. Further aided by an early harvest and extended fall application window, customers in North America moved quickly to secure potash following the announcement of summer-fill pricing programs in late July. On near record demand, North American producers shipped 2.3 million tonnes to the domestic market, more than triple the shipments in the third quarter of 2009 and 42 percent above the previous five-year average. Shipments for the first nine months of 2010 reached 7.0 million tonnes, reflecting a return to normal demand in this mature agriculture market. North American producer offshore potash shipments totaled 2.3 million tonnes in third-quarter 2010, 85 percent higher than in the same quarter last year. As expected, Latin American buyers bought aggressively in preparation for their key planting season, while all other major offshore markets continued large purchases through the quarter. The acceleration of demand combined with diminished distributor inventory levels and typical maintenance related shutdowns pushed global potash producer inventories lower. Inventories of North American producers declined by 41 percent during the quarter and were 17 percent below the previous five-year average at its end. Tightening supplies caused shipping delays and shortfalls and, by the end of the quarter, some suppliers — including Canpotex Limited (Canpotex), the offshore marketing company for Saskatchewan potash producers — had largely allocated all available product through the end of the year. In the face of tightening fundamentals, pricing momentum escalated meaningfully by September and resulted in shipments being booked at higher prices in spot markets. Phosphate and nitrogen markets also benefited from improved conditions. Robust North American fall demand for solid phosphate fertilizers left US producers with


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limited product for offshore markets, which resulted in significantly higher domestic shipments and relatively flat offshore movement compared to the same period last year. Inventories continued to decline and reached record lows in the third quarter, supporting an improved phosphate pricing environment. In nitrogen, strong agricultural demand pushed third-quarter urea shipments from US producers 41 percent higher on a quarter-over-quarter basis. Stronger prices — due to robust demand, tight producer inventories and higher gas prices in key exporting regions — coupled with softer US gas prices toward the end of the quarter, improved domestic producer margins.
 
Other significant factors that affected earnings in the third quarter and first nine months of 2010 compared to the same periods in 2009 were: (1) higher income taxes as a result of increased earnings in 2010 and discrete items which resulted in lower income taxes in 2009 (the effective rate was considerably lower mainly due to an internal restructuring and an increase in permanent deductions that resulted in a recovery; these were partly offset by a functional currency election); (2) higher provincial mining and other taxes as a result of increased sales revenue; (3) increased selling and administrative expenses as a result of our financial performance exceeding budget and an increase in our share price; and (4) increased other income from our share of earnings in Sociedad Quimica y Minera de Chile (“SQM”) and dividends received from Israel Chemicals Ltd (“ICL”), while a gain on disposal of auction rate securities in the second quarter of 2009 did not repeat in 2010. Other comprehensive income in 2010 was impacted by the fair value of our investments in ICL and Sinofert Holdings Limited (“Sinofert”) (which increased more in the third quarter of 2010 compared to 2009 but did not increase as much in the first nine months in 2010 as in the same period in 2009) and the fair value of hedge-accounted natural gas derivatives, which declined due to falling natural gas prices.
 
Balance Sheet
 
Changes in Balances — December 31, 2009 to September 30, 2010 (in $ millions)
 
(PERFORMANCE GRAPH)
 
The increase in property, plant and equipment related primarily (84 percent) to our previously announced potash capacity expansions and other potash projects. Investments rose mainly due to the increase in the fair value of our investments in both ICL and Sinofert. The decrease in receivables was due to the refund of income taxes receivable and provincial mining and other taxes receivable exceeding increased trade receivables (a result of higher


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sales) and increased hedge margin deposits (a result of lower natural gas prices). The decrease in inventories was mainly the result of lower potash levels.
 
The increase in short-term debt and current portion of long-term debt was the result of reclassifying our senior notes due May 31, 2011 as current, which exceeded the reduction in our outstanding commercial paper during the first nine months of 2010. Payables and accrued charges increased mainly as a result of increased income taxes payable (due to higher anticipated earnings coupled with lower required income tax instalments), increased accrued payroll (higher accruals for incentive plans as a result of our financial performance being above budget and a higher share price) and increased accrued provincial mining taxes (due to higher sales revenue). Other liabilities increased mainly as a result of increases to asset retirement obligations while the fair value of our natural gas derivatives declined due to falling natural gas prices.
 
Significant changes in equity were the result of net income and other comprehensive income earned during the first nine months of 2010, which is described above.
 
Business Segment Review
 
Note 6 to the unaudited interim condensed consolidated financial statements provides information pertaining to our business segments. Management includes net sales in segment disclosures in the consolidated financial statements pursuant to Canadian GAAP, which requires segmentation based upon our internal organization and reporting of revenue and profit measures derived from internal accounting methods. As a component of gross margin, net sales (and the related per-tonne amounts) are the primary revenue measures we use and review in making decisions about operating matters on a business segment basis. These decisions include assessments about potash, phosphate and nitrogen performance and the resources to be allocated to these segments. We also use net sales (and the related per-tonne amounts) for business planning and monthly forecasting. Net sales are calculated as sales revenues less freight, transportation and distribution expenses.
 
Our discussion of segment operating performance is set out below and includes nutrient product and/or market performance results where applicable to give further insight into these results.
 
Potash
 
                                                                         
    Three Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2010     2009     % Change     2010     2009     % Change     2010     2009     % Change  
   
 
Sales
  $ 637.2     $ 423.4       50                                                  
Freight
    40.1       16.8       139                                                  
Transportation and distribution
    15.0       9.2       63                                                  
 
 
Net sales
  $ 582.1     $ 397.4       46                                                  
 
 
Manufactured product
                                                                       
Net sales
                                                                       
North American
  $ 251.6     $ 111.0       127       710       266       167     $ 354.12     $ 417.38       (15 )
Offshore
    328.2       283.7       16       1,187       748       59     $ 276.56     $ 379.24       (27 )
 
 
      579.8       394.7       47       1,897       1,014       87     $ 305.60     $ 389.24       (21 )
Cost of goods sold
    215.6       139.1       55                             $ 113.61     $ 137.17       (17 )
 
 
Gross margin
    364.2       255.6       42                             $ 191.99     $ 252.07       (24 )
 
 
Other miscellaneous and purchased product
                                                                       
Net sales
    2.3       2.7       (15 )                                                
Cost of goods sold
    3.0       6.9       (57 )                                                
 
 
Gross margin
    (0.7 )     (4.2 )     (83 )                                                
 
 
Gross Margin
  $ 363.5     $ 251.4       45                             $ 191.62     $ 247.93       (23 )
 
 
 
(1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations.


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    Nine Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2010     2009     % Change     2010     2009     % Change     2010     2009     % Change  
   
 
Sales
  $ 2,170.4     $ 903.3       140                                                  
Freight
    142.9       34.1       319                                                  
Transportation and distribution
    59.5       24.4       144                                                  
 
 
Net sales
  $ 1,968.0     $ 844.8       133                                                  
 
 
Manufactured product
                                                                       
Net sales
                                                                       
North American
  $ 913.9     $ 311.5       193       2,551       599       326     $ 358.19     $ 519.95       (31 )
Offshore
    1,045.4       522.9       100       3,714       1,283       189     $ 281.46     $ 407.57       (31 )
 
 
      1,959.3       834.4       135       6,265       1,882       233     $ 312.70     $ 443.34       (29 )
Cost of goods sold
    688.3       306.3       125                             $ 109.83     $ 162.73       (33 )
 
 
Gross margin
    1,271.0       528.1       141                             $ 202.87     $ 280.61       (28 )
 
 
Other miscellaneous and purchased product
                                                               
Net sales
    8.7       10.4       (16 )                                                
Cost of goods sold
    3.2       14.3       (78 )                                                
 
 
Gross margin
    5.5       (3.9 )     n/m                                                  
 
 
Gross Margin
  $ 1,276.5     $ 524.2       144                             $ 203.75     $ 278.53       (27 )
 
 
 
(1) Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
 
n/m = not meaningful
 
Potash gross margin variance attributable to:
 
                                                                           
    Three Months Ended September 30
      Nine Months Ended September 30
 
Dollars (millions)   2010 vs. 2009       2010 vs. 2009  
            Change in
                      Change in
         
            Prices/Costs                       Prices/Costs          
    Change in Sales
            Cost of
              Change in
            Cost of
         
    Volumes       Net Sales     Goods Sold       Total       Sales Volumes       Net Sales     Goods Sold       Total  
Manufactured product
                                                                         
North American
  $ 138.7       $ (44.9 )   $ 4.4       $ 98.2       $ 819.2       $ (412.8 )   $ 39.0       $ 445.4  
Offshore
    65.4         (55.3 )     0.4         10.5         807.6         (468.4 )     (41.7 )       297.5  
Change in market mix
    (35.9 )       37.3       (1.5 )       (0.1 )       (50.9 )       62.7       (11.8 )       -  
 
 
Total manufactured product
  $ 168.2       $ (62.9 )   $ 3.3       $ 108.6       $ 1,575.9       $ (818.5 )   $ (14.5 )     $ 742.9  
Other miscellaneous and
purchased product
                                3.5                                     9.4  
 
 
Total
                              $ 112.1                                   $ 752.3  
 
 
 


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(PERFORMANCE GRAPH)   (PERFORMANCE GRAPH)
 
 
     
(PERFORMANCE GRAPH)   (PERFORMANCE GRAPH)
 
Canpotex sales to major markets, by percentage of sales volumes, were as follows:
 
                                                                 
    Three Months Ended September 30     Nine Months Ended September 30  
   
                      %
                      %
 
    2010     2009     Change     Change     2010     2009     Change     Change  
   
 
China
    10       1       9       900       12       8       4       50  
India
    16       39       (23 )     (59 )     14       31       (17 )     (55 )
Asia (excluding China and India)
    28       34       (6 )     (18 )     42       41       1       2  
Latin America
    38       20       18       90       25       14       11       79  
Oceania, Europe and Other
    8       6       2       33       7       6       1       17  
 
 
      100       100                       100       100                  
 
 

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The most significant contributors to the change in total gross margin quarter over quarter were as follows(1):
 
         
Net Sales Prices   Sales Volumes   Cost of Goods Sold
 
 
â Lower average realized price for the quarter reflected new pricing levels established in major markets following the unprecedented decline in potash demand during the global economic downturn in 2009.
 
á Farmers increased applications and fertilizer dealers increased purchases due to supportive crop prices and the need to address potash nutrient shortfalls (soil and distribution chain inventories fell significantly during 2009 and have not been replenished in 2010).
á North American shipments increased significantly due to rising crop prices, low customer potash inventories, renewed farmer/dealer confidence and an anticipated strong fall application.
á Canpotex shipments to offshore markets increased due to supportive crop prices and low customer inventories.
 •  Canpotex sales to Latin America and China significantly increased (as a percentage of total sales) while Canpotex sales to India decreased.
 
á Fewer shutdown costs incurred (17 weeks in 2010 compared to 28 in 2009). Shutdown weeks in 2010 related to expansion activities while 2009 shutdown weeks primarily were the result of matching supply to demand.
á Royalty costs lower due to lower average North American listed sales prices per tonne.
â Personnel costs higher due to higher staff levels (anticipating the ramp up to expansion levels) and higher wages.
â The Canadian dollar strengthened relative to the US dollar.
 
The change in market mix produced an unfavorable variance of $35.9 million related to sales volumes and a favorable variance of $37.3 million in sales prices due to the proportional increase in North American sales of higher-priced granular product exceeding the proportional increase in offshore sales of lower-priced standard product. North American customers prefer premium priced granular product over standard product more typically consumed offshore.
 
 
 (1) Direction of arrows refer to impact on gross margin while the • symbol signifies a neutral impact.


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The most significant contributors to the change in total gross margin year over year were as follows(1):
 
         
Net Sales Prices   Sales Volumes   Cost of Goods Sold
 
 
â  Substantial decline in consumption during the 2009 global economic downturn pressured pricing and resulted in new lower pricing levels being established in 2010.
 
á Volumes were up significantly due to positive global crop prices, the need to address potash-depleted soil and favorable conditions in Brazil (for spring planting) and the US (for fall application).
á Canpotex reached short-term agreements with major customers in China and India throughout the first nine months of 2010 (China did not have a contract in 2009 while India did not have a contract in the first half of 2009).
á Latin America’s proportion of total volumes increased more than any other market due to low inventories entering 2010 and favorable crop economics. India purchased more in 2010 but accounted for a larger proportion of Canpotex sales in 2009.
 •  Most buyers’ purchases were for consumption rather than inventory restocking.
 
â Personnel costs higher due to higher wages.
â The Canadian dollar strengthened relative to the US dollar.
â Increased maintenance costs with higher production levels.
á Royalty costs declined due to lower average North American listed sales prices per tonne.
á Fewer shutdown costs incurred (35 weeks in 2010 compared to 117 weeks in 2009).
 •  North American cost of goods sold variance was positive as our lowest cost mine, Rocanville SK, comprised a larger proportion of production while offshore cost of goods sold variance was negative due to more of that product coming from our other mines.
 
The change in market mix year over year produced an unfavorable variance of $50.9 million related to sales volumes and a favorable variance of $62.7 million in sales prices due to the proportional increase in North American sales of higher-priced granular product exceeding the proportional increase in offshore sales of lower-priced standard product.
 
 
 (1) Direction of arrows refer to impact on gross margin while the • symbol signifies a neutral impact.


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Phosphate
 
                                                                         
    Three Months Ended September 30  
   
    Dollars (millions)     Tonnes (thousands)     Average per Tonne(1)  
   
    2010     2009     % Change     2010     2009     % Change     2010     2009     % Change