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POTASH CORP OF SASKATCHEWAN INC 10-Q 2017
10-Q

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

For the Quarterly Period Ended June 30, 2017

OR

 

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

Commission File Number 1-10351

 

Potash Corporation of Saskatchewan Inc.

(Exact name of registrant as specified in its charter)

 

Canada   N/A

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

122 – 1st Avenue South

Saskatoon, Saskatchewan, Canada

  S7K 7G3
(Address of principal executive offices)   (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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

  Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer        Accelerated filer       
Non-accelerated filer      (Do not check if a smaller reporting company)   Smaller reporting company       
       Emerging growth company       

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).

  Yes      No  

As at June 30, 2017, Potash Corporation of Saskatchewan Inc. had 840,086,574 Common Shares outstanding.

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Statements of Income

Unaudited   

In millions of US dollars except as otherwise noted

     Three Months Ended
June 30
     Six Months Ended
June 30
 
      2017      2016      2017      2016  

Sales (Note 2)

   $ 1,120      $ 1,053      $ 2,232      $ 2,262  

Freight, transportation and distribution

     (116      (118      (249      (251

Cost of goods sold

     (749      (692      (1,460      (1,534

Gross Margin

     255        243        523        477  

Selling and administrative expenses

     (48      (55      (98      (108

Provincial mining and other taxes

     (44      (26      (78      (57

Share of earnings of equity-accounted investees

     49        30        88        49  

Dividend income

     4        16        12        16  

Impairment of available-for-sale investment

            (10             (10

Other (expenses) income (Note 3)

     (16      1        (26      (9

Operating Income

     200        199        421        358  

Finance costs

     (61      (54      (120      (106

Income Before Income Taxes

     139        145        301        252  

Income taxes (Note 4)

     62        (24      49        (56

Net Income

   $ 201      $ 121      $ 350      $ 196  

Net Income per Share

           

Basic

   $ 0.24      $ 0.14      $ 0.42      $ 0.23  

Diluted

   $ 0.24      $ 0.14      $ 0.42      $ 0.23  

Weighted Average Shares Outstanding

           

Basic

             840,060,000                839,285,000                839,959,000                838,202,000  

Diluted

     840,124,000        839,786,000        840,111,000        839,028,000  

(See Notes to the Condensed Consolidated Financial Statements)

 

LOGO   LOGO    LOGO

 

1   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


Condensed Consolidated Statements of Comprehensive Income (Loss)

 

Unaudited   

In millions of US dollars

     Three Months Ended June 30      Six Months Ended June 30  
(Net of related income taxes)    2017      2016      2017      2016  

Net Income

   $ 201      $ 121      $ 350      $ 196  

Other comprehensive income (loss)

           

Items that will not be reclassified to net income:

           

Net actuarial loss on defined benefit plans 1

            (103             (103

Items that have been or may be subsequently reclassified to net income:

           

Available-for-sale investments 2

           

Net fair value gain (loss) during the period

     60        (104      93        (103

Cash flow hedges

           

Net fair value (loss) gain during the period 3

     (2      9        (7      3  

Reclassification to income of net loss 4

     11        13        19        28  

Other

            1        3        2  

Other Comprehensive Income (Loss)

     69            (184      108            (173

Comprehensive Income (Loss)

   $     270      $ (63    $     458      $ 23  

1 Net of income taxes of $NIL (2016 – $60) for the three and six months ended June 30, 2017.

2 Available-for-sale investments are comprised of shares in Israel Chemicals Ltd. (“ICL”), Sinofert Holdings Limited (“Sinofert”) and other.

3 Cash flow hedges are comprised of natural gas derivative instruments and treasury lock derivatives and were net of income taxes of $1 (2016 – $(5)) for the three months ended June 30, 2017 and $4 (2016 – $(2)) for the six months ended June 30, 2017.

4 Net of income taxes of $(6) (2016 – $(8)) for the three months ended June 30, 2017 and $(11) (2016 – $(16)) for the six months ended June 30, 2017.

(See Notes to the Condensed Consolidated Financial Statements)

 

 

 

LOGO

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   2


Condensed Consolidated Statements of Cash Flow

 

Unaudited   

In millions of US dollars

 

     Three Months Ended June 30      Six Months Ended June 30  
      2017      2016      2017      2016  

Operating Activities

           

Net income

   $ 201      $ 121      $ 350      $ 196  

Adjustments to reconcile net income to cash provided by operating activities (Note 5)

     151        259        295        465  

Changes in non-cash operating working capital (Note 5)

     (24      44        (94      (49

Cash provided by operating activities

     328        424        551        612  

Investing Activities

           

Additions to property, plant and equipment

     (128      (211      (261      (457

Other assets and intangible assets

     (2      (9      (1      (9

Cash used in investing activities

         (130          (220          (262          (466

Financing Activities

           

Finance costs on long-term debt obligations

            (2      (1      (4

(Repayment of) proceeds from short-term debt obligations

     (81      68        (60      404  

Dividends

     (82      (206      (164      (519

Issuance of common shares

            5        1        25  

Cash used in financing activities

     (163      (135      (224      (94

Increase in Cash and Cash Equivalents

     35        69        65        52  

Cash and Cash Equivalents, Beginning of Period

     62        74        32        91  

Cash and Cash Equivalents, End of Period

   $ 97      $ 143      $ 97      $ 143  

Cash and cash equivalents comprised of:

           

Cash

   $ 28      $ 31      $ 28      $ 31  

Short-term investments

     69        112        69        112  
     $ 97      $ 143      $ 97      $ 143  

(See Notes to the Condensed Consolidated Financial Statements)

 

LOGO

 

3   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


Condensed Consolidated Statements of Changes in Equity

 

Unaudited   

In millions of US dollars

 

                   Accumulated Other Comprehensive (Loss) Income                
     

Share

Capital

     Contributed
Surplus
    

Net

unrealized

gain (loss) on
available-for-

sale

investments

    

Net (loss)

gain on

derivatives

designated

as cash

flow hedges

    

Net

actuarial

loss on

defined

benefit

plans

     Other     

Total

Accumulated

Other

Comprehensive

(Loss)
Income

     Retained
Earnings
     Total
Equity 1
 

Balance – December 31, 2016

   $ 1,798      $ 222      $ 43      $ (60    $  2     $ (8    $ (25    $ 6,204      $ 8,199  

Net income

                                                      350        350  

Other comprehensive income

                   93        12               3        108               108  

Dividends declared

                                                      (167      (167

Effect of share-based compensation
including issuance of common shares

     2        3                                                  5  

Shares issued for dividend reinvestment plan

     3                                                         3  

Balance – June 30, 2017

   $ 1,803      $ 225      $ 136      $ (48    $  2     $ (5    $ 83      $ 6,387      $ 8,498  

Balance – December 31, 2015

   $ 1,747      $ 230      $ 77      $     (117    $  2     $     (10    $ (50    $     6,455      $ 8,382  

Net income

                                                      196        196  

Other comprehensive (loss) income

                       (103      31            (103      2        (173             (173

Dividends declared

                                                      (421      (421

Effect of share-based compensation
including issuance of common shares

     35        (5                                                30  

Shares issued for dividend reinvestment plan

     10                                                         10  

Transfer of net actuarial loss
on defined benefit plans

                                 103               103        (103       

Balance – June 30, 2016

   $     1,792      $     225      $ (26    $ (86    $  2     $ (8    $     (120    $ 6,127      $     8,024  

1 All equity transactions were attributable to common shareholders.

2 Any amounts incurred during a period are closed out to retained earnings at each period-end. Therefore, no balance exists at the beginning or end of period.

(See Notes to the Condensed Consolidated Financial Statements)

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   4


Condensed Consolidated Statements of Financial Position

 

Unaudited   

In millions of US dollars except as otherwise noted

 

As at    June 30,
2017
     December 31,
2016
 

Assets

     

Current assets

     

Cash and cash equivalents

   $ 97      $ 32  

Receivables

     499        545  

Inventories (Note 6)

     845        768  

Prepaid expenses and other current assets

     65        49  
     1,506        1,394  

Non-current assets

     

Property, plant and equipment

     13,190        13,318  

Investments in equity-accounted investees

     1,178        1,173  

Available-for-sale investments

     1,033        940  

Other assets

     239        250  

Intangible assets

     173        180  

Total Assets

   $ 17,319      $ 17,255  

(See Notes to the Condensed Consolidated Financial Statements)

      June 30,
2017
     December 31,
2016
 

Liabilities

     

Current liabilities

     

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

   $ 824      $ 884  

Payables and accrued charges

     664        772  

Current portion of derivative instrument liabilities

     42        41  
     1,530        1,697  

Non-current liabilities

     

Long-term debt

     3,708        3,707  

Derivative instrument liabilities

     42        56  

Deferred income tax liabilities

     2,375        2,463  

Pension and other post-retirement benefit liabilities

     475        443  

Asset retirement obligations and accrued environmental costs

     640        643  

Other non-current liabilities and deferred credits

     51        47  

Total Liabilities

     8,821        9,056  

Shareholders’ Equity

     

Share capital (Note 7)

     1,803        1,798  

Contributed surplus

     225        222  

Accumulated other comprehensive income (loss)

     83        (25

Retained earnings

     6,387        6,204  

Total Shareholders’ Equity

     8,498        8,199  

Total Liabilities and Shareholders’ Equity

   $ 17,319      $ 17,255  

(See Notes to the Condensed Consolidated Financial Statements)

 

 

LOGO

 

5   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


Notes to the Condensed Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2017

 

Unaudited   

In millions of US dollars except as otherwise noted

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 a crop nutrient and related industrial and feed products company. These unaudited interim condensed consolidated financial statements (“interim financial statements”) are based on International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), and have been prepared in accordance with International Accounting Standard (“IAS”) 34, “Interim Financial Reporting.” The accounting policies and methods of computation used in preparing these interim financial statements are consistent with those used in the preparation of the company’s 2016 annual consolidated financial statements.

 

These interim 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 company’s 2016 annual consolidated financial statements. In management’s opinion, the interim financial statements include all adjustments necessary to fairly present such information. Interim results are not necessarily indicative of the results expected for any other interim period or the fiscal year.

These interim financial statements were authorized by the audit committee of the Board of Directors for issue on August 2, 2017.

 

 

Standards, Amendments and Interpretations Effective and Applied

The International Accounting Standards Board (“IASB”) and International Financial Reporting Interpretations Committee (“IFRIC”) have issued the following standards and amendments or interpretations to existing standards that were effective and applied by the company.

 

Standard   Description   Impact

Amendments to IAS 7,

Statement of Cash Flows

  Issued to require a reconciliation of the opening and closing liabilities that form part of an entity’s financing activities, including both changes arising from cash flows and non-cash changes.   Adopted prospectively effective January 1, 2017, with required disclosures included in Note 5.

Amendments to IAS 12,

Income Taxes

  Issued to clarify the requirements on recognition of deferred tax assets for unrealized losses on debt instruments measured at fair value.   Adopted effective January 1, 2017, with no change to the company’s interim financial statements. No changes are expected to the company’s annual consolidated financial statements.

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   6


Standards, Amendments and Interpretations Not Yet Effective and Not Applied

The IASB and IFRIC have issued the following standards and amendments or interpretations to existing standards that were not yet effective and not applied as at June 30, 2017. The company does not anticipate early adoption of these standards at this time.

 

Standard    Description    Expected Impact    Effective Date 1

IFRS 15, Revenue From

Contracts With

Customers

   Issued to provide guidance on the recognition of revenue from contracts with customers, including multiple-element arrangements and transactions not previously addressed comprehensively, and to enhance disclosures about revenue.    The company is reviewing the standard to determine the potential impact, if any.    January 1, 2018, applied retrospectively with certain practical expedients available.

IFRS 9, Financial

Instruments

   Issued to replace IAS 39, providing guidance on the classification, measurement and disclosure of financial instruments and introducing a new hedge accounting model.    The company is reviewing the standard to determine the potential impact, if any.    January 1, 2018, applied retrospectively with certain exceptions.

Amendments to IFRS 2,

Share-Based Payment

   Issued to provide clarification on the classification and measurement of share-based transactions. Specifically, accounting for cash-settled share-based transactions, share-based payment transactions with a net settlement feature and modifications of share-based payment transactions that change classification from cash-settled to equity settled.    The company is reviewing the standard to determine the potential impact, if any.    January 1, 2018, with the option of retrospective or prospective application.
IFRS 16, Leases    Issued to supersede IAS 17, IFRIC 4, SIC-15 and SIC-27, providing the principles for the recognition, measurement, presentation and disclosure of leases. Lessees will be required to recognize assets and liabilities for the rights and obligations created by leases. Lessors will continue to classify leases using a similar approach to that of the superseded standards but with enhanced disclosure to improve information about a lessor’s risk exposure, particularly to residual value risk.    The company is reviewing the standard to determine the potential impact.    January 1, 2019, applied retrospectively with certain practical expedients available.

IFRIC 23, Uncertainty Over Income

Tax Treatments

   Issued to provide guidance on recognition and measurement of uncertain income tax treatments.    The company is reviewing the standard to determine the potential impact, if any.    January 1, 2019, applied retrospectively with certain practical expedients available.
IFRS 17, Insurance Contracts    Issued to replace IFRS 4, providing guidance for the recognition, measurement, presentation and disclosure of insurance contracts giving consideration to: substantive rights and obligations arising from a contract, law or regulation; enforceable rights and obligations in a contract; and whether contracts are written, oral or implied by customary business practices.    Although the company does not underwrite insurance contracts, all significant contracts will be reviewed under the scope of the standard to determine the potential impact, if any.    January 1, 2021, applied retrospectively with certain practical expedients available.

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

 

7   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


2. Segment Information

The company has three reportable operating segments: potash, nitrogen and phosphate. These segments are differentiated by the chemical nutrient contained in the products that each produces. The accounting policies of the segments are the same as those described in Note 1 and are measured in a manner consistent with that of the financial statements. Inter-segment sales are made under terms that approximate market value. The company’s operating segments have been determined based on reports, used to make strategic decisions, that are reviewed by the Chief Executive Officer, assessed to be the company’s chief operating decision-maker.

 

     Three Months Ended June 30, 2017  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 461      $ 384      $ 275      $      $ 1,120  

Freight, transportation and distribution – third party

     (50      (32      (34             (116

Net sales – third party

     411        352        241            

Cost of goods sold – third party

     (198      (292      (259             (749

Margin (cost) on inter-segment sales 1

            8        (8              

Gross margin

     213        68        (26             255  

Items included in cost of goods sold, selling and administrative expenses or other expenses:

              

Depreciation and amortization

     (56      (47      (56      (9      (168

Assets

     9,787        2,466        2,265        2,801        17,319  

Cash outflows for additions to property, plant and equipment

     36        40        51        1        128  

1 Inter-segment net sales were $17.

 

     Three Months Ended June 30, 2016  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 393      $ 383      $ 277      $      $ 1,053  

Freight, transportation and distribution – third party

     (64      (27      (27             (118

Net sales – third party

     329        356        250            

Cost of goods sold – third party

     (206      (236      (250             (692

Margin (cost) on inter-segment sales 1

            10        (10              

Gross margin

     123        130        (10             243  

Items included in cost of goods sold, selling and administrative expenses or other expenses:

              

Depreciation and amortization

     (52      (52      (55      (9      (168

Share of Canpotex’s 2 Prince Rupert project exit costs

     (33                           (33

Assets

     9,780        2,509        2,323        2,714        17,326  

Cash outflows for additions to property, plant and equipment

     74        65        45        27        211  

1 Inter-segment net sales were $17.

2 Canpotex Limited (“Canpotex”).

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   8


     Six Months Ended June 30, 2017  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 890      $ 759      $ 583      $      $ 2,232  

Freight, transportation and distribution – third party

     (114      (64      (71             (249

Net sales – third party

     776        695        512            

Cost of goods sold – third party

     (403      (549      (508             (1,460

Margin (cost) on inter-segment sales 1

            19        (19              

Gross margin

     373        165        (15             523  

Items included in cost of goods sold, selling and administrative expenses or other expenses:

              

Depreciation and amortization

     (111      (97      (114      (18      (340

Assets

     9,787        2,466        2,265        2,801        17,319  

Cash outflows for additions to property, plant and equipment

     81        73        102        5        261  

1 Inter-segment net sales were $39.

 

     Six Months Ended June 30, 2016  
      Potash      Nitrogen      Phosphate      All Others      Consolidated  

Sales – third party

   $ 774      $ 811      $ 677      $      $ 2,262  

Freight, transportation and distribution – third party

     (123      (60      (68             (251

Net sales – third party

     651        751        609            

Cost of goods sold – third party

     (440      (534      (560             (1,534

Margin (cost) on inter-segment sales 1

            20        (20              

Gross margin

     211        237        29               477  

Items included in cost of goods sold, selling and administrative expenses or other expenses:

              

Depreciation and amortization

     (100      (106      (112      (17      (335

Share of Canpotex’s Prince Rupert project exit costs

     (33                           (33

Termination benefit costs

     (32                           (32

Impairment of property, plant and equipment

                   (27             (27

Assets

     9,780        2,509        2,323        2,714        17,326  

Cash outflows for additions to property, plant and equipment

     165        134        88        70        457  

1 Inter-segment net sales were $34.

 

9   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


3. Other (Expenses) Income

 

     Three Months Ended June 30      Six Months Ended June 30  
      2017      2016      2017      2016  

Foreign exchange loss

   $ (9    $ (2    $ (8    $       (19

Proposed Transaction costs (Note 13)

            (14               –        (23       

Other income

     7        3        5        10  
     $ (16    $ 1      $        (26    $ (9

4. Income Taxes

A separate estimated average annual effective tax rate was determined for each taxing jurisdiction and applied individually to the interim period pre-tax income of each jurisdiction.

 

     Three Months Ended June 30      Six Months Ended June 30  
      2017      2016      2017      2016  

Income tax (recovery) expense

   $ (62    $ 24      $ (49    $ 56   

Actual effective tax rate on ordinary earnings

     7%            17%        9%        21%  

Actual effective tax rate including discrete items

         (44%      16%            (16%          22%  

Discrete tax adjustments that impacted the tax rate

   $ (71    $ (4    $ (76    $  

Significant items to note include the following:

 

·    The actual effective tax rate on ordinary earnings for the three and six months ended June 30, 2017 decreased compared to the same periods last year primarily due to significantly lower forecasted annual earnings in the United States.

 

·    In the second quarter of 2017, a discrete deferred tax recovery of $68 was recorded as a result of a Saskatchewan income tax rate decrease.

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

 

Income Tax Assets (Liabilities)   Statements of Financial Position Location   

June 30,

2017

    

December 31,

2016

 

Current income tax assets

       

Current

  Receivables    $ 43      $ 41  

Non-current

  Other assets      60        67  

Deferred income tax assets

  Other assets      10        10  

Total income tax assets

       $ 113      $ 118  

Current income tax liabilities

       

Current

  Payables and accrued charges    $ (7    $ (25

Non-current

  Other non-current liabilities and deferred credits      (47      (43

Deferred income tax liabilities

  Deferred income tax liabilities      (2,375      (2,463

Total income tax liabilities

       $     (2,429    $     (2,531

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   10


5. Consolidated Statements of Cash Flow

 

     Three Months Ended June 30      Six Months Ended June 30  
      2017      2016      2017      2016  

Reconciliation of cash provided by operating activities

           

Net income

   $ 201      $ 121      $ 350      $ 196  

Adjustments to reconcile net income to cash provided by operating activities

           

Depreciation and amortization

     168        168        340        335  

Impairment of property, plant and equipment

                          27  

Net distributed (undistributed) earnings of equity-accounted investees

     35        61        (2      44  

Impairment of available-for-sale investment

            10               10  

Share-based compensation

     2        3        7        5  

Recovery of deferred income tax

     (82      (7      (96      (1

Pension and other post-retirement benefits

     18        13        33        28  

Asset retirement obligations and accrued environmental costs

     3        9        2        25  

Other long-term liabilities and miscellaneous

     7        2        11        (8

Subtotal of adjustments

     151        259        295        465  

Changes in non-cash operating working capital

           

Receivables

     23        186        38        145  

Inventories

     (9      (51      (58      (43

Prepaid expenses and other current assets

     (9      5        (14      3  

Payables and accrued charges

     (29      (96      (60      (154

Subtotal of changes in non-cash operating working capital

     (24      44        (94      (49

Cash provided by operating activities

   $       328      $     424      $     551      $        612  

Supplemental cash flow disclosure

           

Interest paid

   $ 74      $ 64      $ 103      $ 93  

Income taxes paid

   $ 38      $ 35      $ 53      $ 46  

The following is a summary of changes in liabilities arising from financing activities:

 

      December 31,
2016
     Cash Flows 1      Non-cash
Changes
     June 30,
2017
 

Short-term debt and current portion of long-term debt 1

   $ 884      $ (60    $      $ 824   

Long-term debt

     3,707        (1      2         3,708  

Total liabilities from financing activities

   $     4,591      $      (61    $         2      $     4,532  

1 Cash inflows and cash outflows arising from short-term debt transactions are presented on a net basis.

 

11   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


6. Inventories

 

      June 30,
2017
     December 31,
2016
 

Finished products

   $        320      $        269  

Intermediate products

     200        174  

Raw materials

     68        75  

Materials and supplies

     257        250  
     $ 845      $ 768  

The following items affected cost of goods sold during the period:

 

     Three Months Ended June 30      Six Months Ended June 30  
      2017      2016      2017      2016  

Expensed inventories before the following items

   $     661      $     587      $     1,345      $     1,299  

Reserves, reversals and writedowns of inventories

     29        20        33        19  
     $ 690      $ 607      $ 1,378      $ 1,318  

The carrying amount of inventory recorded at net realizable value was $118 as at June 30, 2017 (December 31, 2016 – $47), with the remaining inventory recorded at cost.

7. Share Capital

Authorized

The company is authorized to issue an unlimited number of common shares without par value and an unlimited number of first preferred shares. The common shares are not redeemable or convertible. The first preferred shares may be issued in one or more series with rights and conditions to be determined by the Board of Directors. No first preferred shares have been issued.

Issued

 

     

Number of

Common Shares

     Consideration  

Balance – December 31, 2016

     839,790,379      $ 1,798  

Issued under option plans

     114,900        2  

Issued for dividend reinvestment plan

     181,295        3  

Balance – June 30, 2017

     840,086,574      $     1,803  

Dividends Declared

The company declared dividends per share of $0.10 (2016 – $0.25) during the three months ended June 30, 2017 and $0.20 (2016 – $0.50) during the six months ended June 30, 2017.

Under the terms of the agreement governing the Proposed Transaction, as described in Note 13, the company is permitted to pay quarterly dividends up to but not in excess of levels existing at the time of signing such agreement.

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   12


8. Share-Based Compensation

During the three and six months ended June 30, 2017, the company issued stock options and performance share units (“PSUs”) to eligible employees under the 2016 Long-Term Incentive Plan (“LTIP”). Information on stock options and PSUs is summarized below:

 

     LTIP      Expense for all employee share-based compensation  plans  
    

Units
Granted

in 2017

     Units
Outstanding
as at
June 30, 2017
    

Three Months Ended

June 30

    

Six Months Ended

June 30

 
           2017      2016      2017      2016  

Stock options

     1,482,829        4,511,906      $     2      $     5      $     5      $ 6  

Share-settled PSUs

     555,918        959,700        1        2        2        2  

Cash-settled PSUs

     857,774        1,538,826               2        2        4  
                       $ 3      $ 9      $ 9      $     12  

Grant date fair value per unit for stock options and share-settled PSUs granted during the first quarter of 2017 was $4.36 and $19.93, respectively.

 

Stock Options

Under the LTIP, stock options generally vest and become exercisable on the third anniversary of the grant date, subject to continuous employment or retirement, and have a maximum term of 10 years. The weighted average fair value of stock options granted was estimated as of the date of grant using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:

 

Exercise price per option

   $ 18.71  

Expected annual dividend per share

   $ 0.40  

Expected volatility

     29%  

Risk-free interest rate

     1.67%  

Expected life of options

         5.7 years  

Performance Share Units

PSUs granted under the LTIP in 2017 vest based on the achievement of performance metrics, over three years, comprising 1) the relative ranking of the company’s total shareholder return compared with a specified peer group using a Monte Carlo simulation option-pricing model and 2) the outcome of the company’s cash flow return on investment compared with its weighted average cost of capital. Compensation cost is measured based on 1) the grant date fair value of the units, adjusted for the company’s best estimate of the outcome of non-market vesting conditions 1 at the end of each period for share-settled PSUs and 2) period-end fair value of the awards for cash-settled PSUs. PSUs granted under the LTIP settle in shares for grantees who are subject to the company’s share ownership guidelines and in cash for all other grantees.

1 The company’s cash flow return on investment compared with its weighted average cost of capital is a non-market vesting condition as performance is not tied to the company’s share price or relative share price.

 

 

13   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


9. Financial Instruments

Fair Value

Estimated fair values for financial instruments are designed to approximate amounts for which the instruments could be exchanged in a current arm’s-length transaction between knowledgeable, willing parties. The valuation policies and procedures for financial reporting purposes are determined by the company’s finance department.

Financial instruments included in the unaudited interim condensed consolidated statements of financial position are measured either at fair value or amortized cost. The tables below explain the valuation methods used to determine the fair value of each financial instrument and its associated level in the fair value hierarchy.

 

Financial Instruments Measured at Fair Value    Fair Value Method

Cash and cash equivalents

   Carrying amount (approximation to fair value assumed due to short-term nature).

Available-for-sale investments

   Closing bid price of the common shares (Level 1) as at the statements of financial position dates.

Foreign currency derivatives not traded in an active market

   Quoted forward exchange rates (Level 2) as at the statements of financial position dates.

Natural gas swaps not traded in an active market

   A discounted cash flow model. 1

1  Inputs included contractual cash flows based on prices for natural gas futures contracts, fixed prices and notional volumes specified by the swap contracts, the time value of money, liquidity risk, the company’s own credit risk (related to instruments in a liability position) and counterparty credit risk (related to instruments in an asset position). Futures contract prices used as inputs in the model were supported by prices quoted in an active market and therefore categorized in Level 2.

 

Financial Instruments Measured at Amortized Cost    Fair Value Method

Receivables, short-term debt and payables and accrued charges

   Carrying amount (approximation to fair value assumed due to short-term nature).

Long-term debt senior notes

   Quoted market prices (Level 1 or 2 depending on the market liquidity of the debt).

Other long-term debt instruments

   Carrying amount.

Presented below is a comparison of the fair value of the company’s senior notes to their carrying values.

 

     June 30, 2017      December 31, 2016  
      Carrying Amount of
Liability 1
     Fair Value of
Liability
     Carrying Amount of
Liability 1
     Fair Value of
Liability
 

Long-term debt senior notes

   $     4,204      $     4,547      $     4,202      $     4,384  
1  Includes net unamortized debt issue costs.

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   14


The following table presents the company’s fair value hierarchy for financial assets and financial liabilities carried at fair value on a recurring basis:

 

            Fair Value Measurements at
Reporting Dates Using:
 
     

Carrying

Amount of
Asset (Liability)

    

Quoted Prices

in Active

Markets for

Identical Assets

(Level 1) 1

    

Significant

Other

Observable Inputs

(Level 2) 1,2

 

June 30, 2017

        

Derivative instrument assets

        

Natural gas derivatives

   $ 7      $      $ 7  

Available-for-sale investments 3

         1,033            1,033         

Derivative instrument liabilities

        

Natural gas derivatives

     (84             (84

December 31, 2016

        

Derivative instrument assets

        

Natural gas derivatives

   $ 6      $      $ 6  

Available-for-sale investments 3

     940        940         

Derivative instrument liabilities

        

Natural gas derivatives

     (97                 (97
1  During the six months ended June 30, 2017 and twelve months ended December 31, 2016, there were no transfers between Level 1 and Level 2. The company’s policy is to recognize transfers at the end of the reporting period.
2  During the six months ended June 30, 2017 and twelve months ended December 31, 2016, there were no amounts categorized as Level 3.
3  Available-for-sale investments are comprised of shares in ICL, Sinofert and other.

 

10. Seasonality

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

11. Contingencies and Other Matters

Canpotex

PCS is a shareholder in Canpotex Limited (“Canpotex”), which markets Canadian potash offshore. Should any operating losses or other liabilities be incurred by Canpotex, the shareholders have contractually agreed to reimburse it for such losses or liabilities in proportion to each shareholder’s productive capacity. Through June 30, 2017, there were no such operating losses or other liabilities.

Mining Risk

The risk of underground water inflows, as with most other underground risks, is currently not insured.

Legal and Other Matters

The company is engaged in ongoing site assessment and/or remediation activities at a number of facilities and sites, and anticipated costs associated with these matters are added to accrued environmental costs in the manner previously described in Note 18 to the company’s 2016 annual consolidated financial statements. This includes matters related to investigation of potential brine migration at certain of the potash sites. The following environmental site assessment and/or remediation matters have uncertainties that may not be fully reflected in the amounts accrued for those matters:

Nitrogen and Phosphate

 

·   

The US Environmental Protection Agency (“USEPA”) has identified PCS Nitrogen, Inc. (“PCS Nitrogen”) as a potentially responsible party at the Planters Property or Columbia Nitrogen site in Charleston, South Carolina. PCS Nitrogen is subject to a final judgment by the US District Court for the District of South Carolina allocating 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. In December 2013, the USEPA issued an order to PCS Nitrogen and four other respondents requiring them jointly and severally to conduct certain cleanup work at the site and reimburse the USEPA’s costs for overseeing that work. PCS Nitrogen is currently performing the work required by the USEPA order. The USEPA

 

 

15   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


   

also has requested reimbursement of approximately $5 of previously incurred response costs. The ultimate amount of liability for PCS Nitrogen depends upon, among other factors, the final outcome of litigation to impose liability on additional parties, the amount needed for remedial activities, the ability of other parties to pay and the availability of insurance.

 

·    PCS Phosphate has been identified as a responsible party at the Ward Transformer Superfund Site in Raleigh, North Carolina (“Site”). In the past, PCS Phosphate worked with certain other responsible parties to address PCB soil contamination at the Site pursuant to an agreement with the USEPA. The response actions are nearly complete at an estimated cost of $80, including anticipated remaining work on the Site. The USEPA also sought remediation in certain downstream areas that are referred to as “Operable Unit 1”. PCS Phosphate signed a Consent Decree with the USEPA for Operable Unit 1 in September 2016 that is not expected to require PCS Phosphate to incur any additional remediation costs. Litigation for the recovery of incurred cleanup costs was resolved through mediation and entry of the Consent Decree.

 

·    In 1996, PCS Nitrogen Fertilizer, L.P. (“PCS Nitrogen Fertilizer”), then known as Arcadian Fertilizer, L.P., entered into a Consent Order (the “Order”) with the Georgia Environmental Protection Division (“GEPD”) in conjunction with PCS Nitrogen Fertilizer’s acquisition of real property in Augusta, Georgia. Under the Order, PCS Nitrogen Fertilizer is required to perform certain activities to investigate and, if necessary, implement corrective measures for substances in soil and groundwater. The investigation has proceeded and the results have been presented to GEPD. Two interim corrective measures for substances in groundwater have been proposed by PCS Nitrogen Fertilizer and approved by GEPD. PCS Nitrogen Fertilizer is implementing the approved interim corrective measures, which may be modified by PCS Nitrogen Fertilizer from time to time, but it is unable to estimate with reasonable certainty the total cost of its correction action obligations under the Order at this time.

Based on current information and except for the uncertainties described in the preceding paragraphs, the company does not believe that its future obligations with respect to these facilities and sites are reasonably likely to have a material adverse effect on its consolidated financial statements.

Other legal matters with significant uncertainties include the following:

Nitrogen and Phosphate

 

·    The USEPA has an ongoing initiative to evaluate implementation within the phosphate industry of a particular exemption for mineral processing wastes under the hazardous waste program. In connection with this industry-wide initiative, the USEPA conducted inspections at numerous phosphate operations and notified the company of alleged violations of the US Resource Conservation and Recovery Act
   

(“RCRA”) at its plants in Aurora, North Carolina; Geismar, Louisiana; and White Springs, Florida. The company has entered into RCRA 3013 Administrative Orders on Consent and has performed certain site assessment activities at all of these plants. At this time, the company does not know the scope of action, if any, that may be required. As to the alleged RCRA violations, the company continues to participate in settlement discussions with the USEPA but is uncertain if any resolution will be possible without litigation, or, if litigation occurs, what the outcome would be. The company routinely monitors public information about the impacts of the initiative on other industry members, and it regularly considers this information in establishing the appropriate asset retirement obligations and accruals.

 

·    In August 2015, the USEPA finalized amendments to the hazardous air pollutant emission standards for phosphoric acid manufacturing and phosphate fertilizer production (“Final Rule”). The Final Rule includes certain new requirements for monitoring and emissions that are infeasible for the company to satisfy in a timely manner. As a result, in October 2015, the company petitioned the USEPA to reconsider certain aspects of the Final Rule and separately asked the US Court of Appeals for the District of Columbia Circuit to review the Final Rule. Subsequent to these requests, required emissions testing at our Aurora facility in 2016 indicated alleged exceedances of the mercury emission limits that were established by the Final Rule. The company has communicated with the relevant agencies about this issue and supplemented its filings with the USEPA and the court to include reconsideration and review of the mercury emission limits. The facility also entered into an agreed order with the North Carolina Department of Environmental Quality (“NCDEQ”) in November 2016 to resolve the alleged mercury exceedances and provide a plan and schedule for evaluating alternative compliance strategies. In December 2016, the USEPA proposed amendments to the Final Rule to address certain monitoring requirements raised in the company’s request for reconsideration. The company submitted comments on the proposal and will wait for final USEPA action on all petition issues before determining whether to proceed with the court action, which is being held in abeyance pending the outcome of the USEPA reconsideration proceeding. Given the pending legal issues and the company’s evaluation of alternative compliance strategies, the resulting cost of compliance with the various provisions of the Final Rule cannot be predicted with reasonable certainty at this time.

General

 

·   

The countries where we operate are parties to the Paris Agreement adopted in December 2015 pursuant to the United Nations Framework Convention on Climate Change. Each country that is a party to the Paris Agreement submitted an Intended Nationally Determined Contribution (“INDC”) toward the control of greenhouse gas emissions. The impacts of these INDCs on the company’s operations cannot be determined with any certainty at this time. In October 2016, the Canadian government announced a national plan to put a price on carbon emissions

 

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   16


   

beginning in 2018 of $10 per tonne and increasing by $10 per tonne each year through 2022, to be implemented either through a carbon tax or a cap and trade program at the election of each province. The province of Saskatchewan is considering various alternative approaches to address the national plan. Other countries where the company operates have not at this time announced similar regulatory plans that would appear to have a significant impact on company operations. The company is monitoring these developments and their future effect on its operations cannot be determined with certainty at this time.

In addition, various other claims and lawsuits are pending against the company in the ordinary course of business. While it is not possible to determine the ultimate outcome of such actions at this time, and inherent uncertainties exist in predicting such outcomes, it is the company’s belief that the ultimate resolution of such actions is not reasonably likely to have a material adverse effect on its consolidated financial statements.

The breadth of the company’s operations and the global complexity of tax regulations require assessments of uncertainties and judgments in estimating the taxes it will ultimately pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of disputes arising from federal, provincial, state and local tax audits. The resolution of these uncertainties and the associated final taxes may result in adjustments to the company’s tax assets and tax liabilities.

The company owns facilities that have been either permanently or indefinitely shut down. It expects to incur nominal annual expenditures for site security and other maintenance costs at certain of these facilities. Should the facilities be dismantled, certain other shutdown-related costs may be incurred. Such costs are not expected to have a material adverse effect on the company’s consolidated financial statements and would be recognized and recorded in the period in which they are incurred.

12. Related Party Transactions

The company sells potash from its Canadian mines for use outside Canada and the US exclusively to Canpotex. Sales are at prevailing market prices and are settled on normal trade terms. Sales to Canpotex for the three months ended June 30, 2017 were $276 (2016 – $159) and the six months ended June 30, 2017 were $474 (2016 – $338). At June 30, 2017, $161 (December 31, 2016 – $141) was owing from Canpotex.

13. Proposed Transaction with Agrium Inc.

On September 11, 2016, the company entered into an Arrangement Agreement with Agrium Inc. (“Agrium”) pursuant to which the company and Agrium have agreed to combine their businesses (the “Proposed Transaction”) in a merger of equals transaction to be implemented by way of a plan of arrangement under the Canada Business Corporations Act. On November 3, 2016, the Proposed Transaction was overwhelmingly approved by shareholders of both companies. On November 7, 2016, the Ontario Superior Court of Justice issued a final order approving the Proposed Transaction. Upon the closing of the Proposed Transaction, the new parent company will be named Nutrien Ltd. (“Nutrien”). The Proposed Transaction is currently anticipated to be completed late in the third quarter of 2017 and is subject to customary closing conditions, including remaining regulatory approvals.

Upon the closing of the Proposed Transaction, the company and Agrium will become indirect, wholly owned subsidiaries of Nutrien. PotashCorp shareholders will own approximately 52 percent of Nutrien, and Agrium shareholders will own approximately 48 percent.

 

 

17   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (in US dollars)

The following discussion and analysis is the responsibility of management and is as at August 2, 2017. The Board of Directors (Board) carries out its responsibility for review of this disclosure principally through its audit committee, comprised exclusively of independent directors. The audit committee reviews and, prior to its publication, approves this disclosure, pursuant to the authority delegated to it by the Board. The term “PCS” refers to Potash Corporation of Saskatchewan Inc. and the terms “we,” “us,” “our,” “PotashCorp” and “the company” refer to PCS and, as applicable, PCS and its direct and indirect subsidiaries as a group. Additional information relating to PotashCorp (which, except as otherwise noted, is not incorporated by reference herein), including our Annual Report on Form 10-K for the year ended December 31, 2016 (2016 Form 10-K), can be found on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. The company is a foreign private issuer under the rules and regulations of the US Securities and Exchange Commission (the SEC); however, it currently files voluntarily on the SEC’s domestic forms.

POTASHCORP AND OUR OPERATING ENVIRONMENT

PotashCorp is the world’s largest crop nutrient company by capacity, producing the three primary crop nutrients: potash (K), nitrogen (N) and phosphate (P) for use in the production of fertilizer, industrial and animal feed products.

Our Canadian potash operations – the primary focus and namesake of our company – represent approximately one-fifth of global capacity. To enhance our global footprint, we also have investments in four potash-related businesses in Latin America, the Middle East and Asia. We complement our potash assets with focused positions in nitrogen and phosphate.

Detailed descriptions of our operating environments can be found on pages 18 and 19 (potash), 20 and 21 (nitrogen) and 22 and 23 (phosphate) in our 2016 Annual Integrated Report (2016 AIR).

GOVERNANCE

In fulfilling its oversight responsibilities, our Board’s commitment to excellence in governance permeates our overall approach to business. Our Board fosters a culture that encourages us to uphold the highest ethical standards and strive for excellence in our business practices in order to build long-term value for all our stakeholders.

There have been no significant changes to how we approach governance from that described in our 2016 AIR (see pages 24 to 27).

STRATEGY AND PERFORMANCE

Creating superior shareholder value is essential to ensure we can make plentiful possible for all our stakeholders. Strong and sustainable earnings growth – coupled with a premium valuation multiple – rewards our shareholders and, at the same time, allows us to focus on our broader social and environmental responsibilities. Our seven strategic priorities determine where we focus our efforts to create long-term value for all those associated with our business. Our long-term objective is to create superior shareholder value by: growing earnings and cash flow while minimizing volatility; protecting and enhancing a premium valuation multiple; and maintaining the trust and support of our stakeholders.

Financially, we prioritize earnings growth and investment opportunities in potash, while complementing that business with other best-in-class assets. Our strategic priorities, depicted below and described in further detail along with key target metrics on pages 30 to 47 in our 2016 AIR, did not change during the second quarter of 2017.

 

LOGO

 

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   18


PENDING MERGER OF EQUALS WITH AGRIUM INC.

During the third quarter of 2016, PotashCorp entered into an arrangement agreement (the Arrangement Agreement) with Agrium Inc. (Agrium) to combine their businesses (the Proposed Transaction) in a merger of equals transaction to be implemented by way of a plan of arrangement under the Canada Business Corporations Act. Upon the closing of the Proposed Transaction, which, subject to customary closing conditions, including receipt of remaining regulatory approvals, is currently anticipated to occur late in the third quarter of 2017, the company and Agrium will become indirect, wholly owned subsidiaries of a new parent company to be called Nutrien Ltd. (Nutrien). PotashCorp shareholders will own approximately 52 percent of Nutrien, and Agrium shareholders will own approximately 48 percent. During the fourth quarter of 2016, shareholders of both companies overwhelmingly approved the Proposed Transaction and the Ontario Superior Court of Justice issued a final order approving it. From a regulatory standpoint, we continue to cooperate with the various enforcement agencies in their reviews. We have received clearances in Brazil and Russia, and continue to work on obtaining approval from China, India, Canada and the US.

The creation of Nutrien pursuant to the Proposed Transaction is designed to: 1) bring together world-class nutrient production assets and retail distribution, providing an integrated platform with multiple paths for growth; 2) create up to $500 million of annual run-rate operating synergies within 24 months of closing; 3) enhance financial flexibility through the use of a strong balance sheet and improved cash flows, enabling the support of growth initiatives and shareholder returns; and 4) leverage best-in-class leadership and governance through the combination of two experienced teams that are focused on creating long-term value.

For further discussion of the Proposed Transaction, please refer to our Current Reports on Form 8-K and the documents filed therewith, filed with the SEC on September 12, 2016 and on October 6, 2016 and the various filings with Canadian provincial securities commissions, including the joint information circular of PCS and Agrium dated October 3, 2016.

 

 

RISK

In our 2016 AIR, we provide an overview of our approach to risk (page 28), explain how we use a risk management-ranking methodology to assess the key risks specific to our company (page 49) and provide a description of, management approach to, and any significant developments for, each key risk (pages 50 to 55).

Our risk-ranking matrix, in terms of residual severity of consequence and likelihood, is displayed below.

 

LOGO

 

19   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


Key risks with rankings unchanged from our 2016 AIR were as follows:

 

Risk   

Risk

Ranking

  

Associated

Strategies 1

   Risk   

Risk

Ranking

  

Associated

Strategies 1

Extreme loss    B    LOGO    Safety, health and security   

C

   LOGO
Offshore potash sales and distribution    B    LOGO    Stakeholder support for our business plans   

C

   LOGO
Competitive supply    B    LOGO    Sustaining growth    C    LOGO
Global potash demand    B    LOGO    Trinidad natural gas supply    C    LOGO
Cyber security    C    LOGO    Realization of asset values    D    LOGO
Environment    C    LOGO    Capital management    D    LOGO
International operations and non-operated assets    C    LOGO               
1  Brighter sections indicate the strategic priority (described on page 18 of this Form 10-Q) impacted by the risk. Faded sections mean the strategic priority is not significantly affected by the risk.

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   20


KEY PERFORMANCE DRIVERS – PERFORMANCE COMPARED TO TARGETS

Through our integrated value model, we set, evaluate and refine our targets to drive improvements that benefit all those impacted by our business. We demonstrate our accountability by tracking and reporting our performance against targets related to each strategic priority set out on pages 32 to 47 in our 2016 AIR. A summary of our progress against selected strategic priorities and representative annual targets is set out below.

 

Strategic Priority    Representative 2017 Annual Target    Performance to June 30, 2017

Portfolio & Return Optimization

   Exceed total shareholder return (TSR) performance for our sector and the DAXglobal Agribusiness Index.    PotashCorp’s TSR was -8 percent in the first six months of 2017 compared to our sector’s weighted average return based on market capitalization1 of -4 percent and the DAXglobal Agribusiness Index weighted average return (based on market capitalization) of 4 percent.

Operational Excellence

   Achieve a 95 percent ammonia reliability rate for our nitrogen division.    Our ammonia reliability rate was 93 percent for the first six months of 2017.

People Development

   Maintain an annual employee turnover rate of 5 percent or less.    Employee turnover rate on an annualized basis for the first six months of 2017 was 4 percent.

Safety & Health Excellence

   Achieve zero life-altering injuries at our sites.    There were no life-altering injuries at our sites during the first six months of 2017.
     Reduce total site recordable injury rate to 0.75 (or lower) and total lost-time injury rate to 0.07 (or lower).    During the first six months of 2017, total site recordable injury rate was 0.90 and total lost-time injury rate was 0.07.

Environmental Excellence

   By 2018, reduce environmental incidents (releases, permit excursions and spills) by 40 percent from 2014 levels.    Annualized total environmental incidents were down 58 percent through the first six months of 2017 compared to 2014 annual levels. Compared to the first six months of 2016, total reportable incidents were down 58 percent.
1  TSRs are based on the currencies of the primary exchanges in which the relevant shares are traded.

PERFORMANCE OVERVIEW

This discussion and analysis are based on the company’s unaudited interim condensed consolidated financial statements included in Part I of this Quarterly Report on Form 10-Q (financial statements in this Form 10-Q) based on International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), unless otherwise stated. All references to per-share amounts pertain to diluted net income per share.

For an understanding of trends, events, uncertainties and the effect of critical accounting estimates on our results and financial condition, this Form 10-Q should be read carefully, together with our 2016 AIR.

REVISED ANNUAL EARNINGS GUIDANCE 1 AND FIRST SIX MONTHS 2017 RESULTS

 

     

Revised 

Annual Company

Guidance

  

First Six Months Actual

Results

Earnings per share

   $  0.45 – $  0.65    $  0.42

1 Revised effective April 27, 2017, and maintained on July 27, 2017

 

21   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


OVERVIEW OF ACTUAL RESULTS

 

     Three Months Ended June 30      Six Months Ended June 30  
Dollars (millions), except per-share amounts    2017      2016      Change      % Change      2017      2016      Change      % Change  

Sales

   $     1,120      $     1,053      $ 67        6      $     2,232      $     2,262      $ (30      (1

Gross margin

     255        243        12        5        523        477        46        10  

Operating income

     200        199        1        1        421        358        63        18  

Net income

     201        121        80        66        350        196        154        79  

Net income per share – diluted

     0.24        0.14            0.10        71        0.42        0.23            0.19        83  

Other comprehensive income (loss)

     69        (184      253        n/m        108        (173      281        n/m  

n/m = not meaningful

 

LOGO   LOGO

 

Earnings in the second quarter and first half of 2017 were higher than the same periods of 2016 due primarily to higher gross margin in potash and income tax recoveries in 2017, compared to income tax expenses in 2016, more than offsetting lower gross margins in nitrogen and phosphate.

Global potash markets continued to improve through the second quarter as agronomic need and affordability supported demand, especially offshore, and contributed to modestly higher prices. In North America, a good spring application season led to healthy shipment levels – although below the particularly robust second quarter of 2016 – and reduced inventory throughout the supply chain. Offshore imports to the US reached record levels through the first half, resulting in lower domestic producer sales volumes.

In nitrogen, the startup of new global capacity had a negative impact on market fundamentals during the quarter. Notwithstanding strong consumption in most key regions, new supply outpaced growth in demand and pressured prices. As this supply transition unfolded, US urea prices fell to multi-year lows while ammonia and UAN were pushed to their lowest prices of the year.

Despite strong demand in Latin America, global phosphate markets remained subdued in the second quarter, largely due to increased supply and lower shipments to India. In this environment, prices for most phosphate fertilizer products declined slightly. While prices for feed and industrial products were modestly higher than in the first quarter, they remained well below prior-year levels, due primarily to increased supply from offshore producers.

Other comprehensive income for the second quarter and first half of 2017 was primarily the result of an increase in the fair value of our investment in Israel Chemicals Ltd. (ICL) more than offsetting a decrease in the fair value of Sinofert Holdings Limited (Sinofert). Other comprehensive loss for the second quarter and first half of 2016 was primarily impacted by decreases in the fair value of our investments in ICL and Sinofert and a net actuarial loss resulting from a remeasurement of our defined benefit plans.

 

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   22


OPERATING SEGMENT REVIEW

We report our results (including gross margin) in three business segments: potash, nitrogen and phosphate as described in Note 2 to the financial statements in this Form 10-Q. Our reporting structure reflects how we manage our business and how we classify our operations for planning and measuring performance. We include net sales in segment disclosures in the financial statements in this Form 10-Q pursuant to IFRS, which require segmentation based upon our internal organization and reporting of revenue and profit measures. 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, nitrogen and phosphate 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. Realized prices refer to net sales prices.

Our discussion of segment operating performance is set out below and includes nutrient product and/or market performance results, where applicable, to give further insight into these results.

 

LOGO

 

23   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


POTASH PERFORMANCE

FINANCIAL PERFORMANCE

 

     Three Months Ended June 30  
     Dollars (millions)      Tonnes (thousands)      Average per Tonne 1  
      2017      2016      % Change      2017      2016      % Change      2017      2016      % Change  

Manufactured product

                          

Net sales

                          

North America

   $ 135      $ 167        (19      651        850        (23    $ 208      $     196        6  

Offshore

     276        160        73        1,709        1,272        34      $ 161      $ 125        29  
     411        327        26        2,360        2,122        11      $     174      $ 154        13  

Cost of goods sold

         (193          (192      1                                 $ (82    $ (91      (10

Gross margin

     218        135        61               $ 92      $ 63        46  

Other miscellaneous and purchased product gross margin 2

     (5      (12      (58                                                      

Gross Margin

   $ 213      $ 123        73                                 $ 90      $ 58        55  
1  Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
2  Comprised of net sales $NIL million (2016 – $2 million) less cost of goods sold $5 million (2016 – $14 million).

 

     Six Months Ended June 30  
     Dollars (millions)      Tonnes (thousands)      Average per Tonne 1  
      2017      2016      % Change      2017      2016      % Change      2017      2016      % Change  

Manufactured product

                          

Net sales

                          

North America

   $ 298      $ 305        (2      1,510        1,628        (7    $ 198      $ 187        6  

Offshore

     474        340        39        3,029        2,277        33      $ 156      $ 149        5  
     772        645        20        4,539        3,905        16      $     170      $ 165        3  

Cost of goods sold

         (389          (421      (8                               $ (86    $     (108      (20

Gross margin

     383        224        71               $ 84      $ 57        47  

Other miscellaneous and purchased product gross margin 2

     (10      (13      (23                                                      

Gross Margin

   $ 373      $ 211        77                                 $ 82      $ 54        52  
1  Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
2  Comprised of net sales $4 million (2016 – $6 million) less cost of goods sold $14 million (2016 – $19 million).

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   24


Potash gross margin variance was attributable to:

 

    

Three Months Ended June 30

2017 vs. 2016

    

Six Months Ended June 30

2017 vs. 2016

 
           

Change in

Prices/Costs

                  

Change in

Prices/Costs

        
Dollars (millions)    Change in
Sales Volumes
     Net Sales      Cost of
Goods Sold
     Total     

Change in

Sales Volumes

     Net Sales     

Cost of

Goods Sold

     Total  

Manufactured product

                         

North America

   $     (22    $ 5      $     12      $ (5      $ (9    $ 15      $ 54      $ 60  

Offshore

     19        60        9            88          51        22            26        99  

Change in market mix

     11            (14      3                       10            (14      4         

Total manufactured product

   $ 8      $ 51      $ 24      $ 83        $     52      $ 23      $ 84      $     159  

Other miscellaneous and purchased product

                                7                                           3  

Total

                              $ 90                                         $ 162  

Sales to major offshore markets by Canpotex 1 were as follows:

 

     Three Months Ended June 30      Six Months Ended June 30  
     Percentage of Sales Volumes                Percentage of Sales Volumes            
      2017      2016      % Change      2017      2016      % Change  

Other Asian markets 2

     40        37        8        38        42        (10

Latin America

     40        47        (15      33        39        (15

India

     10               n/m        11        2        450  

China

     3        7        (57      10        8        25  

Other markets

     7        9        (22      8        9        (11
       100        100                 100        100           
1  Canpotex Limited (Canpotex).
2  All Asian markets except China and India.
n/m = not meaningful

 

25   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


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

 

     Sales Volumes   Net Sales Prices   Cost of Goods Sold
Quarter over Quarter   LOGO   North American volumes were lower than the historically strong second quarter of 2016.   LOGO  

Our average realized price reflected a continued recovery in global spot prices.

  LOGO   Costs were lower in 2017 due to our portfolio optimization, including a greater share of production from our lower-cost mines, particularly Rocanville.
  LOGO   Offshore shipments increased, led by strong demand in Brazil.   LOGO   Offshore prices were also higher due to the impact of our share of Canpotex’s project exit costs following its decision not to proceed with development of an export terminal in Prince Rupert, British Columbia impacting the second quarter of 2016.   LOGO   Offshore cost of goods sold variance was less positive than North America as a relatively higher percentage of products sold was produced at higher-cost mines.
Year over Year   LOGO   Offshore volumes were higher due primarily to stronger demand in all key markets.   LOGO   Prices were higher mainly due to a continued recovery in most global spot markets.   LOGO   Costs were lower in 2017 due to our portfolio optimization, including a greater share of production from our lower-cost mines, particularly Rocanville.
  LOGO   North American volumes were slightly lower despite strong demand compared to the historically strong second quarter of 2016.   LOGO   Offshore prices were also higher due to the impact of our share of Canpotex’s project exit costs following its decision not to proceed with development of an export terminal in Prince Rupert, British Columbia impacting the second quarter of 2016.   LOGO   Costs were also lower in 2017 as the first quarter of 2016 included costs associated with the indefinite suspension of potash operations at Picadilly.

 

LOGO

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   26


NON-FINANCIAL PERFORMANCE

The most significant contributors to the change in our non-financial performance highlights were as follows:

QUARTER OVER QUARTER

 

LOGO

 

Production increased as a response to stronger demand and due to the completion of the Rocanville expansion and ramp up.

The 14 recordable injuries in 2017, compared to nine in 2016, resulted in a higher total recordable injury rate.

There were two lost-time injuries in 2017, compared to none in 2016.

The annualized employee turnover rate increased as a result of 27 departures in 2017 compared to 25 departures in 2016.

In 2017, we experienced two environmental incidents, consisting of two potash spills. In 2016, the only environmental incident was a potash spill.

Waste, as defined in our 2016 AIR, increased quarter over quarter due to the increase in production.

 

 

27   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


YEAR OVER YEAR

 

LOGO

 

Production increased as a response to stronger demand and due to the completion of the Rocanville expansion and ramp up.

Combined with lower hours worked in 2017, the 27 recordable injuries in 2017, compared to 25 in 2016, resulted in a higher total recordable injury rate.

There were no significant changes in the total lost-time injury rate between 2016 and 2017.

There were no significant changes between 2016 and 2017.

In 2017, we experienced two environmental incidents, consisting of two potash spills. In 2016, we experienced four environmental incidents: two potash spills, one brine spill and one water release with high suspended solids.

Waste, as defined in our 2016 AIR, increased period over period due to the increase in production.

 

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   28


NITROGEN PERFORMANCE

FINANCIAL PERFORMANCE

 

     Three Months Ended June 30  
     Dollars (millions)      Tonnes (thousands)      Average per Tonne 1  
      2017      2016      % Change      2017      2016      % Change      2017      2016      % Change  

Manufactured product 2

                          

Net sales

                          

Ammonia

   $ 181      $ 177        2        602        543        11      $ 302      $ 325        (7

Urea

     69        71        (3      293        261        12      $ 236      $ 274        (14

Solutions, nitric acid, ammonium nitrate

     105        119        (12      699        703        (1    $ 150      $ 169        (11
     355        367        (3      1,594        1,507        6      $ 223      $ 244        (9

Cost of goods sold

         (290          (242      20                                 $     (182    $     (160      14  

Gross margin

     65        125        (48             $ 41      $ 84        (51

Other miscellaneous and purchased product gross margin 3

     3        5        (40                                                      

Gross Margin

   $ 68      $ 130        (48                               $ 43      $ 86        (50
1  Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
2  Includes inter-segment ammonia sales, comprised of: net sales $17 million, cost of goods sold $9 million and 40,000 sales tonnes (2016 – net sales $17 million, cost of goods sold $7 million and 39,000 sales tonnes). Inter-segment profits are eliminated on consolidation.
3  Including third-party net sales $14 million and cost of goods sold $11 million (2016 – net sales $6 million and cost of goods sold $1 million).

 

     Six Months Ended June 30  
     Dollars (millions)      Tonnes (thousands)      Average per Tonne 1  
      2017      2016      % Change      2017      2016      % Change      2017      2016      % Change  

Manufactured product 2

                          

Net sales

                          

Ammonia

   $ 340      $ 365        (7      1,148        1,144             $ 297      $ 318        (7

Urea

     158        157        1        613        567        8      $ 258      $ 278        (7

Solutions, nitric acid, ammonium nitrate

     216        252        (14      1,400        1,460        (4    $ 154      $ 173        (11
     714        774        (8      3,161        3,171             $ 226      $ 244        (7

Cost of goods sold

         (556          (546      2                                 $     (176    $     (172      2  

Gross margin

     158        228        (31             $ 50      $ 72        (31

Other miscellaneous and purchased product gross margin 3

     7        9        (22                                                      

Gross Margin

   $ 165      $ 237        (30                               $ 52      $ 75        (31
1  Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
2  Includes inter-segment ammonia sales, comprised of: net sales $39 million, cost of goods sold $20 million and 95,000 sales tonnes (2016 – net sales $34 million, cost of goods sold $14 million and 79,000 sales tonnes). Inter-segment profits are eliminated on consolidation.
3  Including third-party net sales of $20 million and cost of goods sold $13 million (2016 – net sales $11 million and cost of goods sold $2 million).

 

29   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


Nitrogen gross margin variance was attributable to:

 

     Three Months Ended June 30
2017 vs. 2016
     Six Months Ended June 30
2017 vs. 2016
 
            Change in
Prices/Costs
                         Change in
Prices/Costs
        
Dollars (millions)    Change in
Sales Volumes
     Net Sales      Cost of
Goods Sold
     Total      Change in
Sales Volumes
     Net Sales      Cost of
Goods Sold
     Total  

Manufactured product

                         

Ammonia

   $ 5      $ (13    $ (3    $ (11      $      $ (25    $ 12      $ (13

Urea

     2        (12      (5      (15        3        (12      (2      (11

Solutions, nitric acid, ammonium nitrate

         (1          (13          (22          (36            (4          (23           (31           (58

Hedge

                   2        2                        12        12  

Change in product mix

            5        (5                            3        (3       

Total manufactured product

   $ 6      $ (33    $ (33    $ (60      $ (1    $ (57    $ (12    $ (70

Other miscellaneous and purchased product

                                (2                                         (2

Total

                              $ (62                                       $ (72

 

     Three Months Ended June 30      Six Months Ended June 30  
     Sales Tonnes
(thousands)
     Average Net Sales Price
per Tonne
     Sales Tonnes
(thousands)
     Average Net Sales Price
per Tonne
 
      2017      2016      2017      2016      2017      2016      2017      2016  

Fertilizer

     672        547      $ 236      $ 267        1,292        1,213      $ 233      $ 248  

Industrial and Feed

     922        960      $     214      $     230        1,869        1,958      $     221      $     242  
       1,594        1,507      $ 223      $ 244        3,161        3,171      $ 226      $ 244  

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

 

     Sales Volumes   Net Sales Prices   Cost of Goods Sold
Quarter over Quarter   LOGO   Volumes were higher, largely due to stronger fertilizer demand.   LOGO   Our average realized price declined as increased global supply weighed on benchmark pricing, pulling down realizations for nearly all our products.   LOGO   Average costs, including our hedge position, for natural gas used as feedstock in production increased 10 percent. Costs for natural gas used as feedstock in Trinidad production fell four percent (contract price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas increased 56 percent. Including losses on our hedge position, our US gas prices increased 28 percent.

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   30


     Sales Volumes   Net Sales Prices   Cost of Goods Sold
Year over Year     There were no significant changes.   LOGO   Weaker benchmark pricing lowered our average realized price during the first half of 2017.   LOGO   Average costs, including our hedge position, for natural gas used as feedstock in production increased eight percent. Costs for natural gas used as feedstock in Trinidad production fell six percent (contract price indexed, in part, to Tampa ammonia prices) while our US spot costs for natural gas increased 53 percent. Including losses on our hedge position, our US gas prices increased 24 percent.
          LOGO   Ammonia cost of goods sold variance was positive due to lower natural gas costs in Trinidad more than offsetting higher natural gas costs in the US.

 

LOGO

 

31   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


NON-FINANCIAL PERFORMANCE

The most significant contributors to the change in our non-financial performance highlights were as follows:

QUARTER OVER QUARTER

 

LOGO

 

Production and the ammonia operating rate decreased between 2016 and 2017 due to unplanned downtime for repairs at our Geismar and Lima facilities.

In 2017, there was one recordable injury and no lost-time injuries compared to no recordable injuries and no lost-time injuries in 2016.

The annualized employee turnover rate increased as a result of seven departures in 2017 compared to four departures in 2016.

In both 2016 and 2017, we had one environmental incident, consisting of an ammonia release.

Greenhouse gas emissions were higher in 2017 due to higher emissions at our nitric acid plants.

 

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   32


YEAR OVER YEAR

 

LOGO

 

There were no significant changes between 2016 and 2017.

In 2017, there were five recordable injuries with no lost-time injuries compared to six recordable injuries including two lost-time injuries in 2016.

The annualized employee turnover rate increased as a result of 14 departures in 2017 compared to seven departures in 2016.

In 2017, we had three environmental incidents, consisting of two ammonia releases and one organic nitrogen permit exceedance. In 2016, we had four environmental incidents, consisting of two ammonia gas releases, one fluoride air permit exceedance and one urea solution spill.

 

 

33   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


PHOSPHATE PERFORMANCE

FINANCIAL PERFORMANCE

 

     Three Months Ended June 30  
     Dollars (millions)      Tonnes (thousands)      Average per Tonne 1  
      2017      2016      % Change      2017      2016      % Change      2017      2016      % Change  

Manufactured product

                          

Net sales

                          

Fertilizer

   $ 117      $ 108        8              348              274        27      $ 337      $ 397        (15

Feed and Industrial

     123        140        (12      242        238        2      $ 507      $ 587        (14
     240        248        (3      590        512        15      $ 407      $ 485        (16

Cost of goods sold

         (266          (259      3                                 $     (452    $     (506      (11

Gross margin

     (26      (11      136               $ (45    $ (21      114  

Other miscellaneous and purchased product gross margin 2

            1        (100                                                      

Gross Margin

   $ (26    $ (10      160                                 $ (44    $ (20      120  
1  Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
2  Comprised of net sales $1 million (2016 – $2 million) less cost of goods sold $1 million (2016 – $1 million).

 

     Six Months Ended June 30  
     Dollars (millions)      Tonnes (thousands)      Average per Tonne 1  
      2017      2016      % Change      2017      2016      % Change      2017      2016      % Change  

Manufactured product

                          

Net sales

                          

Fertilizer

   $     253      $ 299        (15            716              711        1      $ 354      $ 421        (16

Feed and Industrial

     257        307        (16      513        518        (1    $ 501      $ 592        (15
     510        606        (16      1,229        1,229             $ 415      $ 493        (16

Cost of goods sold

         (526          (579      (9                               $     (428    $     (471      (9

Gross margin

     (16      27        n/m               $ (13    $ 22        n/m  

Other miscellaneous and purchased product gross margin 2

     1        2        (50                                                      

Gross Margin

   $ (15    $ 29        n/m                                 $ (12    $ 24        n/m  
1  Rounding differences may occur due to the use of whole dollars in per-tonne calculations.
2  Comprised of net sales $2 million (2016 – $3 million) less cost of goods sold $1 million (2016 – $1 million).

n/m = not meaningful

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   34


Phosphate gross margin variance was attributable to:

 

    

Three Months Ended June 30

2017 vs. 2016

    

Six Months Ended June 30

2017 vs. 2016

 
            Change in
Prices/Costs
                   Change in
Prices/Costs
        
Dollars (millions)    Change in
Sales Volumes
     Net Sales      Cost of
Goods Sold
     Total      Change in
Sales Volumes
     Net Sales      Cost of
Goods Sold
     Total  

Manufactured product

                         

Fertilizer

   $     6      $     (23    $ 5      $     (12      $      $     (48    $ 4      $     (44

Feed and Industrial

            (19          16        (3            (1      (47          49        1  

Change in product mix

     2        (5      3                       1        (1              

Total manufactured product

   $ 8      $ (47    $ 24      $ (15      $      $ (96    $ 53      $ (43

Other miscellaneous and purchased product

                                (1                                         (1

Total

                              $ (16                                       $ (44

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

 

     Sales Volumes   Net Sales Prices   Cost of Goods Sold
Quarter over Quarter   LOGO  

Sales volumes were higher mainly due to stronger agriculture demand in North America.

  LOGO  

Our average realized price was down, as prices for nearly all products decreased, most notably liquid fertilizers.

  LOGO   Feed and industrial was positive as the increase in asset retirement obligations, primarily due to discount rate reductions, was lower than in 2016.
          LOGO   Sulfur costs were down eight percent, decreasing our cost of goods sold.

 

35   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


     Sales Volumes   Net Sales Prices   Cost of Goods Sold
Year over Year     There were no significant changes.   LOGO   Our average realized price was down, reflecting lower benchmark pricing for all of our products.   LOGO   In 2016, there was an impairment of property, plant and equipment related to product that the company no longer produces. There was no such impairment in 2017, resulting in a positive cost of goods sold variance in feed and industrial.
          LOGO   Feed and industrial was positive as the increase in asset retirement obligations due to discount rate adjustments was lower than in 2016.
          LOGO   Sulfur costs were down 14 percent, decreasing our cost of goods sold.

 

LOGO

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   36


NON-FINANCIAL PERFORMANCE

The most significant contributors to the change in our non-financial performance highlights were as follows:

QUARTER OVER QUARTER

 

LOGO

 

There were no significant changes between 2016 and 2017.

In 2017, there were five recordable injuries, and no lost-time injuries, compared to eight recordable injuries including one lost-time injury in 2016.

There were no significant changes between 2016 and 2017.

In 2017, we experienced no environmental incidents. In 2016 there was one ammonia-to-air release.

In 2017 metered water consumption decreased due to increased rainfall at our White Springs facility compared to 2016 and a new water recycling project. Metered water consumption in 2016 was also higher as certain processes at our White Springs facility continued to need water even when product was not being manufactured.

 

 

37   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


YEAR OVER YEAR

 

LOGO

 

There were no significant changes between 2016 and 2017.

In 2017, there were eight recordable injuries, including one lost-time injury, compared to 14 recordable injuries and two lost-time injuries in 2016.

The annualized employee turnover rate rose due to 26 departures in 2017 compared to 20 departures in 2016.

In 2017, we experienced no environmental incidents. In 2016, we had three environmental incidents, consisting of a total suspended solids permit exceedance, a release of ammonia to air and a mercury permit exceedance.

There were no significant changes in water consumption between 2016 and 2017.

 

 

OTHER EXPENSES AND INCOME

 

     Three Months Ended June 30            Six Months Ended June 30  
Dollars (millions), except percentage amounts    2017      2016      Change      % Change             2017      2016      Change      % Change  

Selling and administrative expenses

   $     (48    $     (55    $ 7        (13      $ (98    $ (108    $ 10        (9

Provincial mining and other taxes

     (44      (26          (18      69          (78      (57      (21      37  

Share of earnings of equity-accounted investees

     49        30        19        63          88        49        39        80  

Dividend income

     4        16        (12      (75        12        16        (4      (25

Impairment of available-for-sale investment

            (10      10        (100               (10      10        (100

Other (expense) income

     (16      1        (17      n/m          (26      (9      (17      189  

Finance costs

     (61      (54      (7      13              (120          (106      (14      13  

Income taxes

     62        (24      86        n/m                49        (56          105        n/m  

n/m = not meaningful

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   38


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

 

          Quarter over Quarter    Year over Year  
Provincial Mining and Other Taxes       Provincial mining and other taxes increased primarily due to stronger potash prices.  
Share of Earnings of Equity-Accounted Investees       Share of earnings of equity-accounted investees pertains primarily to SQM and APC. Higher earnings were mainly due to higher earnings at SQM.  

Finance Costs

    There were no significant changes.  
       

LOGO

 

 

Income Taxes

    Income taxes decreased primarily due to a discrete $68 million deferred tax recovery recorded in the second quarter of 2017 as a result of a Saskatchewan income tax rate decrease. As well, significantly lower forecasted annual earnings in the United States contributed to the reduction. For the first six months of 2017, 163 percent of the effective tax rate on the current year’s ordinary earnings pertained to current income taxes (2016 – 89 percent) and (63) percent related to deferred income taxes (2016 – 11 percent). The decrease in the deferred portion is due to significantly lower forecasted annual earnings in the United States.  
    EFFECTIVE TAX RATES AND DISCRETE ITEMS  
             Three Months Ended June 30      Six Months Ended June 30  
            Dollars (millions), except percentage amounts    2017      2016      2017      2016  
    Actual effective tax rate on ordinary earnings      7      17      9      21
    Actual effective tax rate including discrete items          (44 %)           16          (16 %)           22
        Discrete tax adjustments that impacted the tax rate    $ 71      $ 4      $ 76      $  

OTHER NON-FINANCIAL INFORMATION

 

     Three Months Ended June 30      Six Months Ended June 30  
Dollars (millions), except percentage amounts    2017      2016      Change      % Change      2017      2016      Change      % Change  

Taxes and royalties 1

   $     80      $     81      $     (1      (1    $     174      $     159      $     15        9  
1  Includes tax and royalty amounts on an accrual basis calculated as: current income tax expense less investment tax credits and realized excess tax benefit related to share-based compensation plus potash production tax, resource surcharge, royalties, municipal taxes and other miscellaneous taxes.

 

39   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


The most significant contributors to the change in other non-financial information quarter over quarter and year over year were as follows:

 

     Quarter over Quarter    Year over Year

Taxes and Royalties

  There were no significant changes.    Taxes and royalties increased primarily due to higher provincial mining and other taxes as a result of stronger potash prices. This was partially offset by lower current income taxes as a result of significantly lower forecasted annual earnings in the United States.

FINANCIAL CONDITION REVIEW

STATEMENT OF FINANCIAL POSITION ANALYSIS

 

LOGO

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   40


The most significant contributors to the changes in our statements of financial position were as follows (direction of arrows refers to increase or decrease):

 

Assets

 

Liabilities

LOGO

  Inventory was higher mainly due to an increase in potash and phosphate finished goods inventory.  

LOGO

  Payables and accrued charges were lower mainly due to lower trade payables.

LOGO

  Property, plant and equipment decreased primarily as depreciation exceeded additions.  

LOGO

 

Deferred income tax liabilities have decreased primarily due to a discrete deferred tax recovery as a result of a Saskatchewan income tax rate decrease.

LOGO

  Investments were impacted by higher fair value of our available-for-sale investment in ICL more than offsetting a decrease in the fair value of our available-for-sale investment in Sinofert and an increase in the value of our equity-accounted investment in SQM more than offsetting a decrease in the value of APC.      

Equity

       

LOGO

  Retained earnings were higher as a result of net income (discussed in more detail on page 22) exceeding dividends declared.

LOGO

  Accumulated other comprehensive loss changed to accumulated other comprehensive income, primarily as a result of the net change in fair value of our available-for-sale investments noted above.

As at June 30, 2017, $73 million (December 31, 2016 – $21 million) of our cash and cash equivalents was held in certain foreign subsidiaries. There are no current plans to repatriate the funds at June 30, 2017 in a manner that would result in tax consequences.

LIQUIDITY AND CAPITAL RESOURCES

CASH REQUIREMENTS

CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS

Our contractual obligations and other commitments detailed on page 84 of our 2016 AIR summarize certain of our liquidity and capital resource requirements, excluding obligations that have original maturities of less than one year and planned (but not legally committed) capital expenditures. There have been no significant changes to these contractual obligations and other commitments or to our planned capital expenditures during the first six months of 2017.

SOURCES AND USES OF CASH

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

 

     Three Months Ended June 30            Six Months Ended June 30  
Dollars (millions), except percentage amounts    2017      2016      Change      % Change             2017      2016      Change      % Change  

Cash provided by operating activities

   $ 328      $ 424      $     (96          (23      $ 551      $ 612      $ (61      (10

Cash used in investing activities

         (130          (220      90        (41            (262          (466      204        (44

Cash used in financing activities

     (163      (135      (28      21                (224      (94          (130          138  

Increase in Cash and Cash Equivalents

   $ 35      $ 69      $ (34    $ (49            $ 65      $ 52      $ 13      $ 25  

 

41   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


LOGO

 

 

LOGO

 

PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q   42


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

 

     Quarter over Quarter    Year over Year
Cash Provided by Operating Activities  

Cash provided by operating activities was impacted by:

•Higher net income in 2017;

•Lower cash inflows from receivables in 2017;

•Higher recovery of deferred income tax; and

•Lower cash outflows on payables and accrued charges in 2017.

  

Cash provided by operating activities was impacted by:

•Higher net income in 2017;

•Lower cash inflows from receivables in 2017;

•Higher recovery of deferred income tax; and

•Lower cash outflows on payables and accrued charges in 2017.

Cash Used in Investing Activities

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

Cash Used in Financing Activities

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

We believe that internally generated cash flow, supplemented by available borrowings under our existing financing sources, if necessary, will be sufficient to meet our anticipated capital expenditures and other cash requirements for at least the next 12 months, inclusive of requirements relating to the Proposed Transaction and our working capital deficiency, but exclusive of any possible acquisitions. At this time, we do not reasonably expect any presently known trend or uncertainty to affect our ability to access our potential sources of liquidity.

 

LOGO

 

43   PotashCorp 2017 Second Quarter Quarterly Report on Form 10-Q


CAPITAL STRUCTURE AND MANAGEMENT

PRINCIPAL DEBT INSTRUMENTS

 

LOGO

We use a combination of cash generated from operations and short-term and long-term debt to finance our operations. We typically pay floating rates of interest on our short-term debt and credit facility and fixed rates on our senior notes.

During the first half of 2017, there were no significant changes to the nature of our outstanding commercial paper, credit facility, short-term line of credit and uncommitted letter of credit facility described on page 87 in our 2016 AIR. As at June 30, 2017, interest rates on outstanding commercial paper ranged from 1.3 percent to 1.5 percent. (December 31, 2016 – 0.9 percent to 1.1 percent).

The credit facility and line of credit have financial tests and covenants, including consequences of non-compliance, referenced on page 87 of our 2016 AIR, with which we must comply at each quarter-end. We were in compliance with all covenants as at June 30, 2017 and at this time anticipate being in compliance with such covenants through 2017.

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

 

Debt covenants at June 30

Dollars (millions), except ratio amounts

  Limit      2017  

Debt-to-capital ratio 1

  £ 0.65              0.35  

Debt of subsidiaries

  < $       1,000      $  

Net book value of disposed assets

  < $ 4,314 2     $