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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2004

OR

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

Commission File Number 1-10351

POTASH CORPORATION OF SASKATCHEWAN INC.

(Exact name of registrant as specified in its charter)
     
Canada   N/A
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
 
122 – 1st Avenue South   S7K 7G3
Saskatoon, Saskatchewan, Canada   (Zip Code)
(Address of principal executive offices)    

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 x  NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

YES x  NO o

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     As at October 31, 2004, Potash Corporation of Saskatchewan Inc. had 109,541,346 Common Shares outstanding.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Notes to the Consolidated Financial Statements
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS
SIGNATURES
Statement re Computation of Per Share Earnings
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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PART I.     FINANCIAL INFORMATION

 
ITEM 1.     FINANCIAL STATEMENTS

Potash Corporation of Saskatchewan Inc.

Consolidated Statements of Financial Position

(in millions of US dollars except share amounts)
                   
September 30, December 31,
2004 2003
(unaudited)
Assets
                
Current assets
               
 
Cash and cash equivalents
  $ 380.7     $ 4.7  
 
Accounts receivable
    312.5       305.0  
 
Inventories (Note 3)
    369.8       395.2  
 
Prepaid expenses
    40.6       29.0  
      1,103.6       733.9  
 
Property, plant and equipment
    3,053.2       3,108.1  
Other assets
    611.8       628.3  
Goodwill
    97.0       97.0  
    $ 4,865.6     $ 4,567.3  
Liabilities
                
Current liabilities
               
 
Short-term debt
  $ 94.9     $ 176.2  
 
Accounts payable and accrued charges
    476.4       380.3  
 
Current portion of long-term debt
    1.3       1.3  
      572.6       557.8  
 
Long-term debt
    1,267.9       1,268.6  
Future income tax liability
    503.4       484.2  
Accrued post-retirement/post-employment benefits
    195.4       194.5  
Accrued environmental costs and asset retirement obligations
    84.0       81.3  
Other non-current liabilities and deferred credits
    5.2       7.1  
      2,628.5       2,593.5  
Shareholders’ Equity
                
Share capital (Note 5)
    1,345.4       1,245.8  
  Unlimited authorization of common shares without par value;
Issued and outstanding 109,065,096 and 106,224,432 at
September 30, 2004 and December 31, 2003, respectively 		               
Contributed surplus
    273.6       265.2  
Retained earnings
    618.1       462.8  
      2,237.1       1,973.8  
    $ 4,865.6     $ 4,567.3  

(See Notes to the Consolidated Financial Statements)

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Potash Corporation of Saskatchewan Inc.

Consolidated Statements of Operations and Retained Earnings

(in millions of US dollars except per-share amounts)
(unaudited)
                                   
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
Sales
  $ 815.7     $ 674.6     $ 2,377.8     $ 2,081.4  
Less: Freight
    51.2       55.9       178.2       180.8  
        Transportation and distribution
    23.6       28.3       77.9       78.8  
        Cost of goods sold
    551.5       505.9       1,637.6       1,533.9  
Gross Margin
     189.4       84.5       484.1       287.9  
Selling and administrative
    32.2       24.2       83.8       71.8  
Provincial mining and other taxes
    23.1       12.2       67.5       45.1  
Provision for plant shutdowns (Note 6)
    —       121.5       —       123.7  
Provision for PCS Yumbes S.C.M. (Note 7)
    —       140.5       5.9       140.5  
Foreign exchange loss
    20.1       2.2       2.0       41.5  
Other income
    (19.1 )     (5.2 )     (35.2 )     (21.6 )
      56.3       295.4       124.0       401.0  
Operating Income (Loss)
     133.1       (210.9 )     360.1       (113.1 )
Interest Expense
     20.8       24.6       63.8       67.2  
Income (Loss) Before Income Taxes
     112.3       (235.5 )     296.3       (180.3 )
Income Taxes (Note 8)
     37.1       (49.6 )     97.8       (27.5 )
Net Income (Loss)
   $ 75.2     $ (185.9 )     198.5       (152.8 )
   
               
Retained Earnings, Beginning of Period
                     462.8       641.4  
Dividends
                     (43.2 )     (39.1 )
Retained Earnings, End of Period
                   $ 618.1     $ 449.5  
Net Income (Loss) Per Share (Notes 5 and 9)
                                
 
Basic
   $ 0.69     $ (1.78 )   $ 1.85     $ (1.47 )
 
Diluted
   $ 0.68     $ (1.78 )   $ 1.82     $ (1.47 )
Dividends Per Share
   $ 0.15     $ 0.13     $ 0.40     $ 0.38  

(See Notes to the Consolidated Financial Statements)

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Potash Corporation of Saskatchewan Inc.

Consolidated Statements of Cash Flow

(in millions of US dollars)
(unaudited)
                                   
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
Operating Activities
                                
Net income (loss)
  $ 75.2     $ (185.9 )   $ 198.5     $ (152.8 )
Items not affecting cash
                               
 
Depreciation and amortization
    55.6       53.9       179.2       172.9  
 
Stock-based compensation
    2.8       —       8.4       —  
 
(Gain) loss on disposal of property, plant and equipment
    (0.3 )     —       (0.6 )     0.3  
 
Foreign exchange on future income tax
    13.6       1.2       5.8       26.3  
 
Provision for future income tax
    9.9       (49.6 )     34.2       (27.5 )
 
Share of earnings of equity investees
    (12.0 )     (2.3 )     (19.7 )     (7.2 )
 
Provision for plant shutdowns
    —       118.3       —       118.3  
 
Provision for PCS Yumbes S.C.M.
    —       127.6       5.9       127.6  
 
Provision for post-retirement/post-employment benefits
    (5.7 )     2.2       0.9       11.3  
 
Accrued environmental costs and asset retirement obligations
    0.8       —       2.7       1.1  
 
Other non-current liabilities and deferred credits
    0.7       0.2       (1.9 )     0.7  
 
Subtotal of items not affecting cash
     65.4       251.5       214.9       423.8  
Changes in non-cash operating working capital
                                
 
Accounts receivable
    (18.7 )     10.4       (9.1 )     (25.1 )
 
Inventories
    13.4       20.7       16.5       (31.2 )
 
Prepaid expenses
    (18.5 )     8.3       (11.6 )     9.5  
 
Accounts payable and accrued charges
    39.0       22.6       30.9       27.8  
 
Current income taxes
    12.8       0.8       41.0       (12.6 )
 
Subtotal of changes in non-cash operating working capital
     28.0       62.8       67.7       (31.6 )
Cash provided by operating activities
     168.6       128.4       481.1       239.4  
Investing Activities
                                
Additions to property, plant and equipment
    (43.9 )     (33.4 )     (93.3 )     (81.3 )
Proceeds from disposal of property, plant and equipment
    0.5       —       1.2       —  
Dividends received from equity investees
    —       —       4.6       4.0  
Other assets
    0.3       (3.9 )     4.6       (14.7 )
Cash used in investing activities
     (43.1 )     (37.3 )     (82.9 )     (92.0 )
Cash before financing activities
     125.5       91.1       398.2       147.4  
Financing Activities
                                
Proceeds from long-term debt
    —       —       —       250.0  
Repayment of long-term debt
    (0.2 )     (0.3 )     (0.7 )     (0.8 )
Proceeds from (repayment of) short-term debt
    3.5       (88.0 )     (81.3 )     (329.6 )
Dividends
    (12.8 )     (13.0 )     (39.8 )     (39.1 )
Issuance of shares
    58.2       4.6       99.6       5.5  
Cash provided by (used in) financing activities
     48.7       (96.7 )     (22.2 )     (114.0 )
Increase (Decrease) in Cash and Cash Equivalents
     174.2       (5.6 )     376.0       33.4  
Cash and Cash Equivalents, Beginning of Period
     206.5       63.5       4.7       24.5  
Cash and Cash Equivalents, End of Period
   $ 380.7     $ 57.9     $ 380.7     $ 57.9  
Supplemental cash flow disclosure
                               
 
Interest paid
  $ 11.4     $ 6.9     $ 55.0     $ 46.3  
 
Income taxes paid
  $ 6.8     $ 3.5     $ 22.1     $ 23.6  

(See Notes to the Consolidated Financial Statements)

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Potash Corporation of Saskatchewan Inc.

 

Notes to the Consolidated Financial Statements

(in millions of US dollars except share and per-share amounts)
(unaudited)

1.   Significant Accounting Policies

Basis of Presentation

      With its subsidiaries, Potash Corporation of Saskatchewan Inc. (“PCS”) — together known as “PotashCorp” or “the company” except to the extent the context otherwise requires — forms an integrated fertilizer and related industrial and feed products company. The company’s accounting policies are in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). These policies are consistent with accounting principles generally accepted in the United States (“US GAAP”) except as outlined in Note 16. The accounting policies used in preparing these interim consolidated financial statements are consistent with those used in the preparation of the 2003 annual consolidated financial statements, except as disclosed in Note 2.

      These interim consolidated financial statements do not include all disclosures normally provided in annual consolidated financial statements and should be read in conjunction with the most recent annual consolidated financial statements. In management’s opinion, the unaudited consolidated financial information includes all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly such information. Interim results are not necessarily indicative of the results expected for the fiscal year.

      In 2003, the company approved plans to restructure certain operations. Those plans required significant estimates to be made of: (i) the recoverability of the carrying value of certain assets based on their capacity to generate future cash flows, and (ii) employee termination, contract termination and other exit costs. Because restructuring activities are complex processes that can take several months to complete, they involve periodically reassessing estimates. As a result, the company may have to change originally reported estimates as actual payments are made or activities are completed. Please refer to Note 6 and Note 7.

Principles of Consolidation

      The consolidated financial statements include the accounts of the company and its principal operating subsidiaries:

     — PCS Sales (Canada) Inc.

          — PCS Joint Venture, L.P.
     — PCS Sales (USA), Inc.
     — PCS Phosphate Company, Inc.
          — PCS Purified Phosphates
     — White Springs Agricultural Chemicals, Inc.
     — PCS Nitrogen, Inc.
          — PCS Nitrogen Fertilizer, L.P.
          — PCS Nitrogen Ohio, L.P.
          — PCS Nitrogen Trinidad Limited
     — PCS Cassidy Lake Company
     — PCS Yumbes S.C.M. (“PCS Yumbes”)
     — PCS Fosfatos do Brasil Ltda.

Recent Accounting Pronouncements

      In June 2003, the Canadian Institute of Chartered Accountants (“CICA”) issued Accounting Guideline 15 (“AcG-15”), “Consolidation of Variable Interest Entities”. AcG-15 is harmonized with US GAAP and provides guidance for applying the principles in CICA Section 1590, “Subsidiaries” to those entities

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(defined as Variable Interest Entities (“VIEs”)) in which either the equity at risk is not sufficient to permit that entity to finance its activities without additional subordinated financial support from other parties, or equity investors lack voting control, an obligation to absorb expected losses or the right to receive expected residual returns. AcG-15 requires consolidation by a business of VIEs in which it is the primary beneficiary. The primary beneficiary is defined as the party that has exposure to the majority of the expected losses and/or expected residual returns of the VIE. The CICA has recently amended AcG-15 in an effort to clarify certain issues. The amended guideline is effective for all annual and interim periods beginning on or after November 1, 2004. The company does not expect application of the guideline to have a material impact on its consolidated financial statements.

      In July 2004, the CICA proposed, subject to comments received following exposure, to amend Section 3500, “Earnings per Share”, to conform to recent corresponding amendments proposed by the US Financial Accounting Standards Board (“FASB”) and to those adopted by the International Accounting Standards Board. The CICA expects to issue its proposals in the fourth quarter of 2004 with an effective date for interim and annual periods relating to fiscal years beginning on or after January 1, 2005.

      In October 2004, the CICA decided to defer the mandatory effective date of proposed Section 1530, “Comprehensive Income”, proposed Section 3855, “Financial Instruments — Recognition and Measurement” and proposed Section 3865, “Hedges”, by one year, in order to allow adequate time for implementation. The guidance will now apply for interim and annual financial statements relating to fiscal years beginning on or after October 1, 2006. Earlier adoption will be permitted only as of the beginning of a fiscal year. The CICA expects to issue the new pronouncements in the first quarter of 2005.

2.   Changes in Accounting Policy

Sources of GAAP

      Effective January 1, 2004, the company prospectively adopted new accounting requirements of the CICA as issued in Section 1100, “Generally Accepted Accounting Principles”. This section establishes standards for financial reporting in accordance with GAAP and provides guidance on sources to consult when selecting accounting policies and determining appropriate disclosures when a matter is not dealt with explicitly in the primary sources of GAAP. In light of the new Section 1100 provisions, the company reviewed the application of its accounting policies and changed the consolidated financial statement presentation of sales revenue, freight costs and transportation and distribution expenses, without any effect on gross margin or net income. All comparative information has been appropriately reclassified.

      In prior years, the company reported sales revenues (net of discounts, and including amounts recoverable from customers for freight, transportation and distribution) net of related freight, transportation and distribution expenses. The company now reports sales revenues (net of discounts, and including amounts recoverable from customers for freight, transportation and distribution), freight costs, and transportation and distribution expenses as separate line items on the Consolidated Statements of Operations and Retained Earnings.

Asset Retirement Obligations

      On January 1, 2004, the company adopted CICA Section 3110, “Accounting for Asset Retirement Obligations”, which requires the company to record an asset and related liability for the costs associated with the retirement of long-lived tangible assets when a legal liability to retire such assets exists. This includes obligations incurred as a result of acquisition, construction, or normal operation of a long-lived asset. The provisions of Section 3110 require the asset retirement obligation to be recorded at fair value at the time the liability is incurred. Accretion expense is recognized as an operating expense using the credit-adjusted risk-free interest rate in effect when the liability was recognized. The associated asset retirement obligations are capitalized as part of the carrying amount of the long-lived asset and depreciated over the estimated remaining useful life of the asset. The company has recorded asset retirement obligations primarily associated with certain closure, reclamation, and restoration costs for its potash and phosphate operations.

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      The adoption of Section 3110 did not have a significant effect on the results of operations or financial position of the company. Had the provisions of Section 3110 been applied as of January 1, 2003, the pro forma effects for the year ended December 31, 2003 on net loss would not have been material. As required under the standard, the company will make periodic assessments as to the reasonableness of its asset retirement obligation estimates and revise those estimates accordingly. The respective asset and liability balances will be adjusted, which will correspondingly increase or decrease the amounts expensed in future periods.

Hedging Relationships

      Effective January 1, 2004, the company adopted CICA Accounting Guideline 13, “Hedging Relationships”. This guideline sets out the criteria that must be met in order to apply hedge accounting for derivatives and is based on many of the principles outlined in the US standards relating to derivative instruments and hedging activities. The guideline provides detailed guidance on the identification, designation, documentation and effectiveness of hedging relationships, for purposes of applying hedge accounting, and the discontinuance of hedge accounting. Income and expenses on derivative instruments designated and qualifying as hedges under this guideline are recognized in earnings in the same period as the related hedged item. Ineffective hedging relationships and hedges not designated in a hedging relationship are carried at fair value on the Consolidated Statement of Financial Position, and subsequent changes in their fair value are recorded in earnings. The adoption of this accounting guideline did not have a material impact on the consolidated financial statements.

3.   Inventories

                 
September 30, December 31,
2004 2003
(unaudited)
Finished product
  $ 157.9     $ 160.7  
Materials and supplies
    106.9       108.0  
Raw materials
    39.8       54.1  
Work in process
    65.2       72.4  
    $ 369.8     $ 395.2  

4.   Long-term Debt

      In January and February 2004, the company entered into interest rate swap contracts designated as fair value hedges that effectively converted a notional amount of $300.0 of fixed rate debt (due 2011) into floating rate debt based on six-month US dollar LIBOR rates. Net settlements on the swap instruments are recorded as adjustments to interest expense. The company did not enter into any interest rate swap contracts in 2003.

      In October 2004, the company te