<PAGE> 1
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
COMMISSION FILE NUMBER 1-10351
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POTASH CORPORATION OF SASKATCHEWAN INC.
(Exact name of the registrant as specified in its charter)
<TABLE>
<S> <C>
SASKATCHEWAN N/A
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
122 - 1ST AVENUE SOUTH
SASKATOON, SASKATCHEWAN, CANADA S7K 7G3
306-933-8500
(Address and telephone number of the registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<S> <C>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
Common Shares, No Par Value New York Stock Exchange
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 7, 1997, the registrant had 53,558,910 Common Shares (the
"Shares") outstanding, and the aggregate market value of the 53,526,266 Shares
held by non-affiliates of the registrant was approximately $4,141,594,831.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1996 Annual Report to shareholders ("Annual
Report") are incorporated by reference into Part II.
Portions of the registrant's Proxy Circular for its Annual Meeting of
Shareholders in 1997 are incorporated by reference into Part III.
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<PAGE> 2
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
GENERAL
The Company is one of the world's largest integrated fertilizer companies.
In 1996, the Company's potash production represented an estimated 15% of global
production. In 1996, the Company had 23% of global capacity and an estimated 41%
of global excess capacity, giving it more available potash capacity than any
single company or country other than Canada. The Company is also the third
largest producer of phosphates worldwide by capacity, currently representing
approximately 9% of world production and 7% of world capacity.
Potash Corporation of Saskatchewan Inc. is incorporated under the laws of
Saskatchewan and is the successor to a corporation without share capital
established by the Province of Saskatchewan in 1975. Between 1976 and 1990, the
Company acquired substantial interests in the Saskatchewan potash industry. It
purchased the Cory mine in 1976, the Rocanville and Lanigan mines in 1977, and,
by 1990, 100% of the Allan mine when the Company acquired all of the outstanding
shares of Saskterra Fertilizers Ltd. In addition, in 1978 the Company acquired
reserves at Esterhazy, which are mined by a third party.
In November 1989, the Company was privatized by the Province of
Saskatchewan through the sale of 12.86 million common shares to the public at
Cdn$18.00 per common share. While the Province of Saskatchewan initially
retained an ownership interest in the Company, this interest had been reduced to
zero by the end of 1993. At the time of privatization, limitations on ownership
of common shares were imposed in order to restrict the ability of non-residents
of Canada to own and vote the Shares and to restrict any one person or group of
associated persons from holding more than 5% of the Shares, regardless of
residency or citizenship. In 1994, all restrictions on the holdings of the
Shares were eliminated.
In October 1993, the Company acquired (the "Rio Acquisition") from Rio
Algom Limited ("Rio") its New Brunswick potash and port facilities and its
Patience Lake mine in Saskatchewan.
On April 10, 1995, the Company purchased all of the outstanding shares of
Texasgulf Inc. ("Texasgulf") from Elf Aquitaine, Inc. ("Elf (USA)") and Williams
Acquisition Holding Company, Inc. ("Williams"), for an aggregate purchase price
of $833 million (including acquisition costs). On April 10, 1995, the name
"Texasgulf Inc." was changed to PCS Phosphate Company, Inc. ("PCS Phosphate").
PCS Phosphate manufactures and sells solid and liquid phosphate fertilizers,
animal feed supplements, and purified phosphoric acid which is used in food
products and industrial processes. Its facility in Aurora, North Carolina is the
largest vertically-integrated phosphate mine and processing plant in the world.
Other assets of PCS Phosphate include: animal feed plants in four states; two
industrial phosphoric acid plants owned 50% in a joint venture carrying on
business as Albright & Wilson Company ("Albright"); a solution potash and salt
mine in Moab, Utah; an undivided 50% interest in an ammonia storage terminal in
Savannah, Georgia; and PCS Phosphate's product distribution infrastructure.
On October 31, 1995, the Company purchased all of the outstanding shares of
White Springs Agricultural Chemicals, Inc. ("White Springs") from Occidental
Chemical Corporation ("OxyChem"), for an aggregate purchase price of $288.5
million (including acquisition costs). White Springs' primary assets are a
phosphate mine and two chemical plant complexes in northern Florida, Swift Creek
and Suwannee River, and a bulk terminal facility in Jacksonville, Florida. Other
assets of White Springs include an animal feed plant in Davenport, Iowa and two
more at the Suwannee River facility, and the remaining undivided 50% interest in
the ammonia storage terminal in Savannah, Georgia owned with PCS Phosphate.
In November 1995 the Company, in an underwritten public offering, sold 2.3
million Shares at $73 per share, for gross proceeds of $167,900,000. The
offering proceeds were used in connection with the Company's purchase of the
shares of White Springs.
On March 6, 1997, the Company acquired all of the outstanding capital stock
of Arcadian Corporation ("Arcadian") in exchange for 8,030,336 of the Company's
Common Shares and $555,145,002 in cash. See Recent Acquisition of Arcadian
Corporation.
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On December 6, 1996, the Company entered into an agreement with Guano-Werke
GmbH a wholly-owned subsidiary of BASF Aktiengesellschaft, under which the
Company is to purchase 51% of the outstanding shares of Kali und Salz
Beteiligungs Aktiengesellschaft from Guano-Werke GmbH for an aggregate purchase
price of DM 250 million. See Pending Acquisition of Kali und Salz Beteiligungs
Aktiengesellschaft.
Potash Corporation of Saskatchewan Inc. ("PCS") has its head office and
executive offices at Suite 500, 122-1st Avenue South, Saskatoon, Saskatchewan,
Canada S7K 7G3. In this Form 10-K, the term "Company" means PCS, its
predecessors and its direct and indirect subsidiaries unless the context
otherwise indicates.
See Note 15 to the consolidated financial statements for information
concerning the Company's domestic and international results.
Unless otherwise specified, amounts are stated in U.S. Dollars.
POTASH OPERATIONS
The Company's potash operations include the mining and production of
potash, which is predominantly used as fertilizer.
PROPERTIES
The Company controls the right to mine 677,500 acres of land in
Saskatchewan. Included in these holdings are mineral rights to 474,200 acres
contained in blocks around the six mines in which the Company has an interest,
of which acres approximately 33% are owned by the Company, approximately 51% are
under lease from the Province of Saskatchewan and approximately 16% are leased
from other parties. The majority of the leases are for 21-year terms, renewable
at the Company's option. The Company's remaining 203,300 acres are located
elsewhere in Saskatchewan.
Potash is mined by the Company from two main potash bearing formations in
Saskatchewan, the Patience Lake member of the prairie evaporites in the north,
and the Esterhazy member of the prairie evaporites in the south. The Patience
Lake member is mined at the Lanigan, Allan, Patience Lake and Cory mines, and
the Esterhazy member is mined at the Rocanville and Esterhazy mines.
Under a long-term mining and processing agreement (the "Mining and
Processing Agreement") effective through 2026, International Minerals & Chemical
Corporation (Canada) Limited ("IMC") mines and processes PCS reserves at the
Esterhazy division. PCS has the option to terminate this agreement every five
years. It did not opt to give notice to terminate in December, 1995. IMC has the
option of abandoning the mine at any time after 2011, thus terminating the
Mining and Processing Agreement. For the year ending June 30, 1997, the Company
has notified IMC that it requires total finished potash products in the amount
of 500,000 tons. In each year the maximum the Company is permitted to take under
the Mining and Processing Agreement is 1,050,000 tons and the minimum required
amount is 500,000 tons.
Water inflow at the Esterhazy mine has continued, to a greater or lesser
degree, since December 1985. Substantial pumping capacity has been installed and
remedial efforts have been undertaken. The Company's share of water inflow costs
for 1996 was $4.212 million, of which the majority was expensed. IMC has stated
that it will continue conventional mining. PCS has no indication from IMC that
solution mining or substitute shafts will be pursued at this time.
Potash is also produced by the Company at its New Brunswick mine from the
flank of an elongated salt structure and at its solution mining and milling
operation in Moab, Utah.
PRODUCTION
In 1996, the Company's potash mined consisted of 16.75 million tonnes of
ore at an average grade of 23.3% K2O. In 1996, the Company's potash produced
consisted of 5.78 million tonnes of potash (KCl) with an average grade of 61.02%
K2O, representing approximately 37% of North American production.
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The Company's present annual potash production capacity is approximately
12.2 million tonnes KCl, which includes maximum production under the Mining and
Processing Agreement with IMC of approximately one million tonnes at Esterhazy.
In December 1996, the Company's production capacity represented approximately
50% of the North American total while its excess capacity was an estimated 73%
of North American excess production capacity. The Company allocates production
among its mines on the basis of various factors, including the grades of product
which can be produced and cost efficiency. The Patience Lake mine, which was
originally a conventional underground mine, now employs a solution mining
method, while the other Saskatchewan mines which the Company owns or in which it
has an interest employ conventional underground mining methods.
The New Brunswick mine is a conventional cut and fill mine, while the Moab,
Utah mine employs a solution mining method. In addition to their potash
production, these mines also produced 840,589 tonnes of sodium chloride (salt)
in 1996.
As part of the Rio Acquisition, the Company granted a royalty interest to
Rio based upon production and revenue from the New Brunswick and Patience Lake
potash mines and mills (the "Royalty"). The terms of the Royalty provide that if
production meets specified base production levels or the sales of potash are at
prices which meet specified base sales prices, a royalty per tonne is to be
paid, calculated on a formula basis. Payments under the Royalty are limited to a
term expiring October 7, 2003 and to a maximum aggregate payment of Cdn$50
million. No payments have been made in respect of the Royalty to date.
RESERVES
The Company estimates that its conventional mines in Saskatchewan contained
4.63 billion tonnes of recoverable ore at an average grade of 22.9% K2O as at
December 31, 1996, and that such ore will yield 1.50 billion tonnes of finished
product (KCl) at an average grade of 60% K2O.
The Company's ore reserve estimates for its conventional mining operations
in Saskatchewan are based on exploration drill hole data, seismic data and
actual mining results during the past 25 years. The Company's estimated
recoverable ore and the estimated volumes of finished product from such ore are
as follows:
<TABLE>
<CAPTION>
RECOVERABLE FINISHED
MINE ORE PRODUCT
---- ----------- --------
(MILLIONS OF TONNES)
<S> <C> <C>
Allan.................................. 1,035.6 333.5
Cory................................... 1,077.5 359.7
Esterhazy.............................. 82.0 26.1
Lanigan................................ 1,865.0 601.9
Rocanville............................. 573.5 182.7
------- -------
4,633.6 1,503.9
======= =======
</TABLE>
The Company believes that, with production rates at full capacity and
utilizing current technology, the Rocanville mine has a reserve life in excess
of 75 years, each of the Allan, Cory and Lanigan mines has a reserve life in
excess of 100 years, and that the Esterhazy mine has a reserve life of at least
20 years.
Given the characteristics of the solution mining method employed at the
Patience Lake mine, it is not possible to estimate definitively the productive
capacity of or the recoverable ore from this operation. However, based on
information obtained upon acquisition of the mine, current technology and the
present mining area for this operation, the Company believes that the mine has a
reserve life of at least 40 years for the existing mine workings. Different
techniques will have to be utilized to mine reserves outside of the existing
mine workings.
Based on geophysics, exploration drill hole data, definition drilling
underground and actual mining results, the Company estimates proven reserves of
60.3 million tonnes of recoverable ore and 23.0 million tonnes of estimated
finished product (KCl) at its New Brunswick mine. The Company believes that,
based upon its
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<PAGE> 5
proven reserves, the New Brunswick mine has a reserve life of at least 25 years
with production at full capacity. The Company estimates that probable reserves
at the New Brunswick mine consist of 250 million tonnes of recoverable ore and
90 million tonnes of estimated finished product (KCl). The Company believes
that, based upon its proven and probable reserves, the New Brunswick mine has a
reserve life in excess of 100 years at full production capacity and utilizing
current technology.
The Moab solution operation has an estimated remaining life of 11 to 13
years.
PHOSPHATE OPERATIONS
Through PCS Phosphate and White Springs, the Company mines phosphate ore
and manufactures solid and liquid fertilizers, animal feed supplements and
purified phosphoric acid which is used in food products and industrial
processes.
PROPERTIES
The Company conducts its phosphate operations primarily at two facilities,
one a 35,000-acre facility near Aurora, North Carolina (the "Aurora Plant") and
the other a 96,000-acre facility near White Springs in northern Florida (the
"White Springs Plant"). The Company believes the Aurora Plant to be the largest
integrated phosphate mine and phosphate processing complex at one site in the
world. The Aurora Plant facilities include a six million tonne per-year mining
operation, an integrated phosphoric acid processing plant, a liquid fertilizer
(11-37-0) plant, a superphosphoric acid plant, two diammonium phosphate ("DAP")
plants and a solid fertilizer plant capable of producing DAP, granular triple
superphosphate ("GTSP") or monoammonium phosphate ("MAP"). The Company has also
entered into the Albright joint venture which produces high purity phosphoric
acid at Aurora. The White Springs Plant is the fifth largest P2O5 producer, by
capacity, in the United States, with an annual capacity of 1.1 million tonnes.
The White Springs Plant facilities include a mine and two production facilities,
Swift Creek and Suwannee River, with two sulfuric acid plants, three phosphoric
acid processing plants, two DAP plants, a dicalcium phosphate plant and a
deflourinated phosphate rock plant located at the Suwannee River complex; and
two sulfuric acid plants and a phosphoric acid processing plant located at the
Swift Creek complex. The Company's other properties include animal feed plants
in Davenport, Iowa, Kinston, North Carolina, Marseilles, Illinois, Saltville,
Virginia and Weeping Water, Nebraska, and bulk terminal facilities at
Jacksonville, Florida and Morehead City, North Carolina.
PRODUCTION
The Company extracts phosphate ore using surface mining techniques. At each
mine site, the ore is mixed with recycled water to form a slurry, which is
pumped from the mine site to the Company's processing facilities. The ore is
then screened to remove coarse materials, washed to remove clay and floated to
remove sand to produce phosphate "rock". The annual production capacity of the
Company's mines is currently 9.6 million tonnes of phosphate rock. During 1996,
the Aurora Plant's total production of phosphate rock was 4.3 million tonnes and
the White Springs Plant's total production of phosphate rock was 3.1 million
tonnes. The Company generally operates its phosphate mine and phosphate
processing plants 24 hours a day, seven days a week, using rotating shifts.
Phosphate rock is the major input in the Company's phosphorus processing
operations. In addition to phosphate ore, the principal raw materials required
by the Company are sulfur, sulfuric acid and ammonia. The production of
phosphoric acid requires substantial quantities of sulfur, which the Company
purchases from third parties. The Company purchases substantially all its sulfur
on the spot market or pursuant to one or two-year contracts with quarterly price
adjustments. The Company generally purchases very little of its sulfuric acid
requirements from third parties. Sulfur and sulfuric acid have been in abundant
supply in recent years and remain so at the present time. In 1997, the Company
may transport surplus production of sulfuric acid at White Springs to Aurora as
needed.
The Company purchases substantial quantities of ammonia from third parties.
The Company reacts phosphoric acid with ammonia to produce DAP and MAP, as well
as liquid fertilizers. In addition, ammonia
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operations include the purchase, sale and terminalling of anhydrous ammonia.
Most of the ammonia that is currently purchased by White Springs is produced in
the Republic of Russia (the "Russian Ammonia") and imported through a White
Springs-operated ammonia terminal located within the port of Savannah (Garden
City, Georgia) and non-company operated terminals located within the ports of
New Orleans (Taft, Louisiana), Houston and Tampa, Florida. The Company's ammonia
expenses at Aurora are slightly higher than those of many of its competitors
because of higher transportation costs incurred in transporting ammonia from
Savannah to Aurora, North Carolina by rail.
Most of the phosphate rock produced by the Company is used internally by
the Company for the production of phosphoric acid, superphosphoric acid ("SPA"),
chemical fertilizers, purified phosphoric acid and animal feed products. The
balance is sold to third parties, mostly in foreign markets, for use as a direct
application fertilizer on acidic soils.
A portion of the Company's phosphoric acid production, merchant grade
phosphoric acid ("MGA"), is sold in liquid form, mostly to foreign and domestic
producers of solid fertilizers. The solid fertilizers produced by the Company
are DAP and, to a lesser extent, GTSP and MAP. Nearly one-half of the Company's
DAP is exported, with the balance sold domestically, mostly to large regional
dealers that custom blend solid fertilizers.
The Company's liquid fertilizer products, substantially all of which are
sold domestically, consist principally of low-magnesium SPA, which the Company
markets under the name "LoMag". The Company believes that it is the largest U.S.
producer of SPA.
The Company also processes phosphoric acid to produce animal feed
supplements for the poultry and livestock markets. The Albright joint venture
produces purified phosphoric acid for use in various food products and
industrial processes.
RESERVES
At December 31, 1996, the Company's Aurora phosphate mine had estimated
proven and probable reserves of approximately 399 million tonnes of phosphate
rock, at an average grade of 30.7% P2O5. These reserves represented
approximately 30% of the presently known recoverable phosphate reserves in the
U.S. and would permit mining to continue at current rates for about 75 years.
The Aurora phosphate mine has an estimated annual capacity of 6.0 million tonnes
of phosphate rock, representing 10% of U.S. production capacity, and its
processing plants have the capacity to produce 1.15 million P2O5 tonnes of
phosphoric acid, representing 10% of U.S. production capacity. On April 6, 1995,
approximately 408 million tonnes of phosphate reserves were transferred to a
newly established company, the common stock of which was transferred to Elf
(USA) and Williams prior to the sale of PCS Phosphate to the Company. The
Company was granted a 20-year right of first refusal (from April 10, 1995) in
the event that newly established company proposes to sell the reserves. In
addition, the newly established company and Elf (USA) and Williams agreed, for a
period of ten years from April 10, 1995 not to compete, and for the first five
years not to make certain preparations to compete, with the Company with respect
to those reserves. See Environmental Matters -- Permits.
The White Springs phosphate mine had estimated proven and probable reserves
of approximately 57 million tonnes of phosphate rock, at an average grade of
30.7% P(2)O(5). The Company estimates that an additional 13 million tonnes of
phosphate rock could be purchased at market rates from nearby owners.
Accordingly, the total reserves of 70 million tonnes of phosphate rock at White
Springs would sustain a 21 year mine at a mining rate of 3.3 million tonnes per
year. The White Springs mine has an estimated annual capacity of 3.6 million
tonnes of phosphate rock and the processing plants have the capacity to produce
annually approximately 1.1 million P2O5 tonnes of phosphoric acid. See
Environmental Matters -- Permits.
PCS JOINT VENTURE
The Company indirectly holds all outstanding interests in a limited
partnership (the "PCS Joint Venture") doing business in Florida as Florida
Favorite Fertilizer and in Georgia and Alabama as Farmer's
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Favorite Fertilizer. PCS Joint Venture manufactures, processes and distributes
fertilizer and other agricultural supplies from plants located in Florida,
Georgia and Alabama.
MARKETING
The following table summarizes the Company's sales of potash, phosphates
and other products in the past three calendar years:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Potash
Canada.................................................... 14,507 12,483 9,990
United States............................................. 143,137 128,594 119,170
Canpotex.................................................. 184,025 221,169 185,776
Other..................................................... 61,526 53,686 48,181
Phosphates
Canada.................................................... 17,672 23,461
United States............................................. 564,074 247,127
PhosChem.................................................. 275,644 128,320
Other..................................................... 34,575 18,282
Ammonia..................................................... 108,708 22,958
Florida Favorite Fertilizer................................. 53,551 50,817 43,786
</TABLE>
The following table summarizes the Company's revenue from products, by
category:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Potash...................................................... 403,196 421,002 363,117
Florida Favorite Fertilizer................................. 53,551 50,817 43,786
Phosphates
Liquid Fertilizers........................................ 239,716 106,330
Solid Fertilizers (DAP, MAP, GTSP)........................ 379,326 151,152
Animal Feed............................................... 186,145 94,477
Phosphate Rock, Industrial Products....................... 86,777 60,161
Ammonia..................................................... 108,708 22,958
</TABLE>
Fourth quarter gross margin for 1996 was $51.4 million for the potash
operations and $47.6 million for the phosphate operations. The Company has a
diversified customer base, and apart from sales to Canpotex Limited ("Canpotex")
and Phosphate Chemicals Export Association, Inc. ("PhosChem"), no one customer
accounted for as much as 10% of the Company's sales in 1996.
The following table summarizes average prices per tonne received by the
Company on sales of potash in the past five calendar years expressed as a
percentage of 1992 base prices:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
North America.................................... 116% 123% 115% 102% 100%
Offshore......................................... 132% 125% 111% 95% 100%
</TABLE>
In the recent past, fertilizer prices have been volatile. No assurance can
therefore be given that the average market prices for the Company's fertilizer
products will continue at current levels.
The Company sells potash from its Saskatchewan mines for use outside North
America exclusively to Canpotex. PCS Sales (Canada) Inc. (formerly Potash
Corporation of Saskatchewan Sales Limited) ("PCS
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Sales") executes offshore marketing and sales for the Company's New Brunswick
potash and executes marketing and sales for the Company's potash and phosphate
products in Canada. PCS Sales (USA), Inc. executes marketing and sales for the
Company's potash and phosphate products in the United States. PhosChem, an
association formed under the Webb-Pomerene Act (United States), is the principal
vehicle through which the Company executes offshore marketing and sales for its
phosphate fertilizers.
NORTH AMERICAN MARKETING
In 1996, North American sales revenue from potash operations represented
11.2% of the Company's net sales, substantially all of which was attributable to
potash customers in the United States. North American sales are primarily to
large agri-businesses, independent dealers and cooperatives. Typically, North
American potash sales of the Company are greatest in the second calendar
quarter. The Company has no material contractual obligations in connection with
North American sales to sell potash in the future at a specified price.
In 1996, North American sales revenue from phosphate operations represented
41.4% of the Company's net sales, substantially all of which was attributable to
phosphate customers in the United States. Typically, North American phosphate
product sales are greatest in the first and second calendar quarters. In 1996,
approximately 45% of the volume of PCS Phosphate's phosphate rock and phosphate
product sales were made on the spot market with the balance made under short
term contracts. The Company's contractual sales of phosphates are generally made
pursuant to annual sales contracts. The Company has no material contractual
obligations in connection with North American sales to sell phosphate in the
future at a specified price.
Ammonia purchased by White Springs which is not used in the Company's
operations is sold to third party customers in the United States.
At December 31, 1996, the Company's North American sales were handled by 49
employees in Chicago, Illinois, and various other locations in the United
States, and 26 employees in Saskatoon, Saskatchewan.
OFFSHORE MARKETING
Potash produced by the Company in Saskatchewan for sale abroad is sold to
Canpotex, which is owned in equal shares by the three potash producers in the
Province of Saskatchewan (including the Company). Canpotex, which was
incorporated in 1970 and commenced operations in 1972, acts as an export company
and as a unified marketing force for all Saskatchewan potash production in the
offshore marketplace. Each shareholder of Canpotex has an equal voting interest
as a shareholder and through its nominees on the board of directors. The Company
and the other shareholders of Canpotex have agreed that, as long as they are
members of Canpotex, and with respect to potash produced in Canada, they will
not make offshore sales independently. Production from the Company's New
Brunswick mine has been exempted from this requirement by members of Canpotex.
Any member may terminate its membership in Canpotex on six months' notice.
In general, Canpotex sales are allocated among the producers based on
production capacity. If a shareholder cannot satisfy demand for potash by
Canpotex, the remaining shareholders are entitled to satisfy the demand pro rata
based on their allotted production capacity. The Company currently supplies
57.5% of Canpotex's requirements. Canpotex sells potash to government agencies
and private firms pursuant to six-month contracts at negotiated prices or by
spot sales.
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The following table sets forth the percentage of sales of Canpotex for the
past three calendar years in the various geographical regions:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Asia.............................................................. 70% 78% 75%
Latin America..................................................... 14 8 10
Oceania........................................................... 11 10 10
Europe............................................................ 5 4 4
Other............................................................. -- -- 1
----- ----- -----
Total............................................................. 100% 100% 100%
===== ===== =====
</TABLE>
For 1996, revenue from offshore sales of potash from the New Brunswick
mine, through PCS Sales, represented 4.4% of the net sales of the Company; sales
to Canpotex represented 13.1% of the net sales of the Company in 1996.
Since 1975, PhosChem has been the principal vehicle for United States
exports of phosphate fertilizers. Since at least 1985, PCS Phosphate, IMC-Agrico
Company ("IMC-Agrico"), a joint venture between IMC Global Inc. and
Freeport-McMoRan Resources Partners (or its predecessors) and, until the
Company's acquisition of White Springs, OxyChem, have been members. The PhosChem
members have agreed to export their fertilizer products exclusively through
PhosChem, except for exports to Canada or to any member state of the European
Union or the European Economic Area, sales of superphosphoric acid to the Former
Soviet Union ("FSU") and sales to certain buyers affiliated with members.
Historically, PhosChem negotiated prices and other terms for the export sale of
fertilizer products. According to the terms of a PhosChem agreement effective
January 1, 1995, IMC-Agrico is responsible for the marketing of solid
fertilizers (DAP, MAP and GTSP), and PCS Phosphate, or its sales affiliate (PCS
Sales (USA), Inc.), is responsible for the marketing of liquid fertilizer
products (MGA) to export countries. Total P2O5 sales for 1996 were apportioned
as follows: 66% to IMC-Agrico and 34% to PCS Phosphate. The PhosChem arrangement
relies on the sales forces of IMC-Agrico and PCS Sales (USA), Inc. for sales of
solids and liquids, respectively. The PhosChem agreement will be in effect
through December 31, 1997, and subject to renewal thereafter. If the PhosChem
agreement is not renewed, the Company does not believe the disbanding of
PhosChem would materially affect the Company's sales of fertilizer, but there
can be no assurance that, if PhosChem were to be disbanded, the Company would be
able to find alternative outlets for its products or sell its products at prices
or on terms similar to those expected to be obtained by PhosChem. The Company's
1997 PhosChem allocation is 34%.
Revenue from sales to PhosChem accounted for approximately 19.6% of the
Company's net sales, in 1996. Substantially all of the Company's phosphate sales
to China, India and Pakistan were made through PhosChem. Most of the Company's
sales of phosphate products to China are made to the central purchasing
authority of the Chinese government. Sales to Pakistan were made in response to
government tenders, but sales in India were made to many independent buyers.
The following table sets forth the percentage of sales of PhosChem for the
past three calendar years in the various geographical regions:
<TABLE>
<CAPTION>
1996 1995(1) 1994(1)
----- ------- -------
<S> <C> <C> <C>
Asia......................................... 82% 75% 73%
Latin America................................ 17 13 18
Europe....................................... 1 3 2
Mid East..................................... -- 2 5
Africa....................................... -- 2 1
Other........................................ -- 4 --
---- ---- ----
Total........................................ 100% 100% 100%
==== ==== ====
</TABLE>
- ---------------
(1) Numbers do not add to 100% as a result of rounding.
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<PAGE> 10
Offshore sales are subject to those risks customarily encountered in
foreign operations, including (i) fluctuations in foreign currency exchange
rates, (ii) changes in currency and exchange controls, (iii) the availability of
foreign exchange, (iv) laws, policies and actions affecting foreign trade and
(v) other economic, political and regulatory policies of foreign governments.
DISTRIBUTION AND TRANSPORTATION
The Company has an extensive infrastructure and distribution system to
transport and store its potash and phosphate products.
Transportation costs add significantly to the total amounts paid by
purchasers of potash. Producers have a definite advantage in markets close to
their sources of supply (e.g. Saskatchewan producers in the Midwestern United
States, New Brunswick producers on the U.S. Eastern Seaboard and New Mexico
producers in the Southern and Western United States). International shipping
cost variances permit offshore producers (including the FSU, Germany, Israel and
Jordan) to compete effectively in some of the Company's traditional markets.
Most of the Company's potash for North American customers is shipped by
rail. Shipments are also made from each of the Company's Saskatchewan mines to
Thunder Bay, Ontario, for shipment by lake vessel to the Company's warehouses
and storage facilities in Canada and the United States.
Potash from the New Brunswick mine is shipped primarily by ocean-going
vessel from the Port of Saint John, although truck and rail transport are also
used for North American customers.
In the case of the Company's sales to Canpotex, potash is transported by
rail principally to Vancouver, British Columbia, where port facilities exist for
storage pending shipment overseas. The Company has an equity interest in
Canpotex Bulk Terminals Limited, which is a part owner of these port facilities.
The Company, through Canpotex, has an interest in the development of a port
facility located in Portland, Oregon. It is expected that this facility will be
completed later this year.
With respect to phosphates, the Company leases a shipping terminal in
Morehead City, North Carolina, which receives and stores raw materials for, as
well as the products manufactured by, the Aurora facility. The Company owns nine
barges (four used for solid products, two for phosphoric acid, one for sulfuric
acid and two for sulfur) and three tug boats, which are used to transport
materials between its Aurora facility and Morehead City. Raw materials and
products are also transported to and from the Aurora facility by rail. The
Company transports sulfur it purchases from Canada in large, dedicated unit
trains. Both CSX Corporation and Norfolk Southern Corporation serve the Aurora
facility. The Company believes that its location and diversified transportation
and terminalling capabilities put it in a comparable position to most of its
Florida competitors in purchasing sulfur. The Company receives ammonia for its
phosphate operations at Aurora through its ammonia terminal in Savannah,
Georgia; the ammonia is shipped by rail from Savannah to the Aurora facility.
Sulfur is delivered to the White Springs Plant by unit trains from Canada
and by rail from multiple domestic sources. The Company receives ammonia for its
phosphate operations at White Springs through its ammonia terminal in Savannah,
Georgia; ammonia is shipped by rail from Savannah to the White Springs Plant.
The Norfolk Southern Corporation is the only railroad serving the White Springs
Plant. Most of the phosphoric acid and chemical fertilizers produced at the
White Springs Plant are shipped to domestic destinations by rail. The Company
also ships some of its phosphoric acid, chemical fertilizers and animal feed
products, produced at the White Springs Plant, through the bulk terminal located
in Jacksonville, Florida, for offshore sales.
The Company makes domestic deliveries of animal feed products (bulk and
bagged) by rail or truck from its manufacturing facilities and from several
warehouses supplied from its manufacturing facilities.
The Company ships the ammonia it sells to third parties through various
modes of transportation, including barge, rail, truck and pipeline.
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<PAGE> 11
The Company has approximately 3,650 rail cars, approximately 1,300 of which
are owned by the Company and the balance of which are leased.
COMPETITION
The markets for potash, both domestic and foreign, are highly competitive.
Since potash is a commodity, producers must compete based on price and service
(e.g., delivery time and ability to supply all grades). Apart from competitive
pricing, the Company's principal method of competition is in service to
customers. Among other things, the Company serves its customers by maintaining
warehouses and leasing rail cars to enhance its delivery capability. The high
cost of transporting potash limits competition in various areas.
The Company's potash competition includes two producers in Saskatchewan,
three other significant producers in North America and potash producers located
outside North America in the FSU, Israel, Jordan, Germany and France. Because of
the high capital cost and lead time required to construct a new mine, the
Company's principal competition is expected to continue to come from the owners
of existing mines.
Most phosphate products, particularly solid fertilizers, are commodities,
with little or no product differentiation, and thus trade on the basis of prices
determined in highly competitive markets. The vast majority of the United States
phosphate rock not mined by the Company is produced in central Florida,
southeast of Tampa, and most of the United States phosphate processing capacity,
other than at Aurora, is located in Florida and along the coast of the Gulf of
Mexico.
The Company's principal advantage at Aurora in competing with other
producers is that it operates integrated phosphate mine and phosphate processing
complexes while most of its competitors are required to ship phosphate rock by
rail or truck from their mines to their chemical processing plants, thus
incurring substantially higher transportation costs. In addition, ore at Aurora
is of a more uniform grade and is found in thicker seams than that in central
and south Florida.
As a result of its location in North Carolina and the relatively high cost
of transportation, the Company's U.S. phosphate sales from Aurora have a natural
advantage in the Northeast, mid-Atlantic and eastern Midwest regions, while
White Springs and other Florida producers have a natural advantage in the South,
and Gulf coast producers have a natural advantage in areas of the Midwest
accessible to barge traffic up the Mississippi River.
The Company also competes with governmental agencies and independent
phosphate producers in important exporting countries, including Morocco,
Tunisia, Jordan and South Africa.
EMPLOYEES
At December 31, 1996, the Company had 4,490 active employees of whom 1,504
were salaried and 2,986 were hourly paid. Of these employees, the Company's
potash operations employed 1,516 people, the phosphate operations employed 2,647
people, and 141 people were employed at PCS Joint Venture. The corporate office
had a staff of 111 while 75 people were employed in the Company's sales group.
The Company has six collective bargaining agreements. The collective bargaining
agreements at the Allan, Cory and Patience Lake divisions expire on April 30,
1997. The Lanigan agreement expires on January 31, 1998. The Company and the
Rocanville Potash Employees Association have agreed to a new contract which
expires on May 31, 1998. The agreement between IMC and the union representing
the employees at the Esterhazy mine expires on January 31, 1998. The Company's
New Brunswick and Aurora operations are non-union. The collective bargaining
agreement with the union representing employees at the White Springs Plant
expires on December 1, 1997. The Company believes its relations with its
employees to be good.
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<PAGE> 12
GOVERNMENT REGULATIONS
The Company's potash and phosphate operations are subject to various
legislative and regulatory requirements.
POTASH
In late September 1987, legislation was adopted in Saskatchewan that
authorized the government to control production at potash mines located in the
Province of Saskatchewan. The legislation, which has not taken effect but which
can be brought into effect by proclamation of the Cabinet of Saskatchewan,
permits the Cabinet, and the Potash Resources Board which would be created under
such legislation, to prescribe rates of potash production in Saskatchewan and to
allocate production among individual mines. In determining rates for individual
mines, the Potash Resources Board would take into account a mine's productive
capacity, the rate of production from the mine, the present and future inventory
and stockpile requirements for the mine, the portion of demand for potash that
has been fulfilled by the primary production of potash from the mine and any
additional factors which may be prescribed by regulation. Increases in
production capacity would be subject to the approval of the government of
Saskatchewan. The Company cannot predict at this time if or when the legislation
will be proclaimed or its effects on the results of the Company's operations.
PHOSPHATE
The Company's phosphate mining and processing operations are subject to
general U.S. governmental controls in the form of required permits and
applicable laws and regulations, including the North Carolina Mining Act, which
applies to operations at Aurora, and the Florida Land Reclamation Act and the
severance tax law, which apply to operations at White Springs.
ROYALTIES AND CERTAIN TAXES
Saskatchewan potash production is taxed at the provincial level under The
Mineral Taxation Act, 1983 (Saskatchewan). This tax consists of a base payment
and a profit tax. In addition to the potash production tax, rental fees, taxes
and royalties are payable to the Province of Saskatchewan and municipalities by
potash producers in respect of potash reserves or production of potash in the
Province of Saskatchewan. The Company's tax, fees and royalty expenses were
$39.2 million in 1996.
The Company is subject to capital tax on its paid-up capital (as defined in
The Corporation Capital Tax Act of Saskatchewan). In addition, a resource
corporation in the Province of Saskatchewan pays a corporate capital tax surtax
based on the value of Saskatchewan resource sales. This surtax is only payable
to the extent that it exceeds the regular capital tax. In 1996, the Company paid
capital tax of $4.3 million and paid $8.5 million surtax.
The Company pays royalties to the New Brunswick government on the basis of
production from its New Brunswick mine. In addition, the Company pays municipal
taxes. The Company's expenses for such royalties and municipal taxes were $4.4
million in 1996.
The Company does not make royalty payments in connection with its phosphate
operations.
Income Taxes
PCS and certain subsidiaries are subject to federal and provincial income
taxes in Canada. By virtue of deductions with respect to non-capital losses
carried forward, capital cost allowance, Canadian development expense, earned
depletion allowance and resource allowance, such taxes have not yet been payable
by PCS. However, the Company is subject to the Large Corporations Tax. At
December 31, 1996, the Canadian tax pools plus the non-capital losses carried
forward exceed the book value of PCS's depreciable assets. PCS will begin to
book a deferred tax provision, at an effective tax rate of 35%, once the tax
pools plus the non-capital losses carried forward are less than the book value
of the assets. This rate assumes that primarily all Canadian profits for income
tax purposes are resource profits eligible for the resource allowance and that
an earned depletion claim of 25% on resource profits is available to the
Company. Assuming the status quo, the
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<PAGE> 13
Company is likely to begin to record a Canadian deferred income tax provision in
1997 and is unlikely to pay regular Canadian income taxes before the next
decade.
The subsidiaries of the Company which operate in the United States are
subject to U.S. federal and state income taxes. By virtue of certain income tax
deductions available, these subsidiaries are not currently subject to regular
cash income taxes. However, they are subject to alternative minimum tax, which
may be carried forward indefinitely to be applied against regular income tax
liability. In addition, the Company is subject to United States withholding tax
on certain payments received from its U.S. subsidiaries. The tax rate for 1996
was approximately 23.6% of taxable income, of which 13.8% represented deferred
income taxes, and 9.8% represented cash taxes.
RESEARCH AND DEVELOPMENT
The Company maintains research and development facilities located in
Saskatoon, Saskatchewan, employing approximately 26 persons who concentrate on
improving efficiency in mine operations and product quality. Research continues
on the use of three-dimensional seismic methods and other geophysical tools to
detect geological disturbances in ore seams. The Company is also proceeding with
automation of mining machines. Other research includes measures to maintain and
enhance product quality in transit and at offsite storage facilities.
Research and development expenditures in potash amounted to $1.35 million,
$1.55 million and $1.53 million in 1996, 1995 and 1994, respectively. The
Company does not anticipate any material change in the level of research and
development expenditures for 1997.
The Company continues to evaluate ways to more fully automate its phosphate
production facilities, including improvements to its sulfuric acid, phosphoric
acid and purified phosphoric acid plants. The Company is also exploring ways of
further debottlenecking its phosphate production facilities and selectively
adding capacity through technological enhancements.
ENVIRONMENTAL MATTERS
The Company's operations are subject to environmental controls in the form
of required permits and other applicable Canadian and U.S. federal, provincial,
state and local laws and regulations. Such laws and regulations govern air
emissions, waste water discharges, land reclamation and solid and hazardous
waste management. The Company believes that it is currently in material
compliance with applicable environmental laws and regulations and believes that
it is well positioned to meet anticipated requirements under these laws and
regulations. Although significant capital expenditures and operating costs have
been incurred and will continue to be incurred on account of these laws and
regulations, the Company does not believe, except as otherwise set out herein,
that such environmental laws and regulations have had, or will have, a material
adverse effect on its business. However, the Company cannot predict the impact
of new or changed laws or regulations, including the recently-enacted potash
decommissioning regulations discussed below. The Company anticipates that its
routine expenditures related to environmental matters in 1997 will not differ
materially from the previous year.
ENVIRONMENTAL EXPENDITURES
Reclamation and Restoration Costs
Site restoration and reclamation costs have been accrued for various sites.
At December 31, 1996, the Company had accrued $35.9 million for the Aurora,
North Carolina facility, $66.7 million for the White Springs, Florida facility,
$27.4 million for the Moab, Utah facility and $16.6 million for various sulfur
facilities. The idle sulfur facilities were part of the acquisition of Texasgulf
and are undergoing dismantlement and environmental restoration efforts. The
current portion of restoration and reclamation accrued in 1996 totalled $4.5
million. These amounts represent the Company's current estimate of potential
site restoration and reclamation costs which were last assessed in November,
1996. The expenditures are generally incurred over an extended period of time.
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Annual environmental expenditures for reclamation and restoration during
the year ended December 31, 1996 was $69.9 million. Of this amount, $53.5
million was charged to operations, $6.8 million was capitalized and $9.6 million
was charged against accrued reclamation costs.
Capping of By-product Gypsum Stacks
In 1993, the State of Florida passed certain legislation requiring
companies to reduce the potential environmental hazards associated with
accumulations of by-product gypsum (gypsum stacks). The legislation requires
companies to "cap" the gypsum stacks in order to reduce seepage into
groundwater. The procedures are not required until the gypsum stacks are no
longer in use which management currently estimates to be no earlier than the
year 2010. At December 31, 1996, a balance of $34.3 million was included in
accrued reclamation costs for this gypsum stack capping requirement. The
obligations of White Springs regarding the gypsum stacks are guaranteed by PCS.
In North Carolina, on exhaustion of the mine's phosphate reserves,
disposition of the remaining gypsum must comply with the laws in place at that
time.
Other Environmental Costs
The Company's estimated operating expenses, other than reclamation and
restoration and gypsum stack capping, relating to compliance with environmental
laws and regulations governing ongoing potash operations, were approximately
$9.5 million for the year ended December 31, 1996.
The Company incurs, at the potash mines which it operates, ongoing and
routine expenditures to maintain the waste salt piles and brine ponds, to
maintain air quality and to meet general environmental objectives.
Capital Expenditures
Each year the Company undertakes capital projects to improve the pollution
control facilities at the potash mines which it operates. In 1996, a total of
approximately $2.1 million in capital expenditures was spent to meet the
Company's environmental control objectives at such mines.
PCS Phosphate's capital expenditures with respect to environmental matters
have been primarily related to air emission control, water management, land
reclamation and solid waste disposal. In 1992, PCS Phosphate completed
construction of a $30 million water management system at its Aurora mine and
plant site that the Company believes will address significant water management
issues with respect to both the mine and plant operations for the foreseeable
future. Under the Company's new system of discharge minimization, PCS Phosphate
recycles water used in its slurries and cooling operations, adding new water as
needed.
With respect to air emissions, the Company anticipates that additional
expenditures may be required to meet increasingly stringent U.S. federal and
state regulatory and permit requirements. These requirements include existing
and anticipated regulations under the 1990 amendments to the U.S. federal Clean
Air Act and under state law. In particular, both federal and state regulation of
hazardous air pollutants are expected to require additional pollution control
equipment and increased operating expenditures at some U.S. facilities. The
federal operating permit program is also expected to require the addition of
enhanced emissions monitoring equipment at some facilities, as well as the
imposition of permit fees based upon facility air pollutant emissions. If the
Company undertakes facility expansion at its Aurora and/or White Springs plants,
a federal prevention of significant deterioration permit may be required. This
permit would impose certain restrictions on air pollutant emissions from the
expanded portions of the Aurora and/or White Springs plants.
REGULATORY EVALUATION AND REMEDIATION
In addition to environmental regulation of its present operations, the
Company also may incur costs and liabilities in connection with its past and
present waste disposal practices and ownership and operation of real property,
as well as its mining activities. The U.S. federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA") and other U.S.
federal and state laws impose liability
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<PAGE> 15
on, among others, past and present owners and operators of property at which
hazardous substances have been released into the environment and persons who
arrange for disposal of hazardous substances that are released into the
environment. Liability under these laws may be imposed jointly and severally and
without regard to fault or the legality of the original actions, although such
liability may be divided or apportioned according to various equitable and other
factors. In the course of its present and former operations, including those of
divested businesses, PCS Phosphate and White Springs have generated and the
Company will generate wastes that could result in liability for the Company
under these laws.
A U.S. Environmental Protection Agency ("EPA") contractor conducted a
screening site inspection in November 1989 of a portion of the Aurora facility
in order to determine whether further investigation or cleanup should be
conducted. The contractor's report identified certain pesticide and other
contamination of the soil and potential migration pathways for contamination of
surface water and, to a lesser degree, groundwater, and recommended that the
site be evaluated for cleanup. The Company is not aware of any further action by
EPA or its contractor at this site since the report of this inspection was
issued in March 1991. Another EPA contractor conducted a screening site
inspection in May 1990 on a site that includes the Company's Marseilles,
Illinois facility in order to determine whether further investigation or cleanup
of the site should be conducted. The contractor's report identified certain
contamination of the soil and potential migration pathways for contamination of
groundwater and surface water, but did not make any recommendations for further
action. Illinois Environmental Protection Agency ("Illinois EPA") visited the
site in April 1995. During February 1996, the Company received a CERCLA Site
Inspection Report from Illinois EPA based on the April 1995 visitation.
Officials of the Company were also advised verbally, by the Illinois EPA, that
the site, which included the Marseilles facility, would be given a "no further
action" status. However, the Company has received no written notice of this
status from either EPA or Illinois EPA. The Company does not know if any cleanup
will ultimately be required at these two sites, and consequently is unable to
estimate the total costs of cleanup or its share of such costs if a cleanup is
ordered. During September 1995, an investigation of the Saltville, Virginia
facility was undertaken by EPA in connection with a review of the former
operations of Olin Corporation conducted in and around Saltville. During
October, 1996, the Company received a copy of a Health Consultation for the
Former Hydrazine Plant of Olin Corporation. The only item noted in the
consultation report concerning the former hydrazine plant was the presence of
lead around a tank foundation. The Company plans to analyze the soil at that
tank location and to dispose of, in an appropriate manner, any soil having
elevated levels of lead. The Company has no information indicating that any
cleanup required in connection with the Aurora, Marseilles and Saltville sites
will have a material adverse effect upon the Company's financial condition or
results of operation. Further, the Company believes that if it has any material
liability for such costs, it would have claims against third parties in
connection with such liability. Any such claims would be based on statutory
and/or common law obligations of third parties, such as former owners, occupiers
or disposers.
PCS Phosphate was initially named as a party in two cleanup matters
involving the Colorado School of Mines Research Institute ("CSMRI") in
connection with hazardous substances allegedly generated at some of the former
operations of CSMRI. During May, 1995, Elf (USA) advised EPA that Elf (USA) was
handling the matter on behalf of Texasgulf Inc. and another former Elf (USA)
subsidiary, Texasgulf Metals and Minerals Co. On January 28, 1997, EPA issued a
notice that the required cleanup work at one of the sites had been completed.
PCS Joint Venture and its general partner, Potash Corporation of
Saskatchewan (Florida) Inc. ("PCS Florida"), a wholly-owned subsidiary of the
Company, are subject to various environmental laws of the federal and local
governments in the United States, and from time to time investigations relating
to the enforcement of such laws. Currently, the Florida Department of
Environmental Protection is conducting an investigation into soil and ground
water contamination of a PCS Joint Venture fertilizer plant located in Lakeland,
Florida and certain adjoining property. Assessment of the contamination of the
plant site and of certain adjoining property is continuing. No connection
between the operations of PCS Joint Venture (or its predecessor Florida Favorite
Fertilizer, Inc.) and the contamination has been established. The magnitude of
any liability which PCS Joint Venture and PCS Florida may have regarding the
Lakeland, Florida plant has not yet been determined.
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<PAGE> 16
In June 1994, the Georgia Department of Natural Resources, Environmental
Protection Division, wrote to PCS Joint Venture seeking certain environmental
information regarding its Moultrie, Georgia location. In October 1994, an
additional request for information was received from the EPA pursuant to Section
104(e) of the Comprehensive Environmental Response, Compensation and Liability
Act of 1980. Responses to both requests have been provided by PCS Joint Venture.
Based on a preliminary investigation, there appears to be lead-contaminated soil
at the site. However, a complete assessment of the site has not yet been
completed, and the full nature and extent of the contamination cannot be
quantified at this time.
PCS Joint Venture is co-operating with regulatory authorities in their
investigations of the Lakeland and Moultrie sites. It is also attempting to
determine the number and location of other parties who may be liable for
remediation of these sites. However, because site assessments are ongoing and
because other parties may be liable for some or all costs of remediation, the
ultimate liability of PCS Joint Venture has not yet been determined.
PERMITS
A significant portion of the Company's phosphate reserves in Aurora, North
Carolina is located in wetlands and, under the U.S. federal Clean Water Act, a
permit must be obtained from the U.S. Army Corps of Engineers (the "Corps")
before mining activity that will disturb the wetlands may occur. As part of the
permit process for PCS Phosphate, the Corps issued a draft Environmental Impact
Statement in January 1994 in which five alternative mine plans of PCS Phosphate
were identified and evaluated for their environmental and other impacts. During
May 1995, the Environmental Impact Statement was supplemented to add a sixth
alternative. All six alternatives would enable mining to continue until 2013 at
a mining rate of 5.4 million tonnes of phosphate rock per year. The cost of
mining varies under each of the alternatives, given the significance of the
costs of transporting the phosphate ore from the mine to the plants and of
transporting gypsum and clay to reclamation areas. By letter dated November 21,
1996, PCS Phosphate requested that the alternative which would disturb the least
amount of wetlands be approved by the Corps and that a permit be issued based on
such alternative. No record of decision or permit has yet been issued by the
Corps.
The Company will be required to reach an agreement with the Corps on a
wetlands mitigation plan as a condition of any wetlands permit at Aurora. The
plan will require the Company to create or restore wetlands to compensate for
the wetlands impacted by its mining activities. The Company has recently
acquired additional land adjacent to its Aurora, North Carolina facilities for
this purpose. In order to demonstrate the feasibility of such activities, as of
December 31, 1996, the Company had created or restored 1,988 acres of wetlands.
The Company does not anticipate that an Aurora wetlands permit will be
issued before the spring of 1997. The Company does not expect to begin mining in
areas covered by a wetlands permit before 2003. The implementation of an
approved mine plan could be further delayed by litigation, administrative appeal
or other factors. If approval from the Corps were to be denied or were to be
substantially delayed, the Company has adequate phosphate reserves in
non-wetlands areas in North Carolina to continue mining until 2003.
In addition to the wetlands permit from the Corps, the Company also needs
additional authorizations from agencies of the State of North Carolina to
continue its mining activities in North Carolina. One of these is a
certification from the State that the mining activities will comply with water
quality standards. The Company is also required to have State mining permits
that contain bonding and reclamation requirements. The Company has a State
mining permit for the areas presently being mined by the Company that is
effective through 2003, but this permit must be amended periodically to add
additional acreage during this period. The Company also holds another mining
permit from the State for the area of the property that is the subject of its
wetlands permit application to the Corps. This State wetlands permit has been
renewed until 2005. No mining activity can occur in the area pending issuance of
all required permits. In addition, approval of renewals and amendments of these
permits are conditional upon a determination by the State's Division of Coastal
Management that the land use is consistent with the applicable county land use
plan.
The failure of the Company to obtain any of the foregoing permits would
materially limit its phosphate mining operations in North Carolina beyond 2003.
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<PAGE> 17
Gypsum is a by-product of the production of phosphoric acid. Gypsum is
normally placed in above-ground storage areas called gypsum stacks. The gypsum
stacks at the White Springs Plant will continue to be used and when closed will
be covered or capped to the extent required under applicable regulations.
Although the Company's management believes that it will be in compliance with
Florida's Phosphogypsum Rule and as such should be allowed to continue using its
three gypsum stacks for their useful lives of 40 to 50 years, it is not certain
how long White Springs will be allowed to continue using its gypsum stacks
beyond the year 2001. The rule permits the use of existing gypsum stacks until
they reach capacity, if groundwater standards are met by January 1, 2001. A
regulatory prohibition on use of existing stacks would result in a closure/new
stack construction cost in excess of $100 million.
Lands mined by White Springs after July 1, 1975 and unmined lands used in
the mining operations after July 1, 1984 are subject to mandatory reclamation
requirements of the State of Florida. Wetlands must be reclaimed on an
acre-for-acre basis under the rules of the State of Florida Department of
Environmental Protection ("DEP") unless otherwise provided in, or pursuant to, a
Memorandum of Agreement, dated February 1, 1995, between OxyChem and DEP. The
cost of reclamation of mandatory lands is borne solely by White Springs. The
current practice of White Springs is to return most upland areas to commercial
pine plantation, which is the predominant pre-operation land use. Reclaimed
lands include uplands, wetlands and lakes.
In 1996, White Springs completed a series of federal, state, and local
permitting actions effecting a major change in the regulation of the mining
operation and land reclamation. Pursuant to an agreement with the Florida
Department of Environmental Protection ("FDEP"), White Springs will fund a land
acquisition program for environmentally sensitive lands in the region near its
operations. This concept is referred to as "off-site mitigation". Final approval
of state plans to implement the agreement was granted in 1996, as was a required
modification of existing mining permits from Hamilton County. FDEP's and
Hamilton County's approvals are valid for the life of the operations, and define
operating and reclamation standards for that term. Additional permit revisions
incorporating this change were secured from the Corps for federally-regulated
wetlands mining. The revised Corps permit covers operations through the year
2002. Further Corps permitting will be necessary to apply the off-site
mitigation concept to remaining wetlands. Failure to achieve application of this
concept to additional Corps wetlands would result in higher reclamation costs if
on-site wetlands were required. Failure to secure the required permits under
either on-site or off-site mitigation would negatively affect reserves and
costs.
POTASH DECOMMISSIONING REGULATIONS
The environmental regulatory authorities in the Province of Saskatchewan
have enacted regulations to require decommissioning and reclamation plans and
financial assurances with respect to decommissioning by owners and operators of
mines. Discussions between the regulatory authorities and various participants
in the mining industry have continued since 1994. Pursuant to the regulations,
the Company is required to file with the responsible Minister by March 31, 1997
a decommissioning and reclamation plan for each of the Company's mines located
in Saskatchewan. Such plans are subject to approval by the Minister and must
include, among other things, a proposal for financial assurance to ensure
completion of the plan. An approved financial assurance mechanism must be
established by March 31, 1999 or one year following approval of the
decommissioning and reclamation plan, whichever is later. Because of the
uncertainty surrounding the amount and structure of the assurance mechanism, the
Company is unable to accurately estimate the related costs or other financial
implications to the Company.
RECENT ACQUISITION OF ARCADIAN CORPORATION
On March 6, 1997, the Company acquired all of the outstanding capital stock
of Arcadian. Arcadian was merged with and into PCS Nitrogen, Inc. under which
name the former Arcadian business now operates. As hereafter used, "PCS
Nitrogen" refers to PCS Nitrogen Inc., its predecessors and and its direct and
indirect subsidiaries unless the context otherwise indicates.
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GENERAL
PCS Nitrogen is the largest producer and marketer of nitrogen fertilizers
and nitrogen chemicals in the Western Hemisphere. These products are used for
both agricultural and industrial purposes. PCS Nitrogen produces ammonia at six
of its seven domestic plants and in Trinidad. The ammonia is used to produce a
full line of upgraded nitrogen products, including urea, ammonium nitrate,
nitric acid and nitrogen solutions. Ammonia, urea, ammonium nitrate and nitrogen
solutions are sold as fertilizers to agricultural customers and to industrial
customers for various applications, while nitric acid is sold to industrial
customers as an intermediate chemical feedstock. In addition to nitrogen
products, PCS Nitrogen manufactures a variety of phosphate products at one
domestic plant for agricultural and industrial purposes. In 1996, PCS Nitrogen's
sales were divided approximately 60% to agricultural customers and 40% to
industrial customers. PCS Nitrogen's plants ship products to agricultural,
industrial and export customers via barge, rail, truck and ship. The locations
of PCS Nitrogen's plants are Augusta, Georgia; Clinton, Iowa; Geismar,
Louisiana; La Platte, Nebraska; Lima, Ohio; Memphis, Tennessee; Wilmington,
North Carolina; and Point Lisas, Trinidad. In March 1995, PCS Nitrogen
indefinitely shut down production activities at its plant in Savannah, Georgia,
and converted it to a product distribution facility. All of the plants, except
for the Lima and Trinidad plants, were acquired in 1989 in connection with the
formation of Arcadian. The Lima and Trinidad plants were acquired in 1993.
Arcadian was created in 1989 with the acquisition of five previously
separate nitrogen fertilizer businesses. From April 1992 to August 1995,
Arcadian conducted substantially all of its operations through a master limited
partnership, Arcadian Partners, L.P. ("Partners" and together with its
subsidiaries, collectively, "Partnership"). Arcadian created the Partnership and
held a 2% general partner interest and a 43% limited partner interest; a 55%
limited partner interest was represented by publicly traded preference units.
Arcadian effectively acquired all of the preference units of Partners in August
1995.
PRODUCT SALES
The historical combined net sales of PCS Nitrogen's principal products for
the periods indicated are set forth in the table below.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
% OF % OF % OF
TOTAL TOTAL TOTAL
NET NET NET NET NET NET
SALES SALES SALES SALES SALES SALES
------- ----- ------- ----- ------- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Ammonia........................... $ 385.5 29.3% $ 341.7 27.0% $ 306.2 27.8%
Urea.............................. 351.9 26.8 371.5 29.3 276.6 25.1
Nitric Acid....................... 31.2 2.4 30.3 2.4 25.5 2.3
Ammonium Nitrate.................. 79.3 6.1 77.6 6.1 87.7 8.0
Nitrogen Solutions................ 324.7 24.7 317.6 25.1 273.9 24.9
Phosphate Products................ 97.8 7.4 84.0 6.7 91.0 8.3
Other Products.................... 43.6 3.3 44.2 3.4 39.4 3.6
------- -------
- -
-------- ------ ------ ------
Total Net Sales................... $1,314.0 100.0% $1,266.9 100.0% $1,100.3 100.0%
======== ====== ======== ====== ======== ======
</TABLE>
MARKETING AND DISTRIBUTION
PCS Nitrogen supplies customers in the major crop producing and fertilizer
consuming areas of the U.S. from its domestic plants which are strategically
located throughout the eastern half of the U.S., giving PCS Nitrogen access to a
strong, diversified crop base and lengthy fertilizer consuming seasons.
Following the acquisition, the marketing functions for PCS Nitrogen will by
handled by PCS Sales, the Company's marketing subsidiaries. PCS Nitrogen's
domestic plants have ready access to major railroads, truck, barge or
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<PAGE> 19
vessel transportation. At the Geismar plant, PCS Nitrogen also has one of the
few U.S. deep-water direct vessel loading facilities in the industry, which
provides it with ready access to the export market.
The primary customers for fertilizer products are retail chain operators,
dealers, distributors and other fertilizer producers. National farm retail
chains and cooperatives have both distribution and application capabilities. PCS
Nitrogen does not sell products directly to farmers.
PCS Nitrogen distributes its products by barge, railcar and truck to its
customers and through its strategically located storage terminals in high
consumption areas. PCS Nitrogen leases or owns approximately 50 terminal
facilities with an aggregate storage capacity of approximately 600,000 tons of
product. The terminals provide off-season storage and also serve local dealers
during the peak seasonal demand period. PCS Nitrogen operates approximately
1,300 railcars, including various types of specialty railcars necessary for
transporting some of PCS Nitrogen's products.
PCS Nitrogen distributes products from the Trinidad plant to markets in
Latin America, Europe and Africa in addition to the United States. PCS
Nitrogen's distribution operations in Trinidad employ two long-term chartered
ocean-going vessels and utilize spot charters as necessary for the
transportation of ammonia. All bulk urea production is shipped through
third-party carriers.
SEASONALITY AND VOLATILITY
The markets for nitrogen and phosphate fertilizers are global commodity
markets. These products generally have no proprietary distinction, and the
markets for PCS Nitrogen's fertilizer products are both seasonal and volatile.
The seasonality of PCS Nitrogen's business is primarily the result of the
agricultural growing season, which imposes the need to build inventories for the
annual peak periods of fertilizer application. The volatility of PCS Nitrogen's
business is the result of a number of factors, including U.S. and foreign public
sector policies (including international trade policies), the number of acres
planted, weather patterns and conditions, the mix and yield of crops planted,
disposable farm income, the level of imports and, as with other global markets,
the relative value of the U.S. dollar. The most important factors for domestic
markets are weather patterns and conditions (particularly during periods of high
fertilizer application) and the agricultural and trade policies of the U.S.
government.
The effects of the seasonality of PCS Nitrogen's fertilizer sales are
offset in part by the sale of approximately 40% of its production for
industrial, rather than agricultural, purposes. The industrial market business
cycles for PCS Nitrogen's products are generally independent of the agricultural
cycles.
COMPETITION
Although there has been extensive consolidation and privatization
worldwide, substantial competition exists in the nitrogen fertilizer and
chemical industries. PCS Nitrogen competes domestically with a broad range of
companies in the production and sale of nitrogen fertilizer and chemical
products, including subsidiaries of larger chemical companies, farm
cooperatives, integrated energy companies and independent fertilizer companies.
Because fertilizer is a commodity, competition takes place largely on the basis
of price and delivery. The relative cost of, and availability of transportation
for, raw materials and finished products to manufacturing facilities and markets
are important competitive factors.
PCS Nitrogen also competes with foreign companies whose nitrogen products
are imported into the United States. Although diminishing in number, various
foreign competitors receive subsidies from their governments. Some countries
also have natural gas supplies that are surplus to domestic demand. This surplus
natural gas may have a low alternative value and, when used as feedstock for the
manufacture of ammonia and urea, can result in low-cost production. These
low-cost products are being imported into the U.S. and compete with domestically
manufactured nitrogen fertilizers, including those of PCS Nitrogen. In addition,
other importers subsidized by their governments may import products into the
U.S. for reasons not related to U.S. fertilizer market conditions, such as a
need to obtain U.S. dollars.
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<PAGE> 20
PCS Nitrogen believes that its production capacities for each of its
principal nitrogen products are the largest in the Western Hemisphere, and that
its major domestic competitors are Farmland Industries, Inc., CF Industries,
Inc., and Terra Industries Inc.
PCS Nitrogen's domestic plants serve agricultural markets with a
diversified crop base that spans a lengthy growing season. PCS Nitrogen's
domestic manufacturing plants are strategically located in agricultural and
industrial end-use markets in the Southeast, Midwest and Gulf Coast regions. PCS
Nitrogen believes that it is more economical to transport natural gas, the
primary raw material in the production of nitrogen fertilizers and chemicals, to
plants situated in the product markets than to transport such products over long
distances. Several of PCS Nitrogen's domestic plants are located closer to their
primary customers than are their competitors. PCS Nitrogen concentrates its
marketing efforts on these nearby markets where lower transportation costs
result in better margins. The Company believes that the number and geographic
diversity of its plants provide competitive advantages in manufacturing,
distribution, marketing, customer service and other areas when compared to
competitors controlling only a few facilities.
RAW MATERIALS
Natural gas is the primary raw material used for the production of ammonia
and, as a result, virtually all of PCS Nitrogen's other nitrogen products. The
purchase and transportation of natural gas accounts for approximately 40% of PCS
Nitrogen's total domestic production cost. PCS Nitrogen's natural gas strategy
is to purchase approximately one-third of its natural gas in the spot market or
on short-term contracts, one-third of its natural gas pursuant to fixed-price
physical contracts, reserves in the ground or forward contracts which fix the
price of future deliveries, and the remaining one-third of its natural gas in
Trinidad using a pricing formula related to the market price of ammonia. PCS
Nitrogen purchases nearly all its natural gas from producers or marketers at the
point of delivery of the natural gas into the pipeline system, then pays the
pipeline company and, where applicable, the local distribution company to
transport the natural gas to PCS Nitrogen's facilities. Approximately 75% of PCS
Nitrogen's domestic consumption of natural gas is delivered pursuant to firm
transportation contracts which do not permit the pipeline or local distribution
company to interrupt service to, or divert natural gas from, the plant.
In addition to nitrogen products, PCS Nitrogen produces phosphate products
at the Geismar plant for which supplies of phosphate rock and sulfur are
necessary. PCS Nitrogen purchases phosphate rock from Morocco pursuant to an
agreement with a Moroccan government-owned company, the current term of which
expires on December 31, 2002, wherein prices are reset annually through
negotiation. If no agreement on price is reached, either party may terminate the
agreement. Changes in the agreement could affect the stability of the supply of
the raw material and the profitability of PCS Nitrogen's phosphate products.
Sulfur is purchased pursuant to a contract that may be cancelled by either party
upon 180 days' notice prior to the end of any month. Both phosphate rock and
sulfur are delivered to the Geismar plant via ship and barge.
FACILITIES
PCS Nitrogen manufactures nitrogen products at eight plants, of which seven
are located in the United States and one is located in Trinidad. The following
table sets forth the plant locations and production capabilities:
<TABLE>
<CAPTION>
PLANT LOCATIONS PRODUCTS PRODUCED
- --------------- -----------------
<S> <C>
Augusta, Georgia................... Ammonia, urea, nitric acid, ammonium nitrate, and
nitrogen solutions
Clinton, Iowa...................... Ammonia, urea, nitric acid, ammonium nitrate, and
nitrogen solutions
Geismar, Louisiana................. Ammonia, urea, nitric acid, ammonium nitrate, nitrogen
solutions, phosphoric acid, super-phosphoric acid,
phosphate solutions, and sulfuric acid
LaPlatte, Nebraska................. Ammonia, urea, nitric acid, ammonium nitrate, and
nitrogen solutions
</TABLE>
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<PAGE> 21
<TABLE>
<CAPTION>
PLANT LOCATIONS PRODUCTS PRODUCED
- --------------- -----------------
<S> <C>
Lima, Ohio......................... Ammonia, urea, nitric acid, nitrogen solutions, and
ammonium nitrate
Memphis, Tennessee................. Ammonia and urea
Wilmington, North Carolina......... Nitric acid, nitrogen solutions, and ammonium nitrate
Point Lisas, Trinidad.............. Ammonia and urea
</TABLE>
PCS Nitrogen leases or owns terminal facilities at approximately 50
locations throughout the southern, southwestern, midwestern and eastern United
States principally for the storage of nitrogen solutions. PCS Nitrogen also
leases office space for its corporate headquarters.
SERVICE AGREEMENTS
The Geismar plant is integrated with a larger chemical manufacturing
complex owned by Allied-Signal, Inc. ("Allied"). Under the Geismar Services
Agreement, PCS Nitrogen and Allied provide certain support services to each
other, including the provision of utilities, the discharge of wastewater,
security and emergency services, and other essential services. PCS Nitrogen
believes that most of the services that PCS Nitrogen requires are available from
other sources, if necessary. However, the termination of, or the need to
replace, certain of the services provided (such as steam, well water supply and
dock services) could, in the aggregate, involve potentially significant capital
expenditures, increased operating costs and disruptions to the operations of the
Geismar plant.
BP Chemicals Inc. ("BPC") operates the Lima plant on PCS Nitrogen's behalf
under an operating agreement that can be terminated by either party with one
year notice. PCS Nitrogen's payments to BPC under the operating agreement
generally are intended to approximate BPC's previous cost of operating the Lima
plant and are made through the reimbursement of expenses incurred by BPC in
providing such operating services. In addition, due to the mutual
interdependence of the Lima plant and BPC's operations, PCS Nitrogen and BPC
have agreed to provide each other with certain manufacturing support services at
cost pursuant to a contract extending for as long as the plants continue to
operate and either party is required to provide support services thereunder.
PCS Nitrogen uses contract labor personnel provided by Augusta Service
Company, Inc., which is owned 50% by PCS Nitrogen and 50% by DSM Chemicals North
America, Inc. ("DSM"), to provide purchasing, stores and spare parts management,
maintenance, repair and shipping services for the Augusta plant.
PCS NITROGEN LITIGATION
DOJ Investigations
In 1993, PCS Nitrogen learned that the Antitrust Division of the Department
of Justice (the "DOJ") had initiated a grand-jury investigation of pricing
practices in the explosives industry. In response to a subpoena issued in that
investigation, PCS Nitrogen produced to the DOJ in 1994 and 1995 documents
concerning ammonium nitrate sold to explosives manufacturers. In late 1996 and
early 1997, PCS Nitrogen learned that the DOJ had begun contacting current and
former PCS Nitrogen employees seeking information concerning PCS Nitrogen's
pricing of ammonium nitrate in 1992. PCS Nitrogen is cooperating fully with the
DOJ investigation and has been informed by the DOJ that, based on currently
available information, neither PCS Nitrogen nor any of its current or former
directors, officers and employees is a target of the investigation. PCS Nitrogen
believes that neither it nor its employees have violated the antitrust laws and
that the DOJ's investigations are unlikely to result in a material adverse
effect on the Company.
Lake Charles Plant
In connection with an incident at its Lake Charles plant in 1992, PCS
Nitrogen is contesting penalties proposed by the United States Occupational
Safety and Health Administration ("OSHA") totaling $4.35 million. On February
19, 1997, an administrative law judge of the Occupational Safety and Health
Review Commission issued a decision finding that PCS Nitrogen had committed a
willful violation of the
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<PAGE> 22
federal Occupational Safety and Health Act and assessing a penalty of $50,000.
PCS Nitrogen plans to appeal the judge's decision. Other phases of the OSHA
proceeding have generally been favorable to PCS Nitrogen. While PCS Nitrogen and
legal counsel anticipate that any civil penalty ultimately paid will be
substantially less than the remaining $4.35 million penalty proposed by OSHA,
they cannot predict with certainty the outcome of the proceeding.
In September 1996, PCS Nitrogen's liability insurers negotiated preliminary
settlements of substantially all of the civil litigation arising from the Lake
Charles incident. The settlements, which in the aggregate are within the policy
limits of PCS Nitrogen's liability insurance, are subject to the negotiation and
execution of definitive settlement agreements and, with respect to the class
action civil litigation, approval as to fairness by the court. There remain
three lawsuits against PCS Nitrogen arising from the incident, which were
brought by former employees at the Lake Charles plant who allege that they were
wrongfully terminated following the incident. Management and legal counsel
believe that these lawsuits are without merit, and that there will be no
material adverse effect on the Company upon their resolution.
Port Authority of New York and New Jersey
On March 13, 1996, PCS Nitrogen, two other nitrogen producers, and up to 30
unidentified parties were named as defendants in a lawsuit filed in the name of
the Port Authority of New York and New Jersey (the "Port Authority") in New
Jersey state court. The lawsuit was filed by attorneys hired by the Port
Authority's subrogated insurance carriers. The Port Authority's insurers are
seeking to recover damages allegedly incurred as a result of the explosion at
the World Trade Center in New York City on February 26, 1993. The Port
Authority's insurers allege in their complaint that the two other named
defendants and one or more unidentified parties (as manufacturers of ammonium
nitrate), PCS Nitrogen and one or more unidentified parties (as producers of
urea), and one or more unidentified makers of nitric acid are liable under
various tort theories for unspecified property damages, business interruption
losses, lost rent and other damages allegedly incurred by the Port Authority as
a result of the World Trade Center explosion. The lawsuit was removed to federal
court in New Jersey. On February 7, 1997, the defendants filed a motion to
dismiss the suit for failure to state a claim upon which relief could be
granted. Although neither the Port Authority nor its subrogated insurers have
alleged or otherwise revealed the amount of damages sought from the defendants
in the lawsuit, the Port Authority stated in an affidavit submitted to the court
in support of its motion to disqualify its insurers' counsel that as of April 9,
1996, the Port Authority had submitted to its insurers claims relating to the
explosion totaling approximately $340 million, of which the insurers had paid
approximately $160 million. PCS Nitrogen is unaware of any basis for liability
and intends to vigorously defend the lawsuit.
PCS NITROGEN ENVIRONMENTAL MATTERS
The production, distribution and storage of nitrogen and phosphate
fertilizers and chemicals may result in environmental damage. In addition, the
production of fertilizers and chemicals involves the use, handling and
processing of materials that may be considered hazardous within the meaning of
applicable environmental, health and safety laws. PCS Nitrogen believes that the
procedures currently in effect at all of its facilities for the production,
handling and transportation of all materials are consistent with industry
standards and are in general compliance with applicable environmental, health
and safety laws, the violation of which could have a material adverse effect on
the Company.
PCS Nitrogen's operations are subject to extensive and evolving federal,
state and local and certain foreign laws and regulatory requirements relating to
environmental affairs, health and safety, waste management and chemical
products. Permits are required for the operation of PCS Nitrogen's plants and
related facilities, and these permits are subject to revocation, modification
and renewal. Governmental authorities have the power to enforce compliance with
these regulations and permits, and violators are subject to civil and criminal
penalties, including civil fines, injunctions or both. Third parties also may
have the right to pursue legal actions to enforce compliance. Future
developments, such as stricter laws, regulations or enforcement policies
thereunder, could significantly increase the costs of PCS Nitrogen with respect
to the handling, manufacture, use, emission or disposal of substances or wastes
by PCS Nitrogen. Moreover, some risk of environmental costs and liabilities is
inherent in PCS Nitrogen's operations and products, as it is with other
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<PAGE> 23
companies in the industry, and there can be no assurance that material costs and
liabilities will not be incurred by PCS Nitrogen. PCS Nitrogen's capital
expenditures on projects principally related to environmental control,
remediation and compliance in 1996 were approximately $10 million, and PCS
Nitrogen anticipates expenditures of approximately $11 million for similar
projects during 1997 and $7 million for such projects during 1998. PCS Nitrogen
expects that its capital requirements for environmental projects may increase in
the future due to increasingly stringent environmental regulations arising from
current and future requirements of law.
The federal Clean Air Act Amendments of 1990 ("CAA Amendments") provide for
increased regulation of air emissions, including pollutants that may be
considered toxic within the meaning of the statute, and set forth requirements
for federal air emissions operating permits, applications for which have been
submitted to the relevant state permitting authorities. In addition, several
states, including Louisiana and North Carolina, have adopted or are in the
process of adopting stricter controls on air emissions designated as toxic by
those states, which in certain cases include ammonia. PCS Nitrogen retained an
environmental consulting firm to evaluate the applicability of the CAA
Amendments' requirements to PCS Nitrogen's domestic plants. Based on the results
of the study, PCS Nitrogen will be required to take certain actions to ensure
compliance with the CAA Amendments and related applicable state laws. As the
nature and cost of such actions will be determined as the operating permit
application process for each of its plants proceeds, PCS Nitrogen is currently
not able to estimate the potential costs of such action.
The plant sites on which PCS Nitrogen's production operations are located
have been used for many years. Although PCS Nitrogen has utilized, and believes
that its predecessors generally utilized, operating and disposal practices that
PCS Nitrogen believes complied with industry standards at the time, federal and
state laws relating to the remediation of historical disposal sites have become
more stringent. As a result, to the extent that wastes may have been released or
disposed of at its plant sites, PCS Nitrogen has in the past been, and may in
the future be, required to remediate contaminated property or ground water or
remove previously disposed wastes and address related liabilities.
In connection with certain recent modifications and additions to the
Geismar plant, consultants retained by PCS Nitrogen incorrectly estimated
emissions levels for nitrous oxide ("N0x") associated with such projects. As a
result, preconstruction permit applications required for such projects under the
federal Clean Air Act were not filed by PCS Nitrogen. Pursuant to a consent
order with the Louisiana Department of Environmental Quality ("LDEQ"), such
applications have now been filed, and PCS Nitrogen expects LDEQ to issue
corresponding permits soon. Although PCS Nitrogen is unable to predict with
certainty whether LDEQ will impose N0x emissions controls through such permits,
PCS Nitrogen currently estimates that such controls, if imposed, will require
the expenditure of approximately $750,000.
UAN solutions storage facilities at the Clinton and LaPlatte plants are
subject to recently-issued state secondary containment regulations. These
regulations require the installation of spill prevention and containment
structures and equipment, and the adoption of procedures, to prevent or mitigate
releases of UAN solutions to the environment. Based on currently available
information, PCS Nitrogen expects that it will incur expenditures of $2-2.5
million for each of the Clinton and LaPlatte plants for such purposes. PCS
Nitrogen expects to incur the entire Clinton plant expenditure during 1997,
while the LaPlatte plant expenditure will be incurred over a two-year period
ending in 1998.
In February 1996, the North Carolina Department of Environment, Health and
Natural Resources notified PCS Nitrogen that the Navassa, North Carolina
terminal site had been included on the state's Inactive Hazardous Waste Sites
Priority List. Listed sites normally are subject to detailed assessment of the
environmental condition of concern and the feasible remediation options. PCS
Nitrogen nonetheless currently expects that the cost and liability, if any,
associated with the Navassa terminal site will not have a material adverse
effect on the Company.
In 1991, after extensive environmental assessments, PCS Nitrogen installed
a remediation system at the Memphis plant to address certain contaminants found
in the groundwater. Although the system was installed voluntarily and had been
in operation for over a year, the Tennessee Department of Environment and
Conservation ("TDEC") in 1993 proposed to include the Memphis plant on the
state's list of Inactive
I-22
<PAGE> 24
Hazardous Substance Sites. The Tennessee Solid Waste Disposal Control Board
rejected a similar proposal made by the TDEC in 1989. Listed sites normally are
subject to detailed assessment of the environmental condition of concern and the
feasible remediation options, but that process may not be fully appropriate as
to the Memphis plant in view of PCS Nitrogen's existing remediation system.
Nevertheless, in 1994, PCS Nitrogen entered into a voluntary consent agreement
and order with the TDEC providing for oversight and possible modification by the
TDEC of PCS Nitrogen's current remedial action, including authority for
requiring assessments of soils associated with PCS Nitrogen's wastewater
treatment system. There can be no assurance that the Memphis plant will not be
listed in the future, but in the event that it is listed, PCS Nitrogen expects
that the compliance costs will not have a material adverse effect on the
Company.
In 1990, PCS Nitrogen implemented a voluntary program to assess groundwater
quality at the Clinton plant due to the presence of nitrates in the groundwater.
PCS Nitrogen provided the results of its investigation to the Iowa Department of
Natural Resources ("IDNR"). Pursuant to negotiations with the IDNR, the Company
will conduct further investigations and, if necessary, remediation. Further, the
Clinton plant site is immediately adjacent to the Chemplex Superfund site at
which groundwater remediation is currently being conducted. Certain volatile
organic compounds associated with the Chemplex site have been detected in small
amounts in the groundwater at the Clinton plant. It is also possible that
remediation activities at the Chemplex site could result in increased levels of
nitrates in groundwater at the Clinton plant. Nonetheless, based on currently
available information, PCS Nitrogen expects that the cost of the further
assessment and any remediation of nitrates will not have a material adverse
effect on the Company.
The Lima plant discharges wastewater to the Ottawa River under a National
Pollutant Discharge Elimination System permit issued by the Ohio Environmental
Protection Agency ("OEPA"). When the permit was renewed in 1989, the OEPA
initially proposed to impose substantial limitations on certain substances
present in the wastewater, based on concerns over the already impaired quality
of the river water as a result of industrial or municipal discharges. The OEPA
later agreed in an administrative settlement to a five-year permit for the Lima
plant with discharge conditions that were more acceptable to the Lima plant's
prior owner, BPC. The permit expired in 1994, was administratively extended and
was renewed by the OEPA in July, 1996, for a shorter than customary term ending
October 31, 1997. While PCS Nitrogen does not expect that substantial additional
discharge restrictions will be imposed in conjunction with the next renewal, the
OEPA may again seek to impose a reduction in the permitted discharge levels.
Such restrictions may require the installation of improved treatment technology,
the cost of which will depend on the limitations ultimately imposed.
DSM, which conducts manufacturing operations immediately adjacent to the
Augusta plant, is subject to certain corrective action requirements under its
Resource Conservation and Recovery Act ("RCRA") hazardous waste management
permit. Pursuant to these requirements, the Georgia Department of Natural
Resources ("GEPD") identified a number of solid waste management units on DSM's
property, including several on property formerly leased from DSM by PCS
Nitrogen, for assessment and potential remediation. During 1996, PCS Nitrogen
purchased the leased land and the GEPD required PCS Nitrogen to enter into a
corrective action consent order for the performance of the assessment and
remediation actions which would have been required of DSM with respect to the
purchased land under its RCRA permit. PCS Nitrogen is preparing a draft
remediation investigation work plan to be submitted to the GEPD providing for
the assessment of the solid waste management units identified by the GEPD at the
Augusta plant. Due to the preliminary nature of the draft work plan and the fact
that it must be approved by the GEPD prior to implementation, PCS Nitrogen is
currently not able to accurately estimate the amount of costs that will be
incurred. Based on currently available information, however, PCS Nitrogen does
not expect that such costs will have a material adverse effect on the Company.
The Parliament of Trinidad and Tobago is considering legislation providing
for the increased regulation of environmental matters. Due to the uncertain and
emerging nature of this legislation and the regulations to be issued thereunder,
PCS Nitrogen is not currently able to accurately predict the impact that such
legislation and associated regulations may have on its operations in Trinidad.
However, PCS Nitrogen does not currently expect that such legislation or
regulations will have a material adverse effect on the Company.
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<PAGE> 25
PENDING ACQUISITION OF KALI UND SALZ BETEILIGUNGS AKTIENGESELLSCHAFT
On December 6, 1996, PCS entered into an agreement (the "K&S Purchase
Agreement") with Guano-Werke GmbH ("GW"), a wholly-owned subsidiary of BASF
Aktiengesellschaft ("BASF"), under which PCS will purchase 51% of the
outstanding shares (the "K&S Shares") of Kali und Salz Beteiligungs
Aktiengesellschaft ("K&S") from GW for an aggregate purchase price of DM 250
million (approximately $162 million, as at December 31, 1996) (the "K&S
Acquisition"). Upon the closing of the purchase, GW will continue to hold
approximately 25.4% of the outstanding K&S Shares and the remaining 23.6% will
continue to be widely held and publicly traded in Germany. K&S's primary assets
are a 51% interest in Kali und Salz GmbH ("K&S Sub") and a 50% interest in
Potash Company of Canada Limited ("Potacan"). The primary assets of K&S Sub are
its six potash and two salt mines and processing plants in Germany. The primary
assets of Potacan are its potash mine and processing plant in Canada. Wholly
owned subsidiaries of K&S are engaged in the businesses of providing dry solid
waste disposal services and providing transportation and terminalling for
certain bulk commodities. Waste disposal takes place at some of the mines of K&S
Sub and is conducted in compliance with German environmental and other
regulatory requirements. Terminalling services are provided through a terminal
in Hamburg, Germany. As used herein, "DM" means Deutsche Marks.
PURCHASE AGREEMENT
The K&S Purchase Agreement provides that GW will sell 2,550,000 K&S Shares
to PCS for a purchase price of DM 250 million to be paid in cash in two
installments consisting of DM 150 million payable at closing and DM 100 million
payable no earlier than one year and no later than three years from closing. In
addition, GW agreed to grant to PCS a call option to purchase the remaining
1,272,789 K&S Shares held by it at any time before January 1, 2000, at a price
of DM 124.8 million and a right of first refusal thereafter to January 1, 2010.
PCS will fund the purchase price of the K&S Shares with cash obtained from
either its existing cash or borrowings.
The K&S Purchase Agreement contains conditions to closing thereunder,
including the obtaining of certain applicable regulatory approvals. BASF and PCS
have each made the necessary filings under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the waiting period thereunder expired
at midnight on January 12, 1997. Submissions have been made to the Canadian and
German regulatory authorities regarding the proposed transaction and discussions
are continuing with the Canadian authorities. On February 28, 1997 the German
Federal Cartel Office issued an order prohibiting the transaction. PCS and BASF
are preparing and intend to file, as soon as practicable, an application for
authorization from the German Minister of Economics for the transaction to
proceed.
The K&S Purchase Agreement contains certain representations and warranties
made with respect to K&S, K&S Sub and certain other principal operating
subsidiaries, including that, to the best knowledge of GW, (a) any environmental
pollution of the real estate used in the businesses to be acquired, for which
such businesses could be held liable, and (b) any decommissioning costs
applicable to such businesses, under current law or presently required final
operation plans, are covered by enforceable obligations against third parties or
by proper financial statement accruals. The K&S Purchase Agreement also contains
representations and warranties made with respect to K&S, K&S Sub and certain
other principal operating subsidiaries that, to the best knowledge of GW, all
licenses, permits and authorizations necessary to continue such businesses as
currently operated have been obtained. GW has agreed to indemnify PCS for a
period of two years after closing for claims arising out of GW's breaches of its
representations and warranties under the K&S Purchase Agreement. However,
certain environmental claims will be indemnified for a period of five years, and
certain tax claims will be indemnified for a period six months longer than the
applicable statute of limitations.
The financial obligations of GW under the K&S Purchase Agreement are
guaranteed by BASF.
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<PAGE> 26
DESCRIPTION OF K&S SUB'S BUSINESS
German Mining Operations
K&S Sub produces and markets a broad line of fertilizer products compounded
from potassium, magnesium and sulfur. It also produces and markets salt (NaCl).
In 1996, K&S Sub's sales were DM 1375 million, of which 67% was attributable to
sales of muriate of potash and sulphate of potash.
Properties
K&S Sub operates two groups of potash and salt mines and processing plants,
the North Group and the Werra Group. The North Group consists of operating mines
and processing plants at Sigmundshall, Zielitz, Bernburg and
Braunschweig-Luneberg and a processing plant at Bergmannsegen-Hugo. The Werra
Group consists of operating mines and processing plants at Wintershall, Hattorf,
Unterbreizbach and Neuhof-Ellers.
<TABLE>
<CAPTION>
CAPACITY
MINE (THOUSAND TONNES/YR)
-------------------------------------------------- --------------------
<S> <C>
NORTH GROUP
Sigmundshall...................................... 450 K(2)O
Zielitz........................................... 1,250 K(2)O
Bernburg.......................................... 2,000 NaCl
Braunschweig -- Luneburg.......................... 600 NaCl
WERRA GROUP
Wintershall....................................... 600 K(2)O
Hattorf........................................... 700 K(2)O
Unterbreizbach.................................... 350 K(2)O
Neuhof -- Ellers.................................. 350 K(2)O
</TABLE>
Production
K&S Sub extracts ore from its potash mines using conventional underground
drill and blast techniques. The salt mines also utilize various drill and blast
mining methods underground with nearly 50% of the salt production at Bernburg
coming from solution mining caverns. K&S Sub generally operates its mines 24
hours a day, 5 days a week, using 3 shifts, and operates its processing plants
24 hours a day, 7 days a week, using 3 shifts a day.
In the processing plants, saleable products are separated from waste
material by crushing to a fine fraction and then using either electro-static
separation or flotation techniques. In some plants, crystallization circuits are
utilized to improve recovery or produce more refined potassium chloride
products. Finished products are screened to required size ranges and, in some
cases, compactor circuits are utilized to produce a larger size granular product
suitable for bulk blending with other fertilizers.
The collective annual capacity of the operating Werra Group mines and
processing plants is 1.6 million tonnes of potassium chloride, 1.2 million
tonnes of potassium sulfate, 1.3 million tonnes of potassium-magnesium products,
1.1 million tonnes of magnesium sulfate products, 0.2 million tonnes of
magnesium chloride products, and 0.6 million tonnes of sodium chloride.
Production pattern flexibility in the Werra group could permit increases in
annual potassium chloride capacity of 0.5 million tonnes, in annual potassium-
magnesium products capacity of 0.4 million tonnes, and in annual magnesium
sulfate products capacity of 0.2 million tonnes, limited however by the overall
capacity. Thus, an increase in one product may result in a decrease in the
availability of other products. The collective annual capacity of the operating
North Group mines and processing plants is 2.9 million tonnes of potassium
chloride and 2.6 million tonnes of sodium chloride.
I-25
<PAGE> 27
Reserves
K&S Sub has calculated its ore reserves as of October 1996 for the various
operations as follows:
<TABLE>
<CAPTION>
MINE LIFE
ORE RESERVES (YEARS AT CURRENT
MINE (MILLION TONNES) PRODUCTION RATES)
- ---- ---------------- -----------------
<S> <C> <C>
NORTH GROUP
Sigmundshall................................................. 36 14
Zielitz...................................................... 222 50
Bernburg..................................................... 53 57
Braunschweig-Luneburg........................................ 18 30
WERRA GROUP
Wintershall.................................................. 390 51
Hattorf...................................................... 736 84
Unterbreizbach............................................... 144 48
Neuhof-Ellers................................................ 170 57
</TABLE>
Marketing
In 1996, European sales of DM 1045 million represented approximately 76% of
K&S Sub's total sales. European sales were primarily to cooperatives, brokers,
compound fertilizer producers, bulk blenders and industrial customers. Offshore
sales were primarily to cooperatives, brokers, compound fertilizer producers,
bulk blenders and industrial customers located in Brazil, India, Indonesia,
Japan, Malaysia, the United States, Columbia and China. In 1996, no one customer
accounted for as much as 10% of K&S Sub's total sales.
In 1996, K&S Sub had approximately 2,800 European customers, with the top
10 (ranked by volume) accounting for 37% of European sales, and had
approximately 260 overseas customers, with the top 10 (ranked by volume)
accounting for 44% of overseas sales. Sales volumes are spread relatively
uniformly over the year, with sales in the first and fourth quarters exceeding
in a minor amount sales in the second and third quarters. Generally, sales are
made on a spot basis, with 90% of European sales and 75% of offshore sales being
made to traditional long-term customers.
Distribution and Transportation
K&S Sub ships product from its mines to customers by various means,
including rail, barge, truck and ship. Most offshore sales are handled through
the K&S-owned port facility in Hamburg, Germany. In 1996, 2.7 million tonnes of
potash were exported through Hamburg, 0.5 million tonnes of salt and potash
through Wismar, Germany, to Baltic destinations, and lesser quantities through
the ports of Lubeck and Antwerp. K&S's warehouse capacity for all products,
excluding rock salt, totals approximately 1.7 million tonnes, with approximately
1.0 million tonnes capacity at the mines, approximately 0.3 million tonnes
capacity at the port of Hamburg, approximately 0.2 million tonnes of capacity
elsewhere in Germany, and approximately 0.2 million tonnes of storage elsewhere
in Europe.
Competition
Potash is a bulk commodity industry in which production and transportation
costs determine the relative competitiveness of the producers in the various
global regional markets. K&S Sub supplies nearly all of Germany's internal
consumption of potash. In 1996, this represented 20% of its total potash sales.
Western Europe is the most important export market for K&S Sub, representing 42%
of its total potash sales in 1996. K&S Sub competes against indigenous producers
in France and the United Kingdom. Key competitors in Western Europe (ranked in
order of relative share of export sales) in 1996 were located in Israel, Spain,
the United Kingdom, the former Soviet Union, Canada and Jordan. Potash sales
into Asia, particularly India, and into Latin America, particularly Brazil,
represent the other key markets for K&S Sub. In the Indian market,
I-26
<PAGE> 28
key competitors for K&S Sub are producers from the former Soviet Union, Jordan
and Israel. In the Brazilian market, key competitors for K&S Sub are producers
from Canada, the former Soviet Union and Israel. K&S Sub is most competitive in
its domestic market and in European markets where it enjoys some transportation
cost advantage. Moreover, the European markets are the key markets for the
supply of specialty fertilizers containing potassium, magnesium and sulphur. In
1996, approximately 34% of K&S Sub's potash sales was in the form of potassium
sulphate and other specialty fertilizers, a specialized potassium market in
which there are fewer competitors globally.
Employees
At December 31, 1996, K&S directly and through subsidiaries employed 8,846
full-time employees which included 8,431 employees of K&S Sub of which 86
employees worked under part-time contracts.
GOVERNMENT OWNERSHIP
In 1993, a reorganization of the German potash industry occurred and K&S
Sub was created. K&S contributed its mines and properties to K&S Sub and
received 51% of its shares. The Treuhandanstalt, a state agency established for
the purpose of privatizing East German industrial activities, contributed the
former East German mines and properties plus DM 1.0 billion to K&S Sub and
received 49% of its shares.
At present, the German federal government, through Beteiligungs --
Management -- Gesellschaft Berlin mbH ("BMGB"), beneficially owns and controls
49% of the shares of K&S Sub. BMGB's shareholder rights are exercised by
Bundesanstalt fur vereinigungsbedingte Sonderaufgaben, as successor to the
Treuhandanstalt.
On May 13, 1993, a shareholders agreement (the "Shareholders Agreement")
was entered into between K&S and the Treuhandanstalt. It contains a five-year
(to December 31, 1997) business plan (the "Business Plan") and reserves to the
shareholders of K&S Sub authority to amend, or approve deviations from, the
Business Plan. It also establishes a special 75% majority with respect to most
matters requiring shareholder approval, including amendments to the Business
Plan, which special majority provision will expire December 31, 1997, except as
described below.
After 1997, and for so long as BMGB and K&S hold, in the aggregate, 75% or
more of the shares of K&S Sub, a shareholders resolution regarding (a) adoption
of annual financial statements, (b) distribution of profits (i.e., dividends),
or (c) establishment of new waste disposal sites requires an affirmative vote of
at least 75% of the shares outstanding.
In addition, while such aggregate shareholding is at least 75%, BMBG is
entitled to nominate one of the five managing directors of K&S Sub and one-half
of the shareholders representatives on the supervisory board of K&S Sub. The
articles of association of K&S Sub provide that until the shareholders'
resolution approving the 1997 financial statements of K&S Sub is adopted, any
transfer of shares of K&S Sub requires the consent of the non-transferring
shareholder. For the period thereafter, the articles of association provide for
a right of first refusal in favor of K&S regarding the sale by BMGB of its
shares.
The Business Plan requires K&S Sub to make investments, repairs and
remediation to existing mines in an aggregate amount exceeding DM 800 million
and to decommission other mines. The Business Plan also provides for a
structured reduction in the size of the K&S Sub workforce through the end of
1997. It establishes projected cash flows through the period and requires the
shareholders to fund K&S Sub in the event that such cash flows are not attained.
The proportionate liability of each shareholder for such funding is determined
according to a formula, but in no case is K&S's share greater than 20% of the
amount required.
LITIGATION AND REGULATORY PROCEEDINGS
K&S Sub has been sued for damages for breach of contract and additional
compensation before the Commercial Court of Brussels by Cogepotasse S.A. and
ITEMA S.A., both of which are subsidiaries of Societe Commerciale et de l'Azote
("SCPA"). The claim by Cogepotasse is for 66,141,121 Belgian francs ("BFR"). The
claim by ITEMA is for approximately 1,513,000 BFR. (On September 30, 1996, one
BFR equalled 0.03344 U.S. dollar.) The claims are based on the purported breach
of an exclusive distribution
I-27
<PAGE> 29
agreement for the territory of Belgium and Luxembourg entered into by
Cogepotasse with the former East German potash export entity Kali-Bergbau. The
Commercial Court has rejected ITEMA's claim entirely and Cogepotasse's claim in
part. K&S Sub has been deemed liable to pay to Cogepotasse the "half gross
profit" realized on the basis of the exclusive distribution right during a
three-year period to be calculated on the average figures of the past three
years. The Commercial Court has appointed an accountant as expert to determine
the profits of Cogepotasse in the past three years and the costs incurred due to
the agreement in order to allow the Commercial Court to calculate the exact
amount to be paid by K&S Sub. K&S has appealed the decision of the Commercial
Court to the Belgian Court of Appeal.
On December 14, 1993, the Commission of the European Communities (the
"European Commission") gave clearance under the European Communities' merger
control rules by allowing the merger of K&S (in which the West German potash
activities were operated) and MdK (in which the East German potash activities
were operated) into K&S Sub, subject to certain conditions. Such conditions have
been fulfilled by K&S Sub. On February 18, 1994, the Republic of France filed a
lawsuit against the European Commission before the European Court of Justice
applying for an annulment of the European Commission's decision of December 14,
1993. On February 25, 1994, SCPA and Enterprise Miniere et Chimique ("EMC")
filed a lawsuit against the European Commission in the European Court of First
Instance in which the plaintiffs applied for a partial revision of the European
Commission's decision with respect to the conditions set out by the European
Commission and the restructuring of Potacan's sales activities. Neither K&S nor
K&S Sub is a party to either lawsuit, although they have intervenor status.
Based on information currently available to it, K&S does not expect either
lawsuit to result in a ruling which will have a material effect on the 1993
decision of the European Commission.
In March 1994, the European Commission implemented an anti-dumping duty on
imports of muriate of potash into the European Communities from Russia, Belarus
and Ukraine. The effect of the duty is to establish minimum prices for the sale
of such imports in the European Communities. Imports of potash from such
countries have been significantly reduced from import levels prior to the
imposition of duties. The European Commission is presently conducting a review
of the existing anti-dumping order. The outcome of the review cannot be
accurately predicted. If, however, the review results in a reduction or
elimination of the minimum price, imports of potash from Russia, Belarus and
Ukraine into the European Communities could increase significantly from current
levels.
CANADIAN MINING OPERATIONS
K&S holds 50% of the outstanding shares of Potacan, while the remaining 50%
is held by EMC. Potacan Mining Company ("PMC"), a partnership between Potacan
and a wholly owned subsidiary of Potacan, owns and operates a potash mine and
processing plant in Sussex, New Brunswick, Canada. The mine has an annual
productive capacity of approximately 1.2 million tonnes of potassium chloride
and a proven and probable reserve life in excess of 17 years at current rates of
production. At present, most of the potash produced by PMC is marketed by
Potacan through offices in Toronto and Atlanta. Each of the two shareholders in
Potacan has a right to 50% of the production of PMC and may take such product in
kind upon the delivery of proper notice. In 1996, Potacan's sales were CDN$167.5
million (approximately U.S.$122.2 million based on the exchange rate at December
31, 1996, of CDN$1.00 = U.S.$.7296).
The Potacan shareholder agreement between K&S and EMC provides a right of
first refusal in the event either EMC or K&S intends to sell its shares in
Potacan. BASF has advised PCS that EMC has sought to exercise such right and
that K&S had notified EMC that no sale of Potacan shares is occurring and that
therefore the right of first refusal is not applicable. On November 13, 1996,
EMC initiated an arbitration of the matter pursuant to the terms of the
shareholder agreement.
I-28
<PAGE> 30
EXECUTIVE OFFICERS OF THE COMPANY
The name, age, period of service and position held of each of the executive
officers of the Company as at February 28, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE SERVED SINCE POSITION HELD
- ---- --- ------------ -------------
<S> <C> <C> <C>
CHARLES E. CHILDERS.............. 64 1987 Chairman of the Board,
President and Chief Executive Officer
WILLIAM J. DOYLE................. 46 1987 Executive Vice President, Potash and
Sales
JOHN GUGULYN..................... 61 1987 Senior Vice President, Administration
BARRY E. HUMPHREYS............... 53 1976 Senior Vice President, Finance and
Treasurer
JAMES J. BUBNICK................. 57 1976 Senior Vice President, Potash Operations
JOHN L.M. HAMPTON................ 43 1988 Senior Vice President, General Counsel
and Secretary
WAYNE R. BROWNLEE................ 44 1988 Senior Vice President, Expansion and
Development
BETTY-ANN HEGGIE................. 43 1981 Senior Vice President, Corporate
Relations
GARTH W. MOORE................... 48 1982 Senior Vice President, Technical
Services
PETER BRAUN...................... 56 1977 Vice President, Audit
THOMAS J. WRIGHT................. 64 1995 Executive Vice President, PCS Phosphate
</TABLE>
All of the officers have had the principal occupation indicated for the
previous five years except as follows: Mr. Doyle was President of PCS Sales and
located in Chicago, Illinois, prior to becoming Executive Vice President of the
Company in 1995; Mr. Wright was President and Chief Operating Officer of
Texasgulf from 1988 to 1993 and President and Chief Executive Officer from 1993
to April 1995; and on April 27, 1995, Mr. Hampton, Mr. Brownlee, Ms. Heggie, and
Mr. Moore were promoted from Vice President to Senior Vice President, and Mr.
Braun was promoted from Director, Internal Audit, to Vice President.
ITEM 3. LEGAL PROCEEDINGS
AGREEMENT SUSPENDING POTASH DUMPING INVESTIGATION
In March 1987, the U.S. International Trade Commission made a preliminary
determination that there was a reasonable indication that the U.S. potash
producers had been injured by imports of Canadian potash, assuming that Canadian
potash had been "dumped" into the U.S. market at less than "fair value". On
August 26, 1987, the U.S. Department of Commerce ("Commerce") determined on a
preliminary basis that Canadian potash was, or was likely to be, sold in the
United States at less than "fair value".
On January 8, 1988, Commerce signed a suspension agreement with all of the
potash producers in Canada, suspending the dumping investigation by Commerce.
The agreement stipulates that each producer's minimum price for potash sold in
the United States is to be based upon a formula determined by Commerce for each
producer that is designed to limit any dumping by that producer in the future.
Compliance with the agreement is monitored by Commerce. The agreement can be
terminated without termination of the suspended investigation if Commerce
determines that sales are made below the price determined under the formula,
producers having 15% or more of the total Canadian volume or value exported into
the United States withdraw from the agreement, or the conditions of the
agreement are otherwise not being met, in which case the suspended investigation
could be resumed by Commerce.
CIVIL ANTITRUST COMPLAINTS
In June, 1993, the Company and PCS Sales were served with a complaint
relating to a suit filed in the United States District Court for Minnesota
against most North American potash producers, including the Company. The
complaint alleged a conspiracy among the defendants to fix the price of potash
purchased by the plaintiffs as well as potash purchased by the members of a
class of certain purchasers proposed by the plaintiffs. The complaint sought
treble damages in an unspecified amount and other relief. Similar complaints
I-29
<PAGE> 31
were filed in the United States District Courts for the Northern District of
Illinois and the Western District of Virginia. On motion of the defendants, all
of the complaints were transferred and consolidated for pre-trial purposes in
the United States District Court for Minnesota. Amended complaints were filed in
March and April 1994. On January 12, 1995, the Minnesota Federal Court granted
the plaintiffs' motion for class certification. Merits discovery was completed
in September 1995. Expert discovery was completed in November 1995. The Company
and PCS Sales filed a motion for summary judgment on December 22, 1995. On
January 2, 1997, Judge Richard H. Kyle issued an order granting the motions for
summary judgment and dismissing the lawsuit. The plaintiffs appealed that order
to the United States Court of Appeals for the Eighth Circuit, on January 31,
1997.
Additional complaints were filed in the California and Illinois State
Courts on behalf of purported classes of indirect purchasers of potash in those
states. The Company moved to dismiss the California State Court lawsuit for lack
of personal jurisdiction and the court ruled that it does not have personal
jurisdiction over PCS but that it does have personal jurisdiction over PCS
Sales. The case remains at an early stage; no merits discovery has taken place.
The Illinois State Court dismissed the Illinois State Court complaint for
failure to state a cause of action. The Illinois plaintiff appealed that
dismissal and that dismissal was affirmed by the Appellate Court of Illinois on
November 27, 1996. On January 15, 1997 the appellate court denied the
plaintiff's request for rehearing. The plaintiff has the right to petition the
Supreme Court of Illinois to review the Appellate Court's decision.
FTC INVESTIGATION
PCS Phosphate received a letter dated October 2, 1995 from the Federal
Trade Commission requesting certain information concerning its phosphate
operations in connection with a non-public investigation being conducted by its
Bureau of Competition. The investigation is described in the letter as being
made in order to determine whether manufacturers of concentrated phosphates may
have engaged in or are engaging in practices prohibited under the Federal Trade
Commission Act. The Company cooperated in the investigation and responded to the
government's requests for information. On November 21, 1996, an official of the
Bureau of Competition advised the Company that the investigation had been
closed.
BFI, INC. LITIGATION
On May 20, 1995 a complaint was filed by OxyChem against Bienville Forest
Investments, Inc. ("BFI, Inc.") seeking conveyance of 365 acres of land from
BFI, Inc., pursuant to an option to purchase reclaimed lands. BFI, Inc.
counterclaimed against OxyChem seeking damages arising from alleged trespass,
nuisance, interference with business relationships and fraud. BFI, Inc. also
requested that the court require OxyChem to convey certain properties to BFI,
Inc. that had been previously deeded by BFI, Inc. to OxyChem. White Springs
moved to intervene as a party and the court granted the motion. BFI, Inc. has
argued that the option is unenforceable on grounds including: (i) the option
allegedly constitutes an unreasonable restraint on alienation or a violation of
the rule against perpetuities; and (ii) enforcement allegedly is barred by the
statute of limitations, by the doctrine of laches, or by estoppel. White Springs
has similar options with respect to approximately 25,000 additional acres of
land in which BFI, Inc., and/or its affiliates, has an interest. On August 22,
1996, White Springs, BFI, Inc. and Glawson Investments Corp., a BFI, Inc.
affiliate ("Glawson"), signed a Settlement Agreement and a Letter of Intent for
Operating Agreement. The agreements settle the dispute among the parties thereto
as to current and future land ownership and use. The agreements also release
White Springs from claims occurring after October 30, 1995, but do not release
claims that occurred while OxyChem owned White Springs. Under the agreements,
White Springs did not agree to release any of its rights to mine on any
property; however, White Springs released future rights to purchase property in
the Suwannee River mining area while acquiring the right to purchase immediately
property in the Swift Creek mining area, and White Springs agreed to exchange
with BFI, Inc. and Glawson certain properties, to make their respective holdings
more nearly contiguous. White Springs was formally dismissed from the BFI, Inc.
litigation on December 16, 1996.
I-30
<PAGE> 32
PCS NITROGEN LEGAL MATTERS
See Recent Acquisition of Arcadian Corporation -- PCS Nitrogen Litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not Applicable.
I-31
<PAGE> 33
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information under "Common Share Prices and Volumes" in the registrant's
1996 Annual Report is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The information under "Selected Ten-Year Data" in the registrant's 1996
Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information under "Manager's Discussion and Analysis of Financial
Condition and Results of Operations" in the registrant's 1996 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and notes thereto in the registrant's
1996 Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
II-1
<PAGE> 34
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under "Election of Directors" in the Proxy Circular for the
Annual Meeting of Shareholders in 1997 is incorporated herein by reference.
Information concerning executive officers is set forth under "Executive Officers
of the Company" in Part I.
ITEM 11. EXECUTIVE COMPENSATION.
The information under "Executive Compensation" in the Proxy Circular for
the Annual Meeting of Shareholders in 1997 is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under "Ownership of Shares by Directors and Executive
Officers" and "Election of Directors" in the Proxy Circular for the Annual
Meeting of Shareholders in 1997 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under "Election of Directors" and "Executive Compensation"
in the Proxy Circular for the Annual Meeting of Shareholders in 1997 is
incorporated herein by reference.
III-1
<PAGE> 35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Lists of Documents Filed as Part of this Report
1. Financial Statements in Annual Report
<TABLE>
<S> <C>
Auditors' Report....................................................................
Consolidated Statements of Financial Position.......................................
Consolidated Statements of Income and Retained Earnings.............................
Consolidated Statements of Cash Flow................................................
Notes to the Consolidated Financial Statements......................................
</TABLE>
2. Schedules
All Schedules are omitted because the required information is inapplicable
or it is presented in the Consolidated Financial Statements or the notes
thereto.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------------------------------------------------------------
<S> <C>
2(a) Agreement and Plan of Merger dated September 2, 1996, as amended, by and
among the registrant, Arcadian Corporation and PCS Nitrogen, Inc,
incorporated by reference to Exhibit 2(a) to Amendment Number 2 to the
registrant's Form S-4 (File No. 333-17841).
3(i) Restated Articles of Incorporation of the registrant dated October 31, 1989,
as amended May 11, 1995, incorporated by reference to Exhibit 3(i) to the
registrant's report on Form 10-K for the year ended December 31, 1995 (the
"1995 Form 10-K").
3(ii) Bylaws of the registrant dated March 2, 1995, incorporated by reference to
Exhibit 3(ii) to the 1995 Form 10-K.
4 Term Credit Agreement between The Bank of Nova Scotia and other financial
institutions and the registrant dated October 4, 1996, incorporated by
reference to Exhibit 4(b) to the registrant's Form S-4 (File No. 333-17841).
The registrant hereby undertakes to file with the Securities and Exchange Commission, upon
request, copies of any constituent instruments defining the rights of holders of long-term debt
of the registrant or its subsidiaries that have not been filed herewith because the amounts
represented thereby are less than 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis.
10(a) Suspension Agreement concerning Potassium Chloride from Canada dated January
7, 1988, among U.S. Department of Commerce, Potash Corporation of
Saskatchewan, International Minerals and Chemical (Canada) Limited, Noranda,
Inc. (Central Canada Potash Co.), Potash Company of America, a Division of
Rio Algom Limited, S & P Canada, II (Kalium Chemicals), Cominco Ltd., Potash
Company of Canada Limited, Agent for Denison-Potacan Potash Co. and Saskterra
Fertilizers Ltd., incorporated by reference to Exhibit 10 (a) to the
registrant's Form F-1 (File No. 33-31303) (the "F-1 Registration Statement").
10(b) Sixth Voting Agreement dated April 22, 1978, between Central Canada Potash,
Division of Noranda, Inc., Cominco Ltd., International Minerals and Chemical
Corporation (Canada) Limited, PCS Sales and Texasgulf Inc., incorporated by
reference to Exhibit 10(f) to the F-1 Registration Statement.
</TABLE>
IV-1
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------------------------------------------------------------
<S> <C>
10(c) Canpotex Limited Shareholders Seventh Memorandum of Agreement effective April
21, 1978, between Central Canada Potash, Division of Noranda Inc., Cominco
Ltd., International Minerals and Chemical Corporation (Canada) Limited, PCS
Sales, Texasgulf Inc. and Canpotex Limited as amended by Canpotex S & P
amending agreement dated November 4, 1987, incorporated by reference to
Exhibit 10(g) to the F-1 Registration Statement.
10(d) Producer Agreement dated April 21, 1978, between Canpotex Limited and PCS
Sales, incorporated by reference to Exhibit 10(h) to the F-1 Registration
Statement.
10(e) Agreement of Limited Partnership of Arcadian Fertilizer, L.P. (now PCS
Nitrogen Fertilizer, L.P.) dated as of March 3, 1992 (form), and the related
Certificate of Limited Partnership of Arcadian Fertilizer L.P., filed with
the Secretary of State of the State of Delaware on March 3, 1992
(incorporated by reference to Exhibits 3.1 and 3.2 to Arcadian Partners
L.P.'s Registration Statement on Form S-1 (File No. 33-45828)).
10(f) Geismar Complex Services Agreement dated June 4, 1984, between Allied
Corporation and Arcadian Corporation (incorporated by reference to Exhibit
10.4 to Registration Statement on Form S-1 (Registration No. 33-34357)).
10(g) PCS Sales -- Saskterra Special Canpotex Entitlement effective June 13, 1990,
incorporated by reference to Exhibit 10(n) to the registrant's Form S-1 (File
No. 33-36283).
10(h) Canpotex/PCS Amending Agreement, dated with effect October 1, 1992,
incorporated by reference to Exhibit 10(f) to the 1995 Form 10-K.
10(i) Canpotex PCA Collateral Withdrawing/PCS Amending Agreement, dated with effect
October 7, 1993, incorporated by reference to Exhibit 10(g) to the 1995 Form
10-K.
10(j) Esterhazy Restated Mining and Processing Agreement dated January 31, 1978,
between International Minerals and Chemical Corporation (Canada) Limited and
the registrant's predecessor, incorporated by reference to Exhibit 10(e) to
the F-1 Registration Statement.
10(k) Agreement dated December 21, 1990, between International Minerals & Chemical
Corporation (Canada) Limited and the registrant, amending the Esterhazy
Restated Mining and Processing Agreement dated January 31, 1978, incorporated
by reference to Exhibit 10(p) to the registrant's report on Form 10-K for the
year ended December 31, 1990.
10(l) Operating Agreement dated May 11, 1993, between BP Chemicals Inc. and
Arcadian Ohio, L. P., as amended by the First Amendment to the Operating
Agreement dated as of November 20, 1995, between BP Chemicals Inc. and
Arcadian Ohio, L. P. ("First Amendment") (incorporated by reference to
Exhibit 10.2 to Arcadian Partners L. P.'s current report on Form 8-K for the
report event dated May 11, 1993 ("Partners 5/11/93 Report"), except for the
First Amendment which is incorporated by reference to Arcadian Corporation's
report on Form 10-K for the year ended December 31, 1995 ("Arcadian 10-K")).
10(m) Manufacturing Support Agreement dated May 11, 1993, between BP Chemicals Inc.
and Arcadian Ohio, L. P. (incorporated by reference to Exhibit 10.3 to the
Partners 05/11/93 Report).
10(n) Agreement dated October 13, 1995 between the registrant and Charles E.
Childers, incorporated by reference to Exhibit 10(j) to the 1995 Form 10-K.
10(o) Potash Corporation of Saskatchewan Inc. Stock Option Plan -- Directors,
incorporated by reference Exhibit 4(a) to the registrant's Form S-8 (File No.
333-19215) (the "Form S-8").
</TABLE>
IV-2
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------------------------------------------------------------
<S> <C>
10(p) Potash Corporation of Saskatchewan Inc. Stock Option Plan -- Officers and Key
Employees, incorporated by reference to Exhibit 4(b) to the Form S-8.
10(q) Short Term Incentive Plan of the registrant, effective January 1, 1995.
10(r) Long-Term Incentive Plan of the registrant, as amended December 15, 1995,
incorporated by reference to Exhibit 10(n) to the 1995 Form 10-K.
10(s) Resolution and Forms of Agreement for Supplemental Retirement Income Plan,
for officers and key employees of the registrant, as incorporated by
reference to Exhibit 10(o) to the 1995 Form 10-K.
10(t) Forms of Agreement dated December 30, 1994, between the registrant and
certain officers of the registrant, concerning a change in control of the
registrant, incorporated by reference to Exhibit 10(p) to the 1995 Form 10-K.
10(u) Form of Agreement of Indemnification dated August 8, 1995, between the
registrant and certain officers and directors of the registrant, incorporated
by reference to Exhibit 10(q) to the 1995 Form 10-K.
10(v) Deferred Compensation Plan, for certain officers of PCS Phosphate Company,
Inc, incorporated by reference to Exhibit 10(r) to the 1995 Form 10-K.
10(w) Supplemental Retirement Benefits Plan, for eligible employees of PCS
Phosphate Company, Inc., incorporated by reference to Exhibit 10(s) to the
1995 Form 10-K.
10(x) Second Amended and Restated Membership Agreement dated January 1, 1995, among
Phosphate Chemicals Export Association, Inc. and members of such association,
including Texasgulf Inc. (now PCS Phosphate Company, Inc.), incorporated by
reference to Exhibit 10(t) to the 1995 Form 10-K.
10(y) International Agency Agreement dated January 1, 1995, between Phosphate
Chemicals Export Association, Inc. and Texasgulf Inc. (now PCS Phosphate
Company, Inc.) establishing Texasgulf Inc. as exclusive marketing agent for
such association's wet phosphatic materials, incorporated by reference to
Exhibit 10(u) to the 1995 Form 10-K.
10(z) General Partnership Agreement forming Albright & Wilson Company, dated July
29, 1988 and amended January 31, 1995, between Texasgulf Inc. (now PCS
Phosphate Company, Inc.) and Albright & Wilson Americas, Inc., incorporated
by reference to Exhibit 10(v) to the 1995 Form 10-K.
10(aa) Royalty Agreement dated October 7, 1993, by and between the registrant and
Rio Algom Limited, incorporated by reference to Exhibit 10(x) to the 1995
Form 10-K.
10(bb) Amending Resolution and revised forms of agreement regarding Supplemental
Retirement Income Plan of the registrant, incorporated by reference to
Exhibit 10(x) to the registrant's report on Form 10-Q for the quarterly
period ended June 30, 1996 (the "Second Quarter Form 10-Q").
</TABLE>
IV-3
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- -----------------------------------------------------------------------------
<S> <C>
10(cc) Employment Agreement dated May 16, 1996, by and between PCS Phosphate
Company, Inc. and Thomas J. Wright, incorporated by reference to Exhibit
10(y) to the Second Quarter Form 10-Q.
10(dd) Shareholders Rights Agreement dated November 10, 1994, as amended on March
28, 1995, and May 4, 1995, and approved the shareholders on May 11, 1995,
incorporated by reference to Exhibit 4(a) to the 1995 Form 10-K.
11 Statement re Computation of Per Share Earnings.
13 1996 Annual Report.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche.
27 Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K were filed by the registrant during the last quarter
of 1996.
IV-4
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
POTASH CORPORATION OF SASKATCHEWAN, INC.
By: /s/ CHARLES E. CHILDERS
-------------------------------------
Charles E. Childers
Chief Executive Officer
March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CHARLES E. CHILDERS Chairman of the Board, President and March 26, 1997
- ------------------------------------- Chief Executive Officer
Charles E. Childers
/s/ BARRY E. HUMPHREYS Sr. Vice President, Finance and March 26, 1997
- ------------------------------------- Treasurer (Principal Financial and
Barry E. Humphreys Accounting Officer)
/s/ ISABEL B. ANDERSON Director March 26, 1997
- -------------------------------------
Isabel B. Anderson
/s/ DOUGLAS J. BOURNE Director March 26, 1997
- -------------------------------------
Douglas J. Bourne
/s/ DENIS J. COTE Director March 26, 1997
- -------------------------------------
Denis J. Cote
/s/ WILLIAM J. DOYLE Director March 26, 1997
- -------------------------------------
William J. Doyle
/s/ HON. WILLARD Z. ESTEY, Q.C. Director March 26, 1997
- -------------------------------------
Hon. Willard Z. Estey, Q.C.
/s/ DALLAS J. HOWE Director March 26, 1997
- -------------------------------------
Dallas J. Howe
/s/ JAMES F. LARDNER Director March 26, 1997
- -------------------------------------
James F. Lardner
</TABLE>
IV-5
<PAGE> 40
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD E. PHILLIPS Director March 26, 1997
- -------------------------------------
Donald E. Phillips
/s/ PAUL SCHOENHALS Director March 26, 1997
- -------------------------------------
Paul Schoenhals
/s/ DARYL K. SEAMAN Director March 26, 1997
- -------------------------------------
Daryl K. Seaman
/s/ E. ROBERT STROMBERG, Q.C. Director March 26, 1997
- -------------------------------------
E. Robert Stromberg, Q.C.
/s/ JACK G. VICQ Director March 26, 1997
- -------------------------------------
Jack G. Vicq
/s/ BARRIE A. WIGMORE Director March 26, 1997
- -------------------------------------
Barrie A. Wigmore
/s/ PAUL S. WISE Director March 26, 1997
- -------------------------------------
Paul S. Wise
</TABLE>
IV-6
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- ------------------------------------------------------------------------------
<S> <C>
2(a) Agreement and Plan of Merger dated September 2, 1996, as amended, by and among
the registrant, Arcadian Corporation and PCS Nitrogen, Inc, incorporated by
reference to Exhibit 2(a) to Amendment Number 2 to the registrant's Form S-4
(File No. 333-17841).
3(i) Restated Articles of Incorporation of the registrant dated October 31, 1989,
as amended May 11, 1995, incorporated by reference to Exhibit 3(i) to the
registrant's report on Form 10- K for the year ended December 31, 1995 (the
"1995 Form 10-K").
3(ii) Bylaws of the registrant dated March 2, 1995, incorporated by reference to
Exhibit 3(ii) to the 1995 Form 10-K.
4 Term Credit Agreement between The Bank of Nova Scotia and other financial
institutions and the registrant dated October 4, 1996, incorporated by
reference to Exhibit 4(b) to the registrant's Form S-4 (File No. 333-17841).
10(a) Suspension Agreement concerning Potassium Chloride from Canada dated January
7, 1988, among U.S. Department of Commerce, Potash Corporation of
Saskatchewan, International Minerals and Chemical (Canada) Limited, Noranda,
Inc. (Central Canada Potash Co.), Potash Company of America, a Division of Rio
Algom Limited, S & P Canada, II (Kalium Chemicals), Cominco Ltd., Potash
Company of Canada Limited, Agent for Denison-Potacan Potash Co. and Saskterra
Fertilizers Ltd., incorporated by reference to Exhibit 10(a) to the
registrant's Form F1 (File No. 33-31303) (the "F-1 Registration Statement").
10(b) Sixth Voting Agreement dated April 22, 1978, between Central Canada Potash,
Division of Noranda, Inc., Cominco Ltd., International Minerals and Chemical
Corporation (Canada) Limited, PCS Sales and Texasgulf Inc., incorporated by
reference to Exhibit 10(f) to the F-1 Registration Statement.
10(c) Canpotex Limited Shareholders Seventh Memorandum of Agreement effective April
21, 1978, between Central Canada Potash, Division of Noranda Inc., Cominco
Ltd., International Minerals and Chemical Corporation (Canada) Limited, PCS
Sales, Texasgulf Inc. and Canpotex Limited as amended by Canpotex S & P
amending agreement dated November 4, 1987, incorporated by reference to
Exhibit 10(g) to the F-1 Registration Statement.
10(d) Producer Agreement dated April 21, 1978, between Canpotex Limited and PCS
Sales, incorporated by reference to Exhibit 10(h) to the F-1 Registration
Statement.
10(e) Agreement of Limited Partnership of Arcadian Fertilizer, L.P. (now PCS
Nitrogen Fertilizer, L.P.) dated as of March 3, 1992 (form), and the related
Certificate of Limited Partnership of Arcadian Fertilizer L.P., filed with the
Secretary of State of the State of Delaware on March 3, 1992 (incorporated by
reference to Exhibits 3.1 and 3.2 to Arcadian Partners L.P.'s Registration
Statement on Form S-1 (File No. 33-45828)).
10(f) Geismar Complex Services Agreement dated June 4, 1984, between Allied
Corporation and Arcadian Corporation (incorporated by reference to Exhibit
10.4 to Registration Statement on Form S-1 (Registration No. 33-34357).
10(g) PCS Sales -- Saskterra Special Canpotex Entitlement effective June 13, 1990,
incorporated by reference to Exhibit 10(n) to the registrant's Form S-1 (File
No. 33-36283).
10(h) Canpotex/PCS Amending Agreement, dated with effect October 1, 1992,
incorporated by reference to Exhibit 10(f) to the 1995 Form 10-K.
10(i) Canpotex PCA Collateral Withdrawing/PCS Amending Agreement, dated with effect
October 7, 1993, incorporated by reference to Exhibit 10(g) to the 1995 Form
10-K.
</TABLE>
IV-7
<PAGE> 42
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- ------------------------------------------------------------------------------
<S> <C>
10(j) Esterhazy Restated Mining and Processing Agreement dated January 31, 1978,
between International Minerals and Chemical Corporation (Canada) Limited and
the registrant's predecessor, incorporated by reference to Exhibit 10(e) to
the F-1 Registration Statement.
10(k) Agreement dated December 21, 1990, between International Minerals & Chemical
Corporation (Canada) Limited and the registrant, amending the Esterhazy
Restated Mining and Processing Agreement dated January 31, 1978, incorporated
by reference to Exhibit 10(p) to the registrant's report on Form 10-K for the
year ended December 31, 1990.
10(l) Operating Agreement dated May 11, 1993, between BP Chemicals Inc. and Arcadian
Ohio, L.P., as amended by the First Amendment to the Operating Agreement dated
as of November 20, 1995, between BP Chemicals Inc. and Arcadian Ohio, L.P.
("First Amendment") (incorporated by reference to Exhibit 10.2 to Arcadian
Partners L.P.'s current report on Form 8-K for the report event dated May 11,
1993 ("Partners 5/11/93 Report"), except for the First Amendment which is
incorporated by reference to Arcadian Corporation's report on Form 10-K for
the year ended December 31, 1995 ("Arcadian 10-K")).
10(m) Manufacturing Support Agreement dated May 11, 1993, between BP Chemicals Inc.
and Arcadian Ohio, L.P. (incorporated by reference to Exhibit 10.3 to the
Partners 05/11/93 Report).
10(n) Agreement dated October 13, 1995 between the registrant and Charles E.
Childers, incorporated by reference to Exhibit 10(j) to the 1995 Form 10-K.
10(o) Potash Corporation of Saskatchewan Inc. Stock Option Plan -- Directors,
incorporated by reference Exhibit 4(a) to the registrant's Form S-8 (File No.
333-19215) (the "Form S-8").
10(p) Potash Corporation of Saskatchewan Inc. Stock Option Plan -- Officers and Key
Employees, incorporated by reference to Exhibit 4(b) to the Form S-8.
10(q) Short Term Incentive Plan of the registrant, effective January 1, 1995.
10(r) Long-Term Incentive Plan of the registrant, as amended December 15, 1995,
incorporated by reference to Exhibit 10(n) to the 1995 Form 10-K.
10(s) Resolution and Forms of Agreement for Supplemental Retirement Income Plan, for
officers and key employees of the registrant, incorporated by reference to
Exhibit 10(o) to the 1995 Form 10-K.
10(t) Forms of Agreement dated December 30, 1994, between the registrant and certain
officers of the registrant, concerning a change in control of the registrant,
incorporated by reference to Exhibit 10(p) to the 1995 Form 10-K.
10(u) Form of Agreement of Indemnification dated August 8, 1995, between the
registrant and certain officers and directors of the registrant, incorporated
by reference to Exhibit 10(q) to the 1995 Form 10-K.
10(v) Deferred Compensation Plan, for certain officers of PCS Phosphate Company,
Inc, incorporated by reference to Exhibit 10(r) to the 1995 Form 10-K.
10(w) Supplemental Retirement Benefits Plan, for eligible employees of PCS Phosphate
Company, Inc., incorporated by reference to Exhibit 10(s) to the 1995 Form
10-K.
10(x) Second Amended and Restated Membership Agreement dated January 1, 1995, among
Phosphate Chemicals Export Association, Inc. and members of such association,
including Texasgulf Inc. (now PCS Phosphate Company, Inc.), incorporated by
reference to Exhibit 10(t) to the 1995 Form 10-K.
</TABLE>
IV-8
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
- -------------- ------------------------------------------------------------------------------
<S> <C>
10(y) International Agency Agreement dated January 1, 1995, between Phosphate
Chemicals Export Association, Inc. and Texasgulf Inc. (now PCS Phosphate
Company, Inc.) establishing Texasgulf Inc. as exclusive marketing agent for
such association's wet phosphatic materials, incorporated by reference to
Exhibit 10(u) to the 1995 Form 10-K.
10(z) General Partnership Agreement forming Albright & Wilson Company, dated July
29, 1988 and amended January 31, 1995, between Texasgulf Inc. (now PCS
Phosphate Company, Inc.) and Albright & Wilson Americas, Inc., incorporated by
reference to Exhibit 10(v) to the 1995 Form 10-K.
10(aa) Royalty Agreement dated October 7, 1993, by and between the registrant and Rio
Algom Limited, incorporated by reference to Exhibit 10(x) to the 1995 Form
10-K.
10(bb) Amending Resolution and revised forms of agreement regarding Supplemental
Retirement Income Plan of the registrant, incorporated by reference to Exhibit
10(x) to the registrant's report on Form 10-Q for the quarterly period ended
June 30, 1996 (the "Second Quarter Form 10-Q").
10(cc) Employment Agreement dated May 16, 1996, by and between PCS Phosphate Company,
Inc. and Thomas J. Wright, incorporated by reference to Exhibit 10(y) to the
Second Quarter Form 10-Q.
10(dd) Shareholders Rights Agreement dated November 10, 1994, as amended on March 28,
1995, and May 4, 1995, and approved by shareholders on May 11, 1995,
incorporated by reference to Exhibit 4(a) to the 1995 Form 10-K.
11 Statement re Computation of Per Share Earnings.
13 1996 Annual Report.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche.
27 Financial Data Schedule.
</TABLE>
IV-9
<PAGE> 1
Exhibit 10(q)
POTASH CORPORATION OF SASKATCHEWAN INC.
SHORT TERM INCENTIVE PLAN
This Short-Term Incentive Plan (the "Plan") is intended to aid in
maintaining and developing strong management in the Potash Corporation of
Saskatchewan Inc. and its direct and indirect subsidiaries (the "Corporation")
by providing financial incentives to key employees, in addition to their basic
salaries, in recognition of their achievement of objectives which contribute
materially to the success of the Corporation's business interests.
1. DEFINITIONS
In this Plan, except where the context otherwise indicates, the following
definitions apply:
(a) "Award Percentage" means a percentage based on the table
contained in Schedule I and calculated in accordance with the
formulae contained in Schedule I;
(b) "Board" means Board of Directors of Potash Corporation of
Saskatchewan Inc.;
(c) "CEO" means the Chief Executive Officer, from time to time, of
Potash Corporation of Saskatchewan Inc.;
(d) "Committee" means the Compensation Committee of the Board;
(e) "Entitled Employee" means a key employee of the Corporation who
is among the managerial, professional, technical or administrative
employees of the Corporation and is designated by the Committee as
eligible to receive an Incentive Award under this Plan and which
employee is in the employ of the Corporation as of the end of the
year for which awards are to be granted;
(f) "Entitled Mine Employee" means an Entitled Employee who is
attached to one of the potash or phosphate mining divisions of the
Corporation;
(g) "Equity" for any year means the average of the opening and
closing balances (after adding to the closing balance any amount
accrued in such year in respect of Incentive Awards) for the fiscal
year as reported in the audited financial statements of the
Corporation for such year;
(h) "Incentive Awards" means financial incentives awarded to
Entitled Employees pursuant to the Plan;
(i) "Net Income" for any year means the amount reported as net
income in the audited financial statement of the Corporation plus
research and development expenditures, tax expenditures, plus any
amount accrued in such year in respect of Incentive Awards, as
adjusted by the Committee at its discretion to account for the effect
of any
<PAGE> 2
extraordinary nonrecurring charges or credits;
(j) "Return on Equity" or "ROE" means the product obtained by first
dividing Net Income in any year by Equity and multiplying the
resulting quotient by 100;
(k) "Target ROE" means the Return on Equity projected in the
approved budget;
(l) "Target Percentage" means the Award Percentage at Target ROE as
shown in the table contained in Schedule I.
(m) "Termination of Employment" means the cessation of employment
with the Corporation;
(n) "Year" means any given fiscal year of the Corporation;
2. LIMITATION OF AWARD OF INCENTIVES
Generally, no Incentive Award shall be granted under this Plan with
respect to any year in which the Return on Equity is less than 50% of the
Target ROE; provided, however, that the Committee may elect, in its
discretion, to make Incentive Awards in any year in which circumstances
have prevented the Corporation from achieving 50% of the Target ROE.
3. AWARDS GRANTABLE
An Incentive Award is grantable with respect to any Year to any Entitled
Employee who has not less than three months' employment with the
Corporation during such Year. Entitled Employees who have been employed by
the Corporation for less than one year shall have their Incentive Awards
prorated in accordance with their period of employment.
4. METHOD OF DETERMINING INCENTIVE AWARDS
(a) Entitled Employees shall be divided into five groups as
follows:
Senior Executive Group - Senior Vice Presidents and above
Executive Group - Vice Presidents
Senior Management Group - Salary grade 1,200 to 1,499 (Hay Points)
Middle Management Group - Salary grade 900 to 1,199 (Hay Points)
Management Group - Salary grade 775 to 899 (Hay Points)
Provided that the CEO may, from time to time, designate an employee
for inclusion in one of the above-mentioned groups when, but for such
designation, the employee would otherwise not be included in such
group.
<PAGE> 3
(b) Entitled Employees (except Entitled Mine Employees)
The Incentive Award for each Entitled Employee who is not an Entitled
Mine Employee will be the Award Percentage of the annual salary of
such employee, with a deviation of plus or minus 10% of the award so
determined, which deviation will be dependent upon the Entitled
Employee's performance as determined by his or her supervisor and
approved in accordance with the provisions of this Plan.
(c) Entitled Mine Employees
Incentive Awards for each Entitled Mine Employee shall be the sum of
(i) and (ii) below which amounts shall be arrived at by calculating:
(i) The award payable if calculated in accordance with
the provisions of paragraph 4 (b), and thereafter dividing the
award so calculated by 2.
(ii) An award arrived at by calculating the Target
Percentage of the annual salary of such employee and adjusting
that award by applying a formula to be developed from time to
time by the CEO in consultation with the Senior Vice President,
Administration and the appropriate senior group executive, which
formula shall reasonably reflect the actual results of the
mining division to which the employee is attached as compared to
the approved budget for that division, and thereafter dividing
the adjusted award by 2.
(d) General
The Incentive Award for any Entitled Employee may exceed or be below
the amount calculated in accordance with the foregoing formulae at
the discretion of the CEO. Incentive Awards falling outside the
established range shall be recommended by the CEO and shall be
approved by the Committee in the normal course of administering the
Incentive Compensation Plan
5. GRANTING AUTHORITY AND ADMINISTRATION
The Committee shall, on the recommendation of the CEO, approve the number
and amount of Incentive Awards for any given year within three months
after the end of such year. The Committee shall conclusively interpret
the provisions of this Plan and decide all questions of fact arising in
the application. Determinations and interpretations in individual cases
may be made by the CEO with due regard to consistency with any prior
action by the Committee and such determination shall be binding and
conclusive upon the individual employees concerned and persons claiming
under them.
<PAGE> 4
6. NON-ASSIGNMENT
Rights and Incentive Awards granted under this Plan are not assignable,
except that in the case of the death of an Entitled Employee any Incentive
Award which would otherwise be paid to such employee shall be paid to his
or her estate. Incentive Awards are not subject, in whole or in part, to
attachment, execution or levy of any kind.
7. AMENDMENTS
The Board may from time to time amend this Plan, or any provision thereof,
except that the terms and conditions of Incentive Awards which have been
granted cannot be amended so as to adversely affect the rights of the
grantee without his or her consent.
8. TERM
This Plan shall be effective on and from January 1, 1995, shall apply to
Incentive Awards for fiscal year 1995 and thereafter, and shall terminate
only by appropriate action of the Board.
<PAGE> 5
SCHEDULE I
TABLE
<TABLE>
<S> <C> <C> <C>
AWARD PERCENTAGE AT AWARD AWARD PERCENTAGE AT
THRESHOLD ROE PERCENTAGE AT MAXIMUM
GROUP (50% OF TARGET ROE) TARGET ROE (150% OF TARGET ROE)
Senior Executive 20% 40% 80%
Executive 15% 30% 60%
Senior Management 15% 20% 40%
Middle Management 10% 15% 30%
Management 5% 10% 20%
- ---------- ----- ----- -----
</TABLE>
FORMULA
The Award Percentage shall be calculated in accordance with the following
formulae:
(i) Where the ROE is less than the Target ROE:
<TABLE>
<S> <C>
Senior Executive (40%)(AROE)
Executive (30%)(AROE)
Senior Management (10%)(AROE) +10%
Middle Management (10%)(AROE) +5%
Management (10%)(AROE)
- ---------- -----------------
</TABLE>
(ii) Where the ROE is equal to or greater than the Target ROE:
<TABLE>
<S> <C>
Senior Executive (80%)(AROE) -40%
Executive (60%)(AROE) -30%
Senior Management (40%)(AROE) -20%
Middle Management (30%)(AROE) -15%
Management (20%)(AROE) -10%
- ---------- -----------------
</TABLE>
NOTES
(i) Adjusted ROE (AROE) = ROE x 100
---------
Target ROE
(ii) Where AROE is greater than 150 (i.e. the maximum return on
equity) the AROE is deemed to be 150.
<PAGE> 1
Exhibit 11
Potash Corporation of Saskatchewan Inc.
Computation of Per Share Earnings 20-Mar-97
For the Periods ended December 31
(Figures and amounts expressed in thousands, except per share and per option
amounts)
<TABLE>
<CAPTION>
1996 1995 1994 1993
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
A Net Income as reported, Canadian GAAP $209,036 $159,486 $91,219 $44,697
B Items adjusting net income (7,216) 18,598 (4,539) 5,229
C Net income, US GAAP (A+B) $201,820 $178,084 $86,680 $49,926
D Weighted average number of shares outstanding 45,537 43,352 42,872 39,793
E Options outstanding to purchase equivalent shares 1,842 1,392 1,046 841
F Average exercise price per option $52.90 $34.74 $18.00 $16.90
G Average market price per share $70.33 $52.44 $29.81 $22.94
H Period end market price per share $85.00 $70.88 $34.00 $25.63
I Rate of Return available on option proceeds 5% 5% 5% 5%
Canadian GAAP
Basic earnings per share (A/D) $4.59 $3.68 $2.13 $1.12
Fully diluted earnings per share
J Imputed earnings on option proceeds (E*F*I) $4,873 $2,418 $941 $711
Fully diluted earnings per share ((A+J)/(D+E)) $4.51 $3.62 $2.10 $1.12
United States GAAP
Primary earnings per share
K Net additional shares issuable (E-(E*F/G)) 457 470 414 221
Primary earnings per share (C/(D+K)) $4.39 $4.06 $2.00 $1.25
Fully diluted earnings per share
L Net additional shares issuable (E-(E*F/H)) 696 710 492 286
Fully diluted earnings per share (C/(D+L)) $4.37 $4.04 $2.00 $1.25
D+K Weighted average shares for US GAAP 45,994 43,822 43,286 40,014
</TABLE>
<PAGE> 1
Exhibit 13
POTASH CORPORATION OF SASKATCHEWAN INC.
[PICTURE]
1996 ANNUAL REPORT
<PAGE> 2
A PORTRAIT OF GROWTH
[PICTURE]
Potash Corporation of Saskatchewan Inc. (PCS) is fulfilling its long-term
commitment to the world's farmers by producing and marketing three primary
nutrients. The world's largest potash company by capacity and the third largest
phosphate producer has now become the second largest nitrogen company in the
world, as well.
PCS pulls potash from eight mines in Saskatchewan, New Brunswick and Utah, and
handles export sales for the largest New Mexico producer. It has an agreement
to acquire 51 percent of the German company Kali und Salz AG, which if
concluded would give it indirect control of Germany's potash. It produces a
wide range of phosphate products at its giant vertically-integrated complex in
North Carolina and its facilities in northern Florida, and is the world's
largest manufacturer and supplier of phosphate feed supplements for livestock
and poultry. It owns a US full-range retail fertilizer company, Florida
Favorite Fertilizer. Its top-quality potash reserves are North America's
largest, and its phosphate reserves will last more than 50 years operating at
full capacity.
Since acquiring nitrogen producer Arcadian Corporation in March 1997, PCS
produces nitrogen fertilizers and nitrogen chemicals at facilities in Georgia,
Iowa, Louisiana, Nebraska, North Carolina, Ohio and Tennessee in the United
States, and has large-scale operations in Trinidad. Phosphate products are also
produced in Louisiana.
At December 31, 1996, PCS market capitalization was US$3.874 billion. With the
completion of the Arcadian purchase, the Company has 53.6 million shares
outstanding, trading on the Toronto, Montreal and New York stock exchanges.
TABLE OF CONTENTS
Highlights 1 Selected Ten-Year Data 42
Your Company 2 Management's Responsibility 43
Letter to Shareholders 4 Auditors' Report 43
Potash 8 Consolidated Financial
Phosphate 12 Statements 44
Sales 17 Board of Directors 60
Stewardship 24 Shareholder Information 62
Nitrogen 28 Glossary of Financial Terms 63
Management's Discussion and Management and Corporate
Analysis of Financial Condition Information 64
and Results of Operations 32 Glossary of Operational Terms 65
Cover: The 1996 annual report of Potash Corporation of Saskatchewan Inc. paints
the portrait of a company travelling on its chosen road to world leadership in
the vital fertilizer industry.
<PAGE> 3
HIGHLIGHTS
[MAP]
Its acquisition of Arcadian Corporation makes PCS an integrated fertilizer
producer.
In 1996, PCS entered into an agreement to purchase a 51-percent interest in
Kali und Salz AG, which controls German potash.
Financial Summary
(US$ millions except where specified)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net Sales 1,403.9 856.1
Costs and Expenses 1,104.4 631.9
Operating Income 299.5 224.2
Net Income 209.0 159.5
Per Common Share
(Actual Dollars) 4.59 3.68
Dividends Per Share
(Actual Dollars) 1.06 1.06
Cash Flow from Operations 296.2 233.5
Working Capital 278.8 136.1
Long-Term Debt Obligations 620.0 714.5
Return on Investment 10.25% 7.80%
Shareholders' Equity 1,405.5 1,241.9
</TABLE>
All financial data are stated in US dollars.
Potash Operating Summary
(in thousands of KCl tonnes)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total Potash Production 5,782 6,071
North American Sales 2,589 2,274
Offshore Sales 3,023 3,574
Sales to Third Parties 5,612 5,848
Sales to Florida
Favorite Fertilizer 121 108
Total Sales Tonnage 5,733 5,956
</TABLE>
Phosphate Operating Summary
(in thousands of tonnes)
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Total Phosphoric Acid Production (P2O5 tonnes) 2,096 1,008
Sales (product tonnes)
Phosphate Rock 191 211
Phosphate Fertilizer 3,120 1,399
Non-Fertilizer Products 994 596
</TABLE>
The 1995 data cover only a partial year in phosphate, since the properties were
acquired during that year.
[CHART A]
In 1996, PCS again achieved its goal of increasing return to its shareholders
each year.
[CHART B]
PCS improved its strong cash flow position with acquisitions that increased
value for shareholders.
[CHART C]
The 64-percent jump in net sales revenue in 1996 demonstrated the significance
of PCS growth.
[CHART D]
PCS operating income in 1996 was 492 percent higher than in 1992, another
benefit of its acquisitions.
1
<PAGE> 4
ABOUT YOUR COMPANY
[PICTURE]
The domestic market for all three PCS nutrients is large and stable. In the
United States, the primary fertilizer market, corn is the largest user.
PROVIDER OF VITAL NUTRIENTS
Your Company provides potash, phosphate and nitrogen, sources of the major
nutrients that are essential for plant growth and for animal and human life.
The nutrient potassium, found in potash fertilizer, raises crop yields and food
value, builds resistance to disease and environmental stresses, and improves
shipping, handling and storage qualities. Animals need potassium for
maintenance, growth and milk production. Phosphorus is required by plants for
photosynthesis, energy transfer and reproduction, and other yield-developing
processes. Animals need phosphate for general nutrition and normal body growth,
maintenance and repair. Nitrogen is a part of every living cell. The
fundamental building block of all plant proteins, nitrogen improves yield size
and quality. Unlike potassium and phosphorus, it cannot be stored effectively
in the soil and must be replenished each year to ensure good crops.
POSITIONING ON STRENGTH
When it became a public company seven years ago, PCS analyzed its business and
identified the strengths that would achieve its objective of increasing value
for its shareholders. Its major strength was its operating strategy of matching
production to demand to maximize profitability, coupled with its excess
capacity.
Well-established in the mature US market, the Company identified the growing
export market as offering the best potential for increased use of its excess
potash capacity, and for higher earnings. Adopting an acquisition strategy to
capitalize on its financial and industry strengths, it built its future on its
past and present, making PCS first a potash export leader and then an
integrated international fertilizer supplier.
GROWTH STRATEGY
In 1990 it acquired Saskterra, an export-oriented Saskatchewan potash company
that was outside of Canpotex, the export sales agency for Saskatchewan
producers. Then it
[CHART]
PCS has expanded its business and earnings through a strategy of making
acquisitions that build on its strengths.
2
<PAGE> 5
arranged to handle offshore sales for producers in New Mexico. Its 1993
purchase of the potash assets of Potash Company of America gave improved access
to European and Latin American markets through a mine in New Brunswick, on
Canada's east coast.
In 1995, PCS entered the phosphate industry by purchasing Texasgulf, the
premier phosphate company in North America. Again it applied its acquisition
strategy, strengthening its phosphate position by acquiring White Springs
Agricultural Chemicals in Florida. Using its operating strategy, it blended the
two to utilize the strong points of each and achieve maximum profitability.
In 1996, PCS moved to enhance its global potash position by agreeing to
purchase a majority interest in Kali und Salz AG, which controls Europe's most
important potash producer. It also staked out a strong position in nitrogen by
agreeing to acquire Arcadian Corporation, the largest producer and marketer of
nitrogen in the western hemisphere. This purchase was finalized in the first
quarter of 1997.
A BIGGER, STRONGER COMPANY
PCS has played a major role in the consolidation of the fertilizer industry,
first in potash and then in phosphate. Through its acquisitions, it has
transformed itself from the world's largest potash company to the world's
largest company producing all three primary nutrients. A strong, integrated,
market-oriented fertilizer corporation, it is a low-cost producer and market
leader.
Its customer-oriented sales force handles all three nutrients, offering
customers the convenience of a single salesperson, a single billing system and
computer linkups with one major company that is able to serve them better. With
three nutrients, PCS is an efficient one-stop shop for its fertilizer
customers.
Each nutrient will contribute significantly to the Company's net sales revenue
and gross margins, helping it achieve its objective of increasing value for its
shareholders each year.
[PICTURE]
Offshore markets provide the major opportunities for growth. PCS is a leading
supplier to developing nations, where demand for food rises with population and
incomes.
[CHART]
PCS can vary tonnes produced in all three nutrients in response to market
demand, to create optimal margins.
3
<PAGE> 6
[PICTURE]
C.E. Childers,
Chairman, President and
Chief Executive Officer
Dear Shareholders,
I am pleased to report that your Company continues to grow and improve its
financial results. The year 1996 was the sixth straight year of improved
earnings since 1990, our first year as a publicly traded company. Each quarter
as we progressed through the year was the best such quarter in our history. Net
sales of $1,404 million were an improvement of 64 percent over 1995 net sales
($856 million). Net income of $209 million was a 31-percent increase over 1995
net income ($159 million), and net income per share of $4.59 was 25 percent
better than 1995 ($3.68).
You will recall that 1994 was a great year because of the turnaround in the
world potash business. We experienced another growth year for potash in 1995
and saw additional earnings coming in from our 1995 phosphate acquisitions.
This last year, 1996, we enjoyed our first full year of operations of those
acquisitions and the results were very gratifying. Over $1 billion in net sales
was
4
<PAGE> 7
from those acquisitions as well as 49.1 percent ($193.3 million) of our total
gross margin. As you can see, our earnings were very well balanced between
potash and phosphate products.
After two years of improved sales volumes in potash, those volumes declined in
1996. The reason was the reduction in purchases by China and India, two major
potash-importing countries. As a consequence, we moved 3,022,879 tonnes to
offshore markets in 1996, a drop of 15 percent from our 1995 record (3,574,494
tonnes). Although we were below the export sales tonnage of 1994 and 1995, it
was our third highest sales volume to offshore customers in history.
Export sales of potash were complemented, however, with record sales volumes in
North America. Sales to non-affiliated customers totalled 2,589,462 tonnes, a
14-percent increase over 1995 (2,273,416 tonnes). Therefore, our total 1996
potash sales volumes of 5,612,341 tonnes were only 4 percent below our record
year of 1995.
Contrary to conventional wisdom, we were able to improve prices in the
declining export sales market with our 1996 average price 5.6 percent higher
than the 1995 average export price. However, prices for our North American
market declined in 1996 even though volumes in that region increased. Our
average price for all potash sales was adversely affected, as well, by the
decline in sales to the export market since those sales have higher
realizations than domestic sales. Our export sales dropped from 61 percent of
total sales in 1994 and 1995 to approximately 54 percent in 1996. In spite of
those factors, our average prices for all potash sales to outside customers,
excluding sales to another producer, were actually up slightly (0.6 percent) so
that the 4-percent drop in volumes also resulted in a 4-percent drop in potash
sales revenue.
[CHART]
All four quarters in 1996 were the best in its history for Potash Corporation of
Saskatchewan Inc.
5
<PAGE> 8
PCS Phosphate came on strong in 1996. We were very pleased with the performance
of those operations. We sold over 4 million tonnes of phosphate products with
approximately 77 percent of those tonnes going to fertilizer customers. We sold
778,021 tonnes to the animal feed phosphate business and 215,813 tonnes of
purified acid to the industrial business. Sales volumes of all products were
above 1995 volumes since 1995 was not a full year of production for PCS. Prices
for all fertilizer products, as well as for our phosphate feed products and
industrial acid, were up over last year.
Our phosphate management team continues to develop efficiencies through the
integration of the plants acquired from two different owners. We were aided by
lower prices in 1996 for the two main input costs, sulphur and ammonia.
We shipped 42 percent of our phosphate tonnes to offshore markets in 1996.
Those tonnes represented 35 percent of our phosphate revenues, as more of the
lower-priced products were sent overseas.
[CHART]
In phosphate the Company received higher prices for its product in North
America, while in potash the higher prices where offshore.
I'm very proud of PCS employees for their 1996 achievements. PCS teams won the
provincial mine rescue competitions in both Saskatchewan and New Brunswick. The
White Springs operation was awarded Florida's Environmental Excellence Award
for industrial facilities. Individual awards were earned by all employees at
Aurora, North Carolina and White Springs, Florida for reaching a milestone of
1,000,000 employee-hours without a lost-time injury. The employees at
Rocanville once again were awarded the prestigious John T. Ryan trophy,
signifying the safest mine in Canada.
Along with record sales revenue and net income, we continued our strong cash
flow performance. In 1996, operating activities provided $296 million. After
investments and dividend payments, we paid down our debt by $259 million,
6
<PAGE> 9
including the utilization of $40 million cash held at the beginning of the
year. We lowered our debt to capital ratio from 41.5 percent to 30.7 percent
during 1996.
The most exciting news of 1996 came in the third quarter when we announced two
potential acquisitions. The first announcement was our intention to purchase 51
percent of the shares of Kali und Salz AG from BASF, a German industrial
corporation, for 250 million Deutschmarks (approximately $146 million at the
time of writing). Kali und Salz AG is a German potash holding company that
controls 15 percent of the world's potash production. This is our first
acquisition outside of North America and will further enhance our position as
the world's preeminent potash producer. We signed the definitive agreement with
BASF on December 6 and are awaiting a decision from the Minister of Economics
of the German government.
Our second announcement was the signing of an agreement to purchase Arcadian
Corporation, the largest producer of nitrogen products in the western
hemisphere. That agreement calls for PCS to purchase all shares of Arcadian for
$12.25 cash and 0.17713 PCS shares (subject to adjustment) for each Arcadian
share. Arcadian shareholders approved the acquisition on March 4, 1997, and it
closed two days later. This is another milestone for Potash Corporation of
Saskatchewan Inc. as it marks our entry into the nitrogen business.
Today PCS is the world's largest fertilizer company producing all three primary
plant nutrients. We will serve our customers with one-stop service, meeting
their needs for all the basic fertilizer ingredients.
We are looking forward to an exciting future. The fertilizer outlook is bright,
for the reasons we have discussed in previous reports: growing population,
improving diets, no new land, and developing countries just beginning to
understand the importance of balanced fertilization. PCS is well positioned for
further growth. We have quality reserves, quality operations, and quality
employees, and all will be further enhanced with our new acquisitions.
Yours truly,
/s/ C. E. Childers
- ------------------
C. E. Childers
Chairman, President and Chief Executive Officer
March 7, 1997
7
<PAGE> 10
[PICTURE]
Many miles of underground road at PCS Lanigan stretch from the mine shaft to
the ore face where the giant mining machines work, 3,500 feet beneath the
Saskatchewan prairie.
8
<PAGE> 11
PCS POTASH
A Prominent World Supplier
Only seven countries produce significant quantities of potash. PCS draws from
seven mines in Canada, six of which it owns and operates, and one wholly-owned
mine in the United States.
With 23 percent of world capacity and an estimated 41 percent of excess
capacity, PCS can increase production as markets grow and further reduce its
cash costs per tonne. Its vast reserves will last more than 100 years,
reinforcing its leadership in the world potash industry and its position as a
primary supplier to developing nations. Its ore is high grade and its unit
mining costs are low.
[CHART]
PCS and other world suppliers cut production in 1996 in response to lower
demand in offshore markets. Total world production was down an estimated
6 percent.
Potash production costs vary around the world. Important factors are thickness,
consistency and continuity of the ore; its depth, geological conditions and K2O
grade; mill recovery achievable; operational capacity and degree of automation.
PCS is an industry leader in mine automation which helps it reduce its costs.
All mines in Saskatchewan, where the potash beds are flat, are in the lowest
cost quartile on a cash-cost basis. While New Brunswick's steeply-tilted beds
raise production costs, its transportation costs benefit from its proximity to
tidewater. Potash is a transportation-sensitive business.
[MAP]
PCS mines in Canada and the United States produce different grades of potash
product - standard, coarse, granular, soluble and industrial - to suit
different markets. Agricultural product is guaranteed to have a minimum of 60
percent K2O (95 percent KCl) when it leaves a mine site. A representative
sample of each shipment is analyzed to ensure it meets such quality
specifications.
PCS has an agreement to purchase a 51-percent share of Kali und Salz AG. The
Company recently received an order from the German Federal Cartel Office
prohibiting the proposed transaction. German law provides a right to appeal the
order both to the Minister of Economics and to the courts. PCS is requesting
authorization from the German Minister of Economics for the transaction to
proceed. If concluded, the acquisition would give PCS indirect control of Kali
und Salz GmbH, the company formed by the merger and restructuring of the potash
industries in former West and East Germany after reunification.
Kali und Salz GmbH has six potash mines with annual productive capacity of over
8 million tonnes. That includes 4.5 million tonnes of muriate of potash (KCl)
and 3.8 million tonnes of specialty fertilizers such as potassium sulphate
(K2SO4) and water-soluble magnesium sulphate (MgSO4), and
9
<PAGE> 12
[PICTURE]
Machines like this one trim the roof in areas that will continue to be used
after the mining machine cuts through the potash ore.
other specialty products tailored for non-cereal agriculture crops. It also has
two salt mines, with annual capacity of 3.2 million tonnes.
Kali und Salz AG, majority shareholder (51 percent) of the German potash
producer, also has a 50-percent interest in Potash Company of Canada Limited
(Potacan), which owns and operates a potash mine in New Brunswick.
1996 Production
<TABLE>
<CAPTION>
1996 1995 Mine Site
Capacity(1) Production Production Employees
(million tonnes KCl) (million tonnes KCl) (million tonnes KCl) (active)
<S> <C> <C> <C> <C>
Rocanville 2.295 1.502 1.650 316
Lanigan 3.828 1.251 1.460 314
Allan 1.885 .892 .958 269
Cory 1.361 .625 .530 140
Esterhazy(2) .951 .442 .433 2
New Brunswick .770 .702 .695 342
Patience Lake 1.033 .294 .295 81
Moab .080 .074 .050(3) 52
- --------------------------------------------------------------------------------------------------
Total 12.203 5.782 6.071 1,516
</TABLE>
(1) Revised capacities.
(2) Production at Esterhazy is mined from PCS reserves by International Minerals
and Chemical Corporation (Canada) Limited under a long-term agreement.
(3) From purchase April 10, 1995 to December 31, 1995.
EFFICIENT POTASH PRODUCTION
With offshore demand down in 1996, PCS continued its strategy of maintaining
production at levels consistent with maximizing profits. Using 47 percent of
its capacity, it produced 5.782 million tonnes of potassium chloride (KCl), 5
percent less than in 1995.
New Brunswick and Moab produced 840,589 tonnes of sodium chloride (salt) during
the year.
Production costs varied from quarter to quarter, depending on shutdown
schedules and on grades of product. New daily, monthly and yearly production
records were set at Cory and Rocanville; Cory also set weekly records. New
Brunswick established daily and annual records, records for total tonnes mined
and milled, and for salt tonnes produced. Allan and Lanigan set daily
production records, and Allan mined and milled record tonnes per 100 employee-
hours. Moab set and broke three records in the packaging of potash and salt.
Cory, Patience Lake and New Brunswick set productivity records.
Conversion of Cory's mine air heaters to natural gas reduced steam demand and
enabled increased production in winter months. Patience Lake began installing a
new computer-based distributed control system for mill control and began
reclaiming KCl fines from one pond, gaining KCl-rich liquor for use as leach
water in product upgrading. Allan's improved ore flow increased hourly hoisting
capacity by 10 percent.
Collective bargaining units operate at all PCS Saskatchewan mines. The
collective agreement with the Rocanville Potash Employees Association expires
May 31, 1998, and with the Communications, Energy and Paper Workers Union at
Lanigan on January 31, 1998. Negotiations are under way for agreements with the
United Steel Workers of America at Allan,
10
<PAGE> 13
Cory and Patience Lake to replace those expiring on April 30, 1997. New
Brunswick and Moab do not have collective bargaining units.
International Minerals and Chemical Corporation (Canada) Limited mines PCS
reserves at Esterhazy division under a long-term mining and processing
agreement effective through 2026. PCS has the option of terminating this
agreement every five years; the next opportunity is June 30, 2001.
CONSTANT EMPHASIS ON SAFETY
The priority PCS puts on safety has produced steady improvement in safety
records throughout the potash divisions.
In 1996, Rocanville received a fourth national John T. Ryan award for its 1995
safety record. The entire division achieved 3 million employee-hours without a
lost-time injury on December 11, 1996; it reached six years in February 1997.
New Brunswick worked a record 923 days and Lanigan a record 506 days without a
lost-time accident. Patience Lake reached three years on December 1. Allan,
whose underground workers marked two years without a lost-time accident on
October 22 and surface workers one year on June 1, scored its lowest accident
frequency rate since 1990. Cory's surface workers achieved two years without a
lost-time injury on September 1, and 840 days on December 19; underground
workers totalled 345 days. Moab had no lost-time incidents.
PCS teams excelled at the 1996 provincial mine rescue competitions in
Saskatchewan and New Brunswick. In Saskatchewan, Allan won the overall trophy
for underground mines for the 12th time, and Patience Lake was top surface
mine. New Brunswick topped its provincial competition for the sixth time. Allan
won the 16th annual PCS Fireman's Rodeo, its fourth victory. All PCS mines and
fire departments in nearby communities compete in rodeo events based on
different aspects of fire fighting.
TECHNOLOGY ASSISTS PRODUCTION
Building on earlier work in gyroscope technology for guiding automated mining
machines, PCS is beginning trials at Allan division of a prototype fiber optic
gyroscope system manufactured to its specifications. Development of the clay
tracking system needed to use automated machines in Saskatoon-area mines
continues.
After successful field tests, the prototype automatic control system for a
mobile bridge conveyor at Allan is being upgraded. It will be installed as a
production system for a new five-section bridge conveyor that transfers ore
from the mining machine.
Extension of the expert system on the Allan crystallization circuit for direct
control of a key process variable cut steam consumption for the circuit by 15
percent.
Considerable work was done in 1996 in the area of enhancing potash quality.
Image analysis technology was used to achieve rapid measurement of the particle
size distribution of fertilizer products, and detect the distribution of
conditioning additives on potash products. Climate chambers simulating extreme
climatic conditions for storage and handling of potash and DAP products for
export were utilized for continuing research.
[PICTURE]
At Patience Lake, a solution mine, field tests are under way of the automation
system developed for the Patience Lady, a dredge that recovers potash from the
crystallization ponds.
11
<PAGE> 14
[PICTURE]
Giant draglines at PCS Aurora remove the overburden and scoop up huge bites of
phosphate ore, an early step in the production of phosphate products that are
sold worldwide.
12
<PAGE> 15
PCS PHOSPHATE
The Most Diversified Producer
In 1996, PCS combined the phosphate properties acquired in 1995 - at Aurora,
North Carolina and White Springs, Florida - into an efficient, well-balanced
division, PCS Phosphate. The third largest phosphate producer in the world, the
Company represented 8 percent of world production and 6 percent of capacity.
[CHART]
PCS properties in North Carolina and Florida have approximately 40 percent of
US rock reserves.
Its large, rich reserves give it the best rock position of any North American
phosphate company. The Company expects by mid-1997 to complete the long,
demanding and expensive permitting process that lets it draw on those reserves,
giving it mining permits for 20 years.
The vertical integration of mining and processing at Aurora helps make it one
of the most efficient world producers, measured by tonnes of production per
employee. Its quality rock contributes to its rating by outside experts as the
world's lowest-cost acid producer. PCS is still the lowest-cost producer when
Aurora and White Springs are combined and ranked against other producers.
Phosphate rock is produced from the ore mined at both facilities. Most is used
internally to produce phosphoric acid (P2O5). A small amount is exported and
applied directly to acidic soils as fertilizer.
The phosphoric acid that is the feedstock for further phosphate production is
produced by reacting phosphate rock with sulphuric acid made on site from
purchased sulphur. From it, PCS produces phosphate fertilizers and other
products.
Phosphoric acid can be reacted with ammonia to produce DAP (diammonium
phosphate, 46 percent P2O5), the major solid fertilizer product. DAP is an
important domestic and export product which is applied directly or in
fertilizer blends.
Phosphoric acid is also concentrated by evaporation to 54 percent or 70 percent
P2O5 strength, known respectively as MGA (merchant grade acid) and SPA
(superphosphoric acid). A variety of liquid and solid fertilizers, animal feed
supplements and industrial quality acid is made from the acids. MGA comprises
most of world liquid phosphate trade, and importers use it as a source of P2O5,
primarily to produce DAP.
For the domestic market, SPA and MGA are mixed with other nutrients to produce
liquid fertilizers with varying concentrations of P2O5. PCS markets its SPA
LoMag liquid fertilizer (70 percent P2O5) specifically for the growing minimum
till market. Black SPA is also sold in North America to farmers seeking
economical suspension liquid fertilizers.
Black SPA or defluorinated MGA can be reacted with limestone to produce the
animal feed
[MAP]
13
<PAGE> 16
[CHART]
The phosphate feed supplement business is expected to grow as developing
nations demand better quality meat, milk and eggs.
supplements Dical (dicalcium phosphate, 18.5 percent phosphorus) and Monocal
(mono-calcium phosphate, 21 percent phosphorus). A mixture of phosphate rock,
MGA and soda ash or caustic soda can be calcined to produce DFP or
defluorinated phosphate (tricalcium phosphate, 18 percent phosphorus). All
three products are used primarily for poultry, swine and cattle.
A higher concentration phosphoric acid (56 percent P2O5) is made into
industrial-quality phosphoric acid used in food and beverage products for
humans, and industrial applications.
Low-Cost Phosphate Production
Integrating its phosphate operations to focus on the strengths of each has
given PCS unprecedented flexibility in production. It can analyze the markets
and emphasize products for which there is greater demand and better margins.
Following this strategy of producing to achieve maximum margins, it increased
DAP production at both facilities in 1996: Aurora for the export market, and
White Springs mainly for domestic demand. Aurora filled offshore MGA
requirements, but shifted more of its phosphoric acid to DAP production, as
well as higher-margin liquid products for the growing North American liquid
market.
The productive capability of PCS feed phosphate plants was increased by
supplying all but one with black SPA from White Springs. Smaller volumes of
this higher concentration P2O5 acid were required, cutting freight costs by 23
percent. Excess sulphuric acid from White Springs can be shipped to Aurora.
Phosphoric acid production in 1996 totalled 2.096 million P2O5 tonnes, up 4
percent compared to actual 1995 production, before and after acquisition by
PCS. PCS Aurora produced phosphate rock at 72 percent of rated capacity and
phosphoric acid at 101 percent. White Springs produced rock at 87 percent of
capacity and P2O5 at 85 percent. Rock is produced at White Springs' Swift Creek
mine and processed at the Suwannee River and Swift Creek chemical facilities.
[CHART]
With the most diverse product line of any world producer, PCS can shift
production in response to demand and profitability.
1996 Rock and Acid Production
<TABLE>
<CAPTION>
Phosphate Rock Phosphoric Acid
Annual 1996 1995 Annual 1996 1995 Mine Site
Capacity Production Production Capacity Production Production Employees
(million tonnes) (million P2O5 tonnes) (active)
<S> <C> <C> <C> <C> <C> <C> <C>
Aurora 6.0 4.331 3.474(1) 1.152 1.164 .849(1) 1,159
White Springs 3.6 3.143 .542(2) 1.093 .932 .159(2) 1,105
- ------------------------------------------------------------------------------------------------------------
Total 9.6 7.474 4.016 2.245 2.096 1.008 2,264
</TABLE>
(1) From purchase April 10, 1995 to December 31, 1995.
(2) From purchase October 31, 1995 to December 31, 1995.
14
<PAGE> 17
[PICTURE]
The integration of White Springs into PCS Phosphate enabled PCS to use the
strengths of each property, exercising options on product mix and shipping to
market from the most cost-efficient location, thus increasing margins over what
either company did alone.
White Springs productivity rose to 842 P2O5 tonnes per employee in 1996.
Improved markets for superphosphoric acid meant its Swift Creek plant
concentrated on black SPA and ran at capacity, making it one of the most
cost-effective plants in the industry. White Springs set monthly production
records for rock, sulphuric acid, black SPA and DAP, quarterly records in
sulphuric acid, P2O5 and DAP, and annual records in every product.
At Aurora, improved operating techniques, higher onstream factors and increased
yields produced higher volumes of sulphuric acid, P2O5, DAP and purified acid.
Monthly production records were set for sulphuric acid, P2O5, amber P2O5, 54
percent acid, DAP, the upgraded liquid product 11-37-0, purified acid,
turbogenerator income and turbogenerator power production. Annual records were
set for P2O5, amber P2O5, DAP, 11-37-0 and purified acid.
The collective bargaining agreement with the International Chemical Workers
Union at White Springs expires December 1, 1997. PCS Aurora is a non-union
operation.
1996 Phosphate Fertilizer Production
(All figures in million product tonnes)
<TABLE>
<CAPTION>
Aurora White Springs
Annual 1996 1995 Annual 1996 1995
Capacity Production Production(1) Capacity Production Production(2)
<S> <C> <C> <C> <C> <C> <C>
Liquid Fertilizers MGA(3) 1.835 1.750 1.323 1.908 1.448 .257
SPA .676 .300 .182 1.138 .751 .063
Solid Fertilizers DAP 1.247 1.117 .703 .662 .642 .111
</TABLE>
(1) From purchase April 10, 1995 to December 31, 1995.
(2) From purchase October 31, 1995 to December 31, 1995.
(3) A substantial portion is consumed internally in the production of downstream
products. The balance is exported to phosphate fertilizer producers and sold
domestically to dealers that custom-mix liquid fertilizer.
15
<PAGE> 18
1996 Feed Phosphate Production
<TABLE>
<CAPTION>
Annual 1996 1995 Employees
Capacity Production Production (active)
(tonnes) (tonnes) (tonnes)
<S> <C> <C> <C> <C>
Weeping Water, NE 209,000 158,481 89,752(1) 41
Kinston, NC 141,000 70,731 61,164(1) 30
Marseilles, IL 278,000 182,383 113,579(1) 39
Saltville, VA 78,000 76,039 54,401(1) 48
Davenport, IA 280,000 102,585 23,189(2) 29
White Springs, FL (2 plants) 313,000 183,415 35,761(2) 61
Total 1,299,000 773,634 377,846 248
</TABLE>
(1) From purchase April 10, 1995 to December 31, 1995.
(2) From purchase October 31, 1995 to December 31, 1995.
FEED PHOSPHATE PRODUCTION
PCS produces the phosphate feed supplements Dical, Monocal and DFP for
livestock and poultry in seven plants well located to supply customers
throughout the United States.
Weeping Water, Kinston, Marseilles, Davenport and one White Springs plant
produced Dical and Monocal; Saltville and White Springs, DFP. Weeping Water and
Marseilles set monthly, quarterly and annual production records, and Kinston
set daily records. The maximum production rate for Davenport's production
trains averaged 23 percent above year-end 1995.
Weeping Water's new rotary dryer flight design cut natural gas usage by 15
percent. Kinston raised plant capacity by improving its recycle system and
increasing air flows. Saltville's new system for manufacturing pelletized feed
allowed increased production rates. White Springs' DFP plant raised its
instantaneous production rates by improving air handling and gas combustion
rates.
INDUSTRIAL ACID
The purified acid plant at Aurora produced 0.199 million tonnes of purified
acid for industrial use. Its rated capacity is 0.220 million tonnes.
SAFETY IS A PRIORITY
White Springs employees completed 1 million hours without a lost-time accident
in December 1996. Lost-time injuries and illnesses were 25 percent below 1995
levels, and workers compensation cases down 20 percent. General Services
Department employees achieved 8 million hours without a lost-time accident, and
mine employees 1 million hours. The Root Cause Analysis incident investigation
system was implemented. Aurora received the President's Award for 1 million
hours without a lost-time accident.
At the feed operations, employee safety was re-emphasized through new safety
programs at Weeping Water, Kinston, Marseilles and Saltville, resulting in a
35-percent reduction in recordable accidents over the average of the three
previous years.
The Davenport plant was designated a Star facility by the US Department of
Labor Occupational Safety and Health Administration, and completed 17 years
without a lost-time accident. Kinston completed three years and Weeping Water
and Marseilles two years.
TECHNOLOGY ASSISTS QUALITY
Aurora improved its yields by modifying solids and strength control in the
phosphoric acid attack trains, and began using Global Positioning System survey
equipment.
DAP quality at White Springs was substantially improved through technological
changes that cut product moisture content, increased product size and improved
hardness. The January 1997 start-up of a DAP product cooler improved quality
further.
16
<PAGE> 19
SALES
Overview of a Global Enterprise
Fertilizer is traded widely around the world, travelling by ocean-going bulk
carriers, river barges, railroads and trucks between producing and consuming
countries. When a potash, phosphate or nitrogen fertilizer reaches its
destination, it may be applied straight to fields or mixed with other
fertilizers before application.
Potash has the largest international trade; about 80 percent of world
production moves across borders. Canada is the largest supplier to world
markets, followed by the Former Soviet Union and Germany. China, Brazil and
India are the largest offshore consumers, while the US leads world potash
consumption.
About one-third of concentrated phosphate fertilizers is traded
internationally. The solid fertilizer DAP is the major product traded. The US,
the most significant exporter, provides 67 percent of world DAP trade. China is
the largest importer by far, followed typically by India and Pakistan.
Phosphoric acid is usually converted into finished products in the country of
origin, but about 15 percent was traded internationally - as merchant grade
acid (MGA) - in 1996. Morocco, Tunisia and the United States are the largest
exporters of MGA, accounting for 68 percent of trade. India is the major
importer, with Brazil a distant second. Importing countries use purchased acid
as the feedstock for local DAP production.
Most nitrogen fertilizer production is consumed locally. Only one-quarter of
world urea production and 10 percent of ammonia production are traded
internationally. Russia, Trinidad, Canada and the Middle East ship 59 percent
of the world ammonia trade; the US is the largest importer. Russia, Ukraine,
Canada and Saudi Arabia account for 40 percent of urea exports.
[PICTURE]
While China's imports of all three nutrients declined in 1996, it was still
the major offshore market. As its economy grows, its people are demanding more
food and better quality food.
More than 150 countries use fertilizer to improve crop yields. China was the
major offshore importer of all three nutrients in 1996. Though it may buy less
of a nutrient in a given year - as with potash, DAP and urea in 1996 - China is
expected to remain one of the primary forces behind world demand as it
struggles to feed a rising population from a shrinking acreage of arable land.
Its needs will affect the fertilizer industry worldwide.
Other developing nations, too, are major users of fertilizer. In all, these
nations account for approximately 40 percent of world potash consumption and 60
percent of both phosphate and nitrogen consumption.
This is the growth area for fertilizer, for these countries have rising
populations and many have thriving economies. Their demand for food can only be
met by improving crop yields through increased use of fertilizer and other
modern
17
<PAGE> 20
[CHART]
Fertilizer consumption varies year by year, for reasons that often have little
to do with agriculture, but the long-term trend is rising.
agricultural methods. Their upward trend in fertilizer consumption may be
affected temporarily by internal political and economic events, but the trend
is clear.
In 1996, world potash demand was down about 3 percent after two years of
growth, but it rose in each of the years 1994-1996 by an average of 3.3
percent. After two years of growth, world demand for phosphate for fertilizer
was down approximately 2 percent; over the period 1994-1996 it rose by an
annual average of 2.5 percent. World nitrogen demand was up in 1996 for the
third year, by approximately 1.5 percent. The annual increase 1994-1996
averaged 4.1 percent. Offshore demand for both potash and phosphate for
fertilizer fell in 1996, by approximately 4 percent and 2.7 percent
respectively. Offshore demand for nitrogen rose about 1.7 percent.
The United States is an important domestic market for North American companies
such as PCS. Consumption varies little year to year, though it can be affected
by agronomic and economic decisions, as well as weather. Domestic sales of
fertilizer products were affected by a cold, wet spring that delayed planting.
US potash sales were down an estimated 1 percent and phosphates 2 percent.
Nitrogen sales were up an estimated 1 percent.
LEADING POTASH SUPPLIER
In 1996, the Company provided an estimated 15 percent of potash sold worldwide
and 27 percent of domestic sales. The 5.733 million tonnes sold is its second
highest sales total ever, just 4 percent below the record set in 1995.
The average offshore potash price was up 5.6 percent in 1996 while North
American prices declined. The average price for all PCS potash sales to outside
customers (excluding sales to another producer) was up 0.6 percent.
After a late spring that affected potash sales, PCS sales jumped in the summer
and continued strong through the fall, when farmers bought to replace nutrients
and prepare for increased plantings in 1997. World sales of potash to China and
India, leading markets among developing nations, were affected by internal
subsidy issues there. Both countries carried large potash inventories over from
1995, affecting 1996 purchases. Brazil, another of the major potash consumers
among developing nations, began 1996 slowly but bought record volumes as
conditions in its market improved.
[CHART]
PCS domestic sales reached record levels in 1996, while offshore sales were
down.
DOMESTIC
PCS sold a record 2.710 million tonnes domestically, 14 percent above 1995
levels (including 133,207 tonnes to another producer and 120,944 tonnes to
Florida Favorite Fertilizer). Of those volumes, 2.559 million tonnes came from
Saskatchewan, 78,596 tonnes from New Brunswick and 72,477 tonnes from Moab. The
United States market took 90 percent, with agricultural co-ops and big national
firms the largest customers.
After a slow first half, PCS made record potash sales in the summer and fall.
Despite increased US plantings, total North American demand for potash
18
<PAGE> 21
[PICTURE]
Brazil, now the world's fifth largest fertilizer consumer, improves quality and
yields of crops like coffee with added nutrients. PCS provided more than 20
percent of its potash imports in 1996.
was down marginally from 1995, to an estimated 9.7 million tonnes KCl.
Domestic potash prices struggled until the third quarter. Increases scheduled
for the first quarter were not attained, and customers bought in the summer
before the announced fall increase took effect in the third quarter. New prices
were announced late in the year for first quarter 1997.
OFFSHORE
In 1996, PCS made more than half of its potash sales offshore, a total of 3.023
million tonnes, down 15 percent from the 1995 record. This decline reflects
smaller Canpotex sales of 4.15 million tonnes, compared to 5.16 million tonnes
in 1995. The principal reason was lower sales to China.
Due to delays in the reintroduction of subsidies after national elections and
resulting confusion in setting retail prices, India's potash purchases fell to
an estimated 1.2 million tonnes in 1996, 48 percent less than in 1995. India is
not a big market for Canadian potash, but buys significant quantities from
Germany.
Brazil was the potash bright spot in 1996, with record imports of 3 million
tonnes after a slow start early in the year. This total compares to 2.7 million
tonnes in 1994 and 2.5 million in 1995. Brazil bought 521,000 tonnes from
Canpotex and continues to be the largest offshore market for PCS New Brunswick,
accounting for 57 percent of its total exports of 623,100 tonnes.
Prices were strong in the export market after contract customers agreed in
February 1996 to a $5-a-tonne increase for the entire year.
[CHART]
An integrated sales force selling two nutrients contributed to record domestic
potash sales in 1996.
INDUSTRIAL
About 4 percent of PCS 1996 sales were industrial. Some went to companies which
refine the potash further before reselling it for
19
<PAGE> 22
production of downstream industrial products such as soaps, glass, textiles,
dyes, chemicals and drugs. Potash is used directly in the oil and gas industry
in drilling muds. The Company markets a potassium-based water softening
product, Softouch, and an ice melt product.
PHOSPHATE SALES
In its first full year in the phosphate business, PCS sold one of every 19
tonnes of phosphate fertilizer used around the world, and one of every 6 tonnes
applied to North American fields. It supplied almost half of the phosphate feed
supplements fed to North American livestock and poultry and increased its sales
of industrial products.
FERTILIZER PRODUCTS
PCS achieved strong sales of phosphate fertilizer products in 1996, 3.120
million tonnes. It sold 1.880 million tonnes of solid fertilizers, divided 57
percent-43 percent between offshore and domestic sales, and 1.240 million
tonnes of liquid fertilizers, divided 39 percent-61 percent between offshore
and domestic. Offshore sales are handled through PhosChem, a phosphate export
association.
[CHART]
PCS sells phosphate products to a wide variety of customers, varied both
geographically and by end use.
SOLID FERTILIZERS: Following its strategy of producing highest margin products,
PCS increased its DAP production in 1996, and sold 1.062 million tonnes
offshore, more than half its production. It supplied 26.5 percent of the 4
million tonnes shipped by PhosChem. China was the major offshore purchaser with
70 percent of PhosChem DAP sales; in December, Sinochem signed an unprecedented
two-year agreement with PhosChem for monthly DAP shipments that will
approximate 1996 levels each year. The price will be the market-related price
at time of shipment.
PCS domestic DAP sales totalled 803,403 tonnes in a year when the industry sold
4 percent less DAP in the US. All production of the solid fertilizer GTSP was
sold domestically, a total of 14,702 tonnes.
Offshore demand supported higher DAP prices in 1996, and PCS realizations were
5 percent above 1995 levels.
LIQUID FERTILIZERS: Of the 1.240 million tonnes of liquid fertilizers sold in
1996, amber MGA was the major export product, comprising 36 percent of total
liquid sales. India, which imports MGA for its domestic DAP production, was an
important customer. PCS supplied 88 percent of the 504,400 solution tonnes of
MGA shipped by PhosChem in 1996, down from 1995 PhosChem levels. The Company's
domestic and offshore sales of green and amber MGA totalled 45 percent of its
liquid sales.
Phosphoric acid capacity utilization remained tight worldwide, supporting
higher MGA prices. PCS realizations from liquid fertilizer sales were up 11
percent.
PHOSPHATE ROCK
Sales of phosphate rock were down 10 percent to 190,610 tonnes, as the result
of a Company decision to retain its rock for its own production rather than
sell it to competitors. It was sold to customers in New Zealand, Brazil and
Malaysia largely for direct application as fertilizer.
NON-FERTILIZER PRODUCTS
The phosphate feed supplements Monocal, Dical and DFP for livestock and poultry
are the main non-fertilizer products, with industrial phosphates as a
specialized market area.
FEED SUPPLEMENTS: PCS sold 778,021 tonnes of feed products for poultry, swine
and cattle, divided among Monocal (45 percent), Dical (32 percent)
20
<PAGE> 23
and DFP (20 percent). Feedgrade MAP made up the remainder. Almost 90 percent of
feed phosphate sales were domestic, but offshore sales have increased
substantially. Monocal is the largest export product. Most export sales were to
Latin America and Asia.
The US market for phosphate feed supplements fell 5 percent in 1996. It was
influenced mostly by producers' increased use of protein alternatives
containing phosphorus because of higher corn and soybean prices, and to a small
degree by lower cattle numbers. PCS ended the year with a smaller market share,
as a new competitor entered the business, but with better realizations after
raising prices in both domestic and offshore markets.
INDUSTRIAL PRODUCTS: The Company produces purified, or industrial grade,
phosphoric acid in a joint venture with Albright & Wilson Americas. Production
is sold domestically, totalling about 31 percent of the market. In 1996,
215,813 tonnes were sold, in two types: food grade, used for cola beverages,
preservatives and other food products, and technical grade for a variety of
industrial processes and products, including metal finishing, cleaning agents,
electronics and detergents. Prices and volumes are relatively constant in this
high margin business.
AMMONIA: The PCS ammonia business in 1996 consisted of the purchase,
terminalling and sale of anhydrous ammonia. Through an exclusive contract
extending to the end of 1997, a company in the Republic of Russia produced most
of the ammonia purchased for use at PCS chemical plants and for sale to
third-party customers. Third-party sales in 1996 totalled 535,190 tonnes, all
domestic, primarily to DAP producers.
MARKET CONDITIONS
While total fertilizer sales fell slightly in 1996, world markets solidified
the improvement that began in 1994 and continued in 1995. The industry that
will enter the 21st century has benefited from the challenges of the early
1990s, when fertilizer consumption fell sharply. Most of this decline occurred
in the Former Soviet Union (FSU) and Eastern Europe after Communism collapsed.
Reforms to European Union agricultural policy affected consumption there, and
removal of fertilizer purchase subsidies cut consumption in many developing
nations, notably China and India.
[PICTURE]
PCS is a world leader in phosphate feed supplements for livestock and poultry,
with solid North American sales and growing offshore sales.
During this unusual demand-induced freefall, the fertilizer industry was
restructured, rationalized and consolidated. The number of producers in each
branch has decreased, while many mining, oil and chemical companies have left
the business. The result is primarily free-standing, publicly-traded companies
that emphasize the bottom line and are concerned with profits. PCS was a leader
in this consolidation.
21
<PAGE> 24
[CHART]
PCS has consolidated in all three nutrients and is a leading low-cost producer
in each.
Supply has also contracted. Much inefficient potash production has been shut
down. East and West German potash mines were consolidated into one company with
half the previous capacity. FSU potash producers have shut in much potash
capacity or shifted it to salt production. Some phosphoric acid plants in
Europe have been closed, and some FSU capacity has been shut in. In the US,
many small acid plants that operated two decades ago have been closed. Little
major new capacity is planned, and some potash and phosphate reserves will soon
be depleted. New phosphate reserves will be difficult and costly to develop.
Companies without the kind of reserves PCS has will be forced to operate from a
higher-cost base.
INDICATORS TO WATCH:
* Fertilizer trade in China, India and Brazil
* Subsidies in developing nations
* Return of consumption in the FSU
* Further industry consolidation
Signs of recovering consumption can be seen in Eastern Europe, and Western
European consumption has stabilized. North America remains a large and mature
market. However, demand from developing nations leads market growth - and will
do so far into the future.
World population rises by 90 million a year, mostly in developing nations.
Their young populations want better and more varied diets, and thanks to
burgeoning economies, they have the money to pay for those diets. They want
meat, and meat production is grain-intensive. Feed-grain consumption grew 16
percent in developing nations in 1995/1996, four times the growth in
consumption of grain for human food. This will drive growth in demand for
animal feed supplements.
[CHART]
Meat production is grain-intensive. Asia's meat consumption has jumped about
60 percent in the 1990s.
Good harvests in many parts of the world in 1996 improved the world grain
stocks position slightly, but most of the increased production was taken up by
increased demand. Grain stocks remain at historically low levels.
OUTLOOK FOR PCS PRODUCTS IN 1997 AND BEYOND
The Company foresees higher world demand for potash, phosphate and nitrogen
fertilizer in 1997. This should translate into increased sales to PCS customers
for the three primary nutrients. The Company also foresees higher sales of feed
supplements in 1997, both domestically and offshore.
Grain production must rise significantly to improve low world grain inventories
while meeting immediate and growing food demand. China, Asia's powerhouse, is
expected to return to the potash market and continue its phosphate imports.
India is expected to buy more potash while its phosphate
22
<PAGE> 25
demand should increase over 1996 levels. Brazil, the largest economy of South
America, should continue to increase its agricultural production through wise
use of fertilizer. Other developing nations are expected to follow their
example.
North America and Western Europe are expected to require more fertilizer for
the land they are putting back into cultivation in response to world demand for
grain. This should help support fertilizer prices.
The longer term looks equally promising. While the Company believes China,
India and Brazil will continue to be leaders in fertilizer consumption among
the developing nations, markets are also growing in other countries in Asia and
Latin America. All these countries need to use more fertilizer if they are to
adequately feed their populations, and need to balance their fertilizer use
with improved nitrogen/phosphate/potash ratios. To meet the new demand for
meat, they will increase both local production and imports, so the market for
feed supplements is expected to grow there as well as in North America.
Seldom does fertilizer consumption rise in a smooth, steady upward sweep. It is
influenced by economic and political situations in each nation, often little
related to agriculture. But over the long term the trend line rises.
[PICTURE]
Developing nations determined to feed their rising populations are giving
fertilizer more priority in their economic planning, which will benefit
integrated fertilizer companies like PCS with its wide range of products.
23
<PAGE> 26
[PICTURE]
PCS White Springs received an award as a Certified Wildlife Habitat Enhancement
Council site in 1996 for successful reclamation projects such as the one shown
here.
24
<PAGE> 27
PCS STEWARDSHIP
Fulfilling its Responsibilities
SHARING WITH THE COMMUNITY
Each year, PCS responds to many requests to support causes in the communities
in which it operates. As well, individual operations support their immediate
communities with donations to and participation in local causes, from museums
to ball teams.
Through its long-standing Matching Gift Program, the Company matches employees'
personal donations to their favorite eligible charities.
Employees in the Corporate office and at Allan, Cory and Patience Lake
divisions increased their contributions to the Saskatoon United Way by 28
percent in 1996. Employees received their fourth straight Campaign Chair Award
and, for the fifth year, the Company won the Gold Corporate Award. Employees at
PCS White Springs contributed 102 percent of their goal to the local United
Way. Matched by the Company, that contribution made up one-third of the total
funds raised.
PCS is in the second year of its $5-million contribution to the University of
Saskatchewan First & Best National Campaign. In 1996, it donated the first
instalment of a five-year commitment to the North Carolina Museum of Natural
Sciences being built in Raleigh, and contributed to Future Farmers of America.
PCS Phosphate continued to participate with Aurora, North Carolina in operating
the Aurora Fossil Museum, and welcomed fossil hunters to hunt in a deep pit at
the mine on Saturdays for six months of the year.
The Company provided financial assistance and two kayaks to Saskatoon athlete
Corrina Kennedy, a world-class kayaker. PCS Phosphate contributed to the North
Carolina Nature Conservancy, North Carolina Ducks Unlimited and the Raleigh
Housing Authority Scholarship Fund for children from economically deprived
backgrounds living in social housing.
Employees at PCS Moab continued their twice-yearly task of cleaning up a busy
three-mile stretch of the Utah highway leading to the plant and nearby
campgrounds. Kinston feed phosphate plant employees contributed goods and the
plant provided temporary space to the Raleigh Girl Scouts who collected dishes,
toys, clothes and other goods for victims of the flooding Neuse River.
PCS AND ITS PEOPLE
The PCS workforce grew by 28 percent when the Company acquired Arcadian
Corporation. Now, 66 percent of PCS employees work in the United States, 28
percent in Canada and 6 percent in Trinidad.
The Company introduced a new Service Award Program in 1996 to recognize and
reward the long-term commitment of its employees. The program offers a choice
of gifts to employees at five years and every five years thereafter. During the
year, 755 awards were presented. Through the new PCS Scholarship Program, 10
Chairman's Awards and 23 Divisional Awards were presented to sons and daughters
of employees for post-secondary study.
[PICTURE]
Corrina Kennedy paddles on the South Saskatchewan River at Saskatoon. She and
her partner won the pairs 500-metre race at the world championships in a kayak
provided by PCS, and then competed at the 1996 Olympics.
25
<PAGE> 28
CORPORATE GOVERNANCE
PCS, as a Canadian-based corporation listed on both the Toronto and Montreal
stock exchanges, complies with the requirements of those exchanges regarding
corporate governance practices.
The Board of Directors has 15 members, 13 of whom are outside directors. No
significant shareholders are represented on the Board.
There are four committees of the Board, each of which plays a significant role
in the discharge of Board duties and obligations. Each committee (audit,
compensation, environmental affairs and executive) is composed entirely of
outside directors except the executive committee which is chaired by the Chief
Executive Officer. Each committee is empowered to retain outside advisors.
Individual directors may engage outside advisors at the Company's expense upon
authorization of the executive committee.
The executive committee acts as the nominating committee of the Board. It
considers prospective nominees and, when it has reached consensus, Board
approval of the proposed nominee is sought.
A description of the mandate of the Board and of the Board's expectations of
management, as well as additional disclosure regarding corporate governance
matters, can be found in the Company's current proxy circular.
PROTECTING THE ENVIRONMENT
Environmental controls in the form of permits and other applicable Canadian and
American federal, provincial, state and local laws and regulations govern air
emissions, waste water discharges and solid and hazardous waste management at
the potash and phosphate operations of PCS.
The Company takes those responsibilities seriously, and adheres to a corporate
environmental policy that requires it to manage its operations responsibly to
safeguard the natural resources related to or affected by its activities. Each
production unit is required to work diligently to minimize potential risks to
the environment and to comply with environmental legislation. Both capital and
operating funds are allotted.
[PICTURE]
The emission control systems shown here increase environmental protection at
PCS mines.
POTASH AND ITS ENVIRONMENT
PCS potash operations constantly improve their facilities for controlling
pollution, managing wastes and maintaining air quality. PCS Allan was
recognized by the Canadian government for its leadership in reducing greenhouse
emissions, as part of Canada's Climate Change Voluntary Challenge and Registry.
All PCS Canadian divisions are enrolled in the program.
Environmental audits were carried out by the Manager, Environmental Affairs at
all of the Company's potash operations in 1996, and at Florida Favorite
Fertilizer plants. No significant cases of non-compliance were discovered. The
Board's environmental affairs committee reviewed the audit reports.
In Saskatchewan, PCS continued with research projects to evaluate waste
management methods.
26
<PAGE> 29
In 1996, the Saskatchewan Department of Environment and Resource Management
enacted revised Mineral Industry Environmental Protection regulations on mine
decommissioning and financial security requirements. As required, the Company
will file with the department by March 31, 1997 a decommissioning and
reclamation plan for each Saskatchewan mine. Extensive work was carried out in
1996 to complete individual site characterizations to help in development of
the plans.
The plans, which will include a proposal for financial assurances, must be
approved by the department. The financial assurance must be in place by March
31, 1999 or one year after approval of the plans, whichever is later.
PHOSPHATE AND ITS ENVIRONMENT
Independent consulting firms retained by legal counsel conducted environmental
audits at all PCS phosphate facilities in 1996, and no significant cases of
non-compliance were discovered. The auditors at Aurora indicated that the
compliance manuals and environmental action computer system were as good as
they had seen. The reports were reviewed by the Board's environmental affairs
committee.
Environmental operating expenditures at Aurora and White Springs included
spending for their environmental departments and pollution control equipment.
Major capital items were improvements to pond water and spill prevention
systems.
White Springs received the Environmental Excellence Award presented annually to
an industrial facility by the Florida Department of Environmental Protection.
The criteria are innovative environmental control and pollution prevention
measures, compliance with environmental regulations and overall environmental
performance. The total quantities of phosphorus and nitrogen compounds
discharged into the water leaving the White Springs site were reduced 8 percent
in 1996, on top of a 65-percent reduction between 1989-90 and 1995.
Environmental projects at the Company's feed plants included the installation
of two new phosphoric acid tanks in a lined containment area at Weeping Water,
and completion of the tail gas scrubbers at the White Springs DFP plant.
LAND RECLAMATION
Continuing its industry leadership in reclaiming the lands it has mined, PCS
spent approximately $4.4 million in this area in 1996. Aurora continues to
reclaim land at the rate of new mining. Tree planting was completed at its
Charles Tract's clay ponds in February. Initial work was begun or work
continued in four other areas. Construction begins in 1997 on restoring the
headwaters of Whitehurst Creek, according to the plan approved by North
Carolina's permitting agency.
White Springs' Conceptual Reclamation Plan, which gives life-of-mine certainty
for reclamation requirements, was approved by the State of Florida and Hamilton
County in 1996. Those were the first two of four steps required to implement a
first-of-its-kind agreement with the state for revised on-site reclamation
standards in return for payments (related to the rate of mining) for off-site
purchase of environmentally sensitive lands. The final steps, a revised US Army
Corps of Engineers wetlands mining permit and an agreement with the state and
The Nature Conservancy for land purchase, should be completed in 1997.
One land and lake reclamation project has been completed under the new
standards. Kingfishers, which normally nest in riverbank cliffs, have created
nests in the area.
White Springs participates in the Florida Phosphate Council Guiding Principles
program, making a commitment to employees, the community and the environment.
Because a significant portion of Aurora's phosphate reserves is located in
wetlands, the Army Corps of Engineers must approve any mining activity that
will disturb the wetlands. The long permitting process is close to completion.
The public comment period for the plan chosen by the Company in November, in
response to earlier comments on an alternative plan, ended in January. The new
permits, when they are issued, will allow 20 years of mining.
27
<PAGE> 30
[PICTURE]
PCS reached an agreement in 1996 to purchase a nitrogen company which emphasizes
upgraded products in its agricultural, industrial and international sales.
28
<PAGE> 31
PCS NITROGEN
A Wealth of Value-Added Products
PCS took its first steps into the nitrogen business when it announced on
September 2, 1996 that it had reached a definitive agreement to purchase
Arcadian Corporation of Memphis, Tennessee, the largest nitrogen producer in
the western hemisphere. It produces both nitrogen fertilizers and chemicals.
Arcadian's shareholders voted on the deal on March 4, 1997. The acquisition
became final on March 6, 1997, and Arcadian has now become PCS Nitrogen. PCS is
now the world's largest company producing all three primary nutrients.
Arcadian Corporation
1996 Financial Highlights*
<TABLE>
<CAPTION>
($ millions)
<S> <C>
Net Sales $1,314
Cost of Sales $ 966
Gross Profit $ 348
Operating Income $ 291
Net Income $ 161
Cash Flow from Operations $ 361
Current Assets $ 585
Long-Term Debt $ 510
Working Capital $ 397
</TABLE>
* as reported by Arcadian Corporation, January 23, 1997
INTRODUCTION TO NITROGEN
Ammonia production is the first stage in the process of manufacturing nitrogen
fertilizers and chemicals. Annual world ammonia capacity is 144 million tonnes,
with more producers than in potash and phosphate. Production totalled about 124
million tonnes in 1996.
Because of the widespread world production, nitrogen is a very regional
business, with less trade across borders than potash and phosphate. China, the
United States, India and Russia are the world's largest nitrogen producers,
with China, the US and India the largest consumers.
PCS NITROGEN PROPERTIES
[MAP]
The United States is the world's largest importer of ammonia, with Trinidad,
Canada and Russia its primary suppliers. More than 40 percent of US imports
from Trinidad in 1996 were supplied by Arcadian.
From Ammonia to Value-Added Products
Natural gas is reformed with steam to produce hydrogen which is mixed with air
at high temperature and pressure over a catalyst bed to produce ammonia. The
most concentrated form of nitrogen fertilizer, ammonia (NH3, 82 percent
nitrogen) is also the building block for all value-added nitrogen products.
Approximately two-thirds of PCS ammonia production is consumed in these
upgraded products, and the remaining one-third is sold as ammonia. About 80
percent of the Company's production in the US is upgraded. Production in
Trinidad, where margins are protected by a unique natural gas contract, is
divided approximately 70 percent-30 percent between ammonia and urea.
PCS is the largest producer by capacity in the western hemisphere of the
increasingly popular nitrogen solutions (28-32 percent nitrogen), which are
produced by combining the liquid forms of urea and ammonium nitrate. They are
easy to store, handle and apply. PCS has the trademarked nitrogen solutions
URAN, GOLDEN URAN, SURAN and S-25.
29
<PAGE> 32
[CHART]
Urea (46 percent nitrogen) and ammonium nitrate (34 percent nitrogen) are the
solid fertilizers produced. Nitric acid is a feedstock for production of
ammonium nitrate.
Nitrogen chemicals are produced for a variety of industrial customers; they may
be used as raw materials for intermediates in the manufacture of many
industrial products. Nitric acid is produced in varying strengths for
industrial customers. Ammonia and nitric acid are used in the production of
synthetic fibers for sweaters, plastics for house and car, refrigerant in
automobile air conditioners and pigment in automobile paint. Ammonium nitrate
is required in explosives for mining and quarrying. Urea is used in plastics,
pharmaceuticals and dyes, and in resins and adhesives for the building
industry.
Of the ammonia produced and sold as ammonia by Arcadian in 1996, just over half
went to phosphate companies to make the solid fertilizer DAP. About 30 percent
went to industrial accounts, and the remainder to agricultural accounts and
international sales. PCS can use about one-third of this ammonia in its own
phosphate plants.
[CHART]
Worldwide, about 85 percent of ammonia is used to produce a range of
fertilizers. US producers allot more to industrial products and to DAP
production.
Phosphate production facilities at the Geismar, Louisiana plant have 202,000
P2O5 tonnes of annual phosphoric acid capacity, and produce superphosphoric
acid and phosphate solutions.
PCS Nitrogen is a low-cost producer among world producers. It has a natural gas
purchasing strategy by which one-third of its production uses natural gas that
is fixed-priced and one-third, market-priced. The remaining one-third benefits
from natural gas supplies in Trinidad that are indexed to ammonia prices in the
Caribbean. When its fourth Trinidad plant is complete, 45 percent of its
ammonia will be produced under such an arrangement.
Like PCS Phosphate, PCS Nitrogen has the flexibility to switch its basic
ammonia production to the nitrogen products with the best economics.
1996 NITROGEN PRODUCTION
In the year before its acquisition by PCS and transformation into PCS Nitrogen,
Arcadian Corporation produced 3.3 million tonnes of ammonia, two-thirds from
seven plants in the United States and one-third in Trinidad. That represented
12 percent of western hemisphere production.
[CHART]
This breadth of product mix, emphasizing value-added products, will give PCS
Nitrogen the flexibility to respond to market demand, increasing profitability.
On December 31, 1996, Aracadian had 1,271 employees, plus approximately 400
contract workers. Collective bargaining units operate at four plants. The
collective agreement with the
30
<PAGE> 33
1996 Production*
(Thousand Tonnes)
<TABLE>
<CAPTION>
Ammonia(1) Nitric Acid(1) Urea
Capacity Production Capacity Production Capacity Production
<S> <C> <C> <C> <C> <C> <C>
Augusta, GA 622 519 474 466 274 285
Clinton, IA 238 197 126 132 - -
Geismar, LA(2) 476 464 560 452 - -
LaPlatte, NE 182 190 178 153 - -
Lima, OH 525 495 97 99 329 286
Memphis, TN 357 335 - - 399 383
Wilmington, NC - - 161 137 - -
Trinidad 1192 1067 - - 586 563
---- ---- ---- ---- ---- ----
Total 3592 3267 1596 1439 1588 1517
Ammonium Nitrate Nitrogen Solutions
Capacity Production Capacity Production
<S> <C> <C> <C> <C>
Augusta, GA 397 392 581 381
Clinton, IA 79 74 163 123
Geismar, LA(2) - - 1028 950
LaPlatte, NE - - 436 414
Lima, OH - - 163 180
Memphis, TN - - - -
Wilmington, NC - - 408 198
Trinidad - - - -
---- ---- ---- ----
Total 476 466 2779 2246
</TABLE>
* Information supplied by Arcadian Corporation.
(1) A substantial portion of ammonia and nitric acid is upgraded to value-added
products.
(2) The phosphate production facilities at Geismar produced 205,680 P2O5 tonnes
of phosphoric acid in 1996.
Omaha Metal Trades Council in LaPlatte expires on January 1, 1998. New contracts
were negotiated with the Oil, Chemical and Atomic Workers International Union at
Lima, expiring February 16, 1999, and the International Chemical Workers Union
at Clinton, expiring July 31, 1999. A new contract negotiated with the American
Federation of Grain Millers at Memphis will expire September 17, 2000.
DIVERSIFIED NITROGEN SALES
In 1996, Arcadian's sales revenue was $1.3 billion, approximately 60 percent
from agricultural and 40 percent from industrial.
Key nitrogen product sales were: ammonia (1.807 million tonnes), urea (1.653
million tonnes), ammonium nitrate (464,550 tonnes), nitric acid (214,092
tonnes, on a 100-percent nitric acid basis) and nitrogen solutions (2.565
million tonnes).
[CHART]
The US nitrogen production was consumed in the US. About 89 percent of ammonia
from Trinidad went to the US market, mostly to DAP producers.
The nitrogen fertilizer market in the US was tight and production operated at
more than rated capacity.
Sales of phosphate products totalled 439,761 tonnes, with phosphate solutions
the major product, totalling 224,126 tonnes. Phosphoric acid from the Geismar
plant is sold under contract to Rhone-Poulenc Basic Chemicals Company as a
feedstock for its food-grade acid purification plant located adjacent to the
Geismar plant. Sales under this agreement represent approximately 40 percent of
the P2O5 acid production at Geismar.
The facilities at Point Lisas, Trinidad are convenient for sales to Latin
America, Europe and Africa, as well as the US. Forty percent of urea sales and
89 percent of ammonia sales went to the US.
Arcadian sold 43 percent of its US nitrogen production to industrial customers,
a greater share than its competitors. Industrial customers used ammonia, urea,
ammonium nitrate, nitric acid and phosphates for a wide variety of intermediate
products for the home, automobile and fiber industries. Prices and volumes are
relatively constant in this high-margin business which operates consistently
throughout the year.
31
<PAGE> 34
ANALYSIS
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results for 1995 do not include (1) the results of White Springs prior to
October 31, 1995, the date of acquisition, and (2) the results of PCS Phosphate
(formerly Texasgulf Inc.) prior to April 10, 1995, the date of acquisition.
Net sales and gross margins reported in 1995 have been restated to remove the
net sales of Florida Favorite Fertilizer and their corresponding cost of sales
and report them as Other Income. This reclassification will also affect
comparable 1994 results.
On March 6, 1997 the Company completed its acquisition of Arcadian Corporation
through the merger of Arcadian into a wholly-owned subsidiary of PCS, PCS
Nitrogen, Inc. Under the merger, shareholders of Arcadian received $12.25 in
cash and 0.17713 of a common share of PCS for each outstanding share of common
stock of Arcadian. Each outstanding share of Arcadian preferred stock was
converted into 0.948 of a share of Arcadian common stock immediately prior to
the effective time of the merger. The Company utilized a $1.45 billion credit
facility to finance part of this acquisition. The term of this credit facility
is renewable every 364 days with the unanimous consent of the lenders. Failing
that consent, the credit facility will revert to a five year term loan. No
principal payments are required as long as the credit facility continues to be
renewed. Arcadian paid for the redemption of certain mortgage notes with funds
obtained from existing cash and short-term investments. The Company paid the
costs of the Arcadian senior notes tender offer from existing cash and
short-term investments and from borrowings under the credit facility and a
short-term loan to be provided by a bank.
The Company has entered into an agreement to purchase, for 250 million
Deutschmarks, a 51 percent interest in the German publicly traded company, Kali
und Salz AG (K&S AG). The holdings of K&S AG include a 51 percent interest in
Kali und Salz GmbH which is the owner and operator of Germany's potash mines
and a 50 percent interest in Potash Company of Canada Limited (Potacan). The
remaining 49 percent interest in Kali und Salz GmbH is held by BMGB, an agency
of the German government. Potacan is a joint
[PICTURE]
Expenditures relating to environmental reclamation are part of the normal
course of business at the Company's phosphate operations.
32
<PAGE> 35
venture between K&S AG and Entreprise Miniere et Chimique of Paris, France.
Potacan, through a subsidiary, owns and operates a potash mine near Sussex, New
Brunswick. The closing of the transaction is awaiting approval by the German
Minister of Economics. The Company recently received an order from the German
Federal Cartel Office prohibiting the proposed transaction. German law provides
a right to appeal the order both to the Minister of Economics and to the
courts.
1996 VERSUS 1995
Net sales and net income for 1996 improved 64 percent and 31 percent,
respectively. Net income for 1996 was $209.0 million (1995 - $159.5 million) on
net sales of $1,403.9 million (1995 - $856.1 million), or $4.59 per share (1995
- - $3.68 per share). For 1996, gross margin and operating income were $393.4
million and $299.5 million, respectively, compared to a gross margin of $312.6
million and an operating income of $224.2 million for 1995 (increases of 26
percent and 34 percent respectively).
The $547.8 million increase in net sales is comprised as follows:
<TABLE>
<CAPTION>
($ millions)
<S> <C>
Potash $(17.8)
Phosphates
Phosphate Rock 1.1
Phosphate Fertilizer 361.5
Non-fertilizer Products 117.2
Ammonia 85.8
Total Increase in Net Sales Revenue $547.8
</TABLE>
For 1996, North American and offshore net sales revenues were $847.8 million
(1995 - $438.1 million) and $556.1 million (1995 - $418.0 million),
respectively. North American net sales revenue represented 60 percent (1995 -
51 percent) of total net sales revenue, and offshore sales represented 40
percent of net sales revenue (1995 - 49 percent).
Potash, phosphate and ammonia revenues for 1996 were $403.2 million (1995 -
$421.0 million), $892.0 million (1995 - $412.1 million), and $108.7 million
(1995 - $23.0 million), respectively, a decrease of $17.8 million in potash
revenue, a $479.8 million increase in phosphate revenue and a $85.7 million
increase in ammonia revenue compared to the previous year.
[CHART]
In its first full year of phosphate operations, PCS earnings were well-balanced
between its two nutrients.
Gross margins for 1996 increased $80.8 million or 26 percent over 1995. Gross
margin for potash was $200.1 million, a decrease of $23.1 million compared to
1995. Gross margins for phosphate fertilizer, feed, industrial and ammonia
products were $118.9 million (1995 - $50.5 million), $46.0 million (1995 -
$22.9 million), $26.3 million (1995 - $13.6 million) and $2.1 million (1995 -
$2.3 million), respectively. Domestic fertilizer sales were strong in both
potash and phosphate nutrients as customers purchased during the summer fill
program in anticipation of a good fall application period.
The increase in net income of $49.5 million for 1996 is largely attributable to
an additional $565.6 million in revenue from the phosphate and ammonia
acquisitions, and a 7 percent decrease in Saskatchewan provincial mining and
other taxes. This was offset by a decrease in potash revenues of $17.8 million,
an increase in interest expense of $4.9 million relating to a full year's
interest cost on debt financing of $878.8 million incurred to purchase PCS
Phosphate and White Springs, a $467.0 million increase in cost of sales, a
$20.7 million increase in income taxes, and an increase in selling and
administrative expenses of $6.5 million.
Although the Company had increased earnings in 1996 compared to 1995, market
conditions in North America did not live up to expectations for the fertilizer
industry in general. A cold and wet spring put a damper on the domestic market,
resulting in a delayed seeding and harvest season. However, sales rebounded in
the summer and continued high through the fall, when farmers purchased product
to replace the nutrients depleted by higher yielding crops. In the
33
<PAGE> 36
export market, large purchases at the end of 1995 and subsidy issues resulted
in lower sales volumes of potash and DAP to China and India during 1996
compared to 1995. Both countries carried large potash inventories over from
1995, affecting 1996 purchases. Shipments to Brazil, the third major potash
customer among developing nations, began 1996 slowly but it bought record
volumes after resolving some of its finance and economic issues.
POTASH REVENUE
Potash net sales revenue for 1996 decreased by $17.8 million or 4 percent as
compared to 1995 (1996 - $403.2 million; 1995 - $421.0 million). The Company
sold 5.612 million tonnes of potash in 1996, compared to 5.848 million tonnes
sold in 1995, a decrease of 0.236 million tonnes or 4 percent. Potash prices
were up 0.6 percent (excluding sales to another producer).
In 1996, North American and offshore potash sales volumes increased 14 percent
and decreased 15 percent, respectively, compared to 1995. Part of this increase
(6.5 percent) was due to a full year of sales of production from Moab, Utah as
well as sales to a competitor during its strike. Scheduled price increases for
the first quarter of 1996 were not attained and domestic customers bought
mainly during the summer prior to announced price increases. Exclusive of sales
to another producer, prices received from domestic customers were down 5
percent. Potash prices increased 6 percent in the offshore market. Offshore New
Brunswick price realizations in 1996 were flat in comparison to 1995.
North American net sales revenue from potash operations represented 39 percent
of the potash sales revenue of the Company during 1996 (1995 - 35 percent). The
increase in North American potash sales volumes and the decrease in North
American prices resulted in a $11.5 million increase in North American potash
net sales revenue over 1995. North American potash sales volumes for 1996
increased 0.316 million tonnes (1996 - 2.589 million tonnes; 1995 - 2.273
million tonnes) compared to 1995. Of the 2.589 million tonnes for 1996 (1995 -
2.273 million tonnes), 2.438 million tonnes (1995 - 2.137 million tonnes) came
from Saskatchewan, 0.079 million tonnes (1995 - 0.078 million tonnes) from New
Brunswick and 0.072 million tonnes (1995 - 0.058 million tonnes) from Utah.
Sales volumes to another producer were 0.133 million tonnes.
[CHART]
A greater percentage of PCS potash volumes was sold offshore where prices were
higher.
In 1996, offshore net sales revenue from potash operations represented 61
percent of potash net sales revenue of the Company (1995 - 65 percent). The
decrease in offshore sales volumes and the 6 percent increase in overall
offshore selling price resulted in a $29.3 million decrease in offshore potash
net sales revenue compared to 1995. In the offshore market, the Company sold
3.023 million potash tonnes during 1996 (1995 - 3.574 million tonnes), a
decrease of 15 percent. The principal reason for the decrease was lower sales
to China through Canpotex. Of the 3.023 million tonnes, 2.400 million tonnes
were sold through Canpotex and the remaining 0.623 million tonnes were produced
by PCS New Brunswick and sold and delivered to offshore markets, such as
Brazil, by PCS Sales.
PHOSPHATE REVENUE
Phosphate net sales revenue for 1996 was $892.0 million. The sources of this
revenue were as follows: phosphate fertilizer, $619.1 million (69 percent);
non-fertilizer products (animal feed and industrial products), $266.8 million
(30 percent); and phosphate rock, $6.1 million (1 percent).
During 1996, the Company sold 3.120 million tonnes of phosphate fertilizer
(1.569 million tonnes in North America; 1.551 million tonnes in the offshore
market); 0.994 million tonnes of non-fertilizer products (0.911 million tonnes
in North America; 0.083 million tonnes in the offshore market); and 0.191
million tonnes of phosphate rock (0.004 million tonnes in North America and the
remaining 0.187 million tonnes in the offshore market). For 1995, the Company
sold 1.399 million tonnes of
34
<PAGE> 37
phosphate fertilizer (0.630 million tonnes in North America; 0.769 million
tonnes in the offshore market); 0.596 million tonnes of non-fertilizer products
(0.542 million tonnes in North America; 0.054 million tonnes in the offshore
market); and 0.211 million tonnes of phosphate rock (0.027 million tonnes in
North America and the remaining 0.184 million tonnes in the offshore market).
For 1996, North American phosphate net sales revenue accounted for $581.4
million (65 percent) of total phosphate net sales revenue of $892.0 million. In
1996, 57 percent of the Company's North American phosphate net sales revenue
was earned from phosphate fertilizer products which represented 63 percent of
its North American phosphate sales volumes. Offshore sales accounted for 35
percent of total phosphate net sales revenue for 1996 and 42 percent of
volumes. In 1996, 92 percent of the Company's offshore phosphate net sales
revenue was earned from phosphate fertilizer products which represented 85
percent of its offshore phosphate sales volumes.
For 1996, net sales revenue from liquid and solid fertilizers was $619.0
million (1995 - $257.5 million) with sales volumes of 3.120 million tonnes
(1995 - 1.399 million tonnes). Solid phosphate fertilizer (substantially all
DAP) accounted for 61 percent or $379.3 million of the total. Offshore net
sales revenue from DAP accounted for 56 percent of solid fertilizer net sales
revenue while North American net sales revenue from liquid fertilizer accounted
for 69 percent of liquid fertilizer net sales revenue. The average net sales
prices for liquid and solid fertilizer improved by 11 percent and 5 percent,
respectively. Export liquid and solid fertilizer sales prices improved by 7
percent and 8 percent, respectively, compared to the same period a year ago.
North American liquid and solid fertilizer sales prices improved 5 percent and
2 percent, respectively, compared to 1995.
[CHART]
Offshore customers represented 42 percent of sales volumes and 35 percent of
revenue as a greater percentage of lower-priced products was sold overseas.
Net sales revenue from animal feed and industrial products during 1996 was
$266.8 million (1995 - $149.6 million) with sales volumes of 0.994 million
tonnes (1995 - 0.596 million tonnes). For 1996, feed sales tonnage was 0.778
million tonnes (1995 - 0.428 million tonnes) with 11 percent sold to offshore
markets such as South and Central America and Asia, while the remaining 0.216
million tonnes (1995 - 0.168 million tonnes) were industrial products sold to
North American customers. Feed product prices for 1996 improved by 8 percent
over 1995. North American industrial selling prices increased by 14 percent
compared to 1995.
AMMONIA REVENUE
Ammonia sales for 1996 contributed $108.7 million (1995 - $23.0 million) to net
sales revenue with sales volumes of 0.535 million tonnes, (1995 - 0.115 million
tonnes). Ammonia sales are comprised of the resale of purchased product.
COST OF GOODS SOLD
For 1996, the Company produced 5.782 million potassium chloride (KCl) tonnes,
compared to 6.071 million tonnes in 1995, a decrease of 0.289 million tonnes (5
percent) compared to 1995. It produced 2.096 million phosphoric acid (P2O5)
tonnes from its phosphate operations, compared to 1.008 million tonnes in 1995.
Potash unit cost of sales increased by 7 percent compared to 1995 due in part
to a greater proportion of higher cost New Brunswick product in the mix and a
slight increase in the number of shutdown weeks (the number of mineweeks of
shutdown is at the discretion of management). Regarding phosphate, lower
sulphur and ammonia costs were offset by a full year of higher cost White
Springs products.
Depreciation expense for 1996 was $90.1 million compared to $71.0 million in
1995, an increase of $19.1 million or 27 percent. The increase is the result of
$22.8 million additional depreciation from the acquired phosphate operations.
Depreciation expense for the potash operations decreased by $3.6 million as a
result of reduced production.
35
<PAGE> 38
SELLING AND ADMINISTRATIVE
During 1996, selling and administrative expenses were $59.0 million compared to
$52.6 million in 1995. The $6.4 million increase is attributable to the
acquisitions of PCS Phosphate and White Springs and to general increases in
travel, supplies, compensation and benefits.
PROVINCIAL MINING AND OTHER TAXES
Saskatchewan's potash production tax is comprised of a base tax per tonne of
product sold and an additional tax based on mine-by-mine profits. The New
Brunswick division and the Saskatchewan divisions pay a provincial crown
royalty, which is accounted for under cost of goods sold.
Increased profitability at certain of the mines increased the rate of taxes
paid to the Saskatchewan government but total taxes were reduced by lower
prices and potash sales volumes from Saskatchewan. For 1996, Saskatchewan
provincial mining and other taxes were $40.2 million compared to $43.4 million
in 1995, a decrease of 7 percent. Potash production tax for 1996 was $27.5
million compared to $29.7 million in 1995, a decrease of 7 percent.
Saskatchewan capital tax was $12.7 million in 1996 compared to $13.6 million in
1995, a decrease of 7 percent.
INTEREST EXPENSE
For 1996, interest expense was $46.8 million compared to $41.8 million in 1995.
The 1996 amount includes the interest incurred for the full year in respect of
the acquisitions made in 1995 while the 1995 amount includes interest expense
only after each of the respective acquisitions in April and October.
INCOME TAXES
Income taxes in 1996 were $43.7 million, compared to $22.9 million in 1995, an
increase of $20.8 million. The increase is largely attributable to US
withholding taxes and deferred income tax, relating to the Company's acquired
phosphate operations which operated the full year under PCS ownership.
PCS and certain subsidiaries are subject to federal and provincial income taxes
in Canada. By virtue of deductions with respect to non-capital losses carried
forward, capital cost allowance, Canadian development expense, earned depletion
allowance, and resource allowance, such taxes have not yet been payable by the
Company. However, it is subject to the Large Corporations Tax. At December 31,
1996, the Canadian tax pools plus the non-capital losses carried forward exceed
the book value of depreciable assets. PCS will begin to book a deferred tax
provision at the effective rate of 35 percent once the tax pools plus the
non-capital losses carried forward are less than the book value of the assets.
This rate assumes that primarily all Canadian profits for income tax purposes
are resource profits eligible for the resource allowance and that an earned
depletion claim of 25 percent on resource profits is available to the Company.
Assuming the status quo, the Company is likely to begin to record a Canadian
deferred income tax provision in 1997 and is unlikely to pay regular Canadian
income taxes before the next decade.
The Company's subsidiaries which operate in the United States are subject to US
federal and state income taxes. By virtue of certain income tax deductions
available, these subsidiaries are not currently subject to regular cash income
taxes. However, they are subject to the alternative minimum tax, which may be
carried forward indefinitely to be applied against regular income tax
liability. In addition, the Company is subject to United States withholding tax
on certain payments received from its US subsidiaries. For 1996, the tax rate
was approximately 23.6 percent, of which 13.8 percent represented deferred
income taxes, and 9.8 percent represented cash taxes.
1995 VERSUS 1994
OVERALL REVENUE
Net sales revenue for 1995 was $856.1 million, an increase of $493.0 million or
136 percent over 1994. Potash, phosphate, and ammonia revenues for 1995 were
$421.0 million, $412.1 million, and $23.0 million, respectively.
POTASH REVENUE
Potash net sales revenue for 1995 increased by $57.9 million (1995 - $421.0
million; 1994 - $363.1 million) or 16 percent as compared to 1994. The Company
sold 5.848 million tonnes of potash in 1995, compared to 5.569 million tonnes
in 1994, an increase of 0.279 million tonnes or 5 percent.
36
<PAGE> 39
North American and offshore potash sales volumes rose 6 percent and 4 percent,
respectively. Potash selling prices in the North American and offshore markets
increased by 7 percent and 13 percent, respectively. The overall increase in
potash volumes of 5 percent resulted in a $12.2 million increase in potash
sales revenue, while a 10 percent increase in overall potash prices resulted in
a $45.7 million improvement in potash sales revenue.
An improvement of 6 percent in North American potash sales volumes and a 7
percent increase in overall domestic selling price resulted in a $17.0 million
increase in North American revenue. Potash sales volumes increased 0.132
million tonnes (1995 - 2.273 million tonnes; 1994 - 2.141 million tonnes). In
1995, North American sales revenue from potash operations represented 35
percent of the net potash sales of the Company.
The modest increase in North American sales volumes can be attributed to a
strong spring pre-season and a favorable fall season. A strong pre-season fill
in the spring was offset as wet weather shortened the season. The fall season
benefited from optimism in the farm community with respect to the prospects for
1996.
In the offshore market, the Company sold 3.575 million tonnes (1994 - 3.427
million tonnes), an improvement of 4 percent. Of the total, 3.029 million
tonnes were sold through Canpotex and the remaining 0.546 million tonnes were
produced by PCS New Brunswick and sold and delivered to offshore markets, such
as Brazil and Europe, by PCS Sales. In 1995, offshore sales revenue from potash
operations represented 65 percent of the net potash sales of the Company.
Offshore tonnage and prices were up over the previous year primarily because
sales to China reached record levels. However, the PCS share of supply to
Canpotex fell to 59 percent in 1995 from 61 percent in 1994 because its special
entitlement under the 1990 Saskterra purchase agreement expired July 1, 1995.
In subsequent years, the PCS share will be based on its share of Saskatchewan
capacity, currently 57.5 percent.
[CHART]
PCS is the largest supplier to Canpotex, providing 57.5 percent of sales
volumes.
Canpotex sales of 5.16 million tonnes established a new record in 1995 with
1.991 million tonnes sold to China. Net selling prices were up 11 percent in
1995 over 1994 through Canpotex, with a 7 percent increase in tonnage. On the
other hand, New Brunswick offshore prices were up 24 percent but tonnage was
down 10 percent with the decrease experienced mostly in Europe. The overall
result for 1995 was a 19 percent increase in revenue earned from Canpotex and
an 11 percent increase in revenue earned from PCS New Brunswick.
PHOSPHATE REVENUE
Phosphate net sales revenue for the period April 10 to December 31 was $412.1
million. The distribution of this revenue was as follows: phosphate fertilizer,
$257.5 million (62 percent); non-fertilizer products (animal feed and
industrial products), $149.6 million (36 percent); and phosphate rock, $5.0
million (2 percent).
Net sales revenue from liquid and solid fertilizers was $257.5 million with
sales volumes of 1.399 million tonnes. Solid phosphate fertilizer
(substantially all DAP) accounted for 59 percent or $151.2 million of the
total. Offshore sales of DAP accounted for 54 percent of the solid fertilizer
net sales revenue while liquid fertilizers had a 56 percent share of net sales
in the North American market. The average net sales price for these fertilizers
continued to improve throughout the year as increases in DAP prices more than
compensated for certain decreases in liquid fertilizer prices in North America.
Net sales from animal feed and industrial products were $149.6 million with
sales volumes of 0.596 million tonnes. Feed sales tonnage was 0.428 million
tonnes with 13 percent sold offshore while the remaining 0.168 million tonnes
were industrial products sold to North American customers. Feed and industrial
product prices were flat in comparison to 1994.
37
<PAGE> 40
Net sales revenue from phosphate rock was $5.0 million with sales volumes of
0.211 million tonnes. The average net sales price improved throughout the year.
North American phosphate revenue accounted for $269.0 million (65 percent) of
the total phosphate revenue of $412.1 million. In 1995, approximately 65
percent of the volume of phosphate rock and phosphate product sales was made on
the spot market with the balance made generally under annual contracts. Of the
Company's North American phosphate revenue, 48 percent was earned from
phosphate fertilizer products which represented 60 percent of its North
American sales volumes.
PhosChem, a phosphate export association established under US law, is the
principal vehicle through which the Company executes offshore marketing and
sales for its phosphate fertilizers. Offshore sales accounted for 35 percent of
total phosphate product revenue in 1995 and 46 percent of volumes. Of the
offshore tonnage, 95 percent was sold as phosphate fertilizer products while 93
percent of offshore revenue was earned from phosphate fertilizer.
AMMONIA REVENUE
Ammonia sales from White Springs contributed $23.0 million to sales revenue
with sales volumes of 0.115 million tonnes.
COST OF GOODS SOLD
In 1995, the Company produced 6.071 million potassium chloride (KCl) tonnes,
compared to 5.298 million tonnes in 1994, an increase of 0.773 million tonnes
(15 percent).
In 1995, the Company produced 1.008 million phosphoric acid (P2O5) tonnes from
the two phosphate operations since their acquisition.
Potash unit cost of sales decreased by 6 percent in 1995 compared to the
previous year due to reduced shutdown time. There were 17 fewer mineweeks of
shutdown in 1995 than in 1994 (the number of mineweeks of shutdown is at the
discretion of management).
Depreciation and amortization expense for 1995 was $71.0 million compared to
$39.3 million in 1994, an increase of 81 percent. The $31.7 million increase is
a result of higher potash sales volumes and the depreciation resulting from the
phosphate acquisitions for the partial year they were owned by the Company.
SELLING AND ADMINISTRATIVE
In 1995, selling and administrative expenses were $57.0 million as compared to
$35.4 million in 1994, an increase of $21.6 million. The increase is
attributable to the acquisitions of PCS Phosphate and White Springs and to
general increases in supplies, compensation and benefits.
PROVINCIAL MINING AND OTHER TAXES
Saskatchewan's potash production tax is comprised of a base tax per tonne of
product sold and an additional tax based on mine-by-mine profits. The New
Brunswick division and the Saskatchewan divisions pay a provincial crown
royalty, which is accounted for under cost of goods sold.
Higher potash sales volumes from the Saskatchewan mines and increased
profitability at certain of the mines increased the taxes paid to the
provincial government. In 1995, Saskatchewan provincial mining and other taxes
were $43.4 million as compared to $32.4 million in 1994, an increase of 34
percent. Potash production tax for 1995 was $29.6 million compared to $20.6
million in 1994, an increase of 43 percent. The increase is explained by the
Rocanville mine having been joined by the Allan mine in incurring the profits
tax, and in part by overall increased sales. Saskatchewan capital tax was $13.8
million in 1995 compared to $11.7 million in the prior year, an increase of 18
percent.
INTEREST EXPENSE
In 1995, interest expense was $41.8 million compared to $3.8 million in 1994,
an increase of $38.0 million. The purchase of PCS Phosphate was funded through
two credit facilities obtained April 10, 1995 and provided by a syndicate of
chartered banks. The credit facilities which originally aggregated to $760.0
million were increased by $280.0 million on October 26, 1995. In November 1995
the long-term debt was reduced by the net proceeds of $161.2 million from the
November 10, 1995 common share offering. The rate of interest is LIBOR, an
international rate of interest, plus 5/8 of one percent. In 1995, the average
interest rate was approximately 6.7 percent.
38
<PAGE> 41
Interest expense in 1994 and 1993 relates primarily to interest on short-term
borrowings under the Company's commercial paper program which were used to
retire capital leases and acquisition of Potash Company of America assets. The
weighted average short-term debt outstanding in 1994 and 1993 was $18.2 million
and $17.1 million respectively. The weighted average interest rate in 1994 was
4.0 percent and in 1993 3.8 percent.
INCOME TAXES
Income taxes in 1995 were $22.9 million, compared to $3.5 million in 1994, an
increase of $19.4 million. The increase is largely attributable to US
withholding taxes and deferred income taxes relating to the Company's recently
acquired phosphate operations.
PCS and certain subsidiaries are subject to federal and provincial income taxes
in Canada. By virtue of deductions with respect to non-capital losses carried
forward, capital cost allowance, Canadian development expense, earned depletion
allowance, and resource allowance, such taxes have not yet been payable by PCS.
However, the Company is subject to the Large Corporations Tax. At December 31,
1995, the Canadian tax pools plus the non-capital losses carried forward exceed
the book value of PCS's depreciable assets by approximately $100 million. PCS
will begin to book a deferred tax provision, at an effective rate of 35 percent
of income before income taxes, once the tax pools plus the non-capital losses
carried forward are less than the book values of the assets. This rate assumes
that primarily all Canadian profits for income tax purposes are resource
profits eligible for the resource allowance and that an earned depletion claim
of 25 percent on resource profits is available to the Company.
The subsidiaries of the Company which operate in the United States are subject
to US federal and state income taxes. By virtue of certain income tax
deductions available, these subsidiaries are not currently subject to regular
cash income taxes. However, they are subject to the alternative minimum tax,
which may be carried forward indefinitely to be applied against regular income
tax liability. In addition, the Company is subject to United States withholding
tax on certain payments received from its US subsidiaries. The tax rate for
1995 was approximately 24 percent of taxable income, of which 6 percent
represented deferred income taxes, and 18 percent represented cash taxes.
ANALYSIS OF FINANCIAL CONDITION AND CASH FLOW
Following is a table summarizing the Company's financial ratios, as computed
from the Company's financial statements.
<TABLE>
<CAPTION>
Year ended December 31
%
1996 1995 Change
<S> <C> <C> <C>
Quick Ratio 1.23 .72 70.8
Current Ratio 2.48 1.37 81.0
Shareholders' Equity to
Total Assets .56 .48 16.7
Return on Shareholders' Equity 15% 13% 15.4
Book Value per Share $30.83 $27.33 12.8
Asset Turnover 56% 33% 69.7
Return on Investment 10.25% 7.80% 31.4
Long-term Debt to Equity .44:1 .71:1 38.0
</TABLE>
Cash provided by operating activities for 1996 was $296.2 million (1995 -
$233.5 million). The increase in cash from operating activities of $62.7
million is largely attributable to additional net income of $49.6 million, and
an increased provision for deferred income taxes of $19.0 million and
depreciation of $19.2 million. This was partially offset by a net decrease of
$30.3 million in non-cash operating working capital. Cash used in investing
activities for 1996 was $39.0 million, a decrease of $1.114 billion when
compared to 1995. The net cash outlay of $812.2 million for the acquisition of
Texasgulf and $291.5 million for White Springs in 1995 accounted for most of
the difference. Capital for sustaining operations increased by $19.3 million
because of the acquisition of the two phosphate operations. Cash provided by
financing activities in 1996 was $304.0 million. Repayment of long-term
obligations was $259.0 million. The Company paid dividends totalling $48.2
million. In 1995, the Company had net proceeds from long-term obligations of
$825.5 million and paid $45.8 million in dividends.
39
<PAGE> 42
[CHART]
During 1996, PCS lowered its debt to capital ratio to 30.7 percent from 41.5
percent.
Working capital for 1996 increased by $142.7 million. Quick and current ratios
were 1.23 and 2.48 at December 31, 1996 (0.72 and 1.37 respectively at December
31, 1995). At the end of 1996, the debt to capital ratio was at 31 percent (42
percent at December 31, 1995) and the interest coverage ratio was 6.4:1 (5.4:1
at December 31, 1995). Net debt to market capitalization at December 31, 1996
was 16.0 percent (54.4 percent at December 31, 1995).
Cash flow from operations is projected to be positive in the near to
medium-term. Free cash, after operational and sustaining capital expenditures,
is expected to allow for the reduction of the $1.45 billion revolving credit
facility.
Short-term (less than 365 days) cash requirements can be met by borrowing under
a $95 million bank line of credit or utilizing a $110 million commercial paper
program.
Projected cash flows are expected to alleviate any tightening of liquidity
experienced initially by the acquisitions of the nitrogen and German
operations. In the near future, PCS is not anticipating either a significant
downturn in sales or an extension of normal terms. Debt levels should be
reduced sufficiently in the short term to allow for financing flexibility
within the Company's current facilities, if the need arises.
OTHER MATTERS-ENVIRONMENTAL
The Company is subject to various environmental laws and regulations especially
as they apply to operations in North Carolina, Florida and Utah, but more
broadly throughout the United States and Canada. Expenditures relating to
compliance with these environmental laws are considered to be part of the
normal course of business. Future laws and regulations or changes to existing
laws and their impact cannot be predicted. Capital expenditures in 1996
totalled $8.9 million in the environmental area while $72.6 million was
incurred as environmental operating expense. Expenditures in 1997 are expected
to be of a similar magnitude for existing operations in potash and phosphate
while capital spending will be higher in potash by approximately $3.0 million.
OUTLOOK
The statements in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, including those in this "Outlook" section
relating to the period after 1996, are forward-looking statements subject to
uncertainties.
The Company's financial performance continues to be affected by price,
worldwide state of supply and demand for potash and phosphate products,
application rates, government assistance programs, weather conditions, exchange
rates and agricultural and trade policies of producing and consuming nations
which, among other things, are influenced by domestic political conditions. The
Company sells to a diverse group of customers both by geography and by end
product. Market conditions by country will vary on a year-over-year basis and
sales shift from one period to another.
The rising world population and the demand for better diets in developing
nations are expected to continue to drive consumption for fertilizer products
over the long term. Over the short term, there should be increased fertilizer
usage over the next few years as world grain stocks are at historically low
levels, crop prices remain strong, and governments around the world focus on
food production. The Company expects to be an important supplier to these
markets. While the consumption trend line is expected to continue to climb over
the long term, there will be, at times, fluctuations in demand.
The combination of above-average corn prices and the end of acreage set-asides
in the US in 1996 is expected to result in American farmers planting increased
acres this spring. As a result, domestic
40
<PAGE> 43
consumption of all three nutrients is expected to be higher. In addition, there
has been an improvement in the financial position of farmers. Net farm income
was at a record level in 1996. This increased cash flow enables them to increase
application rates. Prices for potash and solid and liquid phosphates are all
expected to increase as the spring season progresses.
A rebound is expected in demand for potash and phosphates from key export
markets that depleted inventories in 1996. DAP exports are expected to rise as
inventories have been drawn down in India and it is expected that India will
return to market in 1997. China has committed to a large DAP contract over two
years (1997-98) approximating 1996 levels. The liquid phosphate supply is also
tight in both the domestic and offshore markets. Subsidy issues in China and
India affected 1996 potash shipments but both countries have used internal
inventories and the prospects for 1997 shipments are promising. Increased
shipments will support prices. The feed phosphate business tends to be
strongest in the winter months and prices remain strong.
PCS continues to operate its potash mines by matching production to sales
demand. Shutdowns at potash mines for inventory correction will influence
production costs on a quarter-over-quarter comparative basis. The Company
produces its potash in Canadian dollars and sells in US dollars and a
strengthening Canadian dollar has the effect of increasing its costs. Prices
for ammonia, a key input for DAP, are expected to moderate while existing low
sulphur prices may increase slightly. The net effect is expected to impact
favorably upon phosphate processing costs for 1997.
The Company expects the acquired business of Arcadian to be somewhat insulated
from cost pressures on natural gas, as Arcadian domestic hedging practices and
natural gas arrangements in Trinidad will reduce the impact of increases in
spot market prices.
Capital expenditures in 1997 are expected to exceed those in 1996 primarily
because of the Arcadian acquisition.
[PICTURE]
PCS will be a continuing source of high quality nutrients for developing nations
as their governments focus on food production.
The narrative, included under this Management's Discussion and Analysis, has
been prepared with reference to the financial statements reported under
Canadian Generally Accepted Accounting Principles (GAAP). Under Canadian GAAP,
dollar figures reported for years prior to the year the Company elected to
report in US funds (1995) have been converted at the rate of 1.4028. This rate
is the month-end rate at December 31, 1994 and is prescribed for use under the
Translation of Convenience method. For purposes of reporting this section under
US GAAP, revenue and expenditures denominated in US dollars would have to be
multiplied by the exchange rate used under the Translation of Convenience
method (1.4028) and then divided by 1.3730 for 1994, to arrive at the revenue
and expenditures as they would have been reported historically under US GAAP.
For the Statements of Financial Position, the year-end rate would be used for
conversion. See the Consolidated Financial Statements, Note 25 reconciling the
consolidated financial statements to US GAAP, and the supplemental schedules
applying US GAAP.
41
<PAGE> 44
Selected Ten-Year Data
For the Years Ended December 31
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL DATA
(US$MILLIONS) 1996 1995(4) 1994(1) 1993(3) 1992 1991 1990 1989(2) 1988 1987
Net Sales 1,403.9 856.1 363.1 212.2 214.1 206.8 189.9 221.6 251.3 179.7
Operating Income 299.5 224.2 98.5 56.9 50.6 39.1 34.6 68.4 84.8 10.8
Interest Expense 46.8 41.8 3.8 8.7 8.3 10.7 15.5 10.2 9.6 25.7
Net Income 209.0 159.5 91.2 44.7 39.8 31.3 17.3 57.7 74.8 (14.8)
Net Income per Share
(Actual Dollars) 4.59 3.68 2.12 1.13 1.03 0.81 0.47 1.65 - -
Dividends per Share
(Actual Dollars) 1.06 1.06 0.77 0.53 0.51 0.51 0.51 0.13 - -
Cash Provided by
Operating Activities 296.2 233.5 150.7 49.8 57.4 53.8 66.1 72.4 97.7 5.7
Working Capital 278.8 136.1 103.3 37.0 70.9 47.4 25.7 16.4 115.3 53.0
Total Assets 2,494.4 2,581.8 1,027.8 1,036.4 915.0 898.8 914.8 915.5 959.0 938.8
Total Long-Term Debt
and Long-Term
Obligations Under
Capital Leases 620.0 714.5 2.0 20.1 48.9 54.4 62.6 67.8 72.3 76.6
Shareholders' Equity 1,405.5 1,241.9 964.3 903.7 809.5 788.9 777.3 745.2 858.9 817.9
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
OPERATING DATA (THOUSANDS)
Employees at Year-End
(Actual Numbers) 4,490 4,579 1,781 1,818 1,415 1,227 1,242 1,256 1,273 1,466
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Potash Production
Tonnage 5,782 6,071 5,298 3,902 3,850 4,030 3,464 4,257 5,089 4,510
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Phosphate Production
(P2O5) Tonnage 2,096 1,008 - - - - - - - -
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Potash Sales - KCl Tonnes
North America(5) 2,577 2,381 2,241 1,968 1,738 1,581 1,647 1,801 1,747 2,225
Sales to Other Producers 133 - - - 56 82 7 382 638 360
Offshore 3,023 3,575 3,427 1,926 2,033 2,246 2,071 1,835 2,343 2,091
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Total Potash Sales
Tonnage 5,733 5,956 5,668 3,894 3,827 3,909 3,725 4,018 4,728 4,676
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Phosphate Sales -
Product Tonnes
Phosphate Rock 191 211 - - - - - - - -
Phosphate Fertilizer 3,120 1,399 - - - - - - - -
Non-Fertilizer Products 994 596 - - - - - - - -
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Florida Favorite Fertilizer
Sales Tonnes 360 350 333 326 295 - - - - -
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Ammonia Sales Tonnes 535 115 - - - - - - - -
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Product Sales Revenues
Potash 403.2 421.0 363.1 212.2 214.1 206.8 189.9 221.6 251.3 179.7
Phosphate Rock 6.1 5.0 - - - - - - - -
Phosphate Fertilizer 619.0 257.5 - - - - - - - -
Non-Fertilizer Products 266.9 149.6 - - - - - - - -
Ammonia 108.7 23.0 - - - - - - - -
------- ------- ------- ------- ----- ----- ----- ----- ----- -----
Total Product
Sales Revenues 1,403.9 856.1 363.1 212.2 214.1 206.8 189.9 221.6 251.3 179.7
======= ======= ======= ======= ===== ===== ===== ===== ===== =====
</TABLE>
(1) The financial statements of the Company for 1994 and prior years have been
restated to US currency in accordance with Canadian GAAP using the
Translation of Convenience Method. The Canadian dollar amounts have been
converted to US currency at the exchange rate of US$1.00 = CDN$1.4028.
(2) In November 1989, the Company was privatized. Subsequent results reflect
the privatization and associated reorganization.
(3) Data for 1993 and thereafter reflect the acquisition of Potash Company of
America assets on October 7, 1993.
(4) Data for 1995 and thereafter reflect the acquisition of Texasgulf Inc. on
April 10, 1995 and the acquisition of White Springs Agricultural Chemicals,
Inc. on October 31, 1995.
(5) Includes potash sales to Florida Favorite Fertilizer, which were then sold
to unaffiliated customers.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly Results
(Thousands) 96 Q1 96 Q2 96 Q3 96 Q4 95 Q1 95 Q2 95 Q3 95 Q4
Potash Production -
KCl Tonnes 1,699 1,512 755 1,816 1,886 2,045 770 1,370
Phosphate Production -
P2O5 Tonnes 514 507 532 543 - 272 283 453
Sales ($) 366,871 352,369 342,148 342,480 135,977 204,447 214,609 301,047
Operating Income ($) 87,122 74,366 66,418 71,586 52,594 64,374 41,154 66,127
Net Income ($) 63,678 52,398 46,772 46,188 51,475 47,744 23,077 37,190
Net Income per Share
(Actual Dollars) ($) 1.40 1.15 1.03 1.01 1.20 1.11 0.53 0.84
------- ------- ------- ------- ------- ------- ------- -------
</TABLE>
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in Canada. These
principles differ in some respects from those applicable in the United States
(see Note 25 to the Company's consolidated financial statements). If the
consolidated financial statements had been prepared in accordance with US GAAP,
certain of the selected financial information would be restated as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
($MILLIONS) 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
Operating Income 299.5 224.2 95.4 62.8 60.6 50.2 45.0 82.1 98.8 9.6
Net Income 201.8 178.1 86.7 49.9 49.3 40.6 24.1 69.4 87.3 (9.3)
Net Income per Share
(Actual Dollars) 4.39 4.06 2.00 1.25 1.27 1.05 0.65 1.99 - -
Dividends per Share
(Actual Dollars) 1.06 1.06 0.79 0.57 0.59 0.63 0.62 0.15 - -
Cash Provided by
Operating Activities 296.2 233.5 146.5 54.6 57.4 66.1 81.8 85.4 112.5 12.3
Total Assets 2,510.1 2,600.4 1,028.1 1,096.4 1,007.0 1,086.8 1,100.7 1,101.6 1,121.6 1,007.5
Shareholders' Equity 1,416.9 1,260.5 964.7 963.6 898.4 960.2 940.1 899.9 1,006.2 877.0
</TABLE>
Notes to Selected Ten-Year Data and Quarterly Results
1. There were no extraordinary items nor were there any discontinued operations
in any of the accounting periods.
2. Fully diluted net income per share did not differ materially from net income
per share in any of the accounting periods.
42
<PAGE> 45
Management's Responsibility for
Financial Reporting
The accompanying financial statements and related financial information are the
responsibility of PCS management and have been prepared in accordance with
generally accepted accounting principles and include amounts based on best
estimates and judgments. Financial information included elsewhere in this
report is consistent with the consolidated financial statements.
To meet management's responsibility for financial reporting and to obtain
reasonable assurance for the integrity and reliability of the financial
reports, the Company's accounting and internal control systems are designed to
safeguard assets and to properly record transactions and events. Policies and
procedures are maintained to support the accounting and internal control
systems.
Our independent auditors, Deloitte & Touche, provide an objective, independent
audit of the financial statements. Their report for 1996 is included.
The Board of Directors, through the audit committee composed exclusively of
outside directors, meets regularly with the independent auditors and
representatives of management, including the Company's internal auditor--both
jointly and separately--to review significant accounting, reporting and
internal control matters. The audit committee also recommends to the Board the
external auditors to be proposed to the shareholders for appointment at the
annual meeting. Interim financial statements are reviewed by the audit
committee prior to release to shareholders.
The financial statements are approved by the Board of Directors on the
recommendation of the audit committee.
/s/ C. E. Childers /s/ B. E. Humphreys
- ------------------------- -------------------------
C. E. Childers B. E. Humphreys
Chairman, President and Senior Vice President
Chief Executive Officer Finance and Treasurer
February 12, 1997
Auditors' Report to the Shareholders of
Potash Corporation of Saskatchewan Inc.
We have audited the consolidated statements of financial position of Potash
Corporation of Saskatchewan Inc. as at December 31, 1996 and 1995 and the
consolidated statements of income and retained earnings and of cash flow for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
1996 and 1995, and the results of its operations and the changes in its
financial position for each of the three years in the period ended December 31,
1996 in accordance with Canadian generally accepted accounting principles.
/s/ DELOITTE & TOUCHE
Saskatoon, Saskatchewan -------------------------
February 12, 1997 Chartered Accountants
43
<PAGE> 46
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
As at December 31
(in thousands of US dollars)
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ - $ 40,497
Accounts receivable (Note 3) 230,778 223,377
Inventories (Note 4) 219,433 221,911
Prepaid expenses (Note 5) 13,896 12,041
Other current assets 2,852 3,315
- ------------------------------------------------------------------------------
466,959 501,141
Property, plant and equipment (Note 6) 1,978,692 2,032,339
Other assets (Note 7) 48,736 48,337
- ------------------------------------------------------------------------------
$2,494,387 $2,581,817
==============================================================================
LIABILITIES
Current Liabilities
Bank indebtedness (Note 8) $ 6,330 $ -
Accounts payable and accrued charges (Note 9) 180,008 199,222
Current portion of long-term debt (Note 10) 1,520 164,971
Current obligations under capital leases (Note 11) 300 870
- ------------------------------------------------------------------------------
188,158 365,063
Long-term debt (Note 10) 618,800 711,585
Obligations under capital leases (Note 11) 1,163 2,913
Deferred income tax liability (Note 18) 28,480 4,743
Accrued post-retirement/post-employment benefits
(Note 12) 95,460 89,570
Accrued reclamation costs (Note 13) 146,512 151,531
Other non-current liabilities and deferred credits 10,318 14,537
- ------------------------------------------------------------------------------
1,088,891 1,339,942
- ------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share Capital (Note 14) 630,484 627,700
Unlimited authorization of common shares; issued
and outstanding 45,581,864 and 45,439,667 shares
in 1996 and 1995, respectively
Contributed Surplus 336,486 336,486
Retained Earnings 438,526 277,689
- ------------------------------------------------------------------------------
1,405,496 1,241,875
- ------------------------------------------------------------------------------
$2,494,387 $2,581,817
==============================================================================
</TABLE>
(See Notes to the Consolidated Financial Statements)
Approved by the Board,
/s/ Jack G. Vicg /s/ Isabel B. Anderson
---------------------- ----------------------
Director Director
44
<PAGE> 47
Consolidated Statements of Income and Retained Earnings
For the Years Ended December 31
<TABLE>
<CAPTION>
(in thousands of US dollars)
1996 1995 1994
---------- ---------- --------
<S> <C> <C> <C>
Net sales (Note 15) $1,403,868 $ 856,080 $363,117
Cost of goods sold 1,010,455 543,491 203,901
---------- ---------- --------
Gross Margin 393,413 312,589 159,216
---------- ---------- --------
Research and development 1,347 1,553 1,534
Selling and administrative expenses 59,022 52,570 31,586
Provincial mining and other taxes (Note 16) 40,197 43,388 32,352
Other income (6,645) (9,171) (4,731)
---------- ---------- --------
93,921 88,340 60,741
---------- ---------- --------
OPERATING INCOME 299,492 224,249 98,475
INTEREST EXPENSE (Note 17) 46,761 41,817 3,772
---------- ---------- --------
INCOME BEFORE INCOME TAXES 252,731 182,432 94,703
INCOME TAXES (Note 18) 43,695 22,946 3,484
---------- ---------- --------
NET INCOME 209,036 159,486 91,219
RETAINED EARNINGS, BEGINNING OF YEAR 277,689 164,037 105,868
DIVIDENDS (48,199) (45,834) (33,050)
---------- ---------- --------
RETAINED EARNINGS, END OF YEAR $ 438,526 $ 277,689 $164,037
========== ========== =======
NET INCOME PER SHARE (Note 19) $4.59 $3.68 $2.12
========== ========== =======
DIVIDENDS PER SHARE $1.06 $1.06 $0.77
========== ========== =======
</TABLE>
(See Notes to the Consolidated Financial Statements)
45
<PAGE> 48
Consolidated Statements of Cash Flow
For the Years Ended December 31
<TABLE>
<CAPTION>
(in thousands of US dollars)
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
WORKING CAPITAL FROM OPERATIONS
Net income $ 209,036 $ 159,486 $ 91,219
Depreciation and amortization 90,125 70,953 39,326
Loss on disposal of fixed assets 2,152 726 340
Provision for deferred income tax 23,737 4,743 -
Provision for post-retirement/
post-employment benefits 5,890 2,052 -
--------- --------- ---------
330,940 237,960 130,885
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
Accounts receivable (7,400) (48,831) (14,356)
Inventories 2,493 9,297 14,562
Prepaid expenses (1,856) 2,521 468
Other current assets 463 1,778 -
Accounts payable and accrued charges (19,214) 26,581 19,146
Accrued reclamation costs (5,021) 5,214 -
Other non-current liabilities and deferred
credits (4,219) (1,037) -
--------- --------- ---------
CASH PROVIDED BY OPERATING ACTIVITIES 296,186 233,483 150,705
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment
Acquisition of Texasgulf Inc. - (812,226) -
Acquisition of White Springs Agricultural
Chemicals, Inc. - (291,540) -
Sustaining operations (58,939) (39,596) (16,751)
Proceeds on disposal of fixed assets 22,716 503 2,039
Additions to other assets (2,819) (10,298) (329)
--------- --------- ---------
CASH USED IN INVESTING ACTIVITIES (39,042) (1,153,157) (15,041)
--------- --------- ---------
CASH (DEFICIENCY) BEFORE FINANCING
ACTIVITIES 257,144 (919,674) 135,664
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from (repayment of)
long-term obligations (258,556) 825,540 (20,633)
Repayment of short-term debt - - (67,851)
Dividends (48,199) (45,834) (33,050)
Issuance of shares 2,784 163,889 2,446
--------- --------- ---------
CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (303,971) 943,595 (119,088)
--------- --------- ---------
(DECREASE) INCREASE IN CASH (46,827) 23,921 16,576
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 40,497 16,576 -
--------- --------- ---------
(BANK INDEBTEDNESS) CASH AND
CASH EQUIVALENTS, END OF YEAR $ (6,330) $ 40,497 $ 16,576
========== ========== =========
Supplemental cash flow disclosure
Interest paid $ 42,901 $ 38,836 $ 4,054
Income taxes paid $ 32,914 $ 6,242 $ 1,200
--------- --------- ---------
</TABLE>
(See Notes to the Consolidated Financial Statements)
46
<PAGE> 49
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
1. DESCRIPTION OF BUSINESS
Potash Corporation of Saskatchewan Inc. (PCS) is an integrated fertilizer
company. The Company's potash producing assets include five mines and mills and
mining rights to potash reserves at a sixth location all in the Province of
Saskatchewan, one mine and mill located in the Province of New Brunswick and
one mine and mill in the State of Utah. The Company's phosphate producing
assets include a vertically-integrated phosphate mine and processing plant
located in the State of North Carolina, phosphate feed plants in six states,
two industrial phosphoric acid plants owned in a joint venture carrying on
business as Albright & Wilson Company, a mine and chemical plant complex and a
bulk terminal facility in the State of Florida and an ammonia terminal in the
State of Georgia.
The Company sells potash from its Saskatchewan mines for use outside North
America exclusively to Canpotex Limited (Canpotex). Canpotex, a potash export,
sales and marketing company owned in equal shares by the three potash producers
in the Province of Saskatchewan (including the Company), resells potash to
offshore customers. PCS Sales (Canada) Inc. and PCS Sales (USA), Inc.,
wholly-owned subsidiaries of PCS, execute marketing and sales for the Company's
potash and phosphate products in North America. PCS Sales (Canada) Inc.
executes offshore marketing and sales for the Company's New Brunswick potash.
PhosChem, a phosphate export association established under US law, is the
principal vehicle through which the Company executes offshore marketing and
sales for its phosphate fertilizers.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company's accounting policies are in accordance with accounting principles
generally accepted in Canada. These policies are consistent with accounting
principles generally accepted in the United States except as outlined in Note
25. The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The
following policies are considered to be significant:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of PCS and its
operating subsidiaries (the "Company" except to the extent the context
otherwise requires):
-- PCS Sales (Canada) Inc. (formerly Potash Corporation of Saskatchewan
Sales Limited) (PCS Sales)
-- PCS Sales (Iowa) Inc.
-- PCS Sales (Indiana) Inc.
-- Potash Corporation of Saskatchewan (Florida) Inc. (PCS Florida)
-- PCS Sales (USA), Inc.
-- Potash Corporation of Saskatchewan Transport Limited (PCS Transport)
-- PCS Phosphate Company, Inc. (PCS Phosphate)
-- Albright & Wilson Company (proportionately consolidated)
-- White Springs Agricultural Chemicals, Inc. (White Springs)
All significant intercompany balances and transactions have been eliminated.
INVENTORIES
Inventories of finished product, raw materials and work in process are valued
at the lower of cost and net realizable value. Cost for substantially all
finished product, raw materials and work in process inventories is determined
using the first in, first out (FIFO) method. Inventories of materials and
supplies are valued at the lower of average cost and replacement cost.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost, except for mineral
properties which are carried at the lower of cost or fair value. Costs of
additions, betterments and renewals are capitalized. The Company periodically
reviews property, plant and equipment for indicators of potential impairment.
Impairment would be measured by comparing book value against the estimated
undiscounted future operating cash flows and any such impairment loss would be
included in the statement of income.
Maintenance and repair expenditures which do not improve or extend productive
life are expensed as incurred.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided for on a basis and at rates
calculated to amortize the cost of the fixed assets over their estimated useful
lives. Depreciation and amortization rates for all mine assets (including mine
development costs) and potash mills are determined using the units of
production method based on estimates of proven and probable reserves. Other
asset classes are depreciated or amortized on a straight-line basis as follows:
land improvements 5 to 30 years, buildings and improvements 6 to 30 years and
machinery and equipment 5 to 25 years.
RESEARCH AND DEVELOPMENT COSTS
Research costs are expensed as incurred.
Development costs include costs for equipment, labor and material relating to
the testing or evaluating of product and process alternatives. These costs are
deferred and amortized on a straight-line basis over a period not exceeding
five years unless the project is determined not to be economically feasible and
of no future benefit to the Company, at which time the costs are expensed.
OTHER ASSETS -- DEFERRED CHARGES
Issue costs of long-term obligations are amortized over the term of the related
liability.
Preproduction costs represent costs incurred during the start-up phase of new
milling facilities, net of revenue earned, and are amortized on a straight-line
basis over ten years.
Trade names and goodwill are being amortized on a straight-line basis over
their estimated useful lives of 15 years. Impairment would be identified by
comparing book value against the estimated undiscounted future operating cash
flows, and any such impairment loss would be included in the statement of
income.
47
<PAGE> 50
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The cost of constructing bases for gypsum stacks and the cost of constructing
settling ponds are capitalized to Other Assets and are amortized on a
straight-line basis over their estimated useful lives of three to five years.
LEASES
Leases entered into are classified as either capital or operating leases.
Leases that transfer substantially all of the benefits and risks of ownership
of property to the Company are accounted for as capital leases. At the time a
capital lease is entered into, an asset is recorded together with the related
long-term obligation. Equipment acquired under capital leases is being
depreciated on the same basis as other fixed assets. Gains or losses resulting
from sale-leaseback transactions are deferred and amortized in proportion to
the amortization of the leased asset. Rental payments under operating leases
are charged to expense as incurred.
REVENUE RECOGNITION
Sales revenue is recognized when the product is shipped or a service is
performed. Revenue is recorded based on the F.O.B. mine, plant or warehouse
price. Transportation costs are recovered from the customer through sales
pricing.
POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS
Accrual of the costs of providing certain post-retirement benefits, including
medical and life insurance coverage, during the active service period of the
employee is recorded monthly and adjusted annually as actuaries' reports become
available.
Accrual during periods of active employment, for the expected cost of certain
benefits payable to former or inactive employees, is also recorded monthly and
adjusted annually. These benefits include long-term disability income payments
and related medical and insurance costs.
FOREIGN EXCHANGE TRANSACTIONS
PCS and its operating subsidiaries have the US dollar as their functional
currency.
Operating transactions are translated to United States dollars at the average
exchange rate of the previous month. Monetary assets and liabilities are
translated at period end exchange rates. Non-monetary assets owned at December
31, 1994 have been translated under the Translation of Convenience Method at
the December 31, 1994 year-end exchange rate of US$1.00 = CDN$1.4028. Additions
subsequent to December 31, 1994 are translated at the exchange rate prevailing
at the time of the transaction.
Foreign exchange gains or losses are included in other income.
CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less are
considered to be cash equivalents.
FINANCIAL INSTRUMENTS
Gains or losses on foreign currency exchange contracts are recognized at the
time that the contracts are entered into and are included in other income.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Trade Accounts - Canpotex $ 34,550 $ 42,129
- Other 178,712 174,383
Non-trade accounts 21,673 11,124
-------- --------
234,935 227,636
Less allowance for doubtful accounts 4,157 4,259
-------- --------
$230,778 $223,377
======== ========
</TABLE>
4. INVENTORIES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Finished product $ 93,717 $115,491
Materials and supplies 73,912 66,708
Raw materials 29,917 11,954
Work in process 21,887 27,758
-------- --------
$219,433 $221,911
======== ========
</TABLE>
5. PREPAID EXPENSES
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Prepaid freight $10,565 $ 9,193
Other 3,331 2,848
------- -------
$13,896 $12,041
======= =======
</TABLE>
Prepaid freight relates to product inventory stored at warehouse facilities
which is invoiced to customers at the time of sale of the inventory.
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996
------------------------------------
Accumulated
Depreciation and Net Book
Cost Amortization Value
---------- -------- ----------
<S> <C> <C> <C>
Land and improvements $ 204,081 $ 17,662 $ 186,419
Buildings and improvements 424,368 92,156 332,212
Machinery and equipment 1,753,017 383,987 1,369,030
Mine development costs 125,908 34,877 91,031
---------- -------- ----------
$2,507,374 $528,682 $1,978,692
========== ======== ==========
</TABLE>
48
<PAGE> 51
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
6. PROPERTY, PLANT AND EQUIPMENT (continued)
<TABLE>
<CAPTION>
1995
-----------------------------------------
Accumulated
Depreciation and Net Book
Cost Amortization Value
---------- -------- ----------
<S> <C> <C> <C>
Land and improvements $ 207,868 $ 15,183 $ 192,685
Buildings and improvements 421,836 83,563 338,273
Machinery and equipment 1,730,777 322,638 1,408,139
Mine development costs 126,003 32,761 93,242
---------- -------- ----------
$2,486,484 $454,145 $2,032,339
========== ======== ==========
</TABLE>
7. OTHER ASSETS
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred charges -- net of accumulated
amortization
Issue costs -- long-term obligations $ 6,409 $ 7,994
Preproduction costs 4,543 1,816
Trade names 1,644 1,740
Goodwill 1,686 1,830
Gypstack linings and settling ponds 9,855 7,167
Prepaid pension costs 9,407 11,958
Land held for sale 9,446 10,464
Investments 4,254 3,952
Notes receivable 1,492 1,416
------- -------
$48,736 $48,337
======= =======
</TABLE>
8. BANK INDEBTEDNESS
Bank indebtedness consists of cheques issued in excess of funds on deposit.
The Company has available lines of credit for short-term financing in the
amount of $95,000 at December 31, 1996 (1995 - $91,600). The lines of credit
are unsecured.
9. ACCOUNTS PAYABLE AND ACCRUED CHARGES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Trade accounts $151,723 $155,891
Accrued interest 6,853 2,993
Accrued payroll 9,015 14,968
Income taxes 395 13,351
Dividends 12,022 12,019
-------- --------
$180,008 $199,222
======== ========
</TABLE>
10. LONG-TERM DEBT
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Syndicated facilities led by
Bank of Nova Scotia
Facility A $ - $274,416
Facility B - 553,000
Credit Facility 575,000 -
</TABLE>
The Credit Facility provides for aggregate unsecured advances of $1.45 billion
at a maximum interest rate of LIBOR, Prime rate or Base Rate Canada Loans, plus
0.5%, payable throughout the term of the Credit Facility. The Facility is
renewable every 364 days with the consent of the lenders. No principal payments
are required during the revolving period. If the Facility is not renewed, it
converts to a five-year term facility repayable in twenty quarterly instalments
each equal to 1% of the principal outstanding on the conversion date and a
final payment of the remaining principal amount due on the fifth anniversary of
the conversion date. The average interest rate on this obligation was 5.88% in
1996.
<TABLE>
<S> <C> <C>
Industrial Revenue and Pollution
Control Obligations 45,320 49,140
</TABLE>
Adjustable Rate Industrial Revenue and Pollution Control Obligations with
varying interest rates and with maturity dates ranging from 1997 to 2012. No
sinking fund requirements prior to maturity. The Adjustable Rate Municipal
Industrial Revenue and Pollution Control Obligations bear interest at rates
ranging from 3.74% to 4.90%. The average interest rate on these obligations was
3.98% in 1996. These loans are secured by bank letters of credit, most of which
are guaranteed by the Company.
<TABLE>
<S> <C> <C>
-------- --------
620,320 876,556
Less current maturities 1,520 164,971
-------- --------
$618,800 $711,585
======== ========
</TABLE>
The fair values of all long-term obligations are approximated by their face
values.
49
<PAGE> 52
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
10. LONG-TERM DEBT (continued)
Long-term debt at December 31, 1996 matures as follows:
<TABLE>
<S> <C>
1997 $ 1,520
1998 1,500
1999 1,200
2000 7,000
2001 -
Subsequent years 609,100
--------
$620,320
========
</TABLE>
11. COMMITMENTS
LEASE COMMITMENTS
The Company has long-term lease agreements for buildings, port facilities,
equipment and rail cars (excluding mineral leases), the latest of which expires
in 2017. Future minimum lease payments under these capital and operating leases
will be approximately as follows:
<TABLE>
OPERATING CAPITAL
------- ------
<S> <C> <C>
1997 $26,944 $1,291
1998 24,431 1,290
1999 20,550 467
2000 16,492 467
2001 13,725 -
Subsequent years 46,821 -
------- ------
3,515
Less amount representing interest 2,052
------
Present value of minimum capital lease payments 1,463
Current portion 300
------
Long-term portion $1,163
======
</TABLE>
Rental expense for operating leases for the years ended December 31, 1996, 1995
and 1994 was $12,431, $11,437 and $9,287, respectively.
OTHER COMMITMENTS
The Company has entered into raw material purchase commitments based upon market
rates at the time of delivery through 1997 in the amount of approximately
$211,279.
On September 2, 1996, the Company announced that it had entered into a
definitive merger agreement with Arcadian Corporation (Arcadian). The Company is
to acquire all the outstanding common shares of Arcadian (approximately 45.5
million shares on a fully diluted basis) at a price expected to be $25.00 to
$27.00 per share (approximately $12.25 per share cash and the balance in PCS
shares). The completion of the merger is conditional upon, among other things,
the approval of the merger by the holders of a majority of the outstanding
shares of Arcadian common stock and preferred stock, voting together as a single
class. Assuming that shareholder approval is obtained, the merger is expected to
become effective on March 6, 1997.
On December 6, 1996, the Company entered into an agreement to purchase a 51%
interest in Kali und Salz AG ("K & S") at a price of 250 million Deutschmarks
(at December 31, 1996 approximately $162,000). The holdings of K & S include a
51% interest in Kali und Salz GmbH and a 50% interest in Potash Company of
Canada Limited. The closing of the transaction is subject to approval by the
German government.
12. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS
CANADIAN
Substantially all employees of the Company are participants in either a defined
contribution or a defined benefit pension plan. The Company's obligations under
the defined contribution plans are limited to making regular payments to the
plan to match contributions made by the employees for current services (to a
maximum of 5.5% of salary). Based on the latest actuarial valuations of the
defined benefit pension plans conducted at December 31, 1994, and updated as at
December 31, 1996, accrued pension benefits were $7,338 and the market values of
the assets of the plans were $8,491.
The Company has established a supplemental retirement income plan for senior
management which is unfunded and non-contributory and provides a supplementary
pension benefit. The plan is provided for by charges to earnings sufficient to
meet the projected benefit obligation.
UNITED STATES
The Company has contributory pension plans that cover a substantial majority of
its employees. Benefits are based on a combination of years of service and
compensation levels, depending on the plan. Generally, contributions to the US
plans are made to meet minimum funding requirements of the Employee Retirement
Income Security Act of 1994 (ERISA).
The components of net pension expense for the Company's US pension plans,
computed actuarially, were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Service cost for benefits earned during the year $ 7,337 $ 2,584
Interest cost on projected benefit obligation 15,351 9,021
Return on plan assets (35,551) (26,048)
Net amortization and deferral 16,875 16,044
-------- --------
Net pension expense $ 4,012 $ 1,601
======== ========
</TABLE>
Assets of both US funded plans consist mainly of corporate equity, US government
and corporate debt securities and units of participation in a collective
short-term investment fund.
50
<PAGE> 53
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
12. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS (continued)
The funding status of the Company's US pension plans and amounts recognized in
the Consolidated Statements of Financial Position was as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Plans' assets at fair value $238,531 $208,992
-------- --------
Actuarial present value of projected benefit obligations:
Vested benefits 169,513 168,111
Non-vested benefits 11,294 11,273
-------- --------
Accumulated benefit obligations 180,807 179,384
Excess projected benefit obligations over accumulated
benefit obligations 40,327 41,578
-------- --------
Total projected benefit obligations 221,134 220,962
-------- --------
Plans' assets exceeding (less than) projected benefit
obligations 17,397 (11,970)
Items not yet recognized in earnings:
Unrecognized net loss (gain) (10,722) 23,675
Unrecognized transition liability 433 253
-------- --------
Net prepaid pension cost 7,107 11,958
White Springs accrued liability 2,300 -
-------- --------
Prepaid pension cost $ 9,407 $ 11,958
======== ========
</TABLE>
Significant actuarial assumptions for the Company's
US funded plans were as follows:
<TABLE>
<S> <C> <C>
Discount rate 7.50% 7.25%
Long-term rate of return on assets 8.00-9.00% 8.00-9.00%
Rate of increase in compensation levels 5.00% 5.00%
</TABLE>
OTHER POST-RETIREMENT PLANS
The Company provides certain health care and life insurance benefits for
retired employees. These plans are either contributory or non-contributory and
contain certain cost-sharing features such as deductibles and coinsurance.
These plans are unfunded and benefits are subject to change.
Although the Company prepares its financial statements under Canadian GAAP, it
has continued to apply the treatment prescribed by SFAS No. 106 under US GAAP
"Employers' Accounting for Postretirement Benefits Other Than Pensions." This
statement requires the accrual of the cost of providing other post-retirement
benefits (OPEBs), including medical and life insurance coverage, during the
active service period of the employee.
The components of OPEBs expense were as follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Service cost $ 2,233 $ 1,017
Interest cost 6,710 3,999
Net amortization and deferral (11) 373
-------- --------
Net cost $ 8,932 $ 5,389
======== ========
</TABLE>
The significant assumptions used in determining post-retirement benefit cost
were as follows:
<TABLE>
<S> <C> <C>
Discount rate 7.5% 7.25%
Health care trend rate 11.6%* 9.50-12.50%*
</TABLE>
*Decreasing gradually to 6.00% in 2003 and thereafter.
If the health care cost trend rate was increased by 1.0 percent, the
accumulated post-retirement benefit obligation and the aggregate of service and
interest cost would have increased as follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
<S> <C> <C>
Accumulated post-retirement benefit obligation $ 843 $ 2,650
Aggregate of service and interest cost $ 77 $ 337
</TABLE>
The components of the Company's post-retirement benefit liability are as
follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Retirees $39,681 $ 45,748
Active:
Fully eligible 20,052 15,051
Not fully eligible 36,778 41,006
------- --------
Total 96,511 101,805
Unrecognized net gain (loss) 341 (11,215)
------- --------
96,852 90,590
Less current portion of SFAS 106 (3,530) (3,530)
Add SFAS 112 liability 2,138 2,510
------- --------
Accrued post-retirement/post-employment
benefits liability $95,460 $ 89,570
======= ========
</TABLE>
The Company has applied Canadian GAAP to prepare its financial statements but
continues to apply SFAS No. 112 under US GAAP "Employers' Accounting for
Postemployment Benefits." This statement requires the Company to accrue, during
periods of active employment, the expected cost of certain benefits payable to
former or inactive employees. These benefits include long-term disability
income payments and related medical and insurance costs.
51
<PAGE> 54
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
12. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS (continued)
The effect of these costs on income before income taxes was $486 and $332 for
1996 and 1995, respectively. As at December 31, 1996, the Company has a
recorded liability for these costs of $2,138 (1995 - $2,510).
All of the Company's US employees may participate in defined contribution
savings plans. These plans are subject to US federal tax limitations and
provide for voluntary employee salary reduction contributions of up to 15
percent of salary and Company matching contributions of up to 5 percent of
salary. The Company's matching contributions were $3,565 and $1,971 for 1996
and 1995 respectively.
13. ENVIRONMENTAL COSTS
RECLAMATION AND RESTORATION COSTS
Site restoration and reclamation costs have been accrued for various sites. At
December 31, 1996, the Company has accrued $35,856 (1995 - $38,353) for the
Aurora, North Carolina facility, $66,669 (1995 - $65,235) for the White
Springs, Florida facility, $27,377 (1995 - $27,509) for the Moab, Utah facility
and $16,610 (1995 - $20,434) for various sulphur facilities. The idle sulphur
facilities were part of the acquisition of Texasgulf Inc. and are undergoing
dismantlement and environmental restoration efforts. The current portion of
restoration and reclamation accrued in 1996 totalled $4,511 (1995 - $3,850).
These amounts represent the Company's current estimate of potential site
restoration and reclamation costs which were last assessed in November 1996.
These expenditures are generally incurred over an extended period of time.
Annual environmental expenditures for reclamation and restoration during the
years ended December 31, 1996 and 1995 were $69,905 and $32,971 respectively.
Of the 1996 amount, $53,507 (1995 - $28,296) was charged to operations, $6,787
(1995 - $4,018) was capitalized and $9,611 (1995 - $657) was charged against
accrued reclamation costs.
Certain reclamation obligations are currently secured by a surety bond of
approximately $13,000.
CAPPING OF BYPRODUCT GYPSUM STACKS
In 1993, the State of Florida passed certain legislation requiring companies to
reduce the potential environmental hazards associated with accumulations of
byproduct gypsum (gypsum stacks). The legislation requires companies to "cap"
the gypsum stacks in order to reduce seepage into the groundwater. The
procedures are not required until the gypsum stacks are no longer in use, which
management currently estimates to be no earlier than the year 2010. At December
31, 1996, a balance of $34,285 (1995 - $34,385) was included in accrued
reclamation costs for this gypsum stack capping requirement. The obligation of
White Springs regarding the gypsum stacks is guaranteed by PCS.
In North Carolina, on expiry of the mine's phosphate reserves, capping of the
remaining gypsum stack must comply with the laws in place at that time.
OTHER ENVIRONMENTAL COSTS
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to existing conditions
caused by past operations and that do not contribute to current or future
revenue generation are expensed. Other than reclamation and restoration and
gypsum stack capping costs discussed above, no significant costs relating to
existing conditions caused by past operations were incurred by the Company
during 1996. Reserves for estimated costs are recorded when environmental
remedial efforts are likely and the costs can be reasonably estimated. In
determining the reserves, the Company uses the most current information
available, including similar past experiences, available technology,
regulations in effect, the timing of remediation and cost-sharing arrangements.
At December 31, 1996, there were no environmental reserves recorded by the
Company other than those related to reclamation and restoration and gypsum
stack capping as discussed above.
The Company's estimated operating expenses, other than reclamation and
restoration and gypsum stack capping, relating to compliance with environmental
laws and regulations governing ongoing operations were approximately $9,533 for
the year ended December 31, 1996. In addition, capital expenditures for
environmental compliance were approximately $2,123 for the year ended December
31, 1996.
14. 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 first
preferred shares may be issued in one or more series with rights and conditions
to be determined by the Board of Directors.
ISSUED:
<TABLE>
<CAPTION>
1996 1995 1994
Consideration Consideration Consideration
-------- -------- --------
<S> <C> <C> <C>
Issued, beginning of year $627,700 $463,811 $461,365
Shares issued under option 2,634 2,516 2,310
Shares issued by prospectus - 161,184 -
Shares issued for dividend reinvestment plan 150 189 136
-------- -------- --------
Issued, end of year $630,484 $627,700 $463,811
======== ======== ========
</TABLE>
52
<PAGE> 55
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
14. SHARE CAPITAL (continued)
ISSUED:
<TABLE>
<CAPTION>
1996 1995 1994
Number of Number of Number of
Common Shares Common Shares Common Shares
---------- ---------- ----------
<S> <C> <C> <C>
Issued, beginning of year 45,439,667 42,988,238 42,780,928
Shares issued under option 140,050 147,650 203,200
Shares issued by prospectus - 2,300,000 -
Shares issued for dividend reinvestment plan 2,147 3,779 4,110
---------- ---------- ----------
Issued, end of year 45,581,864 45,439,667 42,988,238
========== ========== ==========
</TABLE>
STOCK OPTIONS
At December 31, 1996, there were stock options outstanding in respect of
1,842,475 common shares granted to certain employees of the Company and the
directors of PCS with an exercise price from CDN$14.00 to CDN$102.00 for
options held by optionees resident in Canada, and US$12.00 to US$74.75 for
optionees resident in the United States. As at December 31, 1996, 1,004,600 of
the outstanding options were exercisable.
The foregoing options have expiry dates ranging from November 30, 1999 to
November 7, 2006.
STOCK-BASED COMPENSATION DISCLOSURE
The Company continues with its policy of not recording any compensation expense
for the stock options as the exercise price is the quoted market closing price
of the Company's common shares on the last trading day immediately preceding
the date of the grant.
SHAREHOLDER RIGHTS PLAN
The Board of Directors of the Company adopted a shareholder rights plan (the
Plan) on November 10, 1994. The Plan was amended by the Board of Directors on
March 28, 1995 and May 4, 1995 and approved by the shareholders on May 11,
1995. Under the Plan, the Board of Directors declared a dividend distribution
of one right for each common share to holders of record. The rights are not
currently exercisable and only become exercisable upon the occurrence of
certain events as specified in the Plan.
15. GEOGRAPHIC SEGMENTS
Financial information by geographic area is summarized in the accompanying
table.
<TABLE>
<CAPTION>
CANADA UNITED STATES CONSOLIDATED
---------- ---------- ----------
<S> <C> <C> <C>
1996
Sales to customers outside the enterprise
Canada $ 14,507 $ 28,225 $ 42,732
United States 136,981 668,385 805,366
PhosChem - 275,644 275,644
Canpotex 184,025 - 184,025
Other 61,526 34,575 96,101
---------- ---------- ----------
$ 397,039 $1,006,829 $1,403,868
========== ========== ==========
Segment operating earnings $ 113,317 $ 186,175 $ 299,492
========== ========== ==========
Assets $ 840,176 $1,654,211 $2,494,387
========== ========== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C>
1995
Sales to customers outside the enterprise
Canada $ 12,483 $ 23,461 $ 35,944
United States 128,594 270,085 398,679
PhosChem - 128,320 128,320
Canpotex 221,169 - 221,169
Other 53,686 18,282 71,968
---------- ---------- ----------
$ 415,932 $ 440,148 $ 856,080
========== ========== ==========
Segment operating earnings $ 138,939 $ 85,310 $ 224,249
========== ========== ==========
Assets $ 935,075 $1,646,742 $2,581,817
========== ========== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C>
1994
Sales to customers outside the enterprise
Canada $ 9,990 $ - $ 9,990
United States 119,170 - 119,170
Canpotex 185,776 - 185,776
Other 48,181 - 48,181
---------- ---------- ----------
$ 363,117 $ - $ 363,117
========== ========== ==========
Segment operating earnings $ 98,475 $ - $ 98,475
========== ========== ==========
Assets $1,027,766 $ - $1,027,766
========== ========== ==========
</TABLE>
53
<PAGE> 56
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
16. PROVINCIAL MINING AND OTHER TAXES
Provincial mining taxes and other taxes consist of:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Potash Production Tax $ 27,462 $ 29,589 $ 20,613
Saskatchewan Capital Tax 12,735 13,799 11,739
---------- ---------- ----------
$ 40,197 $ 43,388 $ 32,352
========== ========== ==========
</TABLE>
17. INTEREST EXPENSE
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest on - Short-term debt $ 56 $ 190 $ 1,036
- Long-term debt 46,391 41,177 -
- Obligations under capital
leases 314 450 2,736
---------- ---------- ----------
$ 46,761 $ 41,817 $ 3,772
========== ========== ==========
</TABLE>
18. INCOME TAXES
As the Company operates in a specialized industry and in several tax
jurisdictions, its income is subject to various rates of taxation.
The provision for income taxes differs from the amount that would have resulted
from applying the statutory income tax rates to income before income taxes as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Income before income taxes - Canada $ 81,067 $ 102,540 $ 94,703
- United States 171,664 79,892 -
---------- ---------- ----------
Income before income taxes $ 252,731 $ 182,432 $ 94,703
========== ========== ==========
Federal and Provincial Statutory tax rates 46.12% 46.08% 45.84%
========== ========== ==========
Tax at statutory rates $ 116,560 $ 84,065 $ 43,412
Adjusted for the effect of:
Net non-deductible provincial taxes and
royalties and resource allowances (22,879) (22,262) (15,122)
Additional tax deductions (47,699) (38,579) (26,317)
Other (2,287) (278) 1,511
---------- ---------- ----------
Income tax expense $ 43,695 $ 22,946 $ 3,484
========== ========== ==========
</TABLE>
The principal timing differences and their tax effect are as follows:
<TABLE>
<S> <C> <C> <C>
Depreciation and amortization $ 69,849 $ 19,232 $ -
Capitalized expenditures (14,036) (8,328) -
Loss carryforwards (28,230) - -
Other 7,452 394 -
Alternative minimum tax carryforward (6,555) (6,555) -
---------- ---------- ----------
Deferred tax liability $ 28,480 $ 4,743 $ -
========== ========== ==========
</TABLE>
Details of income tax expense are as follows:
<TABLE>
<S> <C> <C> <C>
Canadian
Current $ 3,097 $ 3,236 $ 3,484
United States - Federal
Current 16,861 14,967 -
Deferred 20,651 3,356 -
United States - State
Deferred 3,086 1,387 -
---------- ---------- ----------
Income tax expense $ 43,695 $ 22,946 $ 3,484
========== ========== ==========
</TABLE>
At December 31, 1996, the Company has income tax losses carried forward of
approximately $247,000 which will begin to expire in 1997. The benefit relating
to these loss carryforwards has been recognized by reducing deferred income tax
liabilities.
19. NET INCOME PER SHARE (EARNINGS PER SHARE)
Net income per share is calculated on the weighted average number of shares
issued and outstanding during the twelve months ended December 31, 1996 of
45,537,000 (1995 - 43,352,000; 1994 - 42,872,000). Fully diluted net income per
share did not differ materially from net income per share in any of the
accounting periods.
20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company enters into short-term foreign currency exchange contracts which
are used to reduce the effect of exchange rate fluctuations on its foreign
currency accounts payable. The Company does not hold or issue financial
instruments for trading purposes.
At December 31, 1996, the Company had commitments in the form of foreign
exchange contracts to sell US$8,000 (1995 - $NIL). The fair value of these
contracts approximated the cost amount at December 31, 1996.
The Company's exposure to interest rate risk is limited to its long-term debt.
The effective interest rate on the long-term debt approximates the stated rate
because there are no significant premiums or discounts.
The Company is exposed to credit related losses in the event of non-performance
by counterparties to derivative financial instruments, but it does not expect
any counterparties to fail to meet their obligations.
54
<PAGE> 57
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
20. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
The major concentration of credit risk arises from the Company's receivables. A
majority of the Company's sales are in North America and are primarily for use
in the agricultural industry. Internationally, the Company's products are sold
primarily through two export associations whose accounts receivable are either
insured or secured by letters of credit.
The carrying amount of the Company's cash and cash equivalents, accounts
receivable and accounts payable and accrued charges approximate fair values
because of short-term maturities. The carrying amount of the Company's
long-term debt approximates estimated fair value because the stated interest
rate, which is adjusted at least every 120 days, approximates the market rate.
21. CONTINGENCIES
PCS is a shareholder in Canpotex which markets potash offshore. Should any
operating losses or other liabilities be incurred by Canpotex, the shareholders
have contractually agreed to reimburse Canpotex for such losses or liabilities
in proportion to their productive capacity. There were no such operating losses
or other liabilities in 1996.
In common with other companies in the industry, the Company is unable to
acquire insurance for underground assets.
In June 1993, the Company was served with a complaint relating to a suit filed
in the United States District Court for Minnesota against most North American
potash producers, including the Company. The complaint alleges a conspiracy
among the defendants to fix the price of potash purchased by the plaintiffs as
well as potash purchased by the members of a class of certain purchasers
proposed by the plaintiffs. The complaint seeks treble damages in an
unspecified amount and other relief. Similar complaints were filed in the
United States District Courts for the Northern District of Illinois and the
Western District of Virginia. On motion of the defendants, all of the
complaints were transferred and consolidated for pre-trial purposes in the
United States District Court for Minnesota. Amended complaints were filed in
March and April 1994. On January 12, 1995, the Minnesota Federal Court granted
the plaintiffs' motion for class certification. Merits discovery was completed
in September 1995. Expert discovery was completed in November 1995. The Company
filed a motion for summary judgment on December 22, 1995. On January 2, 1997,
Judge Richard H. Kyle issued an order granting the motions for summary judgment
and dismissing the lawsuit. The plaintiffs appealed that order to the United
States Court of Appeals for the Eighth Circuit on January 31, 1997.
Additional complaints were filed in the California and Illinois State Courts on
behalf of purported classes of indirect purchasers of potash in those states.
The Company moved to dismiss the California State Court lawsuit for lack of
personal jurisdiction and the court ruled that it does not have personal
jurisdiction over PCS but that it does have personal jurisdiction over PCS
Sales. The case remains at an early stage; no merits discovery has taken place.
The Illinois State Court dismissed the Illinois State Court complaint for
failure to state a cause of action. The Illinois plaintiff appealed that
dismissal and that dismissal was affirmed by the Appellate Court of Illinois on
November 27, 1996. On January 15, 1997, the Appellate Court denied the
plaintiff's request for rehearing. The plaintiff has the right to petition the
Supreme Court of Illinois to review the Appellate Court's decision.
Various other claims and lawsuits are pending against the Company. While it is
not possible to determine the ultimate outcome of such actions at this time, it
is management's opinion that the ultimate resolution of such items, including
those pertaining to environmental matters, will not have a material effect on
the Company.
22. RELATED PARTY TRANSACTIONS
The Company has a one-third interest in Canpotex which markets potash offshore.
Sales to Canpotex are at prevailing market prices. Sales for the year ended
December 31, 1996 were $184,025 (1995 - $221,169; 1994 - $185,776).
Account balances resulting from the Canpotex transactions are included in the
Consolidated Statements of Financial Position and settled on normal trade
terms.
23. Quarterly Results (unaudited)
The following quarterly information in management's opinion includes all
adjustments (consisting solely of normal recurring adjustments) necessary for
fair presentation.
<TABLE>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1996
Net Sales $366,871 $352,369 $342,148 $342,480
======== ======== ======== ========
Gross Margin $110,800 $ 92,702 $ 90,955 $ 98,956
======== ======== ======== ========
Operating Income $ 87,122 $ 74,366 $ 66,418 $ 71,586
======== ======== ======== ========
Net Income $ 63,678 $ 52,398 $ 46,772 $ 46,188
======== ======== ======== ========
Net Income per Share $ 1.40 $ 1.15 $ 1.03 $ 1.01
======== ======== ======== ========
1995
Net Sales $135,977 $204,447 $214,609 $301,047
======== ======== ======== ========
Gross Margin $ 72,999 $ 85,471 $ 62,201 $ 91,918
======== ======== ======== ========
Operating Income $ 52,594 $ 64,374 $ 41,154 $ 66,127
======== ======== ======== ========
Net Income $ 51,475 $ 47,744 $ 23,077 $ 37,190
======== ======== ======== ========
Net Income per Share $ 1.20 $ 1.11 $ 0.53 $ 0.84
======== ======== ======== ========
</TABLE>
24. COMPARATIVE FIGURES
Certain of the prior years' figures have been reclassified to conform with the
current year's presentation.
55
<PAGE> 58
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
25. United States Generally Accepted Accounting Principles
A description of the accounting principles which differ significantly in
certain respects from generally accepted accounting principles in the United
States (US GAAP) follows:
Product development costs: Certain costs incurred relating to testing or
evaluating product and process alternatives are deferred until the alternative
is determined not to be technically or economically feasible. US GAAP would
require the reduction of these amounts in the current period's income.
Prior period adjustment: The provincial mining taxes of $6,245 and a
subsidiary's income tax adjustment of $1,267 have been accounted for as a prior
period adjustment, thereby excluding those amounts from the current period's
income. US GAAP would require the reduction of these amounts in the current
period's income.
Other investments: Other investments include portfolio investments which are
carried at cost. US GAAP requires that available-for-sale securities be
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of shareholders' equity.
Foreign currency translation adjustment: The foreign currency translation
adjustment results from the restatement of prior periods so that all periods
presented are in the same reporting currency. US GAAP requires that the
comparative Consolidated Statements of Income and the Consolidated Statements
of Cash Flow be translated using weighted average exchange rates for the
applicable periods. In contrast, the Consolidated Statements of Financial
Position are translated using the exchange rates at the end of the applicable
periods. The difference in these exchange rates is what gives rise to the
foreign currency translation adjustment.
Earnings per share: In computing primary earnings per share, under US GAAP, the
stock options are included in the calculation to the extent that they are
exercisable.
Deferred income taxes: Deferred tax assets have been recognized only to the
extent of reducing deferred tax liabilities. US GAAP would require that
deferred tax assets be recorded when their realization is more likely than not.
Net sales: Sales are recorded net of freight costs (less related revenues) and
transportation and distribution expenses. US GAAP would require that net
freight costs be included in cost of sales and transportation and distribution
expenses be included in operating expenses.
In 1995 the Financial Accounting Standards Board issued Statement No. 123
"Accounting for Stock-Based Compensation." The Company has decided to continue
to apply APB 25 for measurement of compensation of employees.
The application of US GAAP, as described above, would have had the following
approximate effects on operating income, net income, net income per share,
total assets and shareholders' equity:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Operating income as reported in the
consolidated statements
of income and retained earnings $ 299,492 $ 224,249 $ 98,475
Items increasing (decreasing) reported
operating income
Amortization of product development costs - - 1,132
Provincial mining taxes - - (6,245)
Foreign currency translation adjustment - - 2,080
---------- ---------- ----------
Approximate operating income - US GAAP $ 299,492 $ 224,249 $ 95,442
========== ========== ==========
Net income as reported in the
consolidated statements
of income and retained earnings $ 209,036 $ 159,486 $ 91,219
Items increasing (decreasing) reported
net income
Amortization of product development costs - - 1,132
Subsidiary income tax adjustment - - (1,267)
Provincial mining taxes - - (6,245)
Deferred income taxes (7,216) 18,598 -
Foreign currency translation adjustment - - 1,841
---------- ---------- ----------
Approximate net income - US GAAP $ 201,820 $ 178,084 $ 86,680
========== ========== ==========
Weighted average shares outstanding - US GAAP 45,994,000 43,813,000 43,286,000
========== ========== ==========
Net income per share - US GAAP $ 4.39 $ 4.06 $ 2.00
========== ========== ==========
Total assets as reported in the consolidated
statements of financial position $2,494,387 $2,581,817 $1,027,766
Items increasing (decreasing) reported total
assets
Unrealized gain on available-for-sale security - - 919
Deferred income tax asset 15,727 18,598 -
Product development costs - - (591)
---------- ---------- ----------
Approximate total assets - US GAAP $2,510,114 $2,600,415 $1,028,094
========== ========== ==========
Shareholders' equity as reported in the
consolidated statements of financial position $1,405,496 $1,241,875 $ 964,334
Items increasing (decreasing) reported
shareholders' equity
Deferred income taxes 11,382 18,598 -
Unrealized gain on available-for-sale security - - 919
Product development costs - - (591)
---------- ---------- ----------
Approximate shareholders' equity - US GAAP $1,416,878 $1,260,473 $ 964,662
========== ========== ==========
</TABLE>
56
<PAGE> 59
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
25. United States Generally Accepted Accounting Principles (continued)
Supplemental US GAAP Disclosure
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax asset are:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Loss and credit carryforwards $100,455 $ 75,209
Post-retirement/post-employment benefits 38,132 47,386
Accrued reclamation costs 56,660 61,884
Other 33,429 9,549
-------- --------
Total deferred tax assets 228,676 194,028
-------- --------
Deferred tax liabilities:
Basis difference in fixed assets 241,429 176,453
Other 4,345 3,720
-------- --------
Total deferred tax liabilities 245,774 180,173
-------- --------
Net deferred tax asset (liability) $(17,098) $ 13,855
======== ========
Consisting of:
Current deferred tax asset $ 15,727 $ 18,598
Long-term deferred tax liability (32,825) (4,743)
-------- --------
$(17,098) $ 13,855
======== ========
</TABLE>
Stock Compensation Plans
The Company has two stock-based compensation plans which are described below.
The Company applied APB Opinion 25 and related interpretations in accounting
for its plans. No compensation cost has been recognized under APB 25 as the
exercise price of the options at the grant date is equal to the market value of
the shares at the grant date. Had compensation cost for the Company's plans
been determined based on the fair value at the grant dates for awards under the
plans consistent with the method of FASB Statement No. 123, the Company's net
income and net income per share for the year ending December 31, 1996 would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
As Reported Pro Forma
<S> <C> <C>
Net income $ 201,820 $ 191,936
Net income per share $ 4.39 $ 4.17
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Modified Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996 and 1995 respectively: dividend of $1.06
for all years; expected volatility of 32 and 37 percent; risk-free interest
rates of 6.9 and 6.8 percent; expected lives of 10 years for all years; and a
reduction of approximately 25 percent to reflect the probability of forfeiture
for all years.
The Company has two option plans. Under the Officer & Key Employee Plan the
Company may grant options to its officers and key employees for up to 3,842,000
shares of common stock. Under the Directors Plan the Company may grant options
to its directors for up to 456,000 shares of common stock. Under both plans,
the exercise price of each option equals the closing market price of the
Company's shares on the trading day prior to the grant and an option's maximum
term is ten years. All options granted to date have provided that one-half of
the options granted in a year will vest one year from the date of the grant,
with the other half of the options vesting the following year.
A summary of the status of plans as of December 31, 1996 and 1995 and changes
during the years ending on those dates is presented below:
Number of Shares Subject to Option
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Outstanding, beginning of year 1,392,525 1,045,675
Granted 592,000 494,500
Exercised (140,050) (147,650)
Cancelled (2,000) -
--------- ---------
Outstanding, end of year 1,842,475 1,392,525
========= =========
</TABLE>
Weighted Average Exercise Price
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Outstanding, beginning of year $ 34.74 $ 23.19
Granted 71.00 74.52
Exercised 53.17 58.68
Cancelled 74.75 -
Outstanding, end of year 52.90 34.74
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ---------------------------
Range of Exercise Number Weighted Average Weighted Average Number Weighted Average
Prices Outstanding Remaining Life Exercise Price Exercise Price
- ---------------- ---------- -------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
$12.00 to $18.38 81,625 5 years $16.28 81,625 $16.28
$20.00 to $25.38 412,450 7 years 21.64 412,450 21.64
$32.25 264,650 8 years 32.25 264,650 32.25
$70.38 to $74.75 1,083,750 10 years 72.60 245,875 74.52
</TABLE>
57
<PAGE> 60
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
25. United States Generally Accepted Accounting Principles (continued)
The following supplemental schedules present the Income, Cash Flow, and
Financial Position in accordance with US GAAP as adjusted for the GAAP
differences described in this note.
Supplemental Schedule of Consolidated Financial Position
As at December 31
<TABLE>
<CAPTION>
(in thousands of US dollars)
1996 1995
---------- ----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ - $ 40,497
Accounts receivable 230,778 223,377
Inventories 219,433 221,911
Prepaid expenses 13,896 12,041
Other current assets 2,852 3,315
Deferred income tax asset 15,727 18,598
---------- ----------
482,686 519,739
Property, plant and equipment 1,978,692 2,032,339
Other assets 48,736 48,337
---------- ----------
$2,510,114 $2,600,415
========== ==========
Liabilities
Current Liabilities
Bank indebtedness $ 6,330 $ -
Accounts payable and accrued charges 180,008 199,222
Current portion of long-term debt 1,520 164,971
Current obligations under capital leases 300 870
---------- ----------
188,158 365,063
Long-term debt 618,800 711,585
Obligations under capital leases 1,163 2,913
Deferred income tax liability 32,825 4,743
Accrued post-retirement/post-employment benefits 95,460 89,570
Accrued reclamation costs 146,512 151,531
Other non-current liabilities and deferred
credits 10,318 14,537
---------- ----------
1,093,236 1,339,942
---------- ----------
Shareholders' Equity
Share Capital 630,484 627,700
Contributed Surplus 336,486 336,486
Retained Earnings 470,837 317,216
Foreign Currency Translation Adjustment (20,929) (20,929)
---------- ----------
1,416,878 1,260,473
---------- ----------
$2,510,114 $2,600,415
========== ==========
</TABLE>
Supplemental Schedule of Consolidated Income and Retained Earnings
For the Years Ended December 31
(in thousands of US dollars)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $1,516,394 $ 910,988 $ 392,291
Cost of goods sold 1,073,828 543,491 209,312
---------- ---------- ----------
Gross Margin 442,566 367,497 182,979
---------- ---------- ----------
Research and development 1,347 1,553 1,578
Selling, distribution and administrative expenses 108,175 107,478 51,513
Provincial mining and other taxes 40,197 43,388 39,572
Other income (6,645) (9,171) (5,126)
---------- ---------- ----------
143,074 143,248 87,537
---------- ---------- ----------
Operating Income 299,492 224,249 95,442
Interest Expense 46,761 41,817 3,882
---------- ---------- ----------
Income Before Income Taxes 252,731 182,432 91,560
Income Taxes 50,911 4,348 4,880
---------- ---------- ----------
Net Income 201,820 178,084 86,680
Retained Earnings, Beginning of Year 317,216 184,966 132,205
Dividends (48,199) (45,834) (33,919)
---------- ---------- ----------
Retained Earnings, End of Year $ 470,837 $ 317,216 $ 184,966
========== ========== ==========
Net Income Per Share $ 4.39 $ 4.06 $ 2.00
========== ========== ==========
Dividends Per Share $ 1.06 $ 1.06 $ 0.79
========== ========== ==========
</TABLE>
58
<PAGE> 61
Notes to the Consolidated Financial Statements
(in thousands of US dollars)
25. United States Generally Accepted Accounting Principles (continued)
Supplemental Schedule of Consolidated Cash Flow
For the Years Ended December 31
(in thousands of US dollars)
<TABLE>
<CAPTION>
1996 1995 1994
--------- ----------- ---------
<S> <C> <C> <C>
Operating Activities
Working capital from operations
Net income $ 201,820 $ 178,084 $ 86,680
Depreciation and amortization 90,125 70,953 39,150
Loss on disposal of fixed assets 2,152 726 349
Provision for deferred income taxes 30,953 (13,855) -
Provision for post-retirement/post-employment
benefits 5,890 2,052 -
Changes in non-cash operating working capital
Accounts receivable (7,400) (48,831) (14,746)
Inventories 2,493 9,297 14,958
Prepaid expenses (1,856) 2,521 481
Other current assets 463 1,778 -
Accounts payable and accrued charges (19,214) 26,581 19,665
Accrued reclamation costs (5,021) 5,214 -
Other non-current liabilities and deferred
credits (4,219) (1,037) -
--------- ----------- ---------
Cash provided by operating activities 296,186 233,483 146,537
--------- ----------- ---------
Investing Activities
Additions to property, plant and equipment
Acquisition of Texasgulf Inc. - (812,226) -
Acquisition of White Springs Agricultural
Chemicals, Inc. - (291,540) -
Sustaining operations (58,939) (39,596) (17,206)
Proceeds on disposal of fixed assets 22,716 503 2,095
Additions to other assets (2,819) (10,298) (338)
--------- ----------- ---------
Cash used in investing activities (39,042) (1,153,157) (15,449)
--------- ----------- ---------
Financing Activities
Proceeds from long-term obligations - 1,040,000 -
Repayment of long-term obligations (258,556) (214,460) (21,194)
Repayment of short-term debt - - (69,694)
Dividends (48,199) (45,834) (33,919)
Issuance of shares 2,784 163,889 2,512
--------- ----------- ---------
Cash provided by (used in) financing
activities (303,971) 943,595 (122,295)
Effects of changes in exchange rates on
monetary items - - 7,783
(Decrease) Increase in Cash (46,827) 23,921 16,576
Cash and Cash Equivalents, Beginning of Year 40,497 16,576 -
--------- ----------- ---------
(Bank Indebtedness) Cash and Cash Equivalents,
End of Year $ (6,330) $ 40,497 $ 16,576
========= =========== =========
</TABLE>
59
<PAGE> 62
Board of Directors
Potash Corporation of Saskatchewan Inc.
[PICTURE]
Isabel B. Anderson
Ms. Anderson, President and Chief Executive Officer of AAL Infoserve, a
Saskatoon-based information brokerage company, joined the PCS Board in 1989 and
is on the executive committee. A longtime Professor of Economics at the
University of Saskatchewan and specialist in international economics and
Canadian public policy, she was a Commissioner in 1986 for Saskatchewan's
public hearings on the Canada-United States trade negotiations. She has served
on the Canadian delegation to the United Nations Conference on Science and
Technology in Vienna, Austria, and on the Canadian NGO delegation to the United
Nations Conference on Trade and Development in Nairobi, Kenya.
Douglas J. Bourne
Mr. Bourne, of Houston, Texas, is a director, former Chairman and retired CEO
of Battle Mountain Gold Company and, before that, Group Vice President and
director of Pennzoil Company, and Chairman and CEO of Duval Corporation, its
mining subsidiary. A past Chairman of the Potash & Phosphate Institute and the
Sulphur Institute, and a director of The Fertilizer Institute and the American
Mining Congress, he was elected to the PCS Board in 1990 and heads the
environmental affairs committee.
Charles E. Childers
Mr. Childers, President and CEO of Potash Corporation of Saskatchewan Inc. and
its predecessor company since 1987, joined the Board in 1989 and became
Chairman in 1990. He is Chairman of the executive committee. He is President of
the International Fertilizer Industry Association and past Chairman of the
Potash & Phosphate Institute, Canpotex Limited, the Saskatchewan Potash
Producers Association and The Fertilizer Institute. He is active in the
Fertilizer Industry Advisory Committee to the Food and Agriculture
Organization, and sits on the board of directors of Battle Mountain Gold
Company and KAP Resources Ltd.
Denis J. Cote
Mr. Cote, retired Chairman and CEO of the UMA Group Ltd., was President, Chief
Executive Officer and member of the board of Reclamation Management Ltd. in
Vancouver, British Columbia in 1993. He has served on the PCS Board since 1989,
sits on the executive committee and heads the compensation committee. Former
Chairman and director of Joss Energy Ltd., he is a director of the successor
company, Startech Energy Inc. He is a founder and chairman of Inter West Energy
Corporation and a member of the board of the Vancouver Port Corporation. From
1975 to 1981, he served on the board of governors of the University of Calgary.
William J. Doyle
Mr. Doyle, President of PCS Sales, has served on the PCS Board since 1989. He
became President of PCS Sales in 1987, and prior to that was International Vice
President of International Minerals and Chemical Corporation. He is Chairman of
Canpotex Limited and a director of the Potash & Phosphate Institute, PhosChem
and Fersan S.A. in the Dominican Republic. He chairs the International
Fertilizer Industry Association's Potash Committee.
The Honourable Willard Z. Estey, Q.C.
Mr. Estey, of Toronto, Ontario, is a former Chief Justice of Ontario and
Justice of the Supreme Court of Canada. He was appointed Queen's Counsel in
1960. A PCS director since 1990, he sits on the audit committee. He is a
director of Canwest Global Communications Corporation, CamVec Corporation, ACC
Corp. and Fundy Cable Ltd. He is Chairman of the Ballard Foundation, the
Canadian Law Scholarship Foundation and the Ontario Press Council.
Dallas J. Howe
Mr. Howe, President and CEO of Advanced DataSystems Ltd. and BDM Information
Systems Group of Companies, served on the PCS Board from 1982 to 1989 and was
reappointed in 1991. He sits on the audit committee. He has been President, CEO
and founder of an extensive group of high technology information and data
systems companies over twenty years, and is a director of the Saskatoon
Regional Economic Development Authority and Saskatoon City Hospital Foundation.
60
<PAGE> 63
James F. Lardner
Mr. Lardner, of Davenport, Iowa, is a retired Vice President of Deere & Company
who was responsible for agricultural tractor design and North American tractor
operations. He joined the PCS Board in 1989 and serves on the executive
committee. He is a director of the Sears Manufacturing Company and a former
director of the Trane Company and American Standard Inc. Elected to the
National Academy of Engineering in 1985, he often serves on bodies which advise
United States government agencies and departments on science, technology and
engineering policy. He is a consultant on manufacturing strategy and
management, and manufacturing and information technology.
Donald E. Phillips
Mr. Phillips, of Brandon, Mississippi, former President and CEO of Pitman-Moore
Inc., joined the PCS Board in 1991 and serves on the compensation committee. A
former director of Chemical Leaman Tank Lines and a director of Great Lakes
REIT Inc., he is Chairman of the board of directors of Synbiotics Inc., San
Diego, California. He is President of Holmes Community College Development
Foundation, Goodman, Mississippi, a regent of Bethel College and Seminary in
St. Paul, Minnesota, and former Chairman of the board of Lake Forest Graduate
School of Business, Lake Forest, Illinois.
Paul J. Schoenhals
Mr. Schoenhals, President of Petroleum Industry Training Service in Calgary,
Alberta, was Chairman of Potash Corporation of Saskatchewan from 1987 to 1989.
He rejoined the Board in 1992, and sits on the environmental affairs committee.
A former Member of the Legislative Assembly and Cabinet Minister in
Saskatchewan, he is on the boards of Upton Resources Inc., Brandon Energy Ltd.
and Petroleum Industry Training Service. He has been a director of Precambrian
Shield Resources and Sabre West Oil & Gas and on the national advisory board
for Marsh & McLennan.
Daryl K. Seaman
Mr. Seaman, Chairman and President of Dox Investments Inc. in Calgary, Alberta,
joined the PCS Board of Directors in 1989 and is a member of the compensation
committee. Former Chairman and CEO of Bow Valley Industries Ltd., he is a
director of Encal Energy Ltd., Renaissance Energy Ltd., Trimac Ltd., Abacan
Resource Corporation, Basic Industries Corporation, Canadian Chemical
Reclaiming Ltd. and Bow Valley Energy Ltd. He is co-owner and director of the
Calgary Flames Hockey Club.
E. Robert Stromberg, Q.C.
Mr. Stromberg, Partner in Saskatchewan law firm Robertson Stromberg, was
elected to the PCS Board in 1991 and serves on the executive committee.
Admitted to the Saskatchewan Bar in 1969 and appointed Queen's Counsel in 1984,
he is a member of the Law Society of Saskatchewan and the Saskatoon Bar
Association. He serves on the advisory board for the Centre for International
Business Studies, is Chairman of the Saskatoon Airport Authority, a director of
the Canadian Airports Council and past President of the Saskatchewan Place
board.
Jack G. Vicq
Mr. Vicq, Professor of Accounting and Associate Dean of the College of
Commerce, University of Saskatchewan, is responsible for the Centre for
International Business Studies, established to help Saskatchewan businesses
explore export markets and to improve co-operation between the academic and
business communities in developing export opportunities. A member of the PCS
Board since 1989, he heads the audit committee. He sits on committees of the
Saskatchewan and Canadian Institutes of Chartered Accountants and has worked
for the Saskatchewan and Canadian governments in areas of policy, finance and
taxation.
Barrie A. Wigmore
Mr. Wigmore, a Limited Partner with New York investment banking firm Goldman,
Sachs Group, L.P., headed its efforts in such regulated industries as electric
and gas utilities, pipelines and telecommunications. He joined the PCS Board in
1989 and sits on the compensation committee. He writes on financial history and
current financial markets and is Chairman of the American Friends of Worcester
College (Oxford University), trustee of the Progressive Policy Institute and a
director of Fibre Body Industries Inc.
Paul S. Wise
Mr. Wise, of Carefree, Arizona, a past President and CEO of the Alliance of
American Insurers and a member of the PCS board since 1989, currently sits on
the environmental affairs committee. He is also on the boards of United Funds,
Waddell & Reed Funds and TMK/United Funds, and has been on the boards of the
College of Insurance, the Institute of Civil Justice at the Rand Corporation,
the Insurance Hall of Fame, and the National Safety Council and Senior Net. He
was President of the Property Loss Research Bureau and a director of the
Insurance Institute for Highway Safety.
Committees
Executive Committee:
The executive committee is composed of five directors. Between meetings of the
Board it has, with certain exceptions, all the powers vested in the Board. In
addition, the executive committee nominates candidates for directorship of the
Corporation. It also has responsibility for corporate governance issues.
Audit Committee:
The audit committee is composed of three directors, none of whom may be an
officer or employee of the Corporation or any of its affiliates. The committee
meets with the Corporation's financial management personnel, internal auditor
and external auditor at least once each quarter to review the Corporation's
financial reporting practices and procedures and authorize the release of
unaudited quarterly financial statements, and reviews the Corporation's annual
financial statements prior to their submission to the Board for approval. The
committee also recommends to the Board the external auditors to be proposed to
the shareholders for appointment at the annual meeting.
Compensation Committee:
The compensation committee is composed of four non-employee directors. This
committee formulates and makes recommendations to the Board in respect of
compensation issues relating to directors and senior management of the
Corporation and in respect of corporate salary and benefits policy. It reviews
and approves, on an annual basis, the Corporation's salary administration
program. It is responsible for the annual report on executive compensation. The
committee, in consultation with the Chief Executive Officer, considers and
reports to the Board regarding corporate succession matters.
Environmental Affairs Committee:
The environmental affairs committee is composed of three directors. The
committee works to ensure that the Corporation's commitment to the protection
of the environment is fulfilled. It routinely receives environmental audit
reports for review and discussion with senior management and monitors
environmental issues in other areas of corporate activity such as off-site
transportation, distribution and storage of product. The committee reviews and
discusses with management potential changes to regulatory requirements and to
corporate environmental policy.
61
<PAGE> 64
Shareholder Information
Annual Meeting
The Annual Meeting of the shareholders of the Company will be held at 10:30
a.m. Central Standard Time May 8, 1997 in the Commonwealth Ballroom, Ramada
Hotel, First Avenue and 22nd Street East, Saskatoon, Saskatchewan.
Holders of common shares as of March 20, 1997 are entitled to vote at the
meeting and are encouraged to participate. Shareholders who cannot attend are
urged to complete and mail their proxies promptly to ensure their common shares
will be voted.
Dividends
Dividend amounts paid to shareholders resident in the United States are
adjusted by the exchange rate applicable on the dividend record date. Dividends
are normally paid in February, May, August and November, with record dates
normally set approximately three weeks before the payment date.
Future cash dividends will be paid out of, and conditioned upon, the
Corporation's available earnings. Shareholders who wish to have their dividends
deposited directly in their bank accounts should contact the transfer agent and
registrar, R-M Trust.
Dividend Reinvestment Policy
A dividend reinvestment plan established in 1993 allows registered shareholders
to have dividends reinvested to newly-issued common shares of the Corporation
at prevailing market rates.
Information for Shareholders Outside Canada
Dividends paid to residents in countries with which Canada has bilateral tax
treaties, which is the majority of countries, are generally subject to the
15-percent Canadian non-resident withholding tax. There is no Canadian tax on
gains from the sale of shares or debt instruments owned by non-residents not
carrying on business in Canada. No level of government in Canada levies estate
taxes or succession duties.
Investor Inquiries
Shareholders with inquiries can contact Betty-Ann Heggie, Senior Vice
President, Corporate Relations by toll-free lines.
Within Canada: (800) 667-0403.
Within the US: (800) 667-3930.
Website: www.potashcorp.com
Interim Reports, News Releases and
Form 10-K
Those who would like to receive quarterly reports but are not registered
shareholders should contact the Company's Corporate Relations department. News
releases are also available via fax. Copies of the Company's most recent Form
10-K, as filed with the Securities and Exchange Commission, are available upon
request.
Duplicate Mailings
Multiple copies of the annual and quarterly reports may be received by
shareholders who own shares in more than one account or several shareholders
living at the same address. To eliminate multiple mailings, call R-M Trust, the
Company's transfer agent and registrar, toll-free at (800) 387-0825.
Shares Listed
The Toronto Stock Exchange
The Montreal Exchange
New York Stock Exchange
Ownership
On March 7, 1997, there were 2,671 holders of record of the Company's common
shares.
Auditors
Deloitte & Touche
Saskatoon, Saskatchewan
Legal Counsel
Robertson Stromberg
Saskatoon, Saskatchewan
Stikeman, Elliott
Toronto, Ontario
Arent Fox Kintner Plotkin & Kahn
Washington, DC
Bank
The Bank of Nova Scotia
Saskatoon, Saskatchewan
Tax Advisors
Hergott Duval Stack & Partners
Saskatoon, Saskatchewan
Common Share Transfer Agent
In Canada:
The R-M Trust Company
(Dividend Paying Agent)
1080 - 2002 Victoria Avenue
Regina, Saskatchewan S4P 0R7
Phone: (306) 751-7550
Inquiries about shareholdings, share transfer requirements, address changes or
lost certificates should be directed to
R-M Trust's AnswerLine at (800) 387-0825 or to the Corporate Secretary, PCS,
Suite 500, 122 First Avenue South, Saskatoon, Saskatchewan S7K 7G3.
In the United States:
ChaseMellon
Shareholder Services, L.L.C.
85 Challenger Road
Overpeck Center
Ridgefield Park, New Jersey 07660
Phone: (800) 526-0801
EXCHANGE RATE OF THE CANADIAN DOLLAR
In this report, unless otherwise specified, all dollar amounts are expressed in
US dollars (US$). The Government of Canada permits a floating exchange rate to
determine the value of the Canadian dollar (C$) against the US dollar. The
exchange rate at the end of each of the five most recent years ended December
31, and the average, the high and the low exchange rates for each of such five
years, were as follows (such rates, which are expressed in US dollars, being
the noon buying rates in Canada for cable transfers in Canadian dollars by the
Bank of Canada):
<TABLE>
<CAPTION>
Years Ended December 31
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
At end of period .7301 .7325 .7129 .7553 .7867
Average for period(1) .7330 .7307 .7301 .7730 .8276
High for period .7527 .7534 .7644 .8050 .8773
Low for period .7212 .7009 .7098 .7435 .7760
</TABLE>
(1) Based on the average of the exchange rates on the last business day of each
month during the period. The noon buying rate in New York City for cable
transfers in Canadian dollars as certified by the Bank of Canada on March 7,
1997 was US$1.00 = C$1.3680 (equivalent to C$1.00 = US$0.7310).
62
<PAGE> 65
Common Share Prices and Volumes
The following table sets forth the high and low prices, as well as the volumes,
of the Company's common shares as traded on The Toronto Stock Exchange, The
Montreal Exchange and the New York Stock Exchange (composite transactions) on a
quarterly basis, as reported in The Globe and Mail and The Wall Street Journal,
for the periods indicated. Potash Corporation of Saskatchewan Inc. is a TSE 100
company.
<TABLE>
<CAPTION>
The Toronto Stock Exchange1 The Montreal Exchange1 New York Stock Exchange
High Low Volume High Low Volume High Low Volume
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
First Quarter 110.875 82.000 1,747,948 110.875 82.250 185,062 80.500 60.000 26,538,200
Second Quarter 97.000 83.000 1,893,727 97.700 83.000 115,952 71.875 60.250 17,187,800
Third Quarter 108.500 88.000 1,018,661 108.250 88.700 138,003 79.500 64.125 14,057,200
Fourth Quarter 117.950 91.750 3,983,487 117.850 92.950 616,267 86.875 68.250 17,897,800
Year 1996 117.950 82.000 8,643,823 117.850 82.250 1,055,284 86.875 60.000 75,681,000
1995
First Quarter 66.000 45.625 4,970,457 65.750 45.500 306,490 47.125 32.375 20,297,500
Second Quarter 76.750 60.500 2,593,136 76.500 60.750 248,742 55.875 43.500 17,041,400
Third Quarter 93.000 73.500 1,916,335 93.000 74.750 659,437 68.500 53.875 16,258,200
Fourth Quarter 107.000 79.000 4,809,481 106.125 79.000 180,231 79.000 59.500 20,969,000
Year 1995 107.000 45.625 14,289,409 106.125 45.500 1,394,900 79.000 32.375 74,566,100
1994
First Quarter 39.000 32.875 10,307,293 39.000 33.000 1,005,447 29.500 24.625 11,650,800
Second Quarter 38.000 31.125 6,791,884 38.000 31.125 1,864,633 27.625 22.250 7,549,300
Third Quarter 55.750 37.500 9,823,496 55.250 37.875 1,355,018 41.625 26.875 14,878,000
Fourth Quarter 56.375 42.500 3,972,210 56.000 42.500 397,721 42.000 31.125 15,624,800
Year 1994 56.375 31.125 30,894,883 56.000 31.125 4,622,819 42.000 22.250 49,702,900
</TABLE>
1 Trading prices are in CDN$
Glossary of Financial Terms
[CHART]
Asset turnover = sales / total assets measures the efficiency of using assets
to produce sales.
Current ratio = current assets / current liabilities measures the ability to
pay short-term debt obligations.
Long-term debt to equity = long-term debt / shareholders' equity measures the
proportion of creditor to shareholder financing.
Net income per share = earnings available to common shares / weighted average
number of common shares outstanding measures the normalized earnings generated
for each common share.
Quick ratio = cash + cash equivalents + net receivables / current liabilities
measures the ability to meet immediate demands of creditors.
Return on investment = net income plus interest expense / total assets
measures the profitability or earning power of all assets employed.
Return on shareholders' equity = net income / shareholders' equity measures
the adequacy of return on the owners' investment.
Shareholders' equity to total assets = shareholders' equity / total assets
measures the proportion of assets to shareholder financing.
Free cash flow is the cash, exclusive of the change in working capital, which
is provided by operations less disbursements for sustaining capital and
dividends.
Cumulative return to shareholders is calculated by using the difference between
the beginning and ending share prices on the NYSE for the period indicated,
plus dividends received.
63
<PAGE> 66
Corporate Officers and Key Management
Potash Corporation of Saskatchewan Inc.
Charles E. Childers
Chairman, President and
Chief Executive Officer
Wayne R. Brownlee
Senior Vice President
Expansion and Development
John Gugulyn
Senior Vice President
Administration
John L. M. Hampton
Senior Vice President
General Counsel and Secretary
Betty-Ann L. Heggie
Senior Vice President
Corporate Relations
Barry E. Humphreys
Senior Vice President
Finance and Treasurer
Peter Braun
Vice President
Audit
PCS Sales
William J. Doyle
President
Richard J. Lacroix
Executive Vice President
P. Rodney Wilson
Executive Vice President
PCS Potash
Garth W. Moore
President
James J. Bubnick
Executive Vice President
PCS Phosphate
Thomas J. Wright
President
Thomas J. Regan, Jr.
Executive Vice President
William T. Cooper, Jr.
Vice President
Production -- Aurora
Vernon J. Lloyd
Vice President
Production -- White Springs
PCS Nitrogen
Gary E. Carlson
President
James F. Dietz
Executive Vice President
Corporate Data
Potash Corporation of Saskatchewan Inc.
Suite 500
122 -- 1st Avenue South
Saskatoon, SK S7K 7G3
Phone: (306) 933-8500
Fax: (306) 652-2699
PCS Sales
Suite 440
5750 Old Orchard Road
Skokie, IL 60077
Phone: (800) 241-6908
(847) 966-9933
Fax: (847) 966-1205
PCS Phosphate
P.O. Box 30321
3101 Glenwood Avenue
Raleigh, NC 27622-0321
Phone: (919) 881-2700
Fax: (919) 881-2847
PCS Nitrogen
3175 Lenox Park Boulevard
Suite 400
Memphis, TN 38115-4256
Phone: (901) 758-5200
Fax: (901) 758-5201
Florida Favorite Fertilizer
P.O. Box 8000
Lakeland, FL 33802
Phone: (941) 688-2442
Fax: (941) 682-6652
PCS Potash -- Allan
Allan, SK S0K 0C0
Phone: (306) 257-3312
Fax: (306) 257-4240
PCS Potash -- Cory
P.O. Box 1320
Saskatoon, SK S7K 3N9
Phone: (306) 382-0525
Fax: (306) 384-9132
PCS Potash -- Esterhazy
P.O. Box 1060
Esterhazy, SK S0A 0X0
Phone: (306) 745-6601
PCS Potash -- Lanigan
P.O. Box 3100
Lanigan, SK S0K 2M0
Phone: (306) 365-2030
Fax: (306) 365-2526
PCS Potash -- Moab
P.O. Box 1208
Moab, UT 84532
Phone: (801) 259-7171
Fax: (801) 259-7100
PCS Potash --
New Brunswick
P.O. Box 1489
Sussex, NB E0E 1P0
Phone: (506) 433-5445
Fax: (506) 433-6617
PCS Potash -- Patience Lake
P.O. Box 509
Saskatoon, SK S7K 3L6
Phone: (306) 374-4800
Fax: (306) 955-0424
PCS Potash -- Rocanville
Rocanville, SK S0A 3L0
Phone: (306) 645-2870
Fax: (306) 645-2733
PCS Phosphate -- Aurora
P.O. Box 48
Hickory Point Road
Aurora, NC 27806
Phone: (919) 322-4111
Fax: (919) 322-5686
PCS Phosphate -- White Springs
P.O. Box 300
White Springs, FL 32096
Phone: (904) 397-8101
Fax: (904) 397-1026
Davenport Feed Plant
Highway 22 West
P.O. Box 500
Buffalo, IA 52728
Phone: (319) 381-1130
Fax: (319) 381-4990
Kinston Feed Plant
Highway 11 North
P.O. Box 1005
Kinston, NC 28501
Phone: (919) 522-4077
Fax: (919) 522-4996
Marseilles Feed Plant
US Route 6 East
P.O. Box 88
Marseilles, IL 61341
Phone: (815) 795-5111
Fax: (815) 795-5117
Saltville Feed Plant
Government Plant Road
P.O. Box 1069
Saltville, VA 24370
Phone: (703) 496-4741
Fax: (703) 496-5116
Weeping Water Feed Plant
East Garfield Street
P.O. Box 171
Weeping Water, NE 68463
Phone: (402) 267-2365
Fax: (402) 267-7235
PCS Nitrogen -- Augusta
P.O. Box 1483
Augusta, GA 30903
Phone: (706) 849-6100
Fax: (706) 649-6111
PCS Nitrogen -- Clinton
P.O. Box 2966
Clinton, IA 52733-2966
Phone: (319) 243-5800
Fax: (319) 243-7528
PCS Nitrogen -- Geismar
P.O. Box 307
Geismar, LA 70734
Phone: (504) 621-1500
Fax: (504) 621-1504
PCS Nitrogen -- LaPlatte
CS 7354
Bellevue, NE 68005
Phone: (402) 291-0090
Fax: (402) 293-6262
PCS Nitrogen -- Lima
P.O. Box 628
Lima, OH 45802-0628
Phone: (419) 226-1200
Fax: (419) 226-1274
PCS Nitrogen -- Memphis
5790 Old Millington Road
Millington, TN 38053-8306
Phone: (901) 354-3300
Fax: (901) 354-3338
PCS Nitrogen -- Wilmington
P.O. Box 630
Wilmington, NC 28402
Phone: (910) 343-3100
Fax: (910) 343-6601
PCS Nitrogen -- Trinidad
Goodrich Bay Road
Point Lisas, Couva
Trinidad, West Indies
Phone: (809) 636-2205
Fax: (809) 636-8297
64
<PAGE> 67
Glossary of Operational Terms
General
Domestic and Export Markets The domestic or North American market includes
Canada and the United States while the export or offshore market is the rest of
the world.
Mixed fertilizers contain more than one nutrient. A 5-20-20 fertilizer contains
5 percent nitrogen (N), 20 percent phosphorus (P2O5) and 20 percent potash
(K2O) by weight. The nutrient breakdown is always stated in the same order, and
is referred to in the industry as NPK.
Liquid fertilizers come in two types: solution, in which essentially all the
plant nutrients are dissolved in solution; and suspension, a saturated
solution in which some plant nutrients are suspended (by gelling clay).
Metric tonnes equal 2,204.6 pounds or 1,000 kilograms. Most offshore sales are
made in metric tonnes and US dollars, F.O.B. Vancouver for potash, F.O.B. Tampa
for phosphate and F.O.B. Trinidad for nitrogen.
Product tonnes is a standard measure of the weights of all types of potash,
phosphate and nitrogen products.
Short tons are the equivalent of 2,000 pounds each. They are rarely used in
Canada since metrication but are used in the United States. The Corporation's
American price lists are in US dollars per short ton.
Potash
Potassium (K) is the seventh most common element in the earth's crust. It is
usually found combined with chlorine in the chemical compound potassium
chloride, commonly referred to as potash.
Potash is a term typically used to denote materials containing potassium,
particularly potassium fertilizer. Most potash fertilizer is muriate of potash
(KCl, potassium chloride), but potassium combines with other minerals in
specialty fertilizers such as potassium sulphate (K2SO4), potassium magnesium
sulphate (K2Mg2(SO4)3) or potassium nitrate (KNO3). Most Canadian production is
KCl, but Germany produces several specialty fertilizers.
K2O is potassium oxide, a term used in the fertilizer industry to define
potassium content. To convert KCl to K2O, multiply by 0.61.
K2O tonnes are the units of measurement of the nutrient value of
potassium-containing fertilizers produced by different facilities. PCS product
is generally guaranteed to contain no less than 60 percent K2O.
Ore tonnes are the combined weight of NaCl, KCl and other minerals found in
mined potash ore. The NaCl and KCl are separated into tailings and product,
respectively. One ore tonne is processed to produce 0.33 to 0.43 tonnes KCl.
Canpotex Limited is an export company owned by all Saskatchewan potash
producers. Sales through Canpotex are generally allocated pro rata to each
producer on the basis of productive capacity. PCS provides 57.5 percent of
Canpotex product.
Phosphate
Phosphorus (P) is widely distributed in nature in combination with other
elements. It is most commonly found in phosphate ore, the only economical
source of phosphorus for production of phosphate fertilizers and phosphate
chemicals.
BPL, for bone phosphate of lime, is a standard reference for the phosphate
level in phosphate ore and phosphate rock.
DAP, diammonium phosphate, is the most commonly produced and widely traded
phosphate product. Its NPK composition is 18-46-0.
GTSP, granular triple super-phosphate, is a solid fertilizer with NPK
composition 0-46-0.
MAP, monoammonium phosphate, is a solid fertilizer with NPK composition
13-52-0.
MGA, merchant grade phosphoric acid available in amber or green, has NPK
composition 0-54-0. It is primarily used to produce DAP.
Superphosphoric acid, with NPK composition 0-70-0, is used to manufacture
liquid fertilizers. PCS Phosphate's LoMag is superphosphoric acid with its
magnesium content substantially reduced through filtration.
P2O5 is phosphorus pentoxide, a term used to express content of phosphorus. To
convert P to P2O5, multiply by 2.29.
P2O5 tonnes are the units of measurement of phosphorus-containing fertilizers,
which vary from product to product. DAP is typically 46 percent P2O5.
Animal and poultry feed supplements are an important use of phosphate. They are
solid and granular and have different compositions. These products are sold on
the basis of their phosphorus content.
Gypsum is the common name for calcium sulphate, used in the fertilizer industry
as a source of calcium and sulphur, and used in agriculture to reclaim alkali
soils.
PhosChem is an association formed under the Webb-Pomerene Act for US exports of
phosphate fertilizer. PCS is responsible for export sales of liquid fertilizer
products for all PhosChem members.
Nitrogen
Nitrogen (N) is a gas which makes up four-fifths of the atmosphere. It is an
essential nutrient for plant growth. Some plants can fix nitrogen from the air,
but most take it from the soil. It must be applied to soil annually because its
nutrient value is consumed during each growing season.
Ammonia is produced primarily from natural gas and air as the first step in the
production of nitrogen fertilizers. It can also be applied directly to soils.
Anhydrous ammonia (NH3) is a gas with NPK composition 82-0-0, which is changed
under pressure to a liquid, and stored and transported in this form.
Aqua ammonia (NH4OH), ammonium hydroxide, is formed by reacting anhydrous
ammonia in water. Commercial grades usually contain 20-25 percent nitrogen.
Ammonium nitrate (NH4NO3), with NPK composition 34-0-0, is water soluble and
used as a solid fertilizer and as a liquid in nitrogen solutions. Half its
nitrogen is in ammonium form, half in nitrate form.
Nitric acid (HNO3), produced by an ammonia oxidation process, is used in the
production of ammonium nitrate and as an intermediate for industrial purposes.
Nitrogen solutions are produced by blending ammonium nitrate and urea
solutions. Used in manufacturing of starter fertilizers and for direct
application on soils, they vary in nitrogen content (28-32 percent) and are
non-pressure solutions.
Urea (CO(NH2)2), NPK compo-sition 46-0-0, is the most commonly produced and
widely traded nitrogen
product. It is used as fertilizer and for industrial purposes.
65
<PAGE> 68
[CHART]
In the seven full years since PCS has been publicly traded, it has travelled
the road to world fertilizer leadership, providing a cumulative return to
shareholders exceeding 550 percent.
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF
POTASH CORPORATION OF SASKATCHEWAN INC.
<TABLE>
<CAPTION>
Jurisdiction of Incorporation
Name of Entity or Formation
- -------------- -----------------------------
<S> <C>
Potash Corporation of
Saskatchewan Transport Limited Saskatchewan
Canpotex Bulk Terminals Limited Canada
PCS Sales (Canada) Inc. Saskatchewan
Potash Corporation of Saskatchewan Florida
(Florida) Inc.
PCS Sales (Iowa) Inc. Iowa
PCS Joint Venture, LP Florida
PCS Sales (Indiana), Inc. Indiana
609430 Saskatchewan Limited Saskatchewan
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
Jurisdiction of Incorporation
Name of Entity or Formation
- -------------- -----------------------------
<S> <C>
Potash Holding Company Inc. Delaware
PCS Sales (USA) Inc. Delaware
PCS Finance LLC Delaware
Phosphate Holding Company, Inc. Delaware
White Springs Agricultural Chemicals Inc. Delaware
White Springs Phosphate, Inc. (Delaware) Delaware
White Springs OT, LLC Delaware
White Springs ET, LLC Delaware
PCS Phosphate Company, Inc. Delaware
Cardinal Creek Corporation Colorado
Moab Salt Inc. Delaware
Texagulf Aircraft Inc. Delaware
Lone Star Salt Water Company Texas
Mideast Dist. Inc. Delaware
Tg Corporation Delaware
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Jurisdiction of Incorporation
Name of Entity or Formation
- -------------- -----------------------------
<S> <C>
PCS Nitrogen, Inc. Delaware
PCS Nitrogen Payroll Corporation Delaware
PCS Nitrogen Amm Term Corp II Delaware
PCS Nitrogen Amm Term Corp I Texas
AA Sulfuric Corporation Louisiana
PCS Nitrogen Trinidad Fertilizer Corporation Delaware
*PCS Nitrogen Fertilizer Limited Trinidad
*PCS Nitrogen Limited Trinidad
PCS L.P. Inc. Delaware
PCS Nitrogen Fertilizer, Inc. Delaware
PCS Nitrogen Ohio L.P. Delaware
PCS Nitrogen Fertilizer, L.P. Delaware
PCS Nitrogen LCD Corporation Delaware
AC Industries Delaware
PCS Nitrogen Trinidad Corporation Delaware
*PCS Nitrogen Cayman Limited Cayman
*PCS Nitrogen Trinidad Limited Trinidad
*PCS Nitrogen Trinidad Finance Ltd. United Kingdom
</TABLE>
*Reflects name of entity following completion of name changes currently in
process.
<PAGE> 1
Exhibit 23
[LETTERHEAD]
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
POTASH CORPORATION OF SASKATCHEWAN INC.
We hereby consent to the incorporation of our report dated February 12, 1997,
incorporated by reference in this Annual Report on Form 10-K for the year ended
December 31, 1996, into the following Registration Statements:
* Registration Statement No. 33-37855 on Form S-8
* Registration Statement No. 333-19215 on Form S-8
Deloitte & Touche
- -------------------------------------
DELOITTE & TOUCHE
Chartered Accountants
Saskatoon, Saskatchewan, Canada
March 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 234,935
<ALLOWANCES> 4,157
<INVENTORY> 219,433
<CURRENT-ASSETS> 490,506
<PP&E> 2,507,375
<DEPRECIATION> (528,683)
<TOTAL-ASSETS> 2,494,387
<CURRENT-LIABILITIES> 188,158
<BONDS> 619,963
<COMMON> 630,484
0
0
<OTHER-SE> 775,012
<TOTAL-LIABILITY-AND-EQUITY> 2,494,387
<SALES> 1,403,868
<TOTAL-REVENUES> 1,403,868
<CGS> 1,010,455
<TOTAL-COSTS> 1,010,455
<OTHER-EXPENSES> 93,921
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,761
<INCOME-PRETAX> 252,731
<INCOME-TAX> 43,695
<INCOME-CONTINUING> 209,036
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 209,036
<EPS-PRIMARY> 4.59
<EPS-DILUTED> 4.51
</TABLE>
