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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, 1998
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
(Including rights under the Shareholder Rights
Agreement)
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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 15, 1999, the registrant had 54,253,103 Common Shares outstanding,
and the aggregate market value of the 54,209,474 Common Shares held by
non-affiliates of the registrant was approximately $3,005,237,715.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1998 (the "1998 Annual Report") are incorporated by
reference into Part II.
Portions of the registrant's Proxy Circular for its Annual Meeting of
Shareholders to be held on May 6, 1999 (the "1999 Proxy Circular") are
incorporated by reference into Part III.
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PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES.
GENERAL
Potash Corporation of Saskatchewan Inc. ("PCS") and its direct and indirect
subsidiaries (together with PCS' predecessors, the "Company") is one of the
world's largest integrated fertilizer and related industrial and feed products
companies. In 1998, the Company's potash production represented an estimated 16%
of global potash production. In 1998, the Company had 24% of global potash
capacity and an estimated 57% of global excess potash capacity, giving it more
available potash capacity than any single company or country other than Canada.
The Company is the third largest producer of phosphates worldwide by capacity,
currently representing approximately 9% of world phosphates production and 7% of
world phosphates capacity. The Company is also the largest nitrogen producer in
the Western Hemisphere.
PCS is incorporated under the laws of the Province 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 (the "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 Common
Shares and to restrict any one person or group of associated persons from
holding more than 5% of the Common Shares, regardless of residency or
citizenship. In 1994, all restrictions on the holdings of the Common Shares were
eliminated.
In October 1993, the Company acquired from Rio Algom Limited ("Rio") its
New Brunswick potash mine and port facilities and its Patience Lake mine in
Saskatchewan (the "Rio Acquisition").
In April 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). At the time of the acquisition,
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 through a 50% interest
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.
In October 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 $291.5
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, two
additional animal feed plants 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 Common 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.
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In March 1997, the Company through its subsidiary PCS Nitrogen, Inc. ("PCS
Nitrogen") acquired all of the outstanding shares of Arcadian Corporation
("Arcadian") in exchange for 8,029,092 Common Shares and $563.6 million in cash.
PCS Nitrogen produces nitrogen fertilizers and nitrogen chemicals at facilities
in Georgia, Iowa, Louisiana, Nebraska, Ohio and Tennessee in the United States,
and has large scale operations in Trinidad. Other assets of PCS Nitrogen include
a 50% interest in a joint venture that owns and operates an ammonia storage
terminal near Houston, Texas and a 50% joint venture interest in a carbon
dioxide processing operation at PCS Nitrogen's plant in Augusta, Georgia.
In December 1998, the Company purchased, pursuant to a public offering by
the State of Israel, 108,359,925 Ordinary Shares of Israel Chemicals Ltd.
("ICL") for an aggregate purchase price of NIS 382,510,535 (approximately $92
million). This purchase represented 9.03% of the issued and outstanding Ordinary
Shares of ICL. ICL, through its subsidiaries, is a potash, phosphate and bromine
producer and is also involved in other specialty chemical products.
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.
The Company has three principal business segments: potash, phosphate and
nitrogen. For information with respect to the net sales revenue, operating
income and assets attributable to each segment and to the Company's domestic and
international sales, see Note 17 to the Company's audited consolidated financial
statements as at December 31, 1998 and 1997 and for each of the three years
ended December 31, 1998 (together with the Notes thereto, the "Consolidated
Financial Statements"), incorporated by reference under Item 8.
The Company presents its financial statements in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"). See Note 27 to the
Consolidated Financial Statements for a discussion of certain significant
differences between Canadian GAAP and accounting principles generally accepted
in the United States as they relate to the Company.
Unless otherwise specified, dollar amounts are stated in U.S. Dollars.
Except for the historical statements and discussions contained herein,
statements contained in this Report on Form 10-K constitute "forward looking
statements" within the meaning of Section 27A of the U.S. Securities Act of 1933
and Section 21E of the U.S. Securities Exchange Act of 1934. Forward looking
statements may include words such as "expect", "estimate", "project",
"anticipate", "should", "intend" and similar expressions or variations on such
expressions. Any filing of the Company with the U.S. Securities and Exchange
Commission may include forward looking statements. In addition, other written or
oral statements which constitute forward looking statements have been made and
may in the future be made by or on behalf of the Company, including statements
concerning future operating and financial performance, the Company's share of
new and existing markets, general industry trends and the Company's performance
relative thereto and the Company's expectations as to requirements for capital
expenditures and environmental matters.
These forward looking statements rely on a number of assumptions concerning
future events and are subject to a number of uncertainties and other factors,
many of which are outside the Company's control, that could cause actual results
to differ materially from such statements. These factors include, but are not
limited to, fluctuations in supply and demand in fertilizer, sulfur and
petrochemical markets, changes in competitive pressures, including pricing
pressures, changes in capital markets, changes in currency and exchange rates,
unexpected geological and environmental conditions, imprecision in reserve
estimates, the outcome of legal proceedings and changes in government policy and
regulation, including environmental regulation.
The Company disclaims any obligation to update or revise any forward
looking statements, whether as a result of new information, future events or
otherwise.
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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 695,800 acres of land in
Saskatchewan. Included in these holdings are mineral rights to 492,500 acres
contained in blocks around the six mines in which the Company has an interest,
of which acres approximately 35% are owned by the Company, approximately 50% are
under lease from the Province of Saskatchewan and approximately 15% 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
(Canada) Limited Partnership ("IMC") mines and processes PCS reserves at the
Esterhazy mine. 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. In 1998, the Mining and Processing Agreement was amended
to provide for the operation of the agreement on a calendar year basis as
opposed to a fiscal year ending June 30. In each year the maximum the Company is
permitted to take under the Mining and Processing Agreement is 952,500 tonnes
and the minimum required amount is 453,600 tonnes. For the year ending December
31, 1999, the Company has notified IMC that it requires 726,700 tonnes of
finished product.
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
remediation costs for 1998 was $4.4 million. 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.
In the first quarter of 1998, the Company acquired all of the outstanding
shares of Potash Company of Canada Limited ("Potacan"). Potacan's mine flooded
in 1997 and its primary asset is a potash mill facility near Cassidy Lake, New
Brunswick. The mill is currently being used to further process standard grade
product from certain of the Company's other mine sites into coarse and granular
product.
PRODUCTION
The Company produces potash using both conventional and solution mining
methods. In conventional operations, shafts are sunk to the ore body and mining
machines cut out the ore, which is lifted to the surface for processing. In
solution mining, the potash is dissolved in a warm brine and pumped to the
surface for processing.
In 1998, the Company's conventional potash operations mined 20.56 million
tonnes of ore at an average grade of 22.3% K(2)O. In 1998 the Company's potash
produced consisted of 6.99 million tonnes of potash (KCl) with an average grade
of 61.02% K(2)O, representing approximately 41% of North American production.
The Company's present annual potash production capacity is approximately
12.2 million tonnes KCl, which includes maximum annual production under the
Mining and Processing Agreement with IMC of approximately one million tonnes at
Esterhazy. In December 1998, the Company's production capacity
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represented approximately 53% of the North American total while its excess
capacity was an estimated 89% 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 897,674 tonnes of sodium chloride (salt)
in 1998.
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
4.93 billion tonnes of recoverable ore at an average grade of 22.9% K(2)O as at
December 31, 1998, and that such ore will yield 1.6 billion tonnes of finished
product (KCl) at an average grade of 60% K(2)O.
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........................................... 1,282.0 412.8
Cory............................................ 1,073.4 358.4
Esterhazy....................................... 79.0 25.2
Lanigan......................................... 1,852.4 597.8
Rocanville...................................... 642.4 204.6
------- -------
Total......................................... 4,929.3 1,598.8
======= =======
</TABLE>
The Company believes that, with production rates at full capacity and
utilizing current technology, each of the Allan, Cory and Lanigan mines has a
reserve life in excess of 100 years, the Rocanville mine has a reserve life in
excess of 90 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 the 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
49.9 million tonnes of recoverable ore and 18.2 million tonnes of estimated
finished product (KCl) at its New Brunswick mine. The Company believes that,
based upon its proven reserves, the New Brunswick mine has a reserve life of at
least 23 years with production at full capacity. The Company estimates that
probable reserves at the New Brunswick mine consist of 200 million tonnes of
recoverable ore and 72 million tonnes of estimated finished product (KCl). The
Company believes
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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 8 years, at
diminishing capacity.
PHOSPHATE OPERATIONS
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 Facility")
and the other a 96,000-acre facility near White Springs in northern Florida (the
"White Springs Facility"). The Company believes the Aurora Facility to be the
largest integrated phosphate mine and phosphate processing complex at one site
in the world. The Aurora Facility includes a six million tonne per-year mining
operation, four sulfuric acid plants, four phosphoric acid plants, 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 Facility is the third
largest P(2)O(5) producer, by capacity, in the United States, with an annual
capacity of 1.1 million tonnes. The White Springs Facility includes a mine and
two production facilities, Suwannee River and Swift Creek, with two sulfuric
acid plants, three phosphoric acid plants, two DAP plants, a superphosphoric
acid plant, a dicalcium phosphate plant and a defluorinated phosphate rock plant
located at the Suwannee River complex and two sulfuric acid plants and a
phosphoric acid 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.
At its Geismar, Louisiana facility, acquired as part of the Arcadian
acquisition, the Company manufactures a variety of phosphate products that are
used for agricultural and industrial purposes.
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 1998,
the Aurora Facility's total production of phosphate rock was 4.7 million tonnes
and the White Springs Facility's total production of phosphate rock was 3.4
million tonnes. The Company generally operates its phosphate mine and phosphate
processing plants 24 hours a day, seven days a week, using rotating shifts. The
sequence for mining portions of the Aurora property has been identified in the
permit issued by the U.S. Army Corps of Engineers in 1997. For the next two
years, the Company expects to be mining in an area of non-optimal mining
conditions. The quality and condition of the ore is relatively inferior to ore
previously mined at the Aurora facility. This, combined with the general
configuration of the area, does not allow efficient use of the Company's mining
equipment and technology. Following this two-year period, the Company expects to
enter areas believed to hold ore superior in thickness and quality, located
closer to the Company's chemical plants, and configured so as to generally allow
efficient use of Company mining equipment and technology.
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. In December 1997, the Company entered into a
ten-year supply contract with an offshore supplier to supply a portion of the
Company's sulfur requirements and also committed to build a multipurpose
ocean-going vessel to ship such sulfur as well as handle sulfuric acid,
phosphoric acid and other chemicals.
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The Company produces sulfuric acid at both the Aurora Facility and White Springs
Facility and purchases additional sulfuric acid from unaffiliated sellers. The
Company also transports surplus production of sulfuric acid at the White Springs
Facility to the Aurora Facility as needed. Sulfur and sulfuric acid have been in
abundant supply in recent years. However, in 1998, the remaining U.S. Frasch
sulfur producer announced the closure of one of its two mines, an action which
has reduced readily available U.S. supplies of sulfur and increased prices,
notwithstanding a world market having excess supplies of sulfur.
The Company purchases all of its ammonia from or through PCS Nitrogen and
PCS Sales (USA), Inc., wholly owned subsidiaries of the Company. The Company
reacts phosphoric acid with ammonia to produce DAP and MAP, as well as liquid
fertilizers. In addition, ammonia operations include the purchase, sale and
terminalling of anhydrous ammonia. Most of the ammonia that is currently
purchased by PCS Nitrogen is produced in Russia and imported through a White
Springs-operated ammonia terminal located within the port of Savannah (Garden
City, Georgia). The Company's ammonia expenses at the Aurora Facility 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.
Substantially all of the phosphate rock produced by the Company is used
internally for the production of phosphoric acid, superphosphoric acid ("SPA"),
chemical fertilizers, purified phosphoric acid and animal feed products.
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. Over 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, 66% of which was 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.
In addition to nitrogen products, the Company also 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 these phosphate products.
RESERVES
At December 31, 1998, the Company's Aurora phosphate mine had estimated
proven and probable reserves of approximately 386 million tonnes of phosphate
rock, at an average grade of 30.7% P(2)O(5). These reserves 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 and its
processing plants have the capacity to produce 1.152 million P(2)O(5) tonnes of
phosphoric acid. Prior to the acquisition of Texasgulf by the Company in April
1995, approximately 408 million tonnes of phosphate reserves were transferred by
Texasgulf to a newly established company, the common stock of which was
transferred to Elf (USA) and Williams. The Company was granted a 20-year right
of first refusal (from April 10, 1995) in the event that the 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.
The White Springs phosphate mine had estimated proven and probable reserves
of approximately 54 million tonnes of phosphate rock, at an average grade of
30.7% P(2)O(5). The Company estimates that an
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additional 11 million tonnes of phosphate rock could be purchased at market
rates from nearby owners. Accordingly, the total reserves of 65 million tonnes
of phosphate rock at White Springs would sustain the mine for 18 years at a
mining rate of 3.6 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 1.093 million P(2)O(5)
tonnes of phosphoric acid. See "Environmental Matters -- Permits".
NITROGEN OPERATIONS
The Company's nitrogen operations include production of nitrogen
fertilizers and nitrogen chemicals. These products are used for both
agricultural and industrial purposes.
PROPERTIES
PCS Nitrogen manufactures nitrogen products at seven facilities, of which
six are located in the United States and one is located in Trinidad. The
following table sets forth the facility 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, nitric acid, ammonium nitrate and nitrogen
solutions
Geismar, Louisiana................... Ammonia, nitric acid, ammonium nitrate, nitrogen solutions,
phosphoric acid, super-phosphoric acid, phosphate solutions
and sulfuric acid
LaPlatte, Nebraska................... Ammonia, nitric acid, ammonium nitrate and nitrogen
solutions
Lima, Ohio........................... Ammonia, urea, nitric acid, ammonium nitrate and nitrogen
solutions
Memphis, Tennessee................... Ammonia and urea
Point Lisas, Trinidad................ Ammonia and urea
</TABLE>
The plant at Wilmington, North Carolina ceased production on June 8, 1998.
PRODUCTION
Unlike potash and phosphate, nitrogen is not mined. It is taken from the
air and reacted with a hydrogen source, usually natural gas reformed with steam,
to produce ammonia. PCS Nitrogen produces ammonia at all 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.
SERVICE AGREEMENTS
The Geismar plant is integrated with a larger chemical manufacturing
complex owned by Allied-Signal, Inc. ("Allied"). PCS Nitrogen and Allied have an
agreement to 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 nine
months' notice. PCS Nitrogen's payments to BPC under the operating agreement are
generally based on 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
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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., to provide purchasing, stores and spare parts management,
maintenance, repair and shipping services for the Augusta plant.
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 current natural gas
strategy, given the addition in 1998 of a fourth ammonia plant in Trinidad, is
to purchase approximately 28% of its natural gas in the spot market or on
short-term contracts and approximately 28% of its natural gas pursuant to
fixed-price physical contracts or forward contracts which fix the price of
future deliveries. The remaining approximately 44% of its natural gas is
purchased in Trinidad using a pricing formula related to the market price of
ammonia. With the exception of the Trinidad facility, 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 85% 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.
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 Favorite Fertilizer.
PCS Joint Venture manufactures, processes and distributes fertilizer and other
agricultural supplies from plants located in Florida, Alabama and Georgia.
MARKETING
The following table summarizes the Company's net sales revenue of potash,
phosphate and nitrogen products (by nutrient) in the past three calendar years:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Potash
Canada.................................................... $ 21,885 $ 14,460 $ 14,507
United States............................................. 205,701 195,780 143,137
Canpotex.................................................. 252,464 229,666 184,025
Other..................................................... 65,441 64,261 61,526
Phosphates
Canada.................................................... 25,386 24,268 17,672
United States............................................. 688,198 632,616 564,074
PhosChem.................................................. 262,168 261,502 275,644
Other..................................................... 35,237 35,223 34,575
Nitrogen
Canada.................................................... 4,422 2,879 --
United States............................................. 585,672 694,566 108,708
Other..................................................... 161,189 170,708 --
Florida Favorite Fertilizer................................. 55,344 57,156 58,004
</TABLE>
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<PAGE> 10
The following table summarizes the Company's net sales revenue from
products, by category:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Potash...................................................... $545,491 $504,167 $403,196
Florida Favorite Fertilizer................................. 55,344 57,156 58,004
Phosphates
Liquid Fertilizers........................................ 365,006 309,063 239,716
Solid Fertilizers (DAP, MAP, GTSP)........................ 374,525 362,625 379,326
Animal Feed............................................... 187,557 191,016 186,145
Phosphate Rock, Industrial Products....................... 83,901 90,905 86,777
Nitrogen
Ammonia................................................... 258,387 376,972 108,708
Urea...................................................... 200,103 209,825 --
Nitrogen Solutions........................................ 163,018 162,885 --
Other..................................................... 129,775 118,472 --
</TABLE>
For further financial information about the Company's business segments and
domestic and international sales, see Note 17 to the Consolidated Financial
Statements.
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 1998.
Potash from the Company's Saskatchewan mines produced for use outside North
America is sold exclusively to Canpotex. PCS Sales (Canada) Inc. executes
offshore marketing and sales for the Company's New Brunswick potash and executes
marketing and sales for the Company's potash, phosphate and nitrogen products in
Canada. PCS Sales (USA), Inc. executes marketing and sales for the Company's
potash, phosphate and nitrogen products in the United States. PhosChem, an
association formed under the U.S. Webb-Pomerene Act, is the principal vehicle
through which the Company executes offshore marketing and sales for its
phosphate fertilizers. See "Offshore Marketing".
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 the 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.
NORTH AMERICAN MARKETING
In 1998, North American net sales revenue from potash products represented
10% of the Company's total net sales revenue, substantially all of which was
attributable to potash customers in the United States. Typically, North American
potash sales of the Company are greatest in the second calendar quarter. The
vast majority of sales are made on the spot market with the balance made under
short-term contracts. The Company has no material contractual obligations in
connection with North American sales to sell potash in the future at a fixed
price.
In 1998, North American net sales revenue from phosphate products
represented 31% of the Company's total net sales revenue, 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 1998, the majority of PCS Phosphate's phosphate product
sales were made on the spot market, with the balance made under short-term
contracts (generally on an annual basis) and a limited number of sales made
pursuant to multi-year contracts. The Company has no material contractual
obligations in connection with North American sales to sell phosphate in the
future at a fixed price.
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<PAGE> 11
In 1998, North American net sales revenue from nitrogen products
represented 30% of the Company's total net sales revenue and PCS Nitrogen's
non-fertilizer products accounted for approximately 44% of PCS Nitrogen's
nitrogen revenue and 100% of PCS Nitrogen's gross margin. Typically, North
American nitrogen fertilizer sales are greatest in the second calendar quarter.
In 1998, the majority of PCS Nitrogen's nitrogen product sales were made on the
spot market, with the balance made under short-term contracts and a limited
number of sales made pursuant to multi-year contracts. The Company has no
material contractual obligations in connection with North American sales to sell
nitrogen in the future at a fixed price.
Ammonia purchased by PCS Nitrogen which is not used in the Company's
operations is sold to third party customers by PCS Sales (USA), Inc.
The primary customers for fertilizer products are retailers, dealers,
cooperatives, distributors and other fertilizer producers. Such retailers,
dealers and cooperatives have both distribution and application capabilities.
The primary customers for industrial products are chemical product
manufacturers.
At December 31, 1998, the Company's North American sales functions were
handled by 80 employees in Chicago, Illinois and various other locations in the
United States, and 20 employees in Saskatoon, Saskatchewan.
OFFSHORE MARKETING
Potash produced by the Company in Saskatchewan for sale outside North
America 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. The Company's
production from its New Brunswick mine has been exempted from this requirement
by the members of Canpotex. Any member may terminate its membership in Canpotex
at specified times of the year 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
55.65% 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.
The following table sets forth the percentage of sales by Canpotex for the
past three calendar years in the various geographical regions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Asia........................................................ 69% 72% 70%
Latin America............................................... 17 14 14
Oceania..................................................... 9 9 11
Europe...................................................... 5 5 5
---- ---- ----
Total....................................................... 100% 100% 100%
==== ==== ====
</TABLE>
For 1998, sales to Canpotex represented 11% of the total net sales of the
Company and net sales revenue from offshore sales of potash from the New
Brunswick mine, through PCS Sales (Canada) Inc., represented 3% of the total net
sales of the Company.
Since 1975, PhosChem has been the principal vehicle for United States
exports of phosphate fertilizers. Currently, the members of PhosChem are PCS
Phosphate, IMC-Agrico Company ("IMC-Agrico"), a joint venture between IMC Global
Inc. and Phosphate Resource Partners LLP, Mississippi Phosphates Corporation
("MissChem") and Mulberry Corporation. The PhosChem members have agreed to
export their
I-10
<PAGE> 12
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 pursuant to AID ("Agency for International Development") Tenders 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
sales for 1998 were apportioned as follows: 64% to IMC-Agrico, 23% to PCS
Phosphate, 7% to MissChem, and 6% to Mulberry Corporation. The PhosChem
agreement will be in effect through December 31, 1999, 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 estimated 1999 PhosChem allocation is
26.59%.
Revenue from sales to PhosChem accounted for approximately 11% of the
Company's total net sales in 1998. Other offshore phosphate sales accounted for
approximately 2% of the Company's total net sales in 1998. All of the Company's
phosphate sales to China and India 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 in India were made through
the Fertilizer Association of India 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>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Asia........................................................ 85% 88% 82%
Latin America............................................... 7 8 17
Europe...................................................... -- -- 1
Mid East.................................................... 1 1 --
Other....................................................... 7 3 --
---- ---- ----
Total....................................................... 100% 100% 100%
==== ==== ====
</TABLE>
With respect to offshore sales of nitrogen, ammonia and urea sales
predominate and originate primarily from Trinidad, with other sales coming from
purchased product locations. For 1998, net sales revenue from offshore sales of
nitrogen represented 2% of the net sales revenue of the Company.
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 products. Other than storage facilities located at
production plants, in 1998 the Company used 147 locations to store and handle
its products in the field. The Company owns or net leases 1,605 railcars and
full service leases an additional 3,462 railcars.
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 those in the FSU, Germany,
Israel and Jordan) to compete effectively in some of the Company's traditional
markets.
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<PAGE> 13
Most of the Company's potash for North American customers is shipped by
rail. Shipments are also made by rail 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 a port facility located in
Portland, Oregon which became operational during 1997.
With respect to phosphates, the Company has long-term leases on shipping
terminals in Morehead City and Beaufort, North Carolina, through which it
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. In
December 1997, the Company entered into a ten-year supply contract with an
offshore supplier to supply a portion of the Company's sulfur requirements and
also committed to build a multipurpose ocean-going vessel to ship such sulfur as
well as handle sulfuric acid, phosphoric acid and other chemicals. 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 Facility 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
Facility. The Norfolk Southern Corporation is currently the only railroad
serving the White Springs Facility. However, a transload facility at Lake City,
Florida serviced by the CSX Corporation is expected to become operational in
1999. Most of the phosphoric acid and chemical fertilizers produced at the White
Springs Facility 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 Facility, 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 distributes its nitrogen products by barge, railcar, truck, and
direct pipeline to its customers and through its strategically located storage
terminals in high consumption areas. The Company leases or owns approximately 50
nitrogen 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.
The Company distributes products from the Trinidad plant to markets in
Latin America and Europe in addition to the United States. The Company'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.
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<PAGE> 14
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 the quality of service
it provides to customers. Among other things, the Company provides quality
service by maintaining warehouses and leasing railcars to enhance its delivery
capability. The high cost of transporting potash limits competition in various
areas.
The Company's potash competition includes three North American producers
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 operations.
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.
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 enterprises and independent
phosphate producers in important exporting countries, including Morocco,
Tunisia, Jordan and South Africa.
Although there has been extensive consolidation and privatization
worldwide, substantial competition exists in the nitrogen industry. The Company
competes domestically with a broad range of companies in the production and sale
of nitrogen 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.
The Company 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 the Company's. 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.
Pursuant to the Uruguay Round Agreements Act, on March 1, 1999, the U.S.
Department of Commerce and the U.S. International Trade Commission commenced a
"sunset" review of antidumping orders restricting exports of urea from the
former Soviet Union and Romania into the United States in order to determine
whether such orders should be terminated or should remain in effect.
The Company's nitrogen production capability is the largest in the Western
Hemisphere. The Company's domestic nitrogen plants serve agricultural markets
with a diversified crop base that span a lengthy growing
I-13
<PAGE> 15
season and chemical industrial manufacturers located throughout the U.S. Those
plants are strategically located in agricultural as well as industrial end-use
markets in the Southeast, Midwest and Gulf Coast regions. The Company 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
the Company's domestic nitrogen plants are located closer to their primary
customers than are their competitors. The Company concentrates its nitrogen
marketing efforts on these nearby markets where lower transportation costs offer
the potential for better margins. The Company believes that its product mix
diversity and the number and geographic diversity of its nitrogen plants provide
competitive advantages in manufacturing, distribution, marketing, customer
service and other areas when compared to competitors controlling only a few
facilities. In addition, the industrial demand for nitrogen products is
typically less volatile and follows different demand cycles than agricultural
demand for fertilizer. The Company believes that its industrial sales add a
measure of stability to its revenue and are a desirable complement to
agricultural demand.
EMPLOYEES
At December 31, 1998, the Company actively employed 5,744 persons, of whom
2,033 were salaried and 3,711 were hourly paid. Of these employees, the
Company's potash operations employed 1,604 people, the phosphate operations
employed 2,629 people, the nitrogen operations employed 1,219 and 100 people
were employed at PCS Joint Venture. The corporate office had a staff of 90 and
100 people were employed in the Company's sales group.
The Company has entered into nine collective bargaining agreements with
labor organizations representing employees. The collective bargaining agreements
at the Allan, Cory and Patience Lake divisions expire on April 30, 2000. The
Lanigan agreement expires on January 31, 2001. The Company and the Rocanville
Potash Employees Association have a contract that expires on May 31, 2001. The
agreement between IMC and the union representing the employees at the Esterhazy
mine expires on January 31, 2001. The union agreement at PCS Cassidy Lake
expired December 31, 1998 and negotiations are expected to commence in April
1999. The Company's Sussex, 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, 2000 and the agreement with the
employees at the Jacksonville terminal expires September 30, 2001. PCS Nitrogen
has three locations with collective bargaining agreements: Clinton, which
contract expires July 31, 1999; Memphis, which contract expires September 17,
2000; and LaPlatte, with a new contract that expires January 31, 2003. In
addition, the agreement between BPC and the union representing employees at the
Lima plant expires February 16, 2002. The Company believes its relations with
its employees to be good.
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 taxes, fees and royalty expenses were
$74.8 million in 1998.
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 1998, the Company paid
capital tax of $5.3 million and surtax of $13.1 million.
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 $5.6
million in 1998.
The Company does not make royalty payments in connection with its phosphate
and nitrogen operations.
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<PAGE> 16
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 and earned
depletion allowance, such taxes have not yet become payable. However, PCS is
subject to the Large Corporations Tax. In addition, PCS records a deferred tax
provision at the effective rate of 35%. The Company expects to begin paying
Canadian income taxes in 1999.
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
federal cash income taxes. However, they are subject to the Alternative Minimum
Tax, which may be carried forward indefinitely as a credit applied against
future regular income tax liabilities. The Company's nitrogen subsidiaries
operating in Trinidad are subject to Trinidad taxes.
The effective consolidated tax rate for 1998 was 31% (1997 -- 19%) of
income before income taxes, of which 5 percentage points (1997 -- 13 percentage
points) represented cash income taxes and 26 percentage points (1997 -- 6
percentage points) represented deferred income taxes. The reduction in the cash
component of the provision was largely due to a reduction in the amount of U.S.
withholding taxes on certain payments received from the Company's U.S.
subsidiaries.
RESEARCH AND DEVELOPMENT
The Company maintains potash research and development facilities located in
Saskatoon, Saskatchewan, employing approximately 30 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. The
Company supports research in agronomy through Potash & Phosphate Institute
programs.
The Company continues to evaluate ways to more fully automate its phosphate
production facilities, including improvements to its beneficiation (mill),
sulfuric acid and phosphoric acid plants. The Company is also exploring ways of
further debottlenecking its phosphate production facilities and selectively
adding capacity through technological enhancements. The Aurora Facility has
increased direct blending of gypsum and clays which the Company expects should
reduce long-term gypsum handling and reclamation costs.
PCS Nitrogen is utilizing a newly designed balancing system for large, high
speed, rotating equipment to reduce downtime by improving motor stability and
decreasing bearing wear by decreasing vibration and lowering oil temperatures.
Other technology enhancements being considered for improving plant reliability
are expanded applications of dry gas seals, better material selections in
reforming and waste heat recovery systems and improved automation.
ENVIRONMENTAL MATTERS
The Company's operations are subject to numerous environmental requirements
under Canadian, U.S. and Trinidad and Tobago federal, provincial, state and
local laws and regulations. Such laws and regulations govern, among other
matters, air emissions, waste water discharges, land use and reclamation and
solid and hazardous waste management. Many of these laws and regulations are
becoming increasingly stringent, and the cost of compliance with these
requirements can be expected to increase over time. In particular, 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's financial
condition or results of operations.
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<PAGE> 17
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 or permit requirements, including the
recently-enacted potash decommissioning regulations discussed below or changes
in the ways that such laws and regulations are administered or interpreted. The
Company anticipates that its routine expenditures related to environmental
regulatory matters in 1999 will not differ materially from the previous year.
The Company and its facilities are also subject to a range of environmental
statutes and programs focused on site reclamation and restoration and on
investigation and, where necessary, remediation of contaminated properties. The
Company's obligations and potential liabilities under these programs have been
and can be expected to continue to be significant. The Company does not believe,
except as set out herein, that such obligations and potential liabilities have
had, or will have, a material adverse effect on its business. However, it is
often difficult to estimate and predict the potential costs and liabilities
associated with these programs and there is no guarantee that the Company will
not in the future be identified as potentially responsible for additional costs
under these programs, either as a result of changes in existing laws and
regulations or as a result of the identification of additional matters or
properties covered by these programs.
ENVIRONMENTAL EXPENDITURES
Reclamation and Restoration Costs
Site restoration and reclamation costs have been accrued for various sites.
At December 31, 1998, the Company had accrued the following amounts for site
reclamation and restoration: $29.1 million for the Aurora Facility, $66.4
million for the White Springs Facility, $27.4 million for the Moab, Utah
Facility, $9.2 million for various idle sulfur facilities, and $5.0 million for
the Cassidy Lake Facility. 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 costs
accrued in 1998 totaled $7.7 million. These amounts represent the Company's
current estimate of potential site restoration and reclamation costs as last
assessed in December 1998. The expenditures are generally incurred over an
extended period of time.
Annual environmental expenditures for reclamation and restoration during
the year ended December 31, 1998 were $71.9 million. Of this amount, $63.0
million was charged to operations, $4.1 million was capitalized and $4.8 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 regulations implementing
this legislation require companies to "cap" the gypsum stacks in order to reduce
seepage into groundwater when such stacks reach their design capacity (for the
Company, in approximately 35 years), or after March 25, 2001 if groundwater
standards are not being met. At December 31, 1998, a balance of $35.4 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 (see "Site Assessment and Remediation").
In North Carolina, on exhaustion of the mine's phosphate reserves,
disposition of the remaining gypsum must comply with the laws in effect at that
time.
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<PAGE> 18
Other Environmental Costs
The Company's operating expenses, other than reclamation and restoration
and gypsum stack capping, relating to compliance with environmental laws and
regulations governing ongoing operations were approximately $20.5 million for
the year ended December 31, 1998 as compared to $15.5 million for the year ended
December 31, 1997.
Capital Expenditures
Each year the Company undertakes capital projects to improve pollution
control facilities. In 1998, a total of approximately $9.9 million in capital
expenditures (exclusive of capitalized reclamation expenditures) was spent to
meet the Company's environmental control objectives as compared to $10.5 million
in 1997. The Company 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.
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 U.S. federal Clean Air Act, particularly
the 1990 amendments thereto, and under state law. In particular, both federal
and state regulation of hazardous air pollutants (including ammonia in certain
states) are expected to require additional air emission control equipment and
increased operating expenditures at some U.S. facilities. Further, the U.S.
Environmental Protection Agency ("EPA") has published new National Ambient Air
Quality Standards for both ozone and particulate matter which are more stringent
than existing standards. Such standards are being challenged in the U.S.
District Court for the District of Columbia. EPA has also enacted a new rule
requiring easternmost states (including four states in which the Company
operates) to commence reducing their nitrogen oxide (NOx) emissions by 2003,
with such reductions to be fully achieved by 2007. State regulations
implementing these requirements may require additional pollution control
equipment at certain Company facilities.
The federal Clean Air Act 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,
White Springs, Geismar, Lima and/or certain other plants, a federal Prevention
of Significant Deterioration or New Source Review Permit may need to be obtained
prior to any such expansion of these facilities. Such permits would impose
certain restrictions on air pollutant emissions from the expanded portions of
such plants and compliance with those restrictions would likely require
installation and use of additional pollution control devices.
SITE ASSESSMENT AND REMEDIATION
In addition to environmental regulation of its present operations, the
Company also may incur costs and liabilities in connection with its and its
predecessors' past and present waste disposal practices and ownership and
operation of real property and facilities, 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
on, among others, past and present owners and operators of properties or
facilities 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, White Springs and PCS
Nitrogen have generated and the Company will generate wastes that could result
in liability for the Company under these laws.
During the past ten years, EPA officials or EPA contractors have conducted
independent, limited site assessments at Aurora, Marseilles and Saltville
facilities. Following a November, 1989 site visit at Aurora, an EPA contractor
issued a report regarding potential contamination in March, 1991, recommending
further evaluation of possible pesticide impacts, but no further action has
taken place. An EPA contractor visited the Company's Marseilles, Illinois
facility in May, 1990, and officials of the Illinois Environmental Protection
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<PAGE> 19
Agency ("Illinois EPA") visited the site in April, 1995 as part of an evaluation
of properties that included the Company's Marseilles facility. During February,
1996, the Company received a CERCLA Site Inspection Report from Illinois EPA
officials who later verbally advised Company officials that the site would be
given a "no further action" status. As part of a review of former Olin
Corporation facilities, an EPA contractor visited the Company's Saltville,
Virginia plant. A Health Consultation received by the Company in October, 1996
noted the presence of lead in the soil near a tank foundation. The Company
analyzed the soil and disposed of 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 causes
of action against third parties, such as former owners, occupiers or disposers.
PCS Phosphate was initially named as a potentially responsible 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 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. To date, PCS Phosphate has had no further involvement with these
matters.
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 such laws. Currently, the Florida Department of Environmental Protection
("FDEP") 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. On April 8, 1997, FDEP filed a
Complaint and Petition for Enforcement against PCS Joint Venture and others. The
Company filed an Answer, Affirmative Defenses and Cross Claims on May 12, 1997.
Discovery is continuing in this litigation. On October 30, 1998, EPA notified
the Company of potential liability under Section 107(a) of CERCLA. The Company
initially responded on November 16, 1998, indicating that, while it had found no
facts indicating it had any liability, the Company was willing to investigate
and participate in discussions. On December 1, 1998, the Company replied to
EPA's Initial Information Request. By letter dated February 8, 1999, EPA
notified PCS Joint Venture that EPA was initiating a 60 day period for
negotiations to assist in the preparation of an Administrative Order on Consent
and Remedial Investigation Feasibility Study Work Plan. The Company is
continuing to evaluate the nature and extent of the contamination present in
soil and groundwater at the Lakeland facility and is engaged in ongoing
discussions with FDEP regarding possible actions which the Company could take
with respect to this contamination. No connection between the operations of PCS
Joint Venture (or its predecessor Florida Favorite Fertilizer, Inc.) and the
pesticide contamination has been established. No determination has yet been made
as to the extent or nature of any remedial action that may be required or
appropriate. The Company thus has not yet determined the cost of such remedial
action and also has not yet determined the extent to which it may be able to
recover any costs it may incur from third parties.
In June 1994, the Georgia Department of Natural Resources, Environmental
Protection Division ("GEPD"), 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 CERCLA. 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. The initial assessment is that this lead
contamination is attributable to former operations at the site, the facilities
of which were dismantled some time ago. 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. On September 30, 1997, the GEPD
requested that Farmers Favorite Fertilizer submit a Compliance Status Report
("CSR") by
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<PAGE> 20
March 30, 1998, pursuant to the applicable state site remediation program. A
consultant prepared and submitted the CSR for Farmers Favorite Fertilizer. On
September 22, 1998, GEPD requested that a revised CSR be prepared and submitted
by December 31, 1998. On December 15, 1998, a Request for Extension to File the
revised CSR was submitted to GEPD, seeking an extension until May 15, 1999, to
complete needed field work and correspondingly revise the CSR. GEPD and Farmers
Favorite Fertilizer have executed a Consent Order authorizing the extension.
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.
The Company received a request for information dated August 28, 1998, from
the United States Department of Agriculture Forest Service ("USDA Forest
Service") alleging that a subsidiary of Texasgulf, dissolved over forty-five
years ago, may have contributed to environmental impacts in the Klamath National
Forest in northern California. In a letter dated November 2, 1998, a
representative of the Washoe Tribe of Nevada and California invited the Company
to evaluate its potential liability and to participate in an assessment of
natural resource damages. The Company has advised the USDA Forest Service that
the Company does not believe it is a potentially responsible party with respect
to the alleged impacts and also has advised the Washoe Tribe that the Company
did not wish to participate in the assessment.
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's financial condition or results of operations.
In 1991, after extensive environmental assessments, PCS Nitrogen
voluntarily installed a remediation system at the Memphis plant to address
certain contaminants found in the groundwater. The Tennessee Department of
Environment and Conservation ("TDEC") in 1993 proposed to include the Memphis
plant on the state's list of Inactive 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. 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's financial condition or results of operations.
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
has conducted and will conduct further investigations and, if necessary, further
remediation. Further, the Clinton plant site is immediately adjacent to the
Quantum Superfund site at which groundwater remediation is currently being
conducted. Certain volatile organic compounds associated with the Quantum site
have been detected in small amounts in the groundwater at the Clinton plant. It
is also possible that remediation activities at the Quantum site could result in
increased levels of nitrates in groundwater at the Clinton plant. In late 1997,
IDNR officials contacted PCS Nitrogen concerning elevated levels of nitrates in
a receiving water down gradient of the Clinton plant. Although PCS Nitrogen
disagrees with IDNR regarding the source of the nitrate levels, in June 1998,
PCS Nitrogen proposed a voluntary remediation plan agreed to by IDNR which
provides for remediation of nitrates at the site by (i) phytoremediation
(planting of trees to
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<PAGE> 21
absorb nitrates); (ii) installation of a groundwater recovery trench and
discharge through an existing water effluent outfall; and (iii) restoration of
approximately 100 acres of farmland to its natural state of grasses and
woodlands. Nonetheless, based on currently available information, PCS Nitrogen
expects that the cost of the remediation and any further assessment of nitrates
will not have a material adverse effect on the Company's financial condition or
results of operations.
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 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 formerly 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 has submitted a draft remediation investigation work plan to the GEPD
providing for the assessment of the solid waste management units identified by
the GEPD at the Augusta plant which is in the final stages of review. Although
the work plan is subject to final GEPD approval, currently it does not appear
GEPD will require PCS Nitrogen to perform significant assessment or corrective
action activities. Therefore, PCS Nitrogen does not expect to incur material
costs.
PERMITS AND REGULATORY APPROVALS
Many of the Company's operations and facilities are required by federal,
provincial, state and local environmental laws to obtain and operate in
compliance with a range of permits and regulatory approvals. Such permits and
approvals typically have to be renewed or reissued periodically. The Company may
also become subject to new laws or regulations that require it to obtain new or
additional permits or approvals. The Company believes that it is in material
compliance with its current permits and regulatory approvals and also believes
that it is well-positioned to obtain and comply with the additional permits or
approvals that it anticipates may be required in the future. However, there can
be no assurance that such permits or approvals will issue in the ordinary
course. Further, the terms and conditions of future permits and approvals may be
more stringent and may require increased expenditures on the part of the
Company.
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 which was supplemented in May 1995. In 1997, PCS
Phosphate received its required authorizations from the State of North Carolina
and on August 14, 1997, the Corps issued a permit granting approval to mine
certain areas described in the Environmental Impact Statement through 2017. The
permit contains a section on wetlands mitigation approach and methods regarding
wetland impacts associated with mining covered by the permit. The Company has
acquired additional land adjacent to its Aurora, North Carolina facilities for
mitigation purposes. In order to demonstrate the feasibility of such activities,
as of December 31, 1998, the Company had created or restored 2,580 acres of
wetlands.
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. The Company is 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
contains the wetlands covered by the permit issued by the Corps. This State
permit has been renewed until 2005.
Gypsum is a byproduct 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 Facility will continue to be used and when closed
will be covered or capped to the extent required under applicable regulations.
The Florida Phosphogypsum Rule permits the use of existing gypsum stacks until
they reach capacity, if groundwater
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standards are met as of and after March 25, 2001. The Company's management
believes that it will be in compliance with such Rule and as such should be
allowed to continue using its three gypsum stacks for their useful lives of
approximately 35 years; however, until a final determination is made by Florida
environmental authorities, it is not certain how long White Springs will be
allowed to continue using its gypsum stacks beyond the year 2001. A regulatory
prohibition on use of existing stacks would result in a closure/new stack
construction cost currently estimated 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 ("FDEP") unless otherwise provided in, or pursuant to,
a Memorandum of Agreement ("MOA"), dated February 1, 1995, between OxyChem and
FDEP (which agreement was later assigned to the Company). The MOA established
alternate procedures for the Company to follow. 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.
Land reclamation at White Springs is currently performed pursuant to
federal, state, and local regulatory approvals granted in 1996 and 1997 to
implement the 1995 MOA between OxyChem and FDEP. The MOA provides for mitigation
of mining impacts, particularly impacts to wetlands, to be done through funding
of public acquisition of environmentally sensitive lands in the region. Land
reclamation continues to be done on-site but is undertaken using the alternate
standards of the MOA which do not require the on-site reclamation of wetlands
and which allow for the construction of lands that are expected to be of greater
future utility. The Company's contributions for the land acquisition program in
1997 and 1998 totaled $2.5 million.
White Springs has initiated a process for securing an additional federal
permit and ancillary modifications of state and local regulatory approvals
needed for continuation of mining operations beyond the expiration of its
current federal permit in 2002. The process involves environmental studies of
potential mining areas and evaluation of mine plan and reclamation alternatives.
All affected regulatory authorities, various commenting agencies, and interested
outside parties are participating in the process and completion of the process
is targeted approximately for the middle of the year 2000. Selection of mine
plan and reclamation alternatives and the results of the environmental studies
could result in changes to reclamation and mitigation practices with higher
costs and changes to mining areas with reserve impacts. The magnitude of such
cost impacts cannot be estimated until the studies and evaluations are
completed. Failure to secure the required approvals for continuation of the
mining operations under any reclamation or mitigation alternative would
negatively affect reserves and costs.
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, BP Chemicals Inc. The permit expired in 1994, was administratively
extended and renewed by the OEPA in July 1996, for a shorter than customary term
ending October 31, 1997. PCS Nitrogen has filed an application for permit
renewal and is entitled to operate under the current permit until such
application is processed and acted upon. 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.
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
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owners and operators of mines. Pursuant to the regulations, the Company filed a
decommissioning plan for each of the Company's Saskatchewan mines with the
responsible Minister in the spring of 1997. These plans contained a proposal for
financial assurance to ensure completion of the plans and are subject to the
approval of the Minister. An approved financial assurance plan must be
established by March 31, 1999, or one year following approval of the
decommissioning and reclamation plan, whichever is later. An initial response to
the proposed plans was received by the Company in February 1998 and discussions
with the environmental regulatory authorities are continuing. The Company has
been advised that, although the technical aspects of the plan are acceptable,
the regulatory authorities do not accept the schedules proposed in the plans for
decommissioning of the waste salt piles. The regulatory authorities have asked
that the proposed schedules be advanced and discussions continue with the
regulators regarding the format for the revised plans and a submission date.
Because of the uncertainty surrounding the timing of the plan's implementation
and the structure of the financial assurance mechanism, the Company is unable at
this time to accurately estimate the financial implications to the Company.
GOVERNMENT REGULATIONS
In 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 that 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 Company's financial condition or results of
operations.
EXECUTIVE OFFICERS OF THE COMPANY
The name, age, period of service and position held for each of the
executive officers of the Company as at February 28, 1999 are as follows:
<TABLE>
<CAPTION>
SERVED
NAME AGE SINCE POSITION HELD
- ---- --- ------ -------------
<S> <C> <C> <C>
CHARLES E. CHILDERS.................... 66 1987 Chairman of the Board and Chief Executive
Officer
WILLIAM J. DOYLE....................... 48 1987 President and Chief Operating Officer
JOHN GUGULYN........................... 63 1987 Senior Vice President, Administration
BARRY E. HUMPHREYS..................... 55 1976 Senior Vice President, Finance and Treasurer
JOHN L.M. HAMPTON...................... 45 1988 Senior Vice President, General Counsel and
Secretary
WAYNE R. BROWNLEE...................... 46 1988 Senior Vice President, Expansion and
Development
BETTY-ANN L. HEGGIE.................... 45 1981 Senior Vice President, Corporate Relations
THOMAS J. WRIGHT....................... 66 1995 President, PCS Phosphate
GARTH W. MOORE......................... 50 1982 President, PCS Potash
GARY E. CARLSON........................ 45 1997 President, PCS Sales
JAMES F. DIETZ......................... 52 1997 President, PCS Nitrogen
PETER BRAUN............................ 59 1977 Vice President, Audit
DENIS A. SIROIS........................ 43 1978 Vice President and Corporate Controller
</TABLE>
All of the officers have had the principal occupation indicated for the
previous five years except as follows: Mr. Doyle was President of Potash
Corporation of Saskatchewan Sales Limited ("PCS Sales") and located in
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<PAGE> 24
Chicago, Illinois prior to 1995, was Executive Vice President, Potash and Sales,
of the Company from 1995 until March 1997, and President PCS Sales from March
1997 to July 1998; Mr. Wright was President and Chief Executive Officer of
Texasgulf from 1993 to April 1995. Prior to March 1997, Mr. Wright was Executive
Vice President, PCS Phosphate. On April 27, 1995, Mr. Hampton, Mr. Brownlee, and
Ms. Heggie were promoted from Vice President to Senior Vice President, and Mr.
Braun was promoted from Director, Internal Audit, to Vice President. Prior to
March 1997, Mr. Moore was Senior Vice President, Technical Services of the
Company and prior to April 1995, he was Vice President, Technical Services. Mr.
Carlson was Vice President of American Cyanamid, International Agricultural
Products Group from 1993 to June 1996, was Senior Vice President, Marketing of
Arcadian from June 1996 to March 1997, and President of PCS Nitrogen from March
1997 to July 1998. Mr. Dietz was Vice President, Manufacturing of Arcadian
Corporation from 1993 to March 1997 and Executive Vice President of PCS Nitrogen
from March 1997 to July 1998. Mr. Sirois was Controller of the Company prior to
1997.
The terms and conditions of Mr. Childers' employment with the Company are
governed by an employment agreement, the current term of which expires June 30,
2002 and pursuant to which Mr. Childers shall serve as Chairman of the Board and
Chief Executive Officer of the Company until June 30, 1999 and thereafter as
Chairman of the Board and as a special advisor to the Company to June 30, 2002.
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.
In accordance with procedures established by the Uruguay Round Agreements
Act, Commerce and the U.S. International Trade Commission will initiate a
"sunset" review of the suspended investigation in April 1999 to determine
whether the suspended investigation and suspension agreement should be
terminated or should remain in effect.
CIVIL ANTITRUST COMPLAINTS
In June, 1993, PCS and PCS Sales (Canada) Inc. ("PCS Sales (Canada)") 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. 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.
The complaint sought treble damages in an unspecified amount and other relief.
PCS 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 defendants'
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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. Oral arguments were heard on November 17, 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. PCS 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 parties have agreed to stay proceedings pending the outcome of the appeal to
the United States Court of Appeals for the Eighth Circuit. The Illinois State
Court complaint has been dismissed for failure to state a cause of action.
FORMER ARCADIAN EXECUTIVE PROCEEDINGS
On May 7, 1997, J. Douglas Campbell, Alfred L. Williams, Peter H. Kesser,
and David Alyea, former officers of Arcadian, filed lawsuits against the Company
in the United States District Court for the Western District of Tennessee. The
complaints allege that the Company breached employment agreements between
Arcadian and the officers and breached the related assumption agreement among
the Company, PCS Nitrogen, and Arcadian. In addition, Mr. Alyea's complaint
names Charles Childers, John Gugulyn, and John Hampton as additional defendants
and alleges that the defendants interfered with and conspired to interfere with
his employment agreement, and did not accurately state their intentions in
entering into the assumption agreement. The complaints of Mr. Campbell, Mr.
Williams, Mr. Kesser, and Mr. Alyea seek damages in excess of $22.2 million,
$6.2 million, $3.7 million, and $4.2 million, respectively. In addition, on
October 14, 1997, Charles Lance, a former officer of Arcadian Corporation, filed
a lawsuit in the same court against the Company also alleging breaches of his
employment agreement and the related assumption agreement. Mr. Lance seeks
damages in an amount exceeding $3.0 million. Each complaint also seeks certain
additional unspecified damages. On August 11, 1998, the Court ruled that the
Company had assumed the obligations of the employment agreements and that
equitable claims and defenses asserted against the executives for breaches of
fiduciary duties, corporate waste, and self-dealing should be asserted by PCS
Nitrogen in the state court action described below. Trial with respect to the
claims of Mr. Campbell, Mr. Williams and Mr. Kesser commenced on August 17, 1998
and concluded on August 25, 1998. On December 1, 1998 the court entered
judgments in the amounts of $12.7 million, $3.2 million, and $2.6 million in
favor of Mr. Campbell, Mr. Williams and Mr. Kesser, respectively, subject to
pending applications for attorneys' fees or additional amounts to compensate the
former Arcadian executives for the impact of certain excise taxes, if
applicable. The Company has filed Notices of Appeal with respect to these
judgments. The Company has settled the claim of Mr. Alyea for $700,000 and
$50,000 of attorneys' fees (subject to the application for additional fees) and
the claim of Mr. Lance for a total amount of $600,000.
On September 15, 1997, the Company and PCS Nitrogen filed an action in the
Circuit Court of Tennessee for the Thirtieth Judicial District at Memphis
against J. Douglas Campbell, Peter H. Kesser, Alfred L. Williams, Charles W.
Lance, Jr., and David L. Alyea, for declaratory relief and damages. The Company
and PCS Nitrogen alleged that the defendants, all former executives of Arcadian,
committed breaches of their fiduciary duties in the negotiation of, obtaining
approval for, and execution of the employment agreements each of them had with
Arcadian. In addition, the Company and PCS Nitrogen also sought a declaratory
judgment with respect to the unenforceability of the employment agreements. On
October 14, 1997, the defendants removed this action from the Circuit Court of
Tennessee to the United States District Court for the Western District of
Tennessee. On October 21, 1997, the five defendants filed counterclaims: (i)
under the Employee Retirement Income Security Act of 1974, as amended (ERISA),
against PCS Nitrogen, (ii) alleging that the Company and PCS Nitrogen unlawfully
interfered with their attainment of benefits under their employment agreements,
and (iii) incorporating by reference all claims asserted in their individually
filed complaints. The damages sought by the defendants in these counterclaims
appear substantially equivalent to the damages sought in their individually
filed suits as plaintiffs. On July 20, 1998 the federal court dismissed all of
the former executives' claims under ERISA and remanded the case to
I-24
<PAGE> 26
state court, where it remains pending. Pursuant to the settlements with Mr.
Alyea and Mr. Lance, the claims and counterclaims as they concern these
individuals have been non-suited.
Management of the Company, having consulted with legal counsel, believes
that the lawsuits will not have a material adverse effect on the Company's
financial condition or results of operations.
PORT AUTHORITY PROCEEDINGS
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 actually 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. On December 19, 1997, that motion was granted and the complaint was
dismissed with prejudice. On January 15, 1998, the Port Authority appealed the
dismissal to the United States Court of Appeals for the Third Circuit. The case
was briefed and oral argument was heard on September 17, 1998. Although neither
the Port Authority nor its subrogated insurers have alleged or otherwise
revealed the amount of damages sought from PCS Nitrogen 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
continue to vigorously defend the lawsuit.
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 cooperated fully with the DOJ
investigation and was informed by the DOJ in 1997 that, based on available
information, neither PCS Nitrogen nor any of its current or former directors,
officers or employees was a target of the investigation. PCS Nitrogen has been
informed that the DOJ's investigation of these matters as they relate to PCS
Nitrogen, has concluded.
ENVIRONMENTAL PROCEEDINGS
For a description of certain environmental proceedings involving the
Company, see "Environmental Matters".
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
I-25
<PAGE> 27
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information under "Common Share Prices and Volumes", "Shareholder
Information -- Ownership" and "Selected Ten-Year Data" in the registrant's 1998
Annual Report is incorporated herein by reference.
Dividends paid to U.S. holders of Common Shares, who do not use the shares
in carrying on a business in Canada, will be subject to a Canadian withholding
tax under the Income Tax Act. Under the Canada-U.S. Income Tax Convention (1980)
(the "Convention"), the rate of withholding is generally reduced to 15%. Subject
to certain limitations, the Canadian withholding tax will be treated as a
foreign income tax that can generally be claimed as a deduction from income or
as a credit against the U.S. income tax liability of the holder. Holders will
generally not be subject to tax under the Income Tax Act with respect to any
gain realized from a disposition of Common Shares.
ITEM 6. SELECTED FINANCIAL DATA.
The information under "Selected Ten-Year Data" in the registrant's 1998
Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The information under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the registrant's 1998 Annual Report is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements contained in the registrant's 1998
Annual Report are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
II-1
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information under "Election of Directors" in the 1999 Proxy Circular 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 1999 Proxy Circular
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information under "Ownership of Shares" and "Election of Directors" in
the 1999 Proxy Circular is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information under "Election of Directors" and "Executive Compensation"
in the 1999 Proxy Circular is incorporated herein by reference.
III-1
<PAGE> 29
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) List of Documents Filed as Part of this Report
1. Consolidated Financial Statements in Annual Report
<TABLE>
<S> <C>
Auditors' Report............................................ 44
Consolidated Statements of Financial Position............... 45
Consolidated Statements of Income and Retained Earnings..... 46
Consolidated Statements of Cash Flow........................ 47
Notes to the Consolidated Financial Statements.............. 48-61
</TABLE>
2. Schedules
All Schedules are omitted because the required information is inapplicable
or it is presented in the Consolidated Financial Statements.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
2 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(a) 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(b) Bylaws of the registrant dated March 2, 1995, incorporated
by reference to Exhibit 3(ii) to the 1995 Form 10-K.
4(a) 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).
4(b) First Amending Agreement to Term Credit Agreement between
The Bank of Nova Scotia and other financial institutions and
the registrant dated November 6, 1997, incorporated by
reference to Exhibit 4(b) to the registrant's report on Form
10-K for the year ended December 31, 1997 (the "1997 Form
10-K").
4(c) Second Amending Agreement to Term Credit Agreement between
The Bank of Nova Scotia and other financial institutions and
the registrant dated December 15, 1997, incorporated by
reference to Exhibit 4(c) to the 1997 Form 10-K.
4(d) Third Amending Agreement to Term Credit Agreement between
The Bank of Nova Scotia and other financial institutions and
the registrant dated October 2, 1998, incorporated by
reference to Exhibit 4(d) to the registrant's report on Form
10-Q for the quarterly period ended September 30, 1998.
4(e) Indenture dated as of June 16, 1997, between the registrant
and The Bank of Nova Scotia Trust Company of New York,
incorporated by reference to Exhibit 4(a) the registrant's
report on Form 8-K dated June 18, 1997.
</TABLE>
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.
IV-1
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10(a) Suspension Agreement concerning Potassium Chloride from
Canada dated January 7, 1988, among U.S. Department of
Commerce, the registrant, 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 registration statement on 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.
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. 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) Amendment to Agreement of Limited Partnership of Arcadian
Fertilizer L.P. and related Certificates of Limited
Partnership of Arcadian Fertilizer L.P. filed with the
Secretary of State of the State of Delaware on March 6, 1997
and November 26, 1997.
10(g) Geismar Complex Services Agreement dated June 4, 1984,
between Allied Corporation and Arcadian Corporation,
incorporated by reference to Exhibit 10.4 to Arcadian
Corporation's Registration Statement on Form S-1 (File No.
33-34357).
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) Agreement effective August 27, 1998, between International
Minerals & Chemical (Canada) Global Limited and the
registrant, amending the Esterhazy Restated Mining and
Processing Agreement dated January 31, 1978 (as amended).
10(m) Agreement effective August 31, 1998, among International
Minerals & Chemical (Canada) Global Limited, International
Minerals & Chemical (Canada) Limited Partnership and the
registrant assigning the interest in the Esterhazy Restated
Mining and Processing Agreement dated January 31, 1978 (as
amended) held by International Minerals & Chemical (Canada)
Global Limited to International Minerals & Chemical (Canada)
Limited Partnership.
</TABLE>
IV-2
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10(n) 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, 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.
10(o) Second Amendment to Operating Agreement between BP
Chemicals, Inc. and Arcadian Ohio, L.P., dated as of
November 25, 1996, incorporated by reference to Exhibit
10(k) to the 1997 Form 10-K.
10(p) Manufacturing Support Agreement dated May 11, 1993, between
BP Chemicals Inc. and Arcadian Ohio, L.P., incorporated by
reference to Exhibit 10.3 to Arcadian Partners L.P.'s
current report on Form 8-K for the report event dated May
11, 1993.
10(q) First Amendment to Manufacturing Support Agreement between
BP Chemicals, Inc. and Arcadian Ohio, L.P., dated as of
November 25, 1996, incorporated by reference to Exhibit
10(l) to the 1997 Form 10-K.
10(r) Amended and Restated Agreement for Lease dated as of May 16,
1997, between Trinidad Ammonia Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(n) to the registrant's report on Form 10-Q for
the quarterly period ended June 30, 1997 (the "Second
Quarter 1997 Form 10-Q").
10(s) Amended and Restated Lease Agreement dated as of May 16,
1997, between Trinidad Ammonia Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(o) to the Second Quarter 1997 Form 10-Q.
10(t) Amended and Restated Agreement for Lease dated as of May 16,
1997, between Nitrogen Leasing Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(p) to the Second Quarter 1997 Form 10-Q.
10(u) Amended and Restated Lease Agreement dated as of May 16,
1997, between Nitrogen Leasing Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(q) to the Second Quarter 1997 Form 10-Q.
10(v) Amended and Restated Purchase Option Agreement dated as of
May 16, 1997, between Nitrogen Leasing Company, Limited
Partnership, and PCS Nitrogen Fertilizer Operations, Inc.,
incorporated by reference to Exhibit 10(r) to the Second
Quarter 1997 Form 10-Q.
10(w) Amended and Restated Purchase Option Agreement dated as of
May 16, 1997, between Trinidad Ammonia Company, Limited
Partnership and PCS Nitrogen Fertilizer Operations, Inc.,
incorporated by reference to Exhibit 10(s) to the Second
Quarter 1997 Form 10-Q.
10(x) Agreement dated January 1, 1997 between the registrant and
Charles E. Childers, incorporated by reference to Exhibit
10(s) to the 1997 Form 10-K.
10(y) Potash Corporation of Saskatchewan Inc. Stock Option Plan --
Directors, incorporated by reference to Exhibit 4(b) to the
registrant's Post-effective Amendment No. 1 to Form S-8
(File No. 333-19215) (the "Form S-8").
10(z) Potash Corporation of Saskatchewan Inc. Stock Option Plan --
Officers and Key Employees, incorporated by reference to
Schedule D to the registrant's proxy circular for the annual
and special meeting of shareholders held on May 7, 1998.
10(aa) Short-Term Incentive Plan of the registrant, as amended May
7, 1997, incorporated by reference to Exhibit 10(w) to the
Second Quarter 1997 Form 10-Q.
10(bb) Long-Term Incentive Plan of the registrant, as amended May
7, 1997, incorporated by reference to Exhibit 10(x) to the
Second Quarter 1997 Form 10-Q.
10(cc) 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.
</TABLE>
IV-3
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<S> <C>
10(dd) 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(ee) 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(ff) 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(gg) 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(hh) Second Amended and Restated Membership Agreement dated
January 1, 1995, among Phosphate Chemicals Export
Association, Inc. and members of such association, including
Texasgulf Inc., incorporated by reference to Exhibit 10(t)
to the 1995 Form 10-K.
10(ii) International Agency Agreement dated January 1, 1995,
between Phosphate Chemicals Export Association, Inc. and
Texasgulf 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(jj) General Partnership Agreement forming Albright & Wilson
Company, dated July 29, 1988 and amended January 31, 1995,
between Texasgulf Inc. and Albright & Wilson Americas, Inc.,
incorporated by reference to Exhibit 10(v) to the 1995 Form
10-K.
10(kk) 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(ll) 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.
10(mm) Employment Agreement dated January 21, 1998, by and between
PCS Phosphate Company, Inc. and Thomas J. Wright,
incorporated by reference to Exhibit 10(ii) to the 1997 Form
10-K.
10(nn) Shareholder Rights Agreement as amended and restated on
March 2, 1998, incorporated by reference to Schedule B to
the registrant's proxy circular for the annual and special
meeting of shareholders held on May 7, 1998.
11 Statement re Computation of Per Share Earnings.
13 1998 Annual Report.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K were filed by the registrant during the last quarter
of 1998.
Copies of Exhibits to the Form 10-K may be obtained upon request from the
Corporate Secretary, Potash Corporation of Saskatchewan Inc., Suite 500, 122
First Avenue South, Saskatoon, Saskatchewan S7K 7G3, Canada. The Company
reserves the right to recover its reasonable expenses in providing copies of the
Exhibits, such expenses not to exceed $.25 per page.
IV-4
<PAGE> 33
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, 1999
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 and Chief Executive March 26, 1999
- ------------------------------------------ Officer
Charles E. Childers
/s/ BARRY E. HUMPHREYS Senior Vice President, Finance and March 26, 1999
- ------------------------------------------ Treasurer (Principal Financial and
Barry E. Humphreys Accounting Officer)
/s/ ISABEL B. ANDERSON Director March 26, 1999
- ------------------------------------------
Isabel B. Anderson
/s/ DOUGLAS J. BOURNE Director March 26, 1999
- ------------------------------------------
Douglas J. Bourne
/s/ DENIS J. COTE Director March 26, 1999
- ------------------------------------------
Denis J. Cote
/s/ WILLIAM J. DOYLE Director March 26, 1999
- ------------------------------------------
William J. Doyle
/s/ HON. WILLARD Z. ESTEY, Q.C Director March 26, 1999
- ------------------------------------------
Hon. Willard Z. Estey, Q.C
/s/ DALLAS J. HOWE Director March 26, 1999
- ------------------------------------------
Dallas J. Howe
/s/ JAMES F. LARDNER Director March 26, 1999
- ------------------------------------------
James F. Lardner
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DONALD E. PHILLIPS Director March 26, 1999
- ------------------------------------------
Donald E. Phillips
/s/ PAUL SCHOENHALS Director March 26, 1999
- ------------------------------------------
Paul Schoenhals
/s/ DARYL K. SEAMAN Director March 26, 1999
- ------------------------------------------
Daryl K. Seaman
/s/ E. ROBERT STROMBERG, Q.C Director March 26, 1999
- ------------------------------------------
E. Robert Stromberg, Q.C.
/s/ JACK G. VICQ Director March 26, 1999
- ------------------------------------------
Jack G. Vicq
/s/ BARRIE A. WIGMORE Director March 26, 1999
- ------------------------------------------
Barrie A. Wigmore
/s/ PAUL S. WISE Director March 26, 1999
- ------------------------------------------
Paul S. Wise
</TABLE>
<PAGE> 35
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
<S> <C> <C>
2 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(a) 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(b) Bylaws of the registrant dated March 2, 1995, incorporated
by reference to Exhibit 3(ii) to the 1995 Form 10-K.
4(a) 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).
4(b) First Amending Agreement to Term Credit Agreement between
The Bank of Nova Scotia and other financial institutions and
the registrant dated November 6, 1997, incorporated by
reference to Exhibit 4(b) to the registrant's report on Form
10-K for the year ended December 31, 1997 (the "1997 Form
10-K").
4(c) Second Amending Agreement to Term Credit Agreement between
The Bank of Nova Scotia and other financial institutions and
the registrant dated December 15, 1997, incorporated by
reference to Exhibit 4(c) to the 1997 Form 10-K.
4(d) Third Amending Agreement to Term Credit Agreement between
The Bank of Nova Scotia and other financial institutions and
the registrant dated October 2, 1998, incorporated by
reference to Exhibit 4(d) to the registrant's report on Form
10-Q for the quarterly period ended September 30, 1998.
4(e) Indenture dated as of June 16, 1997, between the registrant
and The Bank of Nova Scotia Trust Company of New York,
incorporated by reference to Exhibit 4(a) the registrant's
report on Form 8-K dated June 18, 1997.
10(a) Suspension Agreement concerning Potassium Chloride from
Canada dated January 7, 1988, among U.S. Department of
Commerce, the registrant, 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 registration statement on 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>
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
<S> <C> <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. 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) Amendment to Agreement of Limited Partnership of Arcadian
Fertilizer L.P. and related Certificates of Limited
Partnership of Arcadian Fertilizer L.P. filed with the
Secretary of State of the State of Delaware on March 6, 1997
and November 26, 1997.
10(g) Geismar Complex Services Agreement dated June 4, 1984,
between Allied Corporation and Arcadian Corporation,
incorporated by reference to Exhibit 10.4 to Arcadian
Corporation's Registration Statement on Form S-1 (File No.
33-34357).
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) Agreement effective August 27, 1998, between International
Minerals & Chemical (Canada) Global Limited and the
registrant, amending the Esterhazy Restated Mining and
Processing Agreement dated January 31, 1978 (as amended).
10(m) Agreement effective August 31, 1998, among International
Minerals & Chemical (Canada) Global Limited, International
Minerals & Chemical (Canada) Limited Partnership and the
registrant assigning the interest in the Esterhazy Restated
Mining and Processing Agreement dated January 31, 1978 (as
amended) held by International Minerals & Chemical (Canada)
Global Limited to International Minerals & Chemical (Canada)
Limited Partnership.
10(n) 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, 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.
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
<S> <C> <C>
10(o) Second Amendment to Operating Agreement between BP
Chemicals, Inc. and Arcadian Ohio, L.P., dated as of
November 25, 1996, incorporated by reference to Exhibit
10(k) to the 1997 Form 10-K.
10(p) Manufacturing Support Agreement dated May 11, 1993, between
BP Chemicals Inc. and Arcadian Ohio, L.P., incorporated by
reference to Exhibit 10.3 to Arcadian Partners L.P.'s
current report on Form 8-K for the report event dated May
11, 1993.
10(q) First Amendment to Manufacturing Support Agreement between
BP Chemicals, Inc. and Arcadian Ohio, L.P., dated as of
November 25, 1996, incorporated by reference to Exhibit
10(l) to the 1997 Form 10-K.
10(r) Amended and Restated Agreement for Lease dated as of May 16,
1997, between Trinidad Ammonia Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(n) to the registrant's report on Form 10-Q for
the quarterly period ended June 30, 1997 (the "Second
Quarter 1997 Form 10-Q").
10(s) Amended and Restated Lease Agreement dated as of May 16,
1997, between Trinidad Ammonia Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(o) to the Second Quarter 1997 Form 10-Q.
10(t) Amended and Restated Agreement for Lease dated as of May 16,
1997, between Nitrogen Leasing Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(p) to the Second Quarter 1997 Form 10-Q.
10(u) Amended and Restated Lease Agreement dated as of May 16,
1997, between Nitrogen Leasing Company, Limited Partnership,
and PCS Nitrogen Fertilizer, L.P., incorporated by reference
to Exhibit 10(q) to the Second Quarter 1997 Form 10-Q.
10(v) Amended and Restated Purchase Option Agreement dated as of
May 16, 1997, between Nitrogen Leasing Company, Limited
Partnership, and PCS Nitrogen Fertilizer Operations, Inc.,
incorporated by reference to Exhibit 10(r) to the Second
Quarter 1997 Form 10-Q.
10(w) Amended and Restated Purchase Option Agreement dated as of
May 16, 1997, between Trinidad Ammonia Company, Limited
Partnership and PCS Nitrogen Fertilizer Operations, Inc.,
incorporated by reference to Exhibit 10(s) to the Second
Quarter 1997 Form 10-Q.
10(x) Agreement dated January 1, 1997 between the registrant and
Charles E. Childers, incorporated by reference to Exhibit
10(s) to the 1997 Form 10-K.
10(y) Potash Corporation of Saskatchewan Inc. Stock Option Plan --
Directors, incorporated by reference to Exhibit 4(b) to the
registrant's Post-effective Amendment No. 1 to Form S-8
(File No. 333-19215) (the "Form S-8").
10(z) Potash Corporation of Saskatchewan Inc. Stock Option Plan --
Officers and Key Employees, incorporated by reference to
Schedule D to the registrant's proxy circular for the annual
and special meeting of shareholders held on May 7, 1998.
10(aa) Short-Term Incentive Plan of the registrant, as amended May
7, 1997, incorporated by reference to Exhibit 10(w) to the
Second Quarter 1997 Form 10-Q.
10(bb) Long-Term Incentive Plan of the registrant, as amended May
7, 1997, incorporated by reference to Exhibit 10(x) to the
Second Quarter 1997 Form 10-Q.
10(cc) 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(dd) 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.
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ----------------------- ----
<S> <C> <C>
10(ee) 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(ff) 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(gg) 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(hh) Second Amended and Restated Membership Agreement dated
January 1, 1995, among Phosphate Chemicals Export
Association, Inc. and members of such association, including
Texasgulf Inc., incorporated by reference to Exhibit 10(t)
to the 1995 Form 10-K.
10(ii) International Agency Agreement dated January 1, 1995,
between Phosphate Chemicals Export Association, Inc. and
Texasgulf 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(jj) General Partnership Agreement forming Albright & Wilson
Company, dated July 29, 1988 and amended January 31, 1995,
between Texasgulf Inc. and Albright & Wilson Americas, Inc.,
incorporated by reference to Exhibit 10(v) to the 1995 Form
10-K.
10(kk) 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(ll) 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.
10(mm) Employment Agreement dated January 21, 1998, by and between
PCS Phosphate Company, Inc. and Thomas J. Wright,
incorporated by reference to Exhibit 10(ii) to the 1997 Form
10-K.
10(nn) Shareholder Rights Agreement as amended and restated on
March 2, 1998, incorporated by reference to Schedule B to
the registrant's proxy circular for the annual and special
meeting of shareholders held on May 7, 1998.
11 Statement re Computation of Per Share Earnings.
13 1998 Annual Report.
21 Subsidiaries of the Registrant.
23 Consent of Deloitte & Touche LLP.
27 Financial Data Schedule.
</TABLE>
(b) No reports on Form 8-K were filed by the registrant during the last quarter
of 1998.
<PAGE> 1
Exhibit 10(f)
AMENDMENT TO
LIMITED PARTNERSHIP AGREEMENT
THIS AMENDMENT dated March 6, 1997 between and among PCS Nitrogen, Inc., a
Delaware Corporation ("Nitrogen"), as successor to Arcadian Corporation, and
Arcadian Partners, a Delaware limited partnership ("AP" and collectively with
Nitrogen, the "Partners")
WITNESSETH
----------
WHEREAS the Partners have entered into that certain Limited Partnership
Agreement dated March 3, 1992 (the "Partnership Agreement") forming that certain
limited partnership named Arcadian Fertilizer, L.P. (the "Partnership");
WHEREAS the Partners are all the parties to the Partnership Agreement and
all the partners of the Partnership;
WHEREAS the Partners wish to amend the Partnership Agreement and change
the Partnership as set forth herein;
NOW THEREFORE in consideration of the mutual promises exchanged and
subject to the terms and conditions set forth herein the Partners hereby agree
as follows:
Section 1. Name Change The Partnership Agreement is hereby amended so that
-----------
the name of the Partnership is PCS Nitrogen Fertilizer, L.P.
Section 2. Other Provisions All provisions of the Partnership Agreement
----------------
other than those being amended to change the Partnership's name shall remain in
full force and effect.
IN WITNESS WHEREOF the undersigned caused this Amendment to be executed
and delivered on their behalf on the date first written above.
PCS Nitrogen, Inc.
By: /s/__________________________
John L.M. Hampton
Secretary
Arcadian Partners, L.P.
By: PCS Nitrogen, Inc., Sole General Partner
By: /s/___________________________
John L.M. Hampton
Secretary
<PAGE> 2
State of Delaware PAGE 1
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "ARCADIAN FERTILIZER, L.P.", CHANGING ITS NAME FROM "ARCADIAN FERTILIZER,
L.P." TO "PCS NITROGEN FERTILIZER, L.P.", FILED IN THIS OFFICE ON THE SIXTH DAY
OF MARCH, A.D. 1997, AT 2:06 O'CLOCK P.M.
/s/___________________________
Edward J. Freel, Secretary of State
2289843 8100 AUTHENTICATION: 9264093
981327573 DATE: 08-20-98
<PAGE> 3
AMENDMENT
OF
CERTIFICATE
OF
LIMITED PARTNERSHIP
Arcadian Fertilizer, L.P., a limited partnership organized under the laws
of the state of Delaware (the "Partnership") does hereby certify as follows:
FIRST: The name of the Partnership is Arcadian Fertilizer, L.P.
SECOND: The amendment with respect to which this certificate is being
filed is to change the name of the Partnership to PCS Nitrogen Fertilizer, L.P.
Dated: March 6, 1997
PCS Nitrogen, Inc., Sole
General Partner
By: /s/_____________________
John L.M. Hampton
Secretary
<PAGE> 4
State of Delaware PAGE 1
Office of the Secretary of State
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT
OF "PCS NITROGEN FERTILIZER, L.P.", FILED IN THIS OFFICE ON THE TWENTY-SIXTH DAY
OF NOVEMBER, A.D. 1997, AT 3:45 O'CLOCK P.M.
/s/________________________________
Edward J. Freel, Secretary of State
AUTHENTICATION:
2289843 8100 9264120
DATE:
981327605 08-20-98
<PAGE> 5
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF LIMITED PARTNERSHIP
OF
PCS NITROGEN FERTILIZER, L.P.
The undersigned, desiring to amend the Certificate of Limited Partnership
of PCS Nitrogen Fertilizer, L.P. pursuant to the provisions of Section 17-202 of
the Revised Uniform Limited Partnership Act of the State of Delaware, does
hereby certify as follows:
FIRST: The name of the Limited Partnership is PCS Nitrogen Fertilizer, L.P.
SECOND: Article Three of the Certificate of Limited Partnership shall be
amended to identify PCS Nitrogen Fertilizer Operations, Inc. as the sole general
partner of PCS Nitrogen Fertilizer, L.P. To accomplish the foregoing amendment,
Article Three of the Certificate of Limited Partnership of PCS Nitrogen
Fertilizer, L.P. is hereby amended to read in its entirety as follows:
"The name and business address of the sole general partner are:
Name Business Address
---- ----------------
PCS Nitrogen Fertilizer Operations, Inc. 3175 Lenox Park Blvd.
Suite #400
Memphis, TN 38115"
IN WITNESS WHEREOF, the undersigned have hitherto set their hands on this
26th day of November, 1997.
PCS Nitrogen Fertilizer Operations, Inc., a
Delaware corporation, as the new General Partner
By: /s/_____________________________
Name: John H. Gheens
Title: Assistant Secretary
<PAGE> 1
Exhibit 10(l)
AMENDING AGREEMENT
------------------
THIS AMENDING AGREEMENT made effective the 27th day of August, 1998.
BETWEEN:
INTERNATIONAL MINERALS & CHEMICAL (CANADA) GLOBAL LIMITED,
a Canada corporation, having its registered office at
Esterhazy, Saskatchewan
(hereinafter referred to as "IMC")
OF THE FIRST PART
- and -
POTASH CORPORATION OF SASKATCHEWAN INC., a Saskatchewan
corporation, having its registered office at Saskatoon,
Saskatchewan
(hereinafter referred to as "PCS")
OF THE SECOND PART
WHEREAS:
A. As of January 31, 1978 IMC and Potash Corporation of Saskatchewan
(hereinafter referred to as "PC") entered into a Restated Mining and
Processing Agreement (hereinafter called the "Restated Mining and
Processing Agreement") relative to the mining and processing by IMC of
potash ore owned or controlled by PC, at the Esterhazy Facilities;
B. IMC, PC and Potash Corporation of Saskatchewan Mining Limited
(hereinafter referred to as "PCS Mining") entered into an assignment
agreement as of January 31, 1979 whereby PCS Mining acquired from PC all
right, title and interest of PC in and to the Restated Mining and
Processing Agreement;
C. IMC and PCS entered into a Novation Agreement as of November 16, 1989
whereby PCS assumed all the rights and obligations of PCS Mining under the
Restated Mining and Processing Agreement and IMC released PCS Mining from
all obligations under the Restated Mining and Processing Agreement;
D. IMC and PCS entered into an agreement to amend the Restated Mining and
Processing Agreement on December 21, 1990 to clarify the rights and
obligations of the parties in the event IMC constructs Satellite
Facilities to contend with excess flooding (the Restated Mining and
Processing Agreement as so amended being herein referred to as the
"Agreement");
E. Effective as of February 22, 1995 IMC changed its name from International
Minerals & Chemical Corporation (Canada) Limited to International Minerals
& Chemical (Canada) Global Limited;
<PAGE> 2
F. IMC and PCS desire to amend the Agreement to move from a non-calendar
fiscal year, as currently provided in the Agreement, to a calendar fiscal
year; and
G. IMC and PCS have agreed to amend certain provisions of the Agreement in
the manner hereinafter set forth.
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements contained herein, IMC and PCS agree that the Agreement
is hereby amended as follows:
1. The definition of "Expansion Costs" in subsection 1.01(g) is deleted and
replaced with the following:
'"Expansion Costs": Capital Expenditures incurred for the expansion of
the capacity of the Esterhazy Facilities to produce in excess of 4.2
million Tons of Finished Potash Products per Fiscal Year or in excess of
2.1 million Tons of Finished Potash Products per Fiscal Year where the
Fiscal Year is the Stub Year, pursuant to this Processing Agreement.
Expansion Costs shall not include any Satellite Facility Costs.'
2. The definition of "Fiscal Year" in subsection 1.01(i) is deleted and
replaced with the following:
'"Fiscal Year" shall mean:
(i) at any time on or before June 30, 1998, a period of twelve (12)
consecutive months commencing July 1 and ending June 30;
(ii) between July 1, 1998 and December 31, 1998, the period of six
(6) consecutive months commencing July 1 and ending December 31; and
(iii) at any time on or after January 1, 1999, a period of twelve
(12) consecutive months commencing January 1 and ending December 31.'
3. A new subsection 1.01(t) is added as follows:
'"Stub Year": That Fiscal Year commencing July 1, 1998 and ending
December 31, 1998.'
4. The last complete sentence of subsection 3.01(a) is deleted in its
entirety and replaced with the following:
"Should PCS require Finished Potash Products in excess of such quantities
during any Fiscal Year after the Fiscal Year ending June 30, 1978, IMC
will provide such excess requirements to the extent that any portion of
the capacity of 4,200,000 Tons of Finished Potash Products for the Fiscal
Year (2,100,000 Tons of Finished Potash Products where the Fiscal Year is
the Stub Year) is unused and available for such purpose, and if PCS shall
participate in any expansion of the Esterhazy Facilities beyond such
capacity of 4,200,000 Tons (or 2,100,000 Tons where the Fiscal Year is the
Stub Year) in accordance with Section 6.01(b), then IMC will provide such
excess requirements to the extent that any portion of such expanded
capacity is unused and available for such purpose."
<PAGE> 3
5. Subsection 3.01(c) is deleted and replaced with the following:
"(c) Subject to the provisions of this Article III, for the Fiscal Year
commencing July 1, 1977 and for each succeeding Fiscal Year during the
term of this Processing Agreement, IMC will mine and process and PCS will
commit to have mined and processed by and will take delivery from IMC
pursuant to this Processing Agreement of not less than 500,000 Tons per
Fiscal Year (250,000 Tons where the Fiscal Year is the Stub Year) of
Finished Potash Products and, at the option of PCS exercised by notice
given in accordance with Section 3.02 below, up to a maximum of 1,050,000
Tons of Finished Potash Products per Fiscal Year (525,000 Tons where the
Fiscal Year is the Stub Year), provided that if the actual annual capacity
of the Esterhazy Facilities at the commencement of any Fiscal Year is less
than 4,200,000 Tons of Finished Potash Products, or if the potash
producing license or licenses issued to IMC and PCS under a potash
allocation system then in effect in Saskatchewan aggregate less than
4,200,000 Tons of Finished Potash Products, IMC will mine and process, and
PCS will commit to have mined and processed by and will take delivery from
IMC pursuant to this Processing Agreement of a number of tons of Finished
Potash Products not to exceed PCS's proportionate share of the actual
annual capacity or said aggregate of such potash producing license or
licenses, which proportionate share shall be 26.316% of any Tonnage up to
3,800,000 Tons (1,900,000 Tons where the Fiscal Year is the Stub Year) and
12.5% of any Tonnage over 3,800,000 Tons (1,900,000 Tons where the Fiscal
Year is the Stub Year) up to 4,200,000 Tons (2,100,000 Tons where the
Fiscal Year is the Stub Year).
Notwithstanding anything to the contrary in this Processing Agreement,
while a potash allocation system is in effect in Saskatchewan, IMC shall
not be obligated to produce the requirements of PCS in excess of the
quantity of Finished Potash Products which PCS is licensed to produce, nor
shall IMC be obligated to produce for PCS any quantity of Finished Potash
Products which PCS may be licensed to produce in excess of the
requirements which IMC is obligated to produce for PCS under this Section
3.01."
6. Clause 3.02(a)(i) shall be deleted and replaced with the following:
"(i) If the total quantity of Finished Potash Products requested by PCS
for such Fiscal Year is equal to the amount of Finished Potash Products
committed to be taken by PCS during the current Fiscal Year in accordance
with notice given under this Section 3.02, plus or minus not more than
25%, then such notice shall be given by the first day of the third month
immediately preceding the first day of such Fiscal Year; or"
7. Clause 3.02(a)(ii) shall be deleted and replaced with the following:
"(ii) If the total quantity of Finished Potash Products requested by PCS
for such Fiscal Year is equal to the amount of Finished Potash Products
committed to be taken by PCS during the current Fiscal Year in accordance
with notice given under this Section 3.02, plus or minus more than 25% and
up to 50%, then such notice shall be given by the first day of the sixth
month immediately preceding the first day of such Fiscal Year; or"
8. Clause 3.02(a)(iii) shall be deleted and replaced with the following:
"(iii) If the total quantity of Finished Potash Products requested by PCS
for such Fiscal Year is equal to the amount of Finished Potash Products
committed to be taken by PCS during the current Fiscal Year in
<PAGE> 4
accordance with notice given under this Section 3.02, plus or minus more
than 50%, then such notice shall be given by the first day of the ninth
month immediately preceding the first day of such Fiscal Year."
9. A new clause 3.02(a)(v) is added as follows:
"(v) Notwithstanding anything contained in clauses 3.02(a)(i), (ii) and
(iii), IMC and PCS hereby acknowledge and agree that where the Fiscal Year
is the Stub Year, during such Fiscal Year PCS's requirements for Finished
Potash Products shall be an aggregate of 350,000 Tons and PCS shall be
deemed to have furnished IMC with notice of such requirement for Finished
Potash Products in accordance with this Section 3.02."
10. A new clause 3.02(a)(vi) is added as follows:
"(vi) Notwithstanding anything contained in clauses 3.02(a)(i), (ii) and
(iii), IMC and PCS hereby acknowledge and agree that for the first six
months of that Fiscal Year commencing January 1, 1999 and ending December
31, 1999, PCS's requirements for Finished Potash Products shall be an
aggregate of 350,000 Tons and PCS shall be deemed to have furnished IMC
with notice of such requirement for Finished Potash Products in accordance
with this Section 3.02."
11. A new clause 3.02(a)(vii) is added as follows:
"(vii) Notwithstanding anything contained in clauses 3.02(a)(i), (ii) and
(iii), IMC and PCS hereby acknowledge and agree that for the last six
months of that Fiscal Year commencing January 1, 1999 and ending December
31, 1999, PCS's requirements for Finished Potash Products shall be not
more than an aggregate of 450,000 Tons and not less than an aggregate of
250,000 Tons, and PCS shall provide IMC with notice of its requirements
for Finished Potash Products for such six month period, on or before
November 15, 1998."
12. A new clause 3.02(a)(viii) is added as follows:
"(viii) Notwithstanding anything contained in clause 3.02(a)(iv), IMC and
PCS acknowledge and agree that unless IMC otherwise consents, the
aggregate Tons of Finished Potash Products specified in any notice given
to IMC by PCS pursuant to clauses 3.02(a)(i), (ii) and (iii) for that
Fiscal Year commencing January 1, 2000 and ending December 31, 2000 shall
not be more than 975,000 Tons."
13. The last sentence of subsection of 3.05(b) is deleted in its entirety and
replaced with the following:
"The aforesaid $36,000,000 (Canadian) limitation shall be reduced,
effective July 1, 1979 and on each July 1 thereafter to and including July
1, 1998, by $750,000 (Canadian), and commencing December 31, 1999 and on
each December 31 thereafter by $750,000 (Canadian)."
14. The third complete sentence of section 4.02 following the section heading
is deleted in its entirety and replaced with the following:
<PAGE> 5
"By the last day of the second month immediately following the end of each
Fiscal Year, IMC shall furnish to PCS schedules reflecting in reasonable
detail Actual Costs and Added Costs by principal elements of costs and
Capital Expenditures by capital projects together with the opinion of its
independent public accountants."
15. Clause 4.03(i) is deleted and replaced with the following:
"(i) one-twelfth (except where the Fiscal Year is the Stub Year, in which
case the appropriate fraction shall be one-sixth) of PCS's share of
estimated total production for the applicable Fiscal Year as shown in
IMC's Base Annual Production Schedule multiplied by the Planned Average
Per Ton Production Cost of total production under the Base Annual
Production Schedule for such Fiscal Year plus any amount payable in
accordance with subsection 4.01(i) or subsection 4.01(a) per such Ton,
and"
16. Clause 4.03(ii) and the remaining part of section 4.03 which follows
clause 4.03(ii) is deleted and replaced with the following:
"(ii) one-twelfth (except were the Fiscal Year is the Stub Year, in which
case the appropriate fraction shall be one-sixth) of all Added Costs as
estimated by IMC to be payable by PCS pursuant to this Processing
Agreement for such Fiscal Year.
As soon as practicable after each quarter of each such Fiscal Year (or
each half where such Fiscal Year is the Stub Year), the actual Tonnage
produced and the Actual Costs per Ton shall be computed and determined by
IMC for the preceding quarter of such Fiscal Year (or such half, as the
case may be) and a written statement setting forth such computations by
expense element classification together with Added Costs payable by PCS
pursuant to this Processing Agreement for such preceding quarter (or half,
as the case may be) shall be furnished promptly to PCS. Within thirty
(30) days after such statement has been so furnished such payments shall
be made by IMC to PCS or PCS to IMC as shall be required to adjust the
amount theretofore paid by PCS to the amount to which should have been
paid (on the basis of Actual Costs and Added Costs) by PCS with respect to
Finished Potash Products mined and processed for PCS during such preceding
quarter (or preceding half, as the case may be). Within thirty (30) days
after the audit referred to in Section 4.02, a final adjustment for the
Fiscal Year will be made by IMC and a written statement thereof shall be
submitted to PCS. Within thirty (30) days thereafter payment shall be
made by IMC or PCS as shall be required for the final adjustment shown in
such statement."
17. Section 4.04 is deleted and replaced with the following:
"Section 4.04. IMC to Furnish Base Annual Production Schedule and Planned
Average Per Ton Production Cost. The Base Annual Production Schedule and
the Planned Average Per Ton Production Cost, determined by IMC on a
quarterly (or three (3) consecutive month basis where such Fiscal Year is
the Stub Year) and a Fiscal Year basis supported by estimated Actual Costs
by expense element classification, will be furnished by IMC to PCS a
reasonable time prior to the commencement of each Fiscal Year. PCS will
be advised promptly by IMC of any significant expected changes in the Base
Annual Production Schedule and the Planned Average Per Ton Production Cost
whenever such changes occur or are anticipated to occur."
<PAGE> 6
18. The last complete sentence of Section 5.01 is deleted in its entirety and
replaced with the following:
"The proportionate share of PCS of Capital Expenditures hereunder shall be
a percentage determined by dividing the total Tonnage of Finished Potash
Products processed for PCS or PCS and AMAX, as the case may be, during the
thirty-six (36) month period immediately preceding the Fiscal Year in
which the Capital Expenditures are made with the total Tonnage of Finished
Potash Products processed at the Esterhazy Facilities during such
thirty-six (36) month period."
19. Clause 5.03(d)(i) is amended by adding after the expression "five hundred
thousand (500,000) Tons of Finished Potash Products per Fiscal Year" the
following:
"(two hundred and fifty thousand (250,000) Tons where such Fiscal Year is
the Stub Year)".
<PAGE> 7
20. Article VII is deleted in its entirety and replaced with the following:
"ARTICLE VII
TERM OF PROCESSING AGREEMENT
7.01(a) This Processing Agreement shall continue in effect until December
31, 2001, and, unless terminated by PCS as herein provided, for five (5)
additional consecutive periods of five (5) years each.
7.01(b) PCS may terminate this Processing Agreement as of December 31,
2001, or at the end of any five (5) year period thereafter by giving IMC
six (6) months' written notice prior to December 31, 2001 or the
expiration of any such additional five (5) year period.
7.01(c) Notwithstanding the provisions of subsection 7.01(a), and in
addition to any right that IMC may have in accordance with this Processing
Agreement to terminate this Processing Agreement, IMC may, at any time
after December 31, 2011, by giving to PCS one (1) year's prior written
notice of its intention to do so, terminate all mining and processing with
the Esterhazy Facilities. If IMC provides this notice, this Processing
Agreement shall terminate on the December 31 next following the expiry of
the said one (1) year notice.
7.01(d) If PCS has not terminated this Processing Agreement in accordance
with subsection 7.01(b) and IMC has not terminated this Processing
Agreement in accordance with subsection 7.01(c), so that this Processing
Agreement is in effect on December 31, 2026, and if thereafter IMC shall
continue to manage and operate the Esterhazy Facilities, IMC will, at the
timely request of PCS, continue to perform for PCS, as an independent
contractor, the services generally set forth in subsection 3.01(a) to the
extent that there is capacity to do so at the Esterhazy Facilities which
is unused and available for such purpose from time to time and PCS will
pay IMC for such services as set forth in Article IV. It is understood
and agreed by the parties that after the expiration of the term of this
Processing Agreement PCS shall have no other rights as set forth in this
Processing Agreement, including without limitation, the right to
participate in any expansion of the Esterhazy Facilities and the right to
have a minimum annual quantity of potash mined and processed for it."
21. In the event of any conflict or inconsistency between the terms of this
agreement and the Agreement, the terms of this agreement shall prevail.
22. This agreement shall be governed by and interpreted in accordance with
the laws in force from time to time in the Province of Saskatchewan and
shall, for all purposes, be deemed to have been made in the Province of
Saskatchewan.
23. This agreement may be executed in counterparts and all such counterparts
shall be read together and shall constitute one agreement, and shall be
binding upon all parties when executed by all parties.
24. This agreement shall be binding upon and enure to the benefit of the
parties hereto and their respective successors and assigns, as permitted
under the Agreement.
25. As used in this agreement, including the recitals hereto, all capitalized
terms shall have the meaning subscribed to them in the Agreement.
<PAGE> 8
26. The Agreement is hereby confirmed in all other respects.
IN WITNESS WHEREOF, International Minerals & Chemical (Canada) Global Limited
and Potash Corporation of Saskatchewan Inc. have caused this agreement to be
executed and delivered by the respective officers thereunto duly authorized as
of the day and year first above written.
INTERNATIONAL MINERALS & CHEMICAL
(CANADA) GLOBAL LIMITED
Per: /s/________________________
Per: /s/________________________
POTASH CORPORATION OF SASKATCHEWAN
INC.
Per: /s/________________________
Per: /s/________________________
<PAGE> 1
Exhibit 10(m)
ASSIGNMENT AND CONSENT AGREEMENT
THIS AGREEMENT is made effective as of the 31st day of August, 1998.
BETWEEN:
INTERNATIONAL MINERALS & CHEMICAL (CANADA)
GLOBAL LIMITED, a corporation incorporated
pursuant to the laws of Canada,
(hereinafter referred to as "IMC")
- and -
INTERNATIONAL MINERALS & CHEMICAL
(CANADA) LIMITED PARTNERSHIP, a limited
partnership formed under the laws of Saskatchewan,
by its General Partner, INTERNATIONAL MINERALS
& CHEMICAL (CANADA) GLOBAL LIMITED,
(hereinafter referred to as "IMC LP")
- and -
POTASH CORPORATION OF SASKATCHEWAN INC.,
a corporation incorporated pursuant to the laws of
Saskatchewan,
(hereinafter referred to as "PCS")
WHEREAS:
1. IMC and PCS are parties to a Restated Mining and Processing Agreement
dated January 31, 1978, as amended from time to time (the "Processing
Agreement");
2. As part of a restructuring of its business operations, IMC wishes to
transfer all of its operating assets, which includes all of IMC's interest
in and to the Processing Agreement and the Esterhazy Facilities and
Reserves, as defined in the Processing Agreement (herein collectively
called the "Esterhazy Assets") to IMC LP, a limited partnership formed
between IMC, as the general partner holding a 99.5% partnership interest,
and its wholly-owned subsidiary, IMC Esterhazy Ltd. ("IMC Esterhazy"), as
the limited partner holding a .5% partnership interest; and
3. PCS consents to the assignment of the Processing Agreement by IMC to IMC
LP in accordance with the terms and conditions contained herein;
NOW THEREFORE, in consideration of the premises and of the mutual
covenants and agreements of the parties herein contained, the parties hereto
agree as follows:
1. In consideration of the sum of One Dollar ($1.00) and other valuable
consideration paid by IMC LP to IMC, the receipt and sufficiency of which are
hereby acknowledged, IMC hereby assigns to IMC LP all of its interest in and to
the Processing Agreement.
<PAGE> 2
2. Subject to the terms hereof, PCS hereby consents to the assignment (the
"Assignment") of all of IMC's interest in and to the Processing Agreement by IMC
to IMC LP.
3. For purposes of the Assignment only and without prejudice to any rights
of first refusal or other preferential rights which may arise after the
effective date of this Agreement (the "Effective Date") by the terms of the
Processing Agreement, PCS hereby waives any rights of first refusal or other
preferential rights to acquire any of IMC's interest in any of the Esterhazy
Assets pursuant to the provisions of the Processing Agreement and, in
particular, pursuant to section 11.04 thereof, as a result of the Assignment.
4. IMC LP hereby accepts the assignment set forth in paragraph 1 hereof
and does hereby agree that from and after the Effective Date, it shall perform,
fulfil and discharge all of the covenants, obligations and liabilities of IMC
under the Processing Agreement or any revision or substitution thereof, to the
same extent as if it had been party thereto in the place and stead of IMC. For
this purpose, it is agreed that the reference in section 11.03 of the
Processing Agreement to "INTERNATIONAL" shall henceforth be considered for all
purposes as a reference to IMC.
5. PCS acknowledges, accepts and agrees that from and after the Effective
Date and subject to the terms hereof, IMC LP is substituted as a party to the
Processing Agreement in the place and stead of IMC and is entitled to hold and
enforce all the rights and privileges of IMC under the Processing Agreement.
6. IMC hereby irrevocably and unconditionally guarantees to PCS the
performance of all of the obligations of IMC LP under the Processing Agreement,
and for purposes of the terms of the Processing Agreement, PCS agrees that IMC
is an acceptable guarantor.
7. Nothing in this Agreement shall have the effect of relieving IMC from
those of its obligations under the Processing Agreement which arose prior to
the execution of this Agreement.
8. Each of IMC and IMC LP hereby represents and warrants to PCS that:
(a) IMC, as general partner of IMC LP, has been duly authorized by
IMC LP to execute this Agreement for and on behalf of IMC LP; and
(b) the assets and liabilities of IMC immediately before the
Effective Date were substantially the same as the collective assets
and liabilities of IMC and IMC LP on the Effective Date.
9. IMC agrees that it will not, without the prior consent of PCS, which
consent shall not be withheld unreasonably, (i) cease to be the general partner
of IMC LP, (ii) transfer, assign or relinquish any of its partnership interest
in IMC LP to any party other than IMC Esterhazy, or (iii) cease to hold 100% of
the shares of IMC Esterhazy.
10. The parties hereto agree to perform such further and other acts and to
execute and deliver all such further and other documents and assurances as may
reasonably be required in order to fully perform and carry out the terms of this
Agreement.
11. Notwithstanding any rule of law, equity or statute to the contrary,
this Agreement shall not result in the merger of any covenant, representation or
warranty found in any previous agreement, transfer or document.
<PAGE> 3
12. Any notices, requests, demands and other communications hereunder shall
be in writing and shall be furnished to the parties at the addresses given
below. Such notices and other communications shall be deemed to have been duly
given if delivered personally, by telecopier (confirmation of receipt received
by return telecopy) or mailed by registered mail, return receipt requested to:
IMC and IMC LP:
International Minerals & Chemical
(Canada) Global Limited
General Delivery
Esterhazy, Saskatchewan
S0A 0X0
Attention: Mr. Don Hood
Fax: (306) 745-2100
PCS:
Potash Corporation of Saskatchewan Inc.
PCS Tower
500, 122 - 1st Avenue South
Saskatoon, Saskatchewan
S7K 7G3
Attention: President, PCS Potash
Fax: (306) 652-2699
13. This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective permitted successors and assigns.
14. This Agreement may be executed in several counterparts, each of which
when so executed shall be deemed to be an original and shall have the same force
and effect as an original but such counterparts together shall constitute one
and the same instrument. A telecopy or fax copy of an executed copy of this
Agreement shall have the same force and effect as an originally executed copy of
this Agreement.
IN WITNESS WHEREOF the parties hereto have executed this Agreement
effective as of the day and year first above written.
INTERNATIONAL MINERALS & CHEMICAL
(CANADA) GLOBAL LIMITED
Per: /s/____________________________
Per: /s/____________________________
<PAGE> 4
INTERNATIONAL MINERALS & CHEMICAL
(CANADA) LIMITED PARTNERSHIP BY ITS GENERAL
PARTNER INTERNATIONAL MINERALS & CHEMICAL
(CANADA) GLOBAL LIMITED
Per: /s/_____________________________
Per: /s/_____________________________
POTASH CORPORATION OF SASKATCHEWAN INC.
Per: /s/_____________________________
Per: /s/_____________________________
<PAGE> 1
Exhibit 11
POTASH CORPORATION OF SASKATCHEWAN INC.
COMPUTATION OF PER SHARE EARNINGS
FOR THE YEARS ENDED DECEMBER 31
(Figures and amounts expressed in thousands,
except per share and per option amounts)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
A Net income as reported, Canadian GAAP.......... $261,003 $297,138 $209,036 $159,486 $91,219
B Items adjusting net income..................... 0 (11,382) (7,216) 18,598 (4,539)
C Net income, US GAAP (A + B).................... $261,003 $285,756 $201,820 $178,084 $86,680
D Weighted average number of shares outstanding.. 54,177 52,275 45,537 43,352 42,872
E Options outstanding - opening.................. 2,123 1,571 1,253 901 641
F Options granted during the year................ 824 890 592 495 408
F1 number of days outstanding..................... 56 55 54 54 55
G Average exercise price per option.............. $ 70.35 $ 68.11 $ 52.90 $ 34.74 $ 18.00
H Average market price per share................. $ 74.65 $ 82.60 $ 70.33 $ 52.44 $ 29.81
I Period end market price per share.............. $ 63.88 $ 83.00 $ 85.00 $ 70.88 $ 34.00
J Rate of return available on option proceeds.... 5% 5% 5% 5% 5%
Canadian GAAP
Basic earnings per share (A/D)................. $ 4.82 $ 5.68 $ 4.59 $ 3.68 $ 2.13
Fully diluted earnings per share
K Imputed earnings on option proceeds............ $ 7,912 $ 5,807 $ 3,546 $ 1,565 $ 577
(E*G*J)+(F*F1/365*G*J)
Fully diluted earnings per share............... $ 4.77 $ 5.61 $ 4.53 $ 3.63 $ 2.11
(A+K)/(D+E)+(F*F1/365)
United States GAAP
Basic earnings per share (C/D)................. $ 4.82 $ 5.47 $ 4.43 $ 4.11 $ 2.02
Fully diluted earnings per share
L Net additional shares issuable................. 170 432 457 471 416
(E+F)-((E+F)*G/H)
Fully diluted earnings per share (C/(D+L)).... $ 4.80 $ 5.42 $ 4.39 $ 4.06 $ 2.00
</TABLE>
<PAGE> 1
Exhibit 13
POTASH CORPORATION of SASKATCHEWAN INC.
BALANCED INGREDIENTS FOR GROWTH
1998 ANNUAL REPORT
<PAGE> 2
PROFILE
Potash Corporation of Saskatchewan Inc. (PCS), the world's largest
fertilizer enterprise producing the three primary plant nutrients, provides
quality products to farmers and industry worldwide.
The world's largest potash (K) company by capacity, PCS has vast excess
capacity to draw upon as global demand grows. The third largest phosphate (P)
company in the world, it produces the most diversified product line. It is the
world's second largest nitrogen (N) company with a wide range of upgraded
products.
PCS Sales, its subsidiary, sells all PCS products domestically and
handles some exports, as well as potash exports for a large New Mexico producer.
PCS is a leading member of fertilizer export agencies and owns a full-range
retail company, Florida Favorite Fertilizer.
The 54.2 million PCS shares trade on the Toronto, Montreal and New York
stock exchanges under the symbol POT.
STRATEGY
PCS has followed an operating strategy of pursuing products and markets
with the best margins and an acquisition strategy aimed at building on its
strengths. It has reinforced its solid potash base with acquisitions that expand
its export prospects into key markets. It has diversified into phosphates and
nitrogen with acquisitions that fit its strategy of building a balanced,
market-driven company best able to take advantage of distribution logistics and
economies of scale.
Recognizing the different circumstances of each of its nutrients, PCS
has leveraged them for maximum profits. In potash, it has grown earnings by
matching production to demand. In phosphates and nitrogen, it has utilized its
diversified product range to maximize the production of those products with a
market premium. In both, it uses its upgraded product line and multiple product
locations to develop non-fertilizer business in which the key issues are quality
and security of supply.
Cover: PCS potash, phosphate and nitrogen help farmers to produce better food
for 6 billion people and industry to make better products for the world. Its
three nutrients and varied products within each nutrient give the Company
balance and diversity.
<PAGE> 3
[CHART]
TABLE OF CONTENTS
Highlights........................... 1
Letter to Shareholders............... 2
Production........................... 6
Potash.............................. 6
Phosphate........................... 9
Nitrogen............................ 13
Sales................................ 16
Stewardship.......................... 26
Management's Discussion and
Analysis of Financial Condition
and Results of Operations.......... 32
Selected Ten-Year Data............... 43
Management's Responsibility.......... 44
Auditors' Report..................... 44
Consolidated Financial Statements.... 45
Board of Directors................... 62
Shareholder Information.............. 64
Corporate Information................ back
Glossaries........................... back
<PAGE> 4
[CHART]
PCS AT A GLANCE
PCS PRODUCTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
NUTRIENT* PRODUCTION MODE BASE PRODUCT PRODUCTS PRIMARY END USES
POTASH Mined Potassium chloride Fertilizer Agriculture
Industrial TV/computer screens, water softeners, soaps,
[CHART] perfumes, de-icers
Feed supplements Livestock and poultry
PHOSPHATE Mined and Phosphate rock MGA Feedstock for other phosphate products
Manufactured -- Phosphoric acid
DAP Agriculture
[CHART] SPA, LoMag, Poly-N Liquid fertilizers, feed, industrial products
Feed supplements Livestock and poultry
Industrial acid Soft drinks, food products, industrial
detergents, metal treating, water treatment
NITROGEN Manufactured Ammonia Fertilizer, Agriculture, industrial, other nitrogen
Feedstock products
Urea Agriculture, pharmaceuticals, plastics, resins,
[CHART] adhesives, dyes, pool chemicals, humulin
for diabetics
Feed supplements for livestock
Nitric acid Carpets, photography, batteries, lacquers and
paints, tires, ammonium nitrate
Ammonium nitrate Agriculture, explosives for mining,
construction and road work
Nitrogen solutions Agriculture
* Sales Volumes
</TABLE>
<PAGE> 5
HIGHLIGHTS
[CHART] Record cash flow was used to pay down $375 million in debt.
FINANCIAL SUMMARY
(US$ millions except where specified)
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net Sales 2,307.8 2,325.9
Costs and Expenses 1,861.7 1,878.3
Operating Income 446.1 447.6
EBITDA 636.9 617.6
Net Income 261.0 297.1
Per Common Share (Actual Dollars) 4.82 5.68
Dividends Per Share (Actual Dollars CDN) 1.44 1.44
Cash Flow from Operations 578.0 467.8
Long-Term Debt Obligations 933.3 1,130.0
Shareholders' Equity 2,453.8 2,227.9
Return on Shareholders' Equity 11% 13%
</TABLE>
[CHART] Net sales revenue was almost flat with the 1997 record and provided
record gross margin.
POTASH OPERATING SUMMARY
(in thousands of KCl tonnes)
<TABLE>
<S> <C> <C>
Total Potash Production 6,995 6,483
North American Sales 2,702 3,017
Offshore Sales 3,581 3,623
----- -----
Sales to Third Parties 6,283 6,640
Sales to Florida Favorite Fertilizer 126 129
----- -----
Total Sales Tonnage 6,409 6,769
</TABLE>
[CHART] Fertilizer provided 68 percent of gross margin and non-fertilizer
products 32 percent, showing the value of PCS diversification.
PHOSPHATE OPERATING SUMMARY
(in thousands of tonnes)
<TABLE>
<S> <C> <C>
Total Phosphoric Acid Production (P2O5 tonnes) 2,363 2,282
Sales (product tonnes)
Rock 9 29
Solids 1,962 1,924
Liquids 1,684 1,494
Animal Feed 747 752
Industrial Products 225 235
----- -----
Total Sales Tonnage 4,627 4,434
</TABLE>
Total P2O5 production and sales reflect the acquisition of the Geismar operation
on March 6, 1997.
[CHART] Even after paying nearly $10 million more in provincial mining taxes,
PCS operating income was flat with the 1997 record.
NITROGEN OPERATING SUMMARY
(in thousands of tonnes)
<TABLE>
<S> <C> <C>
Total Nitrogen Production (N tonnes) 3,121 2,349
Sales (product tonnes)
Manufactured Product
Ammonia 1,496 1,061
Urea 1,425 1,226
Nitrogen Solutions 2,164 1,719
Other 1,040 894
Purchased Product 554 1,138
----- -----
Total Sales Tonnage 6,679 6,038
</TABLE>
The nitrogen production and manufacturing data for 1997 cover only a partial
year, since the properties were acquired on March 6, 1997.
<PAGE> 6
[Photo Caption] C.E. Childers, Chairman and Chief Executive Officer
DEAR SHAREHOLDERS:
Your company continued to show strength in 1998 in the important
financial area of cash flow, with operating activities providing $578 million.
Excluding changes in working capital, the amount was $556 million. This was an
improvement over 1997 and our best year ever. Net sales of $2,308 million were
within 1 percent of our record year in 1997, but gross margin of $609 million
was up by 4 percent. Higher provincial mining taxes resulted in operating income
for 1998 approximately the same as in 1997. Income before income taxes was up
over 1997 to a new high of $378 million. However, an increase of 70 percent in
income taxes recorded, from $69 million in 1997 to $117 million in 1998,
resulted in net income of $261 million, compared to $297 million in the previous
year. In what otherwise was a better year financially, $58 million more in taxes
caused net income to drop by $36 million from 1997, our best year ever on the
basis of net income and net income per share.
Since 84 percent of our taxes were deferred, we were able to provide
record cash flows. We used that cash to pay off a net $240 million of debt,
purchase a potash property in New Brunswick, Canada, buy shares in Israel
Chemicals Ltd., and make improvements at our operations. At the end of the year,
our balance sheet was stronger and we had a debt to capital ratio of 29.5
percent.
<PAGE> 7
Potash, our first business and the foundation of the Corporation, had
another outstanding year. Although sales were down in the fourth quarter
compared to the very strong fourth quarter of 1997, total tonnes sold in the
year were only 5 percent below the record tonnage sold the year before. Much
stronger prices, however, resulted in an 8-percent increase in sales revenue and
a 23-percent increase in gross margin. Even though we paid an additional $10
million in Saskatchewan Provincial Mining Tax, our potash subsidiary earned $238
million in operating earnings, an increase of $46 million or 24 percent over
1997.
We purchased Potash Company of Canada Limited (Potacan) from its German and
French owners and are using the mill, renamed PCS Cassidy Lake, to upgrade
standard grade potash produced in Saskatchewan to granular grade product for
markets in Eastern Canada and the United States.
In December, we purchased 9 percent of the shares of Israel Chemicals
Ltd. (ICL) from the Government of Israel in an offering that sold off the
remaining government ownership in that company. The most important asset of
ICL is its ownership in Dead Sea Works, the fifth largest potash exporter in the
world.
PCS Phosphate, our phosphate subsidiary, also had another good year, with
fertilizer products leading the way. The subsidiary had an increase in gross
margin of 14 percent, to $211 million. Fertilizer sales revenue was up 9 percent
and gross margin on fertilizer sales was up 49 percent. Phosphate sold as feed
supplements and as industrial acid was down from last year, but continued to
represent the highest margins.
On a nutrient basis, including the phosphate products produced in our
nitrogen subsidiary, fertilizer products represented 58 percent of total
phosphate gross margin, with feed supplements and purified acid representing 27
percent and 15 percent respectively. Liquid phosphate fertilizers are gaining in
popularity as they are tied to the low-till farming methods being utilized more
each year by American farmers. Our North American sales of liquids were up 18
percent.
[CHART] Net income was below the 1997 record but, at $637 million, PCS earnings
before interest, taxes, depreciation and amortization reached a new
high.
<PAGE> 8
PCS Nitrogen did not fare as well because prices for nitrogen products
continued to fall as the year progressed. Our nitrogen subsidiary had an
operating income of $61 million in 1998, a drop of 51 percent from the $126
million in 1997. We have taken several measures to combat the problem, including
closing down our Wilmington, North Carolina operations. In August we dedicated
our new ammonia plant in Trinidad. It is the fourth plant in our Trinidad
complex and is rated as the most efficient in the world. This plant is helping
to lower our cost of production, increase our volumes of sales and replace some
purchased ammonia.
In addition, we are making efforts to move more nitrogen products to
industrial markets. W. R. Grace built a new calcium nitrite plant at the PCS
complex in Augusta, Georgia. We are providing it with raw materials that
otherwise would have gone to fertilizer products. We are completing construction
of a new 396,000 tonnes per annum (TPA) nitric acid plant at our Geismar,
Louisiana complex to feed new industrial plants built at the nearby BASF and
Rubicon facilities. The new nitric acid plant will consume 100,000 TPA of
ammonia that is presently going into the fertilizer market.
We just recently signed an agreement with Melamine Chemicals which, when
concluded, will see us supply up to 113,000 TPA of urea liquor to a new plant
that will be connected to our Memphis, Tennessee operations. Melamine will begin
construction of this facility in 1999.
In total, excluding selling and corporate costs, the potash subsidiary
supplied 47 percent of our operating income, PCS Phosphate supplied 41 percent
and PCS Nitrogen supplied 12 percent.
Fertilizer products made up 68 percent of sales revenue and 68 percent of
gross margin, while our non-fertilizer products were 32 percent of sales revenue
and gross margin.
Revenue by nutrient was split between the offshore market and the North
American market as follows: potash 58/42 percent; phosphate 29/71 percent;
nitrogen 7/93 percent. In total, 29 percent of our 1998 sales revenue came from
offshore markets and 71 percent from North American markets, virtually identical
to 1997.
In July of 1998, several changes in our management organization were made
in an effort to provide continuity and strength in future leadership. William
Doyle was promoted to President and Chief Operating Officer responsible for
Potash, Phosphate and Nitrogen subsidiaries. Gary Carlson replaced Mr. Doyle as
President of PCS Sales. James Dietz was promoted to replace Mr. Carlson as
President of PCS Nitrogen. These executives, along with Tom Wright, President,
PCS Phosphate, and Garth Moore, President,
[CHART] Although results for the three nutrients will vary over time, potash
gross margin was highest in 1998 as a percentage of sales.
<PAGE> 9
PCS Potash, form the nucleus of our operations and sales team. There were no
changes in the ranks of Senior Vice Presidents in the corporate office.
Although we did make slight alterations to our operating assets during the
year, our recent effort to negotiate the purchase of a controlling interest in
The Israel Corporation, the holding company that controls Israel Chemicals Ltd.,
was unsuccessful. However, your board and your management will continue to
identify potential opportunities that are financially attractive and accretive.
Yours truly,
[signature]
- ------------------------------------
C. E. CHILDERS
Chairman and Chief Executive Officer
March 2, 1999
[CHART] Its varied production within each of its nutrients gives PCS strength
and balance.
[Photo Caption] Through balanced fertilization, productive and efficient North
American farmers achieve their high-quality crops.
<PAGE> 10
PRODUCTION REPORT
PCS POTASH
WHAT IS POTASH? The major source of potassium. In plants, potassium raises
yields and food value, builds disease resistance and improves shipping, handling
and storage qualities; in animals, it helps growth, maintenance and milk
production. SOURCE? Potash is mined from ore deep underground or extracted from
brine, and milled on the surface. Production costs are affected by ore
thickness, consistency and continuity; ore depth, geological conditions and K2O
grade; mill recovery achievable, operational capacity, degree of automation.
WORLD TRADE? There are a limited number of world suppliers but more than 150
countries use it. About three-quarters of world production moves across borders.
Developing nations have little or no supply and account for nearly half of world
consumption.
PCS STRENGTHS: Excess capacity; leading global player; capable of producing
more potash than other world companies at lower cost.
[Photo caption] Lanigan, the largest of the PCS potash properties, set both
productivity and annual production records in 1998.
<PAGE> 11
7
PRODUCING FOR THE WORLD
PCS produces potash from seven mines in Canada, six of which it owns and
operates, and one wholly-owned mine in the United States. With 24 percent of
world capacity and an estimated 57 percent of excess capacity, it can increase
production as markets grow and further reduce costs per tonne. Reserves that
will last more than a century ensure its long-term leadership in potash. A
primary supplier to developing nations where demand for potash keeps growing, it
makes more than half its annual sales offshore.
To suit its different markets, PCS produces potash fertilizer in two
dozen grades. Its agricultural product is guaranteed to have at least 60 percent
K2O (95 percent KCl).
RECORD POTASH PRODUCTION
With a second consecutive year of strong world demand for potash, PCS set a
second consecutive record in 1998 for total production. Using 57 percent of its
capacity and with eight fewer shutdown weeks than in 1997, the Company produced
6.995 million tonnes. New Brunswick and Moab also produced 0.897 million tonnes
of sodium chloride (salt) during the year, used for de-icing winter roads and
making various products. Moab's salt production broke a four-year-old record.
Productivity records were set at Lanigan, Rocanville and New Brunswick, and
annual production records at Lanigan, Rocanville, Cory and New Brunswick.
[PHOTO]
<PAGE> 12
PRODUCTION REPORT
On March 3, 1998, PCS purchased the Potacan property in New Brunswick, a
flooded mine and a mill. Renamed PCS Cassidy Lake, it has an annual milling
capacity of 1.3 million tonnes and a compaction capacity of 1.0 million tonnes
of granular product. A rail car unloading facility was installed there to
receive standard potash from Rocanville for upgrading into granular product.
Since acquisition, 0.283 million tonnes have been compacted at Cassidy Lake,
which has 30 employees.
[CHART] World demand remained strong and PCS drew on its excess capacity,
surpassing its 1997 production record by 8 percent.
In April 1998, a small brine inflow was discovered at the New Brunswick
division, but production was maintained without interruption or danger as
attempts to locate the source of the inflow continued.
Technological advancements in 1998 included developments in computer
applications for on-site analysis of three-dimensional seismic survey data. PCS
personnel researched and developed a fully-automated underground microseismic
event location and analysis system. A flotation column 3.3 meters in diameter
was designed, fabricated and commissioned at Rocanville. Research projects
included the evaluation of thickened tailing technologies through a
combination of process, pipeline and waste stream deposition and weathering
studies. The Company continues to participate in research groups that support
studies relevant to the fertilizer business, such as product quality, minerals
separations, fine particle science and environmental technology.
PCS reserves at Esterhazy division are mined by International Minerals and
Chemical (Canada) Limited Partnership (IMC) 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 December 31, 2001.
Under the agreement, the Company can take between 0.450 and 0.950 million tonnes
of product a year from IMC. For the calendar year 1999, it has increased its
allocation to 0.726 million tonnes.
POTASH 1998
World production: 42.6 million tonnes (est.)
PCS production: 7.0 million tonnes
PCS percentage: 16%
1998 PRODUCTION
(million tonnes KCl)
<TABLE>
<CAPTION>
ANNUAL CAPACITY 1998 PRODUCTION 1997 PRODUCTION MINE SITE EMPLOYEES
(active)
<S> <C> <C> <C> <C>
Lanigan SK 3.828 1.656 1.600 327
Rocanville SK 2.295 1.882 1.692 319
Allan SK 1.885 1.142 1.011 279
Cory SK 1.361 .676 .626 151
Patience Lake SK 1.033 .254 .277 72
Esterhazy SK(1) .951 .543 .498 2
New Brunswick NB .785 .783 .715 334
Moab UT .062 .059 .064 49
Total 12.200 6.995 6.483 1,533
</TABLE>
(1) Production at Esterhazy is mined from PCS reserves by International
Minerals and Chemical (Canada) Limited Partnership under a long-term
agreement.
<PAGE> 13
9
PCS PHOSPHATE
WHAT IS PHOSPHORUS? The energizer of plant production, crucial to photosynthesis
and reproduction and helps other yield-developing processes. It assists animals'
general nutrition and normal body growth, maintenance and repair. SOURCE?
Underground phosphate ore deposits yield phosphate rock from which phosphoric
acid, feedstock for other products, is made. Ore thickness, consistency and
continuity, depth, geological conditions and concentration ratio (tonnes of
material removed per tonne of phosphate rock) affect production costs. WORLD
TRADE? About 60 countries produce phosphate products; about one-third of world
production is traded. More than 150 countries use phosphate fertilizers; about
two-thirds of consumption is in developing nations.
PCS STRENGTHS: Diversified and low-cost production; long-term rock reserves.
[Photo caption] The excellent PCS rock reserves in North Carolina and Florida
will last about 50 years operating at full capacity.
<PAGE> 14
QUALITY AND DIVERSIFICATION
PCS produces a wealth of products at its three phosphate facilities in
the US. From its high-quality phosphoric acid, it makes solid and liquid
fertilizers, industrial phosphoric acid and feed supplements for livestock and
poultry. The most flexible of the major producers, it can switch its production
among these products to maximize its margins.
Outside experts have recognized PCS Aurora in North Carolina as the
lowest-cost world producer of phosphoric acid, and White Springs in Florida is
also a leading low-cost producer. These two facilities combine with the
phosphate plant that is part of the Company's nitrogen operations at Geismar,
Louisiana to make PCS one of the world's lowest-cost P205 producers.
Superphosphoric acid and phosphate solutions are also produced at Geismar,
making PCS the world's leading supplier of superphosphoric acid, a fertilizer
intermediate geared to the increasingly popular conservation tillage systems.
Aurora blends its byproduct gypsum and clays into a unique neutralized
soil for land reclamation so it needs no clay pond impoundment areas.
Convenience to tidewater at both Aurora and White Springs benefits
transportation logistics.
[CHART] With the most varied line in the industry, PCS can shift its feedstock
to the products most in demand by the markets, optimizing margins.
DIVERSITY IN PHOSPHATE PRODUCTION GIVES STRENGTH
In 1998, PCS produced 2.363 million P2O5 tonnes of phosphoric acid. This total,
4 percent more than
[Photo caption] PCS is the world's largest manufacturer of phosphate feed
supplements for livestock and poultry, which help proper growth, maintenance and
reproduction, and in cows, good milk production.
<PAGE> 15
11
1997 production, partially reflects inclusion of a full year of production at
Geismar. Aurora produced phosphate rock at 79 percent of capacity and P205 at 99
percent. White Springs, whose rock comes from its Swift Creek mine and is
processed at its Suwannee River and Swift Creek facilities, produced rock at 94
percent of capacity and P2O5 at 87 percent. Geismar, which uses imported rock,
produced P2O5 at 106 percent of capacity.
Phosphoric Acid 1998
World production: 27.6 million P2O5 tonnes (est.)
PCS production: 2.4 million P2O5 tonnes
PCS percentage 9%
White Springs reduced its costs of producing DAP by 2 percent. It had
record production of green SPA. A major change in the LoMag process, fully
implemented in 1998, enabled production of this type of SPA to increase by 16
percent over 1997 and cut costs of production per P205 tonne. The Swift Creek
plant continued to operate according to its original design, as a single product
producer of black SPA, and raised its output 2 percent above 1997. Again it was
one of the most cost-effective plants anywhere.
Record production volumes at Aurora helped to reduce unit costs at this
already low-cost plant, despite challenging mining conditions and lower ore
availability in the area of its deposit being mined. Annual production records
were set for sulphuric acid, phosphoric acid, green phosphoric acid, 54 percent
1998 ROCK AND ACID PRODUCTION
<TABLE>
<CAPTION>
PHOSPHATE ROCK PHOSPHORIC ACID
ANNUAL 1998 1997 ANNUAL 1998 1997 MINE SITE
CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION EMPLOYEES
(million tonnes) (active)
(million tonnes P2O5)
<S> <C> <C> <C> <C> <C> <C> <C>
Aurora NC 6.0 4.738 4.806 1.202 1.193 1.168 1,177
White Springs FL 3.6 3.393 3.585 1.093 .956 .962 1,113
Geismar LA - - - .202 .214 .152(1) 45
- -------------------------------------------------------------------------------------------------------------------
Total 9.6 8.131 8.391 2.497 2.363 2.282 2,335
</TABLE>
(1) After acquisition, March 6, 1997.
[PHOTO]
<PAGE> 16
PRODUCTION REPORT
1998 PHOSPHATE PRODUCTION
(million tonnes product)
<TABLE>
<CAPTION>
AURORA WHITE SPRINGS GEISMAR
ANNUAL 1998 1997 ANNUAL 1998 1997 ANNUAL 1998 1997(1)
CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liquids
MGA (2) 1.835 1.789 1.753 1.908 1.456 1.474 .337 .357 .252
SPA .676 .437 .348 1.138 .822 .788 .196 .180 .121
Solids
DAP 1.247 1.225 1.215 .710 .700 .724 - - -
</TABLE>
(1) After acquisition, March 6, 1997.
(2) 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.
acid, LoMag, POLY 11 and DAP. Productivity was increased by improvements in
production of amber acid and of the feed acid for industrial acid. Ammonia usage
was cut through improvements in recovery from the DAP plants.
Geismar set an annual P2O5 production record of 0.214 million tonnes,
benefiting from a new reliability team that addresses equipment problems and
proposes corrective actions.
Technological advances at Aurora included development of a new flotation
scheme for two circuits in the mill to improve recovery, and implementation of
low phosphorus technology in the cooling towers to reduce discharge to the
outfalls.
At White Springs, mining production capability and efficiency were
improved. A second rod mill was added to grind rejected "pebble" to product of
usable size, and a telemetry system was installed on one dragline pumping
circuit to pump a denser slurry and cut time lags in start-up and shutdown.
Global Positioning System equipment increased productivity in surveying and
prospecting of mineral reserves.
FEED PHOSPHATE PRODUCTION
PCS is the world's largest manufacturer of phosphate feed supplements for
livestock and poultry. While production was down by 3 percent in 1998, it still
represented an estimated 47 percent of total US feed phosphate production.
Weeping Water, Kinston, Marseilles, Davenport and one White Springs
facility produced Dical and Monocal, while DFP was produced at Saltville and
White Springs. High inventories constrained total production in 1998, but plant
improvements resulted in new daily production records at Weeping Water,
Marseilles and Davenport. Through efficiencies in gas consumption and use of
more of its own rock, costs of producing DFP at White Springs fell by 4 percent.
A new program of annual quality audits at each facility was implemented in
1998 to maintain the reputation of PCS feed products for high quality. A potash
storage dome being constructed at Marseilles will reduce costs of distributing
potash, and is one of many synergies achieved among the Company's operating
units. Acid tanks being built at Marseilles and Kinston will provide a more
constant flow of acid to the plants and free rail cars for other uses.
INDUSTRIAL ACID
The purified acid plant at Aurora produced 0.130 million P2O5 tonnes of
purified acid for industrial use. This was 96 percent of its rated capacity of
0.135 million tonnes.
1998 FEED PHOSPHATE PRODUCTION
(million tonnes)
<TABLE>
<CAPTION>
ANNUAL CAPACITY 1998 PRODUCTION 1997 PRODUCTION EMPLOYEES
(active)
<S> <C> <C> <C> <C>
Davenport IA .280 .094 .080 27
Marseilles IL .278 .175 .187 37
White Springs FL (D/M) .218 .096 .108 20
Weeping Water NE .209 .154 .161 42
Kinston NC .141 .059 .070 27
White Springs FL (DFP) .100 .086 .079 41
Saltville VA .078 .068 .072 50
----- ----- ----- ----
Total 1.304 .732 .757 244
</TABLE>
<PAGE> 17
13
PCS NITROGEN
WHAT IS NITROGEN? A requirement for every living cell. It is part of the genetic
blueprints RNA and DNA, and needed by animals for proper nutrition and
maturation. The fundamental building block of plant proteins, it improves yield
and quality. SOURCE? Ammonia synthesized from natural gas, steam and air is the
feedstock for all nitrogen products and the most concentrated nitrogen
fertilizer. Urea is the major fertilizer source of nitrogen. Solid
fertilizer ammonium nitrate is made from nitric acid. Liquid forms of urea and
ammonium nitrate are combined into nitrogen solutions. WORLD TRADE? More than
75 countries produce ammonia and most use their production internally, so
cross-border trade is limited. North America is a net importer of
nitrogen, unlike potash and phosphate with their excess supply and large
exports.
PCS STRENGTHS: Large percentage of industrial sales; long-term natural gas
contracts in Trinidad.
[Photo caption] Urea is the world's most popular nitrogen fertilizer and, among
other uses, is a raw input for the insulin product humulin used by eight million
diabetics around the world.
<PAGE> 18
PRODUCTION REPORT
A WEALTH OF UPGRADED PRODUCTS
AMMONIA 1998
World production: 126.9 million tonnes (est.)
PCS production: 3.8 million tonnes
PCS percentage: 3%
PCS, the most diversified nitrogen producer, makes upgraded products for
agriculture and industry at six plants in the United States and a large complex
in Trinidad. It produces all the nitrogen fertilizers and its industrial
products are used in the manufacture of essential and familiar products for
home, car, building and pharmaceuticals. PCS micro prilled urea is used as a
nitrogen-based supplement that helps build protein in beef and dairy cattle.
Adequate supplies of natural gas are key to the competitive production of
nitrogen products. Natural gas can represent up to half of the operating budget
of PCS Nitrogen. The Company has the ability to produce 43 percent of its
ammonia in Trinidad, where the price of natural gas is indexed to ammonia prices
in the Caribbean. For its US production, it purchases half of its natural gas at
fixed prices and half at market prices. This breakdown has been adopted as the
ongoing PCS strategy.
Much of the ammonia produced in Trinidad goes to Florida DAP producers.
Nearly half the Company's US production goes to industrial customers as ammonia
or upgraded products. It can use over a third of the remaining ammonia for its
own DAP production. The rest of its nitrogen business is agricultural and
benefits from its strategic plant locations in the US Midwest, close to
customers and profiting from a positive price differential with the Gulf.
VALUE-ADDED PRODUCTS FOR AGRICULTURE AND INDUSTRY
PCS produced 3.806 million tonnes of ammonia in 1998, 63 percent from its
plants in the United States and 37 percent in Trinidad. That ammonia was the raw
material used in its value-added products.
The ammonia plant under construction in Trinidad when PCS acquired the
former Arcadian Corporation, now PCS Nitrogen, began operating in May 1998,
[CHART] With the new PCS ammonia plant in Trinidad now operating, the complex
there has 43 percent of Company capacity.
1998 PRODUCTION
(million tonnes)
<TABLE>
<CAPTION>
AMMONIA(1) NITRIC ACID(1)(2)
ANNUAL 1998 1997* ANNUAL 1998 1997*
CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION
<S> <C> <C> <C> <C> <C> <C>
Trinidad 1.827 1.399 .923 - - -
Augusta GA .622 .666 .549 .474 .511 .409
Lima OH .525 .481 .388 .097 .103 .075
Geismar LA .476 .473 .404 .560 .517 .441
Memphis TN .357 .373 .275 - - -
Clinton IA .238 .226 .182 .126 .122 .105
LaPlatte NE .182 .188 .143 .178 .158 .125
Wilmington NC(3) - - - .161 .025 .087
------ ------ ------ ------ ------ ------
Total 4.227 3.806 2.864 1.596 1.436 1.242
</TABLE>
* After acquisition, March 6, 1997.
(1) A substantial portion of ammonia and nitric acid is upgraded to
value-added products.
(2) HNO3 tonnes
(3) Ceased production June 1998; remaining staff dealing with safety and plant
remediation.
<PAGE> 19
15
[CHART] Industry consultants forecast considerable growth in industrial sales of
nitrogen, which will benefit PCS.
the fourth in the Company's complex there. One of the world's largest and most
advanced facilities, it features a gas-efficient Kellogg Advanced Ammonia
Process (KAAP) reactor.
Because of the difficult nitrogen solutions market, PCS ceased production
at its Wilmington plant, the only nitrogen facility not producing its own
ammonia feedstock. The lower-cost Augusta plant took over the supply of nitric
acid for the Company's contract with W.R. Grace, which built a calcium nitrite
plant adjacent to Augusta.
Annual production records were set at Augusta for all products in 1998.
Record annual ammonia production was also achieved by Trinidad, Geismar and
Memphis; the latter also set a record for the year's urea production. Lima had
record production of nitric acid and LaPlatte of nitrogen solutions.
INDUSTRIAL PRODUCTION
Many PCS nitrogen products have widespread industrial uses. Of the
Company's 1998 US production, more than one-quarter of the ammonia, 62 percent
of urea, 74 percent of ammonium nitrate and all nitric acid went to industry,
mainly in the US.
PCS is responding to the growing demand for industrial nitrogen products by
expanding its production capabilities. Nitric acid capacity is being increased
at Geismar to meet rising market demand. Its new state-of-the-art plant, the
fifth in its complex and the largest in the US, was designed to have extremely
low air emissions. Its production will be used by customers to make both methyl
diphenyl diisocyanate (MDI) and toluene diisocyanate (TDI), used in flexible
cushioning foams and rigid urethane foams.
PCS also produced 0.092 million tonnes of micro prilled urea at Memphis.
[Photo Caption] Several long-term industrial customers have built plants
adjacent to PCS Nitrogen facilities, and are conveniently connected by
pipeline.
<TABLE>
<CAPTION>
UREA SOLIDS AMMONIUM NITRATE SOLIDS NITROGEN SOLUTIONS
ANNUAL 1998 1997* ANNUAL 1998 1997* ANNUAL 1998 1997* EMPLOYEES
CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION CAPACITY PRODUCTION PRODUCTION (active)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
.586 .512 .489 - - - - - - 388
.274 .348 .282 .397 .410 .343 .581 .467 .356 142
.329 .260 .192 - - - .163 .157 .128 2(5)
- - - - - - 1.028 .955 .873 152
.399 .395 .249 - - - - - - 159
- - - .079 .078 .077 .163 .081 .083 114
- - - - - - .436 .436 .344 125
- - - - - - .408 .003 .082 5
1.588 1.515 1.212 .476 .488 .420 2.779 2.099 1.866 1,087(4)
</TABLE>
(4) 502 contract employees work at the nitrogen plants, for a total
active workforce of 1,589.
(5) BP Chemicals operates the Lima facility under an operational
agreement with PCS Nitrogen.
<PAGE> 20
SALES REPORT
PCS SALES
WHAT ARE THE MAJOR MARKETS? The United States, China, India, Brazil.
CHARACTERISTICS? The US, the world's largest consumer of fertilizers, is a
mature market with relatively stable annual consumption. Important factors are
acreage planted and application rates per acre. China, a major potash and
phosphate importer, is evolving from centralized purchasing to a multiple
customer system. In India, an important market for potash and phosphate,
purchases are affected by subsidy levels. Brazil, the largest agricultural
producer in Latin America and a major potash importer, applies fertilizer to
cash crops it grows for export. Weather and politics may affect fertilizer
purchases in any country.
PCS STRENGTHS: Multiple product locations; efficient transportation network;
one-stop shopping convenience.
[PHOTO]
<PAGE> 21
17
BUILDING ON GLOBAL AND DOMESTIC OPPORTUNITIES
World consumption of fertilizers continued to grow in 1998; total sales of
nitrogen, phosphate and potash for agriculture and industry increased by
approximately 1 percent over 1997. Nitrogen and phosphate sales rose despite
economic difficulties in Asia, the Former Soviet Union (FSU) and Latin America,
while world sales of potash fertilizer fell slightly due to large volume buying
the previous year.
PCS continued to serve its customers by providing the three primary
nutrients through its efficient transportation network. That network of
railways, trucks, river barges and ocean-going bulk carriers, plus strategically
located warehouses, makes the Company a reliable supplier able to provide
just-in-time delivery.
A focus group of dealers in 1998 rated PCS Sales as the supplier that does
the best job of serving their NPK needs, and the most honest, modern, dependable
and on-time. Since it has no large retail network, they did not consider it a
competitor.
The major fertilizer market for PCS is the United States, its home market
in all three nutrients. In 1998, PCS maintained its market share in each
nutrient. The world's largest consumer of potash, the US is the Company's
biggest single market. It is a big user of phosphate fertilizers, and PCS has 16
percent of its DAP market and about half of the market for liquid fertilizers.
The US is also a major producer and consumer of ammonia for both fertilizer and
industry; PCS has significant sales in both areas.
[Photo caption] Asia is an emerging fertilizer market with a huge potential for
greater consumption.
<PAGE> 22
SALES REPORT
Offshore, the majority of PCS potash sales are handled by Canpotex, the
export sales agency for Saskatchewan producers. Offshore phosphate sales are the
responsibility of PhosChem, an association for US exports of phosphate
fertilizers whose market position has been strengthened by the inclusion of
Mississippi Chemical and Mulberry. PCS Sales handles all liquid phosphate
exports for PhosChem, as well as offshore sales of the Company's New Brunswick
potash and Mississippi Chemical's potash from New Mexico, and all sales of PCS
nitrogen products.
China, Brazil and India are the major offshore fertilizer markets.
China, with 22 percent of world population and 7 percent of arable land,
has made increased fertilizer use a priority. Its potash consumption has risen
by an average of 9 percent a year in the last 10 years, and PCS is a major
supplier. China is the world's largest DAP importer, with almost two-thirds of
its imports provided by PhosChem. Usually the world's largest importer of urea,
China stopped importing during 1997, affecting ammonia and urea markets.
Brazil, the largest country in South America, is a major consumer of
potash, and an important market for PCS. It is the largest single market for the
Company's New Brunswick potash.
PCS sells little potash to India but its purchases support prices and
absorb tonnage that could otherwise compete with the Company's products. It is a
major phosphate importer. Its primary DAP supplier is the US, and the majority
of its MGA comes from Morocco. It buys MGA to make DAP or it buys DAP, depending
on price.
PCS POTASH IN DEMAND
World demand for potash continued strong in 1998 and, as no new supply came
on stream, the market was firm. World sales are estimated at 41 million tonnes
and PCS sold 16 percent of that, 6.409 million tonnes (including inter-company
sales to Florida Favorite Fertilizer). Its sales were just 5 percent below its
all-time record set in 1997. Offshore markets took 56 percent of total sales
volumes, domestic markets 44 percent. First-quarter sales, led by offshore
demand, established a new Company record, and third-quarter sales came
close to matching the 1997 record for that quarter. Prices increased in
both markets.
DOMESTIC
PCS sold 2.828 million tonnes of potash domestically in 1998, meeting
almost 30 percent of North American demand. After 1997, an exceptional year with
large volume purchases in fall and winter in anticipation of price increases,
1998 sales by all suppliers were down about 11 percent. Sales by PCS, which
include 0.126 million tonnes sold to Florida Favorite Fertilizer, were 10
percent below its 1997 record. The United States market took 90 percent of the
Company's domestic potash; the major customers were large agricultural co-ops
and national firms.
Although shipments for the spring season didn't differ much in total
volumes from 1997, the quarterly distribution was quite different and
illustrates the difficulty of quarter-over-quarter comparisons. After the huge
fall/winter fill which set Company sales records in fourth quarter 1997 and
first quarter 1998, sales in the second quarter were lower than the previous
year. Sales surpassed the 1997 record in the third quarter, but fell back toward
the end of the year, when it was clear that farmers were postponing purchases
for their spring season needs until 1999.
Total domestic sales in 1998 included 0.109 million tonnes of product
compacted at the Company's new Cassidy Lake property in New Brunswick. It began
taking standard potash from Rocanville in April and upgrading it to granular
product wanted in domestic markets on the East Coast.
Domestic prices were the strongest in more than a decade. Higher prices
were achieved for March and held up well for the rest of the year. Proposed
price increases for first-quarter 1999 will be tested when the spring season
commences.
OFFSHORE
Markets offshore bought 3.581 million tonnes of PCS potash in 1998, just
0.042 million tonnes below the export record set in 1997.
Again, China and Brazil were the Company's main markets, but Malaysia
bought record volumes, as did the emerging markets of
[CHART] Notwithstanding the economic difficulties of many Asian nations,
offshore volumes were only 1 percent below the 1997 record.
<PAGE> 23
19
Thailand and Vietnam. Except for Indonesia, Asian economic problems did not
have much impact on sales, for countries there understand how important potash
is to the cash crops they grow for export.
At 5.1 million tonnes, sales by Canpotex were less than 2 percent below the
1997 record. PCS provided 2.966 million tonnes of that. The largest Canpotex
markets were China, Brazil, Malaysia and Japan, which together took 63 percent
of its volumes.
China, which purchased near-record volumes from all suppliers, bought 31
percent of the potash sold by Canpotex. Brazil bought a total of 3.2 million
tonnes from all sources, though economic difficulties in the second half held
its imports below the 1997 record. Canpotex had the second-best year in its long
history in Brazil, providing 20 percent of all potash sold there; that was 13
percent of total Canpotex sales. Brazil was the largest single export market for
PCS potash from New Brunswick, with 55 percent of its offshore sales. Delays in
government decisions on subsidies affected India's 1998 imports slightly,
despite demand.
With strong offshore demand, Canpotex achieved higher prices in Japan,
Korea, Australia, China and Brazil.
NON-FERTILIZER
More than 7 percent of total potash sales were industrial, sold to
customers who refine it further or use it for manufacture of other products.
Sales were up 2 percent over 1997, and 68 percent went offshore, where Japan,
Korea and China are important customers. Industrial potash prices were up by 10
percent.
A small amount of PCS potash is sold for animal feed supplements. In 1998,
sales increased by 13 percent to 0.027 million tonnes.
All non-fertilizer sales are included in domestic and offshore totals.
[Photo caption] Developing nations, where most world population growth is taking
place, are large importers of fertilizers and use them to produce a wide range
of crops.
<PAGE> 24
SALES REPORT
HIGHER PHOSPHATE SALES
With higher world demand for phosphates in 1998 and continued tight supply,
the phosphate market remained in balance. World trade was up an estimated 2
percent over 1997 levels, led by record sales of the many phosphate fertilizer
products.
World production and consumption of DAP rose by 3 percent, setting new
records. China, a major DAP consumer and importer, used large volumes.
Uncertainty about subsidy levels limited India's purchases for much of 1998, but
it re-entered the market late in the year and its total purchases exceeded those
of 1997.
MGA production and consumption worldwide grew by 2 percent in 1998. India
is the single largest importer of MGA, which it uses to make DAP, and in 1998
its purchases amounted to almost half of international trade. Its one-year 1998
contract with its major suppliers matched the 1997 record volumes.
PCS sold 4.627 million tonnes of phosphate products in 1998, 4 percent more
than in 1997. Almost two-thirds of sales were domestic, up from 62 percent the
previous year. Following its policy of emphasizing the products with the best
margins, the Company limited its MGA exports and upgraded its phosphoric acid
for sale in North America where prices were better. It had 23 percent of North
American phosphate sales, including one-third of all non-fertilizer phosphate
sales.
PHOSPHATE PRODUCTS
Solid and liquid phosphates, used primarily for fertilizers, made up 79
percent of PCS phosphate sales in 1998. Feed supplements for livestock and
poultry made up 16 percent, and the remainder was industrial and purified
product and phosphate rock.
SOLID PHOSPHATES: DAP sales in 1998 totalled 1.962 million tonnes, slightly
more than the 1.924 million tonnes sold the previous year. Of that, 1.083
million tonnes were sold offshore through PhosChem, whose DAP sales jumped 11
percent to 4.912 million tonnes; PCS supplied 22 percent of that. Two-thirds
went to China, always the largest offshore buyer, and India, Thailand and Japan
were other major purchasers. Pakistan's purchasing patterns affect world DAP
trade and it returned strongly to the market in 1998, including some tonnage
from PhosChem. Vietnam, another sizable importer, also returned strongly to the
market. Offshore prices were up 3 percent over 1997.
PCS sold 0.879 million tonnes of DAP domestically, 8 percent more than
in 1997 and 45 percent of total DAP sales. Domestic prices were similar to 1997.
LIQUID PHOSPHATES: Sales of liquid phosphate products continued their
annual rise to total 1.684 million tonnes, 13 percent more than 1997, which had
been a 20-percent increase over the previous year. All the increase was in
domestic sales, which were up 18 percent.
Superphosphoric acid, which is used in conservation tillage systems, was
the major domestic product, comprising half of liquid sales. Domestic prices
climbed through spring and summer, with the average price for the year up 3
percent.
[CHART] PCS customers vary by both geography and end use.
[Photo caption] Nitrogen fertilizers are the first fertilizers US farmers buy,
the most in demand and the fastest-growing in use.
<PAGE> 25
21
Amber MGA was the major export product. PCS supplied 71 percent of the
0.503 million tonnes of MGA shipped by PhosChem. The association's sales were up
by 19 percent, with India, Australia and Brazil the biggest markets. Liquid
prices rose through 1998, reflecting strong sales, for a year-over-year increase
of 7 percent.
Phosphate Rock: In keeping with the PCS policy of retaining its phosphate
rock for its own production, sales were limited to 0.009 million tonnes, just 30
percent of 1997 sales.
Feed Supplements: PCS sold 0.747 million tonnes of phosphate feed
supplements, almost identical to 1997. Half of that was Monocal, with Dical
amounting to 27 percent, DFP 21 percent, and feedgrade MAP and DAP the
remainder. Eighty-seven percent of sales were domestic, and prices were similar
to 1997.
In offshore markets, Asian demand was down due to the effect of local
economic problems on demand for meat, but new markets in Chile, Peru and Vietnam
offset this decline. Offshore prices were down 9 percent. When offshore and
domestic markets are taken together, feed supplement prices were flat over 1997.
Liquid products sold to the feed market, and included in total liquid
phosphate sales, amounted to 0.194 million tonnes. When all phosphates sold to
the feed market are considered together, both volumes and prices were flat
compared to 1997.
Industrial Products: In a joint venture with Albright & Wilson Americas,
Aurora produces both food-grade acid and technical grade for industrial
processes and products. Total sales involved were 0.225 million tonnes in 1998,
which are included in other phosphate sales. Additional phosphate products sold
for industrial use, also included in other phosphate sales, totalled 0.213
million tonnes. Most of this came from Geismar, which sells phosphoric acid
under contract to Rhodia, Inc. as a feedstock for its food-grade acid
purification plant located beside the Geismar plant.
Sales volumes of all phosphates sold for industrial use were up 13 percent,
while prices fell 7 percent.
[CHART] The US nitrogen production was consumed in the US. About 85 percent of
ammonia from Trinidad went to the US market, mostly to DAP producers.
NITROGEN SUPPORTED BY INDUSTRIAL PRODUCTS
PCS benefited from its wide range of nitrogen industrial products in 1998,
when ammonia supply continued to outpace demand with a damaging effect on prices
for nitrogen fertilizers.
World consumption of ammonia for both agriculture and industry grew by 2
percent in 1998. Still, the nitrogen market struggled throughout the year, with
trade and prices down compared to 1997.
Along with the excess supply of ammonia, China's absence from the urea
market -- where traditionally it has been a major purchaser -- affected prices
and profits for producers. China's ammonia production was up by an estimated 2
million tonnes, which was upgraded into urea for its own use. Ammonia production
was also higher in the United States, India,
[PHOTO]
<PAGE> 26
SALES REPORT
Trinidad and the Middle East, after new supply came on stream. Consumption
of ammonia rose in China by approximately 2 million tonnes. It also rose in
India, in the Middle East where it was converted to urea for export, and in the
US where it was used to make DAP for export. The FSU cut production in 1998, and
its consumption fell.
Although prices were influenced by the oversupply of ammonia, PCS was
partially sheltered by its wealth of industrial products. In 1998, it had
approximately 28 percent of the industrial nitrogen market in North America, and
18 percent of the total nitrogen market.
NITROGEN PRODUCTS
PCS sold 6.679 million tonnes of nitrogen products, both manufactured and
purchased, in 1998, 11 percent more than in its 10 months as a nitrogen producer
in 1997. Ninety-four percent of sales were domestic. Sales of manufactured
products were up by 25 percent, while resale of purchased product was down by 51
percent. Most of this was ammonia, which the Company purchases from producers in
the Former Soviet Union and other countries. In 1998 it chose to decrease these
purchases by 49 percent and use its own ammonia.
Sales of ammonia, which is used as a fertilizer and as feedstock for other
nitrogen products, totalled 1.496 million tonnes, 41 percent more than in 1997.
Almost 90 percent was domestic.
Urea sales were up 16 percent to 1.425 million tonnes. Urea is the
Company's largest export nitrogen product, and 18 percent of sales went
offshore, all from Trinidad.
Nitrogen solutions again represented the largest sales product, and 2.164
million tonnes were sold, 26 percent more than in 1997. All sales were domestic;
North American farmers' increasing use of conservation tillage methods and site
specific fertilizer applications raises demand for nitrogen solutions, which are
well-suited to these methods.
Other nitrogen sales of 1.040 million tonnes included ammonium nitrate, up
11 percent to 0.465 million tonnes, and nitric acid, up 35 percent to 0.417
million tonnes. All ammonium nitrate and almost all nitric acid was sold in
North America.
Included in total 1998 sales of nitrogen products were 2.254 million tonnes
of higher-margin industrial nitrogen products, 30 percent more than in 1997.
Much of the increase was due to higher contract volumes influenced by the strong
US economy, particularly housing starts.
Also included in total 1998 sales were nitrogen feed sales of 0.074 million
tonnes, 86 percent of it urea prills and the rest urea solutions. Total volumes
were up 2 percent. Almost all sales were domestic, but small volumes were sold
to Mexico for the first time.
Prices for all nitrogen products were down in 1998, affected by an
oversupply of ammonia, China's absence from the market and lower prices for FSU
product due to a devalued ruble and lower production costs. Fertilizer products
were hardest hit, falling
[Photo caption] Urea is an important ingredient in high-quality dyes for
textiles.
<PAGE> 27
23
28 percent from 1997 levels. Prices for industrial products were affected
by the general nitrogen market and fell 14 percent, but remained higher than
fertilizer prices throughout the year. Ammonia prices offshore were down 22
percent and urea prices 18 percent. The fall in domestic prices ranged from 4
percent for ammonium nitrate to 25 percent for ammonia.
In 1998, PCS signed an agreement with Melamine Chemicals, which produces
melamine for surface coating and laminating resins used in countertops,
cabinets, floors, automotive and appliance paints, and other products. When this
agreement is concluded, PCS will provide up to 113,000 tonnes per year of urea
liquor to Melamine Chemicals, which plans to build a plant beside the PCS
facility at Memphis. Construction is expected to begin in 1999. When the
Melamine plant is completed, a large majority of the PCS Memphis production will
be used for industrial purposes.
Several other large customers also have plants adjacent to Company
facilities and connected by convenient pipeline. PCS signed major contracts with
six other industrial customers for nitric acid, ammonia and urea.
OUTLOOK FOR 1999 AND BEYOND
While some national economies floundered in 1998, world population grew by
about 80 million with a corresponding increase in the demand for food. Meeting
that demand from the world's declining acreage of arable land requires balanced
fertilization; without it, there is no hope of feeding billions of people with
ever-increasing food requirements and desire for better and more varied diets,
particularly meat. At the same time, grain stocks are in delicate balance. One
bad crop year can put the global food supply at risk.
PCS is well-equipped to help the world meet these challenges. It is first
and foremost a fertilizer company and a leading exporter to developing
countries, where fertilizer consumption is growing at three to four times the
rate in the developed world. These countries, where population is rising and a
growing middle class insists on better food, increasingly recognize the role of
fertilizer in helping to fulfil the new food demands. They are emphasizing the
need to apply adequate amounts of fertilizer and to better balance their
application of the three nutrients.
China, the world's most populous nation, is the largest user of fertilizer
so its buying patterns are always important and influential. Potash and DAP are
key fertilizer imports for China, and its demand for them is expected to
continue to be strong in 1999. China has made essentially no urea purchases
since mid-1997, with a lowering effect on world nitrogen pricing. It is
producing more of its nitrogen needs. Its return to the urea market would affect
both sales and prices positively, but there is no indication when that might
occur.
India's fertilizer purchases depend on its subsidy levels, and producers
have been urging the government to set levels early for the new fiscal year.
[Photo caption] The people in developing nations are demanding better diets with
more variety and better quality of food, and fertilizer is crucial to meeting
those needs.
<PAGE> 28
SALES REPORT
Large-volume purchases of potash and DAP are expected for 1999. Brazil, the
third of the Big Three offshore potash markets, is expected to continue to
import large volumes of potash, which is critical for the cash crops of
soybeans, coffee, citrus fruits and sugar cane that provide vital export
revenues.
North American fertilizer demand is expected to be higher in 1999 than in
1998, with a strong spring season likely. The US government is providing farmers
with $6 billion in emergency spending for agriculture in support of low
commodity prices and in disaster relief. Net cash farm income is expected to be
the second highest on record. Total acreage planted is expected to be much the
same as in 1998.
In concert with supply, world trade affects prices. Estimates of changes in
1998 trade, compared to 1997, vary among the nutrients: Phosphate trade was up 2
percent, potash trade down 4 percent after a very strong 1997 and nitrogen down
4 percent. In all three nutrients, PCS maintained its market share.
The FSU is an important fertilizer producer and its potash and phosphate
companies are increasingly aware of the law of supply and demand and its effect
on profitability. Potash producers there are operating at close to actual
current capacity but are constrained by infrastructure limitations. They sell
through International Potash Company, whose successful joint agreement with
Canpotex in Malaysia is continuing. Infrastructure constraints also affect the
FSU phosphate industry, which is much smaller since privatization. The nitrogen
situation is different. FSU ammonia production is influenced by local conditions
unrelated to world demand, and benefits from a devalued ruble and lower gas
prices. Ammonia and urea exports are down.
[CHART] World grain inventories remain below the stocks-to-use ratio which the
FAO considers the minimum needed to safeguard food security.
[PHOTO]
<PAGE> 29
25
Efforts are being made to increase domestic fertilizer use, which will
affect the world supply/demand balance. Russia's 1998 crop was a disaster, and
the government has announced measures to increase fertilizer consumption there
in 1999.
Demand is expected to grow in both domestic and offshore potash markets in
1999, and prices should remain firm with continued strong trade. Increases in
world phosphoric acid capacity should be matched by increased utilization, as
phosphate trade is expected to remain strong, keeping supply/demand tight and
prices firm. Nitrogen exports are forecast to increase in 1999 but excess
capacity worldwide will continue to keep prices down, unless there are cutbacks
in production. The nitrogen business has much upside potential and can easily be
stimulated by unexpected events such as plant outages and closures.
PCS anticipates continued strong demand for its industrial products, and
expects to benefit from contracts with new customers scheduled to be completed
in 1999. It will continue to shift its phosphate and nitrogen from fertilizer to
industrial products and feed supplements. Its expansion at Geismar with a
contract customer will enable the Company to continue to grow its sales of
nitric acid, the highest-margin nitrogen product. Industrial prices in
phosphates should be similar to 1998, and in nitrogen they should continue to
demand a premium over fertilizer. Demand for the PCS livestock and poultry feed
supplements is expected to be stable in 1999, but the difficulties in Asian
markets -- where meat consumption had been growing -- will likely affect prices.
Economic and political events within and between nations may cause
temporary problems for fertilizer companies in the short run, but long-term
fertilizer prospects continue to be promising because of rising world population
and demand for food. Rather than a smooth upward sweep, demand for fertilizer
has always snaked around a rising trend line.
INDICATORS TO WATCH
* US acreage planted
* Subsidies in India
* Reappearance of China in the urea market
* Potash imports in Brazil
* Fertilizer exports from the FSU
* Nitrogen plant outages and closures
[Photo caption] In the US, nitrogen and phosphates make up more than 90 percent
of the fertilizer used by wheat, and most is applied before or at planting.
<PAGE> 30
PCS STEWARDSHIP
WHAT DOES STEWARDSHIP MEAN?
Long-term service awards for employees and scholarships for employees'
children; contributions of time and money to community events; attention to
corporate governance; a responsible corporate environmental policy and high
standards of environmental care; treating safety as a priority.
[Photo caption] Restored or created wetlands at Aurora add beauty to the area,
attracting wildlife and wading birds such as this egret.
<PAGE> 31
27
FULFILLING ITS RESPONSIBILITIES
Almost two-thirds of the PCS workforce of 5,744 at December 31, 1998 worked
in the United States, with 29 percent in Canada and 7 percent in Trinidad. The
annual payroll is approximately $248 million.
The Company recognized and rewarded the long-term commitment of its
employees by presenting 955 service awards in 1998. Forty scholarships were
awarded to sons and daughters of employees for post-secondary study -- 12
Chairman's Awards and 28 Divisional Awards.
SHARING IN ITS COMMUNITY
PCS responds to requests to support a wide range of causes in the
communities in which it operates, and individual operations support their local
communities with donations and employee participation in many activities. The
Company matches employees' personal donations to their favorite charities
through its longstanding Matching Gift Program.
In the last three years, PCS has contributed CDN$5 million to the
University of Saskatchewan First and Best Campaign. In response, the University
in 1998 established the Chuck and Norma Childers Chair for Saskatchewan
Enterprise in the College of Commerce. The Company is also in the third year of
its five-year commitment to the North Carolina Museum of Natural Sciences in
Raleigh.
As usual, PCS corporate office employees and those at Cory, Allan and
Patience Lake raised their contribution to the Saskatoon United Way and it was
matched by the Company. Employees again received the Gold Award for
participation and the Company its seventh Gold Corporate Award. PCS Allan
received the Quantum Leap Award for its significant increase in donations.
Employees at White Springs increased their contributions to the United Way of
Suwannee Valley by 6 percent, which, matched by the Company, made up about
one-third of the funds raised. Employees at PCS Nitrogen contributed 19 percent
more to the Memphis United Way than in 1997.
A donation from White Springs gave a major boost to Heritage Village in
Jasper, Florida by making possible the acquisition of land on which this
collection of buildings and exhibits depicting early North Florida history is
located. White Springs contributed to several environmental and educational
organizations in Florida and received the Florida Commissioner of Education's
Business Recognition Award for the third straight year for its contributions to
schools. It also received a Governor's Business Leadership Award for 1998, one
of only nine Florida companies to do so.
The 75 employees at Aurora who participated in the American Cancer
Society's 24-hour Relay for Life raised more money than all other participating
companies or groups and received the Excalibur Award, the Society's top award.
Aurora successfully completed its 23rd annual Salvation Army campaign, with
increased donations, and many employees volunteered to teach Safelife in
elementary schools.
A $10,000 contribution by PCS Nitrogen to the Memphis Zoo was commemorated
by two permanent in-ground plaques in the zoo's Once Upon a Farm area, which
includes growing plots, farm animals and an interactive historical agricultural
display.
Employees at Weeping Water donated their time to give more than 450
visitors to the community's annual Limestone Days tours of the PCS limestone
mine as well as safety training. Limestone Days recognizes the economic
importance of limestone to the local area. Weeping Water uses its limestone to
make the feed supplements Dical and Monocal.
Employees at Clinton made a Christmas Caring Tree, complete with Santa
Claus, for children at the day-care centre at its partner school, Lincoln
Alternative High School, which is operated within the public school system.
CORPORATE GOVERNANCE
The responsibility for corporate governance rests with the Board of
Directors of PCS, which has the duty to direct the management of the business
and affairs of the Company.
Having regard to the guidelines published by the Toronto and Montreal stock
exchanges, PCS reports annually with respect to its corporate governance
practices. For a complete review of those practices, see the section entitled
"Corporate Governance" in the Company's current proxy circular.
The Board of Directors is made up of 15 members, 13 of whom are outside
directors. No significant shareholders are represented on the Board.
<PAGE> 32
STEWARDSHIP
Each of the four committees of the Board 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 Company has adopted a corporate disclosure policy which calls for the
timely public dissemination of material information. Shareholder questions,
comments and concerns may be made to the Senior Vice President, Corporate
Relations, who is responsible for implementing the disclosure policy, to the
Corporate Secretary or to the Company's transfer agent.
PRESERVING THE ENVIRONMENT
Farmers' desire to maintain their land and water is shared by the companies
that provide the nutrients which help keep that land fertile and enable the
effective use of water. Conservation tillage systems are now used on 37 percent
of US cropland, and PCS is a leader in producing fertilizers for those systems.
It shares in efforts by fertilizer companies to encourage farmers to use the
right amounts at the optimum time for each crop, and to balance nutrient use.
PCS takes seriously its responsibility to fulfil the terms of the
environmental permits and applicable federal, provincial, state and local laws
that govern air emissions, waste water discharges, land use and solid and
hazardous waste management at all its operations. It must, according to
corporate environmental policy, manage its operations responsibly to
safeguard the natural resources related to or affected by its activities.
Each production unit must work diligently to minimize potential risks to
the environment and to comply with environmental legislation and regulations.
The Board's environmental affairs committee reviews all audit reports.
In-depth information on PCS environmental activities is available on its
website at www.potashcorp.com.
POTASH AND ITS ENVIRONMENT
The Director, Environmental Affairs for potash, audited all divisions in
1998; each environmental management system met the objective of minimizing the
risk of serious environmental degradation. All divisions except the
newly-acquired Cassidy Lake were substantially compliant with all applicable
environmental regulations and corporate environmental policy. Cassidy Lake
quickly corrected all significant cases of non-compliance.
An impervious cutoff wall five kilometers long and 20 meters deep was
completed at Rocanville, to prevent sub-surface seepage from the waste
management area. The largest such installation in Canada, this wall incorporates
design features developed through research sponsored by the Saskatchewan Potash
Producers Association.
A buried drain was installed at Cassidy Lake to eliminate the possibility
of brine seepage entering the Hammond River. The division received a Watershed
Management Partner Award from the Hammond River Angling Association. The State
of Utah issued final approval for Moab's operating and reclamation plans.
PCS is supporting environmental research at the University of Saskatchewan
investigating the potential for movement of fluids through groundwater barriers.
Early results in this multi-year project indicate that these barriers are more
impermeable than had been thought. An internal research program is being
organized to develop better methods for disposing of the insoluble portion of
potash refinery wastes.
The decommissioning and reclamation plan for each Saskatchewan mine
submitted by PCS Potash to the Saskatchewan Department of Environment and
Resource Management was accepted in its technical aspects. Some discussions
continue between producers and Department officials.
PHOSPHATE AND ITS ENVIRONMENT
In 1998, internal audits were conducted at all phosphate facilities, and a
few issues were identified and corrected. Major capital projects included a
conversion in the Aurora phosphoric acid plant to discharge gypsum directly to
the gypsum/clay blend system and improvements to White Springs' pond system and
spill prevention systems.
[CHART] PCS operations steadily improve their facilities for controlling
pollution, managing wastes and maintaining air quality.
<PAGE> 33
29
Under agreement, the Florida Game and Fresh Water Fish Commission began
managing a reclaimed lake at White Springs for public fishing. The Governor's
Council for Sustainable Florida is working with White Springs as a test case for
application of draft Sustainable Florida Standards for businesses which
integrate environmental protection, economic development, public participation
and community quality of life.
Environmental projects at the Company's feed plants included installation
of new fugitive dust collection systems at Weeping Water and Marseilles.
Land Reclamation: PCS leadership in this area was recognized when the US
Army Corps of Engineers officially agreed in 1998 that 429 acres of restored or
created wetlands at Aurora met the success criteria and could be used for
mitigation against future wetland impacts. Approximately 6,000 trees were
planted in one project and a multi-year monitoring program under way elsewhere
focused on water table levels and successful planted vegetation near three
creeks.
Part of White Springs' reclaimed lands houses a commercial recreational
hunting and fishing business which the Company considers an endorsement of the
wildlife value of its lands. The Florida Department of Environmental Protection
gave this business an award for innovative use of reclaimed lands, recognizing
White Springs in the presentation.
NITROGEN AND ITS ENVIRONMENT
In 1998, three nitrogen facilities and five terminals were audited by a
PCS/consultant team and received favorable reports. A federal Environmental
Protection Agency audit of LaPlatte and three state audits of Augusta resulted
in no citations, and no violations were found in a waste water audit of Lima by
the Ohio Environmental Protection Agency. Augusta and Clinton had no reportable
quantity emissions.
Lima won the Ohio Chemical Council 1998 pollution prevention award. Geismar
received a certificate for participation in the Louisiana Environmental
Leadership Pollution Prevention Program, implementing environmental projects
that go beyond regulatory compliance.
Major capital improvements included installation of an ammonia process
flare for all ammonia relief valves at Geismar, and a waste water concentrator
which allows recovery of ammonia from its waste water system. Lima installed a
vent scrubber for the urea granulator; LaPlatte implemented secondary
containment for all fertilizer storage.
Geismar has an environmental research project to remove uranium and radium
and isolate hydrofluoric and phosphoric acid from the phosphate plant waste
stream. A pilot project was scheduled for early 1999. Clinton is planting poplar
trees to remove nitrates from ground water.
[Photo caption] Water lilies, reeds, shrubs and trees combine into peaceful
beauty in this restored wetland at Aurora, which with White Springs leads in US
land reclamation achievements.
<PAGE> 34
STEWARDSHIP
EMPHASIZING SAFETY IN ALL ITS OPERATIONS
Safety is a top priority and a constant focus at all PCS enterprises, and
operations throughout the Company have achieved enviable safety records. For
example, in 1998, employees at Aurora stacked up 2 million, 3 million and
finally 4 million hours without a lost-time injury. Individual departments
within various facilities have accumulated exceptional safety records: 30 years
in Aurora's Technical Services, 29 years in Lima's Nitrogen Laboratory. The
Company has created the President's Award for 1 million hours worked by an
entire operation without a lost-time injury, and the Chairman's Award for 2
million, 3 million and 4 million hours. All awards are presented personally by
Chairman and CEO Charles E. Childers.
Safety achievements are honored outside the Company, too. In 1998, New
Brunswick and Lanigan each received a John T. Ryan "special award certificate"
for outstanding achievement in safe production in 1997. The John T. Ryan awards
are the awards in Canada for mining safety, and this is Lanigan's sixth award.
New Brunswick also received the New Brunswick Mining Association's award for the
lowest frequency and severity of lost-time accidents of all mines in the
province in 1997.
Recent Potash Safety Milestones
Time without a lost-time injury
Lanigan SK 3 years on August 1, 1998,
2 million hours on February 28, 1999
Allan SK 4 years on October 22, 1998
New Brunswick NB 4 years on June 8, 1998
3 million hours on January 12, 1999
Moab UT 3 years on February 7, 1998
In 1998, Clinton received its fifth Iowa Safety Council Award for
Outstanding Achievement in Accident Prevention. LaPlatte received the Award of
Honor with distinction with six gold stars from the Safety and Health Council of
Greater Omaha, Nebraska, as well as its Seat Belt Honor Award. Wilmington was
presented with its third North Carolina Department of Safety Award.
PCS Nitrogen, Aurora and White Springs received their second consecutive
Thoroughbred Chemical Safety Awards from Norfolk Southern Corporation for
shipping more than 1,000 carloads of hazardous materials in 1997 without a
shipper-caused accident.
Recent Phosphate Safety Milestones
Time without a lost-time injury
Aurora NC 4 million hours on October 13, 1998
White Springs FL 1 million hours on January 18, 1999
Davenport IA 19 years on September 13, 1998
Kinston NC 5 years on December 1, 1998
The entire PCS Phosphate operation reduced its recordable injuries by
38 percent in 1998, achieving an Occupational Safety and Health Administration
(OSHA) incidence rate of 1.61. Safety Training Observation Program (STOP)
training was completed for all employees at Aurora and contractors
working there exceeded 1 million hours without a lost-time injury. White
Springs completed an upgrade of its contractor safety program and trained local
volunteer fire department personnel in hazardous material emergency
response.
PCS Nitrogen improved its overall safety performance in 1998, with an OSHA
recordable rate of 1.3 and three less recordable injuries than in 1997. The
Behavioral Accident Prevention Process was fully implemented. Augusta completed
the year without one OSHA recordable injury, and Lima retained its OSHA VPP Star
status. Memphis hosted a Hazardous Material training demonstration with the
Company training car for the Texas Agricultural Association. Clinton trained
more than 100 local firemen, emergency responders and fertilizer dealers in safe
handling of anhydrous ammonia. Hurricane procedures were included in new health,
safety and environmental procedures at Trinidad. Employees who built the fourth
ammonia plant in Trinidad worked more than 3 million hours without a lost-time
injury.
Recent Nitrogen Safety Milestones
Time without a lost-time injury
Trinidad 2 million hours on January 11, 1999
Geismar LA 4 million hours on December 18, 1998
PCS potash operations excel in the mine rescue competitions in the
provinces in which they operate. For the second consecutive year, Lanigan was
overall winner for soft rock mines in the Saskatchewan Provincial Mine Rescue
Competition, with Rocanville runner-up. New Brunswick was overall winner at the
19th annual New Brunswick Mine Rescue Competition. Lanigan was runner-up in the
18th annual PCS Fireman's Rodeo, which involves all PCS mines and fire
departments in two nearby communities competing in six rodeo events that demand
a range of firefighting skills. It was won in 1998 by the Town of Lanigan team,
which includes several PCS employees.
<PAGE> 35
F I N A N C I A L S
[PHOTO]
[CAPTION]
Corn is the largest user of fertilizer in the US, accounting for more than
40 percent of all application and about the same percentage of each of the three
major nutrients.
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1998 VERSUS 1997
With the exception of purchased product, nitrogen data for 1997 is only for the
period subsequent to the acquisition of Arcadian on March 6, 1997. Phosphate
data for 1997 includes phosphate produced by the acquired Geismar operation.
<TABLE>
<CAPTION>
OVERVIEW
($000'S) 1998 1997 INCREASE (DECREASE) % CHANGE
Net Sales
<S> <C> <C> <C> <C>
North American $ 1,641,376 $1,665,140 $ (23,764) (1)
Offshore 666,387 660,789 5,598 1
$ 2,307,763 $2,325,929 $ (18,166) (1)
Gross Margin $ 609,347 $ 585,171 $ 24,176 4
Operating Income $ 446,056 $ 447,640 $ (1,584) 0
Net Income $ 261,003 $ 297,138 $ (36,135) (12)
Earnings per Share (dollars) $ 4.82 $ 5.68 $ (0.86) (15)
</TABLE>
Higher net sales revenue in potash and phosphate - $41.3 million and $57.4
million, respectively - was more than offset by lower nitrogen net sales revenue
of $116.9 million, resulting in a decrease of $18.2 million in PCS net sales
revenue.
North American net sales revenue represented 71 percent (1997 - 72 percent)
of total net sales revenue and offshore sales represented 29 percent (1997 - 28
percent).
Gross margin for potash products was $316.3 million (an increase of $58.7
million over 1997); for phosphate products $228.2 million (an increase of $33.9
million); and for nitrogen products $64.8 million (a decrease of $68.4 million
from 1997).
The decrease in net income of $36.1 million compared to 1997 is
attributable to: increases in selling and administrative expenses ($16.3
million), provincial mining and other taxes ($9.8 million) and income taxes
($48.4 million) which were partially offset by a $24.2-million increase in gross
margin and a $13.9-million reduction in interest expense.
[CHART] The strongest phosphate sales in its history and potash prices 14
percent higher than in 1997 helped make 1998 a year with record gross margin.
<TABLE>
<CAPTION>
POTASH REVENUE
1998 SALES 1997 SALES $000'S TONNES (000'S)
TONNES TONNES INCREASE INCREASE
$000'S (000'S) $000'S (000'S) (DECREASE) % CHANGE (DECREASE) % CHANGE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North American $227,586 2,702 $210,240 3,017 $17,346 8 (315) (10)
Offshore 317,905 3,581 293,927 3,623 23,978 8 (42) (1)
----------------------------------------------------------------------------------------
$545,491 6,283 $504,167 6,640 $41,324 8 (357) (5)
----------------------------------------------------------------------------------------
</TABLE>
Gross margin for potash products was $316.3 million (1997 - $257.6 million)
or 52 percent (1997 - 44 percent) of consolidated gross margin.
Potash prices in the offshore market rose early in the year with increased
contract prices and then stabilized and rose again in the last half, resulting
in a 9 percent increase on a year-over-year basis. The higher prices realized
were primarily due to higher contract prices with Japan, South Korea and
Australia and increased prices in China and Brazil.
North American potash prices increased in the last half of 1997 and first
half of 1998 due to tighter
[CHART] Firm supply and demand factors resulted in higher potash prices
throughout 1998.
<PAGE> 37
33
supply, then stabilized in the last two quarters, ending the year 21 percent
higher on a year-over-year basis.
The currency devaluations and financial difficulties in Asian countries did
not significantly affect offshore potash sales volumes. Canpotex sales volumes
to Asia decreased by 6 percent from 1997, which was partially offset by a
21-percent increase in sales to Latin America (primarily Brazil). Overall,
offshore sales volumes ended the year down only marginally from 1997.
North American sales volumes declined 10 percent from 1997 levels,
primarily due to abnormally high sales volumes in the last half of that year. In
the North American market, the 2.702 million tonnes sales volumes for 1998 were
sourced as follows: 2.529 million tonnes (1997 - 2.813 million tonnes) came from
Saskatchewan, 0.116 million tonnes (1997 - 0.122 million tonnes) from New
Brunswick and 0.057 million tonnes (1997 - 0.082 million tonnes) from Utah.
[CHART] Potash revenue was 8 percent higher than in 1997, with 58 percent
provided by offshore sales.
North American net sales revenue from potash operations represented 42
percent (1997 - 42 percent) of the Company's potash net sales revenue. Higher
North American potash prices resulted in a $39.4-million increase in North
American potash net sales revenue over 1997. This was partially offset by a
reduction in net sales revenue of $22.1 million due to a 10-percent reduction in
sales volumes, resulting in an overall increase in North American net sales
revenue of $17.3 million.
Offshore net sales revenue from potash operations represented 58 percent
(1997 - 58 percent) of the Company's potash net sales revenue. Higher offshore
prices resulted in a $28.2-million increase in offshore potash net sales
revenue. This was partially offset by a reduction in net sales revenue of $4.2
million due to reduced sales volumes, resulting in an overall increase in
offshore net sales revenue of $24.0 million. In the offshore market, 2.966
million tonnes were sold through Canpotex and the remaining 0.615 million tonnes
were produced by PCS New Brunswick and sold and delivered by PCS Sales.
PHOSPHATE REVENUE
<TABLE>
<CAPTION>
1998 SALES 1997 SALES $000's TONNES (000's)
TONNES TONNES INCREASE % INCREASE %
$000's (000's) $000's (000's) (DECREASE) CHANGE (DECREASE) CHANGE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liquids $ 365,006 1,684 $309,063 1,493 $55,943 18 191 13
Solids 374,525 1,962 362,625 1,924 11,900 3 38 2
Feed supplements 187,557 747 191,016 752 (3,459) (2) (5) (1)
Industrial products 83,210 225 89,588 235 (6,378) (7) (10) (4)
Phosphate rock 691 9 1,317 30 (626) (48) (21) (70)
----------------------------------------------------------------------------------------
$1,010,989 4,627 $953,609 4,434 $57,380 6 193 4
========================================================================================
North American $ 713,584 3,020 $656,884 2,769 $56,700 9 251 9
Offshore 297,405 1,607 296,725 1,665 680 0 (58) (3)
----------------------------------------------------------------------------------------
$1,010,989 4,627 $953,609 4,434 $57,380 6 193 4
========================================================================================
</TABLE>
Gross margin for phosphate was $228.2 million (1997 - $194.4 million) or 37
percent (1997 - 33 percent) of consolidated gross margin.
With the exception of industrial products, phosphate prices in the domestic
market increased or remained constant compared to 1997. Prices for solid
phosphates and feed supplements were flat while liquid phosphate prices
increased by 3 percent when compared to 1997. Industrial prices fell by 3
percent over the same period.
Phosphate prices in the offshore markets (except for feed supplements)
improved during 1998. Liquid phosphate prices were up 7 percent on a
year-over-year basis and solid phosphate prices 3 percent. These increases were
partially due to higher prices realized in Brazil. The price of feed
supplements, affected by the currency devaluations and financial difficulties in
Asian countries, decreased by 9 percent on a year-over-year basis.
Overall, North American phosphate sales volumes increased by 9 percent.
Liquid and solid phosphate sales volumes increased by 18 percent and 8 percent,
respectively. Sales volumes of industrial products decreased by 4 percent due,
in part, to a strike at a significant customer's facility which reduced sales.
Feed supplements sales volumes were down marginally.
Offshore phosphate sales volumes declined 3 percent on an overall basis as
the Company chose to orient its P2O5 production to the North American market
where margins
[CHART] PCS sold more liquid and solid phosphates in 1998, at higher prices.
<PAGE> 38
FINANCIALS
were better. PhosChem had good sales volumes in 1998; sales volumes to Asia
increased by 13 percent and to Latin America by 12 percent. The Company's liquid
and solid sales volumes decreased by 1 percent and 3 percent, respectively,
compared to 1997. Feed supplement sales volumes were flat compared to 1997.
For 1998, North American phosphate net sales revenue accounted for 71
percent (1997 - 69 percent) of total phosphate net sales revenue. Offshore sales
accounted for 29 percent (1997 - 31 percent) of total phosphate net sales
revenue and 35 percent (1997 - 38 percent) of volumes. In 1998, 64 percent (1997
- - 63 percent) of the Company's total phosphate net sales revenue was earned from
phosphate fertilizer products which represented 70 percent (1997 - 70 percent)
of phosphate sales volumes and 58 percent (1997 - 46 percent) of gross margin.
<TABLE>
<CAPTION>
NITROGEN REVENUE
1998 SALES 1997 SALES $000's TONNES (000's)
----------------------------------------------------------------------------------------
TONNES TONNES INCREASE INCREASE
$000's (000's) $000's (000's) (DECREASE) % CHANGE (DECREASE) % CHANGE
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ammonia $194,369 1,496 $183,840 1,061 $ 10,529 6 435 41
Urea 199,141 1,425 203,092 1,226 (3,951) (2) 199 16
Nitrogen solutions 163,014 2,164 161,149 1,719 1,865 1 445 26
Other nitrogen
products 129,775 1,040 118,472 894 11,303 10 146 16
----------------------------------------------------------------------------------------
686,299 6,125 666,553 4,900 19,746 3 1,225 25
Purchased products 64,984 554 201,600 1,138 (136,616) (68) (584) (51)
----------------------------------------------------------------------------------------
$751,283 6,679 $868,153 6,038 $(116,870) (13) 641 11
========================================================================================
North American $700,206 6,261 $798,016 5,544 $ (97,810) (12) 717 13
Offshore 51,077 418 70,137 494 (19,060) (27) (76) (15)
----------------------------------------------------------------------------------------
$751,283 6,679 $868,153 6,038 $(116,870) (13) 641 11
========================================================================================
</TABLE>
[CHART] Non-fertilizer products represented 44 percent of nitrogen net sales
revenue and 35 percent of volumes.
Gross margin for nitrogen products was $64.8 million (1997 - $133.2
million) or 11 percent (1997 - 23 percent) of consolidated gross margin.
The continued absence of China from offshore urea markets and reduced cash
production costs for Former Soviet Union (FSU) producers due to lower gas prices
and currency weakness in the FSU countries led to significant declines in
offshore prices. Urea prices were down 18 percent and ammonia prices down 22
percent compared to 1997.
Falling offshore nitrogen prices resulted in lower North American prices as
well. Prices were down as follows: urea 17 percent, ammonia 25 percent, nitrogen
solutions 20 percent, ammonium nitrates 4 percent and nitric acid 12 percent.
The Company's offshore sales volumes of ammonia increased by 54 percent
which is explained by a full year's operation in 1998 as compared to 10 months
in 1997 and the addition of the new plant in Trinidad. Offshore sales volumes of
urea declined 28 percent as the Company chose to focus its sales on the North
American market where prices were stronger.
In North America, sales of ammonia for fertilizer were slow but the strong
DAP market supported healthy ammonia sales to DAP producers as ammonia is a key
input for DAP. This contributed to a 41 percent increase in manufactured ammonia
sales volumes. When the new PCS facility in Trinidad came on stream, these
tonnes replaced product purchased by the Company, reducing total ammonia sales
volumes (purchased
[CHART] The strong offshore market helped raise DAP prices 3 percent above 1997
levels.
[CHART] The effect of the world oversupply of ammonia on prices was tempered
somewhat for PCS by its large industrial sales.
<PAGE> 39
35
and manufactured) by 5 percent. Urea sales volumes increased 35 percent and
nitrogen solutions sales volumes increased 28 percent.
The Company continued to sell a large portion of its North American
nitrogen production to the more stable industrial market. On a year-over-year
basis, nitrogen industrial prices fell by 14 percent compared to a 28-percent
decline for fertilizer. Non-fertilizer products represented 35 percent (1997 -
30 percent) of nitrogen sales volumes, 44 percent (1997 - 34 percent) of net
sales revenue and 100 percent (1997 -51 percent) of gross margin.
North American net sales revenue accounted for 93 percent (1997 - 92
percent) of total nitrogen net sales revenue.
<TABLE>
<CAPTION>
COST OF GOODS SOLD
1998 1997 INCREASE (DECREASE) % CHANGE
<S> <C> <C> <C> <C>
Potash production (KCl) tonnage (000's) 6,995 6,483 512 8
Phosphate production (P2O5) tonnage (000's) 2,363 2,282 81 4
Nitrogen production (N) tonnage (000's) 3,121 2,349 772 33
</TABLE>
Potash unit cost of sales decreased 2 percent in 1998 compared to 1997, due
primarily to higher production volumes and eight fewer shutdown weeks, which
were partially offset by water management costs at the New Brunswick division
and costs to transport Saskatchewan product to Cassidy Lake for processing.
Overall, phosphate unit cost of sales decreased by 1 percent. This
consisted of increases of 5 percent and 1 percent in the unit cost of sales of
feed supplements and liquid phosphates respectively, offset by decreases of 2
percent for industrial products and 6 percent for solid phosphates (due
primarily to lower input costs for ammonia). The unit cost of sulphur decreased
by 2 percent compared to 1997.
PCS Nitrogen reduced its per unit natural gas cost by 12 percent compared
to 1997 primarily due to its gas contracts in Trinidad. Overall, the per unit
cost of sales of manufactured product declined by 8 percent, primarily due to
reduced gas costs and the opening of an efficient new plant in Trinidad. The
total per unit cost of sales decreased by 16 percent due to reduced gas costs,
the new plant in Trinidad and the reduction in the amount of product purchased
for resale.
Depreciation and amortization expense for 1998 was $190.9 million compared
to $170.0 million in 1997, an increase of $20.9 million or 12 percent. The
increase was largely attributable to $17.7 million additional depreciation and
amortization due to a full year of nitrogen operations in 1998.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses for 1998 were $116.0 million compared
to $99.7 million in 1997. The increase of $16.3 million was attributable to
general increases in compensation and benefits, a full year of amortization of
the goodwill relating to the nitrogen acquisition, an increase in bad debt
expense, an increase in franchise taxes and a Revenue Canada employee benefits
assessment.
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 in cost of goods sold.
For 1998, Saskatchewan provincial mining and other taxes were $80.1 million
compared to $70.3 million in 1997, an increase of $9.8 million. Potash
Production Tax was $61.6 million compared to $53.5 million in 1997, an increase
of $8.1 million. The higher potash prices and the resulting increased profit
per tonne (which was partially due to the strengthening of the US dollar as
compared to the Canadian dollar), combined with the full utilization of certain
provincial resource tax deductions carried forward from previous years,
resulted in most Saskatchewan mines reaching the top marginal profits tax rate
of 35 percent in 1998.
Saskatchewan corporate capital tax was $18.5 million in 1998 compared to
$16.8 million in 1997, an increase of $1.7 million. Various other payments to
the Province in the form of royalties and taxes totalled $13.2 million in 1998
and $12.4 million in 1997, and are included in cost of goods sold.
INTEREST EXPENSE
For 1998, interest expense was $67.6 million compared to $81.4 million in
1997, a decrease of $13.8 million or 17 percent, due to a reduction of the
weighted average long-term debt outstanding from $1.1 billion in 1997 to $968.9
million in 1998. The weighted average interest rate on the long-term debt
outstanding was 6.4 percent (1997 - 6.1 percent).
<PAGE> 40
FINANCIALS
INCOME TAXES
Income taxes for the year were $117.5 million, compared to $69.1 million in
1997, an increase of $48.4 million. The increase reflects the impact of
utilization of non-capital loss carryforwards. Provincial taxes and royalties
are non-deductible for federal income tax purposes.
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 and earned
depletion allowance, such taxes have not yet become payable. However, PCS is
subject to the Large Corporations Tax. In addition, PCS records a deferred tax
provision at the effective rate of 35 percent. The Company expects to begin
paying Canadian income taxes in 1999.
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 federal cash
income tax. However, they are subject to the Alternative Minimum Tax, which may
be carried forward indefinitely as a credit to be applied against future regular
income tax liabilities.
The Company's nitrogen subsidiaries which operate in Trinidad are subject
to Trinidad taxes.
The effective consolidated tax rate for 1998 was 31 percent (1997 - 19
percent) of income before income taxes, of which 5 percentage points (1997 - 13
percentage points) represented cash income taxes and 26 percentage points (1997
- - 6 percentage points) represented deferred income taxes. The reduction in the
cash component of the provision was largely due to a reduction in the amount of
US withholding taxes on certain payments received from the Company's US
subsidiaries.
1997 VERSUS 1996
With the exception of purchased product, nitrogen data for 1997 is only for
the period subsequent to the acquisition of Arcadian on March 6, 1997. Phosphate
data for 1997 includes phosphate produced by the acquired Geismar operation.
<TABLE>
<CAPTION>
OVERVIEW
($000'S) 1997 1996 INCREASE (DECREASE) % CHANGE
Net Sales
<S> <C> <C> <C> <C>
North American $ 1,665,140 $ 847,756 $817,384 96
Offshore 660,789 556,112 104,677 19
$ 2,325,929 $1,403,868 $922,061 66
Gross Margin $ 585,171 $ 383,974 $201,197 52
Operating Income $ 447,640 $ 299,492 $148,148 49
Net Income $ 297,138 $ 209,036 $ 88,102 42
Earnings per Share (dollars) $ 5.68 $ 4.59 $ 1.09 24
</TABLE>
The $922.0 million increase in net sales revenue was comprised of: potash
$101.0 million, phosphate $61.6 million and nitrogen $759.4 million (the
additional nitrogen net sales revenue was primarily due to the acquisition of
Arcadian).
For 1997, North American net sales revenue represented 72 percent (1996 -
60 percent) of total net sales revenue, whereas offshore sales represented 28
percent of total net sales revenue (1996 - 40 percent). The change in the
relative weighting of net sales revenue was principally due to the fact that 92
percent of nitrogen net sales revenue was earned in North America.
Gross margin for potash products was $257.6 million (an increase of $67.0
million); gross margin for phosphate products was $194.4 million (an increase of
$3.1 million); and gross margin for nitrogen products was $133.2 million (an
increase of $131.1 million which was primarily due to the acquisition of
Arcadian).
The increase in net income of $88.1 million when comparing 1997 with 1996
was attributable to: a $67.0 million increase in potash gross margin and a
$131.1 million gross margin contributed by nitrogen. This increase in gross
margin was offset by: $31.6 million of nitrogen selling and administrative
expense (including amortization of goodwill), a $30.1 million increase in
provincial mining and other taxes, a $34.7 million increase in interest expense
relating to the acquisition of the nitrogen operations, and a $25.4 million
increase in the provision for income taxes.
<PAGE> 41
37
POTASH REVENUE
<TABLE>
<CAPTION>
1997 SALES 1996 SALES $000's TONNES (000's)
TONNES TONNES INCREASE % INCREASE %
$000's (000's) $000's (000's) (DECREASE) CHANGE (DECREASE) CHANGE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North American $210,240 3,017 $157,645 2,589 $ 52,595 33 428 16
Offshore 293,927 3,623 245,551 3,023 48,376 20 600 20
--------------------------------------------------------------------------------------
$504,167 6,640 $403,196 5,612 $100,971 25 1,028 18
======================================================================================
</TABLE>
Gross margin for potash products was $257.6 million (1996 - $190.6 million)
or 44 percent of consolidated gross margin.
Potash prices in the offshore market decreased early in the year but had
recovered to 1996 levels by the end of the third quarter, resulting in flat
prices on a year-over-year basis. Price increases of 14 percent were realized in
the domestic market. Comparisons are affected by sales to another producer
during 1996.
North American net sales revenue from potash operations represented 42
percent (1996 - 39 percent) of the potash net sales revenue of the Company. The
closure of Potacan's mine due to flooding and the announced closure of another
competitor's mine in New Mexico tightened supply, which influenced successive
domestic price increases in September and November. The increase in North
American potash prices and an increase in North American sales volumes resulted
in a $52.6 million increase in North American potash net sales revenue over
1996. In the North American market, the 3.017 million tonnes sales volumes for
1997 were sourced as follows: 2.813 million tonnes (1996 - 2.438 million tonnes)
came from Saskatchewan, 0.122 million tonnes (1996 - 0.079 million tonnes) from
New Brunswick and 0.082 million tonnes (1996 - 0.072 million tonnes) from Utah.
Offshore net sales revenue from potash operations represented 58 percent
(1996 - 61 percent) of potash net sales revenue of the Company. Strong offshore
volumes contributed to higher prices during the year. In December, Canpotex
signed a new contract with China at higher prices. The increase in offshore
sales volumes resulted in a $48.4 million increase in offshore potash net sales
revenue. In the offshore market, 2.960 million tonnes were sold through Canpotex
and the remaining 0.663 million tonnes were produced by PCS New Brunswick and
sold and delivered to offshore markets by PCS Sales.
PHOSPHATE REVENUE
<TABLE>
<CAPTION>
1997 SALES 1996 SALES $000's TONNES (000's)
TONNES TONNES INCREASE % INCREASE %
$000's (000's) $000's (000's) (DECREASE) CHANGE (DECREASE) CHANGE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liquids $309,063 1,493 $239,716 1,240 $ 69,347 29 253 20
Solids 362,625 1,924 379,326 1,880 (16,701) (4) 44 2
Feed supplements 191,016 752 186,145 778 4,871 3 (26) (3)
Industrial products 89,588 235 80,662 216 8,926 11 19 9
Phosphate rock 1,317 30 6,115 191 (4,798) (78) (161) (84)
--------------------------------------------------------------------------------------
$953,609 4,434 $891,964 4,305 $61,645 7 129 3
======================================================================================
North American $656,884 2,769 $581,403 2,483 $75,481 13 286 12
Offshore 296,725 1,665 310,561 1,822 (13,836) (4) (157) (9)
--------------------------------------------------------------------------------------
$953,609 4,434 $891,964 4,305 $61,645 7 129 3
======================================================================================
</TABLE>
The acquired Geismar operation increased P2O5 production, liquid sales and
industrial sales.
Gross margin for phosphate was $194.4 million (1996 - $191.3 million) or 33
percent of consolidated gross margin.
For 1997, North American phosphate net sales revenue accounted for 69
percent (1996 - 65 percent) of total phosphate net sales revenue. In 1997, 61
percent (1996 - 57 percent) of the Company's North American phosphate net sales
revenue was earned from liquid and solid phosphate products, which represented
68 percent (1996 - 63 percent) of its North American phosphate sales volumes.
Offshore sales accounted for 31 percent (1996 - 35 percent) of total phosphate
net sales revenue for 1997 and 38 percent (1996 - 42 percent) of volumes. In
1997, 92 percent (1996 - 92 percent) of the Company's offshore phosphate net
sales revenue was earned from liquid and solid phosphate products, which
represented 93 percent (1996 - 85 percent) of its offshore phosphate sales
volumes.
Solid phosphates (substantially all DAP) accounted for 38 percent (1996 -
43 percent) of the total phosphate net sales revenue. Compared to 1996, the
Company received higher prices for most of its phosphate products (with the
exception of DAP). Liquid phosphate prices increased by 5 percent and sales
volumes increased by 20 percent, resulting in additional net sales revenue of
$69.3 million. Solid phosphate prices declined 7 percent as compared to 1996.
However, this was partially offset by an increase in volumes of 2 percent,
resulting in a reduction in net sales revenue of $16.7 million.
<PAGE> 42
FINANCIALS
North American net sales revenue was 92 percent of total feed supplements
and industrial products in 1997 (1996 - 93 percent). Feed supplement prices
increased 6 percent and volumes decreased 3 percent as compared to 1996. This
resulted in additional net sales revenue of $4.9 million. Industrial product
prices increased by 2 percent while sales volumes increased by 9 percent. The
result was additional net sales revenue of $8.9 million. Gross margin provided
by feed and industrial products increased by 19 percent over the previous year.
<TABLE>
<CAPTION>
NITROGEN REVENUE
1997 SALES 1996 SALES
$000'S TONNES (000'S) $000'S TONNES (000'S)
<S> <C> <C> <C> <C>
Ammonia $183,840 1,061 $ - -
Urea 203,092 1,226 - -
Nitrogen solutions 161,149 1,719 - -
Other nitrogen products 118,472 894 - -
---------------------------------------------------------------
666,553 4,900 - -
Purchased products 201,600 1,138 108,708 535
---------------------------------------------------------------
$868,153 6,038 $108,708 535
---------------------------------------------------------------
North American $798,016 5,544 $108,708 535
Offshore 70,137 494 - -
---------------------------------------------------------------
$868,153 6,038 $108,708 535
---------------------------------------------------------------
</TABLE>
Arcadian was acquired in March 1997. North American net sales revenue
accounted for 92 percent of the total nitrogen net sales revenue. Gross margin
for nitrogen products was $133.2 million or 23 percent of consolidated gross
margin.
Limited imports of urea into China resulted in pricing pressures throughout
the world. Ammonia prices have declined since the acquisition, but results were
supported by the Company's strategic plant locations in North America and its
favorable gas contracts in Trinidad.
<TABLE>
<CAPTION>
COST OF GOODS SOLD
1997 1996 INCREASE (DECREASE) % CHANGE
<S> <C> <C> <C> <C> <C>
Potash production (KCl) tonnage (000's) 6,483 5,782 701 12
Phosphate production (P2O5) tonnage (000's) 2,282 2,096 186 9
Nitrogen production (N) tonnage (000's) 2,349 - 2,349
</TABLE>
Potash unit cost of sales decreased marginally in 1997 compared to 1996,
due primarily to higher production volumes and fewer shutdown weeks.
Overall, phosphate unit cost of sales increased by 5 percent. This
consisted of increases of 8 percent and 5 percent in the unit cost of sales of
liquid phosphates and industrial products, respectively, partially offset by a
decrease of 2 percent for feed supplements. These increased costs were primarily
caused by increased rock costs as a result of excessive moisture in the
overburden at Aurora. The unit cost of sales of solid phosphates remained
unchanged during 1997. The input cost of sulphur increased and ammonia decreased
as compared to 1996.
PCS Nitrogen, through its natural gas hedging program and favorable gas
contracts in Trinidad, kept its per unit natural gas cost relatively flat on a
year-over-year basis.
Depreciation and amortization expense for 1997 was $170.0 million compared
to $90.1 million in 1996, an increase of $79.9 million or 89 percent. The
increase was largely attributable to $69.0 million additional depreciation and
amortization from the acquired nitrogen operations.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses for 1997 were $99.7 million as
compared to $60.1 million in 1996, an increase of $39.6 million. The increase
was primarily attributable to the acquisition of Arcadian ($31.6 million
including amortization of goodwill of $12.2 million) 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 in cost of goods sold.
<PAGE> 43
39
For 1997, provincial mining and other taxes were $70.3 million as compared
to $40.2 million in 1996, an increase of $30.1 million. Potash production tax
was $53.5 million compared to $27.5 million in 1996, an increase of $26.0
million. The increased sales volumes in 1997 over 1996 have served, in part, to
increase these taxes. In addition, increased prices for potash and the
resulting increased profit per tonne, combined with the full utilization of
certain provincial resource tax deductions carried forward from prior years,
resulted in most Saskatchewan mines reaching the top marginal profits tax rate
of 50 percent in 1997.
Saskatchewan corporate capital tax was $16.8 million in 1997 compared to
$12.7 million in 1996, an increase of $4.1 million. Various other payments to
the Province in the form of royalties and taxes totalled $12.4 million in 1997
and $10.2 million in 1996, and are reflected in cost of goods sold.
INTEREST EXPENSE
For 1997, interest expense was $81.4 million as compared to $46.8 million
in 1996. The weighted average long-term debt outstanding in 1997 was $1.1
billion (1996 - $0.7 billion). The increase was due to the financing of the
Arcadian acquisition. The weighted average interest rate on the long-term debt
outstanding increased to 6.1 percent in 1997 from 5.8 percent in 1996. The
increase was primarily due to the higher interest rate on the ten-year notes
issued in June 1997.
INCOME TAXES
Income taxes for the year were $69.1 million, compared to $43.7 million in
1996, an increase of $25.4 million. The increase reflects higher taxable
earnings relating to the Company's phosphate operations and taxes relating to
the acquired nitrogen 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, and
earned depletion allowance, such taxes have not yet become payable. However, PCS
is subject to the Large Corporations Tax. In 1997, PCS began to book a deferred
tax provision at the effective rate of 35 percent since the tax pools plus the
non-capital losses carried forward are less than the book value of the assets.
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
tax. However, they are subject to the Alternative Minimum Tax, which may be
carried forward indefinitely as a credit to be applied against future regular
income tax liabilities. In addition, the Company is subject to United States
withholding taxes on certain payments received from its US subsidiaries.
The Company's nitrogen subsidiaries which operate in Trinidad are subject
to Trinidad taxes.
The effective consolidated tax rate for 1997 was 19 percent (1996 - 17
percent) of income before income taxes of which 13 percentage points (1996 - 8
percentage points) represented cash income taxes and 6 percentage points (1996 -
9 percentage points) represented deferred income taxes.
ANALYSIS OF FINANCIAL CONDITION AND CASH FLOW
The following table summarizes certain of the Company's financial ratios as
calculated from the consolidated financial statements:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 INCREASE (DECREASE) % CHANGE
<S> <C> <C> <C> <C>
Quick Ratio .83 .79 .04 5
Current Ratio 1.74 1.62 .12 7
Shareholders' Equity to Total Assets .54 .50 .04 8
Return on Shareholders' Equity 11% 13% (2%) (15)
Book Value per Share $45.24 $41.34 $3.90 9
Asset Turnover 51% 53% (2%) (4)
Return on Investment 9% 14% (5%) (36)
Long-term Debt to Equity .38:1 .51:1 (.13) (25)
</TABLE>
Cash provided by operating activities for 1998 was $578.0 million (1997 -
$467.8 million). The increase of $110.2 million was primarily due to increases
in non-cash expenses charged against operating income (primarily depreciation
and amortization and deferred income taxes) and positive cash flow from
operating working capital.
Cash used in investing activities was $243.3 million (1997 - $1,215.4
million). Included in the 1997 amount is $1,048.3 million that relates to the
acquisition of shares of Arcadian. The 1998 amount includes the purchase of 9
percent of Israel Chemicals Ltd. in the amount of $92.2 million and the purchase
of rail
<PAGE> 44
FINANCIALS
cars under a sale/leaseback transaction in the amount of $19.4 million.
Proceeds from disposal of property, plant and equipment include sale proceeds
of $27.9 million related to the sale/leaseback transaction.
Cash used in financing activities was $275.5 million, primarily to repay
long-term debt and to pay dividends. In 1997, financing activities were a source
of $762.7 million of cash, primarily due to borrowings to finance the purchase
of Arcadian. The Company paid dividends of $51.7 million in 1998 (1997 - $55.3
million). The reduction in dividends paid was due solely to the change in the
exchange rate of the Canadian dollar as compared to the US dollar rather than a
change in dividend policy.
The Company's capital expenditures were $190.2 million in 1998 and are
expected to be approximately $135.0 million in 1999.
The Company has a syndicated credit facility which provides for unsecured
advances of up to $925.0 million of which $488.0 million was outstanding at
December 31, 1998. In addition, the Company has short-term lines of credit for
up to $290.0 million in borrowings, of which $72.1 million was outstanding at
December 31, 1998 and $40.4 million was utilized for letters of credit. The
Company may also issue up to an additional $600.0 million in unsecured debt
securities under its existing shelf registration statement.
The Company believes that internally generated cash flow, as supplemented
by borrowing from existing financing sources, will be sufficient to meet the
Company's anticipated capital expenditure and other cash requirements,
exclusive of any possible acquisitions, in 1999.
RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
The Company's nitrogen operations are significantly affected by the price
of natural gas. The Company employs derivative commodity instruments related to
a portion of its natural gas requirements (primarily futures, swaps and
options) for the purpose of managing its exposure to commodity price risk in
the purchase of natural gas. Changes in the market value of these derivative
instruments have a high correlation to changes in the spot price of natural
gas. Gains or losses arising from settled hedging transactions are deferred as
a component of inventory until the product containing the hedged item is sold.
Changes in the market value of open hedging transactions are not recognized as
they generally relate to changes in the spot price of anticipated natural gas
purchases.
A sensitivity analysis has been prepared to estimate the Company's market
risk exposure arising from derivative commodity instruments. The fair value of
such instruments is calculated by valuing each position using quoted market
prices. Market risk is estimated as the potential loss in fair value resulting
from a hypothetical 10 percent adverse change in such prices. The results of
this analysis indicate that as of December 31, 1998, the Company's estimated
derivative commodity instruments market risk exposure was $34.7 million (1997 -
$22.5 million). Actual results may differ from the estimate. Changes in the
fair value of such derivative instruments, with maturities in 1999 through
2003, will generally relate to changes in the spot price of anticipated natural
gas purchases.
The Company also enters into forward foreign exchange contracts for the
sole purpose of limiting its exposure to exchange rate fluctuations relating to
certain trade accounts. Gains or losses resulting from foreign exchange
contracts are recognized at the time that the contracts are entered into and
are included in Other Income.
ENVIRONMENTAL
The Company is subject to various environmental laws and regulations
throughout the United States, Canada and Trinidad. 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 the
environmental area in 1998 totalled $14.0 million (1997 - $15.4 million; 1996 -
$8.9 million) while $83.4 million (1997 - $66.9 million; 1996 - $63.0 million)
was incurred as environmental operating expense. Expenditures in 1999 are
expected to be of a similar magnitude for existing operations.
YEAR 2000
The year 2000 poses a risk that computer systems, or devices containing
microchips, will generate erroneous results if the year 2000 is stored as 00.
The Year 2000 problem, if not remedied, could result in a system failure or
miscalculations causing what are expected to be temporary disruptions of
operations, including, among other things, an inability to process
transactions, send invoices or engage
<PAGE> 45
41
in similar normal business activities. The Company defines Year 2000 compliance
as computer systems or devices which will function accurately before, on, and
after January 1, 2000 without business or operational interruptions, or
repercussions, due to any date-related functions.
The Company has a Year 2000 committee composed of executive and senior
management to oversee and direct efforts to identify and resolve Year 2000
issues. The Company anticipated Year 2000 requirements for its corporate, potash
and sales administrative systems in the early 1990s by implementing four-digit
century standards. Testing to confirm compliance is complete in these areas.
Based on testing and investigations to date, the Company believes that these
systems will not give rise to material Year 2000 problems. Phosphate and
nitrogen subsidiaries are conducting routine compliant upgrades of their
packaged administrative systems. The last such upgrade is expected to be
completed by mid-1999.
The majority of the Company's production locations' operational systems are
scheduled for compliance in the first quarter of 1999. Compliance for the
remaining plants is scheduled for completion during routine maintenance
shutdowns during 1999.
The Company has formally communicated with critical customers, suppliers
and other external parties to determine the extent to which the Company may be
vulnerable to such parties' failure to resolve their Year 2000 issues. Written
assurances received to date have not identified any matters which are expected
to materially affect the Company. However, the effect, if any, on the Company's
results of operations or financial condition from the failure of these entities
to be Year 2000 ready is uncertain.
The Company is primarily utilizing internal resources to identify, upgrade
and test its systems for Year 2000 compliance. This has not deferred any other
material projects. The Company anticipates that these efforts will be completed
by mid-1999 and that the total estimated costs will approximate $2.0 million. To
date, $0.8 million has been expended. These costs have been and are expected to
continue to be financed from internally generated cash flows.
At this time, the Company believes its most reasonably likely worst case
scenario is that there may be temporary disruptions of power to certain of its
plants and/or that there may be temporary disruptions of certain transportation
services. In either case, the Company does not believe that these disruptions
would have a material adverse effect on its results of operations or financial
condition. This is principally due to the fact that inventory levels would be
building in anticipation of the spring fertilizer season; fertilizer sales are
seasonally low at the beginning of the year and the disruptions, if any, would
be expected to be temporary.
The Company has not identified the need for formal contingency plans at
this time but continues to monitor third parties and evaluate the circumstances
in which such plans may be appropriate.
OUTLOOK
The rising world population and the demand for more food and better diets,
with meat as a protein source, will continue to drive consumption of fertilizers
over the long term. Over the short term, increased fertilizer usage will be
required to replenish world grain stocks which remain low. Governments around
the world are placing priority on fertilizer purchases to increase food
production. While the consumption trend line is expected to continue to climb
over the long term, there will be, at times, fluctuations in demand.
North American fertilizer demand is generally considered mature but is
expected to fluctuate from year to year, as a function of acres planted and
application rates per acre which are influenced by crop prices and weather. US
farmers are projected to continue to commit more than 150 million acres to corn
and soybeans in 1999. These crops are among the largest users of fertilizers. In
addition, US net cash farm income for 1998 is expected to be the second highest
on record as the result of cash received under a US government program. With
large projected acreages for corn and soybeans, it is expected that demand for
fertilizer will remain strong.
The Company sells a significant amount of potash and phosphate in the
offshore markets. To date, the currency devaluations and financial difficulties
in Asian countries have not significantly affected these sales. These countries
purchase fertilizer to grow cash crops for export and to grow food for internal
use. However, the persistence of the currency devaluations and financial
difficulties could affect the growth trend.
The Company also sells product in the non-fertilizer markets which are
affected by domestic economic growth. The outlook for domestic economic growth
should translate into increased demand for these upgraded products.
[CHART] In the US market, which is considered mature, nitrogen consumption has
been increasing more than potash and phosphate. All are affected by the
acreage planted.
<PAGE> 46
FINANCIALS
The effect of such anticipated increase in demand for fertilizer and
non-fertilizer products will be offset to the degree that additional capacity
comes on stream.
Domestic potash sales volumes are expected to grow in 1999 while offshore
sales volumes are expected to increase marginally. Canpotex recently sold a
shipment to India -- its first there in six years. In India, subsidies remain an
important factor and buyers have been purchasing product based on expectations
that subsidies will continue. In China, the fertilizer quotas have been
established for 1999. In January 1999, Canpotex reached agreement with China for
new shipments at a higher price. Proposed increases in the Company's prices in
the domestic market will be fully tested during the spring season.
PCS continues to operate its potash mines by matching production to sales
demand. Shutdowns for inventory correction will influence potash production
costs on a quarter-over-quarter comparative basis. It is expected that the
number of such shutdowns will exceed the 33 weeks of shutdowns incurred in 1998.
Natural gas costs are increasing in Western Canada. The combination of higher
gas costs and increased shutdown weeks is expected to increase production costs
somewhat.
The severe decrease of ammonia prices is expected to favorably affect
phosphate processing input costs on a year-over-year basis. PCS can use up to
one-quarter of the ammonia it produces and sells as ammonia at its own phosphate
plants. However, it is expected that there will be increases in the cost of
sulphur and higher rock costs at Aurora due to difficult conditions in the ore
body currently being mined. These conditions are expected to intensify in early
1999 and continue for approximately two years until mining reaches an area
anticipated to have more advantageous ore conditions.
In the near term, prices for liquid and solid phosphates are expected to
remain steady as supply and demand are in reasonably good balance. However, 1999
sales volumes may be down somewhat from 1998 due to the difficult rock
conditions affecting 1999 P2O5 production volumes. Increased competition in
industrial products and feed supplements will likely affect prices for these
products.
Market prices for nitrogen products are expected to continue under
pressure. 1999 gross margin is expected to be lower than in 1998. The urea
market is influenced by China which, early in 1997, stopped importing urea,
thereby having a negative effect on prices. Chinese buyers remain inactive and
there are no indications as to when they will return to the market.
The Company manages its natural gas costs through a combination of fixed
price contracts, hedges and the Trinidad gas contracts. As the most flexible
producer, PCS will continue to allocate its nitrogen and phosphate feed stock to
production of the products with the best margins.
Capital expenditures in 1999 are expected to be approximately $135.0
million.
The effective consolidated income tax rate on income before taxes is
expected to increase slightly.
The narrative included under this Management's Discussion and Analysis of
Financial Condition and Results of Operations has been prepared on a nutrient
basis (the phosphate products produced at Geismar are included with phosphate
data rather than nitrogen) rather than a subsidiary or business segment basis
and with reference to the consolidated financial statements reported under
accounting principles generally accepted in Canada.
FORWARD-LOOKING STATEMENTS
Certain statements in this annual report and this Management's Discussion
and Analysis of Financial Condition and Results of Operations, including those
in the "Outlook" section, relating to the period after December 31, 1998, are
forward-looking statements subject to significant uncertainties. A number of
factors could cause actual results to differ materially from those expressed in
the forward-looking statements, including, but not limited to, fluctuation in
supply and demand in fertilizer, sulphur and petrochemical markets; changes in
competitive pressures including pricing pressures; changes in capital markets;
changes in currency and exchange rates; unexpected geological or environmental
conditions; imprecision in reserve estimates; the outcome of legal proceedings;
and changes in government policy. The Company sells to a diverse group of
customers both by geography and by end product. Market conditions will vary on a
year-over-year basis and sales can be expected to shift from one period to
another.
[CHART] Peaks and dips are to be expected, but the trend line for fertilizer use
is rising.
<PAGE> 47
SELECTED TEN-YEAR DATA
(FOR THE YEARS ENDED DECEMBER 31)
<TABLE>
<CAPTION>
FINANCIAL DATA (US$ Millions) 1998 1997(5) 1996 1995(4) 1994(1) 1993(3) 1992 1991 1990 1989(2)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales 2,307.8 2,325.9 1,403.9 856.1 363.1 212.2 214.1 206.8 189.9 221.6
Operating Income 446.1 447.6 299.5 224.2 98.5 56.9 50.6 39.1 34.6 68.4
Net Income 261.0 297.1 209.0 159.5 91.2 44.7 39.8 31.3 17.3 57.7
Net Income per Share (Actual Dollars) 4.82 5.68 4.59 3.68 2.12 1.13 1.03 0.81 0.47 1.65
Dividends per Share (Actual Dollars) 0.96 1.03 1.06 1.06 0.77 0.53 0.51 0.51 0.51 0.13
Cash Provided by Operating Activities 578.0 467.8 296.2 233.5 150.7 49.8 57.4 53.8 66.1 72.4
Working Capital 329.2 281.7 278.8 136.1 103.3 37.0 70.9 47.4 25.7 16.4
Total Assets 4,534.3 4,427.6 2,494.4 2,581.8 1,027.8 1,036.4 915.0 898.8 914.8 915.5
Total Long-Term Debt 933.3 1,130.0 620.0 714.5 2.0 20.1 48.9 54.4 62.6 67.8
Shareholders' Equity 2,453.8 2,227.9 1,405.5 1,241.9 964.3 903.7 809.5 788.9 777.3 745.2
- ------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA (Thousands)
EMPLOYEES AT YEAR-END (Actual Numbers) 5,744 5,751 4,490 4,579 1,781 1,818 1,415 1,227 1,242 1,256
- ------------------------------------------------------------------------------------------------------------------------------
POTASH PRODUCTION (KCl) Tonnage 6,995 6,483 5,782 6,071 5,298 3,902 3,850 4,030 3,464 4,257
- ------------------------------------------------------------------------------------------------------------------------------
PHOSPHATE PRODUCTION (P2O5) Tonnage 2,363 2,282 2,096 1,008 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
NITROGEN PRODUCTION (N) Tonnage 3,121 2,349 - - - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
POTASH SALES - KCl Tonnes 6,283 6,640 5,612 5,848 5,569 3,795 3,737 3,909 3,725 4,018
- ------------------------------------------------------------------------------------------------------------------------------
PHOSPHATE SALES - Product Tonnes 4,627 4,434 4,305 2,206 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
NITROGEN SALES - Product Tonnes 6,679 6,038 535 115 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
NET SALES (US$ Millions)
POTASH 545.5 504.2 403.2 421.0 363.1 212.2 214.1 206.8 189.9 221.6
PHOSPHATE 1,011.0 953.6 892.0 412.1 - - - - - -
NITROGEN 751.3 868.1 108.7 23.0 - - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL NET SALES 2,307.8 2,325.9 1,403.9 856.1 363.1 212.2 214.1 206.8 189.9 221.6
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The financial statements of the Company for 1994 and prior years have been
restated to US dollars in accordance with accounting principles generally
accepted in Canada using the Translation of Convenience Method. The Canadian
dollar amounts for these periods have been converted to US dollars at the
exchange rate of US$1.00 = CDN$1.4028.
(2) In November 1989, the Company was privatized. Subsequent results reflect the
privatization and associated reorganization.
(3) Data for 1993 and thereafter reflect the acquisition of Potash Company of
America assets on October 7, 1993.
(4) Data for 1995 and thereafter reflect the acquisition of Texasgulf Inc. on
April 10, 1995 and the acquisition of White Springs Agricultural Chemicals,
Inc. on October 31, 1995.
(5) Data for 1997 and thereafter reflect the acquisition of Arcadian Corporation
on March 6, 1997.
<TABLE>
<CAPTION>
QUARTERLY RESULTS (Thousands) 98 Q1 98 Q2 98 Q3 98 Q4 97 Q1 97 Q2 97 Q3 97 Q4
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Potash Production - KCl Tonnes 1,996 2,046 1,259 1,694 1,653 1,687 1,297 1,846
Phosphate Production - P2O5 Tonnes 561 604 585 613 521 600 599 562
Nitrogen Production - N Tonnes 759 777 781 804 240 724 722 663
Net Sales ($) 583,812 660,442 521,368 542,141 464,834 676,648 573,773 610,674
Operating Income ($) 109,790 146,909 95,575 93,782 90,513 154,714 108,851 93,562
Net Income ($) 63,009 89,117 54,704 54,173 56,365 96,980 71,418 72,375
Net Income per Share (Actual Dollars) ($) 1.17 1.64 1.01 1.00 1.18 1.81 1.33 1.35
- -------------------------------------------------------------------------------------------------------------------
</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 27 to the Company's consolidated financial statements).
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.
3. Net income per share for each quarter has been computed based on the weighted
average number of shares issued and outstanding during the respective
quarter; therefore, quarterly amounts may not add to the annual total.
43
<PAGE> 48
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The accompanying consolidated 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 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 LLP, provide an objective,
independent audit of the consolidated financial statements. Their report for
1998 is included.
The Board of Directors, through the audit committee composed exclusively of
outside directors, meets regularly with the independent auditors -- both jointly
and separately -- to review significant accounting, reporting and internal
control matters. The audit committee also recommends to the Board the
independent auditors to be proposed to the shareholders for appointment at the
annual meeting. Interim consolidated financial statements are reviewed by the
audit committee prior to release to shareholders.
The consolidated financial statements are approved by the Board of
Directors on the recommendation of the audit committee.
[signature] [signature]
C. E. CHILDERS B. E. HUMPHREYS
Chairman and Senior Vice President
Chief Executive Officer Finance and Treasurer
February 10, 1999
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, 1998 and 1997 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, 1998. 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,
1998 and 1997, 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,
1998 in accordance with accounting principles generally accepted in Canada.
Saskatoon, Saskatchewan [signature]
February 10, 1999 DELOITTE & TOUCHE LLP
Chartered Accountants
44
<PAGE> 49
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
AS AT DECEMBER 31
<TABLE>
<CAPTION>
(in thousands of US dollars)
1998 1997
ASSETS
Current Assets
<S> <C> <C>
Cash and cash equivalents $ 67,971 $ 8,756
Accounts receivable (Note 5) 302,974 351,154
Inventories (Note 6) 364,397 353,425
Prepaid expenses 38,839 21,131
-------------------------------
774,181 734,466
Property, plant and equipment (Note 7) 3,003,443 2,995,625
Goodwill (Note 8) 559,621 574,296
Other assets (Note 9) 197,012 123,205
-------------------------------
$4,534,257 $4,427,592
-------------------------------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES
Current Liabilities
<S> <C> <C> <C>
Short-term debt (Note 10) $ 94,940 $ 101,928
Accounts payable and accrued charges (Note 11) 349,684 348,103
Current portion of long-term debt (Note 12) 386 2,740
-------------------------------
445,010 452,771
Long-term debt (Note 12) 933,294 1,129,964
Deferred income tax liability (Note 20) 417,853 338,431
Accrued post-retirement/post-employment benefits (Note 14) 131,179 123,418
Accrued reclamation costs (Note 15) 129,399 139,105
Other non-current liabilities and deferred credits 23,761 16,012
-------------------------------
2,080,496 2,199,701
-------------------------------
</TABLE>
<TABLE>
<CAPTION>
CONTINGENCIES (NOTE 23)
SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
Share Capital (Note 16) 1,227,599 1,211,049
Unlimited authorization of common shares without par value;
issued and outstanding 54,243,795 and 53,896,186 shares
in 1998 and 1997, respectively
Unlimited authorization of first preferred shares;
none outstanding
Contributed Surplus 336,486 336,486
Retained Earnings 889,676 680,356
-------------------------------
2,453,761 2,227,891
-------------------------------
$4,534,257 $4,427,592
-------------------------------
</TABLE>
(See Notes to the Consolidated Financial Statements)
Approved by the Board,
[signature] [signature]
Director Director
45
<PAGE> 50
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
(in thousands of US dollars)
1998 1997 1996
<S> <C> <C> <C>
Net sales (Note 17) $2,307,763 $2,325,929 $1,403,868
Cost of goods sold 1,698,416 1,740,758 1,019,894
---------------------------------------------------
GROSS MARGIN 609,347 585,171 383,974
---------------------------------------------------
Selling and administrative 116,012 99,663 60,142
Provincial mining and other taxes (Note 18) 80,088 70,312 40,197
Other income (32,809) (32,444) (15,857)
---------------------------------------------------
163,291 137,531 84,482
---------------------------------------------------
OPERATING INCOME 446,056 447,640 299,492
INTEREST EXPENSE (NOTE 19) 67,574 81,439 46,761
---------------------------------------------------
INCOME BEFORE INCOME TAXES 378,482 366,201 252,731
INCOME TAXES (NOTE 20) 117,479 69,063 43,695
---------------------------------------------------
NET INCOME 261,003 297,138 209,036
RETAINED EARNINGS, BEGINNING OF YEAR 680,356 438,526 277,689
DIVIDENDS (51,683) (55,308) (48,199)
---------------------------------------------------
RETAINED EARNINGS, END OF YEAR $ 889,676 $ 680,356 $ 438,526
---------------------------------------------------
NET INCOME PER SHARE (NOTE 21) $4.82 $5.68 $4.59
---------------------------------------------------
DIVIDENDS PER SHARE $0.96 $1.03 $1.06
---------------------------------------------------
</TABLE>
(See Notes to the Consolidated Financial Statements)
46
<PAGE> 51
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
(in thousands of US dollars)
1998 1997 1996
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 261,003 $ 297,138 $ 209,036
Items not affecting cash
Depreciation and amortization 190,880 170,002 90,125
(Gain) loss on disposal of property,
plant and equipment (99) (4,739) 2,152
Provision for deferred income tax 97,203 34,491 23,737
Provision for post-retirement/
post-employment benefits 6,848 6,166 5,890
------------------------------------------
555,835 503,058 330,940
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
Accounts receivable 48,751 23,470 (7,400)
Inventories (7,859) 19,873 2,493
Prepaid expenses (16,603) 3,736 (1,393)
Accounts payable and accrued charges (2,477) (68,623) (19,214)
Accrued reclamation costs (7,436) (7,407) (5,021)
Other non-current liabilities and deferred credits 7,749 (6,286) (4,219)
------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 577,960 467,821 296,186
------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (190,155) (160,337) (58,939)
Acquisition of Arcadian Corporation - (1,048,263) -
Proceeds from disposal of property,
plant and equipment 31,926 15,276 22,716
Additions to other assets (85,066) (22,091) (2,819)
------------------------------------------
CASH USED IN INVESTING ACTIVITIES (243,295) (1,215,415) (39,042)
------------------------------------------
CASH (DEFICIENCY) BEFORE FINANCING ACTIVITIES 334,665 (747,594) 257,144
------------------------------------------
FINANCING ACTIVITIES
Proceeds from (repayment of) long-term obligations (233,329) 510,021 (258,556)
Proceeds from (repayment of) short-term debt (6,988) 101,928 -
Repayment of Senior Notes - (374,526) -
Dividends (51,683) (55,308) (48,199)
Issuance of shares 16,550 580,565 2,784
------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (275,450) 762,680 (303,971)
------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,215 15,086 (46,827)
CASH AND CASH EQUIVALENTS (BANK
INDEBTEDNESS), BEGINNING OF YEAR 8,756 (6,330) 40,497
------------------------------------------
CASH AND CASH EQUIVALENTS (BANK
INDEBTEDNESS), END OF YEAR $ 67,971 $ 8,756 $ (6,330)
------------------------------------------
Supplemental cash flow disclosure
Interest paid $ 68,419 $ 84,365 $ 42,901
Income taxes paid $ 19,228 $ 41,252 $ 32,914
-----------------------------------------
</TABLE>
(See Notes to the Consolidated Financial Statements)
-47-
<PAGE> 52
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
1. DESCRIPTION OF BUSINESS
Potash Corporation of Saskatchewan Inc. ("PCS") and its operating
subsidiaries (the "Company" except to the extent the context otherwise requires)
form an integrated fertilizer and related industrial and feed products 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 two mills 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 processing plant complexes in the State
of Florida and a processing plant complex in the State of Louisiana. The
Company's nitrogen producing assets include six domestic plants located in the
states of Georgia, Iowa, Louisiana, Nebraska, Ohio and Tennessee and large-scale
operations in Trinidad. The Company owns or leases in excess of 130 terminal and
warehouse facilities strategically located in Canada and the United States, and
services customers with a fleet of approximately 5,000 rail cars.
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, phosphate and nitrogen products in North America. PCS Sales (Canada)
Inc. executes offshore marketing and sales for the Company's New Brunswick
potash. PCS Sales (USA), Inc. executes offshore marketing and sales for the
Company's nitrogen products. Phosphate Chemicals Export Association, Inc.
("PhosChem"), an unrelated phosphate export association established under United
States 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 ("Canadian GAAP"). These policies are
consistent with accounting principles generally accepted in the United States
("US GAAP") in all material respects except as outlined in Note 27. 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:
o PCS Sales (Canada) Inc.
- PCS Sales (Iowa), Inc.
- PCS Sales (Indiana), Inc.
- Potash Corporation of Saskatchewan (Florida) Inc.
o PCS Sales (USA), Inc.
o Potash Corporation of Saskatchewan Transport Limited
o PCS Phosphate Company, Inc.
- Albright & Wilson Company (proportionately consolidated)
o White Springs Agricultural Chemicals, Inc. ("White Springs")
o PCS Nitrogen, Inc.
- PCS Nitrogen Fertilizer, L.P.
- PCS Nitrogen Ohio, L.P.
- PCS Nitrogen Limited
- PCS Nitrogen Fertilizer Limited
- PCS Nitrogen Trinidad Limited
o PCS Cassidy Lake Company ("PCS Cassidy Lake")
All significant intercompany balances and transactions have been
eliminated.
CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less
are considered to be cash equivalents.
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. Certain inventories of materials
and supplies are valued at the lower of average cost and replacement cost and
certain inventories of materials and supplies are valued at the lower of cost
and market.
PREPAID EXPENSES
Prepaid expenses include prepaid freight which relates to product inventory
stored at warehouse and terminal facilities which is invoiced to customers at
the time of sale of the inventory.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (which includes mine development costs) are
carried at cost, except for mineral properties, which are carried at the lower
of cost or fair value. Costs of additions, betterments, renewals and interest
during construction 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 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 property, plant and equipment 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.
GOODWILL
Goodwill represents the excess of the purchase price and related costs over
the value assigned to the net tangible assets of businesses acquired. Goodwill
is being amortized on a straight-line basis over a period of forty years. The
Company assesses the recoverability of this intangible asset based on estimated
undiscounted future cash flows.
48
<PAGE> 53
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
OTHER ASSETS
Issue costs of long-term obligations are capitalized to deferred charges
and are amortized to interest expense over the term of the related liability.
Preproduction costs are capitalized to deferred charges and represent costs
incurred prior to obtaining commercial production at new milling facilities, net
of revenue earned, and are amortized on a straight-line basis over ten years.
The costs of constructing bases for gypsum stacks and settling ponds are
capitalized to deferred charges and are amortized on a straight-line basis over
their estimated useful lives of three to five years.
Land held for sale is stated at the lower of cost or net realizable value.
Investments in which the Company exercises significant influence (but does
not control) are accounted for using the equity method. Other investments are
stated at cost.
Rotational plant maintenance costs, which consist primarily of planned
major maintenance projects (also known as "turnarounds"), are capitalized when
incurred and are amortized over the anticipated periods until the next scheduled
rotational plant maintenance which ranges from two to four 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 property, plant and equipment. 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.
POST-EMPLOYMENT AND POST-RETIREMENT BENEFITS
Accrual of the costs of the Company's defined benefit pension plans are
recorded monthly and adjusted annually based on actuaries' reports. Pension
expense includes the net of management's best estimate of the cost of benefits
provided, interest cost of projected benefits, return on pension plan assets and
amortization of experience gains or losses and plan amendments. Adjustments
arising from plan amendments, experience gains or losses and changes in
assumptions are amortized on a straight-line basis over the expected average
remaining service life of the employee group covered by the plan. Pension fund
assets are valued at market values.
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.
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. Provisions for estimated costs are recorded
when environmental remedial efforts are likely and the costs can be reasonably
estimated.
In determining the provisions, 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.
FOREIGN EXCHANGE TRANSACTIONS
PCS and its operating subsidiaries have the US dollar as their functional
currency.
Canadian dollar operating transactions are translated to US dollars at the
average exchange rate of the previous month. Trinidadian dollar operating
transactions are translated to US dollars at the average exchange rate for the
period. 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.
FINANCIAL INSTRUMENTS
The Company enters into forward exchange contracts and natural gas futures,
swaps and option agreements to manage its exposure to exchange rate and
commodity price fluctuations. These activities have been designated as hedging
activities by the Company.
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.
Gains or losses resulting from changes in the fair value of natural gas
hedging transactions which have not yet been settled are not recognized as they
generally relate to changes in the spot price of anticipated natural gas
purchases. Gains or losses arising from settled hedging transactions are
deferred as a component of inventory until the product containing the hedged
item is sold, at which time both the natural gas purchase cost and the related
hedging deferral are recorded as cost of sales.
The Company regularly evaluates its unrecognized or deferred gains and
losses on these derivatives from a net realizable value of inventory perspective
and establishes appropriate provisions, if necessary.
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, warehouse or
terminal price. Transportation costs are recovered from the customer through
sales pricing.
3. CHANGE IN ACCOUNTING POLICY
The Company has adopted the provisions of section 3465 of the Canadian
Institute of Chartered Accountants Handbook "Income Taxes". Under this
accounting policy, deferred income taxes are determined based on the difference
between the financial reporting and tax bases of assets and liabilities using
the enacted rates expected to apply to taxable income in the years in which
those temporary differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense for the period is the tax payable for the
period and the change during the period in deferred tax assets and liabilities.
The effect of this change on prior period financial statements and current
period results is not significant.
49
<PAGE> 54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
4. ACQUISITION OF POTASH COMPANY OF CANADA LIMITED
On March 3, 1998, the Company acquired all of the outstanding shares of
Potash Company of Canada Limited for $11,439. Concurrent with the closing, the
name Potash Company of Canada Limited was changed to PCS Cassidy Lake Limited
and this company was subsequently wound up. The acquisition has been accounted
for by the purchase method of accounting and, accordingly, the results of
operations of PCS Cassidy Lake have been included in the consolidated financial
statements from March 4, 1998.
Due to the cessation of mining activities at PCS Cassidy Lake prior to
acquisition, no pro forma information is being presented.
<TABLE>
<CAPTION>
5. ACCOUNTS RECEIVABLE
1998 1997
<S> <C> <C>
Trade accounts - Canpotex $ 30,738 $ 43,097
- Other 247,956 283,485
Non-trade accounts 30,055 31,429
--------------------------
308,749 358,011
Less allowance for doubtful accounts 5,775 6,857
--------------------------
$ 302,974 $ 351,154
--------------------------
6. INVENTORIES
1998 1997
Finished product $ 176,908 $ 162,181
Materials and supplies 106,797 107,518
Raw materials 58,471 59,689
Work in process 22,221 24,037
--------------------------
$ 364,397 $ 353,425
--------------------------
</TABLE>
<TABLE>
<CAPTION>
7. PROPERTY, PLANT AND EQUIPMENT
1998
------------------------------------------
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
----------- ---------------- --------
<S> <C> <C> <C>
Land and improvements $ 206,230 $ 23,318 $ 182,912
Buildings and improvements 449,096 117,037 332,059
Machinery and equipment 3,034,648 631,476 2,403,172
Mine development costs 125,908 40,608 85,300
------------------------------------------
$3,815,882 $ 812,439 $ 3,003,443
------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
ACCUMULATED
DEPRECIATION AND NET BOOK
COST AMORTIZATION VALUE
----------- ---------------- --------
<S> <C> <C> <C>
Land and improvements $ 196,004 $ 20,697 $ 175,307
Buildings and improvements 421,617 102,494 319,123
Machinery and equipment 2,914,119 501,228 2,412,891
Mine development costs 125,908 37,604 88,304
------------------------------------------
$3,657,648 $ 662,023 $ 2,995,625
------------------------------------------
</TABLE>
Depreciation and amortization of property, plant and equipment included in
Cost of Goods Sold and in Selling and Administrative was $154,215 (1997 -
$141,241; 1996 - $87,894).
8. GOODWILL
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cost $ 586,987 $ 586,987
Accumulated amortization 27,366 12,691
----------------------------
$ 559,621 $ 574,296
----------------------------
</TABLE>
Amortization of goodwill included in Selling and Administrative
was $14,675 (1997 - $12,238; 1996 - $54).
<TABLE>
<CAPTION>
9. OTHER ASSETS
1998 1997
<S> <C> <C>
Deferred charges - net of
accumulated amortization $ 41,268 $ 32,080
Prepaid pension costs 11,169 13,143
Land held for sale 3,490 9,435
Investments, at equity 23,961 28,041
Investment, at cost 92,151 -
Rotational plant maintenance costs
- - net of accumulated amortization 21,103 36,137
Other 3,870 4,369
--------------------------
$197,012 $123,205
--------------------------
</TABLE>
Amortization of deferred charges and rotational plant maintenance costs included
in Cost of Goods Sold and in Selling and Administrative was $21,990 (1997 -
$16,523; 1996 - $2,177).
10. SHORT-TERM DEBT
Short-term debt was $94,940 at December 31, 1998 (1997 - $101,928). The weighted
average interest rate on this debt was 6.00% (1997 - 6.17%). The Company had
available lines of credit for short-term financing (net of letters of credit of
$40,431) in the amount of $177,451 at December 31, 1998 (1997 - $205,000).
The lines of credit are unsecured.
<TABLE>
<CAPTION>
11. ACCOUNTS PAYABLE AND ACCRUED CHARGES
1998 1997
<S> <C> <C>
Trade accounts $273,031 $264,679
Accrued interest 6,758 3,927
Accrued payroll 14,429 17,561
Accrued integration 42,702 44,534
Income taxes - 3,778
Dividends 12,764 13,624
--------------------------
$349,684 $348,103
--------------------------
</TABLE>
During the year the Company paid severance, relocation and other related
costs in the amount of $1,832 (1997 - $6,394) which were charged against accrued
integration.
50
<PAGE> 55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
12. LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
SYNDICATED FACILITIES LED BY THE BANK OF NOVA SCOTIA $488,000 $ 685,000
The Credit Facility provides for aggregate unsecured advances of $925
million at an interest rate of LIBOR plus a maximum of 0.75% (actual at December
31, 1998 was 0.40%) or Base Rate Canada Loans, payable throughout the term of
the Credit Facility. The actual weighted average interest rate at December 31,
1998 was 5.66%. The Credit Facility is renewable every 364 days with the consent
of the lenders. No principal payments are required during the revolving period.
If the Credit 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
weighted average interest rate on this obligation was 5.97% in 1998 (1997 -
5.96%).
INDUSTRIAL REVENUE AND POLLUTION CONTROL OBLIGATIONS 44,266 45,641
Adjustable Rate Industrial Revenue and Pollution Control Obligations with
varying interest rates and with maturity dates ranging from 1999 to 2012. No
sinking fund requirements prior to maturity. The Adjustable Rate Industrial
Revenue and Pollution Control Obligations bear interest at rates ranging from
3.41% to 4.30%. The average interest rate on these obligations was 3.67% in 1998
(1997 - 3.92%). These loans are secured by bank letters of credit, most of which
are guaranteed by the Company.
NOTES PAYABLE 400,000 400,000
7.125% notes payable June 15, 2007. No sinking fund requirements prior
to maturity. These notes were issued under a shelf registration
statement covering up to $1,000,000 of debt securities. The notes are
unsecured.
OBLIGATIONS UNDER CAPITAL LEASES 823 1,163
OTHER 591 900
--------------------------
933,680 1,132,704
Less current maturities 386 2,740
--------------------------
$933,294 $1,129,964
--------------------------
</TABLE>
The fair values of all long-term obligations (except the Notes Payable
whose approximate fair value at December 31, 1998 was $419,000) are approximated
by their face values.
Assuming that the Credit Facility will continue to be renewed, long-term
debt at December 31, 1998 will mature as follows:
<TABLE>
<CAPTION>
<C> <C>
1999 $ 386
2000 8,637
2001 -
2002 221
2003 2,637
Subsequent years 921,799
--------
$933,680
--------
</TABLE>
13. COMMITMENTS
LEASE COMMITMENTS
The Company has long-term lease agreements for buildings, port facilities,
certain ammonia plants in Trinidad, equipment, ocean-going transportation
vessels and rail cars (excluding mineral leases), the latest of which expires in
2017.
The Company has lease agreements with unaffiliated entities with respect to
two ammonia plants constructed in Trinidad. The minimum annual lease payments
under these agreements are approximately $27,000. The initial terms of the
leases (five years and seven years) are renewable for additional five-year terms
subject to certain conditions. If the leases are not renewed or are otherwise
terminated, the Company may be required to make residual termination payments of
approximately 85% of the estimated $384,000 costs of construction. The Company
has an option to purchase the plants during the terms of the leases for prices
approximating their fair market values at the date of exercise.
Future minimum lease payments under these operating leases will be
approximately as follows:
<TABLE>
<CAPTION>
<C> <C>
1999 $ 87,599
2000 80,502
2001 75,306
2002 72,160
2003 43,183
Subsequent years 108,452
</TABLE>
Rental expense for operating leases for the years ended December 31, 1998,
1997 and 1996 was $86,633, $65,252 and $29,350, respectively.
OTHER COMMITMENTS
The Company has entered into raw material purchase commitments based upon
market rates at the time of delivery through 2007 in the amount of approximately
$152,816, of which approximately $77,420 relates to 1999.
The Company has entered into an agreement for the construction of a ship to
be delivered in 1999 for ocean-going transportation of raw materials and
finished products in the amount of $37,000. The balance of the progress payments
of $14,800 is required in 1999.
BP Chemicals Inc. ("BPC") operates the Lima plant on behalf of the Company
pursuant to a contract providing for the reimbursement of expenses incurred by
BPC in providing such operating services.
The Company's Trinidad operations have entered into long-term natural gas
contracts with a gas company in Trinidad. The contracts provide for prices which
vary with ammonia market prices, escalating floor prices and minimum purchase
quantities.
51
<PAGE> 56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
14. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS
CANADA
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).
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 and defined benefit 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 1974 ("ERISA"). 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.
TRINIDAD
The Company has contributory defined benefit pension plans that cover a
substantial majority of its employees. Benefits are based primarily on future
service, with past service counting for purposes of vesting and eligibility for
benefits. The plans' assets consist mainly of local government and other bonds,
local mortgage and mortgage-backed securities, fixed income deposits and cash.
ALL PENSION PLANS
The components of net pension expense for the Company's pension plans,
computed actuarially, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost for benefits
earned during the year $11,669 $ 9,827 $ 7,337
Interest cost on projected
benefit obligations 22,019 19,566 15,351
Expected return on plan assets (29,900) (25,234) (35,551)
Net amortization and deferral 1,730 31 16,875
------------------------------------
Net pension expense $ 5,518 $ 4,190 $ 4,012
------------------------------------
</TABLE>
Significant actuarial assumptions used in calculating the net pension expense
for the Company's funded plans were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Discount rate 6.75% 7.50% 7.50%
Long-term rate of return
on assets 9.00% 9.00% 9.00%
Rate of increase in
compensation levels 5.00% 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" and SFAS
No. 132 "Employers' Disclosures about Pensions and Other Postretirement
Benefits". These statements require the accrual of the cost of providing other
post-retirement benefits, including medical and life insurance coverage, during
the active service period of the employee, and prescribe certain disclosure
requirements.
The components of this expense, computed actuarially, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Service cost for benefits
earned during the year $ 2,903 $ 2,701 $2,233
Interest cost on projected
benefit obligations 8,025 7,816 6,710
Net amortization and deferral 2 - (11)
------------------------------------
Net post-retirement expense $10,930 $10,517 $8,932
------------------------------------
</TABLE>
The significant actuarial assumptions used in determining post-retirement
benefit expense were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Discount rate 6.80% 7.50% 7.50%
Health care cost trend rate 10.00%* 10.80% 11.60%
</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 expense would have increased as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Accumulated post-retirement
benefit obligation $ 6,325 $ 4,722 $ 843
Aggregate of service and
interest cost 573 490 77
</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.
The effect of these costs on income before income taxes was $0, $887 and
$486 for 1998, 1997 and 1996, respectively. As at December 31, 1998, the Company
has a recorded liability for these costs of $1,060 (1997 - $1,873).
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 deduction 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 $3,844 and $3,647 for 1998 and 1997,
respectively.
52
<PAGE> 57
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
14. POST-RETIREMENT/POST-EMPLOYMENT BENEFITS AND PENSION PLANS (continued)
<TABLE>
<CAPTION>
The change in benefit obligations and change in plan assets for the above
pension and post-retirement/post-employment plans were as follows:
POST-RETIREMENT/
PENSION POST-EMPLOYMENT
1998 1997 1998 1997
Change in Benefit Obligations
<S> <C> <C> <C> <C>
Balance, beginning of year $306,948 $221,134 $ 119,701 $ 96,511
Acquisitions 849 50,582 - 13,455
Canadian benefit obligations 11,156 - - -
Service cost 11,669 9,827 2,903 2,701
Interest cost 22,019 19,566 8,025 7,816
Participants' contributions 384 282 88 73
Actuarial gain 20,936 15,744 10,421 3,269
Amendments - 2,842 - -
Benefits paid (13,859) (13,029) (4,812) (4,124)
-------------------------------------------------
Balance, end of year 360,102 306,948 136,326 119,701
-------------------------------------------------
Change in Plan Assets
Fair value, beginning of year 333,020 238,531 - -
Acquisitions - 51,984 - -
Canadian plan assets 11,156 - - -
Actual return on plan assets 34,130 55,685 - -
Employer contributions 4,080 2,806 4,092 4,051
Participants' contributions 1,110 987 720 73
Valuation allowance (910) (3,944) - (886)
Benefits paid (13,859) (13,029) (4,812) (3,238)
-------------------------------------------------
Fair value, end of year 368,727 333,020 - -
-------------------------------------------------
Funded Status 8,625 26,072 (136,326) (119,701)
Unrecognized Net Gain (Loss) (11,244) (26,526) 11,908 2,131
Unrecognized Prior Service Cost 2,270 3,245 - -
-------------------------------------------------
Accrued Benefit Cost (349) 2,791 (124,418) (117,570)
Less current portion 2,187 - 3,630 6,378
-------------------------------------------------
1,838 2,791 (120,788) (111,192)
Add SFAS 112 liability - - (1,060) (1,874)
-------------------------------------------------
Accrued Post-retirement/Post-employment Benefits Asset (Liability) $ 1,838 $ 2,791 $(121,848) $(113,066)
-------------------------------------------------
Amounts recognized in the statements of financial position consist of:
Long-term liability $ (9,331) $ (10,352) $(121,848) $(113,066)
Prepaid pension asset 11,169 13,143 - -
-------------------------------------------------
$ 1,838 $ 2,791 $(121,848) $(113,066)
-------------------------------------------------
</TABLE>
The aggregate pension accumulated benefit obligations and aggregate fair value
of plan assets for pension plans with accumulated benefit obligations in excess
of plan assets are as follows:
<TABLE>
<CAPTION>
POST-RETIREMENT/
PENSION POST-EMPLOYMENT
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Accumulated benefit obligations $ 100,213 $ 76,274 $ 121,848 $ 113,066
Fair value of plan assets $ 76,698 $ 61,695 - -
</TABLE>
15. ENVIRONMENTAL COSTS
RECLAMATION AND RESTORATION COSTS
Site restoration and reclamation costs have been accrued for various sites.
At December 31, 1998, the Company has accrued $29,078 (1997 - $31,953) for the
Aurora, North Carolina facility, $66,412 (1997 - $66,810) for the White Springs,
Florida facility, $27,377 (1997 - $27,377) for the Moab, Utah facility, $9,225
(1997 - $12,965) for various sulphur facilities and $5,038 for the Cassidy Lake
facility. 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 1998 totalled $7,731
(1997 - $3,675). These amounts represent the Company's current estimate of
potential site restoration and reclamation costs which were last assessed in
December 1998. These expenditures are generally incurred over an extended period
of time.
Annual environmental expenditures for reclamation and restoration during
the years ended December 31, 1998, 1997 and 1996 were $71,887, $66,972 and
$69,905, respectively. Of the 1998 amount, $62,958 (1997 - $51,421; 1996 -
$53,507) was charged to operations, $4,059 (1997 - $4,948; 1996 - $6,787) was
capitalized and $4,870 (1997 - $10,603; 1996 - $9,611) 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 regulations implementing
this legislation require companies to "cap" the gypsum stacks in order to reduce
53
<PAGE> 58
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
15. ENVIRONMENTAL COSTS (continued)
seepage into the groundwater, when such stacks reach their design capacity (for
the Company, in approximately 35 years), or after March 25, 2001 if groundwater
standards are not being met. At December 31, 1998, a balance of $35,350 (1997 -
$35,350) 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 stacks must comply with the laws in place at that time.
OTHER ENVIRONMENTAL COSTS
Other than reclamation, 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 1998. At December 31, 1998,
environmental provisions recorded by the Company, other than those related to
reclamation, restoration and gypsum stack capping, as discussed above, were
approximately $3,800.
The Company's estimated operating expenses, other than reclamation,
restoration and gypsum stack capping, relating to compliance with environmental
laws and regulations governing ongoing operations were approximately $20,473 for
the year ended December 31, 1998 (1997 - $15,520; 1996 - $9,533). In addition,
capital expenditures for other environmental compliance were approximately
$9,926 for the year ended December 31, 1998 (1997 - $10,464; 1996 - $2,123).
16. 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.
<TABLE>
<CAPTION>
ISSUED: 1998 1997 1996
CONSIDERATION CONSIDERATION CONSIDERATION
<S> <C> <C> <C>
Issued, beginning of year $1,211,049 $ 630,484 $627,700
Shares issued under option 15,414 5,826 2,634
Shares issued to purchase
Arcadian Corporation - 573,278 -
Shares issued for dividend
reinvestment plan 1,136 1,461 150
----------------------------------------------
Issued, end of year $1,227,599 $1,211,049 $630,484
----------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
ISSUED: 1998 1997 1996
NUMBER OF NUMBER OF NUMBER OF
COMMON COMMON COMMON
SHARES SHARES SHARES
<S> <C> <C> <C>
Issued, beginning of year 53,896,186 45,581,864 45,439,667
Shares issued under option 332,800 267,350 140,050
Shares issued to purchase
Arcadian Corporation - 8,029,092 -
Shares issued for dividend
reinvestment plan 14,809 17,880 2,147
------------------------------------------
Issued, end of year 54,243,795 53,896,186 45,581,864
------------------------------------------
</TABLE>
STOCK OPTIONS
At December 31, 1998, there were stock options outstanding in respect of
2,947,075 common shares granted to certain employees of the Company and the
directors of PCS with an exercise price from CDN$14.00 to CDN$121.50 for options
held by optionees resident in Canada, and US$12.00 to US$86.75 for optionees
resident in the United States. As at December 31, 1998, 1,682,325 shares were
subject to exercisable options.
The foregoing options have expiry dates ranging from November 30, 1999 to
November 5, 2008.
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. The Plan was renewed in 1998 and now
expires following the Company's annual meeting in 2001, unless otherwise renewed
or extended.
17. SEGMENTED INFORMATION
The Company has three reportable business segments: potash, phosphate and
nitrogen. All three segments produce fertilizers for sale to agricultural
customers. In addition, approximately 44 percent of nitrogen and 36 percent of
phosphate net sales revenue is from non-fertilizer products. These business
segments are differentiated by the chemical nutrient contained in the product
that each produces with the exception of phosphate products produced at Geismar,
which are included in the nitrogen business segment. Inter-segment net sales are
made under terms which approximate market value. Each of the phosphate and
nitrogen business segments was acquired as a unit.
<TABLE>
<CAPTION>
1998
POTASH PHOSPHATE NITROGEN ALL OTHERS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales - third party $ 545,491 $ 914,197 $ 848,075 $ - $2,307,763
Inter-segment net sales 10,342 1,318 66,704 - -
Gross margin 322,613 210,626 83,027 (6,919) 609,347
Other income 2,101 6,463 10,610 13,635 32,809
Depreciation and amortization 36,242 59,084 86,708 8,846 190,880
Operating income 237,615 207,756 61,077 (60,392) 446,056
Assets 1,037,328 1,359,288 1,931,326 206,315 4,534,257
Expenditures for segment capital assets 43,158 66,958 80,039 - 190,155
</TABLE>
54
<PAGE> 59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
17. SEGMENTED INFORMATION (continued)
<TABLE>
<CAPTION>
1997
POTASH PHOSPHATE NITROGEN ALL OTHERS CONSOLIDATED
<S> <C> <C> <C> <C> <C>
Net sales - third party $ 504,167 $ 926,490 $ 895,272 $ - $2,325,929
Inter-segment net sales 9,017 1,460 18,132 - -
Gross margin 262,237 184,386 143,420 (4,872) 585,171
Other income 6,010 4,863 9,959 11,612 32,444
Depreciation and amortization 39,605 55,102 68,996 6,299 170,002
Operating income 191,857 181,249 125,705 (51,171) 447,640
Assets 1,005,910 1,406,717 1,957,292 57,673 4,427,592
Expenditures for segment capital assets 42,836 47,979 69,522 - 160,337
1996
POTASH PHOSPHATE NITROGEN ALL OTHERS CONSOLIDATED
Net sales - third party $ 403,196 $ 891,964 $ 108,708 $ - $1,403,868
Gross margin 190,655 191,257 2,062 - 383,974
Other income 10,461 5,396 - - 15,857
Depreciation and amortization 38,472 51,653 - - 90,125
Operating income 137,762 182,142 2,062 (22,474) 299,492
Assets 1,005,220 1,447,173 - 41,994 2,494,387
Expenditures for segment capital assets 28,306 30,633 - - 58,939
</TABLE>
FINANCIAL INFORMATION BY GEOGRAPHIC AREA IS SUMMARIZED IN THE FOLLOWING TABLE:
<TABLE>
<CAPTION>
CANADA UNITED STATES TRINIDAD CONSOLIDATED
1998
Net sales to customers outside the Company
<S> <C> <C> <C> <C>
Canada $ 21,885 $ 29,808 $ - $ 51,693
United States 199,956 1,279,615 110,112 1,589,683
PhosChem - 262,168 - 262,168
Canpotex 252,464 - - 252,464
Other 65,441 35,237 51,077 151,755
--------------------------------------------------------------
$ 539,746 $1,606,828 $161,189 $2,307,763
--------------------------------------------------------------
Operating income $ 209,783 $ 220,221 $ 16,052 $ 446,056
--------------------------------------------------------------
Capital assets and goodwill $ 823,827 $2,448,587 $316,025 $3,588,439
--------------------------------------------------------------
1997
Net sales to customers outside the Company
Canada $ 14,460 $ 27,147 $ - $ 41,607
United States 188,416 1,334,672 100,466 1,623,554
PhosChem - 261,502 - 261,502
Canpotex 229,666 - - 229,666
Other 64,261 35,097 70,242 169,600
--------------------------------------------------------------
$ 496,803 $1,658,418 $170,708 $2,325,929
--------------------------------------------------------------
Operating income $ 163,620 $ 257,528 $ 26,492 $ 447,640
--------------------------------------------------------------
Capital assets and goodwill $ 811,135 $2,463,546 $335,745 $3,610,426
--------------------------------------------------------------
1996
Net sales to customers outside the Company
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
--------------------------------------------------------------
Operating income $ 113,317 $ 186,175 $ - $ 299,492
--------------------------------------------------------------
Capital assets and goodwill $ 829,791 $1,150,587 $ - $1,980,378
--------------------------------------------------------------
</TABLE>
18. PROVINCIAL MINING AND OTHER TAXES
<TABLE>
<CAPTION>
Provincial mining taxes and other taxes consist of:
1998 1997 1996
<S> <C> <C> <C>
Potash Production Tax $61,639 $53,453 $27,462
Saskatchewan corporate
capital taxes 18,449 16,859 12,735
-----------------------------------
$80,088 $70,312 $40,197
-----------------------------------
</TABLE>
19. INTEREST EXPENSE
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Interest on
Short-term debt $ 2,942 $ 2,351 $ 56
Long-term debt 64,632 79,088 46,705
-----------------------------------
$67,574 $81,439 $46,761
-----------------------------------
</TABLE>
55
<PAGE> 60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
20. 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 Canadian statutory income tax rates to income before
income taxes as follows:
<TABLE>
<CAPTION>
1998 1997 1996
Income before income taxes
<S> <C> <C> <C>
Canada $122,490 $ 67,606 $ 81,067
United States 243,275 272,520 171,664
Trinidad 12,717 26,075 -
-------------------------------------
Income before income taxes $378,482 $366,201 $252,731
-------------------------------------
Federal and Provincial
Statutory tax rates 46.12% 46.12% 46.12%
-------------------------------------
Tax at statutory rates $174,556 $168,892 $116,560
Adjusted for the effect of:
Net non-deductible provincial
taxes and royalties and
resource allowances 19,327 (7,025) (22,879)
Additional tax deductions (63,330) (73,631) (44,255)
Difference between Canadian
rate and rates applicable to
subsidiaries in other countries (14,071) (24,662) (10,359)
Other 997 5,489 4,628
-------------------------------------
Income tax expense $117,479 $ 69,063 $ 43,695
-------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Details of income tax expense are as follows:
Canada
<S> <C> <C> <C>
- - Current $ 2,351 $ 1,024 $ 3,097
- - Deferred 75,405 2,146 -
United States - Federal
- - Current 6,177 31,888 16,861
- - Deferred 10,683 25,063 20,651
United States - State
- - Current 4,963 - -
- - Deferred 14,561 (716) 3,086
Trinidad
- - Current 5,808 13,564 -
- - Deferred (2,469) (3,906) -
-------------------------------------
Income tax expense $117,479 $ 69,063 $43,695
-------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the net deferred income tax liability are:
<TABLE>
<CAPTION>
1998 1997
Deferred income tax assets:
<S> <C> <C>
Loss and credit carryforwards $ 127,653 $ 91,884
Post-retirement/post-employment benefits 50,161 49,551
Accrued reclamation costs 44,555 49,577
Other 11,312 63,858
--------------------------
Total deferred income tax assets 233,681 254,870
--------------------------
Deferred income tax liabilities:
Basis difference in fixed assets 628,551 574,673
Other 22,983 18,628
--------------------------
Total deferred income tax liabilities 651,534 593,301
--------------------------
Net deferred income tax liability $ 417,853 $ 338,431
--------------------------
</TABLE>
At December 31, 1998, the Company has income tax losses carried forward of
approximately $300,210 which will begin to expire in 2010. The benefit relating
to these loss carryforwards has been recognized by reducing deferred income tax
liabilities. In addition, the Company has alternative minimum tax credits of
approximately $20,359 which carry forward indefinitely.
21. NET INCOME PER SHARE (EARNINGS PER SHARE)
Net income per share was calculated on the weighted average number of
shares issued and outstanding during the twelve months ended December 31, 1998
of 54,177,000 (1997 -52,275,000; 1996 - 45,537,000). Fully diluted net income
per share for the year ended December 31, 1998 was $4.77 (1997 -$5.61; 1996 -
$4.53).
22. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company uses financial instruments, including forward exchange
contracts, futures, swaps and option agreements to hedge foreign exchange and
commodity price risk. The Company does not hold or issue financial instruments
for trading purposes.
At December 31, 1998, the Company had no commitments in the form of foreign
exchange contracts to sell US dollars (1997 - US$46,000).
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.
In addition to physical spot and term purchases, the Company at times
employs futures, swaps and option agreements to establish the cost on a portion
of its natural gas requirements. These instruments are intended to hedge the
future cost of the committed and anticipated natural gas purchases for its US
nitrogen plants. Under these arrangements, the Company receives or makes
payments based on the differential between a specified price and the actual spot
price of natural gas. The Company has certain available lines of credit which
are utilized to reduce cash margin requirements to maintain the derivatives.
Cash margin requirements which have been advanced as at December 31, 1998
totalled $16,199 (1997 - $11,158) and are included in inventory.
As at December 31, 1998, the Company had derivatives qualifying for
deferral in the form of futures and swaps. The futures represented a notional
amount of 33.1 million MMBtus with maturities in 1999 through 2001. The swaps
represented a notional amount of 107.3 million MMBtus with maturities in 1999
through 2003. As at December 31, 1998, net losses arising from settled hedging
transactions which are included as a component of finished goods inventory were
not material.
The Company is exposed to credit related losses in the event of
non-performance by counterparties to derivative financial instruments. The
Company anticipates, however, that counterparties will be able to fully satisfy
their obligations under the contracts.
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. The Company seeks to manage the
credit risk relating to these sales through a credit management program.
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, short-term debt and accounts payable and accrued charges
approximate fair values because of short-term maturities. The carrying amount
of the Company's long-term debt (except the Notes Payable whose approximate
fair value at December 31, 1998 was $419,000) approximates estimated fair value
because the stated interest rates approximate the market rate.
56
<PAGE> 61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
23. CONTINGENCIES
GENERAL
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 1998.
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 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. 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 defendants' 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. Oral arguments were heard on
November 17, 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 parties in the California lawsuit have agreed to stay proceedings
pending the outcome of the appeal to the United States Court of Appeals for the
Eighth Circuit. The Illinois State Court complaint has been dismissed for
failure to state a cause of action.
On May 7, 1997, J. Douglas Campbell, Alfred L. Williams, Peter H. Kesser
and David L. Alyea, former officers of Arcadian Corporation, filed lawsuits
against PCS in the United States District Court for the Western District of
Tennessee. The complaints allege that PCS breached employment agreements between
Arcadian and the officers and breached the related assumption agreement among
PCS, PCS Nitrogen and Arcadian. The complaints of Mr. Campbell, Mr. Williams,
Mr. Kesser and Mr. Alyea seek damages in excess of $22.2 million, $6.2 million,
$3.7 million and $4.2 million, respectively. In addition, on October 14, 1997,
Charles Lance, a former officer of Arcadian Corporation, filed a lawsuit in the
same court against PCS also alleging breaches of his employment agreement and
the related assumption agreement. Mr. Lance seeks damages in an amount exceeding
$3.0 million. Each complaint also seeks certain additional unspecified damages.
Trial with respect to the claims of Mr. Campbell, Mr. Williams and Mr. Kesser
commenced on August 17, 1998 and concluded on August 25, 1998. On December 1,
1998, the court entered judgments in the amounts of $12.7 million, $3.2 million
and $2.6 million in the favor of Mr. Campbell, Mr. Williams and Mr. Kesser,
respectively, subject to pending applications for attorneys' fees or additional
amounts to compensate the Arcadian executives for the impact of certain excise
taxes, if applicable. The Company has filed Notices of Appeal with respect to
these judgments. The Company has settled the claim of Mr. Alyea for $0.7 million
and attorneys' fees (subject to the application for fees) and the claim of Mr.
Lance for the total amount of $0.6 million. Management of the Company, having
consulted with legal counsel, believes that the lawsuits will not have a
material adverse effect on the Company's financial condition or results of
operations.
On March 13, 1996, PCS Nitrogen, two other nitrogen producers and up to
thirty 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 actually filed by the 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.
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. On December 19,
1997, that motion was granted and the complaint was dismissed with prejudice. On
January 15, 1998, the Port Authority appealed the dismissal to the United States
Court of Appeals for the Third Circuit. The case was briefed and oral argument
was heard on September 17, 1998. Although neither the Port Authority nor its
subrogated insurers have alleged or otherwise revealed the amount of damages
sought from PCS Nitrogen 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 totalling approximately $340
million of which the insurers had paid approximately $160 million. PCS Nitrogen
is unaware of any basis for any liability and intends to continue to vigorously
defend the lawsuit.
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's financial condition or results of operations.
UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect the Company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
24. 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, 1998 were $252,464 (1997 - $229,666; 1996 - $184,025).
Account balances resulting from the Canpotex transactions are included in
the Consolidated Statements of Financial Position and settled on normal trade
terms.
25. 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>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
1998
<S> <C> <C> <C> <C>
Net sales $ 583,812 $ 660,442 $ 521,368 $ 542,141
----------------------------------------------
Gross Margin $ 150,673 $ 186,631 $ 140,188 $ 131,855
----------------------------------------------
Operating Income $ 109,790 $ 146,909 $ 95,575 $ 93,782
----------------------------------------------
Net Income $ 63,009 $ 89,117 $ 54,704 $ 54,173
----------------------------------------------
Net Income per Share $ 1.17 $ 1.64 $ 1.01 $ 1.00
----------------------------------------------
1997
Net sales $ 464,834 $ 676,648 $ 573,773 $ 610,674
----------------------------------------------
Gross Margin $ 115,027 $ 184,152 $ 149,466 $ 136,526
----------------------------------------------
Operating Income $ 90,513 $ 154,714 $ 108,851 $ 93,562
----------------------------------------------
Net Income $ 56,365 $ 96,980 $ 71,418 $ 72,375
----------------------------------------------
Net Income per Share $ 1.18 $ 1.81 $ 1.33 $ 1.35
----------------------------------------------
</TABLE>
57
<PAGE> 62
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
25. QUARTERLY RESULTS (UNAUDITED) (continued)
Net Income per Share for each quarter has been computed based on the
weighted average number of shares issued and outstanding during the respective
quarter; therefore, quarterly amounts may not add to the annual total.
26. COMPARATIVE FIGURES
Certain of the prior years' figures have been reclassified to conform with
the current year's presentation.
27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
A description of certain significant differences between Canadian GAAP and
US GAAP follows:
Marketable securities: The Company's investment in Israel Chemicals Ltd.
("ICL") is stated at cost. US GAAP would require that this investment be
classified as available-for-sale and be stated at market value.
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 in
accordance with Canadian GAAP. The difference in these exchange rates is what
gives rise to the foreign currency translation adjustment.
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 reported as an operating expense.
Non-cash financing and investing activities: Non-cash financing and
investing activities are included in the statement of cash flow. US GAAP
requires that non-cash financing and investing activities be disclosed
supplementally rather than being included in the statement of cash flow.
Comprehensive income: Comprehensive income is not recognized under Canadian
GAAP. US GAAP would require the recognition of comprehensive income.
In 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation". The Company has decided to continue
to apply APB Opinion 25 ("APB 25") for measurement of compensation of employees.
THE APPLICATION OF US GAAP, AS DESCRIBED ABOVE, WOULD HAVE HAD THE
FOLLOWING APPROXIMATE EFFECTS ON NET INCOME, NET INCOME PER SHARE, TOTAL ASSETS
AND SHAREHOLDERS' EQUITY:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income as reported $ 261,003 $ 297,138 $ 209,036
Item decreasing reported net income
Deferred income taxes - (11,382) (7,216)
----------------------------------------------
Approximate net income - US GAAP $ 261,003 $ 285,756 $ 201,820
----------------------------------------------
Approximate net income per share - US GAAP $ 4.82 $ 5.47 $ 4.43
----------------------------------------------
Total assets as reported $ 4,534,257 $ 4,427,592 $ 2,494,387
Items increasing reported total assets
Deferred income tax asset - - 15,727
Available-for-sale security (unrealized holding gain) 14,906 - -
----------------------------------------------
Approximate total assets - US GAAP $ 4,549,163 $ 4,427,592 $ 2,510,114
----------------------------------------------
Shareholders' equity as reported $ 2,453,761 $ 2,227,891 $ 1,405,496
Items increasing reported shareholders' equity
Deferred income taxes - - 11,382
Other Comprehensive Income 8,944 - -
----------------------------------------------
Approximate shareholders' equity - US GAAP $ 2,462,705 $ 2,227,891 $ 1,416,878
----------------------------------------------
</TABLE>
SUPPLEMENTAL US GAAP DISCLOSURE
Available-for-Sale Security
The Company's investment in ICL is classified as available-for-sale. The
fair market value of this investment at December 31, 1998 was $107,057 and the
unrealized holding gain was $14,906.
New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits",
which was effective for the Company's 1998 fiscal year. Adoption of this
standard did not have a material impact on the Company's consolidated financial
statements. In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
will be effective for the Company's 2000 fiscal year. The impact on the
Company's consolidated financial statements of the adoption of this standard is
not presently determinable.
Stock Compensation Plans
The Company has two stock-based compensation plans which are described
below. The Company applies 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 SFAS No. 123, the Company's net
income and net income per share for the years ending December 31, 1998, 1997 and
1996 would have been reduced to the pro forma amounts indicated as follows:
58
<PAGE> 63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income $ 261,003 $ 239,667 $ 285,756 $ 271,497 $ 201,820 $ 191,936
Net income per share $ 4.82 $ 4.42 $ 5.47 $ 5.19 $ 4.43 $ 4.21
</TABLE>
In calculating the foregoing pro forma amounts, the fair value of each
option grant was estimated as of the date of grant using the Modified
Black-Scholes option-pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Expected dividend $0.92 $1.03 $1.06
Expected volatility 30% 26% 32%
Risk-free interest rate 4.83% 5.80% 6.90%
Expected life of option 10 YEARS 10 years 10 years
Expected forfeitures 26% 26% 25%
</TABLE>
The Company has two option plans. Under the Officers and Key Employee
Plans, the Company may, after February 3, 1998, issue up to 6,926,125 common
shares pursuant to the exercise of options. Under the Directors Plan, the
Company may, after January 24, 1995, issue up to 456,000 common shares pursuant
to the exercise of options. 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 the plans as of December 31, 1998, 1997 and 1996
and changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO OPTION
1998 1997 1996
<S> <C> <C> <C>
Outstanding, beginning of year 2,461,125 1,845,475 1,395,525
Granted 824,000 889,750 592,000
Exercised (332,800) (267,350) (140,050)
Cancelled (5,250) (6,750) (2,000)
-----------------------------------------
Outstanding, end of year 2,947,075 2,461,125 1,845,475
-----------------------------------------
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED AVERAGE EXERCISE PRICE
1998 1997 1996
<S> <C> <C> <C>
Outstanding, beginning of year $68.11 $52.90 $34.74
Granted 67.88 86.11 71.00
Exercised 47.45 23.12 20.95
Cancelled 82.61 78.44 74.75
Outstanding, end of year 70.35 68.11 52.90
</TABLE>
The weighted-average grant-date fair value of options granted during the year
was $18,665 (1997 - $23,712; 1996 - $14,206). The following table summarizes
information about stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
RANGE OF EXERCISE NUMBER WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
PRICES OUTSTANDING REMAINING LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- ----------------- ----------- ---------------- ---------------- -------- ----------------
<C> <C> <C> <C> <C> <C> <C>
$12.00 to $18.38 18,000 2 years $15.84 18,000 $15.84
$20.00 to $25.38 129,350 5 years 21.96 129,350 21.96
$32.25 176,650 6 years 32.25 176,650 32.25
$67.88 824,000 10 years 67.88 - -
$70.38 to $74.75 917,575 8 years 72.43 917,575 72.43
$81.75 to $86.75 881,500 9 years 86.34 440,750 86.34
</TABLE>
59
<PAGE> 64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
The following supplemental schedules present the Consolidated Financial
Position, Income and Retained Earnings, Cash Flow and Comprehensive Income in
accordance with US GAAP as adjusted for the GAAP differences described in this
note.
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED FINANCIAL POSITION
As at December 31
(in thousands of US dollars)
1998 1997
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 67,971 $ 8,756
Accounts receivable 302,974 351,154
Inventories 364,397 353,425
Prepaid expenses 38,839 21,131
------------------------------
774,181 734,466
Property, plant and equipment 3,003,443 2,995,625
Goodwill 559,621 574,296
Other assets 211,918 123,205
------------------------------
$4,549,163 $4,427,592
------------------------------
LIABILITIES
Current Liabilities
Short-term debt $ 94,940 $ 101,928
Accounts payable and accrued charges 349,684 348,103
Current portion of long-term debt 386 2,740
------------------------------
445,010 452,771
Long-term debt 933,294 1,129,964
Deferred income tax liability 423,815 338,431
Accrued post-retirement/post-employment benefits 131,179 123,418
Accrued reclamation costs 129,399 139,105
Other non-current liabilities and deferred credits 23,761 16,012
------------------------------
2,086,458 2,199,701
------------------------------
SHAREHOLDERS' EQUITY
Share Capital 1,227,599 1,211,049
Contributed Surplus 336,486 336,486
Retained Earnings 910,605 701,285
Foreign Currency Translation Adjustment (20,929) (20,929)
Other Comprehensive Income 8,944 -
------------------------------
2,462,705 2,227,891
------------------------------
$4,549,163 $4,427,592
------------------------------
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED INCOME AND RETAINED EARNINGS
For the Years Ended December 31
(in thousands of US dollars)
1998 1997 1996
<S> <C> <C> <C>
Net sales $2,601,697 $2,610,346 $1,552,885
Cost of goods sold 1,914,757 1,963,565 1,119,758
------------------------------------------------
GROSS MARGIN 686,940 646,781 433,127
------------------------------------------------
Selling, distribution and administrative 193,605 161,273 109,295
Provincial mining and other taxes 80,088 70,312 40,197
Other income (32,809) (32,444) (15,857)
------------------------------------------------
240,884 199,141 133,635
------------------------------------------------
OPERATING INCOME 446,056 447,640 299,492
INTEREST EXPENSE 67,574 81,439 46,761
------------------------------------------------
INCOME BEFORE INCOME TAXES 378,482 366,201 252,731
INCOME TAXES 117,479 80,445 50,911
------------------------------------------------
NET INCOME 261,003 285,756 201,820
RETAINED EARNINGS, BEGINNING OF YEAR 701,285 470,837 317,216
DIVIDENDS (51,683) (55,308) (48,199)
------------------------------------------------
RETAINED EARNINGS, END OF YEAR $ 910,605 $ 701,285 $ 470,837
------------------------------------------------
NET INCOME PER SHARE - BASIC $ 4.82 $ 5.47 $ 4.43
------------------------------------------------
NET INCOME PER SHARE - FULLY DILUTED $ 4.80 $ 5.42 $ 4.39
------------------------------------------------
DIVIDENDS PER SHARE $ 0.96 $ 1.03 $ 1.06
------------------------------------------------
</TABLE>
60
<PAGE> 65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of US dollars)
27. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (continued)
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED CASH FLOW
For the Years Ended December 31
(in thousands of US dollars)
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $261,003 $285,756 $201,820
Items not affecting cash
Depreciation and amortization 190,880 170,002 90,125
(Gain) loss on disposal of property, plant and equipment (99) (4,739) 2,152
Provision for deferred income tax 97,203 45,873 30,953
Provision for post-retirement/post-employment benefits 6,848 6,166 5,890
CHANGES IN NON-CASH OPERATING WORKING CAPITAL
Accounts receivable 48,751 23,470 (7,400)
Inventories (7,859) 19,873 2,493
Prepaid expenses (16,603) 3,736 (1,393)
Accounts payable and accrued charges (2,477) (68,623) (19,214)
Accrued reclamation costs (7,436) (7,407) (5,021)
Other non-current liabilities and deferred credits 7,749 (6,286) (4,219)
----------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 577,960 467,821 296,186
----------------------------------------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (190,155) (160,337) (58,939)
Acquisition of Arcadian Corporation - (474,985) -
Proceeds from disposal of property, plant and equipment 31,926 15,276 22,716
Additions to other assets (85,066) (22,091) (2,819)
----------------------------------------------
CASH USED IN INVESTING ACTIVITIES (243,295) (642,137) (39,042)
----------------------------------------------
FINANCING ACTIVITIES
Proceeds from long-term obligations 143,000 1,210,000 -
Repayment of long-term obligations (375,429) (699,979) (258,556)
Proceeds from short-term debt 215,000 210,000 -
Repayment of short-term debt (221,988) (108,072) -
Repayment of Senior Notes (900) (374,526) -
Dividends (51,683) (55,308) (48,199)
Issuance of shares 16,550 7,287 2,784
----------------------------------------------
CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (275,450) 189,402 (303,971)
----------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,215 15,086 (46,827)
CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS), BEGINNING OF YEAR 8,756 (6,330) 40,497
----------------------------------------------
CASH AND CASH EQUIVALENTS (BANK INDEBTEDNESS), END OF YEAR $ 67,971 $ 8,756 $ (6,330)
----------------------------------------------
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION - 1997
On March 6, 1997, the Company acquired all of the outstanding shares of
Arcadian Corporation. The consideration paid included 8,029,092 common shares of
the Company valued at $573,278.
<TABLE>
<CAPTION>
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED COMPREHENSIVE INCOME
For the Years Ended December 31
(in thousands of US dollars)
1998 1997 1996
<S> <C> <C> <C>
Net income $261,003 $285,756 $201,820
---------------------------------------------
Other comprehensive income
Unrealized holding gain on security 14,906 - -
Deferred income tax expense related to other comprehensive income (5,962) - -
---------------------------------------------
Other comprehensive income, net of tax 8,944 - -
---------------------------------------------
Comprehensive income $269,947 $285,756 $201,820
---------------------------------------------
</TABLE>
61
<PAGE> 66
BOARD OF DIRECTORS
ISABEL B. ANDERSON [PHOTO]
Ms. Anderson, President and Chief Executive Officer of A&L Information
Brokers, a Calgary-based 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 and the
Canadian NGO delegation to the United Nations Conference on Trade and
Development. She focuses on the implications of public policy for the growth and
development of the Western Canadian economy.
DOUGLAS J. BOURNE [PHOTO]
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 [PHOTO]
Mr. Childers, Chairman 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 past
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 has served on the
Fertilizer Industry Advisory Committee to the United Nations Food and
Agriculture Organization. He sits on the boards of directors of Battle Mountain
Gold Company and the Conference Board of Canada, and formerly served on the
boards of QUNO and KAP Resources.
THE HONOURABLE WILLARD Z. ESTEY, Q.C. [PHOTO]
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
and Companion, Order of Canada, in 1991. A PCS director since 1990, he sits on
the audit committee. He is a director of Canwest Global Communications
Corporation, CamVec Corporation and Fundy Cable Ltd. He is Chairman of the
Ballard Foundation and recently conducted the Grain Handling and Transportation
Review for the Government of Canada.
DALLAS J. HOWE [PHOTO]
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.
He has been appointed to the board of governors of the University of
Saskatchewan, and named by Canada's Minister of International Trade to the
Minister's Medical and Health Sectoral Advisory Group.
JAMES F. LARDNER [PHOTO]
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.
DARYL K. SEAMAN [PHOTO]
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 Tetonka Drilling Inc., Encal Energy Ltd., Renaissance Energy
Ltd., Far West Mining Ltd., Alberta 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. [PHOTO]
Mr. Stromberg, a Partner in the 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
NorSask Forest Products Inc. and Hitachi Canadian Industries Ltd., and a
director and past President of Saskatchewan Place.
JACK G. VICQ [PHOTO]
Mr. Vicq is a Professor of Accounting at the College of Commerce,
University of Saskatchewan. Until June 30, 1998, he was Associate Dean of the
College and responsible for the Centre for International Business Studies. 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.
62
<PAGE> 67
DENIS J. COTE [PHOTO]
Mr. Cote retired as Chairman and CEO of the UMA Group Ltd. in 1991. In
1993, he was President, Chief Executive Officer and member of the board of
Reclamation Management Ltd. in Vancouver, British Columbia. 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., and chairs its compensation
committee. He is a founder and Chairman of Inter West Energy Corporation, which
merged with New Cache Resources in 1997, 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 [PHOTO]
Mr. Doyle, President and Chief Operating Officer of Potash Corporation of
Saskatchewan Inc., 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 past Chairman of Canpotex
Limited and continues to serve on its board. He is vice-chairman of the Potash &
Phosphate Institute, and serves on the boards of Fersan S.A. in the Dominican
Republic and the Foundation for Agronomic Research. He chairs the International
Fertilizer Industry Association's Potash Committee.
DONALD E. PHILLIPS [PHOTO]
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 director of Great Lakes REIT Inc., Oak Brook, Illinois, 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, a
trustee of Mississippi College, Clinton, Mississippi, and former Chairman of the
board of Lake Forest Graduate School of Business, Lake Forest, Illinois.
PAUL J. SCHOENHALS [PHOTO]
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. 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. He
sits on the national advisory committee for Bayer Care Canada.
BARRIE A. WIGMORE [PHOTO]
Mr. Wigmore, a Limited Partner with New York investment banking firm
Goldman, Sachs Group, L.P., headed its corporate finance activities in the
electric, gas, pipelines and telecommunications industries. 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) and a director of National Service
Industries Inc.
PAUL S. WISE [PHOTO]
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 a director emeritus of the boards of
United Funds, Waddell & Reed Funds and TMK/United Funds. He has been on the
boards of the College of Insurance, the Institute of Civil Justice at the Rand
Corporation, the Insurance Hall of Fame, 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.
63
<PAGE> 68
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Shareholders Meeting will be held at 10.30 a.m. Central Standard Time
May 6, 1999 in the Commonwealth Ballroom, Ramada Hotel, First Avenue and 22nd
Street East, Saskatoon, Saskatchewan.
Holders of common shares as of March 18, 1999 are entitled to vote at the
meeting and are encouraged to participate. Shareholders who cannot attend are
urged to return their proxies promptly to ensure their shares will be voted.
DIVIDENDS
Dividend amounts paid to shareholders resident in the United States were
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 earlier.
Future cash dividends will be paid out of, and conditioned upon, the Company's
available earnings. Shareholders who wish to have their dividends deposited
directly in their bank accounts should contact the transfer agent and registrar,
CIBC Mellon Trust.
DIVIDEND REINVESTMENT POLICY
Registered shareholders can have dividends reinvested in newly-issued common
shares of PCS at prevailing market rates.
INFORMATION FOR SHAREHOLDERS OUTSIDE CANADA
Dividends paid to residents in countries with which Canada has bilateral tax
treaties 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 nonresidents not carrying on business in Canada. No
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
Non-registered shareholders who would like to receive quarterly reports should
contact the Company's Corporate Relations department. News releases are
available via fax.
Copies of the Company's most recent Form 10-K 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, contact CIBC Mellon
Trust.
SHARES LISTED (POT)
Toronto Stock Exchange
Montreal Exchange
New York Stock Exchange
OWNERSHIP
On March 2, 1999, there were 2,880 holders of record of the Company's common
shares.
COMMON SHARE TRANSFER AGENT
In Canada:
CIBC Mellon Trust Company
1080 - 2002 Victoria Avenue
Regina, Saskatchewan S4P 0R7
Phone: (306) 751-7550
(800) 387-0825
Website: www.cibcmellon.ca
Inquiries about shareholdings, share transfer requirements, address changes or
lost certificates should be directed to CIBC Mellon Trust 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
Website: www.chasemellon.com
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 (CDN$) 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
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
At end of period .6534 .6997 .7301 .7325 .7129
Average for period (1) .6743 .7198 .7330 .7307 .7301
High for period .7105 .7495 .7527 .7534 .7644
Low for period .6343 .6945 .7212 .7009 .7098
</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 2,
1999 was US$1.00 = CDN$1.5200 (equivalent to CDN$1.00 = US$0.6579).
1998 PCS SHARE PRICE
Average Weekly Price ($ Actual)
[CHART] 1998 PCS Share Price -- NYSE Average Weekly Price ($ Actual)
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, Montreal
Exchange and New York Stock Exchange (composite transactions) on a quarterly
basis. Potash Corporation of Saskatchewan Inc. is on the S&P/TSE 60 index and
the TSE 100.
<TABLE>
<CAPTION>
TORONTO STOCK EXCHANGE (1) MONTREAL EXCHANGE (1) NEW YORK STOCK EXCHANGE
High Low Volume High Low Volume High Low Volume
1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
First Quarter 138.200 112.000 5,456,109 137.900 112.000 965,685 97.188 78.500 13,056,600
Second Quarter 132.000 108.500 3,618,117 131.950 108.800 551,271 92.938 73.250 7,033,200
Third Quarter 114.700 75.000 5,090,801 115.000 75.000 1,195,571 77.375 48.375 11,262,400
Fourth Quarter 109.000 75.000 4,021,223 108.500 77.750 505,572 70.875 50.563 12,011,600
------- ------- ---------- ------- ------- --------- ------ ------ ----------
YEAR 1998 138.200 75.000 18,186,250 137.900 75.000 3,218,099 97.188 48.375 43,363,800
------- ------- ---------- ------- ------- --------- ------ ------ ----------
1997
First Quarter 122.700 98.650 3,212,708 122.100 99.000 210,444 89.875 71.500 17,412,400
Second Quarter 117.000 99.850 2,986,406 116.800 100.300 230,607 85.000 71.000 15,201,200
Third Quarter 111.500 98.500 3,854,717 111.100 99.000 624,684 81.125 71.688 17,970,600
Fourth Quarter 122.200 108.750 8,222,508 121.900 108.950 371,250 87.500 78.000 14,982,100
------- ------- ---------- ------- ------- --------- ------ ------ ----------
YEAR 1997 122.700 98.500 18,276,339 122.100 99.000 1,436,985 89.875 71.000 65,566,300
------- ------- ---------- ------- ------- --------- ------ ------ ----------
1996
First Quarter 110.875 82.000 1,747,948 110.875 82.250 185,062 80.500 60.000 29,504,000
Second Quarter 97.000 83.000 1,893,727 97.700 83.000 115,952 71.875 60.250 19,552,800
Third Quarter 108.500 88.000 1,018,661 108.250 88.700 138,003 79.500 64.125 15,875,700
Fourth Quarter 117.950 91.750 3,983,487 117.850 92.950 616,267 86.875 68.250 19,888,000
------- ------- ---------- ------- ------- --------- ------ ------ ----------
YEAR 1996 117.950 82.000 8,643,823 117.850 82.250 1,055,284 86.875 60.000 84,820,500
------- ------- ---------- ------- ------- --------- ------ ------ ----------
</TABLE>
(1) Trading prices are in CDN$
64
<PAGE> 69
CORPORATE INFORMATION
CORPORATE OFFICERS AND KEY MANAGEMENT
POTASH CORPORATION OF SASKATCHEWAN INC.
CHARLES E. CHILDERS
Chairman and Chief Executive Officer
WILLIAM J. DOYLE
President and Chief Operating 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
DENIS A. SIROIS
Vice President and Corporate Controller
PCS SALES
GARY E. CARLSON
President
RICHARD J. LACROIX
Executive Vice President
P. RODNEY WILSON
Executive Vice President
PCS POTASH
GARTH W. MOORE
President
PCS PHOSPHATE
THOMAS J. WRIGHT
President
THOMAS J. REGAN, JR.
Executive Vice President
PCS NITROGEN
JAMES F. DIETZ
President
CORPORATE OFFICES
POTASH CORPORATION OF SASKATCHEWAN INC.
Suite 500, 122 - 1st Avenue South Saskatoon, SK S7K 7G3
Phone: (306) 933-8500
PCS SALES
Suite 440, 5750 Old Orchard Road Skokie, IL 60077
Phone: (800) 241-6908 (847) 583-4400
PCS POTASH
Suite 500, 122 - 1st Avenue South Saskatoon, SK S7K 7G3
Phone: (306) 933-8500
PCS PHOSPHATE
P.O. Box 30321
3101 Glenwood Avenue Raleigh, NC 27622-0321
Phone: (919) 881-2700
PCS NITROGEN
3175 Lenox Park Boulevard, Suite 400 Memphis, TN 38115-4256
Phone: (901) 758-5200
GLOSSARIES
OPERATIONAL TERMS
GENERAL
DOMESTIC AND EXPORT MARKETS
Canada and the United States make up the domestic or North American market; the
rest of the world is the export or offshore market.
MIXED FERTILIZERS contain more than one nutrient. A 6-23-30 fertilizer contains
6 percent nitrogen (N), 23 percent phosphoric acid (P2O5) and 30 percent potash
(K2O) by weight. The nutrient breakdown, always in the same order, is referred
to as NPK in the industry.
LIQUID FERTILIZERS come in two types: solutions, in which the plant nutrients
are dissolved in solution; and suspensions, saturated solutions in which some
plant nutrients are suspended.
METRIC TONNE equals 2,204.6 pounds or 1,000 kilograms, and is 10 percent larger
than a 2,000-pound short ton. Most offshore sales are made in metric tonnes and
US dollars, F.O.B. Vancouver BC for potash, Morehead City NC for phosphate and
Trinidad for nitrogen.
PRODUCT TONNE is a standard measure of the weights of all types of potash,
phosphate and nitrogen products.
NUTRIENT TONNE is a measure of the nutrient weight of potassium, phosphate and
nitrogen fertilizers, and consists of K2O tonnes, P2O5 tonnes and N tonnes.
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.
POTASH typically denotes materials containing potassium, particularly potassium
fertilizer. Most fertilizer is muriate of potash (KCl), potassium chloride.
Potassium combines with other minerals in specialty fertilizers.
POTASH ORE consists typically of KCl, NaCl and other minerals. The KCl becomes
the product stream and is separated from the tailings stream of NaCl and other
minerals. Processing 100 tonnes of ore typically produces 28 to 38 tonnes of
product.
K2O is potassium oxide, a term used in the fertilizer industry to define
potassium content.
K2O TONNE is a term which measures the potassium content of fertilizers having
different chemical analyses.
PHOSPHATE
PHOSPHORUS (P) is widely distributed in nature in combination with other
elements. It is most commonly found in phosphate ore, the only economic source
of phosphorus for producing phosphate fertilizers and phosphate chemicals.
P2O5 is phosphorus pentoxide, a term used to express phosphorus content of ore
or products.
P2O5 TONNE is a term which measures the phosphorus content of fertilizers with
different chemical analyses.
PHOSPHATE ROCK is the main source of phosphoric acid for phosphate fertilizers
and industrial products. A form of calcium phosphate, it also contains other
materials.
MGA, merchant grade acid (54 percent P2O5) available in amber or green form, is
primarily used to make DAP.
DAP, diammonium phosphate (46 percent P2O5), is the major solid phosphate
fertilizer. An important domestic and export product, it is applied directly or
in fertilizer blends.
MAP, monoammonium phosphate (52 percent P2O5), is a solid fertilizer.
SPA, superphosphoric acid (70 percent P2O5), is used in manufacturing liquid
fertilizers and animal feed supplements. PCS LoMag is superphosphoric acid
produced by evaporating MGA to remove water and filtering to remove impurities.
ANIMAL AND POULTRY FEED SUPPLEMENTS blend phosphorus and calcium. Dical
(dicalcium phosphate, 18.5 percent phosphorus) and Monocal (monocalcium
phosphate, 21 percent phosphorus) are used primarily for swine and cattle; DFP
or defluorinated phosphate (tricalcium phosphate, 18 percent phosphorus)
primarily for poultry.
NITROGEN
NITROGEN (N) is a gas which makes up four-fifths of the atmosphere. Essential
for plant growth, it is present in chlorophyll and protein. Some plants can
obtain nitrogen from the atmosphere, but most get it from soil solutions. Its
nutritional value is consumed during each growing season so it must be applied
to soil annually.
N TONNE is a term which measures the nitrogen content of fertilizers having
differing chemical analyses.
AMMONIA is produced primarily from natural gas and atmospheric nitrogen as the
first step in nitrogen fertilizer production. It can also be applied directly to
soils. Anhydrous ammonia (NH3) is a gas with 82 percent N. Ammonia is condensed
by pressure and cooling, and stored and transported in this liquid form.
NITRIC ACID is produced in solutions of varying strengths by reacting ammonia
with atmospheric oxygen. It is used to produce ammonium nitrate and as an
intermediate for industrial purposes.
AMMONIUM NITRATE (34 percent nitrogen) is water soluble and used as a solid
fertilizer, as a liquid in nitrogen solutions and in industrial applications. It
is produced by reacting ammonia with nitric acid.
NITROGEN SOLUTIONS (UAN solutions) are produced by blending ammonium nitrate
solutions with urea solution. Varying in nitrogen content (28-32 percent), these
non-pressure solutions are used principally for direct application on soils and
for manufacturing starter fertilizers.
UREA (46 percent nitrogen), the most commonly produced and widely traded
nitrogen product, is manufactured by reacting ammonia with carbon dioxide under
high pressure. It is used as fertilizer and as a feedstock for industrial and
feed purposes.
FINANCIAL TERMS
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 / AVERAGE INVESTED
CAPITAL measures the adequacy of return on the total creditor and shareholder
capital.
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.
EBITDA represents Earnings (net income) Before Interest, Taxes,
Depreciation and Amortization.
FREE CASH FLOW is the cash, exclusive of the change in working capital,
which is provided by operations less disbursements for sustaining capital,
capitalized turnarounds and dividends.
[LOGO] It is the policy of PCS to manage its operations responsibly in order to
safeguard those natural resources related to or affected by its activities. In
keeping with this policy, the Annual Report uses paper containing at least 10%
post consumer recycled fiber and is recyclable.
<PAGE> 70
PCS SALES VOLUMES BY REGION 1998
<TABLE>
<CAPTION>
<S> <C> <C>
POTASH PHOSPHATE NITROGEN
------ --------- --------
North America 43% North America 65% North America 94%
Asia 34% Asia 26% Latin America 4%
Latin America 15% Latin America 6% Europe 2%
Europe 4% Oceania 2%
Oceania 4% Europe 1%
</TABLE>
PCS is firmly established as a reliable international supplier of the three
primary nutrients, selling to a diversified customer group.
POTASH CORPORATION OF SASKATCHEWAN INC. [LOGO]
Suite 500, 122 - 1st Avenue South Saskatoon Saskatchewan Canada S7K 7G3
www.potashcorp.com
Printed in Canada
<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 Ltd. ........................ Canada
PCS Sales (Canada) Inc. ............................. Saskatchewan
Potash Corporation of Saskatchewan (Florida) Inc. ... Florida
PCS Sales (Iowa), Inc. .............................. Iowa
PCS Joint Venture, LP ............................... Florida
PCS Sales (Indiana), Inc. ........................... Indiana
609430 Saskatchewan Ltd. ............................ Saskatchewan
Potash Holding Company, Inc. ........................ Delaware
PCS Sales (USA), Inc. ............................... Delaware
PCS Administration (USA), Inc. ...................... Delaware
Phosphate Holding Company, Inc. ..................... Delaware
White Springs Agricultural Chemicals, Inc. .......... Delaware
White Springs Phosphate, Inc. ....................... Delaware
PCS Phosphate Company, Inc. ......................... Delaware
Texasgulf Export Corporation ........................ Delaware
Cardinal Creek Corporation .......................... Colorado
Moab Salt, Inc. ..................................... Delaware
Texasgulf Aircraft Inc. ............................. Delaware
Mideast Distributors, Inc. .......................... Delaware
Tg Corporation ...................................... Delaware
Albright & Wilson Company ........................... Virginia
PCS Nitrogen, Inc. .................................. Delaware
PCS Finance Luxembourg S.a.r.l. ..................... Luxembourg
PCS Nitrogen Payroll Corporation .................... Delaware
PCS Nitrogen Amm Term Corp II ....................... Delaware
PCS Nitrogen Amm Term Corp I ........................ Texas
Houston Ammonia Terminal, L.P. ...................... Delaware
AA Sulfuric Corp. ................................... Louisiana
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
JURISDICTION OF INCORPORATION
NAME OF ENTITY OR FORMATION
<S> <C>
PCS Nitrogen Trinidad Fertilizer Corporation.......... Delaware
PCS Nitrogen Fertilizer Limited....................... Trinidad
PCS Nitrogen Holding Company.......................... Delaware
PCS Nitrogen Limited.................................. Trinidad
Augusta Service Company Inc. ......................... Delaware
PCS L.P. Inc. ........................................ Delaware
PCS Nitrogen Fertilizer Operations, 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
PCS Cassidy Lake Company.............................. Ontario
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
POTASH CORPORATION OF SASKATCHEWAN INC.
We hereby consent to the incorporation of our report dated February 10, 1999
into this Annual Report on Form 10-K for the year ended December 31, 1998 and
into the following Registration Statements:
-- Registration Statement No. 33-37855 on Form S-8
-- Registration Statement No. 333-19215 on Form S-8
[signature]
DELOITTE & TOUCHE LLP
CHARTERED ACCOUNTANTS
Saskatoon, Saskatchewan, Canada
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 67,971
<SECURITIES> 0
<RECEIVABLES> 308,749
<ALLOWANCES> (5,775)
<INVENTORY> 364,397
<CURRENT-ASSETS> 774,181
<PP&E> 3,815,882
<DEPRECIATION> (812,439)
<TOTAL-ASSETS> 4,534,257
<CURRENT-LIABILITIES> 445,010
<BONDS> 933,294
0
0
<COMMON> 1,227,599
<OTHER-SE> 1,226,162
<TOTAL-LIABILITY-AND-EQUITY> 4,534,257
<SALES> 2,307,763
<TOTAL-REVENUES> 2,307,763
<CGS> 1,698,416
<TOTAL-COSTS> 1,698,416
<OTHER-EXPENSES> 163,291
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,574
<INCOME-PRETAX> 378,482
<INCOME-TAX> 117,479
<INCOME-CONTINUING> 261,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 261,003
<EPS-PRIMARY> 4.82
<EPS-DILUTED> 4.77
</TABLE>
