20030447 Ver 1_PCS 2005 Annual Report_20060426

PCS
Phosphate VAURORA
PCS PHOSPHATE COMPANY, INC.
P.O. BOX 48, AURORA, NC U.S.A. 27806
April 26, 2006
Ms. Cyndi Karoly
NCDENR - Division of Water Quality
Wetlands/401 Wetlands Unit
1650 Mail Service Center
Raleigh, NC 27699-1650
Dear Ms. Karoly:
As manager of the environmental efforts at PCS Phosphate-Aurora, it gives me great
pleasure to provide you with a copy of PotashCorp's 2005 Annual Report, Business
Review and Financial Review. This publication provides insight into our corporation's
business highlights, long-term goals, and sustainability.
As stated by PotashCorp's President and Chief Executive Officer, William J. Doyle, "Our
vision has always extended beyond financial performance. We want to be a partner of
choice for all our stakeholder groups. That means looking beyond financial
considerations to explore our company's social and environmental performance."
The phosphate deposit in eastern North Carolina provides us with continued opportunity
to achieve this vision. In reference to purified acid production, Mr. Doyle stated, "The
rock quality at our Aurora operation allows us to be a significant player in this growing
high-margin business." As a result, mine continuation permitting as well as other
program permitting is essential for the financial performance of the Phosphate Division.
Page 10 of the Financial Review provides a summary of PCS Phosphate's strengths,
weaknesses, opportunities, and threats. "Our Phosphate Strategy" is presented on
page 14 of the Financial Review.
Please feel free to contact me if I can provide more information or be of any assistance.
Sincerely,
Ross M. Smith
Manager, Environmental Affairs
PCS Phosphate Company, Inc.
Phone: [phone]
E-mail: [e-mail]
J
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ANNUAL REPORT
Z005
enriching
our world
FINANCIAL
PotashCorp
Helping Nature Provide
following long-term
strate
enriching our
•
gies
performance
PotashCorp has built the world's largest fertilizer enterprise, by capacity, on quality crop nutrients
that enrich the earth's soils. In doing so, we have made connections to farmers everywhere who
value our "powerful pink potash" and other fertilizers for feeding their crops. Their corn and
soybeans, bananas and sugar cane and other crops are helping to enrich the lives of people around
the world who are eating better than they ever have. We are proud to be part of that achievement.
We enrich the world in other ways, as well. Our products are required by industries manufacturing
the consumer goods vital to modern living. You won't recognize our products in your computer
screen or your toothbrush, in plastics, paints or other useful items, but they are there, enriching
your life. Just like our high-quality animal feed supplements are helping to feed the cattle, swine,
poultry and other sources of the meat people want to eat and, more and more, can afford. We are
proud to be part of those achievements, too.
It's a win-win proposition. PotashCorp is successfully helping to enrich the world and its people,
and our success ensures that we will also enrich the lives of all our stakeholders for generations
to come.
Nutrients to
enrich the world
Potash, nitrogen and
phosphate are derived
directly or indirectly
from nature, and
PotashCorp converts
them to a form that
plants and animals
can easily absorb.
Potash, the quality leader I Because it improves
the taste, texture and health of many crops, potash is called the
"quality nutrient". It is mined from deposits left behind when
ancient seabeds evaporated, and processed to remove salt and
clay. The resulting product (KCI) strengthens plants and aids water
retention, contributing to larger yields, greater disease resistance
and improved handling and storage qualities. As a feed supplement,
it helps animal growth, maintenance and milk production.
Nitrogen, the building block I Nitrogen is a
basic building block for proteins and enzymes in all living cells.
It is drawn from the air, which is 78 percent nitrogen, and
synthesized into solid and liquid forms. Nitrogen is critical to
yield and quality in plants and essential to animal proteins, RNA,
DNA and maturation. In industry, it is used in plastics, resins,
pharmaceuticals and adhesives.
Phosphate, the energizer I Phosphate is critical
to key energy reactions in plants such as photosynthesis, speeds
maturity and reproduction, and increases yields. In animals, it
energizes muscles and is essential to growth and body repair. It
has many industrial applications, and is used in soft drinks, food
products and metal treatment, among other things. Phosphate
rock is mined from deposits containing the fossilized remains of
ancient sea creatures.
CONTENTS
What's new about this 2005 MD&A?
2 Management's Discussion & Analysis Its new format reflects evolving North American and
international standards in financial reporting, striving to
SECTION 1 Core Businesses and Markets keep PotashCorp at the forefront of disclosure. Four tabbed
The Global Development Story 3 sections make it informative and easy to follow.
Overview of Our Business 5
PotashCorp in the World Potash Scene 6 section I examines the global drivers of
our success, reports on our core businesses and
PotashCorp in the World Nitrogen Scene 8 provides an overview of our markets.
PotashCorp in the World Phosphate Scene 9 More than ever, potash is the heart of
our business as we supply the world.
SECTION 2 Objectives and Strategies
Strategy for Today and Tomorrow 11 section 2 examines our objectives for
our Potash Strategy 12 the business and its various components, and
outlines our strategies to reach those objectives.
Our Nitrogen Strategy 13 Here's how management thinks while
Our Phosphate Strategy 14 planning our future.
SECTION 3 Capability to Deliver section 3 discusses our ability to deliver
Potash: Supplying the World 15 on our strategy to fulfill our objectives, the key
Nitrogen: Supporting Our Trinidad Production 17 drivers of our performance and the ways we
manage the risks inherent in our business.
Phosphate: Using Our Product Diversity 17 This is what drives our success.
Key Performance Drivers 18
Rewarding Results 19 section 4 describes the factors that shaped
Managing Risk 20 2005 business conditions, our performance in
4 those conditions and our prospects in 2006,
SECTION 4 Performance and Prospects and explains our key sensitivities, cash flow,
liquidity and capital resources, and critical
Factors That Shaped 2005 Business Conditions 22 accounting estimates.
2005 Financial Overview 25 Here are the details of another great year
Business Segment Review 26 for PotashCorp.
2006 Outlook 36
Liquidity and Capital Resources/Management 39
Accounting Estimates and Changes 44 section 5, not marked with a color tab,
includes key information and data about
50 Financial Information PotashCorp's performance. It follows a traditional
reporting format, including financial performance
SECTION 5 indicators, auditors' reports and consolidated
l
f

Financial Performance Indicators 50 inancia
statements.
Our financial performance - it's all here.
Auditors' Reports 54
Consolidated Financial Statements 56
Appendix 89
2 POTASHCORP 2005 ANNUAL REPORT MD&A N, P & K and PotashCorp Facts
management's •
iscussion,
& analysis
of Financial Condition and Results of Operations (in US Dollars)
The following discussion and analysis is the responsibility of management and is as
of February 27, 2006. The Board of Directors carries out its responsibility for review
of this disclosure principally through its audit committee, comprised exclusively of
independent directors. The audit committee reviews this disclosure and recommends
its approval by the Board of Directors. Additional information relating to us (which is
not incorporated by reference herein) can be found on SEDAR at www.sedar.com and
on EDGAR at www.sec.gov.
Different nutrients, different business environments
Potash (K) Nitrogen (N) Phosphate (P)
Base Product Potassium chloride (KCI) Ammonia (NH3) Phosphate rock -
phosphoric acid (PZ05)
Geographic Availability Very limited Readily available in numerous Limited
of Raw Materials' locations (natural gas)
Cost of New Capacity 2 Approximately $1.2 billion for Approximately $500 million for Approximately $1 billion for
2 million tonnes KCI 1 million tonnes ammonia 1 million tonnes P205
Greenfield 3 5 years 2 years 3 years
Development Time 4
Producing Countries 5 12 Approximately 60 44 (based on phosphoric acid)
State- or Subsidy- 18% 51% 47%
Controlled Production 6
Industry Operating Rate 7 91% 85% 76%
PotashCorp Capacity 8 12.9 million tonnes potash 4.1 million tonnes ammonia 2.5 million tonnes phosphoric acid
22% of world capacity 2% of world capacity 6% of world capacity
PotashCorp World # 1 # 4 # 3
Position by Capacity 9
1-9, See Appendix, Page 89
POTASHCORP 2005 ANNUAL REPORT MD&A Core Businesses & Markets
section i
Core Businesses and Markets
THE GLOBAL DEVELOPMENT STORY:
ECONOMIC GROWTH DRIVES DEMAND FOR FERTILIZER
The future for global fertilizer enterprises like PotashCorp is being driven by events in countries far from our facilities,
where more and more of our quality products are being delivered. These countries are characterized by:
• rising population
• accelerating income growth
• improving diets that drive the ever-increasing demand for protein
• a shrinking land base per capita that makes higher crop yields vital.
Growing Economies
The world economy grew by 4.3 percent in 2005, led by Asian nations
- China, India and many others. In these countries, rising numbers of
newly prosperous consumers are enjoying the better diets and
improved lifestyles they can now afford. Reports suggest that India's
middle class has reached 250 million and may triple by 2010, and
China's fast-growing middle class already numbers about 200 million.
Rising Incomes
Research has shown that when per capita income rises in countries
with developing economies, a significant portion of the additional
money is spent on a better-quality diet, particularly meat and other
foods rich in protein. In China, for example, about one-third of each
new dollar of income is spent on food. People in these countries are
happily switching from diets based on starch-rich foods to those
focused on chicken, pork, beef and other meats. The global demand
for meat has escalated in the last decade, and its production depends
on grain, oilseed meal, and phosphate and nitrogen feed supplements
to nourish the animals that provide it.
World GDP Growth, 2005
Percent
Source: IMF, Global Insight
Asian countries led the world in GDP growth in 2005,
and rising incomes lead directly to demand for better
diets that stress protein, especially meat. More grain
is needed to produce that meat, which means
increased application of crop-nourishing fertilizers.
Population Growing, Land Base Per Capita Falling
The global population is now 6.5 billion and increasing by more than
75 million a year. Rising population, rapid economic growth and
spreading urbanization work together to diminish the per capita land
base available for agriculture, which is expected to fall by 40 percent
by 2020 to just over 0.2 hectares. More food must be produced on
less available land per person.
Global Trade
Together, these factors are driving trade between global agricultural
producers and consumers. For example, China is the world's fourth-
largest producer of soybeans but cannot meet domestic demand for
cooking oil and the high-protein soybean meal needed by its growing
animal feed industry. Its soybean consumption has tripled in eight
years, and its production shortfall and resulting need for imports are
encouraging farmers in the United States and Brazil to grow soybeans.
Land Available to Agriculture Is Declining
0.4 Hectares of Arable Land per Person
0.3
0.2
0.1
0.0 1970 1960 1990 2000 201OF 202OF
Source: FAO, PPI-PPIC, PotashCorp
The world's need for increasing amounts of fertilizer
is reinforced by the steady decline in the per capita
land available for crops.
China India Indonesia Malaysia Thailand World Brazil
POTASHCORP 2005 ANNUAL REPORT I MD&A I Core Businesses & Markets
Need for Nutrients
in countries such as China, India and Brazil, the nutrient application
rate is key to future agricultural prosperity. Crops require nitrogen,
phosphate and potash, the three primary nutrients. Nitrogen has the
most immediate impact on yield enhancement, but phosphate and
potash work with it synergistically to increase yield, quality and
disease resistance. Farmers in many countries need to use more
of all three nutrients to improve yield and food quality.
Grain Stocks Shrinking as Consumption Rises
In most recent years, grain production has trailed consumption,
requiring withdrawals from world inventories. Stocks are historically
low, with just over two months of grain in reserve. Any disruption of
the efficient global distribution system that delivers these commodities
could be disastrous.
Fertilizer Is Vital
Put these factors together - more people, less land per capita,
economic growth, demand for protein, declining grain stocks - and
they inevitably spell fertilizer. Adequate fertilization of the remaining
agricultural land is vital if the world is to respond successfully to these
multifaceted challenges.
Elasticity of Demand for Fertilizer
Farmers' demand for fertilizer has historically been inelastic to price.
The return on their investment in soil nutrition can be as much as
triple what they spend. In fact, fertilization is a small portion of their
total production costs. US farmers, for example, have to spend about
$200 to produce an acre of wheat, and fertilizer makes up only
13 percent of that. Fertilizer represents just 4 percent of the cost
of producing an acre of soybeans, 7 percent of an acre of cotton,
9 percent of rice and 14 percent of corn.
? This is the global development story that tells of rising
demand for PotashCorp's products, especially potash.
From here, we'll outline how we are positioned to meet
that demand, today and in the future; discuss our
strategy; outline the resources we're putting behind
our strategy; and describe our financial performance
and prospects.
Significant Fertilizer Growth Potential
Million Tonnes per Year
China India Brazil
Bo 50 22
70 45 ® 20
40 18
60 35 16
50 30 14
12
40 2s
. 10
30 20
¦ B
15 6
zo ,
10 4
10 5 2
0 0 0
Current Potential Current Potential Current Potential
0 N N P205 ® KCI
Source: Fertecon, PPI-PPIC, PotashCorp
To achieve scientifically recommended nutrient
levels, China and India would both need to increase
their annual consumption of N, P205 and KCI by about
30 million tonnes. Soybeans, Brazil's major crop, fix
their own nitrogen but are hungry for potash.
World N, P and K Demand Forecast to Grow
Cumulative Growth % Year-over-Year
30
25
20
15
10
5
0
KCI
P205
N
Source: Fertecon, IFA, PotashCorp
Total world demand of the three major nutrients is
expected to increase by 2-3 percent per year to the
end of the decade. Potash demand has risen the most
in the past few years.
DEMAND DRIVERS
FERTILIZER FEED INDUSTRIAL
• Rising world population • Demand for protein-rich diets from • Rising world population
• Economic growth and resulting various animal sources • Economic growth
desire for protein-rich diets' • Herd and flock size Desire for products that contribute
• Acres planted and application rates • Economic growth and rising to modern living
• Crop selection and commodity prices population Government policy
• World grain stocks • "Government policy
• Weather
•` Currency strength
• Government Dolicv
-s
1999 2000 2001 2002 2003 2004 2005 2006E
POTASHCORP 2005 ANNUAL REPORT I MD&A Business Overview
OVERVIEW OF OUR BUSINESS:
FERTILIZER IS MOST SIGNIFICANT
With operations and investments in eight countries, PotashCorp has built a thriving global enterprise based on the primary nutrients -
potash, nitrogen and phosphate. Our products serve three different markets: fertilizer, which involves all three nutrients; feed
supplements, mostly phosphate; and industrial, mainly nitrogen products for industry and purified acid in phosphate. More than
two-thirds of our total N, P and K sales are made in North America and we have dedicated sales teams for fertilizer, feed, industrial
nitrogen and purified acid, focused on providing maximum value to our customers.
World's Ten Largest Fertilizer Companies
20
Coo osa?c- o"0 ?)C.Q 0oo \?a\s
Qo\ys\` Ct` ?e\as PA hem
\SCae\C
Source: Blue, Johnson; Fertecon; Agrium; PotashCorp
00\\ pS\??yS
\ec\aMa
The world's largest integrated producer, by capacity, of the
natural nutrients potash, nitrogen and phosphate, PotashCorp
is particularly the leader in potash, with excess capacity to
meet long-term world needs.
POTASH IS THE BIGGEST CONTRIBUTOR
Fertilizer is the most important of our businesses, and over the last
three years has made up 60 percent of our net sales and produced
69 percent of our gross margin. Potash, the core of our enterprise
and long-term strategy, is the most significant part of the fertilizer
Diverse Customer Base in Potash
2005 Sales Volumes
North America Offshore
ROW
Other Latin America
Brazil
rOther Asia
Japan
Indonesia
Malaysia
India
,C
Source: PotashCorp
Led by China, Brazil and India, offshore markets made up
well over half of our total potash sales volumes in 2005.
The North American market is stable while offshore markets
are growing.
business, producing 83 percent of its gross margin. Over 60 percent
of our potash goes offshore.
Fertilizers are sold primarily for spring and fall application in both
northern and southern hemispheres. Rice, oil palm, sugar cane,
bananas, oranges and coffee are among the diverse offshore crops
that are important for growth in our potash segment. In North
America, all three nutrients are used on corn, wheat, cotton and rice,
while nitrogen-fixing soybeans need mainly potash and phosphate.
In both North American and offshore markets, government policy
can influence farm income and subsidy levels, which affect fertilizer
purchases. Farmers consider crop prices and weather as they
decide what to plant, which impacts fertilizer application rates.
Except in Brazil, the larger offshore fertilizer customers are often
governments and private distributors that tend to buy under
fixed-term price and volume contracts. China, the biggest offshore
purchaser of Canadian potash in 2005, buys on one-year price
contracts; India buys under semi-annual contracts. Brazilian
customers, however, purchase in the spot market. Other important
offshore customers are Japan, Malaysia, Indonesia, Vietnam and
Thailand. In North America, retailers, cooperatives and distributors
buy N, P and K on the spot market from PotashCorp for resale to
their end customer, the farmer.
Canpotex Limited handles all sales of Saskatchewan potash
destined for offshore markets, with product from PotashCorp,
Mosaic and Agrium. Each company owns one-third of Canpotex,
with allocation of sales and costs based on their proportionate
shares of Saskatchewan potash capacity. Marketing together to
Diverse Crop Use of Potassium
Other Crops
Pulses
Fibers 7%
Roots & Tubers Cereals
Pasture &
Fodder Crops
Beverage, sugar
& Tobacco
?r
Fruits & Vegetables
Oil Crops
Source: FAO, IFDC, IFA, PotashCorp
The potassium in potash fertilizer is vital to a diverse range of
crops in almost all agricultural regions. This includes common
cereal crops such as corn, wheat and rice; oil crops like
soybeans and oil palm; and other staples like fruits, vegetables,
coffee, rubber and cotton.
Million Tonnes Primary Product Capacity
22 r-
POTASHCORP 2005 ANNUAL REPORT MD&A Potash
offshore customers reduces transportation and marketing costs,
which are significant, given our distance from ports. Canpotex
maintains a network of agents in those growing markets, ensuring
our products are prominently represented.
Potash from our New Brunswick operation is handled separately
by our own sales division, which also handles North American
sales. In North American markets, continued engagement with our
customers and strategic alliances with dealers who warehouse our
products influence our success in maintaining fertilizer market
share while responding to demand.
For all our products, the most important factor in a customer's
buying decision is price, but surveys show that reliability of supply
and product quality are increasingly important. Our annual
customer surveys show that PotashCorp is ranked above the
average in the industry in both areas. We are sensitive to
customers' specific needs. For example, Chinese buyers prefer
pink potash. Granular potash is sought after in North American
and Brazilian markets for blending, and China is also testing
that higher-margin product. Japan uses our potash products in
industrial applications, for which quality is a significant factor.
Transportation is an important part of fertilizer's final purchase
price. Offshore customers buy product at the port where it is
loaded (FOB) or at their sites with freight costs included (CFR).
Approximately 40 percent of our potash customers are responsible
for their freight costs, and the remainder buy CFR, with Canpotex
paying the freight. Thus changing freight rates affect our margins.
Most offshore phosphate sales are FOB. Our nitrogen is sold
primarily in North America and, like our North American phosphate
sales, on a delivered basis.
Our success in supplying large volumes to more than 50 countries
around the world requires an efficient transportation system.
We operate our own transportation department and utilize
approximately 175 distribution facilities and a fleet of about
7,300 railcars.
FEED AND INDUSTRIAL ARE MORE STABLE
Sales of feed and industrial products have significantly less
seasonality and cyclicality than fertilizer sales.
US bulk feed producers are our main feed customers, and our
plants' proximity to customers is an advantage. Brazil and Mexico
are our largest offshore feed customers.
Nitrogen and phosphate are important to industry as inputs into
a wide range of products that enhance modern living. Industrial
customers for our nitrogen products and our phosphoric acid,
including purified acid, are based mainly in the US, and we
enjoy long-term relationships with them. They include industrial
intermediate and product manufacturers such as ICL and Innophos
in phosphate and BASF and DSM in nitrogen. Offshore, growth in
industrial products that require nitrogen and phosphate is being
driven by rising incomes in fast-growing nations.
POTASHCORP IN THE WORLD POTASH SCENE
Potash is by far the best business of the three fertilizer nutrients,
delivering the highest-quality earnings in the fertilizer universe.
PotashCorp is the world's largest potash producer, with an
estimated 22 percent of global capacity in 2005 and three-quarters
of excess capacity. Our investments in Arab Potash Company (APC)
in Jordan, Sociedad Quimica y Minera de Chile (SQM) in Chile,
Israel Chemicals Ltd. (ICL) in Israel and Sinochem Hong Kong
Holdings Limited (Sinofert) in China further enhance our position.
The potash industry is consolidated. Good deposits that are easy
and economical to mine are rare, so only 12 countries produce
significant amounts. Canada, Russia and Belarus together account
for over two-thirds of world production. Canada alone accounted
for one-third of 2005 production, with PotashCorp providing
more than half of that.
Offshore market competitors include producers in Belarus,
Russia, Germany and Israel. Our major competitors in North
America are Mosaic and Agrium, which have more exposure to
North American sales than we do. However, our share of this
market is rising because they have alloted more product to
fulfilling offshore commitments and they are operating at
or near capacity.
PotashCorp Is the Largest Potash Company
Million Tonnes KCI
PotashCorp
Belaruskali (Belarus)
Mosaic (Canada, US)
ICL (Israel, Spain, UK)
Uralkali (Russia)
Silvinit (Russia)
PotashCorp Production
Kali & Salz (Germany)
Other Production
"China
PotashCorp Investment*
Arab Potash (Jordan) I ® Excess Capacity
Agrium (Canada)
Intrepid (US) I PotashCorp Estimated Share of World
SQM (Chile) Excess Capacity (2005) = 75%
CVRD (Brazil)
012345678910111213
* Investments are: 10% of ICL, 28% of APC and 25% of SQM.
** We own 20% of Sinofert, which has an option to purchase Sinochem
Corporation's 20% interest in Qinghai Salt Lake, the major potash
producer in China.
Source: Fertecon, IFA, PotashCorp
The potash business has the fewest competitors and least
government involvement. With our size and excess capacity,
PotashCorp is well positioned.
POTASHCORP 2005 ANNUAL REPORT I MD&A Potash
Significant barriers prevent easy entry to the potash business. The
rarity of good deposits limits the potential for greenfield mines,
along with their high capital cost and lengthy development time.
Potash is more stable than other fertilizer industries because most
ownership is in the private sector, where decisions are made for
economic, not political, reasons. The only significant government
ownership is in Belarus, where the economy and future GDP
growth depend heavily on US dollar-denominated potash sales.
More than 150 countries consume potash and 80 percent of
product is traded across borders. The growth markets are in
offshore countries with little or no indigenous production, where
PotashCorp is a prominent supplier. In many of those countries,
nutrient application rates - particularly for potassium - do not
achieve a soil nutrient balance that will maximize crop yields.
Soils in China, India and Brazil, all major potash purchasers, are
far from having an appropriate nutrient balance. While China,
the largest consumer, produces about 19 percent of its potash
consumption internally, it surpassed the US in 2005 as the
largest global importer.
World Potash Production and Consumption
Million Tonnes KCI
Production Consumption
,s.o
,R.7 2,.,
6.7 6.6
9.4
i'
'W Europe 5.4 Russia & 2.4
:North Relarus ?.
America: '?_7 Asia
Middle East
7.7
0.6
Africa
letio : 0.7
America -
Oceania,,
Source: Fertecon, IFA, PotashCorp
Strengths
• 75 percent of world excess capacity to respond to rising global
consumption
• This excess capacity can be brought on stream quickly for roughly
one-quarter of the cost of comparable greenfield capacity
• Low-cost, flexible production with small percentage of fixed costs
• Significant reserve life from existing mine shafts
• Few world producers, little government ownership of assets
• Historically stable pricing with upward trend
• Substantial barriers to entry, with high cost/long lead time for
greenfield mines; still no greenfield announcements
• High volumes reduce distribution costs
• Strong free cash flow supports value proposition
• No substitutable products for potash
Weaknesses
• Competitors continue with low-cost incremental expansions
• High Saskatchewan resource taxes and federal and provincial
income taxes, relative to global competitors
• Production uses higher-cost North American natural gas
• High freight costs to ship Saskatchewan potash to port
• Exposure to volatility in currency and ocean freight costs
• Water inflow at New Brunswick increases production costs there
• Potential for rail transportation bottlenecks
Opportunities
• Long-term growth in consumption is expected to continue
• With competitors at or near capacity, our excess capacity allows
us to achieve a higher share of offshore market growth
• Further international investment opportunities
Threats
• Continued upward pricing trend may attract greenfield operations
• Exposure to fluctuating offshore markets
• Short-term weaknesses in global supply/demand fundamentals
fall disproportionately on PotashCorp
Asia and Latin America are regions with little indigenous
supply. For the most part, PotashCorp supplies Asia from
Saskatchewan while our New Brunswick operations serve
Latin America. In both these markets, we compete with
producers from the Middle East, Russia and Belarus.
The historical trend line shows potash demand growth of about
2 percent per year, although external consultants suggest the
long-term outlook could raise this to 3 percent. That creates a
need for 1 million to 1.5 million tonnes of new production each
year - roughly equivalent to opening two greenfield mines every
three years. Several producers have announced debottlenecking
projects, but these incremental expansions will be insufficient to
keep pace with forecast increases in demand. With our excess
capacity, PotashCorp expects to reap a disproportionate share
of this growth.
Cost of Producing a Tonne of Potash
PotashCorp costs are 70% variable and 30% fixed
Royalties & Other Taxes
Depreciation &
Amortization
Source: PotashCorp
Supplies
Potash has a low percentage of fixed costs. The jump in
natural gas prices in 2005 meant that variable energy costs
now make up 21 percent of PotashCorp's cost of producing
a tonne of potash.
POTASHCORP 2005 ANNUAL REPORT MD&A Nitrogen
POTASHCORP IN THE WORLD NITROGEN SCENE
Two criteria are key to success in North American nitrogen markets:
• Access to low-cost natural gas with which to make ammonia
and downstream nitrogen products.
• Proximity to the US market, because ammonia is costly to
transport and because the US accounts for more than
40 percent of world ammonia imports.
PotashCorp meets both these criteria. Almost two-thirds of our
nitrogen is produced in Trinidad, a growing country with a stable
government, where we benefit from long-term, lower-cost natural
gas contracts that index costs to Tampa ammonia prices. Our
Trinidad nitrogen is less than a week's sailing time from our many
US port facilities.
In contrast with the few global producers in potash, nitrogen
is manufactured in approximately 60 countries, which makes
it a fragmented regional business. Production of ammonia, the
feedstock for all downstream products, depends on access to
non-renewable, finite natural gas reserves.
Largest Offshore Ammonia Capacity in the
Western Hemisphere
Million Tonnes Ammonia
5 North American Capacity - Temporarily Curtailed
New Offshore Capacity
Lower-Cost Offshore Capacity
4 North American Capacity -Online
Governments own more than half the world's ammonia plants, so
decisions are often made for political reasons and can significantly
disrupt global nitrogen markets.
The largest ammonia producer is China, followed by India, Russia
and the United States. China also consumes significantly more
ammonia and urea than any other country. The US has the second-
highest consumption, although it is the largest importer. Rising
natural gas costs have squeezed a considerable amount of US
production from the market and increased US reliance on imports.
World Natural Gas Costs
2005 Average
$US/MMBtu
Canada US W. Europe Ukraine Russia
$7.
40 $8.60 $6.00 $1
.70 $1.10
1
l
l
? _" /
l
l
? m

Argentina Venezuela Trinidad North Afr ica Middle East Indonesia
$1.50 $0.80 $3.00 $0.75 $0.75 $2.00
Source: Fertecon, PotashCorp
3 Regions with low-cost reserves of natural gas have a significant
' economic advantage in ammonia production, and many of their
producers aim to export their ammonia to the United States.
2 However, costly specialized vessels are required for transport,
. which reduces this advantage.
o
vl o 0, aJ?i?es ,?cr Qemev. aJS?i?es "caaal ?oSasc ?aaal ?aaa\
Qoas _\6611 ?E?o `NO\t _a0., Vpe\Ss
'There are no current plans to restart Geismar or Memphis.
`*Tringen is the government portion only.
Source: Blue, Johnson; Fertecon; Agrium; PotashCorp
Compared to other producers in the Western Hemisphere,
Trinidad provides us with a competitive advantage. Its long-term
natural gas contracts shelter us from rising US gas prices, which
almost doubled in the fall of 2005.
Countries with rich reserves of gas that are not needed internally
opt to monetize and profit from those reserves by converting the
gas into ammonia and other nitrogen products. However, they
face rail and ocean transportation costs that limit movement of
that ammonia to markets. It must be carefully transported in
specialized refrigerated and pressurized vessels, which are currently
in short supply. Urea, the most popular nitrogen fertilizer, is easier
and cheaper to transport.
US producers act like a shock absorber. In the past, gas was
cheaper and all US producers operated at maximum rates. When
demand outstripped supply, ammonia and urea prices rose, quickly
attracting imports from offshore, which suppressed nitrogen prices.
Now, in an era of high-cost natural gas, nitrogen prices are mainly
driven by US gas costs. As gas prices rise, US producers shut
down, supply tightens and prices go up. The sustained high US
gas costs have kept production down, reducing volatility.
In the last six years, 4.4 million tonnes of US ammonia capacity
was permanently closed. A similar amount is considered
vulnerable. To mitigate the impact of additional tonnes from
low-cost gas regions over the next two years, producers that rely
on high-cost gas in North America and Europe are expected to
shut down some production.
Industrial customers demand consistent quality and just-in-time
delivery to keep their plants running efficiently. They often attain
these through pipelines directly attached to their suppliers.
Within North America, nitrogen sales are regionalized due to
logistical/transportation costs. This limits our competition from
POTASHCORP 2005 ANNUAL REPORT I MD&A I Nitrogen/Phosphate
Agrium and other Canadian sources that serve a different
geographic market.
Competitors closer to the Mississippi River system or the US Gulf
are far more exposed to imports, and are among the first to curtail
production when gas prices spike. These include CF Industries,
Terra and Koch. Our Augusta and Lima plants operate in regions
somewhat insulated from Gulf imports.
Strengths
• Long-term, lower-cost natural gas contracts in Trinidad
• 65 percent of our gross ammonia production is in Trinidad
• Trinidad plants are expanding within existing gas contracts,
adding to cost-advantageous production there
• Close proximity of Trinidad production to the US
• 84 percent of our US manufactured ammonia is sold outside
fertilizer cycles to industrial customers, the largest connected
by pipeline
• Hedging program mitigates natural gas price risk related to
US production
Weaknesses
• 35 percent of our ammonia production is in the US, dependent
on higher-cost gas
• Contractual commitments to industrial customers may force us
to operate unprofitably in a high-cost gas environment
Opportunities
• High volume demand in the US
• Natural gas costs now drive the US market
• US distribution system allows us to import and sell
purchased tonnes
• US industry consolidation
Threats
• Abundant low-cost natural gas in developing countries leads to
its monetization as nitrogen products
• Small supply/demand fluctuations can significantly impact prices
• Nitrogen plants are spread globally, with significant government
ownership and influence
• Short construction period for new capacity can impact the
market quickly
• Reduction in differential between US and Trinidad natural
gas prices
Cost of Producing a Tonne of Ammonia
PotashCorp costs are 82% variable and 18% fixed
Deprer'-•'-- °- Other
Amortization
Labor &
Maintenana
Source: PotashCorp
I Gas
Depending on its price, natural gas can make up between 80 percent
and 95 percent of the cash cost of producing a tonne of ammonia.
Our long-term contracts for lower-cost gas in Trinidad shield nearly
two-thirds of our ammonia production, keeping our average gas
price down despite exposure of our US production to high-cost gas.
POTASHCORP IN THE WORLD PHOSPHATE SCENE
Traditionally, the phosphate business has been identified with
the solid fertilizer DAP (diammonium phosphate), but in today's
market the ability to direct phosphoric acid - the base for all
downstream phosphate products - into non-fertilizer areas has
become an important factor. Producers with abundant, high-
quality rock reserves and the ability to use phosphoric acid in
producing industrial or feed products, while putting as little as
possible into DAP or MAP (monoammonium phosphate), have a
long-term competitive advantage.
The US is the world's largest consumer of phosphoric acid,
followed by China and India. China, the US, India and Brazil
consume significant quantities of phosphate fertilizers.
Phosphate is produced in more than 40 countries, with China
the largest producer, followed by the United States, Morocco
and Russia. Phosphate products include liquid and solid fertilizers,
feed supplements and products used by industry. About 60 percent
of PotashCorp's phosphoric acid is used in fertilizers, mainly DAP
and the liquid fertilizers that are especially important in modern
minimum-till farming.
Almost half of global phosphate production is owned or controlled
by governments, which often accept negligible to negative returns
to support employment. As a result, world DAP capacity has
surged in recent years, with approximately 45 percent of
production traded across borders. Historically, US DAP capacity
was built for export markets, particularly China and India. These
countries have now developed domestic capacity and have
significantly less need for imports from the US.
Others have made announcements about bringing 9 million tonnes
of DAP capacity into production over the next five years. In a
28-million-tonne global market with annual demand growth of
900,000 tonnes, the long-term supply/demand situation for DAP
is fundamentally flawed unless there are permanent shutdowns to
offset this new production. However, at the end of 2005 the North
American market was reasonably tight after a series of temporary
plant closures.
At PotashCorp, we are required to produce some DAP and
currently about 20 percent of our phosphoric acid goes to its
production. We orient our phosphoric acid as much as possible
to feed and industrial products.
POTASHCORP 2005 ANNUAL REPORT MD&A Phosphate
Most Diversified Producer
Flexibility Provides Stability
% Based on Product Tonnes
100
80
60
40
20
Source: Fertecon, Mosaic, PotashCorp
The quality of our rock provides a competitive advantage
compared to the other largest world producers, enabling us
to make a greater range of products. We reduce volatility by
making the most profitable downstream products.
The longer-term fundamentals for both feed and industrial are
favorable. Phosphate rock is necessary for production of all
downstream products and global supply/demand fundamentals
are tight. For the high-quality rock required to economically
produce industrial acid and the specialty feed product DFP,
this is especially the case.
There are only three North American producers of purified acid,
including PotashCorp. The rock quality at our Aurora operation
allows us to be a significant player in this growing high-margin
business. Industry demand for purified acid continues to grow
Lower Rock Costs Create Competitive Advantage
$US/Tonne
35
30
2s
20
Source: TFI, British Sulphur, PotashCorp
Now that we are mining from the low-cost NCPC reserve near
our Aurora facility, we have reduced our rock costs while other
large Florida producers are spending more to transport lower-
quality, higher-cost rock over longer distances to their facilities.
globally, while US production has been rationalized. Several
energy-intensive thermal phosphoric acid plants have shut down
as they are not competitive with the more economical wet process
technology for producing purified acid.
Dical, Monocal and DFP are the three phosphate feed
supplements. Producers can easily move into Dical and Monocal
production, but the quality of our rock at Aurora gives us an
advantage over our competitors in producing DFP.
The feed market is growing globally but has stagnated in the
US. However, industry rationalization has improved the supply/
demand dynamics.
In North America, Mosaic is our major competitor for phosphate
fertilizer and feed products, while imports from Morocco and Israel
compete for industrial sales. We sell phosphate fertilizers offshore
through the sales organization PhosChem, sharing marketing costs
and volumes with two other US producers. PhosChem competes
with global fertilizer producers and, in India and China, with
domestic producers as well. In China, indigenous producers
compete for feed sales.
Strengths
• Significant phosphate rock reserves
• Mining close to processing facilities gives competitive
cost advantage
• High rock quality and proven technology enable economical
production diversity
• Well positioned in North American purified acid and feed
phosphate markets
Weaknesses
• Product mix still requires production of some solid fertilizers
(DAP/MAP)
• Increases in sulfur and ammonia costs can negatively
impact margins
• High percentage of fixed production costs means plants do
not perform profitably at lower operating rates
Opportunities
• World phosphate rock supply/demand fundamentals are
expected to remain tight
• Very few companies globally with high-quality rock to
economically produce purified acid
• Rationalization in North American feed phosphate market
• Increased demand by growing economies for industrial and
feed phosphates
Threats
• Significant government control and intervention globally in
constructing capacity and restricting imports
• China and India increase DAP production, reducing US exports
• Low DAP margins can cause producers to switch to feed
production, hurting this business
• High barriers to exit because of significant environmental
restoration and remediation costs
PotashCorp Mosaic OCP(Morocco)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006E
POTASHCORP 2005 ANNUAL REPORT I MD&A Objectives & Strategies
Cost of Producing a Tonne of Phosphoric Acid
PotashCorp costs are 42% variable and 58% fixed
Depreciation & Amortization
Supplies
Rock
Labor &
Maintenance
Sulfur
Source: PotashCorp
Rock is the largest contributor to phosphate production costs,
and our rock costs are declining due to our high-quality ore
close to Aurora. Sulfur costs rose in 2005 when the market
tightened after hurricanes shut down natural gas and oil
production facilities and refineries along the US Gulf Coast.
section 2
Objectives and Strategies
We are building a foundation for the future on
what makes us unique. In potash, it is our excess
capacity, which serves a growing market.
In nitrogen, our position as a low-cost supplier
to the US from Trinidad makes us stand out.
In phosphate, the quality of our rock allows us
to readily diversify our production into feed and
industrial products.
VISION FOR TOMORROW
We envision PotashCorp as the partner of choice, providing superior value to all our stakeholders. We strive to be the highest-quality
low-cost producer and sustainable gross margin leader in the products we sell and the markets we serve.
STRATEGY FOR TODAY AND TOMORROW: Generate Long-Term Growth, Reduce Natural Volatility
To provide our stakeholders with superior value, our strategy focuses on generating long-term growth while striving to minimize the
natural volatility of our business by reducing fluctuations in our upward earnings trend line. This is our value proposition.
Applying our strategy daily to maximize gross margin, we concentrate on our highest-margin products, which dictates our Potash First
strategy. We complement that by focusing on Trinidad nitrogen and purified phosphoric acid. In potash and purified acid, we are in the
Strategic Positioning Profile
v
a
n
E
0
m
c
Potash

Sinofert/SQM ¦ APC/ICL
Purified Acid
Grow
Minimize Aurora 0 E Feed
white sprint Liquid Fertilizer
Geismar
- - - - Augusta -Trinidad
Memphis Lima
DAP
High Low
Production Cost
• Potash ¦ Phosphate -Nitrogen • Investments
Our goal is to grow the parts of our business that fall strategically
into the top right quadrant of lowest costs and competitive pressures
- potash, our potash investments and purified phosphoric acid. We
seek to minimize our exposure, partly through cost reductions, in
those operations in the lower left quadrant of high costs and
competitive pressures.
PotashCorp's Highest-Margin Business
Focus on Growth with Less Volatility
Gross Margin Percentage of Net Sales
60 r- I
50
40
30
20
* Trinidad contribution to total nitrogen gross margin is shown on Page 13.
Source: PotashCorp
Our highest-margin products - potash, Trinidad nitrogen and
purified acid - are stable businesses that are separate from
the grain cycle, counteracting the volatility of nitrogen and,
phosphate fertilizers.
Potash Trinidad - Nitrogen* Purified Acid - Phosphate
12 POTASHCORP 2005 ANNUAL REPORT I MD&A I Potash Strategy
top right quadrant of our strategic positioning profile, with lowest
costs and lower competitive pressures. In nitrogen, our lower-cost,
long-term natural gas contracts in Trinidad give us a significant
cost advantage over US producers exposed to high US gas prices
that are expected to continue far into the future.
We strive to grow PotashCorp by enhancing our position as
supplier of choice to our customers. We work hard to deliver the
highest-quality products at competitive prices when customers
need them - which is what makes us the supplier of choice. We
seek to become the preferred supplier to high-volume, high-
margin customers with the lowest credit risk. We recognize that
customers' perceptions of our ability to create value for them
based on the price they pay for our products are fundamental to
our ability to maintain and grow their business.
We also grow the company by expanding our existing businesses
that meet our strategic requirements and by seeking value
investments that fit our Potash First strategy. Our decisions are
based on our cash flow return materially exceeding cost of capital.
In making decisions for the future, we always evaluate the best
return on any possible investment that matches our Potash First
strategy. We look at global investments, which must compete on
an ongoing basis with organic growth and shareholder distribution
as the best use of our free cash flow.
OUR POTASH STRATEGY: Meet World Demand for Long-Term Growth
Our business strategy in potash is to use our excess capacity to
fill rising world demand while pursuing acquisitions that extend
our global enterprise. Our investments in APC, ICL and SQM
(28-percent, 10-percent and 25-percent ownership, respectively)
and our 20-percent stake in China's Sinofert fulfill this
requirement, enhancing our profitability.
Our value proposition hinges on the opportunity for long-term
growth in offshore potash volumes provided by our excess
capacity as we bring it on in response to market demand. To
execute this strategy effectively, we must have our capacity
available so we can deploy our low-cost production as the
market grows.
In 2005, demand grew by 1 percent, bringing total growth over the
last four years to 23 percent. Other producers have announced that
they are evaluating the possibility of bringing up to 4 million new
tonnes to market over the next five years. During that time, outside
experts predict, demand growth will be between 4 million and
7 million tonnes. Our competitors are operating at or near capacity
and, even with their potential incremental expansions, we expect
to capture a disproportionate share of the upside in future growth.
If the demand is not there, we simply will not use our excess
capacity. The basis of our success in potash is our strategy of
matching supply to demand. We monitor market conditions and
produce what the market needs. For nearly two decades, we have
been faithfully following and benefiting from this strategy.
New greenfield mines could threaten the success of our potash
strategy but there are few geographic opportunities. Furthermore,
new mines typically make sense economically at 2 million tonnes
of capacity. The threat of greenfield projects does grow with
higher prices and profitability but capital costs are high and lead
PotashCorp Production Is Driven by Markets
Utilization of Excess Capacity to Meet Demand
Million Tonnes KCI
Source: PotashCorp
Illustrative Greenfield Potash Sensitivities
Estimated Price Required to Achieve Desired Return
$US/Tonne
350
010.0
300
250
200
150
100
50
0

Source: PotashCorp
Since 1987, we have followed a strategy of matching our Our high-level analysis supports our belief that, depending on
potash production to world demand. In 2004, we sold more the return levels and tax jurisdictions involved, potash prices
than we produced. In 2005, we rebuilt our inventory. would need to rise by approximately 30 percent to 50 percent
- and stay at that level - to justify a new mine anywhere.
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
High Medium Low
Tax Jurisdiction
POTASHCORP 2005 ANNUAL REPORT MD&A Nitrogen Strategy
times are long. Our recent estimates suggest that current potash
prices do not justify greenfield reinvestment economics.
Our present market position and desire to use our excess capacity
- reaping higher sales volumes at higher prices and lower fixed
costs spread over more tonnes - give us a real competitive
advantage and the opportunity for significant growth in our
potash gross margin.
Our strategy requires us to be the low-cost supplier, on a delivered
basis, to all key markets. That makes logistical considerations such
as the proximity of production to our end customers extremely
important, and we manage transportation and related costs
strategically to meet this goal.
For example, APC has a significant advantage in delivering potash
to India, which is one strategic reason for our increasing investment
in that company, where we appoint the top four management
positions. Similarly, our investment in Chile's specialty producer
SQM gives us a strategic position in the world's leading producer
of upgraded potash products, which are used by specialized
agricultural enterprises. Our investment in Sinofert provides
assured access to the world's largest potash-consuming country.
We will continue to review potash investment and reinvestment
opportunities that expand our global footprint, ensuring that we
will be the low-cost supplier on a delivered basis. This is a key
component of our value proposition.
OUR NITROGEN STRATEGY: Build on Our Trinidad Asset for Reduced Volatility
PotashCorp has the largest offshore ammonia capacity in the
Western Hemisphere, founded on long-term, lower-cost natural
gas contracts with the National Gas Company of Trinidad. Our gas
contracts provide our entire Trinidad complex with 100 percent of
our needs, including all announced expansions, through 2011,
85 percent through 2013 and 51 percent through 2018.
Thus the first component of our nitrogen value proposition is the
stability and growth potential that these assets provide in a high-
cost US gas environment. Maximizing our Trinidad ammonia under
our existing gas contracts enhances our overall strategy of growth
with reduced volatility.
North America is our primary nitrogen market. We serve its need
for nitrogen fertilizers from Trinidad and concentrate our US
production on industrial sales where quality and security of supply
PotashCorp Trinidad Gross Margin Potential
Potential Margins (after Debottlenecks) with Rising Ammonia Prices
$US Millions
400
350
300
250
200
150
100
50
Trinidad contribution to total nitrogen gross margin is shown on the graph at right.
Source: PotashCorp
When natural gas reaches $8 per MMBtu in the US, ammonia
producers there need a Tampa ammonia price of $295 per
tonne just to meet their gas costs. At that ammonia price, and
with our expansions completed, our potential Trinidad gross
margin is $245 million.
are key. Our three operating US plants are linked by pipeline
to customer plants. About two-thirds of the urea we produce
in the US and 84 percent of the ammonia are sold to industrial
customers, and we plan to maximize these stable sales.
We vary production at our US plants in response to margin
volatility created by natural gas costs. Augusta and Lima produced
ammonia and downstream products in 2005. Geismar processed
imported ammonia into nitric acid for the industrial market.
Memphis remained shut down.
Leveraging our marketing and operations expertise through
asset-light, fee-heavy arrangements in low-cost gas regions could
enhance our nitrogen strategy. In these situations, we would seek
to provide management knowledge and distribution resources
with little capital outlay, while a partner provides the assets.
PotashCorp Nitrogen Gross Margin
Correlates to US Gas Prices

450 $US Millions $US/MMBtu
8
Trinidad US
400 Purchased Hedge B
350 US Gas Price 7
300 6
250 5
200
. 4
150
® 3
100
50
¦ ¦ 2
1
-50
2000 2001 2002 2003 2004 2005
Source: NYMEX, PotashCorp
In this high-priced gas environment, our Trinidad operation, with
its long-term, lower-cost natural gas contracts, has an ever more
significant impact on our total nitrogen segment performance.
13
0
2005Year-End Actual Trinldad` $8/MMBtu $101MM13tu
(average NYMEX $8.60/MMBtu) (post-debottlenecks) (post-debottlenecks)
14 POTASHCORP 2005 ANNUAL REPORT MD&A Phosphate Strategy
OUR PHOSPHATE STRATEGY. Develop Industrial and Feed for Reduced Volatility
We focus our phosphate strategy on reducing volatility through
our diversified product line. That lets us allocate our phosphoric
acid to the most profitable downstream products, rather than PotashCorp Phosphate Gross Margin
fertilizers affected by cyclicality. Our emphasis is on production $US Millions
of the higher-margin products, particularly purified acid and feed. 240rI
I = E Industrial 0 Feed 0 Liquids 0 DAP/MAP Period Cost
Our strategy in industrial phosphate is to maximize production
and sales in this stable business where we have only two
competitors. Industrial products are in demand globally and
generate the segment's highest margins, so we are expanding
to gain market share as others shut down high-cost, energy-
intensive plants.
The phosphate feed supplement market has improved significantly
with recent rationalization of competitors and production. Our
strategy is to focus on price rather than volumes in North America
and develop infrastructure in offshore markets to increase sales
volumes there. Increased offshore production of meat from
animals in concentrated feeding operations is promoting long-term
export market growth.
210
180
150
120
90
60
30
,.-
-30 L
_..:;
1998 1999 2000 2001 2002 2003 2004 2005
Source: PotashCorp
Production of high-quality phosphoric acid generates lower-quality Significant earnings generated by industrial acids, especially
acid byproducts suited to production of solid fertilizers such as purified acid, pushed our phosphate segment to almost
DAP, making a base level of this production necessary. Our $100 million in gross margin in 2005. While this was an
strategy is to control costs as much as possible for the products improvement, it is still well below the results of 1998 when
that compete in this highly volatile market. we enjoyed better solid and liquid fertilizer markets.
While industrial products give this segment of our business
stability, phosphate fertilizers have a significant impact. For this
segment to excel, DAP must perform well. While the short-term
market appears satisfactory, substantial overcapacity threatens the
long term. Therefore, continuing development of our purified acid
is of utmost importance.
ro' With our Potash First strategy, we focus on supplying global growth in fertilizer demand
but only produce what the market needs. Our strategy in nitrogen and phosphate focuses
on Trinidad nitrogen and the stability provided by industrial and feed products.
POTASHCORP 2005 ANNUAL REPORT I MD&A Capability to Deliver 15
section 3
Capability to Deliver
POTASHCORP'S COMMITMENT
We back up our vision and strategy by employing and positioning
all necessary resources to deliver on our value proposition. We
allocate our substantial cash flow to the businesses generating
the highest returns; all projects compete for capital on this basis.
Each year we work to find new ways to make it easier for
customers to do business with us. Four customer service initiatives
were begun in 2005: an enterprise-wide customer complaint
system to track all complaints received and their resolution; an
order tracking system; a customer contact recording system; and
customer website enhancements.
Our strong cash flow, our experienced management team,
our productive workforce, our motivated sales teams and our
transportation network work together to ensure that we can
fulfill our commitment to deliver.
PotashCorp 2005 Capital Expenditures
Total US $383 Million
Sustaining
Source: PotashCorp
Potash Capacity
Trinidad
Expansion
Purified Acid
Expansion
We invest our capital where we generate our best returns. In
2005, 27 percent of our capital expenditures went toward our
Potash First strategy, to bring back idled potash capacity. This
was supported by investments in Trinidad nitrogen and Aurora
purified acid, two other stable high-margin businesses.
POTASH: Supplying the World
Quality earnings through growth and reduced volatility depend on
putting proportionately more of our resources into potash, as our
Potash First strategy requires. It is vital that our excess capacity is
ready when the market calls, since tight global supply conditions
are forecast to continue in the long term, our competitors are at
or near capacity and demand is rising.
We have 12.9 million tonnes of capacity, but we have not been
set up and staffed to produce at that level. In 2005, with our
$85-million, 749,000-tonne expansion at Rocanville completed
(including 500,000 tonnes of compaction capacity), we were set
up and staffed to produce 10 million tonnes. Responding to world
demand, we produced 8.8 million tonnes, a PotashCorp record.
In 2006, we will be set up and staffed to produce up to
10.4 million tonnes.
In 2005, we continued our historical practice of matching product
supply to demand. Our objective is to be in a position to handle
surges in demand along an upward trending growth line. From
time to time, this will require temporary production shutdowns
to ensure inventories do not build up.
Making Our Excess Capacity Ready
Our strategy of matching supply to demand is predicated on our
ability to have capacity available when needed. We are bringing
back 400,000 tonnes of capacity at Allan and 1.5 million tonnes
at Lanigan, most of it not used since the 1980s. This 1.9 million
tonnes will be ready for production in the second quarter of 2006
Breakdown of PotashCorp Capacity
Million Tonnes KCI
Allan
Lanigan 0.4
Cory &
Patience Lake
Excess Available
Capacity
zoos
xoduction
Source: PotashCorp
The world needs more potash now, and we are setting up and
staffing to ensure that we will be able to deliver it. If markets
warrant, we can have our full capacity of 12.9 million tonnes
available within three years.
(Allan) and the fourth quarter of 2007 (Lanigan) at a cost of
$275 million, roughly one-quarter of the cost of building a
greenfield mine of that size. This is a huge competitive advantage
for PotashCorp and we are putting the resources into it because
we expect to realize significant returns.
The work at Allan and Lanigan involves an additional $110 million
for another 1.25 million tonnes of compaction capacity to produce
16 POTASHCORP 2005 ANNUAL REPORT I MD&A Capability to Deliver
PotashCorp - Potash Capacity and Production
Million Tonnes KCI
16
PotashCorp 2005 Cash Usage
Significant Investing and Financing Activities
-APC $19M
r- Dividends $65M
Source: PotashCorp
The major difference between PotashCorp and other potash
producers is that we have the excess capacity to enable real
incremental growth in volumes at a time when world demand
is forecast to rise by 2-3 percent per year.
more granular product. Sophisticated farmers in North America,
Brazil and, increasingly, China, want granular potash - an
upgraded product with granules larger than standard product -
to blend with granular nitrogen (urea) and dry phosphate fertilizers.
It commands a premium of approximately $30 per tonne over
standard potash. We expect greater demand for this upgraded
product from farmers adopting the most modern agricultural
practices. This is in keeping with our strategy of being prepared
for the product mix tomorrow's potash market will demand.
The projects at Allan and Lanigan will raise our productive capacity
to 11.9 million tonnes. We are preparing detailed engineering
plans to bring on the remaining 1 million tonnes at Cory and
Patience Lake. We are also exploring expansion options at New
Brunswick beyond that.
In 2005, we committed adequate resources to new three-year
contracts with the unions at Allan, Cory and Patience Lake to
ensure ongoing production. We are currently negotiating with the
union at Lanigan and the Employees Association at Rocanville. Our
New Brunswick operation is not unionized.
Investing in Our Distribution Chain
Preparing for the world's increasing need for our primary product
also involves investing through the distribution chain. Canpotex
is investing in a $35-million, 135,000-tonne expansion of its
terminals at Vancouver and Portland, which serve the rapidly
growing Asian markets. Adding capacity and reducing distribution
bottlenecks will prepare them for the expected growth, and we
will shoulder the majority of the costs and be the largest
beneficiary. We have also opened a terminal in Brazil, one of
our first distribution points outside North America.
Sinofert $
Long-Term Debt
Repayments $101
Source: PotashCorp
Following our Potash First strategy, we increased our
investments in ICL and APC in 2005 and purchased an initial
stake in China's Sinofert. Another significant investment was
the 9.5 million PotashCorp shares we repurchased, adding
value for our long-term shareholders.
Canpotex took delivery of almost 1,200 custom-made potash
railcars in 2005 in preparation for the increasing offshore demand.
CP Rail, which carries Saskatchewan potash to the Pacific, invested
$160 million to expand track capacity and added 60 locomotives
to its fleet in 2005.
To help us move more potash domestically, we have increased our
own railcar fleet over the past few years by more than 500 covered
hopper cars, including approximately 120 in 2005. We have a long-
term agreement with CN that will deliver annual savings in a
period of otherwise rising freight costs. Committed to meeting our
North American growth, CN acquired 75 new locomotives in 2005
and entered into a major refurbishment program involving
approximately 800 covered hopper cars.
Increasing Investments Offshore
Potash First means more than internal organic growth; it also
means strengthening our global position in potash. We have
complemented our internal growth with increases in our offshore
investments. We spent $75 million to raise our share of ICL to
over 10 percent and $19 million to increase our APC position
by 2 percent. We purchased an initial 10-percent stake in China's
Sinofert for $97 million in July 2005, and increased it to 20 percent
in February 2006 for an additional $126 million. With 60 percent
of the market share for distribution of imported fertilizers in China,
Sinofert generates more than half its total gross margin through
potash sales. This investment allows us to improve our access to
and understanding of the Chinese fertilizer market. At year-end,
the combined market value of these investments - over
$1.7 billion - exceeded their book value by approximately
$1 billion. This is equivalent to $17 per PotashCorp share.
2001 2002 2003 2004 2005 2006E 2007F 2008F
POTASHCORP 2005 ANNUAL REPORT MD&A Capability to Deliver 17
NITROGEN: Supporting Our Trinidad Production
Our nitrogen strategy, based on our Trinidad advantage, provides
earnings stability as our value proposition requires. We maximized
our advantage by investing $41 million to debottleneck all four
ammonia production units there. Two units are complete, adding
156,000 tonnes of capacity. Strong nitrogen prices coupled with
above-design results have generated investment payback periods of
two years at one unit and one year at the other. We will allocate
another $20 million in 2006 to complete expansions of the
remaining two units. This should bring an additional 138,000 tonnes
on stream by the third quarter and generate similar returns.
In the US, we employ a gas hedging program to mitigate the risk
of price volatility. We rigorously manage our US operations in a
high-cost gas environment and, when necessary, curtail
production and meet our customer commitments by upgrading
Trinidad production or spot purchasing. However, sometimes we
must continue operating these US plants to meet commitments
to industrial customers, producing at a loss.
We also secure our ability to deliver economically to the US by
signing long-term leases on ammonia vessels at fixed prices to
lower transportation costs.
NYMEX and PotashCorp Gas Prices
$USIMMBtu
14
12
10
NYMEX
PotashCorp
us
PotashCorp
Trinidad
Source: NYMEX, PotashCorp
PotashCorp has the advantage of producing in Trinidad with
long-term natural gas contracts tied to the price of ammonia
while, at the same time, hedging our US gas costs to minimize
risk from gas price swings and protect US margins.
PHOSPHATE: Using Our Product Diversity
In phosphate, enabled by the quality of our rock, we employ our
capital to diversify into higher-margin industrial and feed products
and away from fertilizer.
We increased purified phosphoric acid capacity at Aurora by
83,000 tonnes in 2003. In 2005, we spent $47 million on
construction of a fourth, 82,000-tonne plant there, with a further
$17 million to be spent through June 2006 when it is expected to
come on stream.
In feed phosphates, our new-technology DFP plant at Aurora, which
came on stream in 2003 amid teething problems that extended
through 2004, is now demonstrating its design capacity. We
invested the capital necessary to see this project through, and it
allowed us to focus feed phosphate production at Aurora in 2005,
eliminating the need to operate the White Springs DFP plant.
With both feed and industrial phosphate products, we like their
strategic position of low costs and fewer competitive pressures.
Higher prices have improved margins in both.
As our process requires us to produce a certain amount of
DAP/MAP and export opportunities are declining, we are taking
steps to ensure we remain a preferred supplier to North American
customers. Thus, we are making investments at both Aurora and
White Springs to handle unit trains in the most efficient manner,
reinforcing our reputation for reliability.
7 We are putting our resources behind our strategy in all three nutrients to
deliver on our value proposition. As we measure our progress in achieving
our goals, we always consider our risk.
0
Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec
95 96 96 97 97 98 98 99 99 00 00 01 01 02 02 03 03 04 04 05 05
18 POTASHCORP 2005 ANNUAL REPORT I MD&A I Key Performance Drivers
KEY PERFORMANCE DRIVERS
We set targets each year to advance our goals and drive results.
In 2005, we began to roll out to the organization our key
performance indicators so that employees are able to effectively
monitor the achievement of their contribution to corporate goals.
The metrics we focused on flowed from PotashCorp's long-term
goals, as follows:
By increasing sales of our products with more stable and higher
margins, we maximize shareholder wealth and achieve our goal of
outperforming comparable companies. At the corporate level, the
key performance metric for maximizing shareholder wealth is total
shareholder return on an annual basis and a sustaining basis.
Metrics that support this are cash flow return versus our weighted
average cost of capital, EBITDA multiple relative to our peers, and
growth in sales and gross margin. We want to trade at a higher
multiple than our peers so we do annual surveys to measure
investors' perceptions of our company.
The metrics in our sales and production divisions are cash flow
return at the divisional gross margin level and associated working
capital. We measure our success at increasing sales of products
with stable, desirable margins by analyzing volumes, revenue and
gross margin for all sales within each nutrient. The question we
ask ourselves is, "Have we optimized our gross margin on a
product and customer mix basis?"
The metrics for achieving our goal of being the preferred supplier
are the number of complaints we receive and order fill rate
categories. We survey customers annually to measure our
effectiveness at every stage of the sales transaction and how we
compare with our competitors. Our goal is to outperform and have
top quartile responses. In 2005, we instituted monthly surveys to
monitor customer attitudes about our quality and service.
Being a low-cost supplier is essential to sustaining our profitability.
We achieve this goal by reducing cash costs and spending
appropriate sustaining capital to maintain productivity and low
costs. At the corporate level, the metrics for success are total cost
per tonne of each nutrient or primary product and supporting selling
and administrative expense. In sales, we measure percentage of
customer shipments by preferred carrier and route, associated
transportation and distribution expense, freight cost, sales expense
and number of tonnes per sales representative. Performance
reliability relative to maintenance cost is measured for all nutrients.
Reducing injury rates and environmental impact will help us
achieve our goal of no harm to people, no accidents and no
damage to the environment. Lost-time and recordable injury rates
and environmental events such as reportable releases and permit
excursions measure the components of this goal.
Our goal of having motivated, productive employees is reached
by encouraging and rewarding performance that supports
PotashCorp strategy. We survey employee engagement with our
goals and objectives, and over time will be able to compare year-
over-year results to guide us toward activities we could introduce
or improve to increase employee productivity and emotional
buy-in to our objectives.
By contributing to socio-economic well-being in the communities
in which we operate, we achieve our goal of having a positive
impact there. Part of this is having good governance principles,
and our board continues to update its practices as it monitors
outside opinion and internal effectiveness. We contribute to our
communities by being a competitive employer on a compensation
and benefit basis, and we support local causes. We measure our
success by reviewing the tone of media coverage, the number of
events the company sponsors and total charitable donations and
volunteer hours. We also do community surveys and aim for
superior performance.
LEAD THE GLOBAL
FERTILIZER INDUSTRY
Utilizing a balanced. scorecard approach, we have
developed a system for tracking the drivers of our success.
I tncouraye
nd Rewarc
erformanc(
POTASHCORP 2005 ANNUAL REPORT I MD&A Rewarding Results 19
REWARDING RESULTS
PHILOSOPHY
Our objective is to attract world-class talent who can drive the
business forward and achieve the highest sustainable results for
shareholders. This is essential to the successful leadership and
effective management of PotashCorp on the global playing field
Our executive compensation policies are designed to provide
compensation packages that are competitive within the
marketplace and encourage individual performance consistent
with shareholder expectations. The compensation committee of
our Board of Directors pays close attention to the structure of our
executive compensation and the proportion of remuneration that
is performance-related, on both a short-term and long-term basis.
Our executive compensation program, which has both fixed and
variable components, is heavily weighted to pay-for-performance
and designed to motivate management to carry out the company's
vision and strategy set out on Pages 11 to 14. Cash compensation
Compensation Performance
Element Form Eligibility Period Determination
Base salary Cash All staff Annual • Base salary targets are set to the median of comparable companies,
adjusted to reflect individual performance and internal equity.
Short-term Cash All executives and most 1 year • Awards are based on the achievement of predetermined goals for
incentives full-time permanent corporate performance or a combination of corporate and operating
salaried staff group performance.
Total: 1,500 people • Individual awards can be adjusted (+/- 20%) to recognize individual
(approximately) performance.
Medium-term Performance All executives 3 years • Units are issued at a price equal to the average market price of our
incentives share units and senior common shares at award date.
management • Each award vests and is paid out at the end of the three-year
Total: 65 people performance period in relation to a vesting schedule whereby half of
(approximately) the units are vested in accordance with corporate total shareholder
return (TSR)l targets and half of the units are vested in accordance
with corporate TSR relative to a selected competitive group's TSR.
• The value at payout is based on the number of vested units
multiplied by the 30-day average common share price at the end
of the performance period.
Long-term Performance All executives and 3 years • Performance stock options incorporate a performance-based vesting
incentives stock options other selected (vesting) schedule measuring three-year average excess of cash flow return
managers over weighted average cost of capital.
Total: 215 people 10 years • Value of vested shares based on our common share price
(approximately) (option term) appreciation over the 10-year term.
TSR represents the total return on an investment in PotashCorp stock from the time the investment is made.
The total return has two components: (1) growth in the share price and (2) dividend income on the shares.
E EXECUTIVE COMPENSATION LINKED TO KEY BUSINESS DRIVERS
We believe the strong alignment of executive compensation with performance is in the interests of our stakeholders and motivates
our management with clear signals about the importance of creating sustainable value for PotashCorp shareholders. As noted above,
we place significant emphasis on pay-for-performance, with "at risk" components of total compensation linked to the enhancement
of cash flow return and total shareholder return. An example of the performance conditions that must be achieved before vesting
will occur in our performance stock option plan is set out below. For additional information relating to our incentive plans and how
they link to performance, please refer to our 2006 Proxy Circular on our website.
20 POTASHCORP 2005 ANNUAL REPORT I MD&A I Risk Management
levels (comprised of salary and annual short-term incentive bonuses)
and benefits are typically designed to approximate the median of
our comparator group. Motivation to earn compensation at the
upper range of competitive market levels is emphasized through
medium-term and long-term variable (or "at risk") incentive
components. These medium-term and long-term incentives reward
superior performance and are aligned to sustained growth in
shareholder value through improvements in cash flow return and
total shareholder return. The more senior the management role in
PotashCorp, the higher the proportion of compensation "at risk".
MANAGING RISK
Effective planning and execution of our strategy require detailed
analysis of associated risks and management of those risks to
prevent loss. PotashCorp has adopted a risk management
framework which identifies potential events that could have
adverse effects. We then manage those risk events to provide
reasonable assurance that they will not prevent us from achieving
our goals and objectives - the road maps for successful execution
of our strategy. We assess risks by identifying, measuring and
prioritizing them, based on their estimated likelihood and severity
of loss. Through mitigation responses, we accept, control, share or
transfer, diversify or avoid each risk. Thereafter, we monitor them
at company, process and activity levels.
We have identified six major corporate categories of risks:
markets/business, distribution, operational, financial/information
technology, regulatory and integrity/empowerment. Together and
separately, these threaten our strategies and affect our ability to
take advantage of opportunities to maximize returns for all
stakeholders, as our value proposition requires. Risk threats are
intricately interwoven, but they can be reduced by lowering the
expected frequency or the consequences.
Each year, management re-evaluates the risks identified in
previous years. It then identifies the most significant new or
elevated risks to company strategy resulting from changes in
operations or from external factors. Management reports annually
to the Board of Directors on actions and plans to manage the risk
universe. Most severe of all risks is a loss of reputation, for that
could threaten our earnings, our access to capital or our brand by
creating negative opinions of PotashCorp in the minds of
employees, customers, investors or our communities.
The new or elevated high risks identified in 2005 are:
Sustaining Growth and Our Earnings Multiple
Our Potash First strategy is key to our success. However,
circumstances both external and internal can limit our sustainable
long-term growth in potash and its historically high earnings
multiple. Externally, we believe further acquisition opportunities
are available but may be limited, for the industry is now highly
concentrated. Internally, we responded to the accelerated growth
in world demand that began in 2003 by increasing production. To
REWARD STRUCTURE
Our executive compensation consists of four main elements:
(1) base salary, (2) cash short-term incentives, (3) cash medium-
term incentives (units measuring a three-year performance period),
and (4) long-term incentives - stock options. Highlights of these
elements are outlined in the table on the previous page.
We do not have any non-qualified deferred compensation
arrangements in place for management.
achieve our stated capacity of 12.9 million tonnes and take
advantage of rising world demand, we are investing capital to
bring back capacity idled two decades ago.
Opportunities to invest in other projects with stable, high margins
as a percentage of revenue, such as industrial phosphate products
and Trinidad nitrogen, are limited. It would be difficult for the
phosphate or nitrogen sector to change to more closely resemble
potash industry fundamentals, because of the significant
government involvement in phosphate and the many global
opportunities for nitrogen development based on abundant low-
cost natural gas. Mitigation of this risk requires ongoing active
dialogue between the board and management on PotashCorp
strategy and acceptable risk levels. Likely mitigation action is
increasing our equity ownership in APC, ICL, SQM and Sinofert. As
well, we are conducting a feasibility analysis of expansion in New
Brunswick and reviewing other possible potash investments.
Potash Capacity
For nearly two decades, PotashCorp has followed a strategy of
matching potash production to demand to minimize inventory
overhang, stressing price and margin as more important than
volumes. Inability to respond in time to increased global demand
could harm the credibility of this strategy.
Recent growth in demand for potash has outpaced the historical
trend, and we have responded in ways that mitigate the risk to
the credibility of our strategy. We expanded production capability
at Rocanville and added fourth shifts at Allan and Lanigan. Allan's
capacity is being refurbished and renovation of Lanigan's Phase 1
mill is expected to be complete in late 2007.
Downstream Product Mishaps
In 2005, we increased the rated level of risk of an event occurring
during transportation or customer use of our nitrogen products that
results in third-party exposures and potential PotashCorp liability.
We increased the severity rating of this risk after a serious incident
involving an unrelated product and company in South Carolina.
We have mitigated it by eliminating production and sales of
agricultural ammonium nitrate (AN). For our industrial AN sales,
we thoroughly inspect carriers' equipment, have instituted
POTASHCORP 2005 ANNUAL REPORT I MD&A I Risk Management
a proof-of-delivery system for truck shipments of both industrial
ammonium nitrate and ammonia, and require a global positioning
system on AN truck shipments. We require truck carriers to employ
rigid driver background checks, identification, and equipment
tracking processes and standards.
Labor Relations
Strikes or other forms of work stoppage or slowdown that
result from unsuccessful contract negotiations or other adverse
labor relations activities constitute a risk to our strategy and
opportunities, through disruption and cost. In 2005, this risk rating
increased with the commencement of negotiations with the United
Steelworkers at our Allan, Cory and Patience Lake potash facilities.
The union's expectations reflected the high profitability of potash
at the time of negotiation.
By the end of the year, we had settled new three-year contracts
at Allan, Cory and Patience Lake at acceptable cost increases.
We are currently negotiating with the Communications, Energy &
Paperworkers Union of Canada at Lanigan and we will commence
negotiations with the Rocanville Potash Employees Association.
Regulatory Risk
PotashCorp may be adversely affected by changes in antitrust
laws to which we are subject in various countries. We cannot
predict how these laws or their interpretation, administration and
enforcement will change over time. Changes in antitrust laws
globally, or the interpretation, administration or enforcement
thereof, may limit our future acquisitions or the operations of
Canpotex and PhosChem.
capacity of 2.9 million tonnes per year, with at least 1 million
tonnes expected to come on line in 2009-10.
In response to the surge in world DAP capacity that flooded
markets and suppressed prices in recent years, we have refocused
our phosphate business by leveraging our strengths in specialty
industrial and feed products. Building on our high-quality rock and
proven technology, we are expanding our purified acid production.
A further mitigation effort involves streamlining production of DAP
and the phosphate feed DFP between Aurora and White Springs to
optimize production costs.
Suppressed Demand Creates Structural
Market Imbalance
Our potash business success would be put at risk if growth
in world demand fell below expectations, reducing trade and
affecting our sales volumes and price realizations. This is an
ongoing high risk in our risk universe, but temporary blips in
demand are a feature of the market. Overall, demand has risen
by an average of 2 percent a year since the 1960s, culminating
in a 23-percent jump from 2002 to 2005. Even though purchases
by Brazil dropped by 20 percent in 2005, world demand rose by
1 percent, and forecasts suggest 2-3 percent growth per year to
the end of the decade.
Nonetheless, we mitigate this risk by maintaining our strategy of
matching production to demand, and considering price more
important than volumes. We have increased our ownership in Arab
Potash Company, and we invested in Sinofert, giving us stronger
ties with the huge Chinese market and potash demand there.
Risk of Cyclicality
Many risks we identified as serious in 2004 remained high on the
2005 risk matrix:
New Supply Creates Structural Market Imbalance
In phosphate, competitive supply of solid fertilizer continues to
be built faster than world consumption grows, upsetting the
supply/demand balance and keeping prices down. We consider
this risk more severe now than it was in 2004. Saudi Arabia has
begun building a new DAP production facility with a reported
The risk of short-term cyclicality in product prices is most
significant in phosphate and nitrogen fertilizers, due to
competitive costs, availability of supply and world demand. To
mitigate this risk in phosphate, we are focusing as much as
possible on non-fertilizer products by expanding purified acid
production, consolidating feed phosphate production at Aurora
and growing offshore feed sales, so our plants can operate at
cost-effective utilization rates. In nitrogen, we are expanding our
lower-cost Trinidad production, and we continue to hedge a
portion of our North American gas requirements.
M GLOBAL RISK ENVIRONMENT
World events and trends RISK TO STRATEGY RISK CATEGORIES
that are not unique to our Risks to strategy limit the Market / Business Risk
sector but rather impact implementation of these Distribution Risk
the international business strategies due to a lack of Operational Risk
environment - e.g. interest integration or changes in Financial / Information
rates, exchange rates or the business environment, Technology Risk
wars affecting hindering our ability to take Regulatory Risk
international trade. advantage of opportunities. Integrity / Empowerment Risk
RISK TO REPUTATION
Risks to reputation threaten
PotashCorp's earnings, capital
or brand by creating negative
opinions of the company in
the minds of employees,
customers, investors or our
communities.
21
22 POTASHCORP 2005 ANNUAL REPORT I MD&A I Factors That Shaped 2005 Business Conditions
Political Risk
Our decision to acquire strategic interests in low-cost potash
producers with logistical advantages to offshore markets carries
some risk, as viable low-cost production outside of Canada is in
areas which have elements of political risk. We mitigate this risk
by producing more in Canada, investing in geographically diverse
jurisdictions and encouraging companies we invest in to carry
business interruption insurance.
Distribution Risks
Railcar availability is affected by railway efficiencies and demand
for grain and other commodities. A shortage of railcars for carrying
potash and increased transit time in North America would result in
customer dissatisfaction, loss of sales and higher equipment costs.
To mitigate this risk, we increased our private fleet of hopper cars
in 2005 and influenced Canpotex to do the same. We worked
closely with major North American rail carriers to ensure product
moved quickly and smoothly.
Security Risks
These risks include deliberate, malicious acts that may cause injury,
property damage or harm to the company's reputation as well as
theft of product for use in criminal acts or terrorism. We maintain
strict controls, standards and operating procedures, on top of
increased security and intrusion measures.
Risk to Reputation
Loss of a company's reputation is its greatest risk, and any of
the circumstances outlined could affect PotashCorp's reputation.
To mitigate this risk, we build goodwill, use best practices, are
committed to sustainability, ensure transparency, practice leading-
edge corporate governance and communicate continually with
stakeholders. We strive to have "no surprises" for stakeholders
in order to support our reputation, which is key to achieving our
strategies and value proposition.
section 4
Performance and Prospects
FACTORS THAT SHAPED 2005 BUSINESS CONDITIONS
1 Continued Strength in Global Economy 2 World Grain and Rice Inventories Decline
Despite higher energy prices, world economic growth remained
strong in 2005 at 4.3 percent, with relatively low interest rates
and moderate inflation contributing to rising GDP in most
countries. China and India led with growth of 9.8 percent and
8.1 percent, respectively, exceeding their 2004 performance.
At a solid 3.5 percent, US growth was somewhat below 2004's
above-average 4.1 percent. This strong world economy supported
improving incomes and desire for more and better food,
especially animal protein, which requires more grain to produce.
Ideal growing conditions produced a record crop in 2004 but
grain and rice production in the more normal 2005 weather
again trailed behind demand, although still the second-largest
crop on record. Global demand for wheat and coarse grains has
outstripped production in six of the last seven years and for rice
the last five years. Rice prices were stronger in 2005, but corn
and soybean prices fell due to the large US production, which
was exceeded only by the record set in 2004.
World Economic Growth
Percentage Annual Real GDP Growth
World Grain Production and Consumption
Wheat and Coarse Grains
Billion Tonnes
1.7
1.6
1.5
1.4
1.3
1.2
1.1
Source: IMF Source: USDA
1997 1998 1999 2000 2001 2002 2003 2004 2005
1.0
81/82 84/85 87/88 90191 93/94 96/97 99100 02/03 05/06E
POTASHCORP 2005 ANNUAL REPORT I MD&A I Factors That Shaped 2005 Business Conditions 23
3 Growth in World Potash Demand Returns
to Historical Levels
Following three years of unprecedented growth exceeding
22 percent in total, global potash demand grew by approximately
4 percent in the first half of 2005. Customers then slowed activity
in the second half, resulting in growth of 1 percent for the year.
Imports by China and India rose by 1.5 million tonnes each. That
continued growth was partially offset by adverse weather in
Indonesia, Malaysia and Vietnam that reduced fertilizer usage,
and by difficult economic conditions that cut Brazil's potash
demand by 1.3 million tonnes.
World Potash Demand* Growth
Cumulative Year-over-Year Percentage Growth
30
25
20
1s
10
s

' Producer sales
Source: IFA, Fertecon, PotashCorp
5 Fertilizer Prices Rise
Prices for all three nutrients increased in 2005. Potash prices
responded to tight supply through much of the year. Nitrogen
prices were pulled up by sharp increases in natural gas prices, US
nitrogen curtailments and rising ocean freight rates for ammonia
tankers. Increased phosphate prices reflected higher input costs,
global demand growth that surpassed growth in supply, and lost
phosphate production after hurricanes hit the US Gulf region.
6 Growing Pains in Brazil
Farmers in Brazil had to adjust in 2005 to global and domestic
conditions that affected the national economy. The Brazilian real
continued to appreciate against the US dollar, reducing the
return on crops such as soybeans that are sold into the
international marketplace in US dollars. Drought reduced yields
in southern Brazil, and soybean prices fell after the US harvested
its second-largest crop, raising global inventories. Brazil's banks
reacted by tightening credit, which reduced fertilizer purchases
and cut potash and phosphate imports.
7 Belarusian Potash Company Initiated
Belarusian Potash Company (BPQ a non-profit export marketing
agency, was formed in April 2005 under a presidential decree
giving it the exclusive right to market Belarusian potash. Before
the year ended, Russia's Uralkali agreed to become a co-founder
and Silvinit, also Russian, expressed interest. BPC has stated
that its main objective is to supply potash with minimum
participation of intermediaries.
4 Another Record Year for Canpotex
In 2005, for the third consecutive year, Canpotex sold record
potash volumes: 8.2 million tonnes compared to 7.8 million
tonnes in 2004 and 6.3 million tonnes in 2003. The rapid rise
indicates growing awareness by many nations that their nutrient
consumption is out of balance. They understand the need to
apply more potash to catch up with nitrogen and phosphate
applications and are moving to improve their nutrient ratios.
Canpotex's Sales Volumes
Million Tonnes KCI
8
7
6
5
4
3
2
1
Source:Canpotex
8 Hurricanes Spike US Gas Prices,
Further Tighten Nitrogen Supply
Growth in global nitrogen demand exceeded new capacity,
maintaining a tight supply/demand balance. Supply was further
tightened by US ammonia curtailments - totalling 50 percent of
capacity at year-end - after hurricanes damaged natural gas and
oil production facilities in the Gulf area and coastal oil refineries.
The result was a large, long-lasting rise in prices for oil and
natural gas, increasing the cash costs of producing ammonia.
Several US nitrogen producers were forced to curtail operations.
The benchmark Tampa ammonia price reached a 30-year high.
US Natural Gas Price vs Ammonia Price
Gas $US/MMBtu Tampa Ammonia $US/Tonne -
16 450
14 400
12
10
8
6
4
2
350
300
250
200
150
100
50
0
099 00 01 02 03 04 05
0
78 81 84 87 90 93 96 99 02 05
0
Jan Jul Jan Jul Jan Jul )an Jul Jan Jul Jan Jul
00 00 01 01 02 02 03 03 04 04 05 05
Source: Fertecon, NYMEX
24 POTASHCORP 2005 ANNUAL REPORT I MD&A I Factors That Shaped 2005 Business Conditions
Potash Nitrogen Phosphate
005 2004 200 004 00 00
_
Total World Demand 10 50.7 50.2 143.5 140.4 61.4 60.2
(Million Product Tonnes)
PotashCorp Share of
World Production11 17% 16% 2% 2% 6% 6%
10-11, See Appendix, Page 89
9 US Ammonia Production Down, Imports Up
High natural gas prices reduced US ammonia production,
attracting more imports from lower-cost gas regions such as
Trinidad. Major hikes in ammonia transportation costs had
minimal impact on the Trinidad-US Gulf route while substantially
affecting longer supply routes, which further improved Trinidad's
competitive position. On the Black Sea-US Gulf route, shipping
rates for refrigerated bulk liquid carriers, which carry ammonia,
nearly doubled from the beginning to the end of 2005, spurred
by increased trade. Trinidad's proximity to the US improved its
competitive position as a supplier to the world's largest
ammonia market.
Delivered Ammonia Costs to US Gulf
Low-Cost Gas Countries Have Advantage
$US/Tonne
North Africa Gas Cost
Middle East Other Cash Cost
Freight to Port
Trinidad' .. Freight to US Gulf
Russia Togliatti ONE
Ukraine Port Plant ?I-
Ukraine Other Plants
US Gulf Producers
US Gulf Producers
US Gulf Producers No *=WORM I ' .
0 50 100 150 200 250 300 350 400 450
' Trinidad assumes ammonia based on US gas at $9.00 per MMBtu.
Source: Fertecon, OMS, PotashCorp
10 Consolidation of Purified Acid
Market Continues
High energy prices are pushing consolidation in the purified acid
market. In the US, companies using the older, energy-intensive,
thermal acid production technology are finding themselves
uncompetitive with the new wet process technology, which is
used by PotashCorp.
China, also facing high energy costs, reduced purified acid
production. European producers moved more product to China,
leaving a gap in the Western Hemisphere. These tight global
fundamentals led to higher purified acid prices.
11 Feed Market Contraction,
Industry Rationalization
The US market for animal feed phosphates continued its
slow contraction in 2005, largely due to displacement of
feed phosphates by phytase, an enzyme that improves the
bioavailability of phosphates, and distillers dried grain solids,
an ethanol byproduct suited for use as an animal feed that
contains minor amounts of bioavailable phosphates. The
mothballing of PotashCorp's DFP plant at White Springs, Florida
continued the industry consolidation begun with the permanent
closure of Coronet's aged and inefficient DFP plant near
Lakeland, Florida in 2004.
US DFP Capacity and Production
Million Short Tons
0.8 r
M PCS White Springs PCS Aurora M Coronet N IMCIMosaic
0.7 - Production
0.6
0.5
0.4
0.3
0.2
0.1
Source: TFI, PotashCorp
12 Global DAP Market Strengthened by
India's Large Purchases
The global DAP market was tightened as 2005 progressed by
US production losses due to Hurricanes Katrina and Rita and the
permanent shutdown of the US Chem plant in November, as
well as India's larger purchases. India anchored the increase in
DAP trade by importing approximately 1.5 million tonnes more
than in 2004. This was due to low inventory as 2005 began; low
domestic production, particularly at the Oswal plant; protracted
negotiations between producers and their phosphoric acid
suppliers that limited phosphoric acid imports; and favorable
monsoon rains, which boosted consumption.
India - DAP Imports
Million Tonnes DAP Product
2.5
2.0
1.s
1.0
0.5 -0 0
0.0 2000 2001 2002 2003 2004 2005 2006E
0.0 2000 2001 2002 2003 2004 2005
Source: Fertecon
POTASHCORP 2005 ANNUAL REPORT MD&A 1 2005 Financial Overview 25
2005 FINANCIAL OVERVIEW
This section provides an overview of our financial performance based on our consolidated financial statements on Pages 56 to 88.
All references to per-share amounts pertain to diluted net income or loss per share (EPS). Certain of the prior years' figures have been
reclassified to conform with the current year's presentation.
Dollars (millions) % Increase (Decrease)
2005 2004 2003 2005 2004
Sales $ 3,847.2 $ 3,244.4 $ 2,799.0 19 16
Gross Margin $ 1,125.0 $ 681.4 $ 380.4 65 79
Operating Income $ 892.6 $ 514.3 $ (55.6) 74 n/m
Net Income $ 542.9 $ 298.6 $ (126.3) 82 n/m
Net Income Per Share - Diluted $ 4.89 $ 2.70 $ (1.21) 81 n/m
n/m = not meaningful
2005 Earnings Compared to Guidance 2005 Earnings Compared to 2004
The company's initial midpoint estimate for 2005 EPS, based on The company's EPS for 2004 was $2.70 per share. The final EPS
the Outlook and assumptions described in our 2004 Annual for 2005 was $4.89 per share. The primary causes of t his increase
Report, was approximately $3.88 per share. The final result was from last year's actuals were:
$4.89 per share. The primary causes of this variance from our Effect
guidance midpoint were: cause on EPS
Effect Potash offshore realized prices higher 1.01
Cause on EPS Potash North American realized prices higher 0.91
Potash realized prices higher 0.52 Increase in potash costs due to foreign exchange (0.15)
Potash volumes lower (0.41) Increased potash costs along with lower
increased potash costs (0.28) potash sales volumes (0.06)
Lower provincial mining taxes 0.17 Higher provincial mining taxes (0.26)
Subtotal potash - Subtotal potash 1.45

Increased nitrogen realized prices (exclusive Increased nitrogen realized prices (exclusive
of purchased product) 2.14 of purchased product) 1.05
Cost of natural gas and purchased ammonia higher (1.55) Cost of natural gas and purchased ammonia higher (0.70)
Larger gain on natural gas hedges and Nitrogen costs lower (exclusive of cost of natural gas
purchased product margin 0.28 and purchased ammonia) combined with higher
Nitrogen costs lower (exclusive of cost manufactured volumes 0.05
of natural gas and purchased ammonia) 0.06 Larger gain on natural gas hedges and purchased
i
S
b
l 0
93 product margin 0.05
n
trogen
u
tota .
Subtotal nitrogen 0.45
Phosphate realized prices higher 0.87 Phosphate realized prices higher 0.58
Increased input costs for ammonia, sulfur and rock (0.46) Increased input costs for ammonia and sulfur (0.08)
Phosphate other costs higher along Subtotal phosphate 0.50
with lower phosphate sales volumes (0.09)
Subtotal phosphate 0.32 Increase in other income (excluding gain on sale
of SQM shares) 0.12
Increase in other income 0.06 Increase in selling and administrative (0.08)
Increase in selling and administrative (0.15) Foreign exchange variance and decrease in
Foreign exchange variance and interest expense 0.06
higher interest expense (0.15) Subtotal other 0.10
Subtotal other (0.24)
Subtotal of the above 2.50
uidance
ariance from 2005 diluted EPS
T
tal 1
01 Gain from the sale of SQM shares in 2004 (0.31)
g
o
v .
Total variance from 2004 diluted EPS 2.19

26 POTASHCORP 2005 ANNUAL REPORT MD&A I Potash Results
BUSINESS SEGMENT REVIEW
We report our results of operations in three business segments: potash, nitrogen and phosphate. These business segments are differentiated
by the chemical nutrient contained in the product that each produces. Our reporting structure reflects how we manage our business and
how we classify our operations for planning and measuring performance.
We include net sales in our segment disclosures in the consolidated financial statements pursuant to Canadian generally accepted accounting
principles (Canadian GAAP), which requires segmentation based upon our internal organization and reporting of revenue and profit measures
derived from internal accounting methods. Net sales (and the related per-tonne amounts) are primary revenue measures we use and review in
making decisions about operating matters on a business segment basis. These decisions include assessments about potash, nitrogen and
phosphate performance and the resources to be allocated to these segments. We also use net sales (and the related per-tonne amounts) for
business planning and monthly forecasting. Net sales are calculated as sales revenues less freight, transportation and distribution expenses.
Our discussion of segment operating performance is set out below and includes nutrient product and/or market performance where
applicable to give further insight into these results.
POTASH RESULTS
% Increase % Increase %o Increase
Dollars (mil lions) (Decrease) Tonnes (thousands) (Decrease) Average Price per Tonne (Decrease)
2005 2004 2003 2005 2004 2005 2004 2003 2005 2004 2005 2004 2003 2005 2004
Sales $1,341.1 $ 1,056.1 $758.7 27 39
Freight 129.7 128.7 109.9 1 17
Transportation
and distribution 34.5 32.6 29.7 6 10
$1,176.9 $ 894.8 $619.1 32 45
Net sales
North American $ 495.6 $ 347.5 $230.6 43 51 3,144 3,246 2,870 (3) 13 $157.64 $107.06 $80.33 47 33
Offshore 668.3 504.6 336.2 32 50 5,020 5,030 4,213 - 19 $133.13 $100.33 $79.80 33 26
1,163.9 852.1 566.8 37 50 8,164 8,276 7,083 (1) 17 $142.56 $102.97 $80.01 38 29
Miscellaneous
products 13.0 42.7 52.3 (70) (18) - - - - - - - - - -
1,176.9 894.8 619.1 32 45 8,164 8,276 7,083 (1) 17 $144.16 $108.12 $87.41 33 24
Cost of goods sold 469.5 472.0 415.4 (1) 14 $ 57.51 $ 57.03 $58.65 1 (3)
Gross Margin $ 707.4 $ 422.8 $203.7 67 108 $ 86.65 $ 51.09 $28.76 70 78
Note 18 to the consolidated financial statements provides information pertaining to our business segments.
2005 VS 2004
Highlights
• Gross margin as a percentage of net sales increased to
60 percent, a 28-percent improvement from the 2004 figure
of 47 percent.
• Tight global potash supply resulted in higher realized prices,
contributing the majority of our total annual change in gross
margin. World GDP grew an estimated 4.3 percent in 2005,
Potash gross margin variance attributable to:
Dollars (millions)
2005 vs 2004
Change in Prices Total Gross
Change in
Sales Volumes Cost of
Net Sales 'Goods Sold Margin
Variance
North American . $ (7.7)
Offshore (9.4)
Other' 5.5 $158.7 $ (14.1)
174.7 (22.7)
(1.8) 1.4 $136.9
142,6
5.1
Total `'- $ (11.6) ` $ 331.6 $ (35.4) $:284.6

led by countries such as China and India. Growing prosperity
allows people to improve their diets, primarily with more protein
from animal sources which in turn require more grain - and,
as a result, more fertilizer. This contributed to strong potash
demand from some key offshore customers, particularly China
and India. This increased demand was partially offset by
reduced imports by Brazil, our largest customer in 2004. A
strong currency, weak soybean prices and tighter agricultural
credit negatively affected Brazilian consumption.
In North America, a sharp spike in energy costs combined with
low crop commodity prices led dealers to step back from the
fertilizer market in the fall after a strong first half of the year.
US purchasers appear to have deferred buying decisions from
the fall of 2005 to the spring of 2006 to avoid building high-
cost inventories.
• We produced 8.8 million tonnes of potash in 2005 and ended
the year with total inventories of approximately 1.1 million
tonnes, up from the historic low of 0.5 million tonnes at the end
of 2004 but still approximately 1 million tonnes less than our
total storage capacity.
POTASHCORP 2005 ANNUAL REPORT MD&A I Potash Results
Potash Production (million tonnes KCI)
Production Mine Site
Capacity 2005 2004 2003 Employees
active
Lanigan SK 3.828 2.023 2.025 1.488 378
Rocanville SKI 3.044 2.573 1.833 1.989 340
Allan SK 1.885 1.431 1.344 .934 293
Cory SK 1.361 .826 .738 .730 207
Patience Lake SK 1.033 .251 .239 .251 66
Esterhazy SK2 .953 .953 .953 .953 0
New Brunswick NB .785 .759 .782 .749 332
TOTAL 12.889 8.816 7.914 7.094 1,616
1 Expansion at Rocanville during 2005 raised its capacity to 3.044 million tonnes and total capacity to 12.889 million tonnes.
2 PotashCorp's mineral rights at Esterhazy are mined by Mosaic Potash Esterhazy Limited Partnership under a long- term agreement.
For calendar year 2006, our production allocation is 0.953 million tonnes.
• New three-year labor contracts were successfully ratified at our
Allan, Cory and Patience Lake mines in the fourth quarter. These
contracts extend to April 30, 2008.
Sales and Cost of Goods Sold
The primary reasons for the $284.6-million increase in gross
margin were the following sales and cost of goods sold factors:
• Price increases were achieved in all markets due to strong
demand for potash. Higher realized prices on sales to Canpotex
contributed $151.1 million to the increase while $23.6 million
was realized on offshore sales from our New Brunswick
operation. North American realized prices rose 47 percent, or
over $50 per tonne, due to product price increases effected
throughout the year.
• Prices in the North American market were nearly $25 per tonne,
or 18 percent, higher than offshore prices. The gap between the
two markets is partly due to offshore customers purchasing
under long-term contracts that lag behind North American
PotashCorp Potash Prices
$USITonne
200 r-
175
150
125
100
75
P 50
25
Source: PotashCorp
North America
Offshore
Our potash prices increased by 38 percent in 2005. Offshore
prices rose throughout the year but fell off in the fourth quarter
due to a greater percentage of lower-priced tonnes being sold
to China under an old contract.
spot-market increases. The difference also reflects product mix,
as North American customers prefer granular product that
commands a premium over standard product, which is more
typically consumed offshore.
• Canpotex sold record volumes during 2005 as its sales to India
and China rose 53 percent and 32 percent, respectively. This
was partially offset by a decline in sales volumes to Brazil, as
well as Indonesia, Malaysia and Vietnam, which all experienced
significant drought during the year. Despite the record sales
volumes of 8.2 million tonnes achieved by Canpotex (2004 -
7.8 million tonnes), of which we supplied 54 percent, our total
offshore sales volumes were below 2004 due to Brazil's lower
imports from our New Brunswick operation. Sales to China
represented 26 percent of our offshore sales volumes, while
Brazil represented 17 percent and India 10 percent.
• Saskatchewan competitors were product-constrained
throughout most of the year. As a result, we were able to
increase our market share in North America by 10 percent.
The North American potash market took 12 percent fewer
tonnes during 2005 because, we believe, many dealers delayed
fourth-quarter purchases until 2006. Our North American sales
volumes for the year were still 3.1 million tonnes, only 3 percent
lower than 2004.
• PotashCorp produced a record 8.8 million tonnes of potash in
2005. The expansion at Rocanville and additional shifts at
Lanigan and Allan early in the year increased production from
7.9 million tonnes in 2004 and resulted in economies of scale
and higher operating efficiencies. Costs on a per-tonne basis,
however, rose 1 percent from the prior year, due primarily to
higher energy costs (in particular, natural gas) and the economic
impact of a stronger Canadian dollar. A decline in the US dollar
compared to the Canadian dollar during 2005 negatively
impacted cost of goods sold by over $3.00 per tonne.
2004 VS 2003
Total potash sales increased by $297.4 million from 2003 and net
sales by $275.7 million, driven by higher average realized prices
and record volumes. This led potash to provide $422.8 million
(62 percent) of our total gross margin for the year and increase
27
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003 2004 2005
28 POTASHCORP 2005 ANNUAL REPORT I MD&A I Nitrogen Results
its gross margin percentage from 33 percent of net sales in 2003
to 47 percent.
Canpotex sold 7.8 million tonnes for the year and our
Saskatchewan-sourced offshore volumes rose 28 percent,
favorably impacting net sales by $72.6 million. Brazil remained our
largest customer with 23 percent of volumes. China was second
with 20 percent. Indonesia, Oceania, China, India, Malaysia and
Korea all had double-digit growth, leading to a 19-percent rise in
offshore volumes.
Offshore prices climbed 26 percent despite a 46-percent rise in
Canpotex's ocean freight costs. As new contracts were negotiated
with many customers, tight market conditions enabled us to more
than cover the increases in ocean freight rates. Year over year,
our gains in offshore prices on Saskatchewan-sourced tonnes
favorably impacted net sales by $88.6 million, despite China being
supplied with potash under a contract negotiated last year at old
prices. Average price increases realized on the sale of our New
Brunswick product contributed $29.3 million to the increase in
offshore net sales.
In the North American market, our average realized prices climbed
33 percent. North American volumes rose overall by 13 percent.
With competitors operating near capacity, we were able to
increase market share as the year progressed.
PotashCorp continued to increase production to meet growing
demand, adding shifts at Lanigan and Allan in 2004, and produced
7.9 million tonnes. The growth in volumes allowed us to lower our
Canadian dollar cost of goods sold per tonne by 5 percent and
capitalize on economies of scale. This was partially offset by a
stronger Canadian dollar, resulting in our cost of goods sold
decreasing by $1.62 per tonne from 2003.
NITROGEN RESULTS
% Increase % Increase % Increase
Dollars (millions) (Decrease) Ton nes (thousands) (Decrease) Average Price per Tonne (Decrease)
2005 2004 2003 2005 2004 2005 2004 2003 2005 2004 2005 2004 2003 2005 2004
Sales $1,368.8 $1,210.4 $1,156.4 13 5
Freight 39.9 38.1 48.8 5 (22)
Transportation
and distribution 49.5 42.3 42.8 17 (1)
$1,279.4 $1,130.0 $1,064.8 13 6
Net sales
Ammonia $ 490.0 $ 458.0 $ 368.0 7 24 1,672 1,776 1,755 (6) 1 $293.05 $257.85 $209.63 14 23
Urea 369.5 259.1 276.9 43 (6) 1,321 1,165 1,470 13 (21) $279.63 $222.44 $188.33 26 18
Nitrogen solutions,
nitric acid,
ammonium nitrate 284.2 239.2 250.8 19 (5) 1,850 1,797 2,144 3 (16) $153.67 $133.13 $116.98 15 14
Purchased 109.9 151.5 149.6 (27) 1 377 612 711 (38) (14) $291.28 $247.66 $210.53 18 18
1,253.6 1,107.8 1,045.3 13 6 5,220 5,350 6,080 (2) (12) $240.15 $207.07 $171.92 16 20
Miscellaneous 25.8 22.2 19.5 16 14 - - - - - - - - - -
1,279.4 1,130.0 1,064.8 13 6 5,220 5,350 6,080 (2) (12) $245.09 $211.23 $175.13 16 21
Cost of goods sold 960.7 887.2 871.6 8 2 $184.04 $165.84 $143.35 11 16
Gross Margin $ 318.7 $ 242.8 $ 193.2 31 26 $ 61.05 $ 45.39 $ 31.78 35 43
Note 18 to the consolidated financial statements provides information pertaining to our business segments.
Nitrogen gross margin variance attributable to:
Dollars-(millions) --
2005 vs 2004
Change in Prices Total Gross
Change in Cost of Margin
Sales Volumes Net Sales. Goods Sold Variance
Ammonia $ (11.2) $ 63.4 $ (38.9) $ 13.3
Urea 19,6 79.9 (38.9) 60.6
Solutions, NA, AN 13.4 35.3 (55.8) (7.1)
Purchased (7.2) 15.5 (5.3) 3.0
Hedge gains - - 5.6 5.6
Other (1.1) 4.8 (3.2) 0.5
Total $ 13.5 $198.9 $ (136.5) $ 75.9

2005 VS 2004
Highlights
• Price increases were realized for all nitrogen products.
• Hurricanes that struck the US Gulf region during 2005 and cold
weather in the US late in the year led to high natural gas prices
sustained at more than $13 per MMBtu during the fourth quarter.
This caused ammonia prices to climb rapidly late in 2005 and
led North American producers to curtail half of their ammonia
operating capacity by year-end, tightening market supply.
• Higher ammonia and urea prices were beneficial for PotashCorp's
Trinidad facility due to our long-term, lower-cost natural gas price
contracts. Our Trinidad facility contributed 68 percent of nitrogen
gross margin for the year, while North American production added
I
POTASHCORP 2005 ANNUAL REPORT MD&A Nitrogen Results
17 percent and gains on our natural gas hedges added 15 percent.
The major debottlenecking projects at our 03 and 04 Trinidad
plants were completed during the year, resulting in 156,000
additional tonnes of ammonia production capacity per year.
Sales and Cost of Goods Sold
The most significant sales and cost of goods sold contributors to
the $75.9-million increase in gross margin were the following:
• Urea realized prices increased 26 percent due to tighter
supply/demand fundamentals in world trade, as higher natural
gas prices caused further US industry curtailments and Chinese
export taxes reduced Chinese urea exports by over 2 million
tonnes in 2005, compared to 2004.
• Realized prices for ammonia grew by 14 percent as a result of
the high gas costs and production curtailments in the US. Tight
supply led to increased ammonia imports that were subject to
high freight rates that further influenced prices. The rise in
realized prices for ammonia and urea favorably impacted margins
due to our long-term, lower-cost natural gas price contracts at
Trinidad. Our Trinidad facility provided $217.1 million of 2005
gross margin and contributed 68 percent of nitrogen gross
margin, compared to $145.3 million, or 60 percent, in 2004.
were partially offset by increased production at our Trinidad
operation (which produced at levels above its expected design
capacity). Natural gas costs are the single most important factor
contributing to our nitrogen cost of goods sold, typically
representing between 80 percent and 95 percent of the cash
cost of producing one tonne of ammonia. Our total average
natural gas cost, including the benefit of the natural gas hedges
and our lower-cost Trinidad gas contracts, was $4.46 per MMBtu
PotashCorp Nitrogen Prices
SUS/Tonne
400 r-
350
300
250
200
150
100
• Realized prices for nitrogen solutions, nitric acid and ammonium 50
nitrate generally followed the rise in ammonia and urea prices,
as a number of our customer contracts are tied to either natural
gas prices or the NOLA ammonia price.
• Cost of goods sold increased 11 percent per tonne. Higher
natural gas costs, which led to production curtailments at our
Augusta and Lima facilities during the fourth quarter of 2005,
Ammonia
ea
Nitrogen
Solutions
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003 2004 2005
Source: PotashCorp
High natural gas prices in 2005 led to sustained high realized
prices for nitrogen products that raised our nitrogen gross
margin to a record $318.7 million. Our ammonia prices were
up by 14 percent and our urea prices by 26 percent.
I Nitrogen Production (million tonnes)
Ammonia' Urea Solids Nitrogen Solutions2
Annual Production Annual Production Annual Production
Capacity 2005 2004 2003 Capacity 2005 2004 2003 Capacity 2005 2004 2003
Trinidad 2.007 1.887 1.837 1.759 .709 .748 .619 .647 - - - -
Augusta GA .688 .655 .665 .655 .381 .360 .368 .334 .581 .242 .225 .223
Lima OH .550 .382 .460 .510 .329 .225 .238 .280 .227 .079 .104 .120
Geismar LA4 .483 - - .116 - - - - 1.028 .118 - .250
Memphis TN5 .371 - - .154 .409 - - .178 - - - -
TOTAL 4.099 2.924 2.962 3.194 1.828 1.333 1.225 1.439 1.836 .439 .329 .593
Nitric Acid'-3
Ammonium Nitrate Solids
Annual Production Annual Production Employees
Capacity 2005 2004 2003 Capacity 2005 2004 2003 Active
Trinidad - - - - - - - - 406
Augusta GA .541 .518 .544 .534 .512 .503 .544 .539 118
Lima OH .100 .098 .103 .097 - - - - 46
Geismar LA4 .844 .568 .521 .589 - - - - 59
Memphis TN5 - - - - - - - - 1
TOTAL 1.485 1.184 1.168 1.220 .512 .503 .544 .539 5887
' A substantial portion is upgraded to value-added products. 5 Indefinitely shut down production June 4, 2003.
2 Based on 32% N content. 6 Innovene USA LLC operates the Lima facility under an operational agreement
3 As 100% HNO3 tonnes. with PCs Nitrogen.
4Indefinitely shut down production of ammonia and nitrogen solutions June 4, 2003; 7 485 contract employees work at the nitrogen plants, for a total active
restarted nitrogen solutions production on September 15, 2005. workforce of 1,073.
29
30 POTASHCORP 2005 ANNUAL REPORT I MD&A i Phosphate Results
in 2005, 20 percent higher than in 2004. Our North American
natural gas hedging activities contributed $48.6 million to gross
margin, compared to $43.0 million last year.
2004 VS 2003
Nitrogen sales increased by $54.0 million and net sales by
$65.2 million as compared to 2003. Tight supply/demand
contributed to higher average realized prices, and all products
had double-digit percentage price increases in 2004.
Nitrogen gross margin grew by $49.6 million. Our operation in
Trinidad provided 60 percent of our total nitrogen gross margin
while our US operations contributed 22 percent. The remainder
was achieved from our US gas hedging program.
Overall sales volumes were down 12 percent due to the
production shutdowns at Memphis and Geismar. Nitrogen
solutions sales volumes were down 54 percent and US urea
volumes were down 28 percent, negatively impacting net sales
by $46.0 million and $45.1 million, respectively. These volume
reductions were partially offset by a rise in average realized
prices that increased net sales of these products by a total of
$33.8 million. Despite a 6-percent increase from our Trinidad
operations, total manufactured ammonia sales volumes were flat,
due in part to the shutdown of ammonia production at Geismar.
Urea volumes at our Trinidad plant were down 12 percent as a
result of a turnaround and other tonnage outages, leading to a
reduction in net sales of $13.3 million.
The high natural gas price environment supported an 18-percent
increase in US ammonia prices, resulting in $17.3 million
additional net sales. At our Trinidad facility, average ammonia
and urea prices climbed 28 percent and 18 percent, respectively,
favorably impacting net sales by $85.8 million. Higher average
realized prices for nitric acid and ammonium nitrate were the
primary reason for the $23.1-million increase in net sales
compared to 2003.
Our average unit cost of natural gas, including our hedge, was
$3.71 per MMBtu in 2004, compared to $2.96 per MMBtu in
2003. Since natural gas represents the major component of our
cost of goods sold in nitrogen, this increase was a key factor in
the 16-percent rise in per-tonne costs. Our natural gas hedging
activities contributed $43.0 million to gross margin in 2004,
compared to $89.9 million in 2003.
PHOSPHATE RESULTS
% Increase % Increase % Increase
Dollars (millions) (Decrease) Tonnes (thousands) (Decrease) Average Price pe r Tonne (Decrease)
2005 2004 2003 2005 2004 2005 2004 2003 2005 2004 2005 2004 2003 2005 2004
Sales $1,137.3 $977.9 $883.9 16 11
Freight 80.1 71.9 75.8 11 (5)
Transportation
and distribution 37.9 29.4 26.2 29 12
$1,019.3 $876.6 $781.9 16 12
Net sales
Fertilizer - liquids $ 208.2 $147.3 $167.7 41 (12) 931 704 751 32 (6) $223.68 $209.17 $223.17 7 (6)
Fertilizer - solids 346.7 324.7 249.2 7 30 1,516 1,590 1,494 (5) 6 $228.60 $204.16 $166.78 12 22
Feed 221.0 190.6 182.6 16 4 860 888 861 (3) 3 $256.96 $214.78 $212.25 20 1
Industrial 231.2 204.1 174.5 13 17 664 611 541 9 13 $348.12 $334.09 $322.72 4 4
1,007.1 866.7 774.0 16 12 3,971 3,793 3,647 5 4 $253.61 $228.50 $212.23 11 8
Miscellaneous 12.2 9.9 7.9 23 25 - - - - - - - - - -
1,019.3 876.6 781.9 16 12 3,971 3,793 3,647 5 4 $256.66 $231.11 $214.40 11 8
Cost of goods sold 920.4 860.8 798.4 7 8 $231.75 $226.94 $218.92 2 4
Gross Margin $ 98.9 $ 15.8 $(16.5)1 526 n/m $ 24.91 $ 4.17 $ (4.52) 497 n/m
Note 18 to the consolidated financial statements provides information pertaining to our business segments . n/m = not meaningful
Phosphate gross margin variance attributable to:
Dollars (millions)
2005 vs 2004
Change in Prices Total Gross
Change in Cost of Margin
Sales Volumes Net Sales Goods Sold Variance
Fertilizer - liquids $ 27.6 - $ 21.6 $ (33.3) $ 15.9
Fertilizer -solids (1.7) 32.6 (11.6) 19.3
Feed, (0.4) 37.5 3.8 40.9
Industrial 3.3 14.3 (11.0) 6.6
Other 0.9 - (0.5) 0.4
Total $ 29.7 $ 106.0 $ (52.6) $ 83.1

2005 VS 2004
Highlights
• Increased export demand, industry curtailments, higher input
costs (particularly for ammonia and sulfur) and the closure of a
competitor's plant led to price increases.
• Hurricanes which struck the US Gulf region in the third quarter
disrupted competitor production of phosphate products,
reinforcing an already tight supply situation in the US marketplace.
• Feed phosphate conditions greatly improved, with 20 percent
higher realized prices due to tight supply/demand fundamentals.
POTASHCORP 2005 ANNUAL REPORT MD&A Phosphate Results
• Higher-margin industrial phosphate products represented
55 percent of phosphate gross margin at $54.3 million in 2005,
compared to $47.7 million in 2004, when all other major
product categories saw negative gross margins.
Sales and Cost of Goods Sold
The $83.1-million improvement in gross margin was largely
attributable to the following sales and cost of goods sold
components:
• Price improvements were realized in all major product
categories. In feed, we benefited from tighter North American
supplies and higher North American prices as previously
announced price increases were realized. Realized prices for
solid fertilizers were up as demand in India and Pakistan
increased during 2005. As well, industry curtailments and
production cutbacks in the US during the latter part of 2005
(resulting from the continuing effects of Hurricanes Katrina and
Rita and the closure of US Chem's plant) led to reduced supply.
Liquid phosphate fertilizers benefited from strong demand,
resulting in higher realized prices. Price increases for liquid
fertilizers in the Indian market were a major contributor to
overall favorable offshore price realizations, but higher prices
in the North American market were also achieved.
• Sales volumes were relatively flat, though there was a marked
change in product mix. Liquid fertilizer sales volumes were
32 percent higher as the benefit of the first full year of an MGA
Purified Acid Production (million tonnes P205)
Annual Production
Capacity 2005 2004 2003
Aurora NC .251 .248 .246 .204
Purified acid is a feedstock for production of downstream industrial products
such as metal brighteners, cola drinks and pharmaceuticals.
Phosphate Feed Production (million tonnes)
Annual Production Employees
Capacity 2005 2004 2003 (active)
Marseilles IL .278 .127 .138 .151 24
White Springs FL (monocal) .272 .190 .126 .060 23
Weeping Water NE .209 .119 .122 .147 31
Joplin MO .163 .080 .087 .088 26
Aurora NC (DFP) .159 .115 .079 .050 31
Kinston NC1 - - - .008 0
White Springs FL (DFP)2 .100 .044 .086 .059 0
Fosfatos do Brasil .110 .076 .075 .051 93
TOTAL 1.291 .751 .713 .614 228
1 Ceased production February 19, 2003.
2 Ceased production July 31, 2005 .
Rock and Acid Production
PotashCorp Phosphate Prices
SUS/Tonne
400 r-
350
Industrial
300
250
zoo
150

Source: PotashCorp
Our average phosphate prices rose by 11 percent in 2005, with
the highest increases - $42 per tonne or 20 percent - in feed.
Prices for industrial phosphate products, which represent
55 percent of 2005 phosphate gross margin, rose $14 per tonne.
Phosphate Rock (million tonnes) Phosphoric Acid (million tonnes P205)
Annual Production Annual Production Employees
Capacity 2005 2004 2003 Capacity 2005 2004 2003 (active)
Aurora NC 6.000 4.417 3.964 3.078 1.202 1.048 1.018 .919 1,003
White Springs FL 3.600 3.186 2.745 2.686 .9661 .865 .773 .777 874
Geismar LA - - - - .202 .184 .171 .165 77
TOTAL 9.600 7.603 6.709 5.764 2.370 2.097 1.962 1.861 1,954
1 Elimination of a small phosphoric acid production circuit reduced capacity from 1.093 million tonnes P205 to 0.966 million tonnes.
Phosphate Production (million tonnes product)
Aurora White Springs Geismar
Annual Production Annual Production Annual Production
Capacity 2005 2004 2003 Capacity 2005 2004 2003 Capacity 2005 2004 2003
Liquids: MGA1 1.835 1.697 1.687 1.522 1.908 .879 .858 .966 .337 .304 .282 .272
SPA .676 .149 .224 .285 1.138 .719 .569 .748 .196 .059 .086 .091
Solids (total) 1.247 DAP .495 .472 .377 .710 DAP .477 .575 .625 DAP - - -
MAP .413 .525 .469 MAP .172 .091 - MAP - - -
31
Total .908 .997 ,846 .649 .666 .625 - - -
1 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 who
custom-mix liquid fertilizer.
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2003 2004 2005
32 POTASHCORP 2005 ANNUAL REPORT MD&A Expenses & Other Income
contract with India was realized. These volumes were partially
offset by declines in solid fertilizer volumes as reduced demand
in Brazil more than offset higher Pakistan and India purchases.
The decline in solid fertilizer volumes positively impacted gross
margin as the products for which sales declined were lower-
margin products.
• Cost of goods sold rose by $59.6 million. Although a 7-percent
increase in phosphoric acid production levels allowed us to
benefit from operating rate efficiencies, we experienced an
unfavorable price variance of $52.6 million due to increases in
chemical, reagent and energy costs, as well as higher fixed costs
(primarily fringe benefits and accretion expense associated with
asset retirement obligations). Additionally, raw material input
costs for ammonia and sulfur increased by 10 percent and
3 percent, respectively. The cost and availability of both of
these inputs were negatively impacted by the hurricanes.
2004 VS 2003
Our total phosphate gross margin improved to $15.8 million in
2004 from a loss of $16.5 million in 2003. Total phosphate sales
increased by $94.0 million and net sales by $94.7 million, with
freight, transportation and distribution costs remaining flat, in
aggregate, compared to 2003.
Solid fertilizer net sales increased by $75.5 million over 2003,
driven by 16 percent higher offshore volumes. Volumes were lower
in 2003 as they were impacted by the shutdown of DAP capacity
at the White Springs Suwannee River plant. Prices for DAP and
MAP were higher due to hurricanes during the third quarter that
decreased North American inventory and tightened supply. The
higher prices had a positive impact on net sales of $55.0 million.
Net sales of liquid fertilizers declined by $20.4 million from last
year. Sales volumes dropped 6 percent, largely due to a 23-percent
decline in North American tonnages, as PotashCorp chose to sell
less there when strong competition kept prices under pressure. The
overall decline in sales volumes negatively impacted net sales by
$23.6 million. Prices for liquid fertilizers were also below 2003
levels, primarily as a result of product mix.
Net sales of feed improved by $8.0 million as we benefited from
higher DFP prices and extra volumes due to a plant closure by a
competitor. Industrial net sales rose by $29.6 million compared
with 2003. Volumes increased by 13 percent, favorably impacting
net sales by $28.7 million. The volume increase was largely a
result of lower imports from China, and more product being
available from our purified acid plant expansion at Aurora.
While overall phosphate prices and volumes increased, product costs
continued to be a challenge. Cost of goods sold increased by $8 per
tonne. Average sulfur and ammonia input costs per tonne rose
4 percent and 31 percent, respectively, increasing cost of goods sold
by a total of $29.4 million. In addition to these higher input costs,
continuing start-up problems with our DFP plant at Aurora negatively
impacted cost of goods sold by approximately $9.0 million.
EXPENSES AND OTHER INCOME
Dollars (millions) % Increase (Decrease)
2005 % of Sales 2004 % of Sales 2003 % of Sales 2005 2004
Selling and administrative $144.5 4 $ 130.6 4 $ 96.1 3 11 36
Provincial mining and other taxes 137.2 4 92.6 3 57.0 2 48 62
Foreign exchange loss 12.5 - 19.7 1 51.9 2 (37) (62)
Other income 61.8 2 79.4 2 33.2 1 (22) 139
Other expenses - - 3.6 - 264.2 9 (100) (99)
Interest expense 82.3 2 84.0 3 91.3 3 (2) (8)
Income tax expense (recovery) 267.4 7 131.7 4 (20.6) n/m 103 n/m
n/m = not meaningful
2005 VS 2004
Selling and administrative expenses increased $13.9 million over
2004, primarily as a result of the non-cash expense associated
with performance stock options approved by the company's
shareholders and granted to employees in the second quarter of
2005. For those awards granted to employees eligible to retire
before the vesting period, compensation cost is attributed over the
period from the grant date to the date of retirement eligibility. The
compensation cost attributable to the 2005 stock option grants
for the year ended December 31, 2005 was $24.8 million and we
expect compensation cost for the years ended December 31, 2006
and 2007 to approximate $5.1 million and $4.6 million,
respectively. Total pre-tax stock option expense recorded in 2005
was $27.5 million, of which 81 percent pertained to selling and
administrative expenses. This compared to $11.1 million in 2004,
when 74 percent represented selling and administrative expenses.
The remaining changes in selling and administrative expenses
resulted largely from increased repair and maintenance activities,
partially offset by reductions in other performance-based
compensation due to movements in our share price.
Provincial mining and other taxes rose by $44.6 million, principally
due to increased Saskatchewan Potash Production Tax and
corporate capital tax. Saskatchewan's Potash Production Tax is
comprised of a base tax per tonne of potash sold and an
POTASHCORP 2005 ANNUAL REPORT MD&A I Expenses & Other Income 33
k

additional tax based on mine profits. The profits tax component
rose significantly, driven by 38 percent higher realized potash
prices year over year.
The year-end translation of Canadian dollar-denominated
monetary items on the Consolidated Statement of Financial
Position contributed to a net foreign exchange loss of $12.5 million
in 2005. The impact of the change in the Canadian dollar relative
to the US dollar was not as significant for the year ended
December 31, 2005 as it was in 2004, when a foreign exchange
loss of $19.7 million was recognized.
Other income declined $17.6 million over 2004 despite an
increase of $21.2 million in our share of earnings from equity
investments in SQM and APC. The primary reason for the decline
was that other income in 2004 included a $34.4-million gain on
the sale of approximately 9.8 million shares of SQM.
Weighted average long-term debt outstanding in 2005 was
$1,266.3 million (2004 - $1,269.5 million) with a weighted
average interest rate of 6.9 percent (2004 - 6.9 percent). The
weighted average interest rate on short-term debt outstanding
was 3.5 percent (2004 - 1.4 percent). Despite the higher average
interest rates on short-term debt, interest expense decreased
$1.7 million in 2005, largely due to the impact of higher average
cash balances.
Our effective consolidated income tax rate for 2005 was
approximately 33 percent of income before income taxes. This
compares to a rate of approximately 33 percent in 2004 when
adjusted to reflect the non-taxable gain on the sale of SQM shares
and the provision for PCS Yumbes. Income tax expense increased
substantially over 2004, driven by the marked rise in operating
income. For the year, 85 percent of the effective rate pertained
to current income taxes and 15 percent to future income taxes.
The increase in the current portion of the current/future split from
80 percent in 2004 was principally due to the substantial rise in
potash operating income in Canada.
2004 VS 2003
Selling and administrative expenses increased by $34.5 million,
primarily due to compensation programs tied to our share price
performance and our cash flow return. Our share price nearly
doubled over the course of the year, requiring higher accruals in
respect of these programs. Additionally, $11.1 million in
compensation related to stock options was expensed during 2004.
This non-cash expense arose on the prospective adoption of a new
provision of Canadian GAAP in December 2003. Only $1.0 million
relating to stock option expense was recorded in 2003.
Provincial mining and other taxes increased by $35.6 million year
over year as a direct result of significant increases in profits per
tonne, sales volumes and prices in our Canadian potash operations.
The company experienced a net foreign exchange loss of
$19.7 million in 2004 (2003 - $51.9 million loss). The decline in
foreign exchange loss reflects the Canadian to US dollar exchange
rate changes, year over year. The Canadian dollar closed the year
$0.09 stronger than at December 31, 2003, which compares with
an appreciation of $0.29 from December 31, 2002 to
December 31, 2003. The net foreign exchange loss was also
reduced in part by $8.0 million in gains realized from foreign
currency forward contracts.
Other income rose by $46.2 million, chiefly as a result of: a
$34.4-million gain on sale of approximately 9.8 million shares of
SQM in December in order to comply with certain Chilean securities
ownership thresholds; increases in our share of earnings of equity
investees; and growth in dividends from our portfolio investments.
Interest expense decreased by $7.3 million, due to lower total
debt balances outstanding, interest rate hedging activities and
a substantial build-up of cash and cash equivalents. Weighted
average long-term debt outstanding in the year was
$1,269.5 million (2003 - $1,230.9 million) with a weighted
average interest rate of 6.9 percent (2003 - 7.0 percent). The
weighted average interest rate on short-term debt outstanding
in the year was 1.4 percent (2003 - 1.4 percent).
E IMPACT OF FOREIGN EXCHANGE
Because of the international nature of our operations,
we incur costs and expenses in a number of foreign
currencies other than the US dollar. The exchange rates
covering such currencies have varied substantially over
the last three years. The sharp decline in the US dollar
has had a significant unfavorable impact on costs and
expenses incurred in other currencies, which are
translated into US dollars for financial reporting
purposes. The economic impact was most pronounced
in Canada, where our revenue is earned and received
in US dollars, while the cost base for our potash
operations is in Canadian dollars. This results in higher
translated expenses without any offsetting increase
in revenues.
The following table shows the impact on net income if the 2005
exchange rate had remained at the 2004 year-end rate of 1.2036,
and the impact on 2004 net income had the rate remained at the
2003 year-end rate of 1.2924:
Impact on net income 2005 2004
Dollars (millions), except per-share amounts
Operating income increase before income taxes $12.1 $ 26.3
Net income increase 8.1 17.5
Diluted net income per share increase 0.07 0.15
A general description of our hedging activities to help mitigate
volatility is outlined on Page 44.
34 POTASHCORP 2005 ANNUAL REPORT I MD&A Expenses & Other Income
The company's effective consolidated income tax rate in 2004
approximated 33 percent of income before income taxes when
adjusted to reflect the non-taxable gain on the sale of SQM
shares and the provision for PCS Yumbes. This compares with a
rate of approximately 40 percent (exclusive of the provision for
PCS Yumbes and a future income tax reversal of $6.5 million) for
2003. The decrease in rate is due primarily to the impact of
Saskatchewan resource tax incentives, changes to the Canadian
federal resource allowance and the scheduled Canadian federal
statutory rate reduction. Income tax expense increased, driven by
the rise in operating income levels. For the year, 80 percent of the
effective rate pertained to current income taxes and 20 percent to
future income taxes. The increase in the current tax provision from
zero percent in 2003 was principally due to the substantial rise in
potash operating income in Canada.
STATUS OF 2003 RESTRUCTURING ACTIVITIES
REPORTED IN OTHER EXPENSES
Nitrogen and Phosphate Plant Shutdowns
In 2003, we indefinitely shut down our Memphis, Tennessee
plant and suspended production of certain products at Geismar,
Louisiana due to high US natural gas costs and low product
margins. We recorded $4.8 million in employee special termination
costs, $101.6 million in long-lived asset impairment charges and
$12.4 million in parts inventory writedowns. No significant
payments remain to be made. Management expects to incur
other shutdown-related costs of approximately $10.3 million
should applicable facilities be dismantled, and nominal annual
expenditures for site security and other maintenance costs. The
other shutdown-related costs have not been recorded in the
consolidated financial statements as of December 31, 2005.
The phosphate feed plant at Kinston, North Carolina ceased
operations in 2003. In that year, the company recorded
$0.6 million for costs of special termination benefits, $0.3 million
for parts inventory writedowns and $4.0 million for long-lived
asset impairment charges. The Kinston property was sold in 2004
for nominal proceeds.
No additional significant costs were incurred in 2005 or 2004 in
connection with the nitrogen or phosphate plant shutdowns.
Provision for PCS Yumbes S.C.M.
In December 2004, we concluded the sale of 100 percent of our
shares of PCS Yumbes to SQM. The total gain on the sale was
$3.5 million, of which $2.6 million was recognized in 2004.
During 2004, we also recorded an additional writedown of
$6.2 million, relating primarily to certain mining machinery and
equipment not transferred to SQM. The machinery and equipment
were sold in 2005 for nominal proceeds.
In 2003, in connection with entering into the share purchase
(and related) agreement with SQM, we recorded long-lived
asset impairment charges of $77.4 million, non-parts inventory
writedowns of $50.2 million, employee contractual termination
benefit costs of $1.8 million and $11.1 million for early
termination penalties relating to other contractual arrangements.
No significant payments remain to be made.

POTASHCORP 2005 ANNUAL REPORT MD&A Quarterly Data 35
QUARTERLY RESULTS AND REVIEW OF FOURTH-QUARTER PERFORMANCE
(unaudited, in millions of US dollars except per-share amounts)
2005 2004
Q1 Q2 Q3 Q4 Total Q1 Q2 Q3 Q4 Total
Sales $921.4 $1,057.3 $938.0 $930.5 $3,847.2 $728.4 $833.7 $815.7 $866.6 $3,244.4
Less: Freight 67.2 67.4 59.9 55.2 249.7 58.1 68.9 51.2 60.5 238.7
Transportation & distribution 28.9 32.1 29.8 31.1 121.9 23.0 31.3 23.6 26.4 104.3
Cost of goods sold 566.8 613.0 568.8 602.0 2,350.6 523.3 562.8 551.5 582.4 2,220.0
Gross margin 258.5 344.8 279.5 242.2 1,125.0 124.0 170.7 189.4 197.3 681.4
Operating income 216.7 265.7 214.9 195.3 892.6 97.8 129.2 133.1 154.2 514.3
Net income 131.3 164.2 130.3 117.1 542.9 50.7 72.6 75.2 100.1 298.6
Net income per share - basic 1.18 1.50 1.20 1.11 5.00 0.48 0.68 0.69 0.91 2.77
Net income per share - diluted 1.15 1.46 1.17 1.09 4.89 0.47 0.67 0.68 0.88 2.70
Potash gross margin 176.2 223.3 167.6 140.3 707.4 66.7 121.4 120.8 113.9 422.8
Nitrogen gross margin 65.3 99.4 79.7 74.3 318.7 58.2 43.6 68.0 73.0 242.8
Phosphate gross margin 17.0 22.1 32.2 27.6 98.9 (0.9) 5.7 0.6 10.4 15.8
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. Per-share calculations are based on full dollar and share am ounts.
Certain aspects of our business can be impacted by seasonal factors. Fertilizers are sold primarily for spring and fall application in both northern and southern
hemispheres. However, planting conditions and the timing of customer purchases will vary each year and fertili zer sales ca n be expected to shift from one qua rter
to another. Most feed and industrial sales are by contract and are more evenly distributed throughout the year.
The fourth quarter capped a record year for our company. The final
three months of 2005 resulted in earnings of $117.1 million, or
$1.09 per diluted share, making it the best fourth quarter we have
ever had. Over the course of the year, we also set new standards
for each one of our four quarters. Our total earnings of
$542.9 million, or $4.89 per diluted share, were more than
80 percent higher than our earnings last year. Each of our three
nutrients produced strong operating results.
The foundation for our annual performance came from aggressive
potash purchasing by customers early in 2005. This was followed
in the second half by a pullback in volumes from Brazil, our largest
customer in 2004, and a lull in North American markets. That lull
in potash demand continued into the first quarter of 2006,
following an extended period of record-setting global growth.
Highlights of our 2005 fourth quarter include:
• Our potash operations delivered gross margin of $140.3 million
(2004 - $113.9 million) and raised our margin for the year for
this nutrient to $707.4 million. This is more than the combined
total margin for all three nutrients in 2004. Gross margin as a
percentage of net sales rose to 58 percent from 50 percent
quarter over quarter. Price was the largest contributor to the
substantial increase in margins. Realized prices for potash
were up 21 percent from last year's fourth quarter, but down
5 percent from third-quarter 2005, as the fourth quarter
included record volumes of lower-priced standard-grade
tonnes sold to China under the old contract. We produced
2.4 million tonnes of potash in the fourth quarter, an increase
of 18 percent quarter over quarter that raised our 2005 total
to a record 8.8 million tonnes. We took six mine shutdown
weeks in the fourth quarter in response to 32 percent lower
sales volumes in North America, compared to the fourth
quarter of 2004.
In nitrogen, gross margin of $74.3 million was 2 percent higher
than last year's fourth quarter, raising 2005 gross margin to
$318.7 million, a 31-percent increase over our record 2004
margin of $242.8 million. As North America grew accustomed
to sustained high natural gas prices, nitrogen producers in the
US (including PotashCorp) curtailed production. This tightened
supply and led to increased ammonia imports. It also raised
ammonia prices by 27 percent quarter over quarter. We were
able to capitalize on this by producing nitrogen under long-term,
lower-cost gas contracts in Trinidad, a country well positioned to
deliver to the US market. Trinidad represented 65 percent of our
nitrogen production in 2005; it delivered 87 percent of the
quarter's gross margin in this nutrient.
• Both the quarter and the year marked a resurgence for the
phosphate nutrient. Overall, phosphate gross margin of
$27.6 million for the quarter was up from $10.4 million in
the same quarter last year. Feed phosphate was the largest
contributor to the increase, as prices rose 3 percent over
the third quarter and 25 percent quarter over quarter as
supply/demand fundamentals tightened, in fertilizer, we
benefited from tighter supply and better prices, although the
gains were largely offset by higher costs for sulfur and ammonia.
• Selling and administrative expenses declined $18.3 million from
last year's fourth quarter, reflecting reductions in accruals for
our performance unit incentive plan, which was tied to our
share price at year-end.
• Although the strong Canadian dollar unfavorably impacted
fourth-quarter results, the effect was smaller than in last year's
same quarter given the much sharper decline in the US dollar
in that period.
• Other income declined $39.0 million from last year's fourth
quarter, largely due to 2004's results reflecting a $34.4-million
gain on sale of certain shares of SQM.
36 POTASHCORP 2005 ANNUAL REPORT I MD&A 2006 Outlook
2006 OUTLOOK
1 Economy: Continued strong global economic growth is projected
for 2006. The International Monetary Fund forecasts the same
4.3-percent growth as in 2005, supported by a moderate rise
in world and US interest rates. China's yuan is expected to
appreciate in value by more than 3 percent relative to the US
dollar, and its economy to grow at 8-9 percent, supporting its
rising fertilizer expenditures.
2 Agriculture: The 2006 outlook for agriculture is favorable. In
many countries with rising population and strong GDP growth,
people are more affluent and able to buy food of improved
quality and quantity. The ballooning global demand for grain is
expected to reduce the stocks-to-use ratio of wheat and coarse
grains to the second-lowest level in more than 30 years, while
rice stocks-to-use has fallen to its lowest in that period. To
prevent further decline, farmers in key offshore growing areas
need to adopt scientifically recommended nutrient application
rates to increase crop production.
World Grain Stocks
Wheat and Coarse Grains
Million Tonnes
600
Year-End Grain Stocks
500
400
300
200
100

Source: USDA
35
30
25
should help cushion the impact of higher fertilizer prices in some
jurisdictions. Older vessels are being scrapped at a moderate rate
and capacity is expected to grow by 6.2 percent, reducing fleet
utilization from 95 percent to below 93 percent. The high freight
rate for ammonia vessels is expected to continue, due to strong
demand for transporting ammonia.
4 Potash: Global demand is projected by industry consultants to
increase by 2-3 percent in 2006. Continued growth in demand
is projected for China and Southeast Asian countries. Brazil,
PotashCorp's largest offshore customer in 2004, is expected to
return to the market with purchases somewhere between its record
of 2004 and the reduced 2005 level. Brazil traditionally buys in
the second or third quarter as it prepares for its spring season,
so this will have a greater impact in the second half of the year.
In the US, deferred purchases in the second half of 2005 drew
down field-level potash inventories. As a result, in calendar year
2006, US demand is expected to be similar to that of 2005.
However, in the first quarter of 2006, North American shipments
got off to a slow start as dealers stepped back to see if softness
would lead to lower prices. Consistent with our strategy, we
reduced our production to meet this lower demand. By mid-
February, dealers were re-entering the market but, with greater
inventories at the producer level and very little with dealers, there
could be transportation bottlenecks to get product in place for the
spring season. PotashCorp has an advantage in this scenario
because of our extensive potash warehouse system in the US.
20 Potash Demand* Growth vs Capacity
Assumes All Capacity Announcements Completed
15
3 Ocean Freight Rates: The 2005 decline in ocean freight rates
is projected to continue in 2006, reflecting lower growth in
world trade and increasing dry bulk fleet capacity. This decline
Dry Bulk Vessel Supply and Demand
- Percentage Change Year-over-Year
Cumulative Growth - Million Tonnes KCI
8
PotashCorp Available Capacity
7 PotashCorp Share of Esterhary Expansion
® Projects Under Review
6
Competitive Debottlenecks
5 3% Demand Growth
2% Demand Growth
7
4 1

0'
2006E 2007F 2008F 2009F 201OF
Producer sales
Source: Fertecon, PotashCorp
5 Natural Gas: February 7, 2006 futures markets forecast US gas
prices in the $8-$11/MMBtu range throughout the year. More
drilling rigs and higher liquid natural gas imports are not expected
to keep pace with growth in demand. As a result, a high
percentage of US ammonia production is expected to remain
shuttered while prices rise and imports are high, benefiting our
Trinidad plant which serves the US market.
Percent
40
Source: Marsoft
0 10
73/74 77178 81/82 85/86 89/90 93/94 97/98 01102 05106E
2003 2004 2005 2006E
Approximately 78 percent of our 2006 gas needs are hedged,
including our indexed gas contracts in Trinidad, as of February 27,
2006. Our total North American 10-year gas hedge position is
currently valued at approximately $233 million, with the 2006
portion representing $77 million. We liquidated 40 percent
of the 2006 position in the fourth quarter of 2005 for a
$40-million gain, which will be recognized over the course
of 2006 as the related inventory is sold.
NYMEX US Natural Gas Futures Prices
As at February 7, 2006
$US/MMBTu
12 r-
10
9
8

Source: NYMEX
It
k
DAP Imports by Country
Million Tonnes DAP
6 Nitrogen: High gas prices are expected to keep much US
nitrogen production shut down in 2006, maintaining tight
supply/demand. New global capacity is forecast to come on
stream in low-cost gas regions. This will increase pressure for
permanent curtailments among producers in the US Gulf/
Lower Mississippi area vulnerable to import competition or
European producers whose gas costs have risen, tracking rising
oil prices. In addition, gas supply reductions due to contract
disputes and adverse weather have led to nitrogen curtailments
and shutdowns in Ukraine, Russia, Romania and Eastern Europe.
Vulnerable US Ammonia Plants
11 Plants (Approximately 4.6 Million Tonnes)
i

6t. Helens
• Kccl
odge
CS Mem
• Ch rokee
Che okee
• och
Terra terli t
• A rium Beaumont 0,
Kenai
Alaska tal
•Yf `
, eep
Terra
Fr
R
` Donaldsonville
Mosaic PCs
Faustina Geismar
Source: Fertecon, PotashCorp
POTASHCORP 2005 ANNUAL REPORT I MD&A 1 2006 Outlook
7 Phosphate: Phosphate fertilizers continue to enjoy some
improvement as inventories are under control and demand is
rising. Developments in India and China will be influential in
2006. India's DAP producers have good potential to increase
production, which could lower import needs. Chinese policy on
new DAP production could also impact markets, encouraging
production in excess of China's domestic needs to enter the export
market. However, the permanent shutdown in November 2005 of
1.2 million tonnes of export-oriented DAP/MAP production at US
Chem in Florida could offset these events. As always, the Indian
acid tender will set the tone for the year. However, it should help
that phosphate rock exports from China, an important supplier,
may be further limited. Like natural gas in ammonia production,
rock costs have gone up. This should push up prices and improve
our margins, given our low-cost rock position.
16
14
12
10
8
6
4
2
Source: Fertecon
8 Feed Phosphate Products: US feed phosphate consumption is
expected to continue to decline slowly in 2006. Feed phosphate
margins are expected to grow as fundamentals are tight due to
consolidation, and prices are projected to increase by 20 percent.
9 Financial: Our income tax rate may continue at 33 percent;
however, a recent Canadian appeals court decision in the case
of a uranium producer could lead to a tax refund in 2006 that,
while not assured, would have the effect of lowering our effective
annual tax rate to 31 percent. The non-cash future tax rate is
expected to increase to 25 percent from 15 percent in 2005,
due to anticipated higher tax depreciation claims related to
expenditures for the Allan and Lanigan potash projects. Provincial
mining and other taxes are forecast to approximate 15 percent
of total potash gross margin in 2006, down from 19 percent in
2005, again due to accelerated depreciation claims.
In these conditions, and assuming a Canadian dollar exchange
rate of 1. 15, we anticipate a third consecutive record year, with
earnings expected to increase by approximately 10 percent to
30 percent. That would provide 2006 earnings between $5.25
and $6.25 per share.
37
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
0
1999 2000 2001 2002 2003 2004 2005 2006E 2001E 2008E 2009E 2010E
38 POTASHCORP 2005 ANNUAL REPORT I MD&A I Key Earnings Sensitivities/Financial Condition Review
KEY EARNINGS SENSITIVITIES
A number of factors affect the earnings of the company's three nutrient segments. The table below shows the key factors and their
approximate effect on EPS based on the assumptions used in the 2006 earnings guidance of $5.25 to $6.25 per diluted share.
NYMEX gas price Nitrogen to. 1 13
increases by
$1/MMBtu Potash - 0.04
Sulfur changes by Phosphate t 0.06:
$5/long ton
Canadian to Canadian operating f'0.0z`
US dollar changes expenses net of
by $0.01 provincial taxes
Translation gain/loss t 0.03
Price Potash changes by $5/tonne t 0:19
DAP/MAP`changes by $5/tonne t 0.05
Ammonia increases by $10/tonne
• Nitrogen +0.06
• Phosphate 770.02
Urea changes by $10/tonne t 0.0'7
Volume Potash changes by 100,000 tonnes t 0.06
Phosphate changes by 50,000 P20, tonnes t 0.06
Nitrogen changes by 50,000 N tonnes t 0.06
INDICATORS TO WATCH IN 2006
• Weather and global acreage planted
• US dollar exchange rates with global currencies
• Global crop prices
• Ocean freight rates
• Prices for natural gas, ammonia and sulfur
• US nitrogen curtailments
• Brazil - weather, soybean prices, credit policy
• China's agricultural policy, corn exports;' soybean imports
• US progress on new Farm Bill 2007
• Ethanol and biodiesel developments
• Health of US and world economies
• Effect of livestock-based disease restrictions on world trade
-Avian flu, BSE, F&MD
• Potential tightening of restrictions on the use of meat and
bone meal in animal feeds
• impact of residual grain from ethanol production on US feed
phosphate consumption
FINANCIAL CONDITION REVIEW
Total assets were $5,357.9 million at December 31, 2005, up
$231.1 million or 5 percent over December 31, 2004. Total
liabilities increased $484.2 million from December 31, 2004 to
$3,225.4 million at December 31, 2005, and total shareholders'
equity decreased $253.1 million to $2,132.5 million.
The largest contributors to the change in assets during 2005 were
fixed assets, other assets (primarily intercorporate investments),
inventories, accounts receivable and cash. Total cash declined
$365.0 million from December 31, 2004, primarily due to:
9 common share repurchases of $851.9 million;

14

• additions to property plant and equipment of $382.7 million
(including key expansion projects in all three nutrients);
• dividend payments of $65.4 million; and
• additional investments in APC and ICL of $18.6 million and
$74.9 million, respectively, and an initial investment in Sinofert
of $97.4 million.
The increase in long-term assets was offset in part by depreciation
and amortization of $242.4 million. Inventories rose $125.7 million
year over year as input costs increased and we began to rebuild
inventory levels in anticipation of demand. Accounts receivable
The above sensitivities affect cash flow as well, except the translation gain/loss which is primarily non-cash.
POTASHCORP 2005 ANNUAL REPORT MD&A I Liquidity & Capital Resources 39
increased $100.7 million over the prior year, largely due to record
fourth-quarter potash shipments to offshore customers.
The increase in liabilities was largely attributable to an increase
of $242.8 million in accounts payable, of which $145.2 million
related to a rise in hedging margin deposits associated with
substantially higher natural gas prices at December 31, 2005
compared to December 31, 2004. Short-term debt increased
$158.7 million as a result of timing of cash flows and funds
required for our share repurchase program. Current income and
other taxes payable increased $95.8 million and future income
taxes payable increased $43.9 million compared to December 31,
2004, due to substantially higher profits.
Retained earnings increased at December 31, 2005 compared to
December 31, 2004, while share capital and contributed surplus
balances declined. The $29.1-million decrease in share capital
from December 31, 2004 to December 31, 2005 was the result
of two offsetting factors: (1) common share repurchases of
$125.1 million under our normal course issuer bid; and (2) the
issuance of $96.0 million in common shares arising from stock
option exercises and our dividend reinvestment plan. Our share
repurchase program also had the effect of decreasing contributed
surplus by $264.3 million and decreasing retained earnings by
$462.5 million compared to December 31, 2004. Net earnings
for 2005 of $542.9 million increased retained earnings while
dividends declared of $65.0 million and the impact of the share
repurchase program correspondingly reduced the balance, for a
net increase in retained earnings of $15.4 million at December 31,
2005 compared to December 31, 2004.
LIQUIDITY AND CAPITAL RESOURCES
The following section explains how we manage our cash and
capital resources to carry out our strategy and deliver results.
Liquidity risk arises from our general funding needs and in the
management of our assets, liabilities and optimal capital structure.
We manage liquidity risk to maintain sufficient liquid financial
resources to fund our balance sheet and meet our commitments
and obligations in the most cost-effective manner possible.
CASH REQUIREMENTS
The following aggregated information about our contractual
obligations and other commitments aims to provide insight into our
short- and long-term liquidity and capital resource requirements.
The information presented in the table below does not include
obligations that have original maturities of less than one year,
planned capital expenditures or potential share repurchases.
Long-Term Debt
Long-term debt consists of $1,250.0 million of notes payable
that were issued under US shelf registration statements, a net of
$5.9 million under a back-to-back loan arrangement (described
in Note 12 to the consolidated financial statements) and other
commitments of $2.9 million payable over the next five years.
During 2005, $9.0 million of Industrial Revenue and Pollution
Control Obligations were repaid. The notes payable represent
99 percent of our total long-term debt portfolio and are unsecured.
Of the notes outstanding, $400.0 million bear interest at
7.125 percent and mature in 2007, $600.0 million bear
interest at 7.750 percent and mature in 2011 and $250.0 million
bear interest at 4.875 percent and mature in 2013. There are no
sinking fund requirements. The notes payable are not subject to
any financial test covenants but are subject to certain customary
covenants (including limitations on liens and sale and leaseback
transactions) and events of default, including an event of default
for acceleration of other debt in excess of $50.0 million. The other
long-term debt instruments are not subject to any financial test
covenants but are subject to certain customary covenants and
events of default, including, for other long-term debt, an event of
default for non-payment of other debt in excess of $25.0 million.
Non-compliance with such covenants could result in accelerated
payment of the related debt. The company was in compliance with
all covenants as at December 31, 2005.
The estimated interest payments on long-term debt in the table
below include our cumulative scheduled interest payments on
fixed and variable rate long-term debt. Interest on variable rate
debt is based on interest rates prevailing at December 31, 2005.
Contractual Obligations and Other Commitments Payments Due by Period - Dollars (millions)
Total Within 1 year 1 to 3 years 3 to 5 years Over 5 years
Long-term debt $ 1,258.8 $ 1.2 $ 400.7 $ 0.6 $ 856.3
Estimated interest payments on long-term debt 392.7 87.7 132.6 118.2 54.2
Operating leases 560.6 80.3 137.6 113.7 229.0
Purchase obligations 943.7 122.4 223.7 191.1 406.5
Other commitments 43.0 13.6 16.8 12.6 -
Other long-term liabilities 849.9 45.9 81.1 70.2 652.7
Total $ 4,048.7 $ 351.1 $ 992.5 $ 506.4 $ 2,198.7
40 POTASHCORP 2005 ANNUAL REPORT MD&A Liquidity & Capital Resources
Operating Leases
We have long-term operating lease agreements for buildings, port
facilities, equipment, ocean-going transportation vessels, mineral
leases and railcars, the latest of which expires in 2025. The most
significant operating leases consist of three items. The first is our
lease of railcars, which extends to approximately 2020. The second
is the lease of port facilities at the Port of Saint John for shipping
New Brunswick potash offshore. This lease runs until 2018. The
third is the lease of three vessels for transporting ammonia from
Trinidad. One vessel agreement runs until 2011; the others
terminate in 2016.
Purchase Obligations
We have long-term agreements for the purchase of sulfur for use
in the production of phosphoric acid. These agreements provide
for minimum purchase quantities and certain prices are based on
market rates at the time of delivery. The commitments included in
the table on Page 39 are based on contract prices.
We have entered into long-term natural gas contracts with the
National Gas Company of Trinidad, the latest of which expires in
2018. The contracts provide for prices that vary with ammonia
market prices, escalating floor prices and minimum purchase
quantities. The commitments included in the table on Page 39
are based on floor prices and minimum purchase quantities.
We also have long-term agreements for the purchase of phosphate
rock used at our Geismar facility and limestone used in Brazil. The
commitments included in the table on Page 39 are based on the
expected purchase quantity and current net base prices.
Other Commitments
Other operating commitments consist principally of amounts
relating to various rail freight contracts, the latest of which
expires in 2010.
Other Long-Term Liabilities
Other long-term liabilities consist primarily of net accrued pension
and post-retirement benefits, future income taxes, environmental
costs and asset retirement obligations.
Future income tax liabilities may vary according to changes in tax
laws, tax rates and the operating results of the company. Since it is
impractical to determine whether there will be a cash impact in any
particular year, all long-term future income tax liabilities have been
reflected in the "over 5 years" category in the table on Page 39.
Capital Expenditures
We expect to incur capital expenditures of approximately
$320 million for opportunity capital during 2006, and approximately
$160 million to sustain operations at existing levels.
SOURCES AND USES OF CASH
The company's cash flows from operating, investing and financing
activities, as reflected in the Consolidated Statements of Cash
Flow, are summarized in the following table:
Dollars (millions)
% In crease
(Decrease)
2005 2004 2003 2005 2004
Cash provided by
operating activities $ 865.1 $ 658.3 $ 385.5 31 71
Cash used in
investing activities $(555.3) $(225.5) $(361.7) 146 (38)
Cash (used in) provided by
financing activities $(674.8) $ 21.4 $ (43.6) n/m n/m
Net (decrease) increase in
cash and cash equivalents $(365.0) $ 454.2 $ (19.8) n/m n/m
n/m - not meaningful
Dollars (millions) except ratio amounts
% Increase
December 31 December 31 December 31 (Decrease)
2005 2004 2003 2005 2004
Current assets $ 1,110.8 $1,243.6 $ 733.9 (11) 69
Current liabilities $(1,096.1) $ (703.7) $ (557.8) 56 26
Working capital $ 14.7 $ 539.9 $ 176.1 (97) 207
Current ratio 1.01 1.77 1.32 (43) 34
Our liquidity needs can be met through a variety of sources,
including: cash generated from operations, short-term borrowings
against our line of credit and commercial paper program, and
long-term debt issued under our US shelf registration statement
and drawn down under our syndicated credit facility. Our primary
uses of funds are operational expenses, sustaining and opportunity
capital spending, dividends, and interest and principal payments
on our debt securities.
Cash provided by operating activities increased in 2005 by
31 percent or $206.8 million. The favorable variance was mainly
attributable to: (1) increases in gross margin in all three nutrients,
largely driven by higher sales prices throughout 2005; (2) a
$145.2-million increase in hedging margin deposits caused by
rising natural gas prices; (3) $24.8 million of non-cash costs
associated with our performance stock options approved by the
company's shareholders and granted to eligible employees in
May 2005; and (4) increases in dividends received from our
equity investees.
Cash used in investing activities rose $329.8 million. The most
significant cash outlays included:
• In June 2005, we acquired 1,000,000 additional shares in APC
for $18.6 million and 21,000,000 additional shares in ICL for
$74.9 million. As a result of these purchases, our ownership
interest in APC increased from (approximately) 26 percent to
28 percent and our interest in ICL increased from
(approximately) 9 percent to 10 percent.
POTASHCORP 2005 ANNUAL REPORT MD&A Capital Structure & Management 41
• In July 2005, we acquired a 10-percent interest in the ordinary
shares of Sinofert for cash consideration of $97.4 million.
Pursuant to a strategic investment agreement, we also held
an option to acquire an additional 10-percent interest within
three years of the acquisition. We exercised the option
subsequent to year-end for $126.0 million, plus transaction
costs. Sinofert, a vertically integrated fertilizer enterprise in
the People's Republic of China, is a subsidiary of Sinochem
Corporation and is listed on The Hong Kong Stock Exchange.
• We invested $382.7 million, or 10 percent of revenues
(2004 - $220.5 million, or 7 percent of revenues), in capital
projects, largely related to major expansion projects in all three
nutrients. Approximately 43 percent of our consolidated capital
expenditures related to the potash segment.
During the year, we received $5.2 million relating to the disposal
of PCS Yumbes in 2004. We did not have any significant business
dispositions in 2005.
Cash used in financing activities during 2005 increased by
$696.2 million over last year. We repurchased a total of 9,500,000
common shares at a net cost of $851.9 million during 2005, all of
which had been settled at December 31, 2005. No shares remain
to be repurchased under the program. This spending was partially
offset by a $158.7-million increase in short-term borrowings
during the year, whereas in 2004 we used our cash generated
from operations to reduce commercial paper balances by
$82.7 million. We also received $67.3 million less proceeds from
issuance of common shares in 2005, primarily due to fewer stock
options being exercised compared to 2004.
We have historically paid quarterly dividends to shareholders at
a rate of $0.125 per share on a post-split basis. In July 2004, we
announced that our quarterly cash dividend payment would be
increasing to $0.15 per share, commencing in November 2004.
As a result, total dividend payments to shareholders in 2005
increased by $9.3 million compared to 2004.
We believe that internally generated cash flow, supplemented by
borrowing from existing financing sources if necessary, will be
sufficient to meet our anticipated capital expenditures and other
cash requirements in 2006, exclusive of any possible acquisitions,
as was the case in 2005. At this time, we do not reasonably
expect any presently known trend or uncertainty to affect our
ability to access our historical sources of cash.
CAPITAL STRUCTURE AND MANAGEMENT
Capital Structure
Dollars (millions), except as noted
December 31 D ecember 31
2005 2004
Short-term debt $ 252.2 $ 93.5
Current portion of long-term debt 1.2 10.3
Long-term debt 1,257.6 1,258.6
Total debt 1,511.0 1,362.4
Shareholders' equity $ 2,132.5 $ 2,385.6
Total debt to capital 41% 36%
Fixed rate debt as a percentage of
total indebtedness 83% 92%
Common shares outstanding 103,593,792 110,630,503
Stock options outstanding 5,081,756 6,400,730
Dividend payout ratio 12% 20%

Principal Debt Instruments
Dollars (millions) at December 31, 2005
Total Amount Amount Amount
Amount Outstanding Committed Available
Syndicated credit facility $ 750.0 $ - $ 252.2 $ 497.8
Line of credit 75.0 - 18.7 56.3
Commercial paper 500.0 252.2 - 247.8
US shelf registration 2,000.0 1,250.0 - 750.0
We use a combination of short-term and long-term debt to
finance our operations. We typically pay floating rates of interest
on our short-term debt and fixed rates on our long-term debt.
We have a $750.0-million syndicated credit facility, renewed
in September 2005 for a five-year term, which provides for
unsecured advances. The amount available to us is the total facility
amount less direct borrowings and amounts committed in respect
of commercial paper outstanding. No funds were borrowed under
the facility as of December 31, 2005. The line of credit is
renewable annually and outstanding letters of credit and direct
borrowings reduce the amount available. Both the line of credit
and the syndicated credit facility have financial tests and other
covenants with which we must comply at each quarter-end.
Principal covenants under the credit facility and line of credit
require a debt-to-capital ratio of less than or equal to 0.55:1, a
long-term debt-to-EBITDA (defined in the respective agreements
as earnings before interest, income taxes, provincial mining and
other taxes, depreciation, amortization and other non-cash
expenses) ratio of less than or equal to 3.5:1, tangible net worth
greater than or equal to $1,250.0 million and debt of subsidiaries
not to exceed $590.0 million. The syndicated credit facility and line
of credit are also subject to other customary covenants and events
of default, including an event of default for non-payment of other
debt in excess of Cdn $40.0 million. Non-compliance with any of
the above covenants could result in accelerated payment of the

42 POTASHCORP 2005 ANNUAL REPORT I MD&A I Capital Structure & Management
related debt and amount due under the line of credit, and
termination of the line of credit. We were in compliance with all
covenants as at December 31, 2005.
The commercial paper market is a source of "same day" cash for
the company, and we have a commercial paper program of up to
$500.0 million. This program was increased to $750.0 million
subsequent to year-end. Access to this source of short-term
financing depends primarily on maintaining our R1 low credit
rating by Dominion Bond Rating Service (DBRS) and conditions in
the money markets. The interest rates we pay are partly based on
the quality of our credit ratings, which are all investment grade.
Our credit rating, as measured by Standard & Poor's senior debt
ratings, remained unchanged from December 31, 2004 at BBB+
with a stable outlook. Our credit rating as measured by Moody's
senior debt ratings was upgraded during 2005 from Baal with a
positive outlook to Baal with a stable outlook.
We also have a US shelf registration statement under which
we may issue up to an additional $750.0 million in unsecured
debt securities.
For 2005, our weighted average cost of capital was 8.3 percent
(2004 - 8.4 percent), of which 89 percent represented equity.
OUTSTANDING SHARE DATA
We had 103,593,792 common shares issued and outstanding at
December 31, 2005, compared to 110,630,503 common shares
issued and outstanding at December 31, 2004. The company
repurchased 9,500,000 common shares during the year, while
2,463,289 common shares were issued pursuant to the exercise
of stock options and our dividend reinvestment plan.
During the second quarter, the 2005 Performance Option Plan was
approved by our shareholders. The new plan permits the grant to
eligible employees of options to purchase common shares of the
company at an exercise price based on the market value of the
shares on the date of grant. The key design difference between
the 2005 Performance Option Plan and the company's other stock
option plans is the performance-based vesting feature. In general,
options will vest, if at all, according to a schedule based on the
three-year average excess of the company's consolidated cash flow
return on investment over the weighted average cost of capital.
At December 31, 2005, there were 5,081,756 options to purchase
common shares outstanding under the company's three stock
option plans, as compared to 6,400,730 at December 31, 2004.
OFF-BALANCE SHEET ARRANGEMENTS
We enter into off-balance sheet arrangements in the normal
course of our business, including guarantee contracts, certain
derivative instruments and long-term fixed price contracts. We do
not reasonably expect any presently known trend or uncertainty to
affect our ability to continue using these arrangements. These
types of arrangements are discussed below.
Guarantee Contracts
In the normal course of operations, we provide indemnifications
that are often standard contractual terms to counterparties in
transactions such as purchase and sale contracts, service
agreements, director/officer contracts and leasing transactions.
These indemnification agreements may require us to compensate
the counterparties for costs incurred as a result of various events.
The terms of these indemnification agreements will vary based
upon the contract, the nature of which prevents us from making a
reasonable estimate of the maximum potential amount that could
be required to pay to counterparties. Historically, we have not
made any significant payments under such indemnifications and
no amounts have been accrued in our consolidated financial
statements with respect to these guarantees.
We have guaranteed various debt obligations (such as overdrafts,
lines of credit with counterparties for derivatives and back-to-back
loan arrangements) and other commitments (such as railcar leases)
for certain subsidiaries. We would be required to perform on these
guarantees in the event of default by the guaranteed parties. No
material loss is anticipated by reason of such agreements and
guarantees. At December 31, 2005, the maximum potential
amount of future (undiscounted) payments under significant
guarantees provided to third parties approximated $236.8 million,
representing the maximum risk of loss if there were a total default
by the guaranteed parties, without consideration of possible
recoveries under recourse provisions or from collateral held or
pledged. At December 31, 2005, no subsidiary balances subject to
guarantees were outstanding in connection with the company's
cash management facilities, and we had no liabilities recorded
for other obligations other than subsidiary bank borrowings of
approximately $5.9 million and cash margins held of approximately
$173.7 million to maintain derivatives.
We have guaranteed the gypsum stack capping, closure and post-
closure obligations of White Springs and Geismar, in Florida and
Louisiana, respectively, pursuant to the financial assurance
regulatory requirements in those states. In February 2005, the
Florida Environmental Regulation Commission approved certain
modifications to the financial assurance requirements designed to
ensure that responsible parties have sufficient resources to cover
all closure and post-closure costs and liabilities associated with
gypsum stacks in the state. The new requirements became
effective in July 2005 and include financial strength tests that
are more stringent than under previous law and a requirement
that gypsum stack closure cost estimates include the cost of
treating process water. The company has met its financial
assurance responsibilities as of December 31, 2005. Costs
associated with the retirement of long-lived tangible assets
are included in the accrued costs reflected in Note 15 to our
consolidated financial statements to the extent that a legal
liability to retire such assets exists.
The environmental regulations of the Province of Saskatchewan
require each potash mine to have decommissioning and
4001
POTASHCORP 2005 ANNUAL REPORT MD&A I Market Risks Associated with Financial Instruments 43

reclamation (D&R) plans. In 2001, agreement was reached with
the provincial government on the financial assurances for the
D&R plan to cover an interim period to July 1, 2005. In
October 2004, this interim period was extended to July 1, 2006.
A government/industry task force has been established to assess
decommissioning options for all Saskatchewan potash producers
and to produce mutually acceptable revisions to the plan
schedules. We have posted an irrevocable Cdn $2.0 million
letter of credit as collateral.
Derivative Instruments
We use derivative financial instruments to manage exposure
to commodity price, interest rate and foreign exchange rate
fluctuations. We may choose to enter into certain derivative
transactions that may not qualify for hedge accounting treatment
under Canadian GAAP, but nonetheless economically hedge
certain of our business strategies. These economic hedges are
recorded at fair value on our Consolidated Statements of Financial
Position and marked-to-market each reporting period. However,
we consider any derivative transactions that are specifically
designated (and qualify) for hedge accounting under Canadian
GAAP to be off-balance sheet items since they are not recorded
at fair value.
We employ derivative instruments to hedge the future cost of
committed and anticipated natural gas purchases, primarily for
our US nitrogen plants. By policy, the maximum period for these
hedges cannot exceed five years. Exceptions to policy may be
made with the specific approval of our Gas Policy Advisory
Committee. The fair value of our gas hedging contracts at
December 31, 2005 was $277.1 million (2004 - $66.5 million).
We may use interest rate swaps to manage the interest rate mix
of our total debt portfolio and related overall cost of borrowing.
In 2005, the company terminated our interest rate swap contracts
that effectively converted a notional amount of $225.0 million
(2004 - $300.0 million) of fixed rate debt (due 2011) into floating
rate debt for cash proceeds of $1.8 million (2004 - $3.0 million)
and a gain of $1.6 million (2004 - $0.8 million). Hedge
accounting on all terminated interest rate swap contracts was
discontinued prospectively. The associated gains are being
amortized over the remaining term of the related debt as a
reduction to interest expense. No interest rate swap contracts
were outstanding as at December 31, 2005 or 2004.
Note 28 to our consolidated financial statements provides more
detail on our accounting for and types of derivatives.
Long-Term Fixed Price Contracts
Certain of our long-term raw materials agreements contain
fixed price components. Our significant agreements, and the
related obligations under such agreements, are discussed in
Cash Requirements on Page 39.
MARKET RISKS ASSOCIATED WITH FINANCIAL INSTRUMENTS
Market risk is the potential for loss from adverse changes in the
market value of financial instruments. The level of market risk to
which we are exposed varies depending on the composition of our
derivative instrument portfolio, as well as current and expected
market conditions. The following discussion provides additional
detail regarding our exposure to the risks of changing commodity
prices, interest rates and foreign exchange rates. A discussion of
enterprise-wide risk management can be found on Pages 20 to 22.
COMMODITY RISK
Our natural gas purchase strategy is based on diversification
of price for our total gas requirements (which represents the
forecast consumption of natural gas volumes by our
manufacturing and mining facilities). The objective is to acquire
a reliable supply of natural gas feedstock and fuel on a location-
adjusted, cost-competitive basis in a manner that minimizes
volatility without undue risk.
Our US nitrogen results are significantly affected by the price of
natural gas. As discussed above, we employ derivative commodity
instruments related to a portion of our natural gas requirements
(primarily futures, swaps and options) for the purpose of managing
our exposure to commodity price risk in the purchase of natural
gas, not for speculative or trading purposes. Changes in the
market value of these derivative instruments have a high
correlation to changes in the spot price of natural gas.
A sensitivity analysis has been prepared to estimate our 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, 2005, our estimated
derivative commodity instruments' market risk exposure was
$60.7 million (2004 - $46.2 million) based on our gas hedging
contracts fair-valued at $277.1 million (2004 - $66.5 million).
Actual results may differ from this estimate. Changes in the fair
value of such derivative instruments, with maturities in 2006
through 2015, will generally relate to changes in the spot price
of natural gas purchases.
INTEREST RATE RISK
We address interest rate risk by using a diversified portfolio of
fixed and floating rate instruments. This exposure is also managed
by aligning current and long-term assets with demand and fixed-
term debt and by monitoring the effects of market changes in
interest rates.
44 POTASHCORP 2005 ANNUAL REPORT MD&A I Related Party Transactions/Critical Accounting Estimates
As at December 31, 2005, our short-term debt (comprised of
commercial paper) was $252.2 million, our current portion of
long-term debt was $1.2 million and our long-term portion was
$1,257.6 million. Long-term debt is comprised primarily of
$1,250.0 million of notes payable that were issued under our US
shelf registration statements. At December 31, 2005 and 2004, we
had no interest rate swap agreements outstanding. Since most of
our outstanding borrowings have fixed interest rates, the primary
market risk exposure is to changes in fair value. It is estimated
that, all else constant, a hypothetical 10-percent change in
interest rates would not materially impact our results of operations
or financial position. If interest rates changed significantly,
management would likely take actions to manage our exposure to
the change. However, due to the uncertainty of the specific actions
that would be taken and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
FOREIGN EXCHANGE RISK
We also enter into foreign currency forward contracts for the
primary purpose of limiting exposure to exchange rate fluctuations
relating to Canadian dollar operating and capital expenditures.
These contracts are not designated as hedging instruments for
accounting purposes. Gains or losses resulting from foreign
exchange contracts are recognized in earnings in the period in
which changes in fair value occur.
As at December 31, 2005, we had entered into foreign currency
forward contracts to sell US dollars and receive Canadian dollars
in the notional amount of $43.0 million (2004 - $54.1 million)
at an average exchange rate of 1.1852 (2004 - 1.2306). We also
had small forward contracts outstanding as at December 31, 2005
to reduce exposure to the euro. Maturity dates for all forward
contracts are within 2006 and 2007.
RELATED PARTY TRANSACTIONS
The company sells potash from our Saskatchewan mines for use Potash purchases from SQM were $NIL (2004 - $7.0 million;
outside of North America exclusively to Canpotex. Sales for the 2003 - $13.1 million). Potassium nitrate sales to SQM were $NIL
year ended December 31, 2005 were $577.1 million (2004 - (2004 - $25.1 million; 2003 - $25.8 million). All transactions
$421.9 million; 2003 - $260.6 million). Sales to Canpotex are at with SQM were settled on normal trade terms at negotiated prices
prevailing market prices and are settled on normal trade terms. that approximated market value.
CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
Canadian GAAP. These principles differ in certain significant
respects from US GAAP, and these differences are described and
quantified in Note 33 to the consolidated financial statements.
Our significant accounting policies are contained in Note 2 to the
consolidated financial statements. Certain of these policies involve
critical accounting estimates because they require us to make
particularly subjective or complex judgments about matters that
are inherently uncertain and because of the likelihood that
materially different amounts could be reported under different
conditions or using different assumptions. We have discussed the
development, selection and application of our key accounting
policies, and the critical accounting estimates and assumptions
they involve, with the audit committee of the Board of Directors,
and it has reviewed the disclosures described in this section.
The following section discusses the critical accounting estimates
and assumptions that management has made and how they affect
the amounts reported in the consolidated financial statements. We
consider these estimates to be an important part of understanding
our financial statements.
VARIABLE INTEREST ENTITIES
In the normal course of business, we may enter into arrangements
that need to be examined to determine whether they fall under
the variable interest entity (VIE) accounting guidance described in
the following section. Management needs to exercise significant
judgment to determine if VIE relationships are required to be
consolidated. This process involves understanding the
arrangements, determining whether the entity is considered a VIE
under the accounting rules and determining our variable interests
in the VIE. We use a variety of complex estimation processes
involving both qualitative and quantitative factors that may
involve the use of a number of assumptions about the business
environment in which an entity operates to determine whether
such entity is a VIE, and to analyze and calculate its expected
losses and its expected residual returns. These processes involve
estimating the future cash flows and performance of the entity,
analyzing the variability in those cash flows and allocating the
losses and returns among the identified parties holding variable
interests. Our interests are then compared to those of the
unrelated outside parties to identify the party that is the primary
beneficiary, and thus should consolidate the entity. In addition,
there is a significant amount of judgment exercised in interpreting
the provisions of the accounting guidance and applying them to
our specific transactions.

POTASHCORP 2005 ANNUAL REPORT MD&A Critical Accounting Estimates
PENSION AND OTHER POST RETIREMENT COSTS
We sponsor plans that provide pensions and other retirement
benefits for most of our employees. We believe the accounting
estimates related to our employee benefit plan costs are critical
accounting estimates because: (1) the amounts are based on
complex actuarial calculations using several assumptions; and
(2) given the magnitude of our estimated costs, differences in
actual results or changes in assumptions could materially affect
our consolidated financial statements.
Due to the long-term nature of these plans, the calculation of
expenses and obligations depends on various assumptions such as
discount rates, expected rates of return on assets, health-care cost
trend rates, projected salary increases, retirement age, mortality
and termination rates. These assumptions are determined by
management and are reviewed annually by our actuaries. The
discount rate reflects the weighted average interest rate at which
the pension and other post-retirement liabilities could be
effectively settled using high-quality bonds at the measurement
date. The rate varies by country. We determine the discount rate
using a yield curve approach. Based on the respective plans'
demographics, expected future pension benefit and medical
claims, payments are measured and discounted to determine the
present value of the expected future cash flows. The cash flows
are discounted using yields on high-quality AA-rated non-callable
bonds with cash flows of similar timing. The expected rate of
return on plan assets assumption is based on expected returns for
the various asset classes. Other assumptions are based on actual
experience and our best estimates. Actual results that differ from
the assumptions are accumulated and amortized over future
periods and, therefore, generally affect recognized expense and
the recorded obligation in future periods. We have included a table
in Note 14 to the consolidated financial statements that quantifies
the impact of these differences in each of the last three years.
These differences relate primarily to: (1) actual versus expected
return on plan assets; (2) actual actuarial gains/losses incurred on
the benefit obligation versus those expected and recognized in the
consolidated financial statements; and (3) actual past service costs
incurred as a result of plan amendments versus those expected
and recognized in the consolidated financial statements.
The following table provides the sensitivity of benefit obligations
and expense for our major plans to changes in the discount rate,
expected long-term return on plan assets, rate of compensation
increase and medical trend rate assumptions. A lower discount rate
results in a higher benefit obligation and a lower funded status.
Similarly, poor fund performance results in a lower fair value of
plan assets and a lower funded status. In either situation, we may
have to increase cash contributions to the benefit plans. The
sensitivity analysis should be used with caution as the changes are
hypothetical and the impact of changes in each key assumption
may not be linear. For further details on our annual expense and
obligation, see Note 14 to the consolidated financial statements.
Impact of a 0.5% Change in Key Assumptions
Dollars (millions)
Pension Plans Other Plans
Obligation Expense Obligation Expense
Discount rate
Decrease in assumption $ 40.6 $ 4.1 $ 17.5 $ 1.3
Increase in assumption (36.9) (3.8) (15.7) (1.6)
Expected long-term rate of return
Decrease in assumption n/a 2.3 n/a n/a
Increase in assumption n/a (2.3) n/a n/a
Rate of compensation increase
Decrease in assumption (8.5) (1.8) n/a n/a
Increase in assumption 8.7 1.8 n/a n/a
Medical trend rate
Decrease in assumption n/a n/a (15.7) (3.1)
Increase in assumption n/a n/a 16.2 2.2
n/a - not applicable
ASSET RETIREMENT OBLIGATIONS AND OTHER
ENVIRONMENTAL COSTS
We have significant liabilities relating to asset retirement
obligations and other environmental matters. The major categories
of our asset retirement obligations include reclamation and
restoration costs at our potash and phosphate mining operations
(most particularly phosphate mining). Other environmental
liabilities typically relate to regulatory compliance, environmental
management associated with ongoing operations other than
mining, and site assessment and remediation of contamination
related to the activities of the company and its predecessors.
We believe the accounting estimates related to asset retirement
obligations and other environmental costs are critical accounting
estimates because: (1) we will not incur most of these costs for
a number of years, requiring us to make estimates over a long
period; (2) environmental laws and regulations and interpretations
by regulatory authorities could change or circumstances affecting
our operations could change, either of which could result in
significant changes to our current plans; and (3) given the
magnitude of our estimated costs, changes in any or all of these
estimates could have a material impact on our consolidated
financial statements.
Accruals for asset retirement obligations and other environmental
matters totalled $109.6 million at December 31, 2005 (2004 -
$100.7 million). In arriving at this amount, we considered the
nature, extent and timing of current and proposed reclamation
and closure techniques in view of present environmental laws
and regulations. It is reasonably possible the ultimate costs could
change in the future and that changes to these estimates could
have a material effect on our consolidated financial statements.
INCOME TAXES
We operate in a specialized industry and in several tax
jurisdictions. As such, our income is subject to various rates of
taxation. The breadth of the company's operations and the global
complexity of tax regulations require assessments of uncertainties
45
46 POTASHCORP 2005 ANNUAL REPORT I MD&A Critical Accounting Estimates
and judgments in estimating the ultimate taxes the company will
pay. The final taxes paid are dependent upon many factors,
including negotiations with taxing authorities in various
jurisdictions, outcomes of tax litigation and resolution of disputes
arising from federal, provincial, state and local tax audits. The
resolution of these uncertainties and the associated final taxes
may result in adjustments to our tax assets and tax liabilities.
We estimate future income taxes based upon temporary
differences between the income and losses that we report in our
consolidated financial statements and our taxable income and
losses as determined under applicable tax laws. We record a
valuation allowance against our future income tax assets when we
believe, based on all available evidence, that it is not "more likely
than not" that all of our future income tax assets recognized will
be realized prior to their expiration. The amount of the future
income tax asset recognized and considered realizable could,
however, be reduced if projected income is not achieved.
ASSET IMPAIRMENT
We review long-lived assets and intangible assets with finite lives
whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable.
Determination of recoverability is based on an estimate of
undiscounted future cash flows, and measurement of an
impairment loss is based on the fair value of the assets. We
believe that the accounting estimate related to asset impairment
is a critical accounting estimate because: (1) it is highly susceptible
to change from period to period as it requires management to
make assumptions about future sales, margins and market
conditions over the long-term life of the assets; and (2) the impact
that recognizing an impairment would have on our financial
position and results of operations may be material. During 2003,
we indefinitely shut down certain nitrogen operations, ceased
operations at a phosphate feed plant and entered into an
agreement to sell our shares of PCS Yumbes. In connection with
these activities, we recognized various material impairment
charges, as more fully described in Note 23 to the consolidated
financial statements. As at December 31, 2005, we determined
that there were no other triggering events requiring additional
impairment analysis.
Goodwill is not amortized, but is assessed for impairment at the
reporting unit level annually, or sooner if events or changes in
circumstances indicate that the carrying amount could exceed
fair value. Goodwill is assessed for impairment using a two-step
approach, with the first step being to assess whether the fair value
of the reporting unit to which the goodwill is associated is less
than its carrying value. If this is the case, a second impairment
test is performed which requires a comparison of the fair value of
goodwill to its carrying amount. If fair value is less than carrying
value, goodwill is considered impaired and an impairment charge
must be recognized immediately. The fair value of our reporting
units is determined from internally developed valuation models
that consider various factors, such as normalized and projected
earnings, present value of future cash flows and discount rates. In
each of the last two years we tested goodwill for impairment, and
in each year we determined that, based on our assumptions, the
fair value of our reporting units exceeded their carrying amounts
and therefore we did not recognize impairment.
Long-term investments that are carried at cost or accounted for
using the equity method are also reviewed to determine whether
fair value is below carrying value. An investment is considered
impaired if any such decline is considered other than temporary.
Factors and judgments we consider in determining whether a loss
is temporary include the length of time and extent to which fair
value has been below cost; financial condition and near-term
prospects of the investee; and our ability and intent to hold the
investment for a period of time sufficient to allow for any
anticipated recovery. For actively traded securities, we typically
consider quoted market value to be fair value. For thinly traded
securities where market quotes are either not available or not
representative of fair value, we use estimation techniques such as
market or income valuation approaches to determine fair value.
We cannot predict whether an event that triggers impairment will
occur, when it will occur or how it will affect the asset amounts
we have reported. Although we believe our estimates are
reasonable and consistent with current conditions, internal
planning and expected future operations, such estimates are
subject to significant uncertainties and judgments. As a result,
it is reasonably possible that the amounts reported for asset
impairments could be different if we were to use different
assumptions or if market and other conditions were to change.
The changes could result in non-cash charges that could materially
affect our consolidated financial statements.
STOCK-BASED COMPENSATION
We account for stock-based compensation in accordance with the
fair value recognition provisions of Canadian GAAP. As such,
stock-based compensation expense is measured at the grant date
based on the fair value of the award and is recognized as an
expense over the vesting period. Determining the fair value of
stock-based awards at the grant date requires judgment, including
estimating the expected term of stock options, the expected
volatility of our stock and expected dividends. In addition,
judgment is required to estimate the number of stock-based
awards that are expected to be forfeited.
For those awards with performance conditions that determine
the number of options to which our employees will be entitled,
measurement of compensation cost is based on our best estimate
of the outcome of the performance conditions. If actual results
differ significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
j
1
t
1
POTASHCORP 2005 ANNUAL REPORT I MD&A Recent Accounting Changes 47

DEPRECIATION AND AMORTIZATION
We depreciate certain mining and milling assets using the units of
production method based on the shorter of estimates of reserve or
service lives. We have other assets that we depreciate on a
straight-line basis over their estimated useful lives.
We perform assessments of our existing assets and depreciable
lives in connection with the review of mine operating plans. When
we determine that assigned asset lives do not reflect the expected
remaining period of benefit, we make prospective changes to their
depreciable lives. There are a number of uncertainties inherent in
estimating reserve quantities, particularly as they relate to
assumptions regarding future prices, the geology of our mines, the
mining methods we use and the related costs we incur to develop
and mine our reserves. Changes in these assumptions could result
in material adjustments to our reserve estimates, which could
result in changes to units of production depreciation expense in
future periods. Although some degree of variability is expected, we
believe the extent of our technical data and operating experience
mitigates the potential for significant changes in reserve estimates.
As discussed on Page 46, we review and evaluate our long-lived
assets for impairment when events or changes in circumstances
indicate that the related carrying amounts may not be recoverable.
We believe it is unlikely that revisions to our estimates of reserves
would give rise to an impairment of our assets because of their
significant size in relation to our asset-carrying values.
RECENT ACCOUNTING CHANGES
2005
Effective January 1, 2005, we changed certain of our accounting
policies in response to a new Canadian accounting standard which
provided direction for applying consolidation principles to certain
entities that are subject to control on a basis other than ownership
of voting interests, defined as variable interest entities (VIES).
The adoption of this guideline did not have a material impact
on the company's consolidated financial statements. For further
information, see Note 3 to our consolidated financial statements.
2006
In November 2004, the US accounting standards for inventory
were amended, requiring abnormal amounts of idle facility
expense, freight, handling costs and spoilage to be recognized
as current period charges. The guidance is effective for our 2006
fiscal year and we are currently assessing the potential impact,
if any, on our consolidated financial statements.
In December 2004, US accounting requirements relating to share-
based payments were revised. In 2005, the Financial Accounting
Standards Board ("FASB") released several related Staff Positions
("FSPs") to help clarify and interpret this new guidance. With
limited exceptions, compensation cost will now be measured
based on the grant-date fair value of the equity or liability
instruments issued. In addition, liability awards will be remeasured
each reporting period. We previously elected to expense employee
stock-based compensation using the fair value method
prospectively for all awards granted or modified on or after
January 1, 2003. The new standard is effective for us in the first
quarter of 2006. We are currently assessing the potential impact
of adoption on our financial position and results of operations,
but do not expect it to be material.
In January 2005, the Canadian Institute of Chartered Accountants
("CICA") issued new guidance relating to comprehensive income,
equity, financial instruments and hedges. Under the new standards:
a new location for recognizing certain gains and losses - other
comprehensive income - has been introduced, providing for
certain gains and losses arising from changes in fair value to be
temporarily recorded outside the income statement, but in a
transparent manner; existing requirements for hedge accounting
are extended; and all financial instruments, including derivatives,
are to be included on a company's balance sheet and measured
(in most cases) at fair value. The guidance will apply for interim
and annual financial statements relating to fiscal years beginning
on or after October 1, 2006. Earlier adoption will be permitted
only as of the beginning of a fiscal year. The impact of implementing
these new standards is not yet determinable as it is highly
dependent on fair values, outstanding positions and hedging
strategies at the time of adoption.
In March 2005, the US accounting standards for accounting
for stripping costs incurred during production in the mining
industry were approved. Effective for 2006, stripping costs
incurred during production are variable inventory costs that are
to be attributed to ore produced in that period as a component
of inventory and recognized in cost of sales in the same period
as related revenue. The Canadian standard setters have reached
a tentative conclusion on the accounting for stripping costs that
differs from the US standards. They have suggested that the
activity of removing overburden and other mine waste minerals
in the production phase can represent either a component of
inventory or a betterment to the mineral property, depending
on the benefit received by the entity. We are monitoring the
developments and will determine the potential impact, if any,
on our consolidated financial statements if and when final
Canadian guidance is released.
In October 2005, the CICA issued guidance to address whether a
company has an implicit variable interest in a VIE or potential VIE
when specific conditions exist. This guidance is very similar to rules
issued in the US earlier in the year. An implicit variable interest
acts the same as an explicit variable interest except that it involves
the absorbing and/or receiving of variability indirectly from the
48 POTASHCORP 2005 ANNUAL REPORT I MD&A I Forward-Looking Statements
entity (rather than directly). The identification of an implicit
variable interest is a matter of judgment that depends on the
relevant facts and circumstances. This guidance will be effective for
us in the first quarter of 2006. Implementation is not expected to
have a material impact on our consolidated financial statements.
In November 2005, the CICA issued guidance to clarify the
accounting treatment for a legal obligation to perform an asset
retirement activity in which the timing and/or method of
settlement are conditional on a future event that may or may not
be within the control of the entity. Under this guidance, which is
similar to that issued in the US earlier in the year, an entity is
required to recognize a liability for the fair value of a conditional
asset retirement obligation if the fair value of the liability can be
reasonably estimated. The guidance is effective for our second
quarter in 2006 and is to be applied retroactively, with
restatement of prior periods. Implementation is not expected to
have a material impact on our consolidated financial statements.
For further information relating to the impact of the release of
recent accounting pronouncements in Canada and the US on our
consolidated financial statements, see Notes 2 and 33 to our
consolidated financial statements.
FORWARD-LOOKING STATEMENTS
Certain statements in this 2005 Annual Report (which consists of
the Business Review and the Financial Review), including those in
the "Outlook" section of Management's Discussion & Analysis of
Financial Condition and Results of Operations relating to the
period after December 31, 2005, are forward-looking statements
subject to risks and uncertainties. Statements containing words
such as "could", "expect", "may", "anticipate", "believe",
"intend", "estimate", "plan" and similar expressions constitute
forward-looking statements. These statements are based on
certain factors and assumptions including foreign exchange rates,
expected growth, results of operations, performance and business
prospects and opportunities. While the company considers these
factors and assumptions to be reasonable based on information
currently available, they may prove to be incorrect. A number of
factors could cause actual results to differ materially from those in
the forward-looking statements, including, but not limited to:
fluctuations in supply and demand in fertilizer, sulfur, natural gas,
transportation and petrochemical markets; changes in competitive
pressures, including pricing pressures; risks associated with natural
gas and other hedging activities; changes in capital markets;
changes in currency and exchange rates; unexpected geological
or environmental conditions; and government policy changes.
Additional risks and uncertainties can be found in filings with
the U.S. Securities and Exchange Commission and the Canadian
provincial securities commissions. Forward-looking statements
are given only as at the date of this 2005 Annual Report (which
consists of the Business Review and the Financial Review), and the
company disclaims any obligation to update or revise the forward-
looking statements, whether as a result of new information, future
events or otherwise. Should subsequent events show that the
forward-looking statements released herein may be materially
off-target, the company will evaluate whether to issue, and, if
appropriate following such review, issue a news release updating
guidance or explaining reasons for the difference.
POTASHCORP 2005 ANNUAL REPORT MD&A l 11 Year Report 49
11 YEAR REPORT
FINANCIAL DATA (in millions of US dollars except share and per-share amounts)
005 2004 2003 200 2001 2000 1999 1998 19972 1996 19951

Sales
Potash 1,341.1 1,056.1 758.7 669.0 655.2 710.3., 688.6 663.3 644.0 521.1 530.2
Nitrogen 1,368.8 1,210.4 1,156.4 841.4 993.5 964.5; 744.7 844.2 939.3 111.3 23.8
Phosphate 1,137.3 977.9 883.9 714.0 732.1 868.1 922.3 1,099.5 1,036.7 .972.5 448.8
Total sales 3,847.2 3,244.4 2,799.0 2,224.4 2,380.8 2,5419 2,355.6, 2,607.0 2,620.0 1,604.9 1,002.8
5-year CAGR4 10.1% -
10-year CAGR4 9.1%
Gross margin
Potash 707.4 422.8 203.7 218.0 248.1 307.4 304.2 319.2 261.4 193.0 217.9
Nitrogen 318.7 242.8 193.2 47.4 94.7 104.7 (21.4) 64.8 133.0 2.1 2.3
Phosphate 98.9 15.8 (16.5) 41.9 64.5 76.8 130.5 230.1 196.6 196.2 87.1
Total gross margin 1,125.0 681.4 380.4 307.3 407.3 488.9 413.3 614.1 591.0 391.3 307.3
5-year CAGR4 22.5%
10-year CAGR4 11.1%
Depreciation and amortization
Potash 64.5 66.4 52.4 46.3 34.1 40.9 37.2 36.2 39.6 38.5 42.1
Nitrogen 72.2 79.7 86.4 88.0 72.8 66.1 83.5 86.7 69.0 - -
Phosphate 95.4 84.4 78.9 76.8 72.0 68.1 61.8 59,1 55.1 51.6 28.9
Other 10.3 9.5 9.7 8.0 6.8 11.9 8.6 8.9 6.3 ' - _
Total depreciation and amortization 242.4 240.0 227.4 219.1 185.7 181.0 191.1 190.9 170.0 90.1 71.0
Operating income (loss) 892.6 514.3 (55.6) 166.9 269.7 326.8 (353.0) 442.3 442.0 297.4 219.6
Net income (loss)*3 542.9 298.6 (126.3) 53.6 121.2 198.0 (412.0) 261.0 297.1 209.0 159.5
5-year CAGR4 35.0%
10-year CAGR4 10.0%
Net income (loss) per share - basic 5.00 2.77 (1.21) 0.52 1.17 1.89 (3.80) 2.41 2.84 2.29 1.84
Net income (loss) per share - diluted 4.89 2.70 (1.21) 0.51 1.16 1.88 (3.80) 2.39 2.81 2.27 1.82
Dividends per share 0.60 0.55 0.50 0.50 0.50 0.50 0.50 0.48 0.52 0.53 0.53
Cash provided by operating activities 865.1 658.3 385.5 316.4 75.7 480.4 343.6 578.0 467.8 296.2 233.5
Working capital 14.7 539.9 176.1 8.6 47.1 (148.7) (104.8) 329.2 281.7 278.8 136.1
Total assets 5,357.9 5,126.8 4,567.3 4,685.6 4,597.3 4,145.7 3,916.8 4,534.3 4,427.6 2,494.4 2,581.8
Long-term debt 1,257.6 1,258.6 1,268.6 1,019.9 1,013.7 413.7 437.0 933.3 1,130.0 620.0 714.5
Shareholders' equity 2,132.5 2,385.6 1,973.8 2,092.5 2,086.5 2,012.1 1,962.4 2,453.8 2,227.9 1,405.5 1,241.9
Shares outstanding at the end
of the year (thousands) 103,594 110,631 106,224 104,156 103,904 103,682 107,388 108,488 107,792 91,164 90,880
OPERATING DATA (thousands)
00 004 2003 2002 2001 2000 1999 1998, 19972 1996 19951
Employees at year-end (actual #) 4,879 4,906 4,904 5,199 4,997 5,338 5,498 5,744 5,751 4,490 4,579
Potash production (KCI) tonnage 8,816 7,914 7,094 6,447 6,128 7,149 6,388 6,995 6,483 5,782 6,071
Nitrogen production (N) tonnage 2,600 2,558 2,619 2,990 3,032 2,706 3,138 3,121 2,349 - -
Phosphate production (P205) tonnage 2,097 1,962 1,861 1,512 1,573 2,042 2,124 2,363 2,282 2,096 1,008
Potash sales - KCI tonnes 8,164 8,276 7,083 6,327 6,243 6,912 6,474 6,283 6,640 5,612 5,848
Nitrogen sales - product tonnes 5,220 5,350 6,080 6,391 6,381 6,760 6,705 6,596 5,851 535 115
Phosphate sales - product tonnes 3,971 3,793 3,647 2,863 3,045 3,893 4,016 4,627 4,434 4,305 2,206
1 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.
2 Data for 1997 and thereafter reflect the acqui sition of Arcadian Corporation on March 6, 1997.
3 There were no extraordinary items or discontinued operatio ns in any of the accounting periods.
4 Compound annual growth rate expressed as a percentage.
The consolidated financial statements of the company have been prepared in accordance with Canadian generally accepted accounting principles. These principles differ in certain material
respects from those applicable in the United States. (See Note 33 to the company's consolidated financial statements.) Certain of the prior years' figures have been reclassified to conform
with the current year's presentation.
Additional Information
* The after-tax effects of asset impairment, plant shutdown, plant closure and office co nsolidation charges and the gain on sale of long-term investments and Moab Inc. are included (as
applicable) in the data for 2004, 2003, 2000 and 1999 in the amounts of $(30.8) mi llion, $203.2 million, $1.5 million and $547.1 million, respectively.
50 POTASHCORP 2005 ANNUAL REPORT FINANCIAL PERFORMANCE INDICATORS
FINANCIAL PERFORMANCE I N D I CATO RS (in millions of US dollars except share, per-share and tonnage amounts)
SUMMARY
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Nef incomek(loss)? '' 542.9' 298.6 (126.3) - 53.6 `121.2 198.0 (41,10) 261.0 297.1 209:0 159.5

Net`incorm (16ss?er diluted share:
_ 4.89
2.70
(1:21)
0.51
1.16
1.88 -
(3.80)
2.39 - -
2.81 -
2.27 --
1:
82
EBITDA2 1,135.0 754.3 171.8 386.0 455.4 513.8 . (161.9) 633.2 612.0 387.5 _
290.6
Cash,;flow prior, to --- ---- - - - - ------ ---- --
working capital chanes3 860.3 538.3 368.5 289.2 345.8 405.1 319.6 556.2 489.3 321.7 242.1
Cash jprovided_by operating activities
- - 865.1
- 658.3
- - 385.5 316.4
-- 75.7
--- 480.4 3416 578.0 467.8 296.2 233.5

Return on assets
- -
10.1%
5.8%
(2.8%)
1.1%
2.6%
4.8%
(10.5%) -
5.8% - --
6.7% - --
8.4% -- --
6.2%
Cash flow return 4- 16.1%_ 12.3%
-- 2.6% 6.7%o 8.1% 10.9% - (3.5%) 12.6% 12.8% 12.5% 13.7%
Weighted average cost of coital 8.3% 8.4% 7.3% 7.3% 7.7% 8.7% 8.7% 8.3% 8.8%
J - 9.7% 8.5%
'Totalshafreholc16 return (2.7%) 93.4%_ 37.5% 5.2% (20.4%) 64.6%x_ (23.0% (21.9%) (1.1% 21.4% 111.6°!0
TOtal'debttoca
Pital
-
41.5%
36.4%
42.3%
41.7%
42.1%
31.1%
31.9%
29.5% -
35.7%
30.9%
41.5%:

Net debt to capitals -
39.9%
27.5%
42.2%
41 3°!0
41.3%
mm 28.7%
30 8°!0
28.1%
35.5%
30.9%-- -
40.3%
RECONCILIATIONS AND CALCULATIONS

Net income (loss) 542.9 298.6 (126.3) 53.6 121.2 198.0 (412.0) ,. 261.0 297.1 209.0 159.5
Income taxes 267.4 131.7 (20.6) 30.2 68.2 67.2 7.5 117.5 69.1 43.7 22.9
Interest expense 82.3 84.0 91.3 83.1 80.3 61.6 51.5 63.8 75.8 44.7 37.2
Depreciation and amortization 242.4 240.0 227.4 219.1 185.7 187.0 191.1 190.9 170.0 90.1 71.0
EBITDA2 1,135.0 754.3 171.8 386.0 455.4 513.8 ' (161.9) 633.2 612.0 387.5 290.6
5-year CAGR7 20.0%
10-year CAGR7 11.3%
Cash flowprior to
.working capital changes3 860.3 538.3 368.5 289.2 345.8 405.1 319.6 556.2 489.3 321.7 242.1
Accounts receivable (107.6) (51.9) (39.5) (11.1) 69.9 (52.2) 33.8 48.8 23.5 (7.4) (48.8)
Inventories (119.9) (10.5) 11.8 (18.2) (76.1) (27.4) (16.1) (7.9) 19.9 2.5 9.3
Prepaid expenses and other
current assets (5.8) (6.3) 11.4 (3.9) 2.3 (3.1) 3.2 (16.6) 3.7 (1.9) 2.5
Accounts payable and accrued charges 238.1 188.7 33.3 60.4 (266.2) 158.0 3.1 (2.5) (68.6) (18.7) 28.4
Changes in non-cash operating
working capital 4.8 120.0 17.0 27.2 (270.1) 75.3 24.0 21.8 (21.5) (25.5) (8.6)
Cash provided'by operating activities. 865.1 658.3 385.5' 316.4 75:7 4804 343.6 578.0 ? 467.8 296 2 2315
Net income (loss) 542.9 298.6 (126.3) 53.6 121.2 198.0 (412.0) 261.0 297.1 209.0 159.5
Total assets 5,357.9 5,126.8 4,567.3 4,685.6 4,597.3 4,145.7 3,916.8 4,534.3 4,427.6 2,494.4 2,581.8
Return on assets 10,1% 5.86/o (2.8%)' ` 1.1% 2.6% 4.8%, "(10.5%) 5.8%0 6.70/9 8.40/V' .6.2%
Net income (loss) 542.9 298.6 (126.3) 53.6 121.2 198.0 (412.0) 261.0 297.1 209.0 159.5
Income taxes 267.4 131.7 (20.6) 30.2 68.2 67.2 7.5 117.5 69.1 43.7 22.9
Interest expense 82.3 84.0 91.3 83.1 80.3 61.6 51.5 63.8 75.8 44.7 37.2
Cash taxes paid (141.6) (33.5) (22.8) (4.4) (41.5) (13.4) (5.8) (19.2) (41.3) (32.9) (6.2)
Depreciation and amortization 242.4 240.0 227.4 219.1 185.7 187.0 191.1 190.9 170.0 90.1 71.0
Cash flow4 993.4 720.8 149.0 381.6 413.9 500.4 (167.7) 614.0 570.7 354.6 284.4
Total assets 5,357.9 5,126.8 4,567.3 4,685.6 4,597.3 4,145.7 3,916.8 4,534.3 4,427.6 2,494.4 2,581.8
Cash and cash equivalents (93.9) (458.9) (4.7) (24.5) (45.3) (100.0) (44.0) (68.0) (8.8) - (40.5)
Accumulated depreciation of
property, plant and equipment 1,927.7 1,754.9 1,576.2 1,454.7 1,274.3 1,111.8 951.0 812.4 662.0 528.7 454.1
Accumulated amortization of
other assets and intangible assets 66.4 65.1 70.1 59.1 42.0 38.0 42.0 49.2 17.7 11.8 9.8
Accumulated amortization of goodwill 7.3 7.3 7.3 7.3 7.3 4.3 1.4 27.4 12.7 0.4 -
Accounts payable and accrued charges (842.7) (599.9) (380.3) (347.0) (271.4) (525.9) (349.1) (349.7) (348.1) (180.0) (199.2)
Adjusted assets 6,422.7 5,895.3 5,835.9 5,835.2 5,604.2 4,673.9 4,518.1 5,005.6 4,763.1 2,855.3 2,806.0
Average adjusted assets 6,159.0 5,865.6 5,835.6 5,719.7 5,139.1 4,596.0 4,761.9 4,884.4 4,447.0 2,830.7 2,075.9
Cash flow return4 16.1016 12.3%' ' 246% 6,7% 8.1% 10.9% (3.50/0) ' 12.6% 12.8% 12.5% 13.7%

POTASHCORP 2005 ANNUAL REPORT I FINANCIAL PERFORMANCE INDICATORS 51
?M
r
I`
r
FINANCIAL PERFORMANCE INDICATORS (in millions of US dollars except share, per-share and tonnage amounts)
RECONCILIATIONS AND CALCULATIONS (continued)
2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Weighted average cost of capital 8.3% 8.4% 7.3% 7.3% 7.7% 8.7% 8.7% 8.3% 8.8% 9.7% 8.5%
End of year closing price (dollars) 80.22 83.06 43.24 31.80 30.69 39.16 24.10 31.94 41.50 42.50 35.44
Beginning of year opening price (dollars) 83.06 43.24 31.80 30.69 39.16 24.10 31.94 41.50 42.50 35.44 17.00
Change in share price (dollars) (2.84) 39.82 11.44 1.11 (8.47) 15.06 (7.84) (9.56) (1.00) 7.06 18.44
Dividends per share (dollars) 0.60 0.55 0.50 0.50 0.50 0.50 0.50 0.48 0.52 0.53 0.53
Total shareholder return (2.7%) 93.4% 37.5% 5.2% (20.4%) 64.6% (23.0%) (21.9%) (1.1 %) 21.4% 111.6%
Short-term debt 252.2 93.5 176.2 473.0 501.1 488.8 474.5 94.9 101.9 6.3 -
Current portion of long-term debt 1.2 10.3 1.3 3.4 - 5.7 7.4 0.4 2.7 1.8 165.9
Long-term debt 1,257.6 1,258.6 1,268.6 1,019.9 1,013.7 413.7 437.0 933.3 1,130.0 620.0 714.5
Total debt 1,511.0 1,362.4 1,446.1 1,496.3 1,514.8 908.2 918.9 1,028.6 1,234.6 628.1 880.4
Cash and cash equivalents (93.9) (458.9) (4.7) (24.5) (45.3) (100.0) (44.0) (68.0) (8.8) - (40.5)
Net debts 1,417.1 903.5 1,441.4 1,471.8 1,469.5 808.2 874.9 960.6 1,225.8 628.1 839.9
Shareholders' equity 2,132.5 2,385.6 1,973.8 2,092.5 2,086.5 2,012.1 1,962.4 2,453.8 2,227.9 1,405.5 1,241.9
Total debt to capital 41.5% 36.4% 42.3% 41.7% 42.1% 31.1% 31.9% 29.5% 35.7% 30.9% 41.5%
Net debt to capitals 39.9% 27.5% 42.2% 413% 41.3% 28.7% 30.8% 28.1% 35.5% 30.9% 40.3%
Current assets 1,110.8 1,243.6 733.9 832.0 819.6 871.7 726.2 774.2 734.5 467.0 501.1
Current liabilities (1,096.1) (703.7) (557.8) (823.4) (772.5) (1,020.4) (831.0) (445.0) (452.8) (188.2) (365.0)
Working capital 14.7 539.9 176.1 8.6 47.1 (148.7) (104.8) 329.2 281.7 278.8 136.1
Cash and cash equivalents (93.9) (458.9) (4.7) (24.5) (45.3) (100.0) (44.0) (68.0) (8.8) - (40.5)
Short-term debt 252.2 93.5 176.2 473.0 501.1 488.8 474.5 94.9 101.9 6.3 -
Current portion of long-term debt 1.2 10.3 1.3 3.4 - 5.7 7.4 0.4 2.7 1.8 165.9
Non-cash operating working capital 174.2 184.8 348.9 460.5 502.9 245.8 333.1 356.5 377.5 286.9 261.5
Sales 3,847.2 3,244.4 2,799.0 2,224.4 2,380.8 2,542.9 2,355.6 2,607.0 2,620.0 1,604.9 1,002.8
Freight 249.7 238.7 234.5 215.2 216.7 222.1 212.5 216.5 226.6 144.6 92.8
Transportation and distribution 121.9 104.3 98.7 80.5 83.3 83.1 77.0 77.9 61.7 49.1 53.5
Net sales6 3,475.6 2,901.4 2,465.8 1,928.7 2,080.8 2,237.7 2,066.1 2,312.6 2,331.7 1,411.2 856.5
Potash net sales
North American 495.6 347.5 230.6 215.3 232.1 237.8 237.4 227.6 210.2 157.6 146.1
Offshore 668.3 504.6 336.2 300.7 293.4 340.9 325.9 317.9 294.0 245.6 274.9
Miscellaneous 13.0 42.7 52.3 28.5 6.3 3.4 2.3 2.9 3.8 2.3 0.4
Total 1,176.9 894.8 619.1 544.5 531.8 582.1 565.6 548.4 508.0 405.5 421.4
Potash sales (thousands KCI tonnes)
North American 3,144 3,246 2,870 2,780 2,894 2,939 2,871 2,702 3,017 2,589 2,273
Offshore 5,020 5,030 4,213 3,547 3,349 3,973 3,603 3,581 3,623 3,023 3,575
Total 8,164 8,276 7,083 6,327 6,243 6,912 6,474 6,283 6,640 5,612 5,848
Weighted average shares outstanding
Basic (thousands) 108,568 107,967 104,460 104,042 103,758 104,820 108,460 108,354 104,550 91,074 86,704
Diluted (thousands) 111,078 110,739 104,460 104,632 104,372 105,406 108,460 109,003 105,642 92,119 87,729

Certain of the prior years' figures have been reclassified to conform with the current year's presentation.
See footnotes on Page 52.
52 POTASHCORP 2005 ANNUAL REPORT FINANCIAL PERFORMANCE INDICATORS
FINANCIAL PERFORMANCE I N D I CAT O RS (in millions of US dollars except share, per-share and tonnage amounts)
NON-GAAP FINANCIAL MEASURES AND FOOTNOTES TO RECONCILIATIONS AND CALCULATIONS
The following information is included for convenience only. Generally, a non-
GAAP financial measure is a numerical measure of a company's performance,
financial position or cash flows that either excludes or includes amounts that
are not normally excluded or included in the most directly comparable measure
calculated and presented in accordance with generally accepted accounting
principles ("GAAP"). EBITDA, adjusted EBITDA, cash flow prior to working
capital changes, cash flow, cash flow return, net debt, net debt to capital and
consolidated net sales are not measures of financial performance (nor do they
have standardized meanings) under either Canadian GAAP or US GAAP. In
evaluating these measures, investors should consider that the methodology
applied in calculating such measures may differ among companies and analysts.
The company uses both GAAP and certain non-GAAP measures to assess
performance. Management believes these non-GAAP measures provide
useful supplemental information to investors in order that they may evaluate
PotashCorp's financial performance using the same measures as management.
Management believes that, as a result, the investor is afforded greater
transparency in assessing the financial performance of the company. These
non-GAAP financial measures should not be considered as a substitute for,
nor superior to, measures of financial performance prepared in accordance
with GAAP.
1 The after-tax effects of asset impairment, plant shutdown, plant closure and
office consolidation charges and the gain on sale of long-term investments
and Moab Inc. are included (as applicable) in the data for 2004, 2003, 2000
and 1999 in the amounts of $(30.8) million, $203.2 million, $1.5 million
and $547.1 million, respectively.
2 PotashCorp uses EBITDA and adjusted EBITDA as supplemental financial
measures of its operational performance. Management believes EBITDA and
adjusted EBITDA to be important measures as they exclude the effects of
items which primarily reflect the impact of long-term investment decisions,
rather than the performance of the company's day-to-day operations. As
compared to net income (loss) according to GAAP, these measures are limited
in that they do not reflect the periodic costs of certain capitalized tangible and
intangible assets used in generating revenues in the company's business, or
the non-cash charges associated with impairments and shutdown-related
costs, or gain on sale of long-term investments. Management evaluates such
items through other financial measures such as capital expenditures and
cash flow provided by operating activities. The company believes that these
measurements are useful to measure a company's ability to service debt and
to meet other payment obligations or as a valuation measurement.
EBITDA has not been adjusted for the non-cash effects of asset impairment,
plant shutdown, plant closure and office consolidation charges, nor the gain
on sale of long-term investments or Moab Inc. The non-cash effects of these
items applicable to 2004, 2003, 2000 and 1999 were $(30.8) million,
$245.9 million, $(5.6) million and $563.7 million, respectively. Considering
the effects of these non-cash items, adjusted EBITDA for 2004, 2003, 2000
and 1999 would have been $723.5 million, $417.7 million, $508.2 million
and $401.8 million, respectively.
3 Cash flow prior to working capital changes is defined as the cash provided
by operating activities, exclusive of changes in non-cash operating working
capital. PotashCorp uses cash flow prior to working capital changes as a
supplemental financial measure in its evaluation of liquidity. Management
believes that adjusting principally for the swings in non-cash working capital
items due to seasonality assists management in making long-term liquidity
assessments. The company also believes that this measurement is useful as a
measure of liquidity or as a valuation measurement.
4 PotashCorp uses cash flow and cash flow return as supplemental measures
to evaluate the performance of the company's assets in terms of the cash
flow they have generated. Calculated on the total cost basis of the
company's assets rather than on the depreciated value, these measures
reflect cash returned on the total investment outlay. The company believes
these measures are one of the best predictors of shareholder value. As such,
management believes this information to be useful to investors.
5 Management believes that net debt and net-debt-to-capital ratio are useful to
investors because they are helpful in determining the company's leverage. It
also believes that, since the company has the ability to and may elect to use
a portion of cash and cash equivalents to retire debt or to incur additional
expenditures without increasing debt, it is appropriate to apply cash and cash
equivalents to debt in calculating net debt and net debt to capital. PotashCorp
believes that this measurement is useful as a financial leverage measure.
6 Management includes net sales in its segment disclosures in the
consolidated financial statements pursuant to Canadian GAAP, which
requires segmentation based upon the company's internal organization and
reporting of revenue and profit measures derived from internal accounting
methods. Net sales (and related per-tonne amounts and other ratios) are
primary revenue measures it uses and reviews in making decisions about
operating matters on a business segment basis. These decisions include
assessments about potash, nitrogen and phosphate performance and the
resources to be allocated to these segments. It also uses net sales (and
related per-tonne amounts and other ratios) for business segment planning
and monthly forecasting. Net sales are calculated as sales revenues less
freight, transportation and distribution expenses. Net sales presented on a
consolidated basis rather than by business segment is considered a non-
GAAP financial measure.
7 Compound annual growth rate expressed as a percentage.
FINANCIAL TERMS
Total shareholder return = (change in market price per
common share + dividends per share) / beginning market
price per common share
Debt to capital = total debt / (total debt + total
shareholders' equity)
Net debt to capital =(total debt - cash and cash
equivalents) / (total debt - cash and cash equivalents +
total shareholders' equity)
Cash flow = net income or loss + income taxes + interest -
cash taxes paid + depreciation and amortization
Cash flow return =cash flow / average (total assets-
cash and cash equivalents + accumulated depreciation and
amortization accounts payable and accrued charges)
EBITDA = earnings (net income or loss) before interest,
taxes, depreciation and amortization
Adjusted EBITDA = EBITDA + impairment charges +
non-cash shutdown / closure-related costs and office
consolidation costs - gain on sale of long-term investments
-and-Moab Inc. - -
Return on assets = net income or loss / total assets
Market value of total capital = market value of, total debt
-'cash and cash equivalents + market value of equity
Weighted average cost of capital = ,simple quarterly
average of ((market value of total debt - cash and cash
equivalents) /market value of total capital x after-tax cost of
debt + market value of equity / market value of total capital
x cost of equity)
Average adjusted assets = simple average of the current
year's adjusted assets and the previous year's adjusted
assets, except when a material acquisition occurred, in which
case the weighted average rather than the simple average is
calculated; the last material acquisition was in 1997

POTASHCORP 2005 ANNUAL REPORT MANAGEMENT'S RESPONSIBILITY
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
k
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
The accompanying consolidated financial statements and related financial information are the responsibility of PotashCorp management
and have been prepared in accordance with accounting principles generally accepted in Canada and include amounts based on estimates
and judgments. Financial information included elsewhere in this report is consistent with the consolidated financial statements.
Our independent auditors, Deloitte & Touche LLP, provide an audit of the consolidated financial statements, as reflected in their report for
2005 included on Page 54.
The consolidated financial statements are approved by the Board of Directors on the recommendation of the audit committee.
The audit committee of the Board of Directors is composed of directors who are not officers or employees of PotashCorp. PotashCorp's
interim consolidated financial statements and MD&A are discussed and reviewed by the audit committee with management and the
independent auditors before such information is approved by the committee and submitted to securities commissions or other regulatory
authorities. The annual consolidated financial statements and MD&A are also reviewed by the audit committee together with
management and the independent auditors and are approved by the board.
In addition, the audit committee has the duty to review critical accounting policies and significant estimates and judgments underlying
the consolidated financial statements as presented by management, and to approve the fees of the independent auditors.
Deloitte & Touche LLP, the independent auditors, obtain an understanding of PotashCorp's internal controls and procedures for financial
reporting to plan and conduct such tests and other audit procedures as they consider necessary in the circumstances. The independent
auditors have full and independent access to the audit committee to discuss their audit and related matters.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting. During the
past year, we have directed efforts to improve and document our internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Management has assessed the
effectiveness of the company's internal control over financial reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that the company's internal
control over financial reporting was effective as of December 31, 2005. Management's assessment of the effectiveness of the company's
internal control over financial reporting as of December 31, 2005 has been audited by Deloitte & Touche LLP, as reflected in their report
for 2005 included on Page 55.
W. Doyle
President an
Chief Executive Officer

W. Brownlee
Executive Vice President and
Chief Financial Officer
53
February 14, 2006
54 POTASHCORP 2005 ANNUAL REPORT AUDITORS' REPORTS
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
TO THE SHAREHOLDERS OF POTASH CORPORATION OF SASKATCHEWAN INC.
We have audited the consolidated statements of financial position of Potash Corporation of Saskatchewan Inc. (the Company) as at
December 31, 2005 and 2004 and the consolidated statements of operations and retained earnings and cash flow for each of the years
in the three-year period ended December 31, 2005. 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 Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States). These 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. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Potash Corporation
of Saskatchewan Inc. as at December 31, 2005 and 2004 and the results of its operations and its cash flows for each of the years in the
three-year period ended December 31, 2005, in accordance with Canadian generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of the Company's internal control over financial reporting as of December 31, 2005, based on the criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 14, 2006 expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal
control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Independent Registered Chartered Accountants
Saskatoon, Saskatchewan, Canada
February 14, 2006, except for Note 34 which is as of February 24, 2006
COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCES
The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph
(following the opinion paragraph) when there are changes that have an effect on the comparability of the consolidated financial
statements or changes that have been implemented in the financial statements, such as the changes described in Note 3 and Note 27 to
Potash Corporation of Saskatchewan Inc.'s consolidated financial statements. Our report to the shareholders dated February 14, 2006 is
expressed in accordance with Canadian reporting standards, which do not require a reference to such changes in accounting principles in
the auditors' report when the changes are properly accounted for and adequately disclosed in the consolidated financial statements.

1
Independent Registered Chartered Accountants
Saskatoon, Saskatchewan, Canada
February 14, 2006, except for Note 34 which is as of February 24, 2006
POTASHCORP 2005 ANNUAL REPORT I AUDITORS' REPORTS 55
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
TO THE SHAREHOLDERS OF POTASH CORPORATION OF SASKATCHEWAN INC.
We have audited management's assessment, included in the accompanying Management's Report on Internal Control Over Financial
Reporting, that Potash Corporation of Saskatchewan Inc. (the Company) maintained effective internal control over financial reporting
as of December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on management's assessment and an opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also,
projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk
that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that Potash Corporation of Saskatchewan Inc. maintained effective internal control over
financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion,
Potash Corporation of Saskatchewan Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2005, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial statements of Potash Corporation of Saskatchewan Inc. as at and
for the year ended December 31, 2005 and our report dated February 14, 2006, except for Note 34 which is as of February 24, 2006,
expressed an unqualified opinion on these financial statements and included a separate report titled Comments by Independent Registered
Chartered Accountants on Canada-United States of America Reporting Differences referring to changes in accounting principles.
--D -Y I L (_ 1o
Independent Registered Chartered Accountants
Saskatoon, Saskatchewan, Canada
February 14, 2006
56 POTASHCORP 2005 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
as at December 31
in millions of US dollars except share amounts
2005 2004
Assets
Current assets
Cash and cash equivalents $ 93.9 $ 458.9
Accounts receivable (Note 5) 453.3 352.6
Inventories (Note 6) 522.5 396.8
Prepaid expenses and other current assets 41.1 35.3
1,110.8 1,243.6
Property, plant and equipment (Note 7) 3,262.8 3,098.9
Other assets (Note 8) 852.8 650.2
Intangible assets (Note 8) 34.5 37.1
Goodwill (Note 9) 97.0 97.0
$ 5,357.9 $ 5,126.8
Liabilities
Current liabilities
Short-term debt (Note 10) $ 252.2 $ 93.5
Accounts payable and accrued charges (Note 11) 842.7 599.9
Current portion of long-term debt (Note 12) 1.2 10.3
1,096.1 703.7
Long-term debt (Note 12) 1,257.6 1,258.6
Future income tax liability (Note 25) 543.3 499.4
Accrued pension and other post-retirement benefits (Note 14) 213.9 193.4
Accrued environmental costs and asset retirement obligations (Note 15) 97.3 81.2
Other non-current liabilities and deferred credits 17.2 4.9
3,225.4 2,741.2
Commitments, Contingencies and Guarantees (Notes 13, 29 and 30, respectively)
Shareholders' Equity
Share capital (Note 16) 1,379.3 1,408.4
Unlimited authorization of common shares without par value; issued and outstanding
103,593,792 and 110,630,503 shares at December 31, 2005 and 2004, respectively
Unlimited authorization of first preferred shares; none outstanding
Contributed surplus (Note 17) 36.3 275.7
Retained earnings 716.9 701.5
2,132.5 2,385.6
$ 5,357.9 $ 5,126.8
(See Notes to the Consolidated Financial Statements)
Approved by the Board of Directors,
Director Director
{
POTASHCORP 2005 ANNUAL REPORT I CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
for the years ended December 31 in millions of US dollars except per-share amounts
2005 2004 2003
Sales (Note 18) $ 3,847.2 $ 3,244.4 $ 2,799.0
Less: Freight 249.7 238.7 234.5
Transportation and distribution 121.9 104.3 98.7
Cost of goods sold (Note 19) 2,350.6 2,220.0 2,085.4
Gross Margin 1,125.0 681.4 380.4

Selling and administrative (Note 20) 144.5 130.6 96.1
Provincial mining and other taxes (Note 21) 137.2 92.6 57.0
Foreign exchange loss 12.5 19.7 51.9
Other income (Note 22) (61.8) (79.4) (33.2)
Other expenses (Note 23) - 3.6 264.2
232.4 167.1 436.0
Operating Income (Loss) 892.6 514.3 (55.6)
Interest Expense (Note 24) 82.3 84.0 91.3

Income (Loss) Before Income Taxes 810.3 430.3 (146.9)
Income Taxes (Note 25) 267.4 131.7 (20.6)
Net Income (Loss) 542.9 298.6 (126.3)
Retained Earnings, Beginning of Year 701.5 462.8 641.4
Repurchase of Common Shares (Note 16) (462.5) - -
Dividends (65.0) (59.9) (52.3)

Retained Earnings, End of Year $ 716.9 $ 701.5 $ 462.8

Net Income (Loss) per Share - Basic (Note 26) $ 5.00 $ 2.77 $ (1.21)

Net Income (Loss) per Share - Diluted (Note 26) $ 4.89 $ 2.70 $ (1.21)

Dividends per Share $ 0.60 $ 0.55 $ 0.50
57
(See Notes to the Consolidated Financial Statements)
58 POTASHCORP 2005 ANNUAL REPORT CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOW
for the years ended December 31
2005 in millions of US dollars
2004 2003
Operating Activities
Net income (loss) $ 542.9 $ 298.6 $ (126.3)
Adjustments to reconcile net income to cash provided by operating activities
Depreciation and amortization 242.4 240.0 227.4
Stock-based compensation 27.5 11.1 1.0
Loss (gain) on disposal of property, plant and equipment 11.8 (0.7) 1.0
Gain on sale of long-term investments (Note 4) - (34.4) -
Provisions for nitrogen and phosphate plant shutdowns
and PCS Yumbes S.C.M. (Note 23) - 3.6 245.9
Foreign exchange on future income tax 8.9 17.2 35.9
Provision for (recovery of) future income tax 40.1 26.3 (20.6)
Undistributed earnings of equity investees (33.5) (22.2) (8.4)
Other long-term liabilities 20.2 (1.2) 12.6
Subtotal of adjustments 317.4 239.7 494.8
Changes in non-cash operating working capital
Accounts receivable (107.6) (51.9) (39.5)
Inventories (119.9) (10.5) 11.8
Prepaid expenses and other current assets (5.8) (6.3) 11.4
Accounts payable and accrued charges 238.1 188.7 33.3
Subtotal of changes in non-cash operating working capital 4.8 120.0 17.0
Cash provided by operating activities 865.1 658.3 385.5
Investing Activities
Additions to property, plant and equipment (382.7) (220.5) (150.7)
Purchase of long-term investments (190.9) (105.5) (178.3)
Proceeds from disposal of property, plant and equipment 7.2 2.5 -
Proceeds from sale of long-term investments (Notes 4 and 23) 5.2 100.8 -
Other assets and intangible assets 5.9 (2.8) (32.7)
Cash used in investing activities (555.3) (225.5) (361.7)
Cash before financing activities 309.8 432.8 23.8
Financing Activities
Proceeds from long-term debt obligations - - 250.0
Repayment of long-term debt obligations (10.1) (1.0) (3.4)
Proceeds from (repayment of) short-term debt obligations 158.7 (82.7) (296.8)
Dividends (65.4) (56.1) (52.3)
Repurchase of common shares (851.9) - -
Issuance of common shares 93.9 161.2 58.9
Cash (used in) provided by financing activities (674.8) 21.4 (43.6)
(Decrease) Increase in Cash and Cash Equivalents (365.0) 454.2 (19.8)
Cash and Cash Equivalents, Beginning of Year 458.9 4.7 24.5
Cash and Cash Equivalents, End of Year $ 93.9 $ 458.9 $ 4.7
Supplemental cash flow disclosure
Interest paid $ 86.3 $ 83.3 $ 83.8
Income taxes paid $ 141.6 $ 33.5 $ 22.8
1
>i
1
(See Notes to the Consolidated Financial Statements)
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
Notes to the Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
With its subsidiaries, Potash Corporation of Saskatchewan Inc.
("PCS") -together known as "PotashCorp" or "the company" except
to the extent the context otherwise requires - forms an integrated
fertilizer and related industrial and feed products company. The
company has producing assets in the following locations:
• Potash
- five mines and mills and mining rights to potash reserves at a sixth
location, all in the province of Saskatchewan
- one mine and mill in the province of New Brunswick
The preparation of consolidated 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 consolidated financial statements,
and the reported amounts of revenues and expenses during the
reporting period.
Key areas where management has made complex or subjective
judgments (often as a result of matters that are inherently uncertain)
include, among others, the fair value of certain assets; recoverability
of investments, long-lived assets and goodwill; variable interest
entities; litigation; environmental and asset retirement obligations;
pensions and other post-retirement benefits; stock-based
compensation; and income taxes. Actual results could differ from
these and other estimates, the impact of which would be recorded
in future periods.
• Phosphate
- a mine and processing plant in the state of North Carolina
- a mine and two processing plants in the state of Florida
- a processing plant in the state of Louisiana
- phosphate feed plants in five states and one in Brazil
- two industrial phosphoric acid plants in the states of
` Carolina and Ohio
r • Nitrogen
r
North The following accounting policies are considered to be significant:
- four plants in the states of Georgia, Louisiana, Ohio and Tennessee
- large-scale operations in Trinidad
The company owns or leases approximately 175 terminal and
warehouse facilities strategically located in Canada and the United
States, and services customers with a fleet of approximately
7,300 railcars.
PotashCorp 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, nitrogen and phosphate products in North
America. PCS Sales (Canada) Inc. executes offshore marketing and
sales for the company's New Brunswick potash. PCS Sales (USA), Inc.
generally 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 Canadian
generally accepted accounting principles ("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 33.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
PotashCorp and its subsidiaries, and any variable interest entities
("VIES") for which the company is the primary beneficiary. Principal
operating subsidiaries include:
• PCS Sales (Canada) Inc.
- PCS Joint Venture, Ltd. ("PCS Joint Venture")
• PCS Sales (USA), Inc.
• PCS Phosphate Company, Inc.
- PCS Purified Phosphates
• White Springs Agricultural Chemicals, Inc. ("White Springs")
• PCS Nitrogen, Inc. ("PCS Nitrogen")
- PCS Nitrogen Fertilizer, L.P.
- PCS Nitrogen Ohio, L.P.
- PCS Nitrogen Trinidad Limited
• PCS Cassidy Lake Company ("PCS Cassidy Lake")
• PCS Yumbes S.C.M. ("PCS Yumbes") - sold in 2004 (see Note 23)
• PCS Fosfatos do Brasil Ltda.
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 intermediate
products are valued at the lower of cost and market. Cost for
substantially all finished and intermediate product inventories is
determined using the weighted average cost method. Cost for
substantially all raw materials 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.
59
60 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID EXPENSES
Prepaid expenses include prepaid freight relating to product
inventory stored at warehouse and terminal facilities.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment (which includes mine development
costs) are carried at cost. Costs of additions, betterments, renewals
and interest during construction are capitalized.
Maintenance and repair expenditures, which do not improve or
extend productive life, are expensed in the year incurred.
DEPRECIATION AND AMORTIZATION
Certain mining and milling assets are depreciated using the units of
production method based on the shorter of estimates of reserves or
service lives. 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 (comprised primarily of plant equipment) 20 to 25 years.
GOODWILL
All business combinations are accounted for using the purchase
method. Identifiable intangible assets are recognized separately from
goodwill. Goodwill is carried at cost, is not amortized and represents
the excess of the purchase price and related costs over the fair value
assigned to the net identifiable assets of a business acquired.
OTHER ASSETS AND INTANGIBLES
Issue costs of long-term obligations are capitalized to deferred
charges and are amortized to 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
facilities, net of revenue earned, and are amortized on either a
straight-line or units of production basis over a maximum of 10 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 3 to 5 years.
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. An investment is considered impaired
if its fair value falls below its cost and the decline is considered other
than temporary. Factors the company considers in determining
whether a decline is temporary include the length of time and extent
to which fair value has been below cost, the financial condition and
near-term prospects of the investee, and the company's ability and
intent to hold the investment for a period of time sufficient to allow
for any anticipated recovery. For actively traded securities, the
company typically considers quoted market value to be fair value. For
thinly traded securities where market quotes are either not available
or not representative of fair value, it uses estimation techniques such
as those described under Asset Impairment. When there has been a
decline in value that is other than temporary, the carrying value of the
investment is appropriately reduced.
Finite-lived intangible assets are amortized over their estimated
useful lives as follows: production and technology rights 25 to 30
years and computer software 5 years.
ASSET IMPAIRMENT
The company reviews both long-lived assets to be held and used and
identifiable intangible assets with finite lives whenever events or
changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable. Determination of recoverability
is based on an estimate of undiscounted future cash flows resulting
from the use of the asset and its eventual disposition. Measurement
of an impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold and use is based
on the fair value of the assets, whereas such assets to be disposed
of are reported at the lower of carrying amount or fair value less
costs to sell. During 2004 and 2003, the company recognized
material asset impairment charges as described in Note 23. As at
December 31, 2005, the company determined that there were no
other triggering events requiring impairment analysis.
Goodwill impairment is assessed at the reporting unit level at least
annually (in April), or more frequently if events or circumstances
indicate there may be an impairment. Reporting units comprise
business operations with similar economic characteristics and
strategies and may represent either a business segment or a business
unit within a business segment. Potential impairment is identified
when the carrying value of a reporting unit, including the allocated
goodwill, exceeds its fair value. Goodwill impairment is measured as
the excess of the carrying amount of the reporting unit's allocated
goodwill over the implied fair value of the goodwill, based on the
fair value of the assets and liabilities of the reporting unit.
The fair values are estimated using accepted valuation
methodologies such as discounted future net cash flows, earnings
multiples or prices for similar assets, whichever is most appropriate
under the circumstances.
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. Equipment acquired under capital leases is
depreciated over the period of expected use on the same basis as
other similar 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 expensed as incurred.
PENSION AND OTHER POST RETIREMENT BENEFITS
The company offers a number of benefit plans that provide
pension and other benefits to qualified employees. These plans
include defined benefit pension plans, supplemental pension plans,
defined contribution plans and health, disability, dental and life
insurance plans.
The company accrues its obligations under employee benefit plans
and the related costs, net of plan assets. The cost of pensions and
other retirement benefits earned by employees is generally
actuarially determined using the projected benefit method prorated
on service and management's best estimate of expected plan
4
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts 61
?M
F
1
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investment performance, salary escalation, retirement ages of
employees and expected health-care costs. For the purpose of
calculating the expected return on plan assets, those assets are
valued at fair value. Prior service costs from plan amendments are
deferred and amortized on a straight-line basis over the average
remaining service period of employees active at the date of
amendment. Actuarial gains (losses) arise from the difference
between actual long-term rate of return on plan assets for a period
and the expected long-term rate of return on plan assets for that
period, or from changes in actuarial assumptions used to determine
the accrued benefit obligation. The excess of the net accumulated
actuarial gain (loss) over 10 percent of the greater of the benefit
obligation and the fair value of plan assets is amortized over the
average remaining service period of active employees. The average
remaining service period of the active employees covered by the
company's pension plans is 10.3 years (2004 - 13.3). The average
remaining service period of the active employees covered by the
company's other benefits plans is 13.7 years (2004 - 13.7). When
the restructuring of a benefit plan gives rise to both a curtailment
and a settlement of obligations, the curtailment is accounted for
prior to the settlement. Actuaries perform valuations on a regular
basis to determine the actuarial present value of the accrued
pension and other post-retirement benefits.
Pension and other post-retirement benefit expense includes, as
applicable, the net of management's best estimate of the cost of
benefits provided, interest cost of projected benefits, return on plan
assets, amortization of experience gains or losses and plan
amendments, and changes in the valuation allowance.
Defined contribution plan costs are recognized in earnings for
services rendered by employees during the period.
ENVIRONMENTAL COSTS AND ASSET RETIREMENT
OBLIGATIONS
Environmental costs that relate to current operations are expensed or
capitalized as appropriate. Environmental costs are capitalized if the
costs extend the life of the property, increase its capacity, mitigate or
prevent contamination from future operations, or relate to legal asset
retirement obligations. Costs 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.
The company recognizes its obligations to retire certain tangible
long-lived assets. The fair value of a liability for an asset retirement
obligation is recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the
long-lived asset and then amortized over its estimated useful life. In
subsequent periods, the asset retirement obligation is adjusted for
the passage of time and any changes in the amount or timing of the
underlying future cash flows through charges to earnings. A gain or
loss may be incurred upon settlement of the liability.
STOCK-BASED COMPENSATION PLANS
The company has five stock-based compensation plans, which are
described in Note 27. The company accounts for its grants under
those plans in accordance with the fair value-based method of
accounting for stock-based compensation. For stock option plans, the
fair value of stock options is determined on their grant date and
recorded as compensation expense over the period that the stock
options vest, with a corresponding increase to contributed surplus.
When stock options are exercised, the proceeds, together with the
amount recorded in contributed surplus, are recorded in share capital.
FOREIGN EXCHANGE TRANSACTIONS
The company's functional currency is the US dollar.
Canadian dollar operating transactions are translated to US dollars at
the average exchange rate for the previous month. Trinidad 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. Translation exchange gains and losses of
integrated foreign operations are reflected in earnings.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the company to manage
its exposure to exchange rate, interest rate and commodity price
fluctuations. The company's policy is not to utilize derivative financial
instruments for trading or speculative purposes. The company
formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objective and
strategy for undertaking the hedge transaction. This process includes
linking derivatives to specific assets and liabilities or to specific firm
commitments or forecast transactions. The company also assesses,
both at the hedge's inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly effective
in offsetting changes in fair values of hedged items. When derivative
instruments have been designated within a hedge relationship and
are highly effective in offsetting the identified risk characteristics of
specific financial assets and liabilities, or groups of financial assets
and liabilities, hedge accounting is applied to these derivative
instruments. Hedge accounting requires that gains, losses, revenue
and expenses of a hedging item be recognized in the same period
that the associated gains, losses, revenue and expenses of the
hedged item are recognized. A hedging relationship is terminated if
the hedge ceases to be effective; if the underlying asset or liability
being hedged is derecognized or if it is no longer probable that the
anticipated transaction will occur and the derivative instrument is
still outstanding; or if the derivative instrument is no longer
designated as a hedging instrument. If a hedging relationship is
terminated, the difference between the fair value and the accrued
value of the hedging derivatives upon termination is deferred and
recognized into earnings on the same basis as gains, losses, revenue
and expenses of the previously hedged item are recognized.
62 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The company enters into natural gas futures, swaps and option
agreements to manage the cost of natural gas. 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 gas hedging
transactions that have been settled, terminated or cease to be
effective prior to maturity 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.
The company periodically uses interest rate swaps to manage the
interest rate mix of its total debt portfolio and related overall cost of
borrowing. Hedge accounting treatment for interest rate swaps
results in interest expense on the related debt being reflected at
hedged rates rather than original contractual interest rates.
The company enters into foreign currency forward contracts in
respect of its Canadian dollar requirements for operating and capital
expenditures. These contracts are not designated as hedging
instruments for accounting purposes. Accordingly, they are marked-to-
market and carried at fair value as assets or liabilities, as appropriate,
with changes in fair value recognized in earnings.
REVENUE RECOGNITION
Sales revenue is recognized when the product is shipped, the sales
price is determinable and collectability is reasonably assured.
Revenue is recorded based on the FOB mine, plant, warehouse or
terminal price, except for certain vessel sales which are shipped on
a delivered basis. Transportation costs are recovered from the
customer through sales pricing.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2005, the Canadian Institute of Chartered Accountants
("CICA") issued Section 1530, "Comprehensive Income", Section
3251, "Equity", Section 3855, "Financial Instruments - Recognition
and Measurement" and Section 3865, "Hedges". The new standards
increase harmonization with US GAAP and will require the following:
Financial assets will be classified as either held-to-maturity, held-
for-trading or available-for-sale. Held-to-maturity classification will
be restricted to fixed maturity instruments that the company
intends and is able to hold to maturity and will be accounted for
at amortized cost. Held-for-trading instruments will be recorded at
fair value with realized and unrealized gains and losses reported in
net income. The remaining financial assets will be classified as
available-for-sale. These will be recorded at fair value with
unrealized gains and losses reported in a new category of the
Consolidated Statement of Financial Position under shareholders'
equity called other comprehensive income ("OCI"); and
• Derivatives will be classified as held-for-trading unless designated
as hedging instruments. All derivatives, including embedded
derivatives that must be separately accounted for, will be recorded
at fair value on the Consolidated Statement of Financial Position.
For derivatives that hedge the changes in fair value of an asset or
liability, changes in the derivatives' fair value will be reported in
net income and be substantially offset by changes in the fair value
of the hedged asset or liability attributable to the risk being
hedged. For derivatives that hedge variability in cash flows, the
effective portion of the changes in the derivatives' fair value will
be initially recognized in OCI and the ineffective portion will be
recorded in net income. The amounts temporarily recorded in OCI
will subsequently be reclassified to net income in the periods
when net income is affected by the variability in the cash flows of
the hedged item.
The above guidance will apply for interim and annual financial
statements relating to fiscal years beginning on or after October 1,
2006. Earlier adoption will be permitted only as of the beginning of
a fiscal year. The impact of implementing these new standards is not
yet determinable as it is highly dependent on fair values, outstanding
positions and hedging strategies at the time of adoption.
In October 2005, the Emerging Issues Committee of the CICA (the
"EIC") issued Abstract No. 157, "Implicit Variable Interests Under
AcG-15" ("EIC-157"), to address whether a company has an
implicit variable interest in a VIE or potential VIE when specific
conditions exist. An implicit variable interest acts the same as an
explicit variable interest except that it involves the absorbing and/or
receiving of variability indirectly from the entity (rather than directly).
The identification of an implicit variable interest is a matter of
judgment that depends on the relevant facts and circumstances. EIC-
157 will be effective in the first quarter of 2006. The implementation
of this EIC is not expected to have a material impact on the
company's consolidated financial statements.
In November 2005, the EIC issued Abstract No. 159, "Conditional
Asset Retirement Obligations", to clarify the accounting treatment
for a legal obligation to perform an asset retirement activity in which
the timing and/or method of settlement are conditional on a future
event that may or may not be within the control of the entity. Under
this EIC, an entity is required to recognize a liability for the fair value
of a conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The guidance is effective for
the second quarter of 2006 and is to be applied retroactively, with
restatement of prior periods. The implementation of this EIC is not
expected to have a material impact on the company's consolidated
financial statements.
3. CHANGE IN ACCOUNTING POLICY
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Effective January 1, 2005, the company adopted revised CICA
Accounting Guideline 15 ("AcG-15"), "Consolidation of Variable
Interest Entities". AcG-15 is harmonized in all material respects with
US GAAP and provides guidance for applying consolidation principles
to certain entities (called variable interest entities or VIES) that are
subject to control on a basis other than ownership of voting interests.
An entity is a VIE when, by design, one or both of the following
conditions exist: (1) total equity investment at risk is insufficient to
permit that entity to finance its activities without additional
subordinated support from other parties; (2) as a group, the holders
of the equity investment at risk lack certain essential characteristics
i
i
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
3. CHANGE IN ACCOUNTING POLICY (CONTINUED)
of a controlling financial interest. AcG-15 requires consolidation by a
business of VIEs in which it is the primary beneficiary. The primary
beneficiary is defined as the party that has exposure to the majority
of the expected losses and/or expected residual returns of the VIE.The
adoption of this guideline did not have a material impact on the
company's consolidated financial statements.
Accounting standard-setters continue to deliberate issues associated
with AcG-15. As these issues are addressed and revisions to the
accounting guidance are made, the effects of this new guideline
may change.
4. BUSINESS ACQUISITIONS
2005
The company did not have any significant business acquisitions
in 2005.
2004
On December 21, 2004, the company acquired all the outstanding
shares of RAC Investments Ltd. ("RAC Investments"), an indirect
subsidiary of Israel Chemicals Ltd. ("ICU'), for $100.7, including
acquisition costs. RAC Investments is an investment holding company
which indirectly owns 19,200,242 Series A shares and 2,699,773
Series B shares in Sociedad Quimica y Minera de Chile S.A. ("SQM").
RAC Investments' earnings have been included in the consolidated
financial statements since the acquisition date.
The fair value of the net assets acquired at the date of acquisition
was $100.7, comprised of cash of $3.5 and an investment in SQM
of $97.2. No liabilities were assumed. Cash consideration paid
was $97.2.
Prior to execution of the above-noted transaction, the company
(through a subsidiary) sold 8,500,000 SeriesA shares of SQM via public
auction on the Santiago Stock Exchange (the "Exchange") and
1,301,724 Series A shares in other Exchange transactions. Proceeds on
sale were $66.3, resulting in a non-taxable gain recorded in other
income of $34.4, net of selling costs (see Note 22).
5. ACCOUNTS RECEIVABLE
2005 2004
Trade accounts - Canpotex $ 71.6 $ 55.7
- Other 343.0 260.0
Non-trade accounts 43.8 41.5
458.4 357.2
Less allowance for doubtful accounts (5.1) (4.6)
$ 453.3 $ 352.6
6. INVENTORIES
2005 2004
Finished product $ 268.5 $ 181.8
Intermediate products 94.9 67.0
Raw materials 59.9 50.3
Materials and supplies 99.2 97.7
$ 522.5 $ 396.8
PROPERTY, PLANT AND EQUIPMENT
2005
Accumulated
Depreciation and Net Book
Cost Amortization Value
Land and improvements $ 224.4 $ 47.0 $ 177.4
Buildings and improvements 521.1 194.2 326.9
Machinery and equipment 4,289.6 1,622.8 2,666.8
Mine development costs 155.4 63.7 91.7
$5,190.5 $1,927.7 $3,262.8
2004
Accumulated
Depreciation and Net Book
Cost Amortization Value
Land and improvements $ 223.7 $ 42.5 $ 181.2
Buildings and improvements 481.0 177.6 303.4
Machinery and equipment 4,011.1 1,474.9 2,536.2
Mine development costs 138.0 59.9 78.1
$ 4,853.8 $ 1,754.9 $ 3,098.9
Depreciation and amortization of property, plant and equipment
included in cost of goods sold and in selling and administrative
expenses was $227.4 (2004 - $210.9; 2003 - $193.9). The net
carrying amount of property, plant and equipment not being
amortized at December 31, 2005 because it was under construction
or development was $332.8 (2004 - $234.9).
During the year, the company recorded an impairment charge of
$NIL (2004 - $6.2; 2003 - $117.6) relating to certain assets (see
Note 23). Interest capitalized to property, plant and equipment
during the year was $5.7 (2004 - $2.5; 2003 - $1.5).
Acquiring or constructing property, plant and equipment by incurring
a liability does not result in a cash outflow for the company until
the liability is paid. In the period the related liability is incurred,
the change in operating accounts payable on the Consolidated
Statement of Cash Flow is typically reduced by such amount. In
the period the liability is paid, the amount is reflected as a cash
outflow for investing activities. The applicable net change in
operating accounts payable that was reclassified from investing
activities on the Consolidated Statement of Cash Flow in 2005
was $26.0. The net change in accounts payable in 2004 and
2003 was not significant.
63
64 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
8. OTHER ASSETS AND INTANGIBLE ASSETS
2005 2004
Other assets
Investments at equity
Arab Potash Company ("APC") -
28-percent ownership;
quoted market value of $422.9 $ 224.6 $ 202.0
SQM - 25-percent ownership;
quoted market value of $705.1 261.0 240.2
Other 19.6 20.4
Investments at cost
ICL - 10-percent ownership;
quoted market value of $512.6 167.7 92.8
Sinochem Hong Kong Holdings Limited
("Sinofert") - 10-percent ownership;
quoted market value of $107.7 97.4 -
Deferred charges - net of accumulated
amortization of $50.7 (2004 - $39.8) 30.1 34.8
Accrued pension benefit asset 25.4 25.6
Other 27.0 34.4
$ 852.8 $ 650.2
Intangible assets - net of accumulated
amortization of $15.7 (2004- $11.6) $ 34.5 $ 37.1
During 2005, the company acquired: (1) 1,000,000 additional shares
in APC for $18.6; and (2) 21,000,000 additional shares in ICL for
$74.9. The company also acquired a 10-percent interest in the
ordinary shares of Sinofert for cash consideration of $97.4. Pursuant
to a strategic investment agreement, the company also holds an
option to acquire an additional 10-percent interest within three years
of the acquisition (see Note 34). The price for the shares subject to the
option will be determined by the prevailing market price at the time of
exercise. Sinofert, a vertically integrated fertilizer enterprise in the
People's Republic of China, is a subsidiary of Sinochem Corporation
and is listed on The Hong Kong Stock Exchange.
As noted in the above table, certain of the company's investments in
international entities are accounted for under the equity method.
Accounting principles generally accepted in those foreign jurisdictions
may vary in certain important respects from Canadian GAAP. The
company's share of earnings of these equity investees under the
applicable foreign GAAP has been adjusted for the significant effects
of conforming to Canadian GAAP. The company's share of earnings
of equity investees of $52.1 (2004 - $30.9; 2003 - $12.4) is
included in other income (see Note 22). Dividends received from
equity investees were $18.6 (2004 - $8.7; 2003 - $4.0).
During the year, the company recorded an impairment charge of
$NIL (2004 - $NIL; 2003 - $65.4) relating to certain deferred
charges. Amortization of deferred charges included in cost of goods
sold and in selling and administrative expenses was $10.9 (2004 -
$25.6; 2003 - $28.5).
Intangible assets relate primarily to production and technology
rights and computer software. Other than goodwill (see Note 9), the
company has not recognized any intangible assets with indefinite
useful lives. Total amortization expense relating to finite-lived
intangible assets for 2005 was $4.1 (2004 - $3.5; 2003 - $5.0).
Amortization expense in each of the next five years calculated upon
such assets held as at December 31, 2005 is estimated to be
$6.3 for 2006, $5.4 for 2007, $3.9 for 2008, $3.4 for 2009 and
$2.9 for 2010.
9. GOODWILL
2005 2004
Cost $ 104.3 $ 104.3
Accumulated amortization 7.3 7.3
$ 97.0 $ 97.0
Substantially all of the company's recorded goodwill relates to the
nitrogen segment.
10. SHORT-TERM DEBT
Short-term debt was $252.2 at December 31, 2005 (2004 - $93.5).
The weighted average interest rate on this debt was 3.54 percent
(2004 - 1.42 percent; 2003 - 1.43 percent). The company had an
unsecured line of credit available for short-term financing (net of
letters of credit of $18.7 and direct borrowings of $NIL) in the
amount of $56.3 at December 31, 2005 (2004 - $59.9). In addition,
the company is authorized to borrow a further $247.8 under its
commercial paper program. Subsequent to year-end, the company
increased its borrowing capacity under its commercial paper
program to $750.0.
The line of credit is subject to financial tests and other covenants. The
principal covenants require a debt-to-capital ratio of less than or equal
to 0.55:1, a long-term debt-to-EBITDA (defined in the agreement as
earnings before interest, income taxes, provincial mining and other
taxes, depreciation, amortization and other non-cash expenses) ratio
of less than or equal to 3.5:1, tangible net worth in an amount greater
than or equal to $1,250.0 and debt of subsidiaries not to exceed
$590.0. The line of credit is subject to other customary covenants and
events of default, including an event of default for non-payment of
other debt in excess of Cdn $40.0. Non-compliance with such
covenants could result in accelerated payment of amounts due under
the line of credit, and its termination. The company was in compliance
with the above-mentioned covenants at December 31, 2005.
11. ACCOUNTS PAYABLE AND ACCRUED CHARGES
2005 2004
Income and other taxes $ 239.4 $ 143.6
Trade accounts 194.6 193.0
Margin deposits 173.7 28.5
Accrued compensation 71.0 58.8
Accrued interest 18.5 16.8
Dividends 16.1 16.7
Current portion accrued environmental
costs and asset retirement obligations 12.3 19.5
Current portion pension and
other post-retirement benefits 8.5 23.8
Other payables 108.6 99.2
$ 842.7 $ 599.9
1
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
12. LONG-TERM DEBT Long-term debt at December 31, 2005 will mature as follows:
2005 2004 2006 $ 1.2

V
Industrial Revenue and Pollution
Control Obligations $ - $ 9.0
Adjustable Rate Industrial Revenue and
Pollution Control Obligations that matured
in 2005
Notes Payable
7.125% notes payable June 15, 2007 400.0 400.0
7.750% notes payable May 31, 2011 600.0 600.0
4.875% notes payable March 1, 2013 250.0 250.0
There are no sinking fund requirements prior
to maturity. These notes were issued under
US shelf registration statements covering
up to $2,000.0 of debt securities. The notes
are unsecured. The 2011 and 2013 notes
are redeemable, in whole or in part, at the
company's option at any time prior to maturity
for a price at least equal to the principal
amount of the notes to be redeemed, plus
accrued interest.
Other 8.8 9.9
1,258.8 1,268.9
Less current maturities 1.2 10.3
$1,257.6 $ 1,258.6
The company has entered into back-to-back loan arrangements
involving certain financial assets and financial liabilities. The company
has presented financial assets of $310.1 and financial liabilities of
$316.0 on a net basis because a legal right to set-off exists, and it
intends to settle with the same party on a net basis. Other long-term
debt in the above table includes a net financial liability of $5.9 (2004
- $5.9) pursuant to these arrangements.
The company has a syndicated revolving credit facility, renewed in
September 2005 for a five-year term, which provides for unsecured
advances of up to $750.0 (less the amount of direct borrowings and
commercial paper outstanding). As at December 31, 2005, no
amounts were outstanding and $497.8 was available under the
facility. Principal covenants and events of default under the credit
facility requirements are the same as the line of credit as described
in Note 10. The notes payable are not subject to any financial test
covenants but are subject to certain customary covenants (including
limitations on liens and sale and leaseback transactions) and events
of default, including an event of default for acceleration of other
debt in excess of $50.0. The other long-term debt instruments are
not subject to any financial test covenants but are subject to certain
customary covenants and events of default, including, for other
long-term debt, an event of default for non-payment of other debt
in excess of $25.0. Non-compliance with such covenants could
result in accelerated payment of the related debt. The company
was in compliance with the above-mentioned covenants at
December 31, 2005.
2007 400.5
2008 0.2
2009 0.3
2010 0.3
Subsequent years 856.3
$ 1,258.8
13. COMMITMENTS
LEASE COMMITMENTS
The company has various long-term operating lease agreements for
buildings, port facilities, equipment, ocean-going transportation
vessels, mineral leases and railcars, the latest of which expires in 2025.
Rental expense for operating leases for the years ended December 31,
2005, 2004 and 2003 was $78.9, $69.6 and $39.9, respectively.
PURCHASE COMMITMENTS
The company has long-term agreements for the purchase of sulfur for
use in the production of phosphoric acid. These agreements provide
for minimum purchase quantities and certain prices are based on
market rates at the time of delivery. The commitments included in the
table below are based on contract prices as at December 31, 2005.
The company has entered into long-term natural gas contracts with
the National Gas Company of Trinidad, the latest of which expires in
2018. The contracts provide for prices that vary with ammonia market
prices, escalating floor prices and minimum purchase quantities. The
commitments included in the table below are based on floor prices
and minimum purchase quantities.
The company also has long-term agreements for the purchase of
phosphate rock used at its Geismar facility and limestone used
in Brazil. The commitments included in the table below are based on
the expected purchase quantity and current base prices (less
applicable discounts).
OTHER COMMITMENTS
Other operating commitments consist principally of various rail
freight contracts, the latest of which expires in 2010.
Minimum future commitments under these contractual arrangements
for the next five years and thereafter are shown below.
Operating Purchase Other
Leases Commitments Commitments
2006 $ 80.3 $ 122.4 $ 13.6
2007 74.5 124.0 8.4
2008 63.1 99.7 8.4
2009 58.8 94.8 8.4
2010 54.9 96.3 4.2
Thereafter 229.0 406.5 -
Total $ 560.6 $ 943.7 $ 43.0
65
66 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
14. PENSION AND OTHER POST RETIREMENT BENEFITS
PENSION PLANS
Canada
Substantially all employees of the company are participants in either
a defined contribution or a defined benefit pension plan.
The company has established a supplemental defined benefit
retirement income plan for senior management which is unfunded,
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 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. Contributions to the US plans are made to meet or
exceed minimum funding requirements of the Employee Retirement
Income Security Act of 1974 ("ERISA').
Trinidad
The company has contributory defined benefit pension plans that
cover a substantial majority of its employees. Benefits are based on
service. The plans' assets consist mainly of local government and
other bonds, local mortgage and mortgage-backed securities, fixed
income deposits and cash.
OTHER POST RETIREMENT PLANS
The company provides certain contributory health-care plans and
non-contributory life insurance benefits for retired employees. These
plans contain certain cost-sharing features such as deductibles and
coinsurance, and are unfunded, with benefits subject to change.
DEFINED BENEFIT PLANS
The components of net expense for the company's pension and other post-retirement benefit plans, computed actuarially, were as follows:
Pension Other
2005 2004 2003 2005 2004 2003
Costs arising in the period
Service cost for benefits earned during the year $ 13.8 $ 12.9 $ 12.2 $ 5.7 $ 5.2 $ 5.5
Interest cost on projected benefit obligations 31.1 30.2 29.6 13.3 13.2 12.9
Actual return on plan assets (34.3) (47.1) (73.3) - - -
Actuarial loss (gain) 27.9 23.3 27.3 (12.7) (6.8) 25.7
Plan amendments 3.5 - 2.3 11.5 - (12.6)
Plan curtailments 0.4 - - - - -
Change in valuation allowance 2.4 (2.2) 2.0 - - -
Costs arising in the period 44.8 17.1 0.1 17.8 11.6 31.5
Difference between costs arising in the period and
costs recognized in the period in respect of:
Return on plan assets (2.7) 13.6 42.9 - - -
Actuarial (gain) loss (23.6) (20.2) (27.4) 15.4 9.5 (13.6)
Plan amendments (2.3) 0.4 (2.2) (13.0) (1.9) 2.5
Transitional obligation 1.4 1.5 5.1 0.3 - -
Net expense $ 17.6 $ 12.4 $ 18.5 $ 20.5 $ 19.2 $ 20.4
The assumptions used to determine the benefit obligation and expense for the company's significant plans were as follows (weighted
average as of December 31):
Pension
Other
2005 2004 2003 2005 2004 2003
Discount rate - obligation 5.70% 5.75% 6.10% 5.70% 5.75% 6.10%
Discount rate - expense 5.75% 6.10% 6.50% 5.75% 6.10%1 6.50%
Long-term rate of return on assets 8.50% 8.50% 8.50% n/a n/a n/a
Rate of increase in compensation levels 4.00% 4.00% 4.00% n/a n/a n/a
r Discount rate changed to 6.25% effective July 1, 2004, upon recognitio n of Medicare Part D .
The assumed health-care cost trend rates are as follows:
2005 2004 2003
Health-care cost trend rates assumed for next year 6.00% 6.00% 6.00%
Ultimate health-care cost trend rate assumed 6.00% 6.00% 6.00%
Year that the rate reaches the ultimate trend rate 2005 2004 2003
Effective January 1, 2004, the company's largest retiree medical plan limits the company's share of annual medical cost increases to
4.5 percent for recent and future retirees. Any cost increases in excess of this amount are funded by increased retiree contributions.
i
1
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
14. PENSION AND OTHER POST-RETIREMENT BENEFITS (CONTINUED)
The company's discount rate assumption reflects the weighted average interest rate at which the pension and other post-retirement
liabilities could be effectively settled using high-quality bonds at the measurement date. The rate varies by country. The company determines
the discount rate using a yield curve approach. Based on the plan's demographics, expected future pension benefit and medical claims,
payments are measured and discounted to determine the present value of the expected future cash flows. The cash flows are discounted
using yields on high-quality AA-rated non-callable bonds with cash flows of similar timing. The equivalent level discount rate is then used
as input by the company to determine the final discount rate. The rate selected for the December 31, 2005 measurement date will be used
to determine expense for fiscal 2006.
The expected long-term rate of return on assets assumption is determined using a building block approach. The expected real rate of return
for each individual asset class is determined based on expected future performance. These rates are weighted based on the current asset
portfolio. A separate determination is made of the underlying impact of expenses, inflation, rebalancing, diversification and the actively
managed portfolio premium. The resulting total expected asset return is compared to the historic returns achieved by the portfolio. Based
on these input items, a final rate is selected by the company.
The company uses a December 31 measurement date. The most recent actuarial valuations of the majority of the pension plans for funding
purposes were as of January 1, 2005, and the next required valuations will be as of January 1, 2006. The change in benefit obligations and
change in plan assets for the above pension and other post-retirement plans were as follows:
Pension Other Total
2005 2004 2005 2004 2005 2004
Change in benefit obligations
Balance, beginning of year $ 548.6 $ 502.4 $ 235.4 $ 230.7
Service cost 13.8 12.9 5.7 5.2
Interest cost 31.1 30.2 13.3 13.2
Participants' contributions 0.2 0.2 3.1 2.8
Actuarial loss (gain) 27.9 23.9 (12.7) (6.8)
Foreign exchange rate changes (3.4) 3.1 0.7 1.1
Plan amendments 3.5 - (11.5) -
Benefits paid (26.4) (24.1) (11.4) (10.8)
Balance, end of year 595.3 548.6 222.6 235.4 $ 817.9 $ 784.0
Change in plan assets
Fair value, beginning of year 452.9 406.1 - -
Actual return on plan assets 34.3 47.1 - -
Employer contributions 24.2 20.5 8.3 8.0
Participants' contributions 0.2 0.2 3.1 2.8
Foreign exchange rate changes (4.4) 3.1 - -
Benefits paid (26.4) (24.1) (11.4) (10.8)
Fair value, end of year 480.8 452.9 - - 480.8 452.9
Funded status (114.5) (95.7) (222.6) (235.4) (337.1) (331.1)
Valuation allowance (14.1) (11.7) - - (14.1) (11.7)
Unamortized net actuarial loss 118.4 93.1 41.6 55.3 160.0 148.4
Unamortized prior service cost 6.0 3.8 (19.5) (9.1) (13.5) (5.3)
Unamortized transitional obligation 6.7 6.7 1.0 1.4 7.7 8.1
Accrued pension and other
post-retirement benefit asset (liability) $ 2.5 $ (3.8) $ (199.5) $ (187.8) $ (197.0) $ (191.6)
Amounts included in:
Other assets (Note 8) $ 25.0 $ 16.8 $ 0.4 $ 8.8 $ 25.4 $ 25.6
Liabilities
Current (Note 11) (0.4) (16.0) (8.1) (7.8) (8.5) (23.8)
Long-term (22.1) (4.6) (191.8) (188.8) (213.9) (193.4)
$ 2.5 $ (3.8) $ (199.5) $ (187.8) $ (197.0) $ (191.6)
Letters of credit secured certain of the unfunded defined benefit plans as at December 31, 2005 and 2004.
The company is a sponsor of certain US post-retirement health-care plans that were impacted by the US Medicare Prescription Drug,
Improvement and Modernization Act of 2003. This legislation expanded Medicare to include (for the first time) coverage for prescription
drugs and introduced a prescription drug benefit and federal subsidy to sponsors of retiree health-care benefit plans that provide benefits
at least "actuarially equivalent" to Medicare Part D. The company accounted for the impact of the legislation prospectively as of July 1,
2004. The federal subsidy had the effect of reducing the company's accumulated post-retirement benefit obligation by $23.2 and reducing
the net periodic post-retirement benefit cost for the year by $3.7 (2004 - $1.7).
67
68 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
14. PENSION AND OTHER POST RETIREMENT BENEFITS
(CONTINUED)
The accumulated benefit obligation for all defined benefit pension
plans was $534.7 and $484.7 at December 31, 2005 and 2004,
respectively. The aggregate projected benefit obligation,
accumulated benefit obligation and aggregate fair value of plan
assets for pension plans with accumulated benefit obligations in
excess of plan assets were as follows:
2005 2004
Projected benefit obligation $ 568.4 $ 520.4
Accumulated benefit obligation 521.0 467.9
Fair value of plan assets 419.0 391.1
SENSITIVITY OF ASSUMPTIONS
The effect of a change in the health-care cost trend rate on the other
post-retirement benefit obligation and the aggregate of service and
interest cost would have been as follows:
2005 2004 2003
As reported:
Benefit obligation $ 222.6 $ 235.4 $ 230.7
Aggregate of service
and interest cost 19.0 18.4 18.4
Impact of increase of
1.0 percentage point:
Benefit obligation 31.4 34.4 36.3
Aggregate of service
and interest cost 3.2 3.3 3.8
Impact of decrease of
1.0 percentage point:
Benefit obligation (27.8) (35.3) (31.7)
Aggregate of service
and interest cost (2.9) (3.4) (3.1)
The above sensitivities are hypothetical and should be used with
caution. Changes in amounts based on a 1.0 percentage point
variation in assumptions generally cannot be extrapolated because
the relationship of the change in assumption to the change in
amounts may not be linear. The sensitivities have been calculated
independently of changes in other key variables. Changes in one
factor may result in changes in another, which could amplify or
reduce certain sensitivities.
PLAN ASSETS
Approximate asset allocations, by asset category, of the company's
significant pension plans were as follows at December 31:
Asset Category Target 2005 2004
Equity securities 65% 67% 67%
Debt securities 35% 33% 32%
Real estate - - -
Other - - 1%
Total 100% 100% 100%
The company employs a total return on investment approach
whereby a mix of equities and fixed income investments is used to
maximize the long-term return of plan assets for a prudent level of
risk. Risk tolerance is established through careful consideration of
plan liabilities, plan funded status and corporate financial condition.
The investment portfolio contains a diversified blend of equity and
fixed income investments.
Furthermore, equity investments are diversified across US and
non-US stocks, as well as growth, value and small and large
capitalizations. US equities are also diversified across actively
managed and passively invested portfolios. Other assets such as
private equity, real estate and hedge funds are not used at this time.
Derivatives may be used to gain market exposure in an efficient and
timely manner; however, derivatives may not be used to leverage the
portfolio beyond the market value of the underlying investments.
Investment risk is measured and monitored on an ongoing basis
through quarterly investment portfolio reviews, annual liability
measurements and periodic asset/liability studies. The investment
strategy in Trinidad is largely dictated by local investment restrictions
(maximum of 50 percent in equities and 20 percent foreign) and
asset availability since the local equity market is small and there is
little secondary market activity in debt securities.
DEFINED CONTRIBUTION PLANS
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. The company suspended its contributions of up to
5 percent of salary in July 2003. Contributions were reinstated in
August 2004, providing a minimum of 3 percent (to a maximum of
6 percent) of salary based on company performance. The company's
2005 contributions were $6.1 (2004 - $2.9; 2003 - $3.4).
All of the company's Canadian salaried employees and certain hourly
employees participate in the PCS Inc. Savings Plan and may make
voluntary contributions. The company suspended its contributions to
this plan in July 2003. Contributions were reinstated in August 2004,
providing a minimum of 3 percent (to a maximum of 6 percent) of
salary based on company performance. The company's contributions
in 2005 were $4.4 (2004 - $1.3; 2003 - $2.0).
Certain of the company's Canadian employees participate in the
contributory PCS Inc. Pension Plan. The member contributes to the
plan at the rate of 5.5 percent of the member's earnings, or such
other percentage amount as may be established by a collective
agreement, and the company contributes for each member at the
same rate. The member may also elect to make voluntary additional
contributions. The company's contributions in 2005 were $4.5 (2004
- $3.9; 2003 - $3.4).
CASH PAYMENTS
Total cash payments for pensions and other post-retirement benefits
for 2005, consisting of cash contributed by the company to its
funded pension plans, cash payments directly to beneficiaries for its
unfunded other benefit plans and cash contributed to its defined
contribution plans, were $47.5. Approximately $49.1 is expected to
be contributed by the company to all plans during 2006.
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts 69
14. PENSION AND OTHER POST-RETIREMENT BENEFITS
(CONTINUED)
ESTIMATED FUTURE BENEFIT PAYMENTS
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid from either corporate
assets or the qualified pension trusts:
Other
Reduction due
to Medicare
Pension Gross Part D Subsidy Net
2006 $ 25.2 $ 9.4 $ 0.5 $ 8.9
2007 26.6 10.1 0.5 9.6
2008 28.7 10.8 0.6 10.2
2009 29.0 11.4 0.6 10.8
2010 30.7 12.1 0.7 11.4
2011-2015 184.8 70.2 4.2 66.0
15. ENVIRONMENTAL COSTS AND ASSET RETIREMENT
OBLIGATIONS
The company records an asset and related retirement obligation for
the costs associated with the retirement of long-lived tangible assets
when a legal liability to retire such assets exists. The major
categories of asset retirement obligations include: reclamation and
restoration costs at the company's potash and phosphate mining
operations (most particularly phosphate mining), including
management of mining byproducts such as gypsum and various
mine tailings; land reclamation and revegetation programs;
decommissioning of underground and surface operating facilities;
general clean-up activities aimed at returning the areas to an
environmentally acceptable condition; and post-closure care and
maintenance. The asset retirement obligations are generally incurred
over an extended period of time.
The estimation of asset retirement obligation costs depends on the
development of environmentally acceptable closure and post-closure
plans. In some cases, this may require significant research and
development to identify preferred methods for such plans which are
economically sound and which, in most cases, may not be
implemented for several decades. The company has continued to
utilize appropriate technical resources, including outside consultants,
to develop specific site closure and post-closure plans in accordance
with the requirements of the various jurisdictions in which it operates.
The company estimates that the undiscounted cash flows required to
settle the asset retirement obligations approximate $3,800.0. The
estimated cash flows have been discounted at credit-adjusted risk-
free rates ranging from 5.00 percent to 6.75 percent. Other than
certain land reclamation programs, settlement of the obligations is
typically correlated with mine life estimates. Cash flow payments are
expected to occur principally over the next 100 years for the
company's phosphate operations. Payments relating to certain potash
operations are not expected to occur until after that time. The present
value of the company's asset retirement obligations at December 31,
2005 totalled $91.8 (2004 - $85.0), as set out in the table below.
The current portion totalled $6.6 (2004 - $4.8).
Other environmental liabilities typically relate to regulatory
compliance, environmental management practices associated with
ongoing operations other than mining, site assessment and
remediation of environmental contamination related to the activities
of the company and its predecessors, including waste disposal
practices and ownership and operations of real property and facilities.
SITE ASSESSMENT AND REMEDIATION COSTS
The company has accrued assessment costs, including legal and
consulting fees, and remediation costs related to the clean-up of
contaminated sites currently or formerly associated with the company
or its predecessors' business in the amount of $14.1 (2004 - $14.4)
for certain PCS Joint Venture facilities, $0.3 (2004 - $0.3) for various
sulfur facilities and $3.4 (2004 - $1.0) for other matters in the
phosphate and nitrogen businesses. The current portion of these
costs totalled $5.7 (2004 - $14.7).
ENVIRONMENTAL OPERATING COSTS AND CAPITAL
EXPENDITURES
The company's operating expenses, other than costs associated
with asset retirement obligations, relating to compliance with
environmental laws and regulations governing ongoing operations
were approximately $87.2 (2004 - $68.9; 2003 - $59.0). These
amounts include environmental operating expenses related
primarily to the production of phosphoric acid, fertilizer, feed and
other products.
The company routinely undertakes environmental capital projects. In
2005, capital expenditures of $10.0 (2004 - $7.6) were incurred to
meet pollution prevention and control objectives and $0.6 (2004 -
$0.3) were incurred to meet other environmental objectives.
Following is a reconciliation of asset retirement and other
environmental obligations as at December 31:
2005 2004
Asset retirement obligations,
beginning of year $ 85.0 $ 81.6
Liabilities incurred 8.5 15.7
Liabilities settled (6.0) (16.0)
Accretion expense 4.4 5.2
Revisions in estimated cash flows (0.1) (1.5)
Asset retirement obligations,
end of year 91.8 85.0
Other environmental liabilities 17.8 15.7
Less current portion (Note 11) (12.3) (19.5)
$ 97.3 $ 81.2
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 common shares are not redeemable or convertible. The
first preferred shares may be issued in one or more series with rights
and conditions to be determined by the PCS Board of Directors.
70 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
16. SHARE CAPITAL (CONTINUED)
ISSUED 2005 2004 2003
Consideration Consideration Consideration
Issued, beginning
of year $ 1,408.4 $ 1,245.8 $ 1,186.9
Shares issued under
option plans 95.7 162.1 58.7
Shares issued
for dividend
reinvestment plan 0.3 0.5 0.2
Shares repurchased (125.1) - -
Issued, end of year $ 1,379.3 $ 1,408.4 $ 1,245.8
ISSUED 2005 2004 2003
Number of Number of Number of
Common Shares Common Shares Common Shares
Issued, beginning
of year 110,630,503 106,224,432 104,155,296
Shares issued under
option plans 2,459,594 4,397,324 2,061,700
Shares issued
for dividend
reinvestment plan 3,695 8,747 7,436
Shares repurchased (9,500,000) - -
Issued, end of year 103,593,792 110,630,503 106,224,432
NORMAL COURSE ISSUER BID
On January 25, 2005, the Board of Directors of PCS authorized a
share repurchase program of up to 5,500,000 common shares
(approximately 5 percent of the company's issued and outstanding
common shares) through a normal course issuer bid. On
September 22, 2005, the Board of Directors authorized an increase
in the number of common shares sought under the share repurchase
program. This amendment allowed PotashCorp to repurchase up to
4,000,000 additional common shares. Shares could be repurchased
from time to time on the open market through February 14, 2006 at
prevailing market prices. The timing and amount of purchases, if any,
under the program were dependent upon the availability and
alternative uses of capital, market conditions and other factors. The
company completed the repurchase program by December 31, 2005.
During 2005, the company repurchased for cancellation 9,500,000
common shares under the program, at a net cost of $851.9 and an
average price per share of $89.67. The repurchase resulted in a
reduction of share capital of $125.1, and the excess net cost over
the average book value of the shares has been recorded as a
reduction of contributed surplus of $264.3 and a reduction of
retained earnings of $462.5.
17. CONTRIBUTED SURPLUS
2005 2004 2003
Balance, beginning of year $ 275.7 $ 265.2 $ 264.2
Stock-based compensation 24.9 10.5 1.0
Share repurchases (Note 16) (264.3) - -
Balance, end of year $ 36.3 $ 275.7 $ 265.2
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts 71
18. SEGMENT INFORMATION
The company has three reportable business segments: potash, nitrogen and phosphate. These business segments are differentiated by the
chemical nutrient contained in the product that each produces. Inter-segment sales are made under terms that approximate market value. The
accounting policies of the segments are the same as those described in Note 2.
2005
Potash Nitrogen Phosphate All others Consolidated
Sales $ 1,341.1 $ 1,368.8 $ 1,137.3 $ - $ 3,847.2
Freight 129.7 39.9 80.1 - 249.7
Transportation and distribution 34.5 49.5 37.9 - 121.9
Net sales - third party 1,176.9 1,279.4 1,019.3 -
Cost of goods sold 469.5 960.7 920.4 - 2,350.6
Gross Margin 707.4 318.7 98.9 - 1,125.0
Inter-segment sales 5.8 100.7 14.0 - -
Depreciation and amortization 64.5 72.2 95.4 10.3 242.4
Goodwill 96.6 0.4 97.0
Assets
r 1,236.8 1,526.5 1,723.0 871.6 5,357.9
Additions to property, plant and equipment 165.5 99.3 109.5 8.4 382.7
2004
Potash Nitrogen Phosphate All others Consolidated
Sales $ 1,056.1 $ 1,210.4 $ 977.9 $ - $ 3,244.4
Freight 128.7 38.1 71.9 - 238.7
Transportation and distribution 32.6 42.3 29.4 - 104.3
Net sales - third party 894.8 1,130.0 876.6 -
Cost of goods sold 472.0 887.2 860.8 - 2,220.0
Gross Margin 422.8 242.8 15.8 - 681.4
Inter-segment sales 5.9 92.9 12.1 - -
Depreciation and amortization
Goodwill
Assets
Additions to property, plant and equipment
66.4 79.7 84.4
- 96.6 -
1,374.9 1,428.4 1,615.6
92.2 62.1 56.8
9.5 240.0
0.4 97.0
707.9 5,126.8
9.4 220.5
2003
Potash Nitrogen Phosphate All others Consolidated
Sales $ 758.7 $ 1,156.4 $ 883.9 $ - $ 2,799.0
Freight 109.9 48.8 75.8 - 234.5
Transportation and distribution 29.7 42.8 26.2 - 98.7
Net sales - third party 619.1 1,064.8 781.9 -
Cost of goods sold 415.4 871.6 798.4 - 2,085.4
Gross Margin 203.7 193.2 (16.5) - 380.4
Inter-segment sales 6.0 67.8 9.4 - -
Depreciation and amortization 52.4 86.4 78.9 9.7 227.4
Goodwill - 96.6 - 0.4 97.0
Assets 1,058.6 1,386.0 1,634.4 488.3 4,567.3
Additions to property, plant and equipment 50.9 39.8 55.3 4.7 150.7
72 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
18. SEGMENT INFORMATION (CONTINUED)
As described in Note 1, PhosChem and Canpotex execute offshore marketing, sales and distribution functions for certain of the company's
products. Financial information by geographic area is summarized in the following table:
Country of Origin
Canada United States Trinidad Other Consolidated
2005
Sales to customers outside the company
Canada $ 69.3 $ 105.9 $ - $ - $ 175.2
United States 576.6 1,470.9 545.5 - 2,593.0
PhosChem - 166.7 - - 166.7
Canpotex 577.1 - - - 577,1
Other 118.2 106.7 86.6 23.7 335.2
$ 1,341.2 $ 1,850.2 $ 632.1 $ 23.7 $ 3,847.2
Operating income $ 464.1 $ 170.2 $ 199.3 $ 59.0 $ 892.6
Capital assets and goodwill $ 954.6 $ 1,751.1 $ 612.4 $ 41.7 $ 3,359.8
Country of Origin
Canada United States Trinidad Other Consolidated
2004
Sales to customers outside the company
Canada $ 48.3 $ 87.5 $ - $ - $ 135.8
United States 443.0 1,383.7 413.1 2.8 2,242.6
PhosChem - 140.4 - - 140.4
Canpotex 421.9 - - - 421.9
Other 114.9 57.3 86.1 45.4 303.7
$ 1,028.1 $ 1,668.9 $ 499.2 $ 48.2 $ 3,244.4
Operating income $ 250.0 $ 67.8 $ 139.8 $ 56.7 $ 514.3
Capital assets and goodwill $ 831.2 $ 1,722.6 $ 601.4 $ 40.7 $ 3,195.9
Country of Origin
Canada United States Trinidad Other Consolidated
2003
Sales to customers outside the company
Canada $ 41.1 $ 91.4 $ - $ - $ 132.5
United States 314.9 1,392.4 350.6 11.7 2,069.6
PhosChem - 87.0 - - 87.0
Canpotex 260.6 - - - 260.6
Other 96.8 58.9 49.0 44.6 249.3
$ 713.4 $ 1,629.7 $ 399.6 $ 56.3 $ 2,799.0
Operating income (loss) $ 97.8 $ (82.7) $ 91.4 $ (162.1) $ (55.6)
Capital assets and goodwill $ 786.2 $ 1,745.6 $ 604.7 $ 68.6 $ 3,205.1
19. COST OF GOODS SOLD 21. PROVINCIAL MINING AND OTHER TAXES
The primary components of cost of goods sold are labor, employee Provincial mining and other taxes consist of:
benefits, services, raw materials (including inbound freight and 2005 2004 2003
purchasing and receiving costs), operating supplies, energy costs, Potash Production Tax $ 94.8 $ 63.7 $ 35.8
property and miscellaneous taxes, and depreciation and Saskatchewan corporate
amortization. capital taxes and other 42.4 28.9 21.2
20. SELLING AND ADMINISTRATIVE $ 137.2 $ 92.6 $ 57.0
i
1
J
The primary components of selling and administrative are
compensation, employee benefits, supplies, communications, travel,
professional services, and depreciation and amortization.
r
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
22. OTHER INCOME
2005 2004 2003
Share of earnings of
equity investees $ 52.1 $ 30.9 $ 12.4
Dividend income 9.2 8.2 5.6
Gain on sale of long-term
investments (Note 4) - 34.4 -
Other 0.5 5.9 15.2
$ 61.8 $ 79.4 $ 33.2
costs of special termination benefits, $0.3 for parts inventory
writedowns and $4.0 for long-lived asset impairment charges. The
Kinston property was sold in 2004 for nominal proceeds. There was
no significant gain or loss on sale.
No additional significant costs were incurred in 2005 or 2004 in
connection with the plant shutdowns as described above.
Fair value for purposes of all impairment measurements was
determined based on discounted expected future net cash flows.
PROVISION FOR PCS YUMBES S.C.M.
23. OTHER EXPENSES
2005 2004 2003
Provision for nitrogen and
phosphate plant shutdowns $ - $ - $ 123.7
Provision for
PCS Yumbes S.C.M. - 3.6 140.5
$ - $ 3.6 $ 264.2
PROVISION FOR NITROGEN AND PHOSPHATE
PLANT SHUTDOWNS
2003
In June 2003, the company indefinitely shut down its Memphis,
Tennessee nitrogen plant and suspended production of certain
nitrogen products at its Geismar, Louisiana facilities due to high US
natural gas costs and low product margins. The company determined
that all employee positions pertaining to the affected operations
would be eliminated, and recorded $4.8 in connection with costs
of special termination benefits in 2003. No significant payments
relating to the terminations remain to be made.
In connection with the shutdowns, management had determined that
the carrying amounts of the long-lived assets at the Memphis and
Geismar nitrogen facilities were not fully recoverable, and an
impairment loss of $101.6, equal to the amount by which the carrying
amount of the facilities' asset groups exceeded their respective fair
values, was recognized. Of the total impairment charge, $100.6
related to property, plant and equipment and $1.0 related to other
assets. As part of its review, management also wrote down certain
parts inventories at these plants in the amount of $12.4.
Management expects to incur other shutdown-related costs of
approximately $10.3 should applicable facilities be dismantled, and
nominal annual expenditures for site security and other maintenance
costs. The other shutdown-related costs have not been recorded in the
consolidated financial statements as of December 31, 2005. Such costs
will be recognized and recorded in the period in which they are incurred.
The phosphate feed plant at Kinston, North Carolina ceased
operations in 2003. In that year, the company recorded $0.6 for
2004
In December 2004, the company concluded the sale of 100 percent
of its shares of PCS Yumbes, which was included in its potash
segment, to SQM. The company received proceeds of $34.5 in 2004
and $5.2 in 2005 in respect of the sale. The total gain was $3.5, of
which $2.6 was recognized in 2004. The deferred portion of the gain
will be recognized in earnings in proportion to any future dilution or
sale of part or all of the company's interest in SQM.
During 2004, the company recorded a writedown of $6.2, relating
primarily to certain mining machinery and equipment that were
not transferred to SQM under the terms of the agreement. For
measurement purposes, fair value was determined in reference to
market prices for similar assets. The machinery and equipment were
sold in 2005 for nominal proceeds.
2003
In 2003, in connection with entering into the share purchase (and
related) agreement with SQM, management conducted an
assessment of the recoverability of the long-lived assets of the PCS
Yumbes operations. As a result of its review, management determined
that the carrying amounts of PCS Yumbes' long-lived assets were not
recoverable and recorded an impairment charge of $77.4, equal to the
amount by which the carrying amount of the asset group exceeded
fair value. Of the total impairment charge, $13.0 related to property,
plant and equipment, $63.9 related to deferred preproduction costs
and $0.5 related to deferred acquisition costs. For purposes of the
impairment measurement, fair value was determined in reference to
the commercial sale agreement referred to above. As part of the
review, management also wrote down certain non-parts inventory by
$50.2 due to the need to liquidate all inventories that would not be
transferred to SQM under the agreement. The company recorded a
provision of $1.8 in 2003 pertaining to contractual termination
benefits to be paid to employees, primarily under Chilean law. The
company had also incurred early termination penalties in respect of
certain PCS Yumbes contractual arrangements and recorded a
provision of $11.1 in 2003 for these contract termination costs. No
significant payments remain to be made.
73
74 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
24. INTEREST EXPENSE
2005 2004 2003
Interest expense on
Short-term debt $ 7.0 $ 3.4 $ 5.1
Long-term debt 88.4 86.5 88.7
Interest income (13.1) (5.9) (2.5)
$ 82.3 $ 84.0 $ 91.3
25. 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 (loss) before income taxes as follows:
2005 2004 2003
Income (loss) before income taxes
Canada $ 381.5 $ 175.0 $ 16.3
United States 170.0 69.1 (86.3)
Trinidad 175.6 118.5 80.6
Other 83.2 67.7 (157.5)
$ 810.3 $ 430.3 $ (146.9)
Federal and provincial statutory tax rates 42.52% 43.36% 44.36%
Tax at statutory rates $ 344.5 $ 186.6 $ (65.2)
Adjusted for the effect of:
Writedown of PCS Yumbes - 1.4 50.8
Gain on sale of long-term investments - (14.9) -
Net non-deductible provincial taxes and royalties and resource allowances (1.2) 8.1 7.5
Stock-based compensation deduction (13.2) (17.1) (5.4)
Additional tax deductions (14.8) (11.0) (11.8)
Difference between Canadian rate and rates applicable to subsidiaries
in other countries (48.9) (26.7) 4.4
Other 1.0 5.3 (0.9)
Income tax expense (recovery) $ 267.4 $ 131.7 $ (20.6)
Details of income tax expense (recovery) are as follows:
2005 2004 2003
Canada
Current $ 170.5 $ 69.4 $ 14.9
Future 12.6 11.5 20.6
United States - Federal
Current 0.8 14.7 (16.4)
Future 30.8 (19.4) (40.7)
United States - State
Current 2.2 2.2 (0.6)
Future (12.8) 12.5 (8:5)
Trinidad and other
Current 53.8 19.1 2.1
Future 9.5 21.7 8.0
Income tax expense (recovery) $ 267.4 $ 131.7 $ (20.6)
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts 75
25. INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to significant portions of the net future income tax liability are:
i 2005 2004
Future income tax assets:
Loss and credit carryforwards $ 266.2 $ 294.2
Accrued pension and other post-retirement benefits 80.3 78.3
Accrued environmental costs and asset retirement obligations 0.1 0.9
Other 44.4 31.8
Total future income tax assets 391.0 405.2
Future income tax liabilities:
Basis difference in fixed assets 833.6 814.3
Basis difference in investments 27.6 27.6
Other 73.1 62.7
Total future income tax liabilities 934.3 904.6
Net future income tax liabilitv $ 543.3 $ 499.4
The company has determined that it is more likely than not that the future income tax assets will be realized through a combination of
future reversals of temporary differences and taxable income.
At December 31, 2005, the company has income tax losses carried forward of approximately $531.0 that will begin to expire in 2018. In
addition, the company has alternative minimum tax credits of approximately $19.9 that carry forward indefinitely. The benefit relating to
these amounts has been recognized by reducing future income tax liabilities.
26. NET INCOME (LOSS) PER SHARE
2005 2004 2003
Basic net income (loss) per share'
Net income (loss) available to common shareholders $ 542.9 $ 298.6 $ (126.3)
Weighted average number of common shares 108,568,000 107,967,000 104,460,000
Basic net income (loss) per share $ 5.00 $ 2.77 $ (1.21)
Diluted net income (loss) per share'
Net income (loss) available to common shareholders $ 542.9 $ 298.6 $ (126.3)
Weighted average number of common shares 108,568,000 107,967,000 104,460,000
Dilutive effect of stock options 2,510,000 2,772,000 -
Weiqhted average number of diluted common shares 111,078,000 110,739,000 104,460,000
Diluted net income (loss) per share $ 4.89 $ 2.70 $ (1.21)
I Net income (loss) per share calculations are based on full dollar and share amounts.
Diluted net income (loss) per share is calculated based on the weighted average number of shares issued and outstanding during the year.
The denominator is: (1) increased by the total of the additional common shares that would have been issued assuming exercise of all stock
options with exercise prices at or below the average market price for the year; and (2) decreased by the number of shares that the company
could have repurchased if it had used the assumed proceeds from the exercise of stock options to repurchase them on the open market at
the average share price for the year. For performance-based stock option plans, the number of contingently issuable potential common
shares included in the calculation is based on the number of shares that would be issuable based on period-to-date (rather than anticipated)
performance, if the effect is dilutive. For years in which there was a loss applicable to common shares, stock options with exercise prices at
or below the average market price for the year were excluded from the calculations of diluted net loss per share, as inclusion of these
securities would have been anti-dilutive to the net loss per share.
Excluded from the calculation of diluted net income (loss) per share were average options outstanding of NIL (2004 - NIL; 2003 -
2,239,861) as the options' exercise price was greater than the average market price of the common shares for the year.
27. STOCK-BASED COMPENSATION
The company has five stock-based compensation plans, which are described below. The company accounts for its grants under those plans
in accordance with the fair value-based method of accounting for stock-based compensation. The compensation cost that has been charged
against income for those plans was $37.3 (2004 - $35.3; 2003 - $6.6).
STOCK OPTION PLANS
The company has three stock option plans. Under the Officers and Employees Plan, the company may, after February 3, 1998, issue up to
13,852,250 common shares pursuant to the exercise of options.
76 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
27. STOCK-BASED COMPENSATION (CONTINUED)
Under the Directors Plan, the company may, after January 24, 1995, issue up to 912,000 common shares pursuant to the exercise of options.
No stock options have been granted under the Directors Plan since November 2002, and the PCS Board of Directors determined in 2003
to discontinue granting stock options to directors. Under both plans, 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 and an option's maximum term is 10 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 vesting the following year.
On May 5, 2005, the company's shareholders approved the 2005 Performance Option Plan under which the company may, after
February 28, 2005 and before January 1, 2006, issue options to acquire up to 1,200,000 common shares. Under the plan, 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
and an option's maximum term is 10 years. The key design difference between the 2005 Performance Option Plan and the company's other
stock option plans is the performance-based vesting feature. In general, options will vest, if at all, according to a schedule based on the
three-year average excess of the company's consolidated cash flow return on investment over weighted average cost of capital.
A summary of the status of the plans as of December 31, 2005, 2004 and 2003 and changes during the years ending on those dates is
presented as follows:
Number of Shares Subject to Option
Performance Option Plan Officers and Employees and Directors Plans
2005 2005 2004 2003
Outstanding, beginning of year - 6,400,730 10,876,022 11,638,750
Granted 1,188,500 - - 1,399,072
Exercised - (2,459,594) (4,397,324) (2,061,700)
Cancelled (2,500) (45,380) (77,968) (100,100)
Outstanding, end of year 1,186,000 3,895,756 6,400,730 10,876,022
The company did not grant any stock options in 2004.
Weighted Average Exercise Price
Performance Option Plan Officers and Employees and Di rectors Plans
2005 2005 2004 2003
Outstanding, beginning of year $ - $ 38.14 $ 36.64 $ 31.95
Granted 88.25 - - 39.50
Exercised - 38.14 36.67 28.56
Cancelled 90.38 41.03 38.59 35.29
Outstanding, end of year 90.08 38.41 38.14 36.64
The weighted average grant-date fair value of options granted during the year was $34.5 (2004 - $NIL; 2003 - $15.7).
The following table summarizes information about stock options outstanding at December 31, 2005:
Options Outstanding Options Exercisable
Range of Number Weighted Average Weighted Average Weighted Average
Exercise Prices Outstanding Remaining Life Exercise Price Number Exercise Price
Officers and Employees an d Directors Plans
$21.84 to $31.50 828,000 5 years $ 30.05 828,000 $30.05
$33.01 to $42.85 1,977,059 7 years $ 38.20 1,977,059 $38.20
$43.38 to $52.11 1,090,697 6 years $ 45.13 1,090,697 $45.13
3,895,756 6 years $ 38.41 3,895,756 $38.41
Performance Option Plan
$88.23 to $94.28 1,186,000 9 years $ 90.08 - $ -
5,081,756 7 years $ 50.46 3,895,756 $38.41
The foregoing options have expiry dates ranging from November 2006 to May 2015.
Prior to 2003, the company applied the intrinsic value-based method of accounting for the plans. Effective December 15, 2003, the company
adopted the fair value-based method of accounting for stock options prospectively to all employee awards granted, modified or settled after
January 1, 2003. Since the company's stock option awards at that time vested over two years, the compensation cost included in the
determination of net income (loss) for years ended December 31, 2004 and 2003 is less than that which would have been recognized if the
fair value-based method had been applied to all awards since the original effective date of CICA Section 3870, "Stock-based Compensation
and Other Stock-based Payments". The following table illustrates the effect on net income (loss) and the related per-share amount if the
fair value-based method had been applied to all outstanding and unvested awards in each period.
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
27. STOCK-BASED COMPENSATION (CONTINUED)
2005 2004 2003
Net income (loss) - as reported $ 542.9 $ 298.6 $ (126.3)
Add: Stock-based employee compensation expense included in reported
net income (loss), net of related tax effects 18.4 8.8 0.8
Less: Total stock-based employee compensation expense determined under
fair value-based method for all option awards, net of related tax effects
(18.4)
(12.8)
(14.8)
Net income (loss) - pro formal $ 542.9 $ 294.6 $ (140.3)

t Compensation expense under the fair value-based method is recognized over the vesting period of the related stock options. Accordingly, the pro forma results of applying
this method may not be indicative of future results.
2005 2004 2003
Basic net income (loss)
per share
As reported $ 5.00 $ 2.77 $ (1.21)
Pro forma 5.00 2.73 (1.34)
Diluted net income (loss)
per share
As reported $ 4.89 $ 2.70 $ (1.21)
Pro forma 4.89 2.66 (1.34)
In calculating the foregoing pro forma amounts, the fair value of
each option grant was estimated as of the date of grant using the
Black-Scholes-Merton option-pricing model with the following
weighted-average assumptions:
Year of Grant
2005 2003 2002
Expected dividend $0.60 $0.50 $0.50
Expected volatility 28% 27% 32%
Risk-free interest rate 3.86% 4.06%
8 4.13%
8
Expected life of options 6.5 years years years
DEFERRED SHARE UNIT AND OTHER PLANS
The company offers a deferred share unit plan to non-employee
directors, which entitles those directors to receive discretionary
grants of deferred share units ("DSUs"), each of which has a value
equal to the market value of a common share at the time of its grant.
The plan also allows each director to choose to receive, in the form
of DSUs, all or a percentage of the director's fee, which would
otherwise be payable in cash. Each DSU fully vests upon award, but
is distributed only when the director has ceased to be a member of
the Board of Directors of the company. Vested units are settled in
cash based on the common share price at that time. As of
December 31, 2005, the total DSUs held by participating directors
was 63,635 (2004 - 50,999; 2003 - 35,906).
The company offers a performance unit incentive plan to senior
executives and other key employees. The performance objectives
under the plan are designed to further align the interests of
executives and key employees with those of shareholders by linking
the vesting of awards to the total return to shareholders over the
three-year performance period ending December 31, 2005. Total
shareholder return measures the capital appreciation in the
company's common shares, including dividends paid over the
performance period. Vesting of one-half of the awards is based on
increases in the total shareholder return over the three-year
performance period. Vesting of the remaining one-half of the awards
is based on the extent to which the total shareholder return matches
or exceeds the total shareholder return of the common shares of a
pre-defined peer group. Vested units are settled in cash based on the
common share price generally at the end of the performance period.
Compensation expense for this program is recorded over the three-
year performance cycle of the program. The amount of compensation
expense is adjusted over the three-year performance cycle to reflect
the current market value of common shares and the number of
shares vested in accordance with the vesting schedule based upon
total shareholder return and such return compared to the company's
peer group.
28. FINANCIAL INSTRUMENTS AND RISK
MANAGEMENT
Derivative financial instruments are financial contracts whose value
is derived from a foreign exchange rate, interest rate or commodity
index. The company uses derivative financial instruments, including
foreign currency forward contracts, futures, swaps and option
agreements, to manage foreign exchange, interest rate and
commodity price risk. Any derivative transactions that are specifically
designated (and qualify) for hedge accounting are considered by
the company to be off-balance sheet items since they are not
recorded at fair value on the Consolidated Statements of Financial
Position. The notional amounts of the company's financial
instruments described below represent the amount to which a rate
or price is applied in order to calculate the amount of cash that must
be exchanged under the contract. These notional amounts do not
represent assets or liabilities and therefore are not reflected in the
Consolidated Statements of Financial Position.
The company manages interest rate exposures by using a diversified
portfolio of fixed and floating rate instruments. The company's
sensitivity to fluctuations in interest rates is substantially limited to
certain of its cash and cash equivalents, short-term debt and long-
term debt. During the year, the company terminated its interest rate
swap contracts that effectively converted a notional amount of
$225.0 (2004 - $300.0) of fixed rate debt (due 2011) into floating
rate debt for cash proceeds of $1.8 (2004 - $3.0) and a gain of $1.6
(2004 - $0.8). Hedge accounting on all terminated interest rate
swap contracts was discontinued prospectively. The associated gains
are being amortized over the remaining term of the related debt as
a reduction to interest expense. No interest rate swap contracts were
outstanding as at December 31, 2005 or 2004.
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
77
78 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts
28. FINANCIAL INSTRUMENTS AND RISK
MANAGEMENT (CONTINUED)
and anticipated natural gas purchases for its US nitrogen and
phosphate 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. At December 31,
2005, it had collected cash margin requirements of $173.7 (2004-
$28.5) which were included in accounts payable and accrued
charges (see Note 11).
As at December 31, 2005, the company had derivatives qualifying
for hedge accounting in the form of swaps which represented a
notional amount of 82.3 MMBtu with maturities in 2006 through
2015. As at December 31, 2005, deferred losses from settled
hedging transactions were $7.2 (2004 - $3.0).
As at December 31, 2005, the company had entered into foreign
currency forward contracts to sell US dollars and receive Canadian
dollars in the notional amount of $43.0 (2004 - $54.1) at an
average exchange rate of 1.1852 (2004 - 1.2306). The company
also had small forward contracts outstanding as at December 31,
2005 to reduce exposure to the euro, Maturity dates for all forward
contracts are within 2006 and 2007.
The company is exposed to credit-related losses in the event of non-
performance by counterparties to derivative financial instruments. It
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 its 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 substantially insured or secured by letters of credit.
FAIR VALUE
Fair value represents point-in-time estimates that may change in
subsequent reporting periods due to market conditions or other
factors. The estimated fair values disclosed below are designed to
approximate amounts at which the financial instruments could be
exchanged in a current transaction between willing parties.
However, some financial instruments lack an available trading
market and therefore certain fair values are based on estimates
using net present value and other valuation techniques, which are
significantly affected by assumptions as to the amount and timing of
estimated future cash flows and discount rates, all of which reflect
varying degrees of risk.
Due to their short-term nature, the fair value of cash and cash
equivalents, accounts receivable, short-term debt, and accounts
payable and accrued charges is assumed to approximate carrying value.
The fair value of the company's gas hedging contracts at December 31,
2005 approximated $277.1 (2004 - $66.5). Futures contracts are
exchange-traded and fair value was determined based on exchange
prices. Swaps and option agreements are traded in the over-the-
counter market and fair value was calculated based on a price that was
converted to an exchange-equivalent price. The fair value of the
company's notes payable at December 31, 2005 approximated
$1,324.9 (2004 - $1,383.2) and reflects a current yield valuation
based on observed market prices. The fair value of the company's other
long-term debt instruments approximated carrying value.
29. CONTINGENCIES
CANPOTEX
PCS is a shareholder in Canpotex, which markets potash offshore.
Should any operating losses or other liabilities be incurred by
Canpotex, the shareholders have contractually agreed to reimburse
it for such losses or liabilities in proportion to their productive
capacity. There were no such operating losses or other liabilities in
2005, 2004 or 2003.
MINING RISK
In common with other companies in the industry, the company is
unable to acquire insurance for underground assets.
INVESTMENT IN APC
The company is party to a shareholders agreement with Jordan
Investment Company ("JIC") with respect to its investment in APC.
The terms of the shareholders agreement provide that, from
October 17, 2006 to October 16, 2009, JIC may seek to exercise a
put option (the "Put") to require the company to purchase JIC's
remaining common shares in APC. If the Put were exercised, the
company's purchase price would be calculated in accordance with a
specified formula based, in part, on future earnings of APC. The
amount, if any, which the company may have to pay for JIC's
remaining common shares if there was to be a valid exercise of the
Put is not presently determinable.
LEGAL AND OTHER MATTERS
In 1994, PCS Joint Venture responded to information requests from
the US Environmental Protection Agency ("USEPA") and the
Georgia Department of Natural Resources, Environmental Protection
Division ("GEPD") regarding conditions at its Moultrie, Georgia
location. PCS Joint Venture believes that the lead-contaminated
soil and groundwater found at the site are attributable to former
operations at the site prior to PCS Joint Venture's ownership. In
2005, the GEPD approved a Corrective Action Plan to address
environmental conditions at this location. As anticipated, the
approved remedy requires some excavation and off-site disposal of
impacted soil and installation of a groundwater recovery and
treatment system. PCS Joint Venture began the remediation in
November 2005. No significant change to management's estimate
of accrued costs was required as of December 31, 2005 as a result
of approval of the remedial action plan.
In 1998, the company, along with other parties, was notified by the
USEPA of potential liability under the US federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("CERCLA") with respect to certain soil and groundwater conditions
at a PCS Joint Venture blending facility in Lakeland, Florida and
certain adjoining property. In 1999, PCS Joint Venture signed an
Administrative Order and Consent with the USEPA pursuant to
which PCS Joint Venture agreed to conduct a Remedial Investigation
and Feasibility Study ("RUFS") of these conditions. PCS Joint Venture
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts 79
29. CONTINGENCIES (CONTINUED)
and another party are sharing the costs of the RI/FS. The draft
feasibility study has been submitted for review and approval. The
parties are reviewing comments of the USEPA and Florida
Department of Environment on the draft feasibility study and will
respond to such comments in the first quarter of 2006. No final
determination has yet been made of the nature, timing or cost of
remedial action that may be needed, nor to what extent costs
incurred may be recoverable from third parties.
In 2003, the USEPA notified PCS Nitrogen that it considers PCS
Nitrogen to be a potentially responsible party with respect to a
former fertilizer blending operation in Charleston, South Carolina,
known as the Planters Property or Columbia Nitrogen site, formerly
owned by a company from whom PCS Nitrogen acquired certain
other assets. In March 2005, the USEPA released for public comment
a range of remedial alternatives and a proposed remedy for this site.
In September 2005, Ashley II of Charleston, L.L.C., the current owner
of the site, filed a petition in the United States District Court for the
District of South Carolina seeking a declaratory judgment that PCS
Nitrogen is liable to pay environmental response costs at the site
and reimbursement of environmental response and other costs
incurred and to be incurred by Ashley II of Charleston, L.L.C. In
December 2005, PCS Nitrogen filed a motion to dismiss the petition
filed by Ashley II of Charleston, L.L.C. PCS Nitrogen expects that the
United States District Court will issue a decision on the motion to
dismiss in early 2006. In February 2006, PCS Nitrogen and other
potentially responsible parties received a notice from the USEPA
requesting reimbursement of previously incurred response costs of
approximately $3.0 plus interest, and the performance or financing
of future site investigation and response. PCS Nitrogen will continue
to monitor these and other developments with respect to the site.
PCS Nitrogen intends to vigorously defend its interests in these
actions. It will also continue to assert its position that it is not a
responsible party and to work to identify former site owners and
operators that would be responsible parties with respect to the site.
The USEPA announced an initiative to evaluate implementation
within the phosphate industry of a particular exemption for mineral
processing wastes under the hazardous waste program. In
connection with this industry-wide initiative, the USEPA conducted
hazardous waste compliance evaluation inspections at numerous
phosphate operations, including the company's plants in Aurora,
North Carolina, Geismar, Louisiana and White Springs, Florida. In
September 2005 and December 2005 respectively, the USEPA
notified the company of various alleged violations of the Resource
Conservation and Recovery Act at its Aurora and White Springs
plants. The company is currently reviewing these notices. At this
early stage, it is unable to evaluate the extent of any exposure that
it may have in these matters.
The company is also engaged in ongoing site assessment and/or
remediation activities at a number of other facilities and sites. Based
on current information, it believes that its future obligations with
respect to these facilities and sites are not reasonably likely to have
a material adverse effect on the company's consolidated financial
position or results of operations.
The breadth of the company's operations and the global complexity
of tax regulations require assessments of uncertainties and
judgments in estimating the ultimate taxes the company will pay.
The final taxes paid are dependent upon many factors, including
negotiations with taxing authorities in various jurisdictions,
outcomes of tax litigation and resolution of disputes arising from
federal, provincial, state and local tax audits. The resolution of these
uncertainties and the associated final taxes may result in
adjustments to the company's tax assets and tax liabilities.
Various other claims and lawsuits are pending against the company
in the ordinary course of business. While it is not possible to
determine the ultimate outcome of such actions at this time, and
there exist inherent uncertainties in predicting such outcomes, it is
management's belief that the ultimate resolution of such actions is
not reasonably likely to have a material adverse effect on the
company's consolidated financial position or results of operations.
30. GUARANTEES
In the normal course of operations, the company provides
indemnifications that are often standard contractual terms to
counterparties in transactions such as purchase and sale contracts,
service agreements, director/officer contracts and leasing
transactions. These indemnification agreements may require the
company to compensate the counterparties for costs incurred as a
result of various events, including environmental liabilities and
changes in (or in the interpretation of) laws and regulations, or as a
result of litigation claims or statutory sanctions that may be suffered
by the counterparty as a consequence of the transaction. The terms
of these indemnification agreements will vary based upon the
contract, the nature of which prevents the company from making
a reasonable estimate of the maximum potential amount that it
could be required to pay to counterparties. Historically, the
company has not made any significant payments under such
indemnifications and no amounts have been accrued in the
accompanying consolidated financial statements with respect to
these indemnification guarantees.
The company enters into agreements in the normal course of
business that may contain features which meet the definition of a
guarantee. Various debt obligations (such as overdrafts, lines of
credit with counterparties for derivatives, and back-to-back loan
arrangements) and other commitments (such as railcar leases)
related to certain subsidiaries have been directly guaranteed by the
company under such agreements with third parties. The company
would be required to perform on these guarantees in the event of
default by the guaranteed parties. No material loss is anticipated by
reason of such agreements and guarantees. At December 31, 2005,
the maximum potential amount of future (undiscounted) payments
under significant guarantees provided to third parties approximated
$236.8. As many of these guarantees will not be drawn upon and
the maximum potential amount of future payments does not
consider the possibility of recovery under recourse or collateral
provisions, this amount is not indicative of future cash requirements
or the company's expected losses from these arrangements. At
December 31, 2005, no subsidiary balances subject to guarantees
were outstanding in connection with the company's cash
management facilities, and it had no liabilities recorded for other
80 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
30. GUARANTEES (CONTINUED)
obligations other than subsidiary bank borrowings of approximately
$5.9, which are reflected in other long-term debt in Note 12, and
the cash margin requirements to maintain derivatives as disclosed in
Note 28.
The company has guaranteed the gypsum stack capping, closure and
post-closure obligations of White Springs and PCS Nitrogen in
Florida and Louisiana, respectively, pursuant to the financial
assurance regulatory requirements in those states. In February 2005,
the Florida Environmental Regulation Commission approved certain
modifications to the financial assurance requirements designed to
ensure that responsible parties have sufficient resources to cover all
closure and post-closure costs and liabilities associated with gypsum
stacks in the state. The new requirements became effective in July
2005 and include financial strength tests that are more stringent
than under previous law and a requirement that gypsum stack
closure cost estimates include the cost of treating process water.
The company has met its financial assurance responsibilities as of
December 31, 2005. Costs associated with the retirement of long-
lived tangible assets have been accrued in the accompanying
consolidated financial statements to the extent that a legal liability
to retire such assets exists (see Note 15).
The environmental regulations of the Province of Saskatchewan
require each potash mine to have decommissioning and reclamation
("D&R") plans. In 2001, agreement was reached with the provincial
government on the financial assurances for the D&R plan to cover an
interim period to July 1, 2005. In October 2004, this interim period
was extended to July 1, 2006. A government/industry task force has
been established to assess decommissioning options for all
Saskatchewan potash producers and to produce mutually acceptable
revisions to the plans. The company has posted an irrevocable
Cdn $2.0 letter of credit as collateral.
During the year, the company entered into various other commercial
letters of credit in the normal course of operations. As at December 31,
2005, $18.7 of letters of credit were outstanding (2004 - $15.1).
The company expects that it will be able to satisfy all applicable credit
support requirements without disrupting normal business operations.
31. RELATED PARTY TRANSACTIONS
Sales to Canpotex are at prevailing market prices. Sales for the year
ended December 31, 2005 were $577.1 (2004 - $421.9; 2003 -
$260.6). Account balances resulting from the Canpotex transactions
are included in the Consolidated Statements of Financial Position and
settled on normal trade terms (see Note 5).
Potash purchases from SQM in 2005 were $NIL (2004- $7.0; 2003
- $13.1). Potassium nitrate sales to SQM for 2005 were $NIL (2004
- $25.1; 2003 - $25.8). All transactions with SQM were settled
on normal trade terms at negotiated prices that approximated
33. RECONCILIATION OF CANADIAN AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Canadian GAAP varies in certain significant respects from US GAAP.
As required by the United States Securities and Exchange Commission,
the effect of these principal differences on the company's consolidated
financial statements is described and quantified below:
(a) Long-term investments: The company's investments in ICL and
Sinofert are stated at cost. US GAAP requires that these investments
be classified as available-for-sale and be stated at market value with
the difference between market value and cost reported as a
component of Other Comprehensive Income ("OCI").
Certain of the company's investments in international entities are
accounted for under the equity method. Accounting principles
generally accepted in those foreign jurisdictions may vary in certain
important respects from Canadian GAAP and in certain other respects
from US GAAP. The company's share of earnings of these equity
investees under Canadian GAAP has been adjusted for the significant
effects of conforming to US GAAP.
(b) Property, plant and equipment and goodwill: The net book
value of property, plant and equipment and goodwill under Canadian
GAAP is higher than under US GAAP, as past provisions for asset
impairment under Canadian GAAP were measured based on the
undiscounted cash flow from use together with the residual value of
the assets. Under US GAAP they were measured based on fair value,
which was lower than the undiscounted cash flow from use together
with the residual value of the assets. Fair value for this purpose was
determined based on discounted expected future net cash flows.
(c) Depreciation and amortization: Depreciation and amortization
under Canadian GAAP is higher than under US GAAP, as a result of
differences in the carrying amounts of property, plant and equipment
under Canadian and US GAAP.
(d) Exploration costs: Under Canadian GAAP, capitalized
exploration costs are classified under property, plant and equipment.
For US GAAP, these costs are generally expensed until such time as
a final feasibility study has confirmed the existence of a
commercially mineable deposit.
(e) Pre-operating costs: Operating costs incurred during the
start-up phase of new projects are deferred under Canadian GAAP
until commercial production levels are reached, at which time they
are amortized over the estimated life of the project. US GAAP
requires that these costs be expensed as incurred.
(f) Asset retirement obligations: The company adopted SFAS
No. 143, "Accounting for Asset Retirement Obligations", for US
GAAP purposes effective January 1, 2003. A GAAP difference arises
because the equivalent Canadian standard was not adopted until
January 1, 2004.
market value. (g) Pension and other post-retirement benefits: Under Canadian
GAAP, when a defined benefit plan gives rise to an accrued benefit
32. COMPARATIVE FIGURES asset, a company must recognize a valuation allowance for the
Certain of the prior years' figures have been reclassified to conform excess of the adjusted benefit asset over the expected future benefit
with the current year's presentation. to be realized from the plan asset. Changes in the pension valuation
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts 81
33. RECONCILIATION OF CANADIAN AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTINUED)
allowance are recognized in income. US GAAP does not specifically
address pension valuation allowances, and the US regulators have
interpreted this to be a difference between Canadian and US GAAP.
In light of this, a difference between Canadian and US GAAP has
been recorded for the effects of recognizing a pension valuation
allowance and the changes therein under Canadian GAAP.
The company's accumulated benefit obligation for its US pension
plans exceeds the fair value of plan assets. US GAAP requires the
recognition of an additional minimum pension liability in the amount
of the excess of the unfunded accumulated benefit obligation over
the recorded pension benefits liability. An offsetting intangible asset
is recorded equal to the unrecognized prior service costs, with any
difference recorded as a reduction of accumulated OCI. No similar
requirement exists under Canadian GAAP.
(h) Foreign currency translation adjustment: The company
adopted the US dollar as its functional and reporting currency on
January 1, 1995. At that time, the consolidated financial statements
were translated into US dollars at the December 31, 1994 year-end
exchange rate using the translation of convenience method under
Canadian GAAP. This translation method was not permitted under
US GAAP. US GAAP required the comparative Consolidated
Statements of Operations and Consolidated Statements of Cash
Flow to be translated at applicable weighted-average exchange
rates; whereas the Consolidated Statements of Financial Position
were permitted to be translated at the December 31, 1994
year-end exchange rate. The use of disparate exchange rates under
US GAAP gave rise to a foreign currency translation adjustment.
Under US GAAP, this adjustment is reported as a component of
accumulated OCI.
(i) Derivative instruments and hedging activities: Under Canadian
GAAP, effective January 1, 2004, derivatives used for non-trading
purposes that do not qualify for hedge accounting are carried at fair
value on the Consolidated Statements of Financial Position, with
changes in fair value reflected in earnings. Derivatives embedded
within hybrid instruments are generally not separately accounted for
except for those related to equity-linked deposit contracts, which are
not applicable to the company. Gains and losses on derivative
instruments held within an effective hedge relationship are
recognized in earnings on the same basis and in the same period as
the underlying hedged items. There is no difference in accounting
between Canadian and US GAAP in respect of derivatives that do
not qualify for hedge accounting. Unlike Canadian GAAP, however,
the company recognizes all of its derivative instruments (whether
designated in hedging relationships or not, or embedded within
hybrid instruments) at fair value on the Consolidated Statements of
Financial Position for US GAAP purposes. Under US GAAP, the
accounting for changes in the fair value (i.e. gains or losses) of a
derivative instrument depends on whether it has been designated
and qualifies as part of a hedging relationship. For strategies
designated as fair value hedges, the effective portion of the change
in the fair value of the derivative is offset in income against the
change in fair value, attributed to the risk being hedged, of the
underlying hedged asset, liability or firm commitment. For cash flow
hedges, the effective portion of the changes in the fair value of the
derivative is accumulated in OCI until the variability in cash flows
being hedged is recognized in earnings in future accounting periods.
For both fair value and cash flow hedges, if a derivative instrument
is designated as a hedge and meets the criteria for hedge
effectiveness, earnings offset is available, but only to the extent that
the hedge is effective. Ineffective portions of fair value or cash flow
hedges are recorded in earnings in the current period.
(j) Provision for plant shutdowns: The 2003 provision for
plant shutdowns included as a component of other expenses under
Canadian GAAP includes $12.7 for writedowns of parts inventory.
US GAAP requires that these writedowns be presented as a
component of cost of goods sold.
(k) Provision for PCS Yumbes S.C.M.: The 2003 provision for PCS
Yumbes included as a component of other expenses under Canadian
GAAP includes $50.2 for writedowns of non-parts inventory. US
GAAP requires that these writedowns be presented as a component
of cost of goods sold.
(1) Comprehensive income: Comprehensive income is recognized
and measured under US GAAP pursuant to SFAS No. 130,
"Reporting Comprehensive Income". This standard defines
comprehensive income as all changes in equity other than those
resulting from investments by owners and distributions to owners.
Comprehensive income is comprised of two components, net income
and OCI. OCI refers to amounts that are recorded as an element of
shareholders' equity but are excluded from net income because
these transactions or events were attributed to changes from non-
owner sources. As described in Note 2, Canadian standards relating
to comprehensive income are not effective until fiscal years
beginning on or after October 1, 2006.
(m) Income taxes related to the above adjustments: The income
tax adjustment reflects the impact on income taxes of the US GAAP
adjustments described above. Accounting for income taxes under
Canadian and US GAAP is similar, except that income tax rates of
enacted or substantively enacted tax law must be used to calculate
future income tax assets and liabilities under Canadian GAAP,
whereas only income tax rates of enacted tax law can be used
under US GAAP.
(n) Income tax consequences of stock-based employee
compensation: Under Canadian GAAP, the income tax benefit
attributable to stock-based compensation that is deductible in
computing taxable income but is not recorded in the consolidated
financial statements as an expense of any period (the "excess
benefit") is considered to be a permanent difference. Accordingly,
such amount is treated as an item that reconciles the statutory
income tax rate to the company's effective income tax rate. Under US
GAAP, the excess benefit is recognized as additional paid-in capital.
The application of US GAAP, as described above, would have had the
following effects on net income (loss), net income (loss) per share,
total assets and shareholders' equity.
82 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
33. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTINUED)
2005 2004 2003
Net income (loss) as reported - Canadian GAAP $ 542.9 $ 298.6 $ (126.3)
Items increasing or decreasing reported net income (loss)
Cash flow hedge ineffectiveness 2.3 2.6 -
Pre-operating costs - - 63.0
Depreciation and amortization 8.4 8.4 8.5
Exploration costs (6.4) - -
Accretion of asset retirement obligations - 3.3 (3.3)
Share of earnings of equity investees 3.7 - -
Pension and other post-retirement benefits 2.4 (2.2) 2.0
Deferred income taxes relating to the above adjustments (3.4) (4.3) (23.7)
Income taxes related to stock-based compensation (17.2) (15.9) (4.4)
Net income (loss) - US GAAP $ 532.7 $ 290.5 $ (84.2)
Basic weighted average shares outstanding - US GAAP 108,568,000 107,967,000 104,460,000
Diluted weighted average shares outstanding - US GAAP 111,078,000 110,739,000 104,460,000
Basic net income (loss) per share - US GAAP $ 4.91 $ 2.69 $ (0.81)
Diluted net income (loss) per share - US GAAP $ 4.80 $ 2.62 $ (0.81)
Total assets as reported - Canadian GAAP $ 5,357.9 $ 5,126.8 $ 4,567.3
Items increasing (decreasing) reported total assets
Inventory and other current assets (7.2) (0.4) (2.7)
Available-for-sale securities (unrealized holding gain) 355.2 161.7 60.6
Fair value of derivative instruments 277.1 66.5 59.8
Property, plant and equipment (118.1) (126.5) (134.9)
Exploration costs (6.4) - -
Pension and other post-retirement benefits 14.1 11.7 13.9
Intangible asset relating to additional minimum pension liability 11.1 9.6 2.7
Investment in equity investees 4,8 - -
Goodwill (46.7) (46.7) (46.7)
Total assets - US GAAP $ 5,841.8 $ 5,202.7 $ 4,520.0
Total shareholders' equity as reported - Canadian GAAP $ 2,132.5 $ 2,385.6 $ 1,973.8
Items increasing (decreasing) reported shareholders' equity
Accumulated other comprehensive income (loss),
net of related income taxes 343.2 96.8 31.2
Foreign currency translation adjustment 20.9 20.9 20.9
Accretion of asset retirement obligations - - (3.3)
Provision for asset impairment (218.0) (218.0) (218.0)
Depreciation and amortization 53.2 44.8 36.4
Exploration costs (6.4) - -
Cash flow hedge ineffectiveness 4.9 2.6 -
Pension and other post-retirement benefits 14.1 11.7 13.9
Share of earnings of equity investees 3.7 - -
Deferred income taxes relating to the above adjustments 27.0 30.4 34.7
Shareholders' equity - US GAAP $ 2,375.1 $ 2,374.8 $ 1,889.6
SUPPLEMENTAL US GAAP DISCLOSURE
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs", to clarify that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges,
and to require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The
guidance is effective for inventory costs incurred during 2006. Earlier application is permitted. The company is reviewing the guidance to
determine the potential impact, if any, on its consolidated financial statements.
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts 83
33. RECONCILIATION OF CANADIAN AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (CONTINUED)
In December 2004, the FASB issued SFAS No. 123 (Revised 2004),
"Share-Based Payment", which requires all share-based payments
to employees, including grants of employee stock options, to be
recognized as compensation expense in the consolidated financial
statements based on their fair values. In 2005, the FASB released
several related Staff Positions ("FSPs") to help clarify and interpret
this new guidance. The new rules modify certain measurement and
expense recognition provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", including the requirement to estimate
employee forfeitures each period when recognizing compensation
expense and requiring that the initial and subsequent measurement
of the cost of liability-based awards each period be based on the fair
value (instead of the intrinsic value) of the award. SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather
than as an operating cash flow as required under current literature.
This requirement will reduce net operating cash flows and increase
net financing cash flows in periods after adoption. As described
below, the company previously elected to expense employee stock-
based compensation using the fair value method prospectively for all
awards granted or modified on or after January 1, 2003. The new
standard is effective January 1, 2006. The company is assessing the
impact of adoption on its consolidated financial position and results
of operation, but does not expect it to be material.
In March 2005, the FASB issued FSP FIN 46(R)-5, "Implicit Variable
Interests under FASB Interpretation No. 46(R), Consolidation of
Variable Interest Entities", to address whether a company has an
implicit variable interest in a VIE or potential VIE when specific
conditions exist. The guidance describes an implicit variable interest
as an implied financial interest in an entity that changes with
changes in the fair value of the entity's net assets exclusive of
variable interests. An implicit variable interest acts the same as an
explicit variable interest except that it involves the absorbing and/or
receiving of variability indirectly from the entity (rather than directly).
The guidance did not have a material impact on the company's
consolidated financial statements.
In March 2005, the FASB issued FIN No. 47, "Accounting for
Conditional Asset Retirement Obligations". FIN No. 47 clarifies that
the term Conditional Asset Retirement Obligation as used in SFAS
No. 143, "Accounting for Asset Retirement Obligations", refers to a
legal obligation to perform an asset retirement activity in which the
timing and/or method of settlement are conditional on a future event
that may or may not be within the control of the entity. Accordingly,
an entity is required to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. The guidance did not have a material
effect on the company's consolidated financial statements.
In March 2005, the FASB ratified the consensus reached by the
Emerging Issues Task Force ("EITF") on Issue No. 04-6, "Accounting
for Stripping Costs Incurred During Production in the Mining
Industry", that stripping costs incurred during production are
variable inventory costs that should be attributed to ore produced in
that period as a component of inventory and recognized in cost of
sales in the same period as related revenue. The consensus will be
effective for the company in 2006. The company is reviewing the
guidance to determine the potential impact, if any, on its
consolidated financial statements. The EIC in Canada has reached a
tentative conclusion on this issue that differs from the EITF
consensus. Specifically, it has suggested that the activity of removing
overburden and other mine waste minerals in the production phase
represents either a component of inventory or a betterment to the
mineral property, depending on the benefit received by the entity.
The company is monitoring the developments and will determine the
potential impact, if any, on its consolidated financial statements if
and when related Canadian guidance is released.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections", which requires that changes in accounting
principle be retrospectively applied as of the beginning of the first
period presented as if that principle had always been used, with the
cumulative effect reflected in the carrying value of assets and
liabilities as of the first period presented and the offsetting
adjustments recorded to opening retained earnings. SFAS No. 154 is
effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005, with early adoption
permitted. The company is reviewing the guidance to determine the
potential impact, if any, on its consolidated financial statements.
In November 2005, the FASB issued FSP FAS 115-1 and FAS 124-1,
"The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain investments", which nullified 2004 guidance
issued by the EITF on determining whether an impairment is other-
than-temporary, and effectively reverted back to previous guidance
in this area. The FSP generally encompasses guidance for
determining when an investment is impaired, how to measure the
impairment loss and what disclosures should be made regarding
impaired securities. This FSP is effective for the first quarter of 2006
and is not expected to have a material impact on the company's
consolidated financial statements.
Available-for-Sale Security
The company's investments in ICL and Sinofert are classified as
available-for-sale. The fair market value of these investments at
December 31, 2005 was $620.3 and the unrealized holding gain
was $355.2.
Deferred Income Taxes
The total valuation allowance recognized for deferred income tax
assets in 2005 was $45.5 (2004 - $29.4). The company has
determined that it is more likely than not that the deferred income
tax assets net of the valuation allowance will be realized through
a combination of future reversals of temporary differences and
taxable income.
84 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
33. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTINUED)
Stock-Based Compensation
Prior to 2003, the company applied the intrinsic value-based method of accounting for its stock option plans under US GAAP. Effective
December 15, 2003, the company adopted the fair value-based method of accounting for stock options prospectively to all employee awards
granted, modified or settled after January 1, 2003 pursuant to the transitional provisions of SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure". Since the company's stock option awards at that time vested over two years, the compensation
cost included in the determination of net income (loss) for years ended December 31, 2004 and 2003 is less than that which would have
been recognized if the fair value-based method had been applied to all awards since the original effective date of SFAS No. 123, "Accounting
for Stock-Based Compensation". The following table illustrates the effect on net income (loss) and net income (loss) per share under US
GAAP if the fair value-based method had been applied to all outstanding and unvested awards in each period.
2005 2004 2003
Net income (loss) - as reported under US GAAP $ 532.7 $ 290.5 $ (84.2)
Add: Stock-based employee compensation expense included
in reported net income (loss), net of related tax effects 18.4 8.8 0.8
Less: Total stock-based employee compensation expense determined under
fair value-based method for all option awards, net of related tax effects (18.4) (12.8) (14.8)
Net income (loss) - pro forma under US GAAP t $ 532.7 $ 286.5 $ (98.2)
Compensation expense under the fair value-based method is recognized over the vesting period of the related stock options. Accordingly, the pro forma results of applying
this method may not be indicative of future results.
2005 2004 2003
Basic net income (loss) per share
As reported $ 4.91 $ 2.69 $ (0.81)
Pro forma 4.91 2.65 (0.94)
Diluted net income (loss) per share
As reported $ 4.80 $ 2.62 $ (0.81)
Pro forma 4.80 2.59 (0.94)
Derivative Instruments and Hedging Activities
The company has designated its natural gas derivative instruments as cash flow hedges.
The portion of gain or loss on derivative instruments designated as cash flow hedges that are effective at offsetting changes in the hedged
item is reported as a component of accumulated OCI and then is reclassified into cost of goods sold when the product containing the hedged
item is sold. Any hedge ineffectiveness is recorded in cost of goods sold in the current period. During the year, a gain of $48.6 was
recognized in cost of goods sold (2004 - $43.0; 2003 - $89.9). Of the deferred gains at year-end, approximately $103.9 will be reclassified
to cost of goods sold within the next 12 months.
Pensions and Other Post-Retirement Benefits
Amounts recognized in the Supplemental Schedule of Consolidated Financial Position for US GAAP purposes consist of:
Pension Other Total
2005 2004 2005 2004 2005 2004
Prepaid pension costs $ 39.1 $ 28.5 $ 0.4 $ 8.8 $ 39.5 $ 37.3
Other intangible asset 11.1 9.6 - - 11.1 9.6
Current liabilities (0.4) (16.0) (8.1) (7.8) (8.5) (23.8)
Long-term liabilities (116.5) (69.1) (191.8) (188.8) (308.3) (257.9)
Accumulated other comprehensive income 83.3 54.9 - - 83.3 54.9
Net amount recognized $ 16.6 $ 7.9 $ (199.5) $ (187.8) $ (182.9) $ (179.9)
Related Party Transactions
During the year, sales to a company associated with the immediate family of a member of the PCS Board of Directors totalled
$12.6 (2004 - $16.2). These transactions were conducted in the normal course of business at the prevailing market prices and on
normal trade terms.
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS I in millions of US dollars except share and per-share amounts 85
33. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTINUED)
SUPPLEMENTAL SCHEDULES
The following supplemental schedules present the consolidated Financial Position, Operations and Retained Earnings, Comprehensive Income
(Loss), Accumulated Other Comprehensive Income (Loss), and Cash Flow in accordance wit h US GAAP as adjusted for the GAAP d ifferences
described in this note.
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED FINANCIAL POSITION
As at December 31
2005 2004
Assets
Current assets
Cash and cash equivalents $ 93.9 $ 458.9
Accounts receivable 453.3 352.6
Inventories 515.3 393.8
Prepaid expenses and other current assets 41.1 37.9
Current portion of derivative instruments 103.9 38.2
1,207.5 1,281.4
Derivative instruments 173.2 28.3
Property, plant and equipment 3,138.4 2,972.4
Other assets 1,226.8 823.6
Intangible assets 45.6 46.7
Goodwill 50.3 50.3
$ 5,841.8 $ 5,202.7
Liabilities
Current liabilities
Short-term debt $ 252.2 $ 93.5
Accounts payable and accrued charges 842.7 599.9
Current portion of long-term debt 1.2 10.3
1,096.1 703.7
Long-term debt 1,257.6 1,258.6
Deferred income tax liability 690.2 521.6
Accrued pension and other post-retirement benefits 308.3 257.9
Accrued environmental costs and asset retirement obligations 97.3 81.2
Other non-current liabilities and deferred credits 17.2 4.9
3,466.7 2,827.9
Shareholders' Equity
Share capital 1,379.3 1,408.4
Additional paid-in capital 75.1 297.3
Retained earnings 577.5 572.3
Accumulated other comprehensive income 343.2 96.8
2,375.1 2,374.8
$ 5,841.8 $ 5,202.7
86 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
33. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED OPERATIONS AND RETAINED EARNINGS
For the Years Ended December 31
2005 2004 2003
Sales $ 3,847.2 $ 3,244.4 $ 2,799.0
Less: Freight 249.7 238.7 234.5
Transportation and distribution 121.9 104.3 98.7
Cost of goods sold 2,337.5 2,207.9 2,141.2
Gross Margin 1,138.1 693.5 324.6
Selling and administrative 144.5 130.6 96.1
Provincial mining and other taxes 137.2 92.6 57.0
Foreign exchange loss 12.5 19.7 51.9
Share of earnings of equity investees (55.8) (30.9) (12.4)
Other income (9.7) (48.5) (20.8)
Other expenses 6.4 3.6 138.3
235.1 167.1 310.1
Operating Income 903.0 526.4 14.5
Interest Expense 82.3 84.0 91.3
Income (Loss) Before Income Taxes 820.7 442.4 (76.8)
Income Taxes 288.0 151.9 7.4
Net Income (Loss) 532.7 290.5 (84.2)
Retained Earnings, Beginning of Year 572.3 341.7 478.2
Repurchase of Common Shares (462.5) - -
Dividends (65.0) (59.9) (52.3)
Retained Earnings, End of Year $ 577.5 $ 572.3 $ 341.7
Net Income (Loss) per Share - Basic $ 4.91 $ 2.69 $ (0.81)
Net Income (Loss) per Share - Diluted $ 4.80 $ 2.62 $ (0.81)
Dividends per Share $ 0.60 $ 0.55 $ 0.50
NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts 87
33. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31
2005 2004 2003
Net income (loss) $ 532.7 $ 290.5 $ (84.2)
Other comprehensive income
Change in unrealized holding gains and losses on
available-for-sale securities 193.5 101.2 42.7
Change in gains and losses on derivatives designated
as cash flow hedges 255.0 49.3 98.3
Reclassification to income of gains and losses on cash flow hedges (53.5) (43.0) (89.9)
Adjustment to additional minimum pension liability (28.4) (9.6) 23.4
Share of other comprehensive income of equity investees 1.1 - -
Deferred income taxes related to other comprehensive income (121.3) (32.3) (29.7)
Other comprehensive income, net of related income taxes 246.4 65.6 44.8
Comprehensive income (loss) $ 779.1 $ 356.1 $ (39.4)
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31
2005 2004 2003
Accumulated other comprehensive income (loss), beginning of year $ 96.8 $ 31.2 $ (13.6)
Other comprehensive income, net of related income taxes 246.4 65.6 44.8
Accumulated other comprehensive income, end of year $ 343.2 $ 96.8 $ 31.2
The balances related to each component of accumulated other comprehensive income, net of related income taxes, are as follows:
2005 2004 2003
Unrealized gains and losses on available-for-sale securities $ 236.3 $ 106.7 $ 39.0
Gains and losses on derivatives designated as cash flow hedges 182.4 47.4 43.1
Additional minimum pension liability (55.4) (36.4) (30.0)
Share of other comprehensive income of equity investees 0.8 - -
Foreign currency translation adjustment (20.9) (20.9) (20.9)
Accumulated other comprehensive income, end of year $ 343.2 $ 96.8 $ 31.2
88 NOTES TO THE POTASHCORP CONSOLIDATED FINANCIAL STATEMENTS in millions of US dollars except share and per-share amounts
33. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(CONTINUED)
SUPPLEMENTAL SCHEDULE OF CONSOLIDATED CASH FLOW
For the Years Ended December 31
2005 2004 2003
Operating Activities
Net income (loss) $ 532.7 $ 290.5 $ (84.2)
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation and amortization 234.0 231.6 218.9
Stock-based compensation 27.5 11.1 1.0
Loss (gain) on disposal of property, plant and equipment 11.8 (0.7) 1.0
Gain on sale of long-term investments - (34.4) -
Provisions for nitrogen and phosphate plant shutdowns and PCS Yumbes - 3.6 120.1
Writedown of inventories - - 62.9
Foreign exchange on deferred income tax 8.9 17.2 35.9
Provision for deferred income tax 43.5 30.6 3.0
Income taxes related to stock-based compensation 17.2 15.9 4.4
Undistributed earnings of equity investees (37.2) (22.2) (8.4)
Other long-term liabilities 20.2 (2.3) 15.9
Changes in non-cash operating working capital
Accounts receivable (107.6) (51.9) (39.5)
Inventories (122.2) (10.5) 14.5
Prepaid expenses and other current assets (8.2) (8.9) 9.4
Accounts payable and accrued charges 238.1 188.7 30.6
Cash provided by operating activities 858.7 658.3 385.5
Investing Activities
Additions to property, plant and equipment (376.3) (220.5) (150.7)
Purchase of long-term investments (190.9) (105.5) (178.3)
Proceeds from disposal of property, plant and equipment 7.2 2.5 -
Proceeds from sale of long-term investments 5.2 100.8 -
Other assets and intangible assets 5.9 (2.8) (32.7)
Cash used in investing activities (548.9) (225.5) (361.7)
Financing Activities
Proceeds from long-term debt obligations - - 250.0
Repayment of long-term debt obligations (10.1) (1.0) (3.4)
Proceeds from (repayment of) short-term debt obligations 158.7 (82.7) (296.8)
Dividends (65.4) (56.1) (52.3)
Repurchase of common shares (851.9) - -
Issuance of common shares 93.9 161.2 58.9
Cash (used in) provided by financing activities (674.8) 21.4 (43.6)
(Decrease) Increase in Cash and Cash Equivalents (365.0) 454.2 (19.8)
Cash and Cash Equivalents, Beginning of Period 458.9 4.7 24.5
Cash and Cash Equivalents, End of Period $ 93.9 $ 458.9 $ 4.7
34. SUBSEQUENT EVENT
In February 2006, the company exercised its option to acquire an additional 10-percent interest in the ordinary shares of Sinofert for cash
consideration of $126.0, plus transaction costs. The additional investment increases the company's interest to 20 percent.
I
POTASHCORP 2005 ANNUAL REPORT APPENDIX
MARKET AND INDUSTRY DATA STATEMENT
Some of the market and industry data contained in this annual report and this Management's Discussion & Analysis of Financial Condition and Results of
Operations are based o n internal surveys, market research, independent industry publications or other publicly available information. Although we believe that the
independent sources us ed by us are reliable, we have not independently verified and cannot guarantee th e accuracy or completeness of this information. Similarly,
we believe our internal research is reliable, but such research has not been verifie d by any independent sources.
Information in the preparation of this annual report is based on statistical data an d other material available at February 27, 2006.
FOOTNOTES, SOURCES, ABBREVIATIONS, TERMS A ND MEASURES
FOOTNOTES ABBREVIATED COMPANY NAMES AND SOURCES* (continued)
1 Geographic Availabili ty Source: Fertecon, EIA PhosChem Phosphate Chemical Export Association, Inc., USA
of Raw Materials PPI Potash & Phosphate Institute, USA
2 Cost of New Capacity Source: Fertecon PPIC Potash & Phosphate Institute of Canada, Canada
3 Greenfield Definition: New operation built on Silvinit
Sinofert 1SC Silvinit, Russia
Sinochem Hong Kong Holdings Limited
undeveloped site (HKSE, 0297.HK), China
4 Greenfield Developm ent Time Source: Fertecon SQM Sociedad Quimica y Minera de Chile S.A. (Santiago Bolsa
5 Producing Countries Source: Fertecon de Comercio Exchange, NYSE: SQM), Chile
6 State- or Subsidy- Source: Fertecon, British Sulphur, PotashCorp Terra Terra Industries, Inc. (NYSE: TRA), USA
Controlled Productio n TFI The Fertilizer Institute, USA
7 Industry Operating R ate Source: Fertecon, PotashCorp Thomson Financial Thomson Financial Inc., USA
8 PotashCorp Capacity Source: Fertecon, PotashCorp Tringen Trinidad Nitrogen Co., Limited, Trinidad
9 PotashCorp World Source: Fertecon; Blue, Johnson; Agrium; TSX Toronto Stock Exchange, Canada
Position by Capacity PotashCorp Uralkali JSC Uralkali, Russia
US Chem U.S. Agri-Chemicals Corporation, USA
10 Total World Demand Source: Fertecon USDA
of Agriculture, USA
US Department
11 PotashCor Share of
P Source: Fertecon; Blue, Johnson; A rium;
9 Yara Yara International (Formerly Hydro Agri and Hydro Gas
World Production PotashCorp and Chemicals) (Oslo: YAR), Norway
ABBREVIATED COMPANY NAMES AND SOURCES* GLOSSARY OF TERM S
Agrium Agrium Inc. (TSX and NYSE: AGU), Canada Canpotex An export company owned by all Saskatchewan producers
APC Arab Potash Company Ltd. (Amman: ARPT), Jordan of potash (PotashCorp, Mosaic and Agrium).
BASF BASF Group (Xetra: BAS, NYSE: BF), USA Consumption Product applied vs product purchased
Belaruskali PA Belaruskali, Belarus vs Demand
Blue, Johnson
BPC Blue, Johnson & Associates, USA
Belarusian Potash Company, Belarus
North America
The North American market includes Canada and the
British Sulphur British Sulphur Consultants, UK United States.
Canpotex Canpotex Limited, Canada Offshore Offshore markets include all markets except Canada and
CF Industries CF Industries, Inc., USA the United States.
Cherokee Chem Cherokee Nitrogen Co., USA PhosChem An association formed under the Webb-Pomerene Act
Christensen Christensen, USA for US exports of phosphate fertilizer products. Members
CNC Caribbean Nitrogen Company, Trinidad are PotashCorp, Mosaic and Mississippi Phosphates
Coastal Coastal Catalyst and Chemical Co., USA Corporation. PCS Sales is responsible for export sales of
Coronet Coronet Industries, Incorporated, USA liquid fertilizers for all PhosChem members while Mosaic
CVRD Companhia Vale do Rio Doce, Brazil is responsible for sales of solid fertilizers for members.
DJUSBM Dow Jones U.S. Basic Materials Index, USA State- or Subsidy- State-controlled: Operational control in the hands of the state
DSM DSM Chemicals North America Inc. (XAMS: DSMA, Controlled Production Subsidy-controlled: The state provides subsidies which
NYSE: DSMKY), USA control the economic viability of the operation
Dyno Dyno Nobel Limited, Norway SCIENTIFIC TERMS
FAO Food and Agriculture Organization
USA
of the United Nations
Nitrogen o
NH3 ammonia (anhydrous), 82.2 /o N
Fertecon ,
Fertecon Limited and Fertecon Research Centre Limited, UK HN03 nitric acid, 22% N (liquid)
ICL Israel Chemicals Ltd. (Tel Aviv: CHIM), Israel UAN nitrogen solutions, 28-32% N (liquid)
IFA International Fertilizer Industry Association, France Phosphate P205 phosphoric acid (liquid)
IFDC International Fertilizer Development Center, USA MGA merchant grade acid, 54% PZOS (liquid)
IMC IMC Global Inc. (now Mosaic), USA DAP diammonium phosphate, 46% P205 (solid)
IMF International Monetary Fund, USA MAP monoammonium phosphate, 52% P205 (solid)
Innovene Innovene USA LLC, USA SPA superphosphoric acid, 70% PZOS (liquid)
Intrepid Intrepid Potash, USA MCP monocalcium phosphate, 48.1 % P205 (solid)
Kali & Salz (K&S) Kali and Salz GmbH (Xetra: SDF), Germany DCP dicalcium phosphate, 42.4% PZOS (solid)
Koch Koch Industries, Inc., USA DFP defluorinated phosphate, 41.2% P205 (solid)
Marsoft Marsoft Inc., USA Potash KCI potassium chloride, 60-63.2% (solid)
Mosaic The Mosaic Company (NYSE: MOS), USA FERTILIZER MEASURES
NCPC North Carolina Phosphate Company, USA
P205 tonne
Measures the phosphorus content of fertilizers having
NOLA New Orleans, Louisiana, USA different chemical analyses
NYMEX
OCP New York Mercantile Exchange, USA
Office Cherifien des Phosphates, Morocco N tonne Measures the nitrogen content of fertilizers having different
OMS Overseas Marine Services, USA chemical analyses
Oswal Oswal Chemicals & Fertilizers Limited, India Product tonne Standard measure of the weights of all types of potash,
Pemex Petroleos Mexicanos, Mexico phosphate and nitrogen products
89
* Where PotashCorp is listed as a source in conjunction with external sources, we have supplemented the external data with internal analysis
enriching
knowledge

ANYTIME
At PotashCoM
our commitment to transparent disclosure is
evident in all our communications - but the most
recent information can always be found on our award-
winning website. Visit our Investor Relations section for
market overviews, web-exclusive features, management
videos, the latest news releases, dividend notices
and more - all before your coffee gets cold.
www.potashcorp.com/investor-relations
F_
I
L
PotashCorp
Helping Nature Provide
ANNUAL REPORT
Z005
40
enriching
our world

BUSINESS
REVIEW
SM PotashCorp
Helping Nature Provide
rewarding investors •
enrichin
people throughout the world
PotashCorp is the world's foremost supplier of
potash, the crop nutrient that delivers the highest-
quality earnings in the fertilizer universe. Our large,
low-cost operations in Canada represented 22 percent
of world potash capacity in 2005, giving us an
unmatched ability to serve a stable North American
customer base and growing offshore markets.
PotashCorp also has approximately 75 percent of the
world's excess potash capacity. This, combined with
strategic investments in Jordan, Israel, Chile and China,
provides a competitive advantage that makes us the
unparalleled leader in our industry.
Our Vision
Our vision is to be the partner of choice, providing
superior value to all our stakeholders. We strive to be
the highest-quality low-cost producer and sustainable
gross margin leader in the products we sell and the
markets we serve.
We link our financial performance with areas of
extended responsibility that include safety, the
environment and all those who have a social or
economic interest in our business.
Our Strategy
Using a Potash First strategy, we focus our capital -
internally and through investments - to prepare for
continuing growth in global demand for potash. By
investing in capacity while matching supply to demand,
we create the potential for significant growth while
limiting downside risk.
In addition, we leverage our strengths in nitrogen and
phosphate, focusing on products and locations with the
greatest gross margin potential and least volatility.
Potash, nitrogen and phosphate are essential for healthy
crops. As growing populations place greater demands on
the world's farmland, fertilizer products are needed to
replenish nutrients taken from the soil with each harvest.
enriching lives
With greater wealth, people in countries like China and
India want to improve their lives with better diets that
include more protein from animal sources. To provide
that, farmers must grow higher-yielding, nutrient-rich
crops to fuel animal production.
enriching our stakeholders
Since 1989, PotashCorp has delivered total shareholder
return of 1,055 percent, more than triple the sector
average of 346 percent. We also improve our
communities through the creation of jobs, local
purchasing and a partnership approach to donations
and sponsorships.
CONTE NTS 2 The Potash Advantage 4 Letter to Shareholders 9 Goals and Targets 15 Sustainability 23 Shareholder Information
For Management's Discussion & Analysis and complete financial statements, please see the accompanying 2005 Financial Review.
enriching food
PotashCorp's 2005 Performance
PotashCorp enjoyed double-digit price increases in all three nutrients, leading to record earnings and
gross margin. With potash competitors at or near their production limits, we were able to demonstrate the
leverage of our excess capacity. This was supported by strong performance in nitrogen, as our Trinidad asset
made a larger contribution, and improvements in phosphate, where our ability to produce higher-margin
industrial products provides a competitive edge.
2005 Business Highlights
• Delivered record earnings for the second straight year, with
$542.9 million beating our previous mark by 82 percent
• Achieved record gross margin of $1.125 billion
• Reached record potash gross margin of $707.4 million
• Delivered record nitrogen gross margin of $318.7 million,
including $217.1 million from Trinidad
• Generated $98.9 million in phosphate gross margin, more
than six times the 2004 total
• Repurchased 9.5 million PotashCorp shares, nearly
9 percent of the company
2005 Operating Highlights
• Increased potash production to a record 8.82 million tonnes
• Initiated projects to bring back 1.9 million tonnes of idle
potash capacity over the next two years
• Recognized as Canada's best corporate reporter, earning the
Overall Award of Excellence in Corporate Reporting for the
second consecutive year
Second Consecutive Record
for Potash Gross Margin
$US Millions
800
700
600
500
400
300
200
100
0
We set a potash production record in 2005
while capturing higher prices than ever
before. This led to a second straight year
of record potash gross margin, which
exceeded the previous record margin for
the entire company.
Graph source: PotashCorp
2005 Financial Highlights All financial data in this report are stated in US dollars.
$ millions except per-share amounts
2005 CHANGE 2004 CHANGE 2003 5-YEAR 10-YEAR
YOY YOY CAGR** CAGR**
Financial Results
Sales $ 3,847.2 19% $ 3,244.4 16% $ 2,799.0 10% 9%
Net sales * $ 3,475.6 20% $ 2,901.4 18% $ 2,465.8 11% 9%
Gross margin $1,125.0 65% $ 681.4 79% $ 380.4 23% 11%
Net income (loss) $ 542.9 82% $ 298.6 n/m $ (126.3) 35% 10%
I Net income (loss) per diluted share $ 4.89 81% $ 2.70 n/m $ (1.21) 33% 8%
EBITDA * $1,135.0 50% $ 754.3 339% $ 171.8 20% 11%
Additions to property, plant
and equipment $ 382.7 74% $ 220.5 46% $ 150.7
Dividends paid $ 65.4 17% $ 56.1 7% $ 52.3
Financial Position
Total assets $ 5,357.9 5% $ 5,126.8 12% $ 4,567.3
Net debt * $1,417.1 57% $ 903.5 (37%) $ 1,441.4
Cash flow prior to working
capital changes * $ 860.3 60% $ 538.3 46% $ 368.5
Cash provided by operating activities $ 865.1 31% $ 658.3 71% $ 385.5
n/m - not meaningful
* See reconciliation and description of certain non-GAAP measures in Fi nancial Performa nce Indicators in our Financial R eview, Pages 50 to 52.
** Compound annual growth rate expressed as a percentage.

2001 2002 2003 2004 2005
2 POTASHCORP 2005 ANNUAL REPORT I OVERVIEW
The Potash Advantage Potash is known as the quality nutrient because it enhances the taste,
size, shelf life and yield of crops. But it's also the quality nutrient for
investors, offering significant advantages in today's market:
1 Potash is the best
positioned of the three
nutrients - it has the
fewest competitors,
the least government
involvement and the
highest barriers
to entry.
2 Potash supply is tight,
as competitors are at
or near their production
limits. This, along with
PotashCorp's strategy
of matching supply to
demand, has enabled
potash to separate from
3 Demand for potash is
increasing, particularly in
offshore markets. Global
demand has grown by
23 percent in the last
four years, as many
nations are increasing
potash application to
4 Significant new
competitive production
appears unlikely before
the end of the decade -
potash deposits are rare
and we estimate that a
new 2-million-tonne mine
would require about
$1.2 billion and five years
to bring into production.
POTASHCORP 2005 ANNUAL REPORT I OVERVIEW 3
The PotashCorp Advantage
At PotashCorp, our unrivaled potash
assets are only part of what sets us
apart from other companies.
A number of factors make us the
leader in our industry:
87 Percent of 2005 Gross Margin
Delivers High-Quality Earnings
US Nitrogen
Phosphate
Fertilizers & Feed
Industrial
Phosphate LN?jmlo' job)
Trinidad Potash
Nitrogen
110*87%
The objective of our long-term strategy is to
reward investors with earnings growth and
reduced volatility. High-quality earnings
result from our strategic focus on areas with
high margin potential and limited downside
risk. Thus, in 2005, 63 percent of our gross
margin came from potash, 19 percent from
Trinidad nitrogen and 5 percent from
industrial phosphate (primarily purified acid).
Graph source: PotashCorp
Potash
0
Nitrogen
Phosphate
Investments
1 Unmatched position in potash
PotashCorp is uniquely positioned to meet rising global potash demand by
bringing on additional production in a timely and cost-effective manner.
2 Global resources
Our large, low-cost potash facilities in Canada are complemented
by strategic investments in Jordan, Israel, Chile and China.
3 Targeted strengths in nitrogen and phosphate
Long-term, lower-cost natural gas contracts in Trinidad provide an edge
in serving the US nitrogen market. In phosphate, our superior-quality
rock gives us greater ability to produce higher-margin industrial acids,
especially purified acid.
4 Executing long-term vision and strategies
PotashCorp has followed a steady course for two decades, using
proven business strategies that capitalize on our unique strengths.
5 Strong cash flow
Strong cash flow has been used to strengthen our business. In 2005,
we reinvested $1.5 billion, including $852 million to repurchase
9.5 million shares (about 9 percent of our company).
6 Stability
PotashCorp captured 87 percent of gross margin from areas of our
business that are less dependent on volatile agricultural cycles.
7 Commitment to Core Values
We are committed to safety, integrity, listening, sharing, accountability and
continuous improvement.
Allan SK
Cory SK
Esterhazy SKI
Lanigan SK
Patience Lake SK ©OA
Rocanville SK
New Brunswick NB
Augusta GA
Geismar LA
Lima OH
Memphis TN
Trinidad
Aurora NC Marseilles IL
Fosfatos do Brasil Weeping Water NE
Geismar LA White Springs FL
Joplin MO
Arab Potash Company (APC), Jordan (28%)
Israel Chemicals Ltd. (ICL), Israel (10%)
Sociedad Quimica y Minera de Chile S.A. (SQM), Chile (25%)
Sinochem Hong Kong Holdings Limited (Sinofert), China"(206/.
PotashCorp's mineral rights at Esterhazy are mined by,Mosaic Potash
Esterhazy Limited Partnership under a long-term agreement.
PotashCorp
facilities and
investments
POTASHCORP 2005 ANNUAL REPORT I LETTER TO SHAREHOLDERS
the •
ca]?acitY
enrich our world

Even as your company emerges from another year of record performance, our real
excitement comes from what can be accomplished as we move forward. Our life-
giving products continue to grow in importance as a larger percentage of the world's
population has greater wealth and wants more nutritious food. This has increased
demand for potash - tightening supply, driving up prices and leading to consecutive
years of significant gross margin growth. We view our 2005 potash gross margin,
which was more than triple the level of two years ago, as the new norm. We believe
this so strongly that we continued to reinvest in our Potash First strategy in 2005,
repurchasing 9 percent of our company, initiating a three-year, $400-million capital
spending program for potash production and extending our investments in other
companies around the world that enhance our position in this key nutrient.

Enriching Our Our strategies - and successes - are no surprise to those who follow PotashCorp.

Communities We stand where we are today after two decades of consistent and patient
commitment to a long-term vision, supported by our people and our stakeholders.
As chair of the University of
'
" Over that period, we often described our business as a marathon rather than a sprint
Saskatchewan
s
Thinking the
World of Our Future" capital
and operated with an understanding that our course includes some tough hills and
campaign, Bill Doyle is shown smooth stretches where we can run flat out. This was still evident in 2005 - a year
here in front of the College that included record earnings and gross margin - as the tremendous potash volumes
Building. of the first six months were followed by a reduced pace to close the year. That is how
we entered 2006, knowing that the fundamentals that drive our growth continue to
move more decisively in our favor.
Our offshore customers are enjoying tremendous economic growth, led by China and
India. With more money in hand, the first priority for many people in those countries
is to improve their quality of life by purchasing better food. That is increasing the
demand for potash, the fertilizer ingredient with the greatest impact on food quality.
Over the past few years, all potash producers have benefited from these conditions.
This has taken our competitors to or near their production limits, while PotashCorp's
growth was only a prelude to the real power of our excess capacity. The world needs
more potash and we are the only source of significant new supply. That enabled us to
operate at the highest level in our history, setting a production record while capturing
higher prices than ever before.
This raised our potash gross margin to a record level for the second consecutive year,
a key driver of our best-ever results. Our success in potash was supported by strong
performance in nitrogen, where our Trinidad asset provides a significant advantage,
and a bounce-back in phosphate as improvements in feed and fertilizer added to the
steady strength of our industrial products, especially purified acid.
William J. Doyle
President and Chief Executive Officer
f
People unfamiliar with our history see this as "overnight
success." The reality is that PotashCorp has been and
will continue to be a long-term story. Today, we have
75 percent of the world's unused potash capacity and are
well positioned to reach our full capacity of 12.9 million
tonnes annually. As we increase production by bringing
back idle capacity, we reduce our cost per tonne. With
reduced costs and higher prices on a growing number of
tonnes, we have triple leverage to increase our earnings.
As well, our long-term investments in other global potash
companies - Arab Potash Company in Jordan, Israel
Chemicals Ltd. in Israel and the potassium nitrate
producer SQM in Chile - have an immediate impact
on our short-term performance.
Another important part of our Potash First strategy
is our recent investment in Sinofert, which gives us a
20-percent interest in the fertilizer business of Sinochem.
This will take us inside the world's largest fertilizer-
consuming country with state-of-the-art distribution
access and better market information.
All of these investments will increase in value and provide
us with tremendous growth opportunities.
Enriched performance
The rising value of our products was reflected in
double-digit price increases in all three nutrients in
2005. The most significant gains were in potash, which
rose 38 percent, or $40 per tonne.
Cash Flow Continues to Fuel Growth
POTASHCORP 2005 ANNUAL REPORT I LETTER TO SHAREHOLDERS
With total sales volumes of 8.2 million tonnes, potash
gross margin increased to $707.4 million, surpassing the
record $681.4 million in combined margin for all three
nutrients in 2004.
The rise in potash gross margin is the best indicator of
PotashCorp's value proposition. In 2005, we increased
potash gross margin as a percentage of net sales to
60 percent from 47 percent the previous year. With every
dollar of potash sold delivering $0.60 of gross margin, the
untapped value of our excess capacity is substantial. Based
on our current market outlook, the potential price and
volume increases could have a dramatic impact on the
growth in potash gross margin.
Nitrogen gross margin climbed to $318.7 million, driven
by our Trinidad asset which produced 65 percent of our
ammonia and contributed $217.1 million in gross margin.
Trinidad's location makes it well-suited to deliver to the
US market and its gross margin as a percentage of net
sales climbed to 38 percent from 32 percent. With natural
gas costs at sustained record-high levels, North American
producers curtailed nitrogen production. As supply
tightened and demand grew, we sold our products at
prices 16 percent higher than in 2004. Our nitrogen
segment also provided $48.6 million from our 2005
natural gas hedging activities.
In phosphate, we achieved gross margin of $98.9 million
despite higher prices for key inputs, including sulfur and
ammonia. Our average prices rose by 11 percent with the
In 2005, we demonstrated our confidence in the outlook for potash by
reinvesting our considerable cash flow to further enhance our advantage
in this nutrient. We repurchased 9.5 million PotashCorp shares, expanded
our potash investments in Israel and Jordan and purchased an interest in
Sinofert, a large fertilizer supplier in China, the largest fertilizer market
in the world.
We made internal investments for organic growth to bring back idle potash
capacity in Saskatchewan, a move made possible by tax changes in that
province. We also invested in the areas of nitrogen and phosphate with the
highest gross margin and most stable returns - specifically, nitrogen in
Trinidad and purified acid production at Aurora.
PotashCorp's Strong Cash Flow
M Millions
1000
800
600
400
200
Cash flow continues to be a PotashCorp
strength and is an integral part of our
value proposition. In 2005, we generated
$865.1 million in cash flow from operations.
2001 2002 2003 2004 2005
POTASHCORP 2005 ANNUAL REPORT LETTER TO SHAREHOLDERS
highest increases in feed, where prices improved $42 per
tonne in 2005, with another $50 boost planned for 2006
Industrial phosphate products again delivered the best
results in this nutrient, contributing $54 million in
phosphate segment gross margin. Purified acid
represented $50 million of that margin, which was
29 percent of net sales.
As a result, PotashCorp earned $542.9 million in net
income, or $4.89 per diluted share, beating our previous
record by 82 percent.
Investors recognized the strength of our business early
in the year and drove our share price to a record level.
When the price backed off, we saw an opportunity and
capitalized on it by extending our share repurchase
program. The decision to buy back and cancel these
shares should benefit our long-term shareholders to
an even greater extent as we move forward. We see the
potential of our excess capacity and anticipate it will
only increase in value.
A new era in potash
Our optimism for the potash business is fueled by
conditions that have unfolded over years and are set to
continue for the foreseeable future. PotashCorp is the
unparalleled leader in the best-positioned nutrient in the
fertilizer industry and this gives us a sense of excitement
about the future.
The supply/demand fundamentals in potash are intrinsically
tight. Even though the timing of short-term consumption
can shift, the picture of our industry is quite clearly drawn.
While some producers are working toward incremental
expansions, the prospect of significant new production
from a greenfield operation is unlikely before the end of
the decade. Deposits are rare and even if a new ore body
was discovered, we estimate about $1.2 billion and five
years would be required to bring it into production.
That is a major capital investment and a long wait before
positive cash flow would be generated. Although prices
have risen, we believe they are still below the level needed
to make a greenfield project economically attractive.
PotashCorp's excess capacity is the quickest and most
cost-effective source of additional production. We have
in place the ability to raise production to meet demand
that every tonne of capacity we bring back costs about
25 cents on the dollar compared to a greenfield investment.
We intend to optimize our production to maximize
the value of our potash resources. In 2005, we increased
production by 902,000 tonnes and announced plans to
invest $275 million to bring back idle capacity at Lanigan
and Allan. This will increase our annual production
capability by 1.9 million tonnes by 2007. We previously
invested $85 million at Rocanville, resulting in a capacity
increase of 749,000 tonnes.
This is necessary to meet the growing demand from
offshore customers. From 2002 to 2004, world demand
grew by 22 percent. Although growth slowed to 1 percent
in 2005, the impact remained significant with our
competitors operating at capacity. PotashCorp is positioned
to reap the lion's share of any increase in demand.
Our 2005 offshore volumes were consistent with the record
levels of the previous year, demonstrating the value of our
diverse global customer base. While Brazil, our largest
customer in 2004, reduced imports, China and India more
than offset the decline with increased volumes. China
purchased a record 2.4 million tonnes from Canpotex,
as the offshore marketing agency for Saskatchewan
producers sold more potash than ever before.
With our investment in Sinofert, Canpotex will be able
to increase its market penetration in China in the future.
We also expect Brazil to return to the market in 2006,
purchasing somewhere between the record total of 2004
and the lower level of 2005. These factors could take our
offshore volumes to another record in 2006.
In North America, fertilizer dealers purchased
aggressively in the first six months of 2005 in advance
of announced price increases, then backed off to see if
softening world demand would reduce prices. While this
slowed the wind in our sails, it is expected to pick up
force again. The requirements of the steady North
American market are well established and don't vary
much from year to year. We anticipate North American
2006 volumes to be flat to down slightly from 2005, but
consistent with historical levels.
Better prices are expected in offshore and North
American markets, which should propel us to another
1
growth. More important, we do this with the knowledge year of record potash earnings.
POTASHCORP 2005 ANNUAL REPORT LETTER TO SHAREHOLDERS
The potash business gives us a long look at the competitive there with lower-cost gas even as rising natural gas costs
horizon. We can see that there will be no significant new in the United States drive up ammonia prices and expand
competitive capacity through the end of the decade, so
supply will remain tight. North America is a mature market
and we know what to anticipate from our customers. The
growth from offshore customers will continue driving our
business, although we recognize that these evolving markets
are subject to some fluctuations in their growth patterns.
With that in mind, we are prepared to use only as much
of our excess capacity as required to provide stability
while generating larger margins and higher earnings.
Tight focus, reduced volatility
Our nitrogen and phosphate strategies are built around
areas of each nutrient where we have the greatest
competitive strengths, reducing volatility and lessening
the impact of fertilizer cycles.
In nitrogen, our advantageous natural gas contracts in
Trinidad support our strategy. We can produce nitrogen
our Trinidad margins.
We are adding nearly 300,000 tonnes of capacity at
Trinidad, with 156,000 tonnes brought on stream in 2005
and another 138,000 tonnes in 2006. This will increase
the benefit of our lower-cost production there. When
natural gas prices climb in the US, our margins grow.
Phosphate fertilizers improved in 2005 with demand
rising and inventories under control. However, their long-
term fundamentals are challenged, so we are increasingly
moving away from commodity-like products into niche
markets. Our high-quality rock gives us the flexibility
to produce purified acid, the most profitable of our
industrial products, as well as DFP, the specialty animal
feed supplement. Our production process requires us to
produce a certain amount of DAP but we are shifting as
much of our phosphoric acid as possible into the high-
margin industrial and feed products.
The growth in potash demand is global, creating a diversified customer base that provides
strength and balance. With many offshore countries gaining economic power and increasing
potash consumption, the impact of short-term fluctuations from any single region is lessened.
Research has shown that China, India and Brazil all need to significantly increase potash
consumption to meet scientifically recommended application ratios. China would need to
nearly triple its consumption to meet these ratios, adding 16 million tonnes annually. Usage
would need to climb 7 million tonnes in India and 6 million tonnes in Brazil to reach optimal
levels. Not only is this global need for potash a growth opportunity for PotashCorp, the
geographic and customer diversity of our business provides a measure of stability in the
event of an economic shift or a poor growing season in one part of the world.
Million Tonnes KCI
3.0
Brazil
2.5
2.0
1.5
1.0
0.5
A look at selected offshore markets demonstrates
how stronger sales volumes to India and China
offset a demand shock in Brazil in 2005.
Geographic Diversity
Growth from Diverse Markets Among Offshore Markets
PotashCorp Sales Volumes
0.0
2001 2002 2003 2004 2005
8 POTASHCORP 2005 ANNUAL REPORT LETTER TO SHAREHOLDERS
Our focus is on purified acid, where we are expanding
production by 82,000 tonnes. This new plant is scheduled
to come on stream in the second quarter of 2006, and
should add approximately $20 million in gross margin
on a full-year basis.
As a result, we expect our 2006 gross margins in nitrogen
and phosphate to rival or exceed those of 2005.
Partner of choice
Our vision has always extended beyond financial
performance. We want to be a partner of choice for all
our stakeholder groups. That means looking beyond
financial considerations to explore our company's social
and environmental performance.
Our ability to execute our strategies is linked to the skills
and abilities of our people. Their importance cannot be
overstated and their safety, without exception, is our
No. 1 priority. Our nitrogen operations had a record
year, reducing their recordable accident frequency rate
by 14.5 percent from their previous best performance.
We celebrated many milestones in 2005, including
5 million hours without a lost-time injury in Trinidad
and 6.65 million hours at Geismar.
Overall, however, we did not live up to the record
safety performance of the previous year and, sadly,
we experienced a fatality underground at our Lanigan
operation. This is the greatest concern of every miner
and mining executive and we will work together to try
to ensure this never happens again.
We track safety continuously and recognized in early
2005 that we had fallen behind our 2004 levels. We
revitalized our efforts and acted swiftly to introduce
the Senior Safety Leadership Team, which will provide
direction, leadership and expectations for our safety
processes. Another initiative in late 2005 was to have
each facility create a Safety Action Plan to address
measurable performance in behavior-based safety, key
procedures, contractor safety and organizational culture.
The initial plans were completed in January 2006 and
we will be vigilant in monitoring the key safety measures
that were outlined in the plans. While our industry has
inherent risks, we want every person who works at our
operations to return to their families healthy and safe at
the end of each day.
We also strive to improve quality of life by actively
participating in our communities. We continued to support
the University of Saskatchewan, which has helped
develop many of the employees who contribute daily to
our success. We renewed our sponsorship of the Chicago
Botanic Gardens, funding a research chair in soil science.
As a global company, we operate with a broader view.
Early in 2005, we were among the first corporations to
step forward following the tsunami in Southeast Asia,
providing $1 million to the relief effort. We have a strong
connection to the region, where we have worked with
people for many years on issues of human development
and food production.
Our local governments also benefited from our superior
results in 2005. For example, we paid approximately
$214 million in royalties and taxes in Saskatchewan. It's
one more way our success enriches others connected to
our company.
Enriching lives
At PotashCorp, our products and our performance
present opportunities - to help farmers grow greater
quantities of more nutritious food, to have a positive
impact on the lives of our people and the communities
in which they reside, while delivering the best possible
returns to investors.
To achieve this, we will continue with our long-term
strategy of matching potash supply to demand and focus
on the areas of phosphate and nitrogen with the least
volatility. By doing so, we can deliver greater value which
will enrich all our stakeholders.
Our efforts benefit from the strong guidance and
leadership of PotashCorp's Board of Directors. I'd like
to thank each one for their dedication and support.
As we move forward, we will continue to look for ways to
deliver on our promise to the many people who recognize
that our success is truly their success.
William J. Doyle
President and Chief Executive Officer
February 27, 2006
POTASHCORP 2005 ANNUAL REPORT GOALS AND TARGETS
our long-term
achieved •
0a S partially achieved
did not achieve O
Continuous improvement and accountability are among our core values at PotashCorp.
Each year, we set targets connected to our goals and operating strategies and report on our performance.
To continue to outperform our sector and other basic materials companies in total shareholder return.
2005 Targets 2005 Results 2006 Targets
Exceed total shareholder return o Three-year return of 158 percent surpassed the DJUSBM, 1 Exceed total shareholder return
performance for our sector* and although PotashCorp trailed the sector for that period. performance for our sector and
companies on the Dow Jones U.S. Return for 2005 was below that of the sector and DJUSBM. companies on the DJUSBM
Basic Materials Index (DJUSBM) for for 2006.
2005 and three-year average.
2 Non-cash operating working
Be the preferred fertilizer investment • A survey of buy- and sell-side analysts clearly identified capital to be less than 10 percent
as measured by surveys. PotashCorp as the leading investment in the sector. of net sales.
Non-cash operating working • PotashCorp's non-cash operating working capital was 3 Total cash flow return to exceed
capital to be less than 10 percent approximately 5 percent of net sales. cost of capital by 800 basis points.
of net sales.**
4 Carry a higher multiple than
Total cash flow return to exceed cost • Total cash flow return exceeded cost of capital by the average of other fertilizer
of capital by 500 basis points.** 780 basis points. companies on both earnings
Carry a higher multiple than the • PotashCorp multiples were higher than the average of other and cash flow.
average of other fertilizer companies fertilizer companies based on earnings and cash flow. 5 Exceed 2005 gross margin by
on both earnings and cash flow. 20 percent.
Exceed five-year average of historical • Gross margin as a percentage of net sales reached 32 percent,
gross margin as a percentage of well above the five-year average of 19 percent.
net sales.**
Be at the top of our earnings • Earnings per share of $4.89 exceeded our initial guidance of
guidance range. $3.50-$4.25 per share.
PotashCorp Gross Margin
as a Percentage of Net Sales
Percentage
Focusing on High-Margin Businesses
A rising gross margin as a percentage of net sales reflected our tighter
focus on areas of our business that provide the greatest gross margin:
potash, Trinidad nitrogen and industrial phosphate, primarily purified
phosphoric acid.
These three businesses generated 87 percent of PotashCorp's total
gross margin in 2005. Each delivered a high percentage of gross
margin in relation to its net sales - potash was 60 percent, Trinidad
nitrogen 38 percent and purified phosphate 29 percent.
* Sector = Mosaic, Agrium, Yara, SQM, ICL and K&S.
** See reconciliation and description of certain non-GAAP measures in Financial Performance Indicators in our Financial Review, Pages 50 to 52.
2001 2002 2003 2004 2005
10 POTASHCORP 2005 ANNUAL REPORT GOALS AND TARGETS
To remain the leader and preferred supplier of potash, nitrogen and phosphate products worldwide.
2005 Targets 2005 Results 2006 Targets
Increase potash sales volumes by o Potash sales volumes decreased by approximately 1 percent, 1 Increase North American realized
5 percent at 25 percent higher while realized prices were up by 38 percent. prices for potash by 10 percent.
realized prices.
2 Increase offshore potash sales
Industrial nitrogen net sales from US • Industrial nitrogen represented 73 percent of net sales volumes by 5 percent.
plants to comprise 70 percent of the from US facilities. 3 Increase North American realized
total from those plants.
feed prices by 20 percent.
Increase North American feed • Monocal rose by 17 percent, Dical 19 percent and 4 Increase realized nitric acid prices
realized prices by 15 percent. DFP 28 percent, for an overall increase of 21 percent. by 5 percent.

Increase purified acid price • Realized prices for purified acid increased by 10 percent.
realizations by 5 percent.
Implement enterprise-wide customer • A new system, with automated tracking and reporting, was
complaint system to facilitate developed and implemented.
tracking and resolution.
Outperform competitors on quality • PotashCorp outperformed the industry average for quality and
and service as measured by service in all key product categories.
customer surveys.
Expand computer applications' • Customers and vendors now can receive automated order
e-mail capabilities to improve information by fax or e-mail.
communications with customers
and vendors.
PotashCorp's Purified Acid Prices
Grovvth Based on 2004 =100
PotashCorp's Superior Product Quality
Scale of 1-100 0 PotashCorp M Industry Average
100
Matching Strengths to Opportunities
Tight fundamentals led to higher prices for purified acid products. North American supply
tightened considerably as China reduced production in the face of higher energy costs,
removing approximately 150,000 tonnes from the export market. European producers
moved more product to China, leaving a supply gap in the Western Hemisphere.
With our superior-quality rock, PotashCorp focused on higher-margin industrial phosphate
products and received better realized prices for our purified acid, leading to a gross margin
increase. We are building on this advantage by expanding our facility at Aurora.
Maintaining the Highest Standards
Customers consistently list product quality as one of the key criteria they use in choosing
a supplier. Our annual customer survey showed that PotashCorp continues to outperform
competitors in terms of quality in each of our major product categories: fertilizer, feed,
industrial nitrogen and purified phosphate.
Service is another important differentiator and PotashCorp has always been a leader in this
area. When asked about ease of placing an order and response to problems or questions,
PotashCorp's average score in the four customer groups was approximately 10 percent
higher than the average of our competitors.
2004 2005
Fertilizer Feed Industrial Purified
Nitrogen Phosphate
POTASHCORP 2005 ANNUAL REPORT I GOALS AND TARGETS 11
To be the low-cost supplier in our industry.
2005 Targets 2005 Results 2006 Targets
Achieve rock costs at Aurora and a Rock costs for 2005 were 1 percent below 2004. 1 Achieve rock costs at Aurora
White Springs 5 percent below 2004. and White Springs 3 percent
Achieve conversion costs for a P205 conversion costs for 2005 were 1 percent below 2004. below 2005.
P205 production 4 percent better 2 Achieve conversion costs for
than 2004. P205 production 9 percent
better than 2005.
Achieve 5-percent reduction in O Canadian dollar potash conversion costs rose by 5 percent,
per-tonne potash conversion costs largely due to a 27-percent increase in natural gas costs. 3 Achieve 5-percent reduction
on a Canadian dollar basis. in per-tonne potash conversion
costs on a Canadian dollar basis.
Achieve energy efficiency in nitrogen O Energy efficiency in nitrogen remained the same as in 2004.
2 percent better than 2004. 4 Improve energy efficiency in
Operate the Aurora DFP plant at (3 The facility demonstrated its ability to operate at 98 percent of Trinidad by 10 percent from 2005.
design capacity. design capacity. 5 Reduce/avoid transportation and
distribution expenses to achieve a
Yield a 3-percent saving in • Through cost-avoidance and expense management, level 3 percent below market rates.
transportation and distribution transportation and distribution expenses were kept 5 percent
from industry benchmark. below market rates.

Turning Transportation and Distribution
into a Competitive Edge
Strong long-term relationships with key transportation suppliers, carefully managed
cost-avoidance strategies and a proactive approach to ocean freight contracts
enabled PotashCorp to better control expenses and increase gross margin in 2005.
While transportation costs have risen by an average 2-3 percent annually, the
sharp spike in demand for railcars, combined with rising fuel costs and higher risk
premiums, led to cost increases of 10-50 percent for some companies in 2005.
By securing long-term contracts in advance of these increases, PotashCorp was
able to minimize the impact of price hikes. Distribution partners recognized the
value of our long-term business, along with our large volumes and high safety
standards. This enabled us to negotiate better rates with reduced risk premiums.
In a similar fashion, long-term ocean freight rate contracts provide a competitive
advantage in shipping potash to offshore customers and ammonia from Trinidad.
Various cost-avoidance measures yielded savings that far exceeded the industry
benchmark, securing our position as a low-cost supplier to our customers.
We made investments to improve our transportation and distribution profile in
Brazil, including a new warehouse. As our potash volumes to offshore customers
increase, infrastructure improvements are required. We view the improvement of
our ability to move additional volumes with increasing efficiency as an important
investment in our potash business, which is one of the main reasons for our
investment in Sinofert.
achieved •
partially achieved 0
did not achieve 0
We opened a new warehouse in Brazil in January 2006.
Potash is shipped to Brazil by sea, then trucked to our
warehouse, which gives us an advantage in distribution
to customers around that country.
12 POTASHCORP 2005 ANNUAL REPORT GOALS AND TARGETS
To move closer to our goal of no harm to people, no accidents, no damage to the environment.
2005 Targets 2005 Results 2006 Targets
Reduce recordable and lost-time O Recordable and lost-time injury rates both increased from the 1 Reduce recordable and lost-time
injury rates by 10 percent, record-low levels of 2004. injury rates by 30 percent from
Reduce reported releases and permit • Releases and permit excursions were reduced by 37 percent. 2005 levels.
excursions by 25 percent. 2 Reduce reportable releases and
Achieve 100-percent compliance on • 100-percent compliance was achieved. permit excursions by 30 percent
from 2005 levels

all environmental and safety audit .
action items. 3 Achieve 100-percent compliance
on all environmental, safety and
security audit action items.
Making Accident Prevention a Priority
Reducing risk is part of PotashCorp's business strategy - and one of the fundamental principles of our approach to safety. Even after the
record safety performance of 2004, our company continued to focus on new ways to prevent accidents. While our results in 2005 did not
meet our expectations, the commitment to safety remained a priority.
This led to the creation of a high-level team focused on the prevention of accidents with employees and contractors. This Senior Safety
Leadership Team is shifting attention from traditional safety measures such as the frequency of lost-time injuries or recordable accidents
and placing greater attention on eliminating behaviors that cause accidents before injuries happen.
"We're looking for trends of behaviors that cause accidents, so that we can eliminate those vulnerabilities," said Jim Dietz, PotashCorp's
Executive Vice President, Chief Operating Officer and safety team leader. "When we accomplish this, we'll really be a leading company in
terms of safety."
For example, the PCS Phosphate Aurora railyard created a Critical Behavior Inventory, illustrated with photos, to demonstrate the correct
(and incorrect) methods of dealing with railcars. Since we began focused observation of railyard practices, overall safe behavior has
increased from 98.5 percent to 99.8 percent.
The Senior Safety Leadership Team discussed this approach with safety managers from all of PotashCorp's operating facilities at a safety
conference in 2005. The objective is to create consistency in how safety policies, procedures and practices are applied and measured.
Senior Safety Leadership Team
The Senior Safety Leadership Team is composed of
(from left to right):
Tom Brower,
Senior Director, Safety and Health
Jim Dietz,
Executive Vice President and Chief Operating Officer
Garth Moore,
President, PCS Potash
John Hunt,
Vice President, Safety, Health and Environment
Tom Regan,
President, PCS Phosphate
Clark Bailey,
Vice President, Manufacturing and Technical,
PCS Nitrogen
POTASHCORP 2005 ANNUAL REPORT GOALS AND TARGETS 13
To have motivated and productive employees committed to our long-term goals.
2005 Targets 2005 Results 2006 Targets
Integrate key corporate performance 0 Key performance indicators are being used in more 1 Fill at least 75 percent of senior
metrics into regular employee departmental and individual goal-setting and performance staff openings with internal
reviews, providing managers with discussions. Changes to compensation and incentive pay candidates.
greater discretion to reward have been implemented to allow flexibility in rewarding
individual achievement. excellent performance. 2 Maintain or improve employee
Proactively improve orientation 0 A framework for employee orientation, including a handbook engagement levels as measured
by employee engagement survey.
programs for new employees and for new employees, is in development. Cross-border transfers
career development processes for are being improved, creating new opportunities for current 3 Stabilize rate of employee
existing employees. employees. turnover at Trinidad operations.
Complete implementation of a human v Full implementation has been completed in the United States,
resources administration system while final extension into Canada is on hold.
enabled by information technology.
Maintain personnel turnover O Turnover in Trinidad increased as PotashCorp employees
improvements achieved in 2004 were recruited to fill positions in a rapidly developing
in Trinidad. chemical sector.
Putting Performance First
Continuous improvement is a core value at PotashCorp - one that requires
people in our company to deliver better performance in all areas of our
operations year after year. In recognition of this, we have developed
compensation and advancement plans that challenge and reward
employees who drive the company's success.
This includes a system of short- and long-term incentives based on
PotashCorp's overall performance, using indicators such as total shareholder
return and cash flow return versus the cost of capital to measure success.
The programs are designed to develop strong corporate management and
provide a financial incentive for employees to achieve success.
In 2006, the short-term incentive program will be extended to include
approximately 1,500 employees. In addition to linking employee rewards
with corporate performance objectives, this strengthens PotashCorp's ability
to attract and retain key talent and provides more people with greater
potential to share in our success.
Recognizing that people are motivated by more than financial rewards, we
have placed a priority on giving top performers the ability to advance. In
2005, 41 of 54 senior-level position movements were filled from within,
including all opportunities at the executive level.
achieved •
partially achieved
did not achieve 0
Integrity and sharing what we learn are core values
at PotashCorp. At our Annual Meeting of Shareholders,
Trent Sereda and Tanya Krause (shown here) were
recognized for living these values as they perform
their functions in the Saskatoon office.
14 POTASHCORP 2005 ANNUAL REPORT GOALS AND TARGETS
To improve the socio-economic well-being of our communities.
2005 Targets 2005 Results 2006 Targets
Be in the top quartile of responses • A survey conducted in Aurora showed that people view 1 Continue to be engaged with
in a survey of community leaders. PotashCorp as important to the local economy (97 percent), community support projects at
a strong community supporter (89 percent) and a good each of our plants and offices.
employer (85 percent).
2 Achieve a 10-percent increase

Be engaged with community • Our company and our people were engaged in efforts to in individual participation in the
support projects at each of our improve our communities. This included cash donations, matching gift program and a
plants and offices. volunteer efforts and relationship-building activities like 20-percent increase in total
Limestone Days at Weeping Water. donations.
Achieve a 10-percent increase in • Individual participation increased by 15 percent and total 3 Remain in the top quartile of
individual participation in the matching donations rose by 58 percent. governance practices as measured
gift program and a 20-percent by external reviews.
increase in total donations.
Remain in the top quartile of • PotashCorp's governance practices were ranked in the top
governance practices as measured 10 percent of 209 S&P/TSX companies evaluated by Report
by external reviews. on Business magazine.
V Gi=Rts ON
Many PotashCorp employees demonstrated
their compassion and commitment following
Hurricane Katrina. Led by employees at Geismar
who opened their homes to victims, people
from across our company contributed to the
effort by delivering supplies and cooking
for volunteers. Debra Flerlage, an executive
secretary at our Northbrook office, organized
a clothing drive that gathered more than
70 bags of clothing from her fellow employees.
As a company, we donated $250,000 to the
relief effort.
Joining Hands with Our Communities
Being engaged with our communities extends beyond the employment and financial
impact of our facilities. We are active volunteers in the places where we work and live,
and support initiatives that bring us closer to our communities. Our people have
embraced this by supporting local organizations, with activities such as:
• At White Springs, our employees have a long-term relationship with the Hamilton
County School System, working with at-risk kids and preparing them for opportunities
to join the workforce.
• A team of Trinidad employees participated in the Energy Challenge, a 24-hour outdoor
event that involves hiking mountain trails and building sleeping accommodations, to
raise money for FEEL, which works with charitable agencies to provide aid to people
in Trinidad and Tobago.
• Aurora workers spent a day during the holiday season ringing bells to raise money for
the Salvation Army.
• In Rocanville, our people formed a team to raise money by running in the 24-Hour
Relay For Life.
• Our Cory personnel donated food and gifts to local charitable organizations.
In total, 100 percent of our facilities, including each of our operating facilities and our
corporate offices in Saskatoon and Northbrook, made connections in their communities
through volunteerism, partnerships and financial donations.
achieved •
partially achieved
did not achieve 0
POTASHCORP 2005 ANNUAL REPORT I SUSTAINABILITY 15
sustainabili
and our bottom line
Highlights of Sustainability
Achievements in 2005
Governance
Introduced formal review process
for individual directors.
Energy
Improved natural gas efficiency at
Trinidad's 03 and 04 plants by up
to 10 percent; installed a turbine
generator to utilize excess steam
at Geismar; reduced energy use
for future production at Lima by
8 percent.
Community Relations
Participated in volunteer activities
in each of the communities
where we operate and at our
corporate centers.
Safety
Nitrogen operations reduced
their accident frequency rate by
14.5 percent from the previous
record low.
Environment
Reduced permit excursions by
65 percent to a record low.
Stakeholder Engagement
Surveys with all key stakeholder
groups showed that PotashCorp
is a preferred supplier to customers,
is respected by our communities
and is supported by our investors.
Our commitment to sustainability is anchored in two simple propositions:
• it is the right thing to do
• it is good business.
Our sustainability initiatives are having a clear impact on our bottom line through increased
productivity and lower operating costs. Our shareholders also benefit from the company's
lower risk profile and improved earnings multiple.
This section highlights some of our sustainability achievements and describes how we
addressed a number of sustainability issues in 2005 - such as governance, business
benefits, management systems, stakeholder engagement, employee relations and customer
concerns - in ways that will form the basis for improved performance in the future.
PotashCorp's Commitment to Sustainability
Our Sustainability Vision
In pursuing the best interests of the corporation, we consider our impact on investors,
customers, employees, suppliers and the communities and environment where we do
business. All are essential to PotashCorp's long-term success.
Our Sustainability Commitments
Health and Safety: Our goal is no harm to people, no accidents.
Integrity: We operate with integrity and respect for human rights and the rule of law.
Governance: We are committed to being a leader in corporate governance, recognizing it as
a cornerstone of a sustainable organization.
Financial Performance: We will manage our financial performance to maximize long-term
value for shareholders.
Environmental Responsibility: Our goal is no damage to the environment.
Energy: We will use energy efficiently and constantly strive to improve.
Employees: We are committed to respect for human dignity and fairness in the workplace.
Stakeholder Engagement: We listen to all stakeholders.
Community Development: One measure of our success is the economic activity we generate
in the communities where we operate.
Customers and Business Partners: We work to create mutual advantage in all our relationships.
16 POTASHCORP 2005 ANNUAL REPORT SUSTAINABILITY
Why is corporate governance such an important part
of sustainability?
Good governance is the underpinning for a sustainable corporation. The value of the company lies
not only in its superior physical, logistical and human assets but in the confidence that the business
strategy is sound and systems are in place to ensure that corporate assets are consistently deployed
for the benefit of the company's stakeholders.
las Howe We believe strongly that good governance practices both protect and enhance shareholder value,
and PotashCorp will continue to pursue the highest standards of corporate governance.
PotashCorp
Board of Directors What changes did PotashCorp's board introduce in 2005
to strengthen its governance?
PotashCorp's board takes a highly disciplined and proactive approach to corporate governance.
Our governance committee ensures that we meet or exceed all regulatory governance practices
by maintaining a comprehensive checklist that compares our practices to existing and
emerging requirements.
We also review closely what our stakeholders and third-party governance monitors are saying about
best governance practices. Our approach is to consider carefully whether any particular suggested
best practice makes sense for PotashCorp. We do not adopt practices simply for the sake of change,
but we are not afraid of being on the leading edge of best governance practices.
In 2005, we implemented a practice of formally reviewing individual directors. In addition, we
initiated a process for directors to set individual goals and objectives for themselves which are
designed to improve their own performance and that of the entire board. The board demonstrated
its commitment to strategic planning by devoting a portion of every regular meeting to this subject
and convening additional special sessions specifically dedicated to strategy. These included an
educational component and a thorough review of the strengths, weaknesses, opportunities and
threats relevant to PotashCorp, particular competitors and the industry in general.
We also amended our governance principles to implement a meaningful majority vote requirement
for the election of directors. Specifically, we now will require directors who fail to get more votes cast
in favor of their election than votes cast against and withheld to submit their resignation to the board.
We also gave consideration to the concept of term limits for directors. Proponents argue that directors
with lengthy tenure may lack the independence necessary to sit on key committees. However, we
have found that experienced directors have the confidence and institutional knowledge necessary to
articulate competing points of view and to challenge management, especially in the area of strategy.
Consequently, we prefer to rely on an evaluation process rather than arbitrary term limits.
A Clear Approach
to Disclosure
Transparency is fundamental to good
governance and sound operating
practices. PotashCorp has made this
a priority and earned the Canadian
Institute of Chartered Accountants
(CICA) Overall Award of Excellence
for Corporate Reporting for the
second consecutive year. The overall
honor was one of five corporate
reporting awards presented to
PotashCorp by the CICA in 2005.
Others included the top honor for
best financial reporting.
i
'I
Wayne Brownlee
Executive Vice President
and Chief Financial Officer
Jim Dietz
Executive Vice President
and Chief Operating Officer
POTASHCORP 2005 ANNUAL REPORT I SUSTAINABILITY
How did sustainability contribute to business performance
and shareholder value in 2005?
Our commitment to sustainability contributes to our financial performance in a number of ways.
Our sustainability practices are helping us improve safety, reduce risks, increase productivity and
lower operating costs, all of which have a direct impact on our bottom line. For example:
• Paying attention to environmental and social issues lowers our risk profile and our costs.
• Our efforts to improve energy efficiency reduce costs and make us more competitive.
• A culture of integrity, fairness and opportunity is a key motivator for our employees.
• We benefit from reduced insurance premiums that resulted from our joint commitment to
safety with a local business partner.
In short, sustainability is good business and good for our shareholders, who benefit directly from our
improved financial performance.
Shareholders also benefit from the way in which sustainability increases transparency, enhances our
reputation and builds trust.
These are not soft issues. Transparency created through our extensive public reporting and ongoing
dialogue with stakeholders compels us to deliver on strategies and targets. It reinforces the need for
proper risk mitigation and a disciplined management focus. It also strengthens our reputation, one of
our most valuable assets.
Transparency improves our share price and earnings multiple which, in turn, reduce our cost of capital.
In addition, it promotes greater opportunities to create value for shareholders.
Our experience is clearly demonstrating the contribution that sustainability is making to both
our near-term financial results and our long-term viability as a company - to the benefit of our
shareholders and other key stakeholders.
tJ 60t&???
Creating Value by "Doing What's Right"
Once considered a cost of doing business, sustainability is increasingly being recognized as a way to
increase value. According to the Global Environmental Management Initiative:
• 50% of a company's market value can be attributed to sustainable business practices.
• 35% of institutional investors make portfolio decisions based on intangibles like safety, health and
environmental performance.
• 81 % of Global 500 executives place safety, health, environmental and social issues among the top
10 value drivers of their businesses.
Sustainability is at the heart of PotashCorp's vision and values. By addressing the triple bottom line in
our business practices, the company grows stronger and perpetuates a culture of "doing what's right."
How is PotashCorp driving its sustainability program
into the organization?
When we began our sustainability journey nearly five years ago, we recognized that success would
depend on change at every level in the organization.
While commitment from the top was essential, our ability to make continuous ongoing improvements
in our economic, social, environmental and safety performance also required grassroots support.
In 2004, 1 visited all of our plant locations to speak to local management and our employees about
sustainability. My goal was threefold. First, I explained sustainability. Second, I told our employees why
it was in the best interests of all stakeholders for the company to make a long-term commitment to this
17
18 POTASHCORP 2005 ANNUAL REPORT SUSTAINABILITY
Jim Dietz
Executive Vice President
and Chief Operating Officer
G. David Delaney
President
PCs Sales
business approach. Finally, I explained the business reasons for adopting sustainable business practices.
The response I got from employees throughout the company was very positive and encouraging.
The same has been true at our annual Best Practices Workshop which brings together all of our
plant General Managers. We've been addressing sustainable business practices at this workshop
since 2001 and sharing innovative approaches for implementing sustainability at the plant level.
Sustainability goals have now been introduced into our plant-level Key Performance Indicators
and site action plans.
What were the priority areas for PotashCorp's sustainability
program in 2005?
We created a Senior Safety Leadership Team whose goal is to create an incident-free culture
throughout PotashCorp that prevents accidents from happening. Our plant management teams
have created specific site action plans to achieve the necessary cultural change and ratchet our
safety program up to the next level. Open communication and employee participation are clearly
key to our success.
Our efforts to improve our environmental performance are equally ambitious. Our land reclamation
programs continue to receive recognition, with our Whitehurst Creek, North Carolina project
earning local and national awards. We still see potential for reducing waste and improving energy
efficiency throughout the company.
As we begin 2006, I'm confident our production sites will identify and address more opportunities
for making PotashCorp sustainable in all areas. There is company-wide recognition that sustainability
has become a core part of the way we do business and, quite simply, it is the right thing to do.

In Touch with Our Communities
Sustainability reporting is part of PotashCorp's program of continuous improvement. While our annual
sustainability report provides an overall picture of our progress from year to year, we have also
initiated a program of site-specific sustainability reports that give our communities a more detailed
picture of what is happening at their local facilities.
The first of these site-specific reports was issued late in 2005 and all of our operating facilities will report
directly to their communities in 2006. These reports include information on safety and environmental
performance, community involvement initiatives and spending with local business partners.
What steps did PotashCorp take in 2005 to help meet its
customers' needs for sustainable supplies of potash?
When worldwide potash demand first began to spike, PotashCorp implemented a three-pronged
plan to increase our sustainable supplies of potash and meet our customers' needs.
First, we began to tap into our vast reserves by expanding our production capacity and ramping
up our production schedule. This increases our ability to meet growing demand and provide
customers with greater reliability of supply.
Second, we're widening the distribution pipeline by expanding our fleet of dedicated hopper
cars and making sure our shipping partners are doing the same. As a company, we have added
more than 500 covered hopper cars in the last few years, including approximately 120 in 2005;
Canpotex added almost 1,200. In addition, Canadian Pacific Railway, which transports our potash
destined for offshore sales, has completed a $160-million expansion of its track network between
Saskatchewan and the Port of Vancouver. It has also invested in 60 more locomotives. Our North
Barbara Jane Irwin
Dior Vice President
Administration
POTASHCORP 2005 ANNUAL REPORT SUSTAINABILITY
American carrier, CN, acquired 75 new locomotives in 2005 and entered into a major refurbishment
program involving 800 covered hopper cars.
Finally, we're working more closely with our offshore and North American customers to ensure we have
the best possible information about their needs. Our industry used to plan for two peak buying seasons
with plenty of time to rebuild inventories in between. Those days are gone. The fact is there's always a
spring or fall fertilizer season somewhere in the world. To meet our customers' needs, we must now move
product year-round, and the only way we can do this is to plan with our customers on an ongoing basis.
These efforts have already yielded good results for both our customers and our company. In many
countries, we have increased our market share because our customers recognize what we're doing to
secure their supply of potash, not only for today but for the future. Our commitment to sustainable
growth helps them to grow.

Shared Values, Shared Success
PotashCorp's sustainability efforts are important to building strong and lasting relationships with
customers. As people around the world gain awareness of the importance of sustainable business
practices, our approach to triple bottom-line reporting creates confidence that our company is a
reliable and trustworthy business partner.
"Looking at their sustainability efforts, it is clear to me that PotashCorp is a company that we share a
value system with," said Mike Anderson, President and CEO of The Andersons, one of the largest fertilizer
distributors in the United States Midwest. "I look at the focus of their company - its commitment to
relationships and communities, that their word is their bond - and I feel good about working with them."
How is PotashCorp strengthening its position
as an employer of choice?
PotashCorp has always recognized that our financial success and industry leadership as a sustainable
company depend on a skilled and dedicated workforce.
To remain competitive in a global environment, we must continue to retain and recruit top performers
and provide them with the skills to succeed, the information to understand long-term goals, and a safe
and fair work environment.
In 2005 we completed a major review of our compensation practices. This led to some significant
changes that will become effective in 2006. Most notably, we adjusted our salary increase process to
provide managers with greater flexibility to reward top performers. In addition, we are continuing the
application of a top-performer incentive component for merit pay increases that was introduced in 2005.
We are also increasing the number of employees eligible to participate in the annual short-term
incentive bonus program. In 2006, the number will jump from approximately 4 percent of the workforce
to 30 percent. Because the size of the annual bonus is directly tied to the company's performance,
participating employees will be rewarded for their motivation and commitment to PotashCorp's success.
Another area we're addressing is helping individual employees achieve their personal career goals.
This effort is strongly supported by a philosophy to "promote from within." The majority of job
openings are first posted internally, enabling qualified employees to advance within our organization
and transfer into different functional disciplines or to different locations. This approach has received
very positive feedback.
As our business becomes more global, we see the need to prepare our workforce for the challenges
of international business. This could include assignments in other countries or training for new and
different tasks.

19
Mike Anderson, President and CEO
20 POTASHCORP 2005 ANNUAL REPORT SUSTAINABILITY
L. Heggie
Senior Vice President
Corporate Relations
Investors Value
Potash First
Our ongoing dialogue with stakeholders,
which includes an annual investor
survey, gives us insight into their
expectations and the opportunities
for our company. In 2005, our investors
told us they recognize the value-driving
potential of our potash operations,
rating it as 9 on a scale of 1-10,
far surpassing nitrogen (5.4) and
phosphate (4.4).
This was supported by responses
to follow-up questions related to
the preferred use of our significant
cash flow. Investors showed a clear
preference for spending in the potash
business, to bring back capacity and
make selective acquisitions.
Value-Driving Capabilities of the Nutrients
As ranked by buy-side analysts
Excellent
Potash
Nitrogen
Phosphate
Living by Our Code
In addition to making clear our strategies, goals and targets, PotashCorp provides every employee with
our Statement of Core Values and Code of Business Conduct. These documents set forth the company's
commitments to integrity, sustainability and the need to avoid conflicts of interest.
The principles embedded in these documents are reflected in our daily business practices, and our
successes are celebrated each year at our Annual Meeting of Shareholders. During the meeting, we
introduce people from across the company whose efforts brought to life our core values in the
workplace and demonstrated how following our code of conduct contributes to business success.
Employees are asked to recommit to the code annually.
Why does PotashCorp place so much importance on
stakeholder engagement?
Our reputation is one of our most valuable assets and we care about how we are perceived by
our key stakeholders. Listening to stakeholders is a core value of our company and engagement
with them is a fundamental part of our planning and future success.
The knowledge we gain through our annual surveys shapes our sustainability efforts. We share
information on our strategies and performance and solicit feedback because this increases
understanding, strengthens our reputation and builds stakeholder support for our growth.
What did you learn from your external stakeholders in 2005?
Each year, we have independent research companies survey our external stakeholders: customers,
investors and people in the communities where we operate. In addition, we monitor media
coverage and measure whether we are portrayed in a positive, negative or neutral tone.
Our 2005 customer surveys showed that PotashCorp remained a preferred supplier in all four of
our product categories: fertilizer, feed, industrial nitrogen and purified phosphate. The surveys also
showed considerable concern about reliability of supply. Our communication efforts are focused
on what we're doing to further enhance our supply capability as we bring back potash capacity
and expand nitrogen and purified acid production.
We assess the opinions of investors through an annual survey of buy-side and sell-side analysts.
This survey showed strong support for our Potash First strategy, as investors view us as the leader
for this nutrient. They also recognized the long-term growth potential this gives our company.
The 2005 community survey conducted in Aurora, North Carolina revealed a strong base of
support for our operations. On average, 90 percent of respondents provided positive feedback on
PotashCorp's economic, employment and social performance. This connection to the community is
invaluable in gaining permits required for continued operations and the expansion of our purified
acid facility.
In addition to our own research, we measure the quantity and tone of media coverage at local
and national levels. Based on research completed in the fourth quarter of 2005, the volume of
media coverage had increased 82 percent over the previous year, reflecting growing interest in
our company. The tone of coverage was largely positive, as we drew attention for our strong
financial and social performance.

0 1 2 3 4 5 6 7 8 9 10
Source: Christensen
POTASHCORP 2005 ANNUAL REPORT BOARD OF DIRECTORS 21
Frederick J. Blesi, of Glenview, Illinois, is a
retired Chairman and CEO of the Phosphate
Chemicals Export Association Inc. (PhosChem),
principal exporter of US phosphate chemicals.
Before joining PhosChem, he was Vice President,
International with International Minerals and
Chemical Corporation. He is a director of the
Evans Scholars Foundation and The Western
Golf Association. He joined the PCS Inc. Board
in 2001. 2, 5
William J. Doyle, of Winnetka, Illinois, is
President and CEO of Potash Corporation of
Saskatchewan Inc. He became President of PCS
Sales in 1987, after a career with International
Minerals and Chemical Corporation. He is
Chairman of The Fertilizer Institute and the
Potash & Phosphate Institute and Vice Chairman
of Canpotex Limited. Mr. Doyle is on the College
Board of Advisors at Georgetown University. He
joined the PCS Inc. Board in 1989. 1
John W. Esrey, of Glenview, Illinois, is
President and CEO of S&C Electric Company.
He is a member of the Board of Governors of
the National Electrical Manufacturers Association,
a director of the Executives' Club of Chicago,
and a member of the Dean's Advisory Board
at the Kellogg School of Management at
Northwestern University. He joined the PCS Inc.
Board in 2003. 3, 4
Wade Fetzer III, of Glencoe, Illinois, is Retired
Partner with the investment banking firm
Goldman Sachs. He sits on the boards of Sphere
Communications, Northern Star Broadcasting,
University of Wisconsin Foundation and Rush-
Presbyterian St. Luke's Medical Center. He is also
on the Kellogg Alumni Advisory Board. He joined
the PCS Inc. Board in 2002. 2, 3
Dallas J. Howe, of Calgary, Alberta, is owner
and CEO of DSTC Ltd., a technology investment
company, and a director of Advanced Data
Systems Ltd. and the Saskatchewan Wheat Pool.
A director of the PCS Crown corporation from
1982 to 1989, he joined the PCS Inc. Board in
1991 and was elected Chair in 2003. 1, 2
Alice D. Laberge, of Vancouver, British
Columbia, is a Corporate Director and the
former President and CEO of Fincentric
Corporation, a global provider of software
solutions to financial institutions. She was
previously Senior Vice President and Chief
Financial Officer of MacMillan Bloedel Limited,
and is a director of the Royal Bank of Canada,
Catalyst Paper, the United Way of the Lower
Mainland and St. Paul's Hospital Foundation.
She joined the PCS Inc. Board in 2003. 4, 5
Jeffrey J. McCaig, of Houston, Texas, is
Chairman and CEO of Trimac Holdings, a bulk
trucking and third-party logistics company. Prior
to that, he practiced law, specializing in corporate
financing and securities. He is a director of Orbus
Pharma Inc., The Standard Life Assurance Company
of Canada and Stoneham Administration Inc. He
joined the PCS Inc. Board in 2001. 3, 5
Mary Mogford, of Newcastle, Ontario, is a
Corporate Director and a former Ontario Deputy
Minister of Finance and Deputy Minister of Natural
Resources. She is a director of Falconbridge Ltd.,
MDS Inc. and Sears Canada Inc., and a member of
the Altamira Advisory Council. She is a Fellow of
the Institute of Corporate Directors (ICD) and an
accredited director under the ICD/Rotman School
of Business Directors' Education Program. She
joined the PCS Inc. Board in 2001. 2, 5
Paul J. Schoenhals, of Calgary, Alberta, is
President and CEO of Enform, a petroleum
industry safety and training service. He is a former
Member of the Legislative Assembly and Cabinet
Minister in Saskatchewan and was Chairman of
Potash Corporation of Saskatchewan, the Crown
corporation, from 1987 to 1989. He joined the
PCS Inc. Board in 1992. 3, 4
E. Robert Stromberg, QC, of Saskatoon,
Saskatchewan, was formerly associated with the
Saskatchewan law firm Robertson Stromberg
Pedersen. He is a director of NorSask Forest
Products Inc. and Hitachi Canadian Industries
Ltd. and holds the rank of Honorary Lieutenant-
Colonel of the North Saskatchewan Regiment.
He joined the PCS Inc. Board in 1991. 1, 2, 4
Jack G. Vicq, of Saskatoon, Saskatchewan, is
Professor Emeritus of Accounting, University of
Saskatchewan. He is a past Associate Dean of
Commerce at the university and was responsible
for the Centre for International Business Studies.
He formerly held the A.W. Johnson Distinguished
Chair in Public Policy in the Saskatchewan
Department of Finance. He joined the PCS Inc.
Board in 1989. 1, 5
Elena Viyella de Paliza, of the Dominican
Republic, is President of Inter-Quimica, S.A., a
chemicals importer and distributor, Monte Rio
Power Corp and Indescorp, S.A. She is president
of the Dominican Business Council, a member
of the board of the Inter-American Dialogue and
past president of the Dominican Stock Exchange,
Dominican Manufacturers Association and the
National Agribusiness Board. She joined the PCS
Inc. Board in 2003. 1, 4
committees 1 Executive 2 Corporate governance and nominating 3 Compensation
4 Safety, health and environment 5 Audit
PotashGorp Board of Directors
22 POTASHCORP 2005 ANNUAL REPORT CORPORATE OFFICERS AND KEY MANAGEMENT
Corporate Officers and Key Management
William J. Doyle
President and Chief Executive Officer
He joined the company in 1987 as President of PCS Sales, and has more
than 30 years in the fertilizer industry. He was named CEO in 1999.
Wayne R. Brownlee
Executive Vice President and Chief Financial Officer
An MBA with responsibility for corporate business development, he joined
the company in 1988 and was appointed CFO in 1999.
James F. Dietz
Executive Vice President and Chief Operating Officer
A chemical engineer with more than 30 years in the fertilizer industry,
he joined the company in 1997 and became COO in 2000.
Betty-Ann L. Heggie
Senior Vice President, Corporate Relations
An educator with a marketing background, she joined the company in
1981 and rose to her current post in 1995, with responsibility for
PotashCorp's reputation.
Barbara Jane Irwin
Senior Vice President, Administration
A lawyer by training with more than 20 years in human resources, she
joined the company in 2000 with responsibility for recruitment, benefits
and compensation.
Robert A. Jaspar
Senior Vice President, Information Technology
A chartered accountant, he came to PotashCorp in 1997 as an internal
auditor and moved to his current position in 2003, managing the systems
that meet company information needs.
Joseph A. Podwika
Senior Vice President, General Counsel and Secretary
A lawyer, he joined PotashCorp in 1997 and took on his current post in
2005, with responsibility for the delivery of legal services and oversight
of corporate governance.
G. David Delaney
President, PCS Sales
With a BSc in Agriculture, he has worked in the fertilizer industry since
1983 and joined PotashCorp in 1997, rising to his current position in 2000.
Garth W. Moore
President, PCS Potash
A mining engineer, he has spent more than 30 years in the potash industry
and joined PotashCorp in 1982, rising to his current position in 1997.
Thomas J. Regan, Jr.
President, PCS Phosphate
A chemical engineer and MBA
operations, joining PotashCorp
phosphate division in 1999.
he has spent 30 years in industrial
n 1995 and becoming president of its
Stephen F. Dowdle
Senior Vice President, Fertilizer Sales, PCS Sales
A PhD in agronomy and soil science with two decades of industry
experience, he joined PotashCorp in 1999 and assumed responsibility
for all domestic and international fertilizer transactions in 2000.
Daphne J. Arnason
Vice President, Internal Audit
A chartered accountant, she joined the company in 1988 and rose to
her current position in 2003, with responsibility for auditing policies
and programs.
Karen G. Chasez
Vice President, Procurement
A social worker with 19 years in fertilizer industry publishing and
administration, she has overseen company purchasing, inventory and
supplier negotiations since joining PotashCorp in 2000.
John R. Hunt
Vice President, Safety, Health and Environment
After earning a degree in agricultural business, he has spent 24 years
in the fertilizer industry, joining PotashCorp in 1997 and moving to his
present position in 2005.
Denis A. Sirois
Vice President and Corporate Controller
A certified management accountant, he joined the company in 1978
and has held his current position since 1997, with wide responsibilities
in financial reporting.
POTASHCORP 2005 ANNUAL REPORT I SHAREHOLDER INFORMATION
Shareholder Information
Annual Meeting
The Annual Shareholders meeting will be held at 10:30 a.m.
Central Standard Time May 4, 2006 in the Adam Ballroom,
Delta Bessborough Hotel, 601 Spadina Crescent East,
Saskatoon, Saskatchewan.
It will be carried live on the company's website,
www.potashcorp.com.
Holders of common shares as of March 13, 2006 are entitled to
vote at the meeting and are encouraged to participate.
Dividends
Dividend amounts paid to shareholders resident in Canada are
adjusted by the exchange rate applicable on the dividend
record date. Dividends are normally paid in February, May,
August and November, with record dates normally set
approximately three weeks earlier. Future cash dividends will be
paid out of, and are 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 Company.
Registered shareholders can have dividends reinvested in newly
issued common shares of PotashCorp 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 (assuming ownership of
less than 25 percent) or debt instruments of the company
owned by non-residents not carrying on business in Canada. No
government in Canada levies estate taxes or succession duties.
Ownership
On February 27, 2006, there were 1,837 holders of record of
the company's common shares.
Shares Listed
Toronto Stock Exchange
New York Stock Exchange
Ticker Symbol: POT
Investor Inquiries
Betty-Ann Heggie, Senior Vice President, Corporate Relations
Canada: [phone] US: [phone]
e-mail: [e-mail]
Visit us at www.potashcorp.com
Common Share Transfer Agent
In Canada: In the United States:
CIBC Mellon Trust Company Mellon Investor Services, L.L.C.
600 The Dome Tower 480 Washington Boulevard
333 - 7th Avenue SW Jersey City N1 07310-1900
Calgary AB T2P 2Z1
Phone: [phone]
[phone]
Website: www.cibcmellon.com
Phone: [phone]
Website: www.mellon.com
Shareholders with address changes or inquiries concerning
their Potash Corporation of Saskatchewan Inc. stock are invited
to contact:
CIBC Mellon Trust (address above), or
Joseph A. Podwika, Corporate Secretary
PotashCorp
Suite 500, 122 - 1st Avenue South
Saskatoon SK S7K 7G3
Interim Reports, News Releases and Form 10-K
Non-registered shareholders who wish to receive quarterly
reports should contact the Corporate Relations department.
News releases are available via fax and e-mail.
Copies of the company's most recent Form 10-K are available
upon request and on our website.
NYSE Corporate Governance
Disclosure contemplated by 303A.11 of the NYSE's listed
company manual is available on our website at
www.potashcorp.com. The company has filed its annual
written affirmations/certifications pursuant to the NYSE listing
company manual. The certifications required by Section 302
of the Sarbanes-Oxley Act of 2002 are filed as exhibits to our
2005 Annual Report on Form 10-K.
Corporate Offices
Canada: Suite 500, 122 - 1st Avenue South, Saskatoon SK S7K 7G3 Phone: [phone]
23
US: Suite 400, 1101 Skokie Boulevard, Northbrook IL 60062 Phone: [phone]
24 POTASHCORP 2005 ANNUAL REPORT I SHAREHOLDER INFORMATION
Common Share Prices and Volumes
The table below sets forth the high and low prices, as well as the volumes, for the company's common shares as traded on the
Toronto Stock Exchange and the New York Stock Exchange (composite transactions) on a quarterly basis. Potash Corporation of
Saskatchewan Inc. is on the S&P/TSX 60 and the S&P/TSX Composite indices.
(Note: Data are adjusted for stock split effective August 9, 2004 on the TSX and August 16, 2004 on the NYSE.)
Toronto Stock Exchanger New York Stock Exchange
High Low Volume High Low Volume
2005 First Quarter 113.92 89.11 18,297,446 92.00 72.91 32,012,000
Second Quarter 132.11 98.39 13,432,009 106.67 79.27 29,833,400
Third Quarter 137.99 108.23 14,451,392 115.15 92.85 24,526,600
Fourth Quarter 108.89 84.76 22,180,812 93.32 72.77 46,103,900
Year 2005 137.99 84.76 68,361,659 115.15 72.77 132,475,900
2004 First Quarter 57.93 50.96 12,670,142 44.75 38.13 15,905,400
Second Quarter 64.87 54.58 12,009,046 48.50 39.46 23,604,000
Third Quarter 81.00 60.75 13,237,872 64.25 45.78 30,366,000
Fourth Quarter 104.06 76.05 16,211,631 84.00 60.65 29,245,700
Year 2004 104.06 50.96 54,128,691 84.00 38.13 99,121,100
2003 First Quarter 51.40 41.28 15,018,768 33.18 27.48 25,139,800
Second Quarter 47.21 40.75 12,704,274 32.75 29.82 21,213,000
Third Quarter 50.52 42.40 8,477,440 36.78 30.95 14,140,200
Fourth Quarter 57.75 46.88 14,428,736 43.63 35.24 24,381,780
Year 2003 57.75 40.75 50,629,218 43.63 27.48 84,874,780
1 Trading prices ar e in Cdn$ Sour ce: Thomson Financial
Yearly POT Stock Price - NYSE Composite
Sus
120
115.15
• High
Close
100 • Low

80 84.00
72.77
60

40

9.50

43.44
?

'
859
44.94 4
37 09

35

0.06 3841

43.63
'
34.60

•

8.13
06
21/ ?\ •
20 12.81
7.63 7.25 9.44 11.25
• .
?-
_
16.19 30.00 24.19 -
21.28 26.12
21.00 24.83 27.48
6.25 5.38 6.63 9.13 9.13 11.13
0
1989 1990 1991 1992 1993
1994 1995
1996
1997 1998 1999
2000 2001
2002 2003
2004 2005
Sour ce: Thomson Financial
POT Share Ownership - Geographic Distribution
Percent III us E Canada III Europe and Others
100
80
60
40
20
2005 Monthly POT Stock Price - NYSE Composite
WS
120
• High
Close 115.15
• 11.80
109.98
110

00 . Low 106.67 ?10
/ 105.93

9200 90.88 9086
90.95 94
24 9332
90 '?
83.80 •?:
/ .
• 92.85
8.01 - 85.39
• 82.75
80 `
• 82.30 -i-
80.27 79.27 83.28

70
72.91 75.51
72.77 73.09
60

50
Jan Feb Mar Apr
May June July Aug Sept
Oct Nov Dec
Source: Thomson Financial
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
As at December 31, 2005
Source: Thomson Financial
enriching crops •
enrichin
PotashCorp results 9
Net Sales*
$US Millions
3500
3000
2500
2000
1500
1000
500
0
2001 2002 2003 2004 2005
Cash Flow Return on Investri
Percentage
18
I1
9
6
3
0
2001 2002 2003 2004 2005
Over the last three years we answered the world's call for more potash.
We achieved new records in net sales, EBITDA and gross margin. Our
cash flow return on investment rose to 16 percent and our interest
coverage increased to 14 times. We ended 2005 with a net-debt-to-
capital ratio of under 40 percent, despite using $852 million
in cash to buy back almost 9 percent of our outstanding shares.
EBITDA*
$US Millions
1200
1000
800
600
400
200
0
2001 2002 2003 2004 2005
12
9
6
3
Gross Margin
$US Millions
1200
1000
800
600
400
200
0
2001 2002 2003 2004 2005
40
30
20
10
V 2001 2002 2003 2004 2005 V 2001 2002 2003 2004 2005
* See reconciliation and description of certain non-GAAP measures in Financial Performance Indicators in our Financial Review, Pages 50 to 52.
Adjusted EBITDA* Interest Coverage
Times
15
Net Debt to Capital*
Percentage
50
enriching
knowledge
ANYWHERE
When people around the world
search for information, our website provides a great
resource. With material ranging from conditions affecting
our business to fertilizer facts and even a KidsWeb section,
www.potashcorp.com is available to anyone, anywhere, anytime.
We are committed to serving not only our stakeholders
but also a growing world hungry for knowledge.
www.potashcorp.com
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