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Non-GAAP Financial Measures and Footnotes to Reconciliations and Calculations

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

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  

After-tax effects of items affecting net income are as follows:

    2008    2007   2006   2004    2003   2000    1999
Impairment of property, plant and equipment $ –  $ – $ 4.5 $ –  $ 89.7 $ 14.5  $ 513.8
Impairment of auction rate securities   66.6    18.6   –   –    –   –    –
Plant shutdown and closure   –    –   –   6.2    113.5   –    24.1
Office consolidation   –    –   –   –    –   3.3    9.2
Gain on sale of assets   (15.6)   –   –   (37.0)   –   (16.3)   –
Total after-tax effects on net income $ 51.0  $ 18.6 $ 4.5 $ (30.8) $ 203.2 $ 1.5  $ 547.1
 
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 the following items:

    2008    2007   2006   2004    2003   2000    1999
Impairment of property, plant and equipment $ –  $ – $ 6.3 $ –  $ 132.4 $ 14.5  $ 530.4 
Impairment of auction rate securities   88.8    26.5   –   –    –   –    – 
Plant shutdown and closure   –    –   –   6.2    113.5   –    24.1 
Office consolidation   –    –   –   –    –   –    9.2 
Gain on sale of assets   (21.4)   –   –   (37.0)   –   (20.1)   – 
Total non-cash items included in EBITDA   67.4    26.5   6.3   (30.8)   245.9   (5.6)   563.7 
EBITDA   4,962.6    1,879.8   1,117.9   754.3    171.8   513.8    (161.9)
Adjusted EBITDA $ 5,030.0  $ 1,906.3 $ 1,124.2 $ 723.5  $ 417.7 $ 508.2  $ 401.8 
 
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
Adjusted EBITDA = EBITDA + impairment charges + non-cash shutdown / closure-related costs and office consolidation costs – gain on sale of assets
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
Cash flow = net income or loss + income taxes + change in unrealized loss/(gain) on derivatives included in net income + interest – current income taxes + depreciation and amortization
Cash flow return = cash flow / average (total assets – cash and cash equivalents – fair value of derivative assets + accumulated depreciation and amortization – net unrealized gains on available-for-sale securities – accounts payable and accrued charges)
Current income taxes = income tax expense (recovery) – provision for (recovery of) future income tax
EBITDA = earnings (net income or loss) before interest, taxes, depreciation and amortization
Market value of total capital = market value of total debt – cash and cash equivalents + market value of equity
Net debt to capital = (total debt – cash and cash equivalents) / (total debt – cash and cash equivalents + total shareholders’ equity)
Return on assets = net income or loss / total assets
Total debt to capital = total debt / (total debt + total shareholders’ equity)
Total shareholder return = (change in market price per common share + dividends per share) / beginning market price per common share
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)