Expenses & Other Income

Expenses & Other Income

2008 vs 2007

Selling and administrative expenses include costs related to certain performance-based compensation plans (which are linked in part to the company’s share price performance), which decreased during the year due to our declining share price in 2008 compared to a rising share price in both 2007 and 2006.

Provincial mining and other taxes increased principally due to higher potash profit per tonne. Saskatchewan’s Potash Production Tax is comprised of a base tax per tonne of product sold and an additional tax based on mine profits. The profit tax is calculated on a per-tonne basis and is reduced by capital expenditures (substantially all of which are grossed up by 20 percent for profit tax purposes). The profit tax component increased $347.2 million in 2008 compared to 2007, as a result of substantial potash price increases. The increase would have been even higher were it not for the significant capital expenditures (to expand our mines in Saskatchewan) incurred during the year, which were used to offset a portion of the profit tax. In addition, gross potash revenue on a per-tonne basis was higher in 2008 than in 2007. The company is also subject to the Saskatchewan Corporation Capital Tax (calculated as a percentage of Saskatchewan sales), which increased 132 percent or $61.6 million from 2007.

Foreign exchange gains of $126.0 million were recorded during 2008. A weaker Canadian dollar relative to the US dollar on the period-end translation of Canadian dollar denominated monetary items on the Consolidated Statements of Financial Position and a reduction in our monetary position resulted in a gain that was partially offset by losses on foreign exchange forward contracts. In comparison, the Canadian dollar strengthened in 2007, resulting in losses that were partially offset by foreign exchange forward contract gains, contributing to foreign exchange losses of $70.2 million that year.

Other income grew $208.0 million or 166 percent. Our share of earnings from equity investments in APC and SQM increased $179.6 million in 2008 compared to 2007, while dividend income from our investments in ICL and Sinofert contributed an additional $48.9 million compared to last year. Partially offsetting these increases was an $88.8 million provision for other-than-temporary impairment of auction rate securities recorded in other income in 2008, of which $50.0 million represented a reclassification from other comprehensive income (OCI) of items considered temporarily impaired as of December 31, 2007. In 2007, the provision for other-than-temporary impairment of auction rate securities was $26.5 million (while $50.0 million of unrealized losses was recorded in other comprehensive income). Other income in 2008 also includes a $25.3 million gain on the settlement of the forward purchase contract for shares in Sinofert, and a $21.4 million gain on the sale of certain phosphate feed plant assets in Brazil.

The interest expense category declined $5.9 million. Weighted average balances of debt obligations outstanding and the associated interest rates were as follows:

An additional $21.1 million of interest was capitalized in 2008 compared to 2007 as a result of significant mine expansion projects in Saskatchewan, reducing the interest expense category. The lower average balance of long-term debt obligations outstanding for 2008 resulted in interest expense on long-term debt being $16.7 million lower than in 2007, which was more than offset by an increase of $19.8 million in short-term interest expense caused by a higher balance in short-term debt obligations in 2008. Interest income decreased $12.1 million compared to 2007 due to lower average outstanding cash balances in 2008.

The company’s effective income tax rate for 2008 was 24 percent (2007 – 27 percent). A scheduled 1.5 percentage point reduction in the Canadian federal income tax rate applicable to resource companies, along with the elimination of the 1 percent surtax, became effective at the beginning of 2008. There was also a significant increase in permanent deductions in the US. In addition, there were the following discrete tax adjustments that impacted the rates:

• In 2008, income tax recoveries of $71.1 million (of which $29.1 million was current and $42.0 million was future) were recorded that related to an increase in permanent deductions in the US from prior years.
• Future income tax assets were written down by $11.0 million during 2008.
• The $25.3 million gain that was recognized in 2008 as a result of the change in fair value of the forward purchase contract for shares in Sinofert was not taxable.
• During the fourth quarter of 2007, the Government of Canada enacted a reduction of the federal corporate income tax rate from 21 percent in 2007 to 15 percent by 2012. In addition, a small change was enacted in the second quarter of 2007. The federal corporate income tax changes reduced the company’s future income tax liability by $40.1 million in 2007.

For 2008, 90 percent of the income tax rate pertained to current income taxes and 10 percent related to future income taxes (excluding the effect of the income tax recoveries and future income tax asset writedowns). The increase in the current tax provision from 65 percent last year (excluding the effect of the Canadian tax rate changes on the company’s future income tax liability recognized during 2007) is largely due to the use of certain US federal income tax loss carryforwards in the first three quarters of 2007 to reduce the current rate. Since the income tax loss carryforwards were used by the end of 2007, 2008 earnings were fully taxable.

2007 vs 2006

Selling and administrative expenses increased as higher expenses associated with certain of our performance-based compensation plans (which are linked in part to the company’s share price performance or earnings performance) and higher stock option expense (as costs associated with the 2005, 2006 and 2007 Performance Option Plans were recognized during 2007 compared to only the 2005 and 2006 Performance Option Plans during 2006) were recognized during 2007.

Provincial mining and other taxes increased principally due to higher potash profit per tonne and potash sales volumes impacting our Saskatchewan Potash Production Tax and corporate capital tax. The profit tax component increased $59.3 million in 2007 compared to 2006 as a result of higher potash per-tonne profit, caused by higher potash prices and lower fixed costs per tonne (volumes were 31 percent higher in 2007 than 2006). The 40 percent or $13.3 million increase in corporate capital tax expense resulted from higher potash sales revenues and was partially offset by changes enacted by the Province of Saskatchewan during the second quarter of 2006 to reduce the capital tax resource surcharge from 3.6 percent to 3 percent over the next three years, with a 0.3 and a 0.2 percentage point reduction effective each of July 1, 2006 and July 1, 2007, respectively.

The impact of a stronger Canadian dollar relative to the US dollar on the period-end translation of Canadian dollar denominated monetary items on the Consolidated Statements of Financial Position, partially offset by treasury gains, contributed to foreign exchange losses of $70.2 million in 2007. The Canadian dollar gained strength against the US dollar over the course of 2007, particularly in the last three quarters. In comparison, in 2006, the Canadian dollar strengthened over the first half of the year then weakened during the second half, contributing to a foreign exchange gain of $4.4 million in that period.

Other income grew $31.5 million or 34 percent. Our share of earnings from equity investments in APC and SQM increased $21.8 million in 2007 compared to 2006, while dividend income from our investments in ICL and Sinofert contributed an additional $37.0 million compared to 2006. Other income was partially offset by a $26.5 million provision for other-than-temporary impairment of auction rate securities.

The interest expense category declined $16.9 million. Weighted average balances of debt obligations outstanding and the associated interest rates were as follows:

The lower average balance of short-term debt obligations outstanding for 2007 resulted in interest expense on short-term debt being $25.8 million lower than in 2006. The effect of higher interest income due to higher average balances of cash and other short-term investments during 2007 compared to 2006 was partially offset by interest income recognized on income tax refunds during 2006. Declines in net interest expense during 2007 were offset in part by the higher average balance of long-term debt obligations outstanding. The overlap of $500.0 million of notes in December 2006, prior to the repayment of $400.0 million of notes in June 2007, increased interest expense $14.0 million compared to 2006.

The company’s effective income tax rate for 2007 was 27 percent (2006 – 20 percent). A scheduled 2 percentage point reduction in the Canadian federal income tax rate applicable to resource companies, effective at the beginning of 2007, and a reduction of the future income tax rate enacted during the fourth quarter of 2007 were offset by a higher percentage of consolidated income earned in higher-tax jurisdictions during 2007 compared to 2006. In addition, there were the following discrete tax adjustments that impacted the rates:

• During the fourth quarter of 2007, the Government of Canada enacted a reduction of the federal corporate income tax rate from 21 percent in 2007 to 15 percent by 2012. In addition, there was a small change enacted in the second quarter of 2007. The federal corporate income tax changes reduced the company’s future income tax liability by $40.1 million. In 2006, changes were enacted by the Government of Canada to reduce the federal corporate income tax rate and the federal corporate surtax, reducing our future income tax liability by $22.9 million at that time.
• During 2006, the Province of Saskatchewan enacted changes to the corporate income tax that resulted in a $21.9 million reduction in our future income tax liability in that year.
• In 2006, income tax refunds totaling $34.1 million were recorded.