QUARTERLY RESULTS

Quarterly Results and Review of Fourth-Quarter Performance

Although the global economic crisis led to slower demand for all three nutrients and lower prices for phosphate and nitrogen, our potash operations drove fourth-quarter gross margin to $873.1 million, 63 percent above the $535.0 million generated in the same period last year. Included in fourth-quarter results is $88.9 million in writedowns of year-end nitrogen and phosphate inventory values, which reduced earnings by $0.22 per share in the quarter. Cash flow from operations of $763.3 million was the third-highest quarterly total in company history (only the second and third quarters of 2008 were higher), while the $3,013.2 million achieved for the year exceeded the 2007 record by 78 percent.

Highlights of our 2008 fourth quarter include:

• Potash gross margin of $744.8 million was almost three times higher than the $256.4 million generated in the same quarter last year. Total realized prices climbed to $625 per tonne, a 235 percent increase over fourth-quarter 2007 levels. The offshore realized price of $583 per tonne was 242 percent higher than in last year’s fourth quarter, and reflected a larger proportion of sales directed to contract markets with lower netbacks based on prices established earlier in the year. Realized prices in the North American spot market reached $740 per tonne, up 246 percent from last year and 32 percent from the trailing quarter, as a September 2008 price increase was realized. Potash sales volumes of 1.4 million tonnes were 37 percent lower than in the same period last year. Our offshore sales volumes of 1.1 million tonnes were down 27 percent compared to the same quarter last year. During the quarter, Canpotex shipped approximately 340,000 tonnes to China and 475,000 tonnes to India, the two largest contract markets; 45 percent lower and 107 percent higher, respectively, than shipments in the same quarter last year. Spot market sales volumes to Brazil declined 91 percent in the fourth quarter of 2008 versus the same quarter last year. North American potash volumes were down 54 percent from last year’s fourth quarter. Potash cost of goods sold was $33 per tonne higher quarter over quarter, primarily the result of increased royalties paid in Saskatchewan and New Brunswick, as well as strike and other labor costs that mainly resulted from work stoppages. A total of 20 mine shutdown weeks were taken in the quarter as a result of strikes at our Allan, Cory and Patience Lake facilities.
• Due to substantially lower sales volumes, phosphate gross margin of $110.4 million was 22 percent below the $141.9 million of last year’s fourth quarter. However, our unique ability to allocate phosphoric acid feedstock to higher-netback downstream products proved beneficial in the quarter’s difficult market conditions. Liquid fertilizers generated $92.9 million of phosphate gross margin, industrial products added $20.0 million and feed phosphate $18.2 million. With rapidly deteriorating market demand and prices, solid fertilizers incurred a loss of $21.8 million, inclusive of a writedown of $52.9 million of inventory on hand at year-end that was produced earlier in the quarter with higher-cost sulfur and ammonia. Higher-priced sales early in the quarter led to increases in quarter-over-quarter realized prices for liquid fertilizer (+220 percent), solid fertilizers (+145 percent), feed (+153 percent) and industrial products (+91 percent). By the end of the quarter, prices for all products were negatively affected by market conditions, including rapidly declining spot prices for raw material inputs. Weakened prices were especially evident in the solid fertilizer sector, demonstrating the importance of our diverse phosphate product mix. Solid fertilizer sales volumes fell 81 percent, while liquid fertilizer sales volumes dropped 42 percent. Feed sales volumes declined 53 percent as the beef, pork and poultry industries continued to suffer, distillers' dried grains with solubles was used as a substitute and many feed mills remained shut down. Sales volumes for industrial products, traditionally a more stable area of the phosphate business, declined a comparatively small 17 percent.
• Nitrogen contributed $17.9 million of gross margin in the fourth quarter, compared to $136.7 million in the fourth quarter of 2007, reflecting the rapid decline in sales volumes, along with a $36.0 million writedown of inventories produced with higher-cost natural gas early in the quarter. Market prices for nitrogen products fell dramatically over the quarter. However, with most of our fourth-quarter nitrogen volumes sold early in the quarter when prices were at their peak, realized prices for ammonia were 42 percent above the same quarter last year. Urea prices were flat while prices for nitrogen solutions rose 78 percent on early fourth-quarter business. The international ammonia market weakened considerably during the fourth quarter as large-scale cutbacks were made to operating rates in the phosphate and industrial sectors, which account for a significant portion of global ammonia import demand. Our ammonia sales volumes fell 23 percent from the same quarter last year, while urea sales volumes were 14 percent lower. Sales volumes for nitrogen solutions were down 59 percent from the fourth quarter of 2007. Our total average natural gas cost, including our hedge, was $6.16 per MMBtu, a 40 percent increase over last year.
• Selling and administrative expenses were lower in 2008, due primarily to reduced medium-term incentive plan accruals and valuation of deferred share units that were directly impacted by the significant downward movement in our share price during the quarter.
• Provincial mining and other taxes increased $68.9 million year over year due primarily to a $64.3 million increase in Saskatchewan Potash Production Tax, which was attributable to potash profit per tonne increasing substantially from the prior year.
• Approximately $62.8 million of foreign exchange gains resulted from the Canadian dollar weakening significantly against the US dollar during the fourth quarter of 2008, gains on the translation of Canadian dollar denominated monetary items and offset by foreign exchange forward contract losses. A foreign exchange loss of $2.8 million resulted last year when the Canadian dollar marginally strengthened.
• Other income increased $64.1 million over 2007 as dividend income increased $32.4 million and our share of earnings from equity investees contributed an additional $44.8 million. Also included in other income was an $88.8 million provision for other-than-temporary impairment in auction rate securities, compared to a provision of $26.5 million in the fourth quarter of 2007.
• Interest expense more than doubled compared to 2007 due to a significant increase in short-term debt.
• The effective income tax rate was 8 percent (2007 – 15 percent) due to the cumulative adjustment for a reduction in the rate during the quarter. The decrease was mainly due to lower earnings than expected from the US operations without a corresponding drop in US permanent deductions.