Expenses & Other Income

Expenses and other income

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. 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 component increased $59.3 million in 2007 compared to 2006, as a result of two factors. First, the profit tax component, which is calculated on a per-tonne basis, is reduced by capital expenditures (portions of which are grossed up by 20 percent for profit tax purposes); the per-tonne impact of these annual expenditures reduced 2006 potash production tax more significantly than in 2007. In addition, gross potash revenue on a per-tonne basis was higher in 2007 than in 2006. Second, Saskatchewan-produced potash sales volumes rose by 34 percent in 2007, which increased profit per tonne as the fixed costs on a per-tonne basis were reduced. The 40 percent or $13.3 million increase in corporate capital tax expense resulted from higher potash sales revenues. It 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 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 Statement 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 year.

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 last year. Partially offsetting these increases was a $26.5 million provision for other-than-temporary impairment of auction rate securities recorded in other income in 2007.

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. These 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 issued 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.

Our consolidated reported income tax rate for 2007 was approximately 27 percent (2006 – 20 percent) and the consolidated effective income tax rate was 30 percent (2006 – 30 percent). Items to note include the following:

• 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.
• 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. This was in addition to a small change enacted in the second quarter of 2007. These changes reduced our 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.

Aside from the impact of income tax refunds received and the effect of Canadian tax rate changes on our future income tax liability recognized during each year, 65 percent of the effective rate pertained to current income taxes in 2007 as compared to 60 percent in 2006. The increase in 2007 is largely due to the increase in nitrogen and phosphate operating income in the US, a jurisdiction where, as of December 31, 2006, we had federal income tax loss carryforwards of approximately $372.3 million that were available to offset this income; this total was reduced to nil as of December 31, 2007.

2006 vs 2005

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), higher stock option expense (as costs associated with both the 2005 and 2006 Performance Option Plans were recognized during 2006 compared to only the 2005 Performance Option Plan during 2005) and increased corporate amortization costs were incurred during 2006.

Provincial mining and other taxes declined 52 percent in 2006 compared to 2005, principally due to decreases in the Saskatchewan Potash Production Tax and corporate capital tax. The profit tax component declined significantly as a result of the deductibility of our capital expenditures to bring back idled potash capacity. This component was enhanced by high capital expenditures and 12 percent lower potash sales volumes. In addition, during the second quarter of 2006, the Province of Saskatchewan enacted changes to reduce the capital tax resource surcharge over the next three years, with a 0.3 percentage point reduction effective July 1, 2006.

Treasury activity and the year-end translation of Canadian dollar-denominated monetary items on the Consolidated Statement of Financial Position contributed to a net foreign exchange gain of $4.4 million in 2006. The Canadian dollar gained strength against the US dollar over the first half of 2006, then weakened during the second half. The strengthening of the Canadian dollar relative to the US dollar during 2005 contributed to foreign exchange losses of $12.5 million that year.

Other income increased by $32.2 million as a $3.0 million dividend was received from Sinofert during 2006 and dividend income from our investment in ICL increased by $8.9 million compared to 2005. A reduction in loss on disposal of assets compared to that recognized during 2005 and a higher gain on sale of property, plant and equipment (including a $4.4 million gain on the sale of four of the company's PCS Joint Venture Ltd. properties) further contributed to the increase. These were complemented by a slightly higher share of earnings from equity investees during 2006.

Including the current portion, weighted average long-term debt outstanding during 2006 was $1,296.7 million (2005 – $1,266.3 million) with a weighted average interest rate of 6.9 percent (2005 – 6.9 percent). The weighted average interest rate on short-term debt outstanding in 2006 was 5.2 percent (2005 – 3.5 percent) and the weighted average short-term debt outstanding was $518.8 million (2005 – $115.9 million). Although the average balance of short-term debt outstanding was higher at higher interest rates, the interest expense category increased only $3.3 million due to the impact of higher capitalized interest because of expansion and other projects and interest income recognized on income tax refunds received during 2006.

The company's consolidated reported income tax rate for 2006 was approximately 20 percent (2005 – 33 percent). The reduction was due to the following:

• During 2006, we reduced our consolidated effective income tax rate from 33 percent to 30 percent, primarily due to two factors that occurred during the year. First, the Province of Saskatchewan enacted changes to the corporate income tax, reducing the rate from 17 percent to 12 percent over the next three years. The impact of this change, reducing our future income tax liability by $21.9 million, was also recognized during the year. Second, we revised our estimated allocation of annual income before income taxes by jurisdiction as a result of a decrease in expected potash operating income in Canada.
• During 2006, the Government of Canada enacted changes to the federal corporate income tax and the corporate surtax. The corporate income tax rate will be reduced from 21 percent to 19 percent over the next four years and the corporate surtax will be reduced from 1.12 percent to nil in 2008. The $22.9 million impact of this change that reduced our future income tax liability was recognized during 2006.
• Income tax refunds totaling $34.1 million were recorded, relating to a recent Canadian appeal court decision (pertaining to a uranium producer) that affirmed the deductibility of the Saskatchewan capital tax resource surcharge.

The combination of income tax refunds received, changes in tax rates and lower operating income led to a decline in income tax expense of $109.3 million compared to 2005. For 2006, 60 percent of the effective rate pertained to current income taxes and 40 percent to future income taxes, aside from the impact of the aforementioned income tax refunds and the effect of the Canadian tax rate changes on the company's future income tax liability recognized during the year. The decrease in the current tax provision from 85 percent last year is largely due to the significant decrease in potash operating income in Canada and the change in mix and levels of income earned in the company's other tax jurisdictions.

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