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 Obligations
Long-term debt obligations consists of $1,350.0 million of senior notes that were issued under US shelf registration statements, a net of $5.9 million under back-to-back loan arrangements (described in Note 13 to the consolidated financial statements) and other commitments of $2.6 million payable over the next five years.
The senior notes represent more than 99 percent of our total long-term debt obligations portfolio and are unsecured. Of the senior notes outstanding, $600.0 million bear interest at 7.750 percent and mature in 2011, $250.0 million bear interest at 4.875 percent and mature in 2013 and $500.0 million bear interest at 5.875 percent and mature in 2036. Senior notes in the principal amount of $400.0 million were repaid in full at maturity in June 2007. There are no sinking fund requirements. The senior notes 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, 2007. Under certain conditions related to change in control, the company is required to make an offer to purchase all, or any part, of the senior notes due 2036 at 101 percent of the principal amount of the senior notes repurchased, plus accrued interest.
The estimated interest payments on long-term debt obligations in the table above 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, 2007.
Operating Leases
We have long-term operating lease agreements for buildings, port facilities, equipment, ocean-going transportation vessels and railcars, the latest of which expires in 2022. The most significant operating leases consist of three items. The first is our lease of railcars, which extends to approximately 2022. The second is the lease of port facilities at the Port of Saint John for shipping New Brunswick potash offshore, which runs until 2018. The third is the lease of four vessels for transporting ammonia from Trinidad. One vessel agreement runs until 2018; 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 above are based on contract prices.
We have entered into long-term natural gas contracts with the National Gas Company of Trinidad and Tobago Limited, the latest of which expires in 2018. The contracts provide for prices that vary primarily with ammonia market prices, escalating floor prices and minimum purchase quantities. The commitments included in the table above 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. The commitments included in the table above 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, and mineral lease commitments, the latest of which expires in 2028.
Other Long-Term Liabilities
Other long-term liabilities consist primarily of net accrued pension and other 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 above.
Capital Expenditures
Based on our current exchange rate expectations, during 2008 we expect to incur capital expenditures, including capitalized interest, of approximately $1,090 million for opportunity capital, approximately $310 million to sustain operations at existing levels and approximately $30 million for site improvements.
Investment Liquidity
Investments
Investments include auction rate securities. All securities continue to be rated AAA, with the exception of one investment (face value $19.9 million) which has a split rating. Although this investment is rated AAA by one ratings agency, another has it sub AAA although still investment grade. Maturities extend through 2046. The securities include collateralized loan obligations with a face value of $48.3 million and collateralized debt obligations with a face value of $84.2 million. As of December 31, 2007, the balance recorded in investments related to these auction rate securities was $56.0 million (face value $132.5 million), resulting in an unrealized loss of $76.5 million. The unrealized loss represents the company's estimate of diminution in value as of December 31, 2007 resulting from the current lack of liquidity for these investments at year-end and uncertainty as to the ultimate recoverability. Of the decline in value, $50.0 million is presently considered temporary and $26.5 million is considered other-than-temporary. We have commenced an arbitration proceeding against the investment firm that purchased the securities for our account without our authorization, and we intend to pursue our claim vigorously.
We are exposed to liquidity and credit risk on investments in auction rate securities due to the current lack of liquidity that has existed since August 2007; therefore the securities are being held in our account for longer than the approximate 28 days that was originally anticipated. We are uncertain as to when the liquidity for such securities will improve. As a result, during the fourth quarter we reclassified the investments from short-term to long-term, reflecting that liquidity may not return within one year and, further, that we may hold the investments for a longer period of time, as we are able to do.
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:
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, long-term debt issued under our US shelf registration statements, and long-term debt drawn down under our syndicated credit facility. Our primary uses of funds are operational expenses, sustaining and opportunity capital spending, intercorporate investments, dividends, and interest and principal payments on our debt securities.
Cash provided by operating activities grew to $1,688.9 million in 2007, an increase of 142 percent compared to 2006, largely attributable to net income of $1,103.6 million which was $471.8 million higher than in 2006. The strengthening of the Canadian dollar against the US dollar in 2007 increased the reconciliation of net income to cash provided by operating activities by $51.9 million compared to 2006, when the impact was negligible. The increase in provision for future income taxes positively impacted the change in reconciliation of net income to cash provided by operating activities by $69.6 million, and higher depreciation and amortization expense in 2007 due to recent expansion projects now being depreciated improved it by an additional $48.9 million compared to 2006. The change in accounts payable and accrued charges of $250.9 million contributed a further $520.0 million in additional cash flows for 2007 compared to 2006. Accounts payable and accrued charges increased during 2007 with higher incentive plan accruals, trade accounts payable, income taxes payable, deferred revenues and dividends payable. This compares to 2006 when the change in accounts payable represented a cash outflow of $269.1 million due to (1) reductions in income tax payable because of paying 2005 Canadian income taxes due in first-half 2006 and making Canadian income tax installments for 2006 based on expectations higher than actual results; (2) lower hedging margin deposits as a result of falling natural gas prices and reduced volume of derivative instruments outstanding; and (3) payments of incentive compensation accruals related to performance units granted under the company's medium-term incentive plan (which is evaluated on a three-year cycle and paid every three years). These were partially offset by the change in other long-term liabilities which negatively impacted the reconciliation of net income to cash provided by operating activities by $57.9 million in 2007 compared to a positive impact of $13.4 million in 2006, a change of $71.3 million that was significantly attributable to increased pension funding during 2007. Further, the change in accounts receivable negatively impacted 2007 operating cash flows by $154.6 million compared to a positive impact of $11.0 million in 2006, as accounts receivable increased more at the end of 2007 than 2006 with significantly higher product pricing.
Cash used in investing activities declined $81.6 million year over year. The most significant cash outlays included:
- During the first quarter of 2007, $9.7 million was paid to settle outstanding amounts related to the December 2006 purchase of additional shares in SQM. During the third quarter of 2007, we purchased an additional 1,011,062 shares of SQM for cash consideration of $16.8 million, which was financed by cash on hand. Our ownership interest in SQM remains at approximately 32 percent. During 2006, we acquired additional interests in Sinofert, APC and SQM for cash consideration of $352.5 million. The Sinofert purchase price was financed by short-term debt; the purchase prices of APC and SQM were financed by cash on hand.
- Our spending on property, plant and equipment was $607.2 million in 2007, an increase of $98.6 million over 2006. Approximately 56 percent (2006 – 58 percent) of our consolidated capital expenditures related to the potash segment.
- We invested $132.5 million in investments in the form of auction rate securities during 2007.
Cash used in financing activities increased $911.7 million during 2007 compared to the cash inflow from financing activities in 2006. During 2007, we repaid $400.0 million of 10-year bonds that matured in June 2007 while we received $483.9 million proceeds from issuance of long-term debt (net of discount and issue costs) in 2006. Dividend payments increased as we doubled our quarterly dividend in May 2007 (from $0.05 per share to $0.10 per share), using an additional $32.7 million, while $26.4 million lower repayments of short-term debt (as the balance was reduced through 2006) partially offset this.
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 2008, exclusive of any possible acquisitions, as was the case in 2007. 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.