NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in millions, except per share amounts and as otherwise designated)
(Unaudited)
1. Organization
and Nature of Business
The Mosaic Company (
Mosaic
, and, with its consolidated
subsidiaries,
we
,
us
,
our
, or the
Company
) produces and markets concentrated phosphate and potash crop nutrients. We conduct our business through
wholly and majority owned subsidiaries as well as businesses in which we own less than a majority or a noncontrolling interest, including consolidated variable interest entities and investments accounted for by the equity method. We are organized
into the following business segments:
Our
Phosphates
business segment owns and operates mines and
production facilities in Florida which produce concentrated phosphate crop nutrients and phosphate-based animal feed ingredients, and processing plants in Louisiana which produce concentrated phosphate crop nutrients. Our Phosphates segments
results also include our international distribution activities. In fiscal 2011, the Phosphates segment acquired a 35% economic interest in a joint venture that owns the Miski Mayo Mine in Peru. On August 5, 2013, we entered into a
Shareholders Agreement with Saudi Arabian Mining Company (
Maaden
) and Saudi Basic Industries Corporation (
SABIC
) under which the parties have formed a joint venture to develop, own and
operate integrated phosphate production facilities in the Kingdom of Saudi Arabia (the
Northern Promise Joint Venture
). We own 25% of the joint venture and will market approximately 25% of its production. On March 17,
2014, we completed the acquisition of the Florida phosphate assets and assumption of certain related liabilities (
CF Phosphate Assets Acquisition
) of CF Industries, Inc. (
CF
). This transaction is
further described in Note 17 to our Condensed Consolidated Financial Statements in this report.
Our
Potash
business segment owns and operates potash mines and production facilities in Canada and the U.S. which produce potash-based crop nutrients, animal feed ingredients and industrial products. Potash sales include domestic and
international sales. We are a member of Canpotex, Limited (
Canpotex
), an export association of Canadian potash producers through which we sell our Canadian potash outside the U.S. and Canada.
Intersegment sales are eliminated within Corporate, Eliminations and Other. See Note 15 of our Condensed Consolidated
Financial Statements in this report for segment results.
2. Cargill Transaction
As previously reported, on May 25, 2011, we facilitated the exit by Cargill, Incorporated
(
Cargill
) from its equity interest in us through a split-off to its stockholders and a debt exchange with its debt holders, and initiated the first in a series of transactions (the
Cargill
Transaction
) intended to result in the ongoing orderly disposition of the approximately 64% (285.8 million) of our shares that Cargill formerly held. Among other previously reported actions in furtherance of the Cargill Transaction, on
December 6, 2013, we entered into a share repurchase agreement (the
MAC Trusts Share Repurchase Agreement
) with two former Cargill stockholders (the
MAC Trusts
) to purchase all of the
remaining shares of Class A Common Stock (
Class A Shares
) held by the MAC Trusts through a series of eight purchases occurring from January 8, 2014 through July 30, 2014. At June 30, 2014, pursuant to
the MAC Trusts Share Repurchase Agreement, all 21,647,007 Class A Shares, Series A-3, held by the MAC Trusts, and 15,462,145 Class A Shares, Series A-2, had been repurchased for an aggregate of $1.7 billion.
Subsequent to June 30, 2014, pursuant to the MAC Trusts Share Repurchase Agreement, the remaining 6,184,863
Class A Shares, Series A-2, have been repurchased for an aggregate of approximately $300 million.
6
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The MAC Trusts Share Repurchase Agreement, along with the share
repurchase agreements we entered with certain Cargill family member trusts (the
Family Trusts Share Repurchase Agreements
and together with the MAC Trusts Share Repurchase Agreement, the
Share Repurchase
Agreements
) are accounted for as a forward contract with an initial liability established at fair value based on the average of the weighted average trading price for each of the preceding 20-day trading days as noted above and a
corresponding reduction of equity. The contract is subsequently remeasured at the present value of the amount to be paid at settlement with the difference being recognized in the consolidated statement of earnings. We are required to
exclude the common shares that are to be repurchased in calculating basic and diluted earnings per share (
EPS
). Any amounts, including contractual (accumulated) dividends and participation rights in undistributed
earnings, attributable to shares that are to be repurchased that have not been recognized in the consolidated statement of earnings shall be deducted in computing income available to common shareholders, consistent with the two-class
method. See the calculation of EPS in Note 6 of our Condensed Consolidated Financial Statements.
3. Summary of Significant Accounting
Policies
Statement Presentation and Basis of Consolidation
The accompanying unaudited Condensed Consolidated Financial Statements of Mosaic have been prepared on the accrual basis
of accounting and in accordance with the requirements of the Securities and Exchange Commission (
SEC
) for interim financial reporting. As permitted under these rules, certain footnotes and other financial
information that are normally required by accounting principles generally accepted in the United States (
U.S. GAAP
) can be condensed or omitted. The Condensed Consolidated Financial Statements included in this
document reflect, in the opinion of our management, all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement of the results for the interim periods presented. The following notes should be read in conjunction
with the accounting policies and other disclosures in the Notes to the Consolidated Financial Statements included in our Transition Report on Form 10-K filed with the SEC for the transition period from June 1, 2013 to December 31, 2013
(the
10-K Report
). Sales, expenses, cash flows, assets and liabilities can and do vary during the year as a result of seasonality and other factors. Therefore, interim results are not necessarily indicative of the results
to be expected for the full fiscal year.
The accompanying Condensed Consolidated Financial Statements include
the accounts of Mosaic and its majority owned subsidiaries. Certain investments in companies where we do not have control but have the ability to exercise significant influence are accounted for by the equity method.
Accounting Estimates
Preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods. The most significant estimates made by management relate to the estimates of
fair value of acquired assets and liabilities, the recoverability of non-current assets including goodwill, the useful lives and net realizable values of long-lived assets, environmental and reclamation liabilities including asset retirement
obligations (
ARO
), the costs of our employee benefit obligations for pension plans and postretirement benefits, income tax related accounts, including the valuation allowance against deferred income tax
assets, inventory valuation and accruals for pending legal and environmental matters. Actual results could differ from these estimates.
7
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
4. Recently Issued Accounting Guidance
Recently Adopted Accounting Pronouncements
In July 2013, the Financial Accounting Standards Board (
FASB
) issued Accounting
Standards Update (
ASU
) No. 2013-11,
Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net
Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward
Exists,
which requires that an unrecognized tax benefit should be presented in the financial statements as a reduction of a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward when
settlement in this manner is available under the law. This guidance was effective for us beginning January 1, 2014 and will be applied on a prospective basis to all unrecognized tax benefits that exist at the effective date. This guidance did
not have a material impact on our results of operations or financial position.
Pronouncements Issued But Not Yet
Adopted
In April 2014, the FASB issued ASU No. 2014-08,
Presentation of Financial
Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
, which changes the criteria for reporting a discontinued
operation. Under this standard, a disposal of part of an organization that has a major effect on its operations and financial results is a discontinued operation. This guidance is effective prospectively for us beginning January 1,
2015 with earlier application permitted, but only for disposals (or classifications as held for sale) that have not been reported previously. We do not expect that this guidance will have a material impact on our results of operations or
financial position.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with
Customers (Topic 606),
which requires revenue to be recognized based on the amount an entity is expected to be entitled to for promised goods or services provided to customers. The standard also requires expanded disclosures regarding
contracts with customers. The guidance in this standard supersedes the revenue recognition requirements in Topic 605,
Revenue Recognition
, and most industry-specific guidance. This guidance is effective for us beginning
January 1, 2017, with retrospective application required, subject to certain practical expedients. We are currently evaluating the requirements of this standard, and have not yet determined the impact on our results of operations or financial
position.
8
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
5. Other Financial Statement Data
The following provides additional information concerning selected balance sheet accounts:
|
|
|
|
|
|
|
|
|
(in millions)
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Other current assets
|
|
|
|
|
|
|
|
|
Final price deferred
(a)
|
|
$
|
51.4
|
|
|
$
|
154.3
|
|
Income and other taxes receivable
|
|
|
144.8
|
|
|
|
272.6
|
|
Prepaid expenses
|
|
|
118.6
|
|
|
|
115.8
|
|
Assets held for sale
(b)
|
|
|
91.3
|
|
|
|
111.9
|
|
Other
|
|
|
70.5
|
|
|
|
52.2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
476.6
|
|
|
$
|
706.8
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
|
Payroll and employee benefits
|
|
$
|
146.7
|
|
|
$
|
111.8
|
|
Asset retirement obligations
|
|
|
105.1
|
|
|
|
86.3
|
|
Customer prepayments
|
|
|
275.4
|
|
|
|
131.9
|
|
Other
|
|
|
305.0
|
|
|
|
336.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
832.2
|
|
|
$
|
666.3
|
|
|
|
|
|
|
|
|
|
|
Other noncurrent liabilities
|
|
|
|
|
|
|
|
|
Asset retirement obligations
|
|
$
|
759.6
|
|
|
$
|
637.6
|
|
Other
|
|
|
325.1
|
|
|
|
289.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,084.7
|
|
|
$
|
927.1
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Final price deferred is product that has shipped to customers, but the price has not yet been agreed upon. This has not been included in inventory
as risk of loss has passed to our customers. Amounts in this account are based on inventory cost.
|
(b)
|
See further description of assets held for sale in Note 16.
|
6. Earnings Per Share
We use the two-class method to
compute basic and diluted EPS. Earnings for the period are allocated pro-rata between the common stockholders and the participating securities. Our only participating securities are related to the Share Repurchase Agreements. The numerator for basic
and diluted EPS is net earnings for common stockholders. The denominator for basic EPS is the weighted-average number of shares outstanding during the period, excluding the effects of shares subject to forward contracts. The denominator for diluted
EPS also includes the weighted average number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued, unless the shares are anti-dilutive, and excludes the effects of
shares subject to forward contracts.
9
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following is a reconciliation of the numerator and denominator for
the basic and diluted EPS computations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months
ended June 30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net earnings attributed to Mosaic
|
|
$
|
248.4
|
|
|
$
|
429.8
|
|
|
$
|
466.0
|
|
|
$
|
809.6
|
|
Undistributed earnings attributable to participating securities
|
|
|
(6.3
|
)
|
|
|
|
|
|
|
(19.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator for basic and diluted earnings available to common stockholders
|
|
$
|
242.1
|
|
|
$
|
429.8
|
|
|
$
|
446.5
|
|
|
$
|
809.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares outstanding
|
|
|
384.0
|
|
|
|
425.8
|
|
|
|
392.5
|
|
|
|
425.8
|
|
Shares subject to forward contract
|
|
|
(9.8
|
)
|
|
|
|
|
|
|
(16.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares outstanding attributable to common stockholders
|
|
|
374.2
|
|
|
|
425.8
|
|
|
|
376.1
|
|
|
|
425.8
|
|
Dilutive impact of share-based awards
|
|
|
2.0
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares outstanding
|
|
|
376.2
|
|
|
|
427.2
|
|
|
|
377.5
|
|
|
|
427.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
|
$
|
0.65
|
|
|
$
|
1.01
|
|
|
$
|
1.19
|
|
|
$
|
1.90
|
|
Diluted net earnings per share
|
|
$
|
0.64
|
|
|
$
|
1.01
|
|
|
$
|
1.18
|
|
|
$
|
1.90
|
|
A total of 1.3 million shares of Common Stock subject to issuance upon exercise of
stock options for the three and six months ended June 30, 2014, and 0.4 million shares for the three and six months ended June 30, 2013, have been excluded from the calculation of diluted EPS as the effect would have been
anti-dilutive.
7. Income Taxes
We record unrecognized tax benefits in accordance with applicable accounting standards. During the six months ended June 30, 2014, gross unrecognized tax benefits increased by $12.8 million to $112.0
million. If recognized, approximately $100.0 million of the $112.0 million in unrecognized tax benefits would affect our effective tax rate in future periods.
We recognize interest and penalties related to unrecognized tax benefits as a component of our income tax provision. We had accrued interest and penalties totaling $23.2 million and $28.8 million as of
June 30, 2014 and December 31, 2013, respectively, that were included in other noncurrent liabilities in the Condensed Consolidated Balance Sheets.
Based upon the information available as of June 30, 2014, we anticipate that the amount of uncertain tax positions will change in the next twelve months; however, the change cannot reasonably be
estimated.
It is reasonably possible that the Company could change the tax status of one of its non-U.S.
subsidiaries within the next twelve months, which would result in a tax benefit to the Company in the period when the tax status changes. As of June 30, 2014, this tax benefit is estimated to be between $60 million and $100 million.
For the three months ended June 30, 2014, tax expense specific to the period included a benefit of $13.5 million,
which primarily related to changes in estimates related to the filing of the December 31, 2013 tax returns for certain non-U.S. subsidiaries. For the six months ended June 30, 2014, we recorded tax benefits specific to the period of $76.0
million, which primarily related to the intended sale of our distribution business in Argentina, as well as the changes in estimates previously noted.
10
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
8. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Raw materials
|
|
$
|
42.1
|
|
|
$
|
34.0
|
|
Work in process
|
|
|
536.3
|
|
|
|
433.6
|
|
Finished goods
|
|
|
921.6
|
|
|
|
891.6
|
|
Operating materials and supplies
|
|
|
79.6
|
|
|
|
73.7
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,579.6
|
|
|
$
|
1,432.9
|
|
|
|
|
|
|
|
|
|
|
9. Goodwill
The changes in the carrying amount of goodwill, by reporting unit, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phosphates
|
|
|
Potash
|
|
|
Total
|
|
Balance as of December 31, 2013
|
|
$
|
535.8
|
|
|
$
|
1,258.6
|
|
|
$
|
1,794.4
|
|
Foreign currency translation
|
|
|
|
|
|
|
(1.8
|
)
|
|
|
(1.8
|
)
|
Reallocation of goodwill to assets held for sale
|
|
|
5.1
|
|
|
|
(4.8
|
)
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2014
|
|
$
|
540.9
|
|
|
$
|
1,252.0
|
|
|
$
|
1,792.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We review goodwill for impairment annually in October or at any time events or
circumstances indicate that the carrying value may not be fully recoverable, which is based on our accounting policy.
10. Financing
Arrangements
Term Loan Facility
On March 20, 2014, Mosaic entered into an unsecured $800 million term loan facility (the
Term Loan
Facility
) with certain financial institutions. Under the Term Loan Facility, Mosaic may on up to two occasions borrow, on a pro rata basis, up to $370 million under Term A-1 Loans (the
Term A-1 Loans
) and up
to $430 million under Term A-2 Loans (
Term A-2 Loans
, and collectively with the Term A-1 Loans,
Loans
). The lenders commitments to loan such amounts expire on the earlier of
September 19, 2014, full funding of the Loans or earlier termination of the loan commitments (the
Commitment Termination Date
). Final maturity of the Term A-1 Loans is the third anniversary of the Commitment
Termination Date and final maturity of the Term A-2 Loans is the fifth anniversary of the Commitment Termination Date. In addition, Mosaic is required to repay 5.00% of the Term A-1 loan balance on each of the first two anniversaries of the
Commitment Termination Date and 5.00% of the Term A-2 loan balance on each of the first two anniversaries, 7.50% on the third anniversary, and 10.00% on the fourth anniversary of the Commitment Termination Date. A ticking fee accrues at an annual
rate of 0.125% on the aggregate undrawn commitments under the Term Loan Facility beginning April 19, 2014. Mosaic may prepay the outstanding Loans at any time, partially or in whole, at its own discretion, without premium or penalty.
As of June 30, 2014, no borrowings have been made or are outstanding under the Term Loan Facility.
Proceeds of borrowings under the Term Loan Facility may be used to replenish cash that Mosaic used to fund the CF Phosphate Assets Acquisition as described in Note 17 or for working capital, capital expenditures, dividends, share repurchases, other
acquisitions and other lawful corporate purposes.
11
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Term Loan Facility has cross-default provisions that, in general,
provide that a failure to pay principal or interest under any one item of other indebtedness in excess of $50 million or $75 million for multiple items of other indebtedness, or breach or default under such indebtedness that permits the holders
thereof to accelerate the maturity thereof, will result in a cross-default.
The Term Loan Facility requires
Mosaic to maintain certain financial ratios, including a maximum ratio of Total Debt to EBITDA (as defined) of 3.5 to 1.0, as well as a minimum Interest Coverage Ratio (as defined) of not less than 3.0 to 1.0.
The Term Loan Facility also contains other events of default and covenants that limit various matters. These provisions
include limitations on indebtedness, liens, investments and acquisitions (other than capital expenditures), certain mergers, certain sales of assets and other matters customary for credit facilities of this nature.
11. Contingencies
We have described below judicial and administrative proceedings to which we are subject.
We have contingent environmental liabilities that arise principally from three sources: (i) facilities currently or formerly owned by our subsidiaries or their predecessors; (ii) facilities
adjacent to currently or formerly owned facilities; and (iii) third-party Superfund or state equivalent sites. At facilities currently or formerly owned by our subsidiaries or their predecessors, the historical use and handling of regulated
chemical substances, crop and animal nutrients and additives and by-product or process tailings have resulted in soil, surface water and/or groundwater contamination. Spills or other releases of regulated substances, subsidence from mining
operations and other incidents arising out of operations, including accidents, have occurred previously at these facilities, and potentially could occur in the future, possibly requiring us to undertake or fund cleanup or result in monetary damage
awards, fines, penalties, other liabilities, injunctions or other court or administrative rulings. In some instances, pursuant to consent orders or agreements with governmental agencies, we are undertaking certain remedial actions or investigations
to determine whether remedial action may be required to address contamination. At other locations, we have entered into consent orders or agreements with appropriate governmental agencies to perform required remedial activities that will address
identified site conditions. Taking into consideration established accruals of approximately $36.2 million and $31.3 million as of June 30, 2014 and December 31, 2013, respectively, expenditures for these known conditions currently are not
expected, individually or in the aggregate, to have a material effect on our business or financial condition. However, material expenditures could be required in the future to remediate the contamination at known sites or at other current or former
sites or as a result of other environmental, health and safety matters. Below is a discussion of the more significant environmental matters.
EPA RCRA Initiative
. In 2003, the U.S. Environmental Protection Agency (
EPA
) Office of Enforcement and Compliance Assurance announced that it would be
targeting facilities in mineral processing industries, including phosphoric acid producers, for a thorough review under the U.S. Resource Conservation and Recovery Act (
RCRA
) and related state laws. Mining and
processing of phosphates generate residual materials that must be managed both during the operation of a facility and upon a facilitys closure. Certain solid wastes generated by our phosphate operations may be subject to regulation under RCRA
and related state laws. The EPA rules exempt extraction and beneficiation wastes, as well as 20 specified mineral processing wastes, from the hazardous waste management requirements of RCRA. Accordingly, certain
of the residual materials which our phosphate operations generate, as well as process wastewater from phosphoric acid production, are exempt from RCRA regulation. However, the generation and management of other solid wastes from phosphate operations
may be subject to hazardous waste regulation if the waste is deemed to exhibit a hazardous waste characteristic. As part of its initiative, we understand that EPA has inspected all or nearly all facilities in the
12
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
U.S. phosphoric acid production sector to ensure compliance with applicable RCRA regulations and to address any imminent and substantial endangerment found by the EPA under RCRA.
We have provided the EPA with substantial amounts of information regarding the process water recycling practices and the hazardous waste handling practices at our phosphate production facilities in Florida and Louisiana, and the EPA has inspected
all of our currently operating processing facilities in the U.S. In addition to the EPAs inspections, our phosphates concentrates facilities have entered into consent orders to perform analyses of existing environmental data, to perform
further environmental sampling as may be necessary, and to assess whether the facilities pose a risk of harm to human health or the surrounding environment.
We have received Notices of Violation (
NOVs
) from the EPA related to the handling of hazardous
waste at our Riverview (September 2005), New Wales (October 2005), Mulberry (June 2006), Green Bay (August 2006) and Bartow (September 2006) facilities in Florida. The EPA issued similar NOVs to our competitors, including with respect to the Plant
City Facility acquired in the CF Phosphate Assets Acquisition as described in Note 17, and referred the NOVs to the U.S. Department of Justice (
DOJ
) for further enforcement. We currently are engaged in discussions with the
DOJ and EPA with respect to our facilities (excluding the Plant City Facility). We believe we have substantial defenses to allegations in the NOVs, including but not limited to previous EPA regulatory interpretations and inspection reports finding
that the process water handling practices in question comply with the requirements of the exemption for extraction and beneficiation wastes. We intend to evaluate various alternatives and continue discussions to determine if a negotiated resolution
can be reached. If it cannot, we intend to vigorously defend these matters in any enforcement actions that may be pursued.
We are negotiating the terms of a possible settlement with the EPA, the DOJ, the Florida Department of Environmental Protection and the Louisiana Department of Environmental Quality (collectively, the
Government
) and the final terms are not yet agreed upon or approved. If a settlement can be achieved, in all likelihood our commitments would be multi-faceted with key elements including, in general and among other
elements, the following:
|
|
|
Incurring future capital expenditures likely to exceed $150 million in the aggregate over a period of several years.
|
|
|
|
Providing meaningful additional financial assurance for the estimated costs of closure and post-closure care (
Gypstack Closure
Costs
) of our phosphogypsum management systems (
Gypstacks
). For financial reporting purposes, we recognize our estimated ARO, including Gypstack Closure Costs, at their present value. This present value
determined for financial reporting purposes is reflected on our Consolidated Balance Sheets in accrued liabilities and other noncurrent liabilities. As of December 31, 2013, the undiscounted amount of our ARO, determined using the assumptions
used for financial reporting purposes, was approximately $1.5 billion and the present value of our Gypstack Closure Costs reflected in our Consolidated Balance Sheet was approximately $465 million. Currently, financial assurance requirements in
Florida and Louisiana for Gypstack Closure Costs can be satisfied through a variety of methods, including satisfaction of financial tests. In the context of a potential settlement of the Governments enforcement action, we expect that we would
agree to pre-fund a material portion of our Gypstack Closure Costs, primarily by depositing cash, currently estimated to be in the amount of approximately $625 million, into a trust fund which would increase over time with reinvestment of earnings.
Amounts held in any such trust fund (including reinvested earnings) would be classified as restricted cash included in other assets on our Consolidated Balance Sheets. We expect that any final settlement of this matter would resolve all of our
financial assurance obligations to the Government for Gypstack Closure Costs. Our actual Gypstack Closure Costs are generally expected to be paid by us in the normal course of our Phosphates business over a period that may not end until three
decades or more after a Gypstack has been closed.
|
13
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
We have also established accruals to address the estimated cost of civil penalties in connection with this matter, which we do not believe, in light
of the relevant regulatory history, would be material to our results of operations, liquidity or capital resources.
|
In light of our strong operating cash flows, liquidity and capital resources, we believe that we have sufficient liquidity and capital resources to be able to fund such capital expenditures, financial
assurance requirements and civil penalties as part of a settlement. If a settlement cannot be agreed upon, we cannot predict the outcome of any litigation or estimate the potential amount or range of loss; however, we would face potential exposure
to material costs should we fail in the defense of an enforcement action.
See Note 17 for a discussion of how
the EPAs RCRA Initiative and Florida financial assurance requirements affect the facilities we acquired in the CF Phosphate Assets Acquisition.
EPA EPCRA Initiative
. In July 2008, the DOJ sent a letter to major U.S. phosphoric acid manufacturers, including us, stating that the EPAs ongoing investigation indicates apparent violations
of Section 313 of the Emergency Planning and Community Right-to-Know Act (
EPCRA
) at their phosphoric acid manufacturing facilities. Section 313 of EPCRA requires annual reports to be submitted with
respect to the use or presence of certain toxic chemicals. DOJ and EPA also stated that they believe that a number of these facilities have violated Section 304 of EPCRA and Section 103 of the Comprehensive Environmental Response,
Compensation and Liability Act (
CERCLA
) by failing to provide required notifications relating to the release of hydrogen fluoride from the facilities. The letter did not identify any specific violations by us
or assert a demand for penalties against us. We cannot predict at this time whether the EPA and DOJ will initiate an enforcement action over this matter, what its scope would be, or what the range of outcomes of such a potential enforcement action
might be.
Florida Sulfuric Acid Plants.
On April 8, 2010, the EPA Region 4 submitted an
administrative subpoena to us under Section 114 of the Federal Clean Air Act (the
CAA
) regarding compliance of our Florida sulfuric acid plants with the New Source Review requirements of the
CAA. The request received by Mosaic appears to be part of a broader EPA national enforcement initiative focusing on sulfuric acid plants. We cannot predict at this time whether the EPA and DOJ will initiate an enforcement action over this matter,
what its scope would be, or what the range of outcomes of such a potential enforcement action might be.
Other Environmental Matters
. Superfund and equivalent state statutes impose liability without regard to fault or
to the legality of a partys conduct on certain categories of persons who are considered to have contributed to the release of hazardous substances into the environment. Under Superfund, or its various state analogues, one party
may, under certain circumstances, be required to bear more than its proportionate share of cleanup costs at a site where it has liability if payments cannot be obtained from other responsible parties. Currently, certain of our subsidiaries are
involved or concluding involvement at several Superfund or equivalent state sites. Our remedial liability from these sites, alone or in the aggregate, currently is not expected to have a material effect on our business or financial condition. As
more information is obtained regarding these sites and the potentially responsible parties involved, this expectation could change.
We believe that, pursuant to several indemnification agreements, our subsidiaries are entitled to at least partial, and in many instances complete, indemnification for the costs that may be expended by us
or our subsidiaries to remedy environmental issues at certain facilities. These agreements address issues that resulted from activities occurring prior to our acquisition of facilities or businesses from parties including, but not limited to, ARCO
(BP); Beatrice Fund for Environmental Liabilities; Conoco; Conserv; Estech, Inc.; Kaiser Aluminum & Chemical Corporation; Kerr-McGee Inc.; PPG Industries, Inc.; The Williams Companies; CF; and certain other private parties. Our subsidiaries
have already received and anticipate receiving amounts pursuant to
14
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the indemnification agreements for certain of their expenses incurred to date as well as future anticipated expenditures. We record potential indemnifications as an offset to the established
accruals when they are realizable or realized.
MicroEssentials
®
Patent Lawsuit
On January 9, 2009, John Sanders and Specialty Fertilizer Products, LLC filed a complaint against Mosaic, Mosaic Fertilizer, LLC, Cargill, Incorporated and Cargill Fertilizer, Inc. in the United
States District Court for the Western District of Missouri (the
Missouri District Court
). The complaint alleges that our production of MicroEssentials
®
SZ, one of several types of the
MicroEssentials
®
value-added ammoniated phosphate crop nutrient products that we produce, infringes on a patent
held by the plaintiffs since 2001. Plaintiffs have since asserted that other MicroEssentials
®
products also
infringe the patent. Plaintiffs seek to enjoin the alleged infringement and to recover an unspecified amount of damages and attorneys fees for past infringement. Our answer to the complaint responds that the plaintiffs patent is not
infringed, is invalid and is unenforceable because the plaintiffs engaged in inequitable conduct during the prosecution of the patent.
The Missouri District Court stayed the lawsuit pending an ex parte reexamination of plaintiffs patent claims by the U.S. Patent and Trademark Office (the
PTO
). That ex
parte reexamination has now ended. On September 12, 2012, however, Shell Oil Company (
Shell
) filed an additional reexamination request which in part asserted that the claims as amended and added in connection with the
ex parte reexamination are unpatentable. On October 4, 2012, the PTO issued an Ex Parte Reexamination Certificate in which certain claims of the plaintiffs patent were cancelled, disclaimed and amended, and new claims were
added. Following the PTOs grant of Shells request for an
inter parties
reexamination, on December 11, 2012, the PTO issued an initial rejection of all of plaintiffs remaining patent claims. On September 12,
2013, the PTO reversed its initial rejection of the plaintiffs remaining patent claims and allowed them to stand. Shell has appealed the PTOs decision. A successful appeal by Shell could limit or eliminate the claims the plaintiffs can
assert against us.
We believe that the plaintiffs allegations are without merit and intend to defend
vigorously against them. At this stage of the proceedings, we cannot predict the outcome of this litigation, estimate the potential amount or range of loss or determine whether it will have a material effect on our results of operations, liquidity
or capital resources.
Brazil Tax Contingencies
Our Brazilian subsidiary is engaged in a number of judicial and administrative proceedings relating to various non-income
tax matters. We estimate that our maximum potential liability with respect to these matters is approximately $102 million. Approximately $55 million of the maximum potential liability relates to PIS and Cofins tax credit cases while the majority of
the remaining amount relates to various other non-income tax cases such as value added taxes. In the event that the Brazilian government was to prevail in connection with all judicial and administrative matters involving us and considering the
amount of judicial deposits made, our maximum cash tax liability with respect to these matters would be approximately $101 million. Based on the current status of similar tax cases involving unrelated taxpayers, we believe we have recorded adequate
accruals, which are immaterial, for the probable liability with respect to these Brazilian judicial and administrative proceedings.
Other Claims
We also have certain other contingent
liabilities with respect to judicial, administrative and arbitration proceedings and claims of third parties, including tax matters, arising in the ordinary course of business. We do not believe that any of these contingent liabilities will have a
material adverse impact on our business or financial condition, results of operations, and cash flows.
15
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. Accounting for Derivative Instruments and Hedging Activities
We periodically enter into derivatives to mitigate our exposure to foreign currency risks and the
effects of changing commodity and freight prices. We record all derivatives on the Consolidated Balance Sheets at fair value. The fair value of these instruments is determined by using quoted market prices, third party comparables, or internal
estimates. We net our derivative asset and liability positions when we have a master netting arrangement in place. Changes in the fair value of the foreign currency, commodity, and freight derivatives are immediately recognized in earnings because
we do not apply hedge accounting treatment to these instruments. As of June 30, 2014 and December 31, 2013, the gross asset position of our derivative instruments was $22.8 million and $7.9 million, respectively, and the gross liability
position of our liability instruments was $7.9 million and $20.4 million, respectively.
Unrealized gains and
(losses) on foreign currency exchange contracts used to hedge cash flows related to the production of our products are included in cost of goods sold in the Consolidated Statements of Earnings. Unrealized gains and (losses) on commodities contracts
and certain forward freight agreements are also recorded in cost of goods sold in the Consolidated Statements of Earnings. Unrealized gains or (losses) on foreign currency exchange contracts used to hedge cash flows that are not related to the
production of our products are included in the foreign currency transaction gain/(loss) line in the Consolidated Statements of Earnings.
As of June 30, 2014 and December 31, 2013, the following is the total absolute notional volume associated with our outstanding derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions of Units)
Derivative Instrument
|
|
Derivative
Category
|
|
Unit of
Measure
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Foreign currency derivatives
|
|
Foreign currency
|
|
US Dollars
|
|
|
1,237.2
|
|
|
|
940.2
|
|
Natural gas derivatives
|
|
Commodity
|
|
MMbtu
|
|
|
3.1
|
|
|
|
8.2
|
|
Ocean freight contracts
|
|
Freight
|
|
Tonnes
|
|
|
0.2
|
|
|
|
0.3
|
|
Credit-Risk-Related Contingent Features
Certain of our derivative instruments contain provisions that are governed by International Swap and Derivatives
Association (
ISDA
) agreements with the counterparties. These agreements contain provisions that allow us to settle for the net amount between payments and receipts, and also state that if our debt were to be rated below
investment grade, certain counterparties could request full collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a
liability position as of June 30, 2014 and December 31, 2013, was $2.6 million and $12.3 million, respectively. We have no cash collateral posted in association with these contracts. If the credit-risk-related contingent features
underlying these agreements were triggered on June 30, 2014, we would be required to post $0.2 million of collateral assets, which are either cash or U.S. Treasury instruments, to the counterparties.
Counterparty Credit Risk
We enter into foreign exchange and certain commodity and interest rate derivatives, primarily with a diversified group of highly rated counterparties. We continually monitor our positions and the credit
ratings of the counterparties involved and limit the amount of credit exposure to any one party. While we may be exposed to potential losses due to the credit risk of non-performance by these counterparties, material losses are not anticipated. We
closely monitor the credit risk associated with our counterparties and customers and to date have not experienced material losses.
16
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
13. Fair Value Measurements
Following is a summary of the valuation techniques for assets and liabilities recorded in our Consolidated Balance Sheets
at fair value on a recurring basis:
Foreign Currency Derivatives
-The foreign currency derivative
instruments that we currently use are forward contracts, zero-cost collars, and futures, which typically expire within eighteen months. Valuations are based on exchange-quoted prices, which are classified as Level 1. Some of the valuations are
adjusted by a forward yield curve or interest rates. In such cases, these derivative contracts are classified within Level 2. Changes in the fair market values of these contracts are recognized in the Condensed Consolidated Financial Statements as a
component of cost of goods sold or foreign currency transaction gain (loss). As of June 30, 2014 and December 31, 2013, the gross asset position of our foreign currency derivative instruments was $19.1 million and $0.6 million,
respectively, and the gross liability position of our foreign currency derivative instruments was $7.4 million and $18.1 million, respectively.
Commodity Derivatives
-The commodity contracts primarily relate to natural gas. The commodity derivative instruments that we currently use are forward purchase contracts, swaps, and three-way
collars. The natural gas contracts settle using NYMEX futures or AECO price indexes, which represent fair value at any given time. The contracts maturities are for future months and settlements are scheduled to coincide with anticipated gas
purchases during those future periods. Quoted market prices from NYMEX and AECO are used to determine the fair value of these instruments. These market prices are adjusted by a forward yield curve and are classified within Level 2. Changes in the
fair market values of these contracts are recognized in the Condensed Consolidated Financial Statements as a component of cost of goods sold. As of June 30, 2014 and December 31, 2013, the gross asset position of our commodity
derivative instruments was $3.5 million and $6.0 million, respectively, and the gross liability position of our commodity derivative instruments was $0.3 million and $2.0 million, respectively.
Freight Derivatives
-The freight derivatives that we currently use are forward freight agreements. We estimate fair
market values based on exchange-quoted prices, adjusted for differences in local markets. These differences are generally valued using inputs from broker quotations. Therefore, these contracts are classified in Level 2. Certain ocean freight
derivatives are traded in less active markets with less availability of pricing information and require internally-developed inputs that might not be observable in or corroborated by the market. These contracts are classified within Level 3. Changes
in the fair market values of these contracts are recognized in the Condensed Consolidated Financial Statements as a component of cost of goods sold. As of June 30, 2014 and December 31, 2013, the gross asset position of our freight
derivative instruments was $0.2 million and $1.3 million, respectively, and the gross liability position of our freight derivative instruments was $0.2 million and $0.3 million, respectively.
Financial Instruments
The carrying amounts and estimated fair values of our financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
|
December 31, 2013
|
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
|
Carrying
Amount
|
|
|
Fair
Value
|
|
Cash and cash equivalents
|
|
$
|
2,367.0
|
|
|
$
|
2,367.0
|
|
|
$
|
5,293.1
|
|
|
$
|
5,293.1
|
|
Receivables, net
|
|
|
604.2
|
|
|
|
604.2
|
|
|
|
543.1
|
|
|
|
543.1
|
|
Accounts payable
|
|
|
750.2
|
|
|
|
750.2
|
|
|
|
570.2
|
|
|
|
570.2
|
|
Short-term debt
|
|
|
12.7
|
|
|
|
12.7
|
|
|
|
22.6
|
|
|
|
22.6
|
|
Long-term debt, including current portion
|
|
|
3,013.5
|
|
|
|
3,284.3
|
|
|
|
3,009.3
|
|
|
|
3,059.6
|
|
17
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For cash and cash equivalents, receivables, net, accounts payable and
short-term debt, the carrying amount approximates fair value because of the short-term maturity of those instruments. The fair value of long-term debt, including current portion, is estimated using quoted market prices for the publicly registered
notes and debentures, classified as Level 1 and Level 2, respectively, within the fair value hierarchy, depending on the market liquidity of the debt.
14. Related Party Transactions
We enter into transactions
and agreements with certain of our non-consolidated companies from time to time. As of June 30, 2014 the net amount due to our non-consolidated companies totaled $59.0 million and the amount due from them was $52.6 million at December 31,
2013.
The Condensed Consolidated Statements of Earnings included the following transactions with our
non-consolidated companies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June
30,
|
|
|
Six months ended
June 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Transactions with non-consolidated companies included in net sales
|
|
$
|
307.7
|
|
|
$
|
464.9
|
|
|
$
|
512.7
|
|
|
$
|
802.8
|
|
Transactions with non-consolidated companies included in cost of goods sold
|
|
|
191.3
|
|
|
|
168.8
|
|
|
|
288.7
|
|
|
|
248.7
|
|
18
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Business Segments
The reportable segments are determined by management based upon factors such as products and services, production
processes, technologies, market dynamics, and for which segment financial information is available for our chief operating decision maker. For a description of our business segments see Note 1 to the Condensed Consolidated Financial Statements in
this report. We evaluate performance based on the operating earnings of the respective business segments, which includes certain allocations of corporate selling, general and administrative expenses. The segment results may not represent the actual
results that would be expected if they were independent, stand-alone businesses. Corporate, Eliminations and Other primarily represents unallocated corporate office activities and eliminations. All intersegment transactions are eliminated within
Corporate, Eliminations and Other. Segment information for the three and six months ended June 30, 2014 and 2013 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phosphates
|
|
|
Potash
|
|
|
Corporate,
Eliminations
and Other
|
|
|
Total
|
|
Three months ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
1,671.5
|
|
|
$
|
760.2
|
|
|
$
|
8.5
|
|
|
$
|
2,440.2
|
|
Intersegment net sales
|
|
|
|
|
|
|
2.1
|
|
|
|
(2.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,671.5
|
|
|
|
762.3
|
|
|
|
6.4
|
|
|
|
2,440.2
|
|
Gross margin
|
|
|
283.5
|
|
|
|
250.5
|
|
|
|
(12.9
|
)
|
|
|
521.1
|
|
Operating earnings
|
|
|
206.2
|
|
|
|
212.9
|
|
|
|
(15.9
|
)
|
|
|
403.2
|
|
Capital expenditures
|
|
|
115.0
|
|
|
|
93.8
|
|
|
|
5.2
|
|
|
|
214.0
|
|
Depreciation, depletion and amortization expense
|
|
|
94.9
|
|
|
|
92.0
|
|
|
|
7.5
|
|
|
|
194.4
|
|
|
|
|
|
|
Three months ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
1,645.7
|
|
|
$
|
968.6
|
|
|
$
|
4.4
|
|
|
$
|
2,618.7
|
|
Intersegment net sales
|
|
|
|
|
|
|
5.3
|
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
1,645.7
|
|
|
|
973.9
|
|
|
|
(0.9
|
)
|
|
|
2,618.7
|
|
Gross margin
|
|
|
279.4
|
|
|
|
388.9
|
|
|
|
(3.0
|
)
|
|
|
665.3
|
|
Operating earnings
|
|
|
190.9
|
|
|
|
346.3
|
|
|
|
(11.5
|
)
|
|
|
525.7
|
|
Capital expenditures
|
|
|
140.3
|
|
|
|
216.0
|
|
|
|
17.7
|
|
|
|
374.0
|
|
Depreciation, depletion and amortization expense
|
|
|
74.1
|
|
|
|
88.7
|
|
|
|
4.9
|
|
|
|
167.7
|
|
|
|
|
|
|
Six months ended June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
2,925.1
|
|
|
$
|
1,486.5
|
|
|
$
|
14.9
|
|
|
$
|
4,426.5
|
|
Intersegment net sales
|
|
|
|
|
|
|
9.0
|
|
|
|
(9.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
2,925.1
|
|
|
|
1,495.5
|
|
|
|
5.9
|
|
|
|
4,426.5
|
|
Gross margin
|
|
|
490.8
|
|
|
|
462.6
|
|
|
|
(20.6
|
)
|
|
|
932.8
|
|
Operating earnings
|
|
|
344.3
|
|
|
|
379.1
|
|
|
|
(53.6
|
)
|
|
|
669.8
|
|
Capital expenditures
|
|
|
238.4
|
|
|
|
237.7
|
|
|
|
12.8
|
|
|
|
488.9
|
|
Depreciation, depletion and amortization expense
|
|
|
176.3
|
|
|
|
178.8
|
|
|
|
13.6
|
|
|
|
368.7
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to external customers
|
|
$
|
3,146.5
|
|
|
$
|
1,777.0
|
|
|
$
|
7.7
|
|
|
$
|
4,931.2
|
|
Intersegment net sales
|
|
|
|
|
|
|
21.5
|
|
|
|
(21.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
3,146.5
|
|
|
|
1,798.5
|
|
|
|
(13.8
|
)
|
|
|
4,931.2
|
|
Gross margin
|
|
|
532.4
|
|
|
|
785.9
|
|
|
|
(11.3
|
)
|
|
|
1,307.0
|
|
Operating earnings
|
|
|
375.6
|
|
|
|
652.5
|
|
|
|
(11.3
|
)
|
|
|
1,016.8
|
|
Capital expenditures
|
|
|
240.5
|
|
|
|
450.8
|
|
|
|
50.2
|
|
|
|
741.5
|
|
Depreciation, depletion and amortization expense
|
|
|
145.9
|
|
|
|
167.6
|
|
|
|
9.2
|
|
|
|
322.7
|
|
|
|
|
|
|
Total assets as of June 30, 2014
|
|
$
|
10,894.0
|
|
|
$
|
9,953.9
|
|
|
$
|
(2,554.4
|
)
|
|
$
|
18,293.5
|
|
Total assets as of December 31, 2013
|
|
|
9,945.1
|
|
|
|
9,597.4
|
|
|
|
11.5
|
|
|
|
19,554.0
|
|
19
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
16. Assets Held for Sale
In 2013, we decided to exit our distribution businesses in Argentina and Chile. In connection with this decision, we wrote
down the related assets by approximately $56 million pre-tax to their estimated fair value, of which $50 million was included in loss on write down of assets in the Consolidated Statement of Earnings in our 10-K Report. As a result of new
information regarding the structure of the intended disposition of Argentinas distribution business as an asset sale, during the six months ended June 30, 2014, we recorded a $53.6 million tax benefit. Additionally, the decision was made
in the second quarter of 2014 to close the Chile business and sell the remaining fixed assets. We recorded a loss of $5.6 million pre-tax related to the decision. The assets related to Argentinas distribution businesses and the fixed assets
related to Chiles distribution businesses qualify for asset held for sale accounting. At June 30, 2014, we included $49.8 million in other current assets and $8.1 million in accrued liabilities in our Condensed Consolidated Balance
Sheet as assets held for sale. We expect to continue to sell our products in these countries by using other distribution channels.
In 2013, we also decided to sell the salt operations of our Hersey, Michigan mine and close the related potash operations. In connection with the planned sale of this mine, we wrote down the related
assets by approximately $48 million pre-tax, to their estimated fair value in 2013, and recorded a corresponding tax benefit of approximately $17 million, which is reflected in the Consolidated Statement of Earnings in our 10-K Report. At
June 30, 2014, approximately $41 million has been included in assets held for sale related to Hersey. The sale of the salt operations was completed on July 29, 2014 for $55 million, resulting in a pre-tax gain of $13.5 million.
17. CF Acquisition
On March 17, 2014, we completed the CF Phosphate Assets Acquisition. The purchase price was $1,172.1 million, which includes $22.2 million related to adjustments to working capital acquired that was
paid subsequent to June 30, 2014, plus an additional $203.7 million (all in cash) to fund CFs asset retirement obligation trust and escrow. We acquired CFs phosphate mining and production operations in Central Florida and terminal
and warehouse facilities in Tampa, Florida. This acquisition allows us to take advantage of synergies associated with combining our phosphate operations and logistical capabilities in Central Florida with those of CF. In addition, we will be able to
forego the construction of a beneficiation plant at Ona and the construction of an ammonia plant. The results of the CF phosphates operations have been included in our condensed consolidated financial statements for the period from March 17,
2014 through June 30, 2014.
As part of the CF Phosphate Assets Acquisition, we assumed certain ARO
related to Gypstack Closure Costs at both the Plant City, Florida phosphate concentrates facility (the
Plant City Facility
) and a closed Florida phosphate concentrates facility in Bartow, Florida (the
Bonnie
Facility
) that we acquired. Associated with these assets are two related financial assurance arrangements for which we became responsible and that pre-fund the estimated Gypstack Closure Costs for these facilities, pursuant to federal
or state law. One is a trust (the
Plant City Trust
) established to meet the requirements under a consent decree with the EPA and the FDEP with respect to RCRA compliance at Plant City (the
Plant City Consent
Decree
) that also satisfies Florida financial assurance requirements at that site. The other is a trust fund (the
Bonnie Facility Trust
) established to meet the requirements under Florida financial assurance
regulations (the
Florida Financial Assurance Requirement
) that apply to the Bonnie Facility. In the CF Phosphate Assets Acquisition, we deposited $189.2 million into the Plant City Trust as a substitute for funds that CF
had deposited into trust. The Plant City Trust is currently fully funded based on our most recent closure cost estimates. In addition, in July 2014, the FDEP approved our funding of $14.5 million into the Bonnie Facility Trust, which substituted
funds that CF had deposited into an escrow account. We expect we will be required to deposit up to an additional $4 million in the Bonnie Facility Trust near the end of 2015. Both financial assurance funding obligations require estimates of
20
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
future expenditures that could be impacted by refinements in scope, technological developments, cost inflation, changes in regulations, discount rates and the timing of activities. Additional
funding would be required in the future if increases in cost estimates exceed investment earnings in the Plant City Trust or the Bonnie Facility Trust. The deposits into the Plant City Trust and the Bonnie Facility Escrow are reflected in the
Statement of Cash Flows components of the $1,353.6 million cash used in the CF Phosphate Assets Acquisition.
At June 30, 2014, the aggregate amount of AROs associated with the Plant City Facility and the Bonnie Facility
included in our consolidated balance sheet was $100 million. The aggregate amount held in the Plant City Trust and the Bonnie Facility Trust exceeds the aggregate amount of AROs associated with the Plant City Facility and the Bonnie Facility because
the amount required to be held in the Plant City Trust represents the aggregate undiscounted estimated amount to be paid by us in the normal course of our Phosphates business over a period that may not end until three decades or more after the
Gypstack has been closed, while the ARO included in our Condensed Consolidated Balance Sheet reflect the discounted present value of those estimated amounts. As part of the acquisition we also acquired ARO related to land reclamation.
The following table summarizes the amounts of the assets acquired and liabilities assumed as recognized with the
acquisition. The fair value of these assets and liabilities is provisional pending receipt of the final valuation:
|
|
|
|
|
(in millions)
|
|
|
|
Inventory
|
|
$
|
144.1
|
|
Other current assets
|
|
|
0.5
|
|
Mineral properties and rights
|
|
|
499.7
|
|
Property, plant and equipment
|
|
|
627.1
|
|
Funds for asset retirement obligations
(1)
|
|
|
203.7
|
|
Other assets
|
|
|
56.8
|
|
Current liabilities
|
|
|
(1.5
|
)
|
Other liabilities
|
|
|
(9.0
|
)
|
Asset retirement obligation
|
|
|
(145.6
|
)
|
|
|
|
|
|
|
|
$
|
1,375.8
|
|
|
|
|
|
|
(1)
|
Included with other assets in the Condensed Consolidated Balance Sheet as of June 30, 2014
|
We also signed two strategic supply agreements with CF under which CF will provide Mosaic with ammonia for its production
purposes (
CF Ammonia Supply Agreements
). Under one agreement, which is expected to commence prior to January 1, 2017, Mosaic will purchase approximately 545,000 to 725,000 tonnes annually for up to fifteen years at a
price tied to the prevailing price of U.S. natural gas. The execution of this agreement was not contingent upon the completion of the acquisition; therefore, no corresponding asset or liability was recorded as part of the acquisition accounting.
Under the second agreement, which became effective on the acquisition date, Mosaic will purchase
approximately 270,000 tonnes annually for three years from CFs Trinidad operations at CFR Tampa market-based pricing. The effectiveness of this agreement was a condition to the acquisition and included in the acquisition accounting, but
its impacts were not material.
We recognized approximately $2.0 million and $7.0 million of acquisition and
integration costs that were expensed during the three and six months ended June 30, 2014. These costs are included within selling, general and administrative expenses in the Condensed Consolidated Statements of Earnings.
21
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The CF phosphates operations contributed revenues of $217.0 million and
net earnings (loss) of $(2.2) million from March 17, 2014 through June 30, 2014, excluding the effects of the acquisition and integration costs described above.
The unaudited pro-forma consolidated results presented below include the effects of the acquisition as if it had been
consummated as of January 1, 2013. The pro-forma results below include adjustments related to depreciation and amortization to reflect the fair value of acquired property, plant and equipment and identifiable intangible assets, depletion of
acquired mineral rights, and the associated income tax impacts. The pro-forma information does not necessarily reflect the actual results of operations had the acquisition been consummated at the beginning of the fiscal reporting period indicated
nor is it indicative of future operating results. The pro-forma information does not include any adjustment for potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition or transaction or
integration costs relating to the acquisition.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
June 30,
|
|
|
Six months ended
June 30,
|
|
(in millions)
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
Net sales
|
|
$
|
2,440.2
|
|
|
$
|
2,808.4
|
|
|
$
|
4,571.6
|
|
|
$
|
5,413.8
|
|
Net earnings attributable to Mosaic
|
|
$
|
248.4
|
|
|
$
|
432.6
|
|
|
$
|
455.5
|
|
|
$
|
796.3
|
|
18. Investment in Northern Promise Joint Venture
As of June 30, 2014, our investment in Northern Promise Joint Venture is approximately $323.5 million and is
accounted for as an equity method investment. We currently estimate that the cost to develop and construct the integrated phosphate production facilities (the
Project
) will approximate $7.5 billion, which we expect to be
funded primarily through investments by us, Maaden and SABIC and through borrowing arrangements and other external project financing facilities (
Funding Facilities
). We currently estimate that our cash investment in
the Project, including the amount we have invested to date together with the amounts discussed below, will approximate $850 million. We own a 25% equity interest in the Northern Promise Joint Venture.
On June 30, 2014, the Northern Promise Joint Venture entered into Funding Facilities with a consortium of 20
financial institutions for a total amount of approximately $5.0 billion.
Also on June 30, 2014, in
support of the Funding Facilities, we, together with Maaden and SABIC, agreed to provide our respective proportionate shares of the funding necessary for the Northern Promise Joint Venture by:
|
(a)
|
Contributing equity or making shareholder subordinated loans of up to $2.4 billion to fund project costs to complete and commission the Project (the
Equity Commitments
).
|
|
(b)
|
Through the earlier of Project completion or June 30, 2020, contributing equity, making shareholder subordinated loans or providing bank
subordinated loans, to fund cost overruns on the Project (the
Additional Cost Overrun Commitment
).
|
|
(c)
|
Through the earlier of Project completion or June 30, 2020, contributing equity, making shareholder loans or providing bank subordinated loans,
to fund scheduled debt service (excluding accelerated amounts) payable under the Funding Facilities and certain other amounts (such commitment, the
DSU Commitment
and such scheduled debt service and other amounts,
Scheduled Debt Service
). Our proportionate share of amounts covered by the DSU Commitment is not presently anticipated to exceed approximately $200 million. No amounts have been recorded as of June 30, 2014 for the
fair value of the DSU Commitment as no borrowings have been made against the Funding Facilities. As borrowings are made, will record the fair value of the DSU Commitment with respect thereto. We anticipate that the aggregate fair value of the DSU
commitment will be substantially less than $200 million.
|
22
THE MOSAIC COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
(d)
|
To the extent that, by December 31, 2016, the Northern Promise Joint Venture has not received payment of certain governmental funding that has
been allocated for the development of infrastructure assets to be utilized for the Project in the amount of at least $260 million, providing subordinated bridge loans to the Northern Promise Joint Venture (the
IFA Bridge
Loan
).
|
|
(e)
|
From the earlier of the project completion date or June 30, 2020, to the extent there is a shortfall in the amounts available to pay Scheduled
Debt Service, depositing for the payment of Scheduled Debt Service an amount up to the respective amount of certain shareholder tax amounts, and severance fees under the Northern Promise Joint Ventures mining license, paid within the prior 36
months by the Northern Promise Joint Venture on behalf of us, Maaden and SABIC, if any.
|
The Northern Promise Joint Venture has not yet entered into definitive agreements for certain of the planned Funding
Facilities (the
Future Funding Facilities
) for the Project, and the definitive terms with respect to these Future Funding Facilities have not been established. To the extent that the Northern Promise Joint Venture does not
obtain definitive commitments for certain of these Future Finance Facilities in the amount of approximately $560 million aggregate principal amount by June 30, 2016, we, together with Maaden and SABIC, have agreed to either arrange for
other Future Funding Facilities or provide funding in the form of financial indebtedness to the Northern Promise Joint Venture in the amount of our respective proportionate shares of the shortfall.
We anticipate that, in connection with the Future Finance Facilities, we and the Northern Promise Joint Venture will
undertake obligations in addition to the current Equity Commitments, the Additional Cost Overrun Commitment, the DSU Commitment and the IFA Bridge Loan.
19. Subsequent Event
On July 21, 2014, we decided to
permanently discontinue production of MOP at our Carlsbad, New Mexico facility. The final date for production is expected to be December 31, 2014. The decision was based on the quality of the ore in the Carlsbad basin and the age of the
facilitys infrastructure. Our larger potash production facilities at Esterhazy, Belle Plaine and Colonsay in Saskatchewan, Canada will continue to produce MOP.
We plan to transition the Carlsbad facility to exclusive production of our highly valued K-Mag
®
product line. We currently estimate that the discontinued production will result in total pre-tax charges in the
range of $135 million to $160 million (primarily in the form of non-cash accelerated depreciation and depletion charges of approximately $105 million to $130 million and cash severance charges of $10 million to $20 million). The third quarter
pre-tax charges are estimated to be in the range of $55 million to $75 million, with the majority of the remainder expected to be recorded in the fourth quarter.
23