##### 



Financial
statements and notes
Managements report to the shareholders  The Audit Committee of the Board of Directors, whose members are unrelated and independent of
management, meets at least four times a year with management, the internal auditors and the
external auditors to oversee the discharge of the responsibilities of the respective parties. The
Audit Committee reviews the independence of the external auditors, pre-approves audit and permitted
non-audit services and reviews the consolidated financial statements and other financial disclosure
documents before they are presented to the Board for approval.  -s- Michael M. Wilson
    
    -s- Bruce G. WatermanMichael M. Wilson
   President & Chief Executive Officer
   Calgary, Canada
   February 9, 2005
    
    Bruce G. Waterman
   Senior Vice President, Finance
   & Chief Financial Officer
 Auditors report  We conducted our audits in accordance with Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable assurance whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of the Corporation as at December 31, 2004 and 2003, and the results of its
operations and its cash flows for each of the years in the three-year period ended December 31,
2004, in accordance with Canadian generally accepted accounting principles.  (KPMG LLP)KPMG
LLP
   Chartered Accountants
   Calgary, Canada
   February 9, 2005




---



##### 



Consolidated
statements of operations and
retained earnings Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(millions of U.S. dollars, except per share amounts)Sales
    
    
    3,001
    
    
    
    2,630
    
    
    
    2,198Direct freight
    
    
    163
    
    
    
    131
    
    
    
    115Net Sales
    
    
    2,838
    
    
    
    2,499
    
    
    
    2,083Cost of product
    
    
    1,928
    
    
    
    1,760
    
    
    
    1,564Gross profit
    
    
    910
    
    
    
    739
    
    
    
    519Expenses (income)Selling, general and administrative
    
    
    301
    
    
    
    286
    
    
    
    246Depreciation and amortization
    
    
    156
    
    
    
    140
    
    
    
    148Kenai award and settlement (note 3)
    
    
    (86
    )
    
    
    -
    
    
    
    -Asset impairment (note 9)
    
    
    -
    
    
    
    235
    
    
    
    -Royalties and other taxes
    
    
    29
    
    
    
    17
    
    
    
    19Other expenses (note 4)
    
    
    43
    
    
    
    40
    
    
    
    42Earnings before interest expense and income taxes
    
    
    467
    
    
    
    21
    
    
    
    64Interest on
long-term debt
    
    
    51
    
    
    
    58
    
    
    
    59Other interest
    
    
    4
    
    
    
    5
    
    
    
    9Earnings (loss) before income taxes
    
    
    412
    
    
    
    (42
    )
    
    
    (4
    )Current income taxes (note 5)
    
    
    99
    
    
    
    22
    
    
    
    (21
    )Future income taxes (reduction) (note 5)
    
    
    37
    
    
    
    (43
    )
    
    
    17Income taxes
    
    
    136
    
    
    
    (21
    )
    
    
    (4
    )Net earnings (loss)
    
    
    276
    
    
    
    (21
    )
    
    
    -Retained earnings  beginning of year
    
    
    145
    
    
    
    191
    
    
    
    245Change in accounting policy (note 2)
    
    
    -
    
    
    
    -
    
    
    
    (29
    )Common share dividends declared
    
    
    (14
    )
    
    
    (14
    )
    
    
    (14
    )Preferred securities charges
    
    
    (9
    )
    
    
    (11
    )
    
    
    (11
    )Retained earnings  end of year
    
    
    398
    
    
    
    145
    
    
    
    191Earnings (loss) per share(note 6)Basic
    
    
    2.04
    
    
    
    (0.25
    )
    
    
    (0.08
    )Diluted
    
    
    1.91
    
    
    
    (0.25
    )
    
    
    (0.08
    )
 See accompanying notes. 2




---



##### 



Consolidated statements of cash flows  Years ended December 31
    
    2004
    
    
    2003
    
    
    2002(millions of U.S. dollars, except per share amounts)OperatingNet earnings (loss)
    
    
    276
    
    
    
    (21
    )
    
    
    -Items not affecting cashDepreciation and amortization
    
    
    156
    
    
    
    140
    
    
    
    148Asset impairment (note 9)
    
    
    -
    
    
    
    235
    
    
    
    -Kenai award and settlement (note 3)
    
    
    (36
    )
    
    
    -
    
    
    
    -Proceeds on settlement (note 3)
    
    
    25
    
    
    
    -
    
    
    
    -Gain on disposal of assets and investments
    
    
    (6
    )
    
    
    (5
    )
    
    
    -Future income taxes (reduction) (note 5)
    
    
    37
    
    
    
    (43
    )
    
    
    17Foreign exchange
    
    
    (5
    )
    
    
    (8
    )
    
    
    14Net changes in non-cash working capitalAccounts receivable
    
    
    (52
    )
    
    
    (98
    )
    
    
    1Inventories
    
    
    (83
    )
    
    
    12
    
    
    
    43Prepaid expenses
    
    
    4
    
    
    
    (25
    )
    
    
    (4
    )Accounts payable and accrued liabilities
    
    
    69
    
    
    
    12
    
    
    
    19Income and other taxes payable
    
    
    54
    
    
    
    (15
    )
    
    
    (14
    )Other operating
    
    
    10
    
    
    
    2
    
    
    
    -Cash provided by operating activities
    
    
    449
    
    
    
    186
    
    
    
    224InvestingCapital expenditures
    
    
    (82
    )
    
    
    (99
    )
    
    
    (52
    )Decrease (increase) in other assets
    
    
    (14
    )
    
    
    3
    
    
    
    2Proceeds from disposal of assets and investments
    
    
    10
    
    
    
    12
    
    
    
    9Net change in non-cash working capital
    
    
    -
    
    
    
    26
    
    
    
    9Other
    
    
    7
    
    
    
    10
    
    
    
    3Cash used in investing activities
    
    
    (79
    )
    
    
    (48
    )
    
    
    (29
    )FinancingCommon shares
    
    
    12
    
    
    
    6
    
    
    
    108Bank indebtedness repayment
    
    
    -
    
    
    
    (1
    )
    
    
    (211
    )Long-term debt repayment
    
    
    (134
    )
    
    
    (27
    )
    
    
    (9
    )Common share
dividends  paid
    
    
    (14
    )
    
    
    (14
    )
    
    
    (14
    )Preferred securities charges paid
    
    
    (9
    )
    
    
    (11
    )
    
    
    (11
    )Cash used in financing activities
    
    
    (145
    )
    
    
    (47
    )
    
    
    (137
    )Increase in cash and cash equivalents
    
    
    225
    
    
    
    91
    
    
    
    58Cash and
cash equivalents  beginning of year
    
    
    200
    
    
    
    109
    
    
    
    51Cash and
cash equivalents  end of year
    
    
    425
    
    
    
    200
    
    
    
    109Dividends per common share for the year
    
    
    0.11
    
    
    
    0.11
    
    
    
    0.11Supplemental cash flow disclosureInterest paid
    
    
    60
    
    
    
    61
    
    
    
    67Income taxes paid (received)
    
    
    42
    
    
    
    30
    
    
    
    (6
    )See accompanying notes.
 3




---



##### 



Consolidated balance sheet  Years ended December 31
    
    2004
    
    
    2003(millions of U.S. dollars)ASSETSCurrent assetsCash and cash equivalents
    
    
    425
    
    
    
    200Accounts receivable (note 7)
    
    
    388
    
    
    
    314Inventories (note 8)
    
    
    447
    
    
    
    368Prepaid expenses
    
    
    56
    
    
    
    601,316
    
    
    
    942Property, plant and equipment(note 9)
    
    
    1,239
    
    
    
    1,260Other assets(note 10)
    
    
    77
    
    
    
    71Future income tax assets(note 5)
    
    
    24
    
    
    
    -2,656
    
    
    
    2,273LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesAccounts payable and accrued liabilities (note 12)
    
    
    472
    
    
    
    404Current portion of long-term debt (note 13)
    
    
    60
    
    
    
    121532
    
    
    
    525Long-term debt(note 13)Recourse debt
    
    
    471
    
    
    
    503Non-recourse debt
    
    
    69
    
    
    
    111540
    
    
    
    614Other liabilities(note 14)
    
    
    257
    
    
    
    181Future income tax liabilities(note 5)
    
    
    201
    
    
    
    1321,530
    
    
    
    1,452Shareholders equityShare capital (note 17)Authorized:
unlimited common shares and preferred securitiesIssued and outstanding:Common
shares:      2004  132 million (2003  127 million)
    
    
    553
    
    
    
    490Preferred securities: eight percent redeemable: 2004  seven
million (2003  seven million)
    
    
    172
    
    
    
    172six percent convertible,
redeemable: 2004  nil (2003 
two million)
    
    
    -
    
    
    
    50Contributed surplus
    
    
    2
    
    
    
    1Retained earnings
    
    
    398
    
    
    
    145Cumulative translation adjustment
    
    
    1
    
    
    
    (37
    )1,126
    
    
    
    821Subsequent event(note 17)Commitments(note 19)Contingencies(note 20)2,656
    
    
    
    2,273
  APPROVED BY THE BOARD: -s- M. M. Wilson
    
    -s- Harry G. SchaeferDirector
    
    Director
 4




---



##### 



Notes to the consolidated financial statements 1. ACCOUNTING POLICIES Principles of consolidation and preparation of financial statements
These consolidated financial statements are prepared and reported in U.S. dollars in accordance
with accounting principles generally accepted in Canada (Canadian GAAP) and, except as outlined in
note 25, are in accordance with accounting principles generally accepted in the United States (U.S.
GAAP). The consolidated financial statements of the Corporation include the accounts of Agrium Inc., its
subsidiaries, and its proportionate share of revenues, expenses, assets and liabilities of
Profertil S.A. Intercompany transactions and balances are eliminated. The underlying financial records contain amounts based on informed estimates and best judgments of
management. Certain comparative figures have been reclassified to conform to the current years
presentation. Cash and cash equivalents
Cash equivalents consist primarily of short-term investments with an original maturity of three
months or less and are stated at cost, which approximates fair value. Inventories
Wholesale inventories, consisting primarily of fertilizers, operating supplies and raw materials,
include both direct and indirect production costs and freight to transport the product from the
production facility to the final warehouse facility. Fertilizers include the Corporations
completed product as well as work in process. Operating supplies include catalysts used in the
Wholesale production process, materials used for maintenance and repairs and other supplies.
Wholesale inventory is valued at the lower of weighted average cost and net realizable value. Retail inventories are recorded at the lower of purchased cost on a first in, first out basis, and
net realizable value and include the cost of delivery to move the product to the respective farm
centre. Property, plant and equipment
Property, plant and equipment are recorded at cost and include the cost of replacements and
betterments. Depreciation is calculated using the straight-line method based on the estimated service lives of
the respective assets, ranging from three to 25 years. Management reviews property, plant and equipment on an ongoing basis to determine if circumstances
indicate impairment in the carrying value or changes in the estimated useful life of the asset. If
impairment has occurred, an impairment charge is recognized as an asset impairment expense in the
amount that the carrying value of the asset exceeds its fair value. Where the estimated useful
life changes, depreciation is adjusted prospectively. Facility costs
Costs incurred during the shutdown of a production facility for periodic scheduled maintenance (a
turnaround) are deferred and charged to production costs on a straight-line basis over the period
until the next scheduled turnaround, generally one to four years. Unamortized costs that will be
charged to production costs within one year of the balance sheet date are included in prepaid
expenses, and all other costs are included in other assets. Costs incurred during an extended shut
down, due to market conditions or facility failure, are charged to other expense. Other assets
Other assets include value-added tax, long-term receivables, deferred costs and investments in
associated companies. Value-added tax assets relate to South America operations and are
accumulated on the balance sheet as costs are incurred and are recovered against future value-added
taxes collected by the Corporation and due to the government. Investments in companies where the Corporation has the ability to exercise significant influence,
which is generally evidenced by ownership of between 20 percent and 50 percent of the equity, are
carried on the equity basis of accounting. The Corporations share of earnings is included in other
income. Investments where the Corporation does not exercise significant influence are accounted
for using the cost method. 5




---



##### 



Notes to the consolidated financial statements Employee future benefits
The Corporation maintains both defined benefit and defined contribution pension plans in Canada and
in the United States, which are either contributory or non-contributory with regard to
participants. The majority of employees are members of defined contribution pension plans. The
Corporation also maintains health care plans and life insurance benefits for retired employees.
Benefits from defined benefit plans are based on either a percentage of final average earnings and
years of service or a flat dollar amount for each year of service. The pension plan and
post-retirement benefit costs are determined annually by independent actuaries and include current
service costs and a provision for the amortization of prior service costs. The Corporation has additional non-contributory defined benefit and defined contribution plans for
senior management, which provide supplementary pension benefits. Employee future benefits are funded by the Corporation and obligations are determined using the
projected benefit method of actuarial valuation prorated over the projected length of employee
service. Employee future benefit costs for current service are charged to earnings in the year
incurred. Past service costs, experience gains or losses and the effects of changes in plan
assumptions are amortized on a straight-line basis over the expected average remaining service life
of the relevant employee group. Contributions by the Corporation to defined contribution employee
future benefit plans are expensed as incurred. Environmental remediation
Environmental costs that relate to current operations may be expensed or capitalized. Expenditures
that relate to existing conditions caused by past operations, and that do not contribute to current
or future revenue generation, are expensed. Environmental costs are capitalized if the costs
extend the life of the property, increase its capacity and/or mitigate or prevent contamination
from future operations. Costs are recorded when environmental remediation efforts are probable and
the costs can be reasonably estimated based on current law and existing technologies. Estimated
costs are based on managements best estimate of undiscounted future costs. Asset retirement obligations
The Corporation recognizes asset retirement obligations in the period in which they are incurred if
a reasonable estimate of fair value can be determined and a legal obligation exists. The liability
is measured at discounted fair value and is adjusted to its present value in subsequent periods
through accretion expense. The associated asset retirement costs are capitalized as part of the
carrying amount of the long-lived asset. Future income taxes
Future income taxes are recognized for differences between the carrying values of assets and
liabilities and their respective income tax bases. Future income tax assets and liabilities are
measured using substantively enacted income tax rates expected to apply to taxable income in the
years in which temporary differences are expected to be reversed or settled. The effect on future
income tax assets and liabilities of a change in rates is included in the period during which the
change is considered substantively enacted. Future income tax assets are recorded in the financial
statements if realization is considered more likely than not. Revenue recognition
Revenue is recognized when the product is delivered to the customer or when the risks and rewards
of ownership are otherwise transferred to the customer. Transportation costs are recovered from
the customer through product or service pricing. Stock-based compensation
The Corporation has four stock-based compensation plans, which are described in note 18. The
Corporation accounts for plans that settle through the issuance of equity using the fair value
method, whereby the fair value of the stock-based award is determined at the date of grant using a
market-based option valuation model. The fair value of the award is recorded as compensation
expense over the vesting period of the award, with a corresponding increase to contributed surplus.
On exercise of the award, the proceeds, together with the amount recorded in contributed surplus,
are recorded as share capital. Stock-based plans that are likely to settle in cash or other assets are accounted for as
liabilities based on the intrinsic value of the awards. The compensation expense is accrued over
the vesting period of the award, based on the difference between the market value of the underlying
stock and the exercise price of the award, if any. Fluctuations in the market value of the
underlying stock determined based on the closing price of the stock on the last day of each
reporting period will result in a change to the accrued compensation expense and is recognized in
the period in which the fluctuation occurs. 6




---



##### 



Notes to the consolidated financial statements Derivative financial instruments
Derivative financial instruments are used by the Corporation to manage its exposure to commodity
price and foreign exchange rate fluctuations. The Corporation enters into natural gas options and
swaps to manage exposure to changes in cash flows related to fluctuation in the market prices for
natural gas consumed in operations. The Corporation enters into forward exchange contracts and
foreign currency options to manage exposure to changes in cash flows in its Canadian operations
related to changes in the Canadian/U.S. dollar exchange rates. These derivative contracts are initiated within the guidelines of the Corporations risk management
and hedging policies, which require specific authorization for approval and commitment of
contracts. The Corporation formally documents all qualifying relationships between hedging
instruments and hedged items, as well as its risk management objective and strategy for undertaking
the hedge transaction. Hedge accounting is used when there is a high degree of effectiveness between changes in cash flows
of the derivative instrument and the cash flows of the hedged item. The Corporation assesses, both
at inception of the hedge and on a quarterly basis, the effectiveness of hedge relationships. Derivative contracts accounted for as hedges are not recognized in the consolidated balance sheets.
Gains or losses on these contracts, including realized gains and losses on hedging derivative
contracts settled prior to maturity, are recognized when the related hedged transaction is
recognized. If effectiveness ceases or the hedge is de-designated, the Corporation discontinues
hedge accounting and any subsequent changes in the market value of the derivative contract, are
recognized in other expenses in the period of change. Derivative contracts, which do not qualify as hedges, are recorded at fair value in the
consolidated balance sheet. Any changes in the market value of the derivative contracts are
recorded in other expenses when those changes occur. Foreign currency translation
The Corporations Canadian operations are considered self-sustaining and are translated into U.S.
dollars using the current rate method. Under this method, assets and liabilities are translated at
period-end exchange rates and items included in the statements of operations and retained earnings
and cash flows are translated at the rates in effect at the time of the transaction. The gain or
loss on translation is charged to cumulative translation adjustment in shareholders equity. The change in the cumulative translation adjustment of $38-million (2003  $95-million) is
comprised of unrealized currency translation adjustments that arise on the translation to U.S.
dollars of assets and liabilities of the Corporations self-sustaining operations. The Corporations South America operations are considered integrated and translated into U.S.
dollars using the temporal method. Under this method, monetary assets and liabilities are
translated at year-end exchange rates and items included on the statements of operations and cash
flows are translated at rates in effect at the time of the transaction. Non-monetary assets and
liabilities are translated at historical rates. The gain or loss on translation is charged to the
statement of operations as other expense. While South America Wholesale has always been
integrated, prior to October 1, 2003, our South America Retail subsidiary was considered
self-sustaining and translated into U.S. dollars using the current
rate method. Foreign currency translation of our South America Retail subsidiary was prospectively changed from the current rate
method to the temporal method due to a significant change in economic facts and circumstances. The
functional currency changed from the Argentine peso to U.S. dollars. The circumstances supporting
the change include the transacting of sales in U.S. dollars and the reduction in banking
restrictions in Argentina. 7




---



##### 



Notes to the consolidated financial statements 2. CHANGES IN ACCOUNTING POLICIES Stock-based compensation
In the fourth quarter in 2003, the Corporation began expensing stock options on a prospective
basis, effective January 1, 2003. Prospective adoption requires that the fair value of stock
options granted in 2003 and thereafter be expensed in the financial statements over the
option-vesting period. The Corporation will continue to provide pro forma disclosure of the effect
on net earnings (loss) and earnings (loss) per share had the fair value been expensed for stock
options granted prior to 2003. Asset retirement obligations
Effective January 1, 2003, the Corporation early-adopted the new Canadian accounting standard for
asset retirement obligations. Previously, when the cost of site restoration exceeded the salvage
value of the asset, the Corporation accrued for site restoration costs systematically to the
expected settlement amount in the year the obligation was anticipated to settle. Under the new
accounting policy, the Corporation recognizes asset retirement obligations in the period in which
they are incurred if a reasonable estimate of fair value can be determined. The liability is
measured at fair value and is adjusted in subsequent periods as accretion expense is recorded. The
associated asset retirement costs are capitalized as part of the carrying amount of the long-lived
asset, and the asset is depreciated over the assets estimated useful life. The change in
accounting policy was recorded retroactively. The effect of adoption on the balance sheet as at
January 1, 2003 is presented below as increases (decreases): 2003Asset retirement cost, included in property, plant and equipment
    
    
    28Accumulated depreciation on property, plant and equipment
    
    
    6Asset retirement obligations, included in other liabilities
    
    
    28Accumulated accretion of asset retirement obligations, included in other liabilities
    
    
    7Site restoration and reclamation, formerly included in other liabilities
    
    
    (15
    )Long-term future income tax liabilities
    
    
    2Opening retained earnings
    
    
    -
 Prior period-consolidated balance sheets have been restated. Site restoration and reclamation expense recorded under the accounting policy for prior periods
approximated the depreciation and accretion expense under the retroactive application of the new
accounting policy. As a result, prior period statements of operations were not restated. Goodwill and other intangible assets
Effective January 1, 2002, the Corporation adopted the new accounting standard for goodwill. This
standard requires that goodwill be subject to an annual impairment test rather than being
amortized. In 2002, the Corporation completed the transitional impairment test using a discounted
cash flow method for the reporting unit that includes goodwill. The results of the test indicated
that goodwill recorded in the Corporations phosphate business, which was included in the
reportable segment entitled North America Wholesale, was impaired. The amount of the impairment
represented the entire goodwill balance of $45-million ($29-million net of tax). The resulting
impairment loss was recognized as a change in accounting policy and charged to retained earnings as
of January 1, 2002. 8




---



##### 



Notes to the consolidated financial statements 3. KENAI AWARD AND SETTLEMENT The following amounts were recorded during 2004 relating to the arbitration award and settlement of
legal claims in our dispute with Union Oil Company of California (Unocal): 2004Arbitration award
    
    
    50Settlement of legal claims
    
    
    3686
 Arbitration award
During 2004, the Corporation was awarded liquidated damages with respect to a dispute with Unocal
over gas supply obligations to our Kenai, Alaska nitrogen facility. The Arbitration Panel awarded
the Corporation $37-million plus interest for damages up to April 2004. An additional $4-million
was received for the period May to September 2004 and $9-million for the period October to December
2004. The total liquidated damages recorded for the year totaled $50-million. Settlement of legal claims
In December of 2004, the Corporation settled its dispute with Unocal over obligations under the
Purchase and Sale Agreement, pursuant to which the Corporation acquired its Kenai, Alaska nitrogen
facility. The settlement agreement establishes a definitive gas supply obligation from Unocal to
the Kenai facility up until October 31, 2005. The net gain of $36-million recorded in the fourth quarter of 2004 was comprised of the following: 2004Net cash received
    
    
    25Earn-out adjustment (2001  2004)
    
    
    81Adjustments related to termination of gas supply
    
    
    (70
    )Net gain
    
    
    36
 4. OTHER EXPENSES 2004
    
    
    2003
    
    
    2002Interest
    
    
    (16
    )
    
    
    (5
    )
    
    
    -Facility costs
    
    
    5
    
    
    
    10
    
    
    
    8Performance incentives
    
    
    3
    
    
    
    9
    
    
    
    -Environmental remediation and accretion of asset retirement obligation
    
    
    14
    
    
    
    6
    
    
    
    10Foreign exchange
    
    
    (6
    )
    
    
    (8
    )
    
    
    14U.S. dollar forced conversion (a)
    
    
    -
    
    
    
    -
    
    
    
    (10
    )Kenai, Alaska nitrogen facility earn-out
    
    
    28
    
    
    
    -
    
    
    
    -Other
    
    
    15
    
    
    
    28
    
    
    
    2043
    
    
    
    40
    
    
    
    42
  (a)
    During 2002, Retail collected receivables in their South America operations at rates better
than anticipated and recovered $10-million of prior year losses incurred on the conversion of
U.S. dollar debts to the Argentine peso on a one-to-one basis. 9




---



##### 



Notes to the consolidated financial statements 5. INCOME TAXES The major factors that caused variations from the expected combined Canadian federal and provincial
statutory income tax rates were the following: 2004
    
    
    2003
    
    
    2002Earnings (loss) before income taxesCanadian
    
    
    132
    
    
    
    66
    
    
    
    (35
    )Foreign
    
    
    280
    
    
    
    (108
    )
    
    
    31412
    
    
    
    (42
    )
    
    
    (4
    )Statutory rate (%)
    
    
    41
    
    
    
    42
    
    
    
    43Income taxes at statutory rates
    
    
    170
    
    
    
    (18
    )
    
    
    (2
    )Recognition of previously unrecognized tax assets
    
    
    (20
    )
    
    
    (13
    )
    
    
    (4
    )Differences in foreign tax rates
    
    
    (20
    )
    
    
    (5
    )
    
    
    (10
    )Manufacturing and processing allowance
    
    
    (8
    )
    
    
    (5
    )
    
    
    6Resource royalties and allowances
    
    
    2
    
    
    
    6
    
    
    
    1Foreign exchange gains relating to Canadian and Argentine operations
    
    
    8
    
    
    
    9
    
    
    
    -Other
    
    
    4
    
    
    
    5
    
    
    
    5Income taxes
    
    
    136
    
    
    
    (21
    )
    
    
    (4
    )CurrentCanadian
    
    
    7
    
    
    
    (2
    )
    
    
    (4
    )Foreign
    
    
    92
    
    
    
    24
    
    
    
    (17
    )99
    
    
    
    22
    
    
    
    (21
    )FutureCanadian
    
    
    51
    
    
    
    43
    
    
    
    -Foreign
    
    
    (14
    )
    
    
    (86
    )
    
    
    1737
    
    
    
    (43
    )
    
    
    17136
    
    
    
    (21
    )
    
    
    (4
    )
 The significant components of future income tax liabilities and assets at December 31 are as
follows: 2004
    
    
    2003Future income tax liabilitiesDepreciation and amortization
    
    
    196
    
    
    
    190Partnership deferral
    
    
    95
    
    
    
    60Other
    
    
    36
    
    
    
    39Total future income tax liabilities
    
    
    327
    
    
    
    289Future income tax assetsLoss carry forwards expiring through 2011
    
    
    63
    
    
    
    101Asset retirement obligation and environmental liabilities
    
    
    57
    
    
    
    44Receivable allowances and accrued liabilities
    
    
    21
    
    
    
    21Employee future benefits
    
    
    18
    
    
    
    16Other
    
    
    14
    
    
    
    16Future income tax assets before valuation allowance
    
    
    173
    
    
    
    198Valuation allowance
    
    
    (23
    )
    
    
    (41
    )Total future income tax assets, net of valuation allowance
    
    
    150
    
    
    
    157Net future income tax liabilities
    
    
    177
    
    
    
    132Future income tax assets
    
    
    (24
    )
    
    
    -Future income tax liabilities
    
    
    201
    
    
    
    132Net future income tax liabilities
    
    
    177
    
    
    
    132
 10




---



##### 



Notes to the consolidated financial statements 6. EARNINGS (LOSS) PER SHARE The following table summarizes the computation of net earnings (loss) per share: 2004
    
    
    2003
    
    
    2002NumeratorNet earnings (loss)
    
    
    276
    
    
    
    (21
    )
    
    
    -Preferred securities charges (a)
    
    
    (9
    )
    
    
    (11
    )
    
    
    (11
    )Numerator for basic earnings (loss) per share
    
    
    267
    
    
    
    (32
    )
    
    
    (11
    )Preferred securities charges (a)
    
    
    9
    
    
    
    -
    
    
    
    -Numerator for diluted earnings (loss) per share
    
    
    276
    
    
    
    (32
    )
    
    
    (11
    )DenominatorWeighted average denominator for basic earnings (loss) per share
    
    
    131
    
    
    
    126
    
    
    
    123Dilutive instrumentsStock options (b), (c)
    
    
    1
    
    
    
    -
    
    
    
    -Preferred securities converted to common shares$175-million, eight percent (b), (d)
    
    
    12
    
    
    
    -
    
    
    
    -$50-million, six percent (b), (e)
    
    
    -
    
    
    
    -
    
    
    
    -Denominator for diluted earnings (loss) per share
    
    
    144
    
    
    
    126
    
    
    
    123Basic earnings (loss) per share
    
    
    2.04
    
    
    
    (0.25
    )
    
    
    (0.08
    )Diluted earnings (loss) per share
    
    
    1.91
    
    
    
    (0.25
    )
    
    
    (0.08
    )
  (a)
    Under Canadian GAAP the preferred securities (note 17) are considered equity
instruments. The preferred securities charges that have been charged to retained earnings are
deducted from net earnings (loss) for the computation of basic earnings (loss) per share.(b)
    For diluted earnings (loss) per share, these dilutive instruments are added back only
when the impact of the instrument is dilutive to basic earnings (loss) per share.(c)
    Stock options, using the treasury stock method, with an average share price less than
or equal to the average price during the year are considered dilutive and potential common
share equivalents are considered outstanding. At December 31, 2004, there were eight million
dilutive stock options. At December 31, 2003 and 2002, there were nine million antidilutive
stock options.(d)
    This series of preferred securities is redeemable at the option of the Corporation.
The redemption price may be paid by issuing common shares as disclosed in note 17. At
December 31, 2004, there were seven million dilutive preferred securities. At December 31,
2003 and 2002, there were seven million antidilutive preferred securities.(e)
    This series of preferred securities was converted to common shares in January 2004, as
disclosed in note 17. At December 31, 2003 and 2002, there were two million antidilutive
preferred securities. 7. ACCOUNTS RECEIVABLE 2004
    
    
    2003Trade accounts
    
    
    376
    
    
    
    297Allowance for doubtful accounts
    
    
    (11
    )
    
    
    (16
    )Rebates and other non-trade accounts
    
    
    20
    
    
    
    25Income and other taxes
    
    
    -
    
    
    
    7Other
    
    
    3
    
    
    
    1388
    
    
    
    314
 11




---



##### 



Notes to the consolidated financial statements On an ongoing basis, certain of the Corporations U.S. subsidiaries sell their accounts receivable
balances to a subsidiary of the Corporation. The subsidiary has an agreement to sell to a
financial institution, on an ongoing basis, an undivided percentage interest in this designated
pool of receivables, on a non-recourse basis, in an amount not to exceed $125-million. The
Corporation has granted a security interest to the financial institution for the sold receivables.
The fees and expenses are calculated based on the receivables sold and the prevailing commercial
paper rate. The agreement expires in December 2007 and may be
terminated earlier by either Agrium, with proper notice, or the
financial institution, provided certain conditions are met. Servicing of the receivables sold is performed by a U.S. subsidiary of the Corporation which
charges a fee of two percent of the pool balances. At December 31, 2004 and 2003, the accounts
receivable balances sold were nil. Average monthly receivables sold, fees and expenses incurred on this program for the years ended
December 31, were as follows: 2004
    
    
    2003
    
    
    2002Average monthly receivables sold
    
    
    -
    
    
    
    50
    
    
    
    98Fees and expenses paid
    
    
    -
    
    
    
    1
    
    
    
    3
 8. INVENTORIES 2004
    
    
    2003RetailFertilizers
    
    
    85
    
    
    
    75Chemicals
    
    
    88
    
    
    
    76Other
    
    
    7
    
    
    
    15180
    
    
    
    166North America WholesaleFertilizers
    
    
    166
    
    
    
    98Operating supplies
    
    
    63
    
    
    
    72Raw materials
    
    
    27
    
    
    
    25256
    
    
    
    195South America Wholesale
    
    
    11
    
    
    
    7447
    
    
    
    368
 9. PROPERTY, PLANT AND EQUIPMENT 2004
    
    
    2003Accumulated
    
    
    
    
    
    
    
    
    
    
    AccumulatedDepreciation and
    
    
    Net Book
    
    
    
    
    
    
    Depreciation and
    
    
    Net BookCost
    
    
    Amortization
    
    
    Value
    
    
    Cost
    
    
    Amortization
    
    
    ValueLand
    
    
    29
    
    
    
    -
    
    
    
    29
    
    
    
    28
    
    
    
    -
    
    
    
    28Building and improvements
    
    
    328
    
    
    
    191
    
    
    
    137
    
    
    
    308
    
    
    
    157
    
    
    
    151Machinery and equipment
    
    
    2,165
    
    
    
    1,168
    
    
    
    997
    
    
    
    2,020
    
    
    
    1,020
    
    
    
    1,000Other
    
    
    121
    
    
    
    45
    
    
    
    76
    
    
    
    110
    
    
    
    29
    
    
    
    812,643
    
    
    
    1,404
    
    
    
    1,239
    
    
    
    2,466
    
    
    
    1,206
    
    
    
    1,260
 In the fourth quarter of 2003, the Corporations Kenai, Alaska nitrogen facility in the North
America Wholesale business unit was determined to be impaired in the amount of $235-million
($140-million net of tax). The asset impairment was calculated as the difference between the
carrying amount and the fair value of the Alaskan nitrogen facility. The impairment loss was
proportionately allocated to reduce the cost base of the asset categories above. 12




---



##### 



Notes to the consolidated financial statements 10. OTHER ASSETS 2004
    
    
    2003South America value-added tax and other costs
    
    
    30
    
    
    
    34Long-term receivables
    
    
    6
    
    
    
    9Long-term investments
    
    
    23
    
    
    
    12Other
    
    
    18
    
    
    
    1677
    
    
    
    71
 11. BANK INDEBTEDNESS In May 2004, Agrium Inc. and its wholly owned subsidiary, Agrium U.S. Inc., entered into a
$450-million three-year syndicated revolving unsecured credit facility. The new credit agreement
replaced Agrium Inc.s $225-million credit facility due in May 2004 and Agrium U.S. Inc.s
$56-million credit facility due in December 2004. Under the terms of the agreement, Agrium Inc. and Agrium U.S. Inc. may borrow a maximum principal
amount of $325-million and $125-million respectively. Interest rates are at either Canadian prime
rate plus a variable margin, U.S. base rate established by a bank plus a variable margin, LIBOR
plus a variable margin or bankers acceptance rate plus a variable margin, at the election of the
borrower. The credit facility requires that Agrium Inc. maintain certain financial ratios and other
covenants. Profertil S.A.
Profertil has access to short-term borrowings from Argentine financial institutions at prevailing
interest rates, based on LIBOR, to fund working capital requirements. 12. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2004
    
    
    2003Trade
    
    
    204
    
    
    
    161Accrued liabilities
    
    
    203
    
    
    
    229Income and other taxes
    
    
    53
    
    
    
    -Accrued interest payable
    
    
    12
    
    
    
    14472
    
    
    
    404
 13




---



##### 



Notes to the consolidated financial statements 13. LONG-TERM DEBT 2004
    
    
    2003Recourse debtUnsecured6.86% senior notes due December 29, 2005 to 2007 (a) (c)
    
    
    45
    
    
    
    607.06% senior notes due December 29, 2005 to 2010 (b) (c)
    
    
    86
    
    
    
    1007% debentures due February 1, 2004 (c)
    
    
    -
    
    
    
    757.7% debentures due February 1, 2017 (c)
    
    
    100
    
    
    
    1007.8%
debentures due February 1, 2027 (c)
    
    
    125
    
    
    
    1258.25% debentures due February 15, 2011 (c)
    
    
    125
    
    
    
    125SecuredProfertil
S.A.  Other
    
    
    -
    
    
    
    3Other
    
    
    20
    
    
    
    20501
    
    
    
    608Principal repayments due within one year
    
    
    30
    
    
    
    105471
    
    
    
    503Non-recourse debtSecuredProfertil
S.A.  Other (d)
    
    
    99
    
    
    
    127Principal repayments due within one year
    
    
    30
    
    
    
    1669
    
    
    
    111
  (a)
    The notes have three remaining equal annual principal repayments, with the next
repayment due December 29, 2005. These notes are guaranteed by Agrium U.S. Inc. and require
the Corporation to maintain certain financial ratios and other covenants.(b)
    The notes have six remaining equal annual principal repayments, with the next
repayment due December 29, 2005. These notes are guaranteed by Agrium U.S. Inc. and require
the Corporation to maintain certain financial ratios and other covenants.(c)
    These notes and debentures require the Corporation to meet certain financial ratios
and other covenants.(d)
    The Corporations share of amounts outstanding under the credit agreement at December
31, 2004, is $99-million of which $30-million is repayable within one year. At December 31,
2004, amounts outstanding under the credit agreement are broken into tranches of $89-million,
$57-million and $50-million, of which the Corporations share is 50 percent. The two smaller
tranches accrue interest at the LIBOR rate plus a spread. The $89-million tranche accrues
interest at a fixed rate. Principal plus accrued interest is repayable in 12 semi-annual
installments. The facility matures December 31, 2010.The Corporation pledged its shares in Profertil to the bank as security in the event of default.
The joint venture partners have also entered into an agreement that sets conditions on the
transfer of the ownership interests in Profertil for a period of six years commencing from the
completion date, which was November 30, 2001. 14. OTHER LIABILITIES 2004
    
    
    2003Asset retirement obligations (notes 2 and 15)
    
    
    52
    
    
    
    43Environmental remediation and shutdown costs
    
    
    145
    
    
    
    87Employee future benefits (note 16)Pensions
    
    
    14
    
    
    
    13Other post-retirement benefits
    
    
    36
    
    
    
    31Other
    
    
    10
    
    
    
    7257
    
    
    
    181
 14




---



##### 



Notes to the consolidated financial statements 15. ASSET RETIREMENT OBLIGATIONS The Corporations asset retirement obligations were applicable and associated with nitrogen,
phosphate and potash production facilities, marketing and distribution facilities and phosphate and
potash mine assets. These obligations generally relate to dismantlement and site restoration. A reconciliation between the opening and closing asset retirement obligation balances is provided
below: 2004
    
    
    2003Balance, beginning of year
    
    
    43
    
    
    
    35Foreign exchange translation
    
    
    2
    
    
    
    5Additions
    
    
    4
    
    
    
    -Accretion, included in other expenses
    
    
    3
    
    
    
    3Balance, end of year
    
    
    52
    
    
    
    43
 The Corporation estimates that the undiscounted, inflation-adjusted cash flow required to settle
the asset retirement obligation is approximately $648-million, which will be settled between 2005
and 2080. Discount rates ranging from seven and one-half percent to eight percent were used to
determine the asset retirement obligation. 15




---



##### 



Notes to the consolidated financial statements 16. EMPLOYEE FUTURE BENEFITS The Corporations disclosures for employee future benefits for the year ended December 31, 2004,
are measured with information from September 30, 2004. Obligations and assets
The change in accrued benefit obligations and change in plan assets for the defined benefit pension and
post-retirement benefit plans are as follows: Defined Benefit Pension Plans
    
    
    Post-retirement Benefit Plans2004
    
    
    2003
    
    
    2002
    
    
    2004
    
    
    2003
    
    
    2002Change in accrued benefit obligationsBalance, beginning of year
    
    
    127
    
    
    
    105
    
    
    
    96
    
    
    
    40
    
    
    
    31
    
    
    
    23Foreign exchange on Canadian obligations
    
    
    5
    
    
    
    10
    
    
    
    -
    
    
    
    1
    
    
    
    2
    
    
    
    -Interest cost
    
    
    9
    
    
    
    7
    
    
    
    7
    
    
    
    3
    
    
    
    2
    
    
    
    2Service cost
    
    
    6
    
    
    
    5
    
    
    
    4
    
    
    
    3
    
    
    
    3
    
    
    
    2Actuarial loss
    
    
    5
    
    
    
    7
    
    
    
    3
    
    
    
    4
    
    
    
    3
    
    
    
    5Curtailment
    
    
    -
    
    
    
    (2
    )
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Medicare
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (2
    )
    
    
    -
    
    
    
    -Benefits paid
    
    
    (7
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )Balance, end of year
    
    
    145
    
    
    
    127
    
    
    
    105
    
    
    
    48
    
    
    
    40
    
    
    
    31Change in plan assetsFair value, beginning of year
    
    
    88
    
    
    
    67
    
    
    
    76
    
    
    
    -
    
    
    
    -
    
    
    
    -Foreign exchange on Canadian assets
    
    
    4
    
    
    
    9
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Actual return on plan assets
    
    
    10
    
    
    
    8
    
    
    
    (4
    )
    
    
    -
    
    
    
    -
    
    
    
    -Employer contributions
    
    
    11
    
    
    
    9
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Benefits paid
    
    
    (7
    )
    
    
    (5
    )
    
    
    (5
    )
    
    
    -
    
    
    
    -
    
    
    
    -Fair value, end of year
    
    
    106
    
    
    
    88
    
    
    
    67
    
    
    
    -
    
    
    
    -
    
    
    
    -Unfunded status
    
    
    39
    
    
    
    39
    
    
    
    38
    
    
    
    48
    
    
    
    40
    
    
    
    31Unrecognized net loss
    
    
    (28
    )
    
    
    (28
    )
    
    
    (26
    )
    
    
    (11
    )
    
    
    (8
    )
    
    
    (5
    )Unrecognized prior service cost
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    (1
    )
    
    
    (1
    )
    
    
    -Accrued employee future benefits
    
    
    11
    
    
    
    11
    
    
    
    12
    
    
    
    36
    
    
    
    31
    
    
    
    26Amounts recognized in the consolidated
balancesheets consist of:Other assets
Prepaid employee future benefits
    
    
    (3
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    -
    
    
    
    -
    
    
    
    -Other
liabilities  pensions (note 14)
    
    
    14
    
    
    
    13
    
    
    
    14
    
    
    
    36
    
    
    
    31
    
    
    
    2611
    
    
    
    11
    
    
    
    12
    
    
    
    36
    
    
    
    31
    
    
    
    26
 The accumulated benefit obligation at September 30, 2004, is $124-million ($111-million and
$85-million for 2003 and 2002 respectively). The estimated aggregate expected contribution to fund
the Corporations defined benefit plans for the next fiscal year is $6-million to $11-million. 16




---



##### 



Notes to the consolidated financial statements Estimated future benefit payments are as follows: Defined Benefit
    
    
    Post-retirement
    
    
    TotalPension Plans
    
    
    Benefit PlansExpected benefit payments2005
    
    
    7
    
    
    
    1
    
    
    
    82006
    
    
    7
    
    
    
    1
    
    
    
    82007
    
    
    7
    
    
    
    1
    
    
    
    82008
    
    
    8
    
    
    
    1
    
    
    
    92009
    
    
    8
    
    
    
    2
    
    
    
    102010 through 2014
    
    
    46
    
    
    
    13
    
    
    
    59
 Expense
The components of net employee future benefits expense for the Corporations pension and
post-retirement benefit plans are computed actuarially as follows: 2004
    
    
    2003
    
    
    2002Defined benefit pension plansService cost for benefits earned during the year
    
    
    6
    
    
    
    5
    
    
    
    4Interest cost on projected benefit obligations
    
    
    9
    
    
    
    7
    
    
    
    7Expected return on plan assets
    
    
    (7
    )
    
    
    (6
    )
    
    
    (6
    )Net amortization and deferral
    
    
    2
    
    
    
    1
    
    
    
    1Net expense
    
    
    10
    
    
    
    7
    
    
    
    6Post-retirement benefit plansService cost for benefits earned during the year
    
    
    4
    
    
    
    3
    
    
    
    2Interest cost on projected benefit obligations
    
    
    3
    
    
    
    2
    
    
    
    2Net expense
    
    
    7
    
    
    
    5
    
    
    
    4Defined contribution pension plans
    
    
    11
    
    
    
    10
    
    
    
    7Total expense
    
    
    28
    
    
    
    22
    
    
    
    17
 Assumptions
Significant actuarial assumptions used in calculating the future benefits obligation and the net
employee future benefits expense were as follows: Future Benefits Obligation
    
    
    Future Benefits Expense(percent)
    
    
    2004
    
    
    
    2003
    
    
    
    2002
    
    
    
    2004
    
    
    
    2003
    
    
    
    2002Defined benefit pension plansDiscount rate
    
    
    6
    
    
    
    6
    
    
    
    7
    
    
    
    6
    
    
    
    7
    
    
    
    7Long-term rate of return on assets
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8
    
    
    
    8Rate of increase in compensation levels
    
    
    4
    
    
    
    3
    
    
    
    4
    
    
    
    4
    
    
    
    3
    
    
    
    4Post-retirement benefit plansDiscount rate
    
    
    6
    
    
    
    6
    
    
    
    7
    
    
    
    6
    
    
    
    6
    
    
    
    7Health care cost trend rate
    
    
    12
    
    
    
    12
    
    
    
    8
    
    
    
    12
    
    
    
    12
    
    
    
    8
 The Corporations assumption for the long-term rate of return on assets is based on the long-term
expectations of inflation, together with the expected long-term real return for each asset class,
weighted in accordance with the stated investment policy for the plan. Expectations of real
returns and inflation are based on a combination of current market conditions, historical capital
market data and future expectations. 17




---



##### 



Notes to the consolidated financial statements A one-percentage point change in the assumed health care cost trend rate would have the following
effects: One Percentage
    
    
    One PercentagePoint Increase
    
    
    Point DecreaseEffect on accumulated post retirement
benefit obligation as of September 30, 2004
    
    
    6
    
    
    
    (5
    )Effect on total of service and interest cost
    
    
    1
    
    
    
    (1
    )
 Asset allocation and investment strategy
Defined benefit pension plan asset allocation at September 30, 2004 and 2003, and target allocation
for 2005 are as follows: Target(percent)
    
    Allocation
    
    
    Plan AssetsAsset categories
    
    
    2005
    
    
    
    2004
    
    
    
    2003Equity securities (a)
    
    
    44  69
    
    
    
    65
    
    
    
    58Debt securities
    
    
    29  54
    
    
    
    33
    
    
    
    40Cash and other
    
    
    0  14
    
    
    
    2
    
    
    
    2
  (a)
    Equity securities held by the plans do not include any of the Corporations common shares. The Corporations
investment strategy for all defined benefit plans is consistent with the 2005
target allocation of plan assets. The effective date of the most recent actuarial valuations for funding purposes for the Canadian
registered plans is December 31, 2004. The next required valuations for funding purposes range
from December 31, 2005 to December 31, 2007. For U.S. registered plans, the effective date of the most recent actuarial valuation for funding
purposes is January 1, 2004, and the next required valuation is January 1, 2005. 17. SHARE CAPITAL 2004
    
    
    2003
    
    
    2002Number
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    NumberOf Shares
    
    
    
    
    
    
    Of Shares
    
    
    
    
    
    
    Of Shares(millions)
    
    
    Amount
    
    
    (millions)
    
    
    Amount
    
    
    (millions)
    
    
    AmountCommon sharesIssued and outstanding, beginning of year
    
    
    127
    
    
    
    490
    
    
    
    126
    
    
    
    484
    
    
    
    115
    
    
    
    376Shares issued, net of issuance costs (a)
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    11
    
    
    
    106Issued on preferred securities redemption (b)
    
    
    4
    
    
    
    50
    
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    -Issued on exercise of stock options
    
    
    1
    
    
    
    13
    
    
    
    1
    
    
    
    6
    
    
    
    -
    
    
    
    2Issued and outstanding, end of year
    
    
    132
    
    
    
    553
    
    
    
    127
    
    
    
    490
    
    
    
    126
    
    
    
    484Preferred securitiesIssued and outstanding, beginning of year
    
    
    9
    
    
    
    222
    
    
    
    9
    
    
    
    221
    
    
    
    9
    
    
    
    221Share redemption (b)
    
    
    (2
    )
    
    
    (50
    )Amortization of issuance costs
    
    
    -
    
    
    
    -
    
    
    
    -
    
    
    
    1
    
    
    
    -
    
    
    
    -Issued and outstanding, end of year
    
    
    7
    
    
    
    172
    
    
    
    9
    
    
    
    222
    
    
    
    9
    
    
    
    221Total
    
    
    139
    
    
    
    725
    
    
    
    136
    
    
    
    712
    
    
    
    135
    
    
    
    705
  (a)
    In March 2002, the Corporation issued 11.2 million common shares at $9.85 per common share.
The total proceeds from the issue, net of expenses, were $106-million, and were used to pay
down bank indebtedness.(b)
    In January 2004, pursuant to the Corporations plan to redeem the six percent preferred
securities, all holders of the convertible, redeemable preferred securities elected to convert
the securities into common shares at the stated conversion price of $11.9677 per share,
resulting in the issuance of an additional 4.18 million common shares. The redemption price
was 103 percent of the principal amount, plus accrued and unpaid securities charges. 18




---



##### 



Notes to the consolidated financial statements As at December 31, 2004, the Corporation has one class of preferred securities issued and
outstanding: $175-million, unsecured eight percent redeemable preferred securities due June 30, 2047
The charges on these securities are payable quarterly in arrears and the Corporation has the right
to defer the charges for up to 20 consecutive quarterly periods, subject to certain restrictions.
The preferred securities are redeemable at the option of the Corporation, in whole or in part, on
or after April 22, 2003, at the principal amount plus accrued and unpaid securities charges (the
redemption price) to the date of redemption. The Corporation may, at its option pay the redemption
price or any deferred charges in cash or by issuing common shares to settle the obligation. In January 2005, the Corporation announced its intention to redeem the $175-million, eight percent
redeemable preferred securities for cash on February 14, 2005. The redemption price will equal the
principal amount of the securities plus accrued and unpaid interest to the date of redemption. 18. STOCK-BASED COMPENSATION The Corporation offers the following plans as part of compensation for services rendered. Stock options
The Corporation has a stock option plan under which the Board of Directors may grant options to
officers and employees to acquire common shares. At December 31, 2004, the Board of Directors was
authorized to grant options on up to nine million common shares (2003  10 million; 2002  11
million) of which eight million options (2003  nine million; 2002  nine million) had been granted
and are outstanding at December 31, 2004. An options maximum term is 10 years. Options are
granted throughout the year and vest and become exercisable equally over a four-year period,
commencing one year after the grant date. Officers of the Corporation can receive options on the
basis of one option for each common share acquired by the officer in the open market, to a maximum
of 100,000 options per officer, with the exercise price of each option equal to the purchase price
paid for the original share. These options lapse if the officer does not hold 100 percent of the
purchased shares on the first anniversary date, 75 percent on the second anniversary date, 50
percent on the third anniversary date and 25 percent on the fourth anniversary date. Stock option transactions for the respective years were as follows: 2004
    
    
    2003
    
    
    2002Options
    
    
    Weighted
    
    
    Options
    
    
    Weighted
    
    
    Options
    
    
    WeightedOutstanding
    
    
    Avg. Exercise
    
    
    Outstanding
    
    
    Avg. Exercise
    
    
    Outstanding
    
    
    Avg. Exercise(millions)
    
    
    Price (C$)
    
    
    (millions)
    
    
    Price (C$)
    
    
    (millions)
    
    
    Price (C$)Outstanding, beginning
of year
    
    
    9
    
    
    
    16.31
    
    
    
    9
    
    
    
    16.21
    
    
    
    8
    
    
    
    16.20Granted
    
    
    -
    
    
    
    21.39
    
    
    
    1
    
    
    
    15.59
    
    
    
    1
    
    
    
    15.89Exercised
    
    
    (1)
    
    
    
    13.96
    
    
    
    (1)
    
    
    
    13.19
    
    
    
    -
    
    
    
    10.82Cancelled
    
    
    -
    
    
    
    17.77
    
    
    
    -
    
    
    
    18.25
    
    
    
    -
    
    
    
    18.52Outstanding, end of year
    
    
    8
    
    
    
    16.62
    
    
    
    9
    
    
    
    16.31
    
    
    
    9
    
    
    
    16.21Exercisable, end of year
    
    
    7
    
    
    
    16.68
    
    
    
    6
    
    
    
    16.37
    
    
    
    6
    
    
    
    16.34
 As disclosed in note 2, the Corporation began prospectively expensing the fair value of equity
settled awards granted after January 1, 2003 over their vesting period. In accordance with the
prospective method of adoption, the Corporation will continue to record no compensation expense for
stock options granted prior to January 1, 2003, and will continue to provide pro forma disclosure
of the effect on net earnings (loss) and net earnings (loss) per share had the fair value of
options been expensed, as follows: 2004
    
    
    2003
    
    
    2002(millions of U.S. dollars, except per share amounts)
    
    As
    
    
    Pro
    
    
    As
    
    
    Pro Forma
    
    
    As
    
    
    Pro FormaReported
    
    
    Forma
    
    
    Reported
    
    
    
    
    
    ReportedNet earnings (loss)
    
    
    276
    
    
    
    272
    
    
    
    (21)
    
    
    
    (26)
    
    
    
    -
    
    
    
    (6)Earnings (loss) per common shareBasic
    
    
    2.04
    
    
    
    2.01
    
    
    
    (0.25)
    
    
    
    (0.29)
    
    
    
    (0.08)
    
    
    
    (0.14)Diluted
    
    
    1.91
    
    
    
    1.89
    
    
    
    (0.25)
    
    
    
    (0.29)
    
    
    
    (0.08)
    
    
    
    (0.14)
 19




---



##### 



The fair values of all equity settled options have been estimated using a Black Scholes option
pricing model and based on the following assumptions: 2004
    
    
    2003
    
    
    2002Dividend yield (%)
    
    
    1
    
    
    
    1
    
    
    
    1Expected stock price volatility (%)
    
    
    32
    
    
    
    32
    
    
    
    30Risk-free interest rate (%)
    
    
    4
    
    
    
    4
    
    
    
    5Expected life of the options (years)
    
    
    7
    
    
    
    7
    
    
    
    7
 The weighted average fair value price per share of options granted in the years indicated was as
follows: 2004  C$7.49; 2003  C$6.34; and 2002  C$7.87. The following table summarizes stock options outstanding and exercisable under the plan at December
31, 2004: Options Outstanding
    
    
    Options ExercisableWeighted Avg.
    
    
    
    
    
    
    NumberNumber Outstanding
    
    
    Remaining
    
    
    Weighted Avg.
    
    
    Exercisable at
    
    
    Weighted Avg.Range of
    
    at Year End
    
    
    Contractual Life
    
    
    Exercise Prices
    
    
    Year End
    
    
    ExerciseExercise Prices (C$)
    
    (millions)
    
    
    (years)
    
    
    (C$)
    
    
    (millions)
    
    
    Price (C$)Less than 11.86
    
    
    1
    
    
    
    5
    
    
    
    11.81
    
    
    
    1
    
    
    
    11.8111.86 to 15.85
    
    
    2
    
    
    
    6
    
    
    
    14.17
    
    
    
    2
    
    
    
    13.3915.86 to 20.15
    
    
    4
    
    
    
    4
    
    
    
    17.80
    
    
    
    3
    
    
    
    18.1820.16 to 22.15
    
    
    1
    
    
    
    5
    
    
    
    20.59
    
    
    
    1
    
    
    
    20.6010.29 to 22.15
    
    
    8
    
    
    
    5
    
    
    
    16.62
    
    
    
    7
    
    
    
    16.68
 In 2004, the Corporation recognized a total compensation expense of $1-million in connection with
options (2003  $1-million). Tandem options
Effective January 1, 2004, the stock option plan was amended to attach Stock Appreciation Rights
(SARs) to all future grants of options (tandem options). Tandem options provide option holders
with a right to surrender vested options for either common shares or SARs. The election of a SAR
entitles the holder to receive on surrender of the option a cash payment equal to the excess of the
U.S. equivalent of the highest price of the Corporations shares on the Toronto Stock Exchange
(TSX) on the date of exercise over the exercise price of the tandem option. The election to
exercise one component of the tandem option causes cancellation of the other component. The
Corporation expects the majority of tandem option holders will elect to exercise options as SARs,
and will therefore receive settlement in cash. Tandem options have a maximum term of 10 years, are granted throughout the year, and vest and
become exercisable equally over a four-year period, commencing on the first anniversary of the
grant date. In 2004, the Corporation recognized a total compensation expense of less than $1-million in
connection with tandem options. Stock Appreciation Rights (SARs)
Effective January 1, 2004 the Corporation adopted a program whereby certain employees are granted
SARs which entitle the employee to receive a cash payment equal to the excess of the highest price
of the Corporations shares on the Toronto Stock Exchange (TSX) on the date of exercise over the
exercise price of the right. SARs have a maximum term of 10 years, are granted throughout the
year, and vest and become exercisable equally over a four-year period, commencing on the first
anniversary of the grant date. The Corporation had a program in place whereby SARs were granted to all regular employees hired
prior to May 5, 2003. The plan provided for cash awards based on the appreciation of the
Corporations common share price above certain hurdle prices over a five-year term ending May 4,
2004. Grants of these SARs grants were made on May 5, 1999, to all regular employees at that date,
with further grants made to employees hired after that date on subsequent May 5 anniversaries up to
May 5, 2003. No further grants were made under this program subsequent to May 5, 2003. The
issuance price of the SARs was based on the closing price of the Corporations shares on the New
York Stock Exchange (NYSE) on the day preceding the relevant grant date. The first vesting point
was reached on November 14, 2003, and eligible employees were paid 25 percent of the value of their
SARs based on the difference between the issuance price of their rights and $15.00. All SARs
granted through this program were cancelled on cessation of the program on May 4, 2004. 20




---



##### 



Notes to the consolidated financial statements In 2004, the Corporation recognized a total compensation expense of less than $1-million (2003 
$3-million; 2002  $nil) in connection with SARs. Performance Share Unit Plan (PSUs)
Effective October 2003, a PSU Plan was implemented for executive officers and other eligible
managers. The value of each PSU granted is based on the value of the Corporations common shares
on the NYSE. When cash dividends are paid on the common shares of the Corporation, additional PSUs
of equivalent value are credited to the designated employees account. PSUs vest on the third anniversary of the grant date, based upon the relative ranking of the
Corporations average quarterly total shareholder return over a three-year performance cycle,
compared against the average quarterly total shareholder return over the same period of a peer
group of companies. Payout ranges between 50 percent of the original PSUs granted, up to 150
percent of the original PSUs granted dependent on total shareholder return over the three-year
period. On vesting, the value of PSUs is payable to the holders in cash. No common shares are
issuable to holders of PSUs. In 2004, the Corporation recognized compensation expense of $2-million (2003  less than
$1-million; 2002  $-nil) in connection with PSUs. Directors Deferred Share Unit Plans (DSUs)
The Corporation has two DSU Plans. Under the first plan, directors can elect to have a portion or
all of their directors fees paid in DSUs. The number of DSUs issued is calculated by dividing the
directors fees by the fair market value of the Corporations common shares on the date that the
fees become payable. Effective May 2002, the Corporation implemented a DSU Plan for directors permitting grants at the
discretion of the Board of Directors. Under this plan, a specified number of DSUs may be granted
to each director upon the approval of the Board of Directors. Under both plans, the DSUs are fully vested upon being granted but are not paid until a directors
departure from the Board, at which time units are settled in cash. The issue amount and subsequent
changes in the common share price in relation to the issue price will be recorded as compensation
expense and included in selling, general and administrative expenses in the period the change takes
place. In each of the years 2002, 2003 and 2004, the Corporation recognized compensation expense of less
than $1-million in connection with DSUs. 19. COMMITMENTS 2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009Cost of productOperating lease commitments
    
    
    45
    
    
    
    27
    
    
    
    19
    
    
    
    16
    
    
    
    13Natural gas commitments  North America
    
    
    514
    
    
    
    11
    
    
    
    -
    
    
    
    -
    
    
    
    -Power, sulphuric acid and other payments
    
    
    39
    
    
    
    23
    
    
    
    22
    
    
    
    22
    
    
    
    21Profertil natural gas and other
    
    
    31
    
    
    
    31
    
    
    
    31
    
    
    
    31
    
    
    
    31629
    
    
    
    92
    
    
    
    72
    
    
    
    69
    
    
    
    65OtherLong-term debt and capital lease repayments
    
    
    60
    
    
    
    51
    
    
    
    54
    
    
    
    36
    
    
    
    15Total
    
    
    689
    
    
    
    143
    
    
    
    126
    
    
    
    105
    
    
    
    80
 The operating lease commitments consist primarily of leases for rail cars and contractual
commitments at distribution facilities in North America Wholesale, vehicles and application
equipment in Retail and office equipment and property leases throughout the Corporations
operations. The commitments represent the minimum payments in each of the next five years under
each agreement. Operating lease payments expensed in 2004 were $42-million (2003  $39-million;
2002  $28-million). The Corporation has entered into a number of agreements with suppliers to guarantee supply of raw
materials required in the production processes at its wholesale facilities. Among these are fixed
base-price natural gas agreements at the Profertil facility and a co-generation power contract for
the Carseland facility; which are included in the commitments, based on the minimum obligations
under these contracts. Additionally, the Corporations minimum commitments for North American
natural gas purchases not under 21




---



##### 



Notes to the consolidated financial statements fixed base-price contracts are calculated using the prevailing New York Mercantile Exchange (NYMEX)
forward prices at December 30, 2004, adjusted for transportation differentials to each production
facility. The Corporation has a 20-year power co-generation agreement for its Carseland facility that expires
December 31, 2021. The minimum commitment under this agreement is to purchase 60 megawatts of
power per hour (MWh) until 2011 and 20 MWh for the remainder of the term. The price for the power
is based on a fixed charge adjusted for inflation and a variable charge based on the cost of
natural gas, which is provided to the facility for power generation. Profertil has four firm supply, U.S. dollar denominated natural gas purchase contracts expiring in
2012, 2013 and 2017. Repsol-YPF, our joint venture partner in Profertil, supplies 50 percent of
this gas under two contracts. In December 2003, Profertil signed a 10-year U.S. dollar denominated contract with Repsol-YPF for
the purchase of additional natural gas. Prices have been set for the period to December 31, 2006. 20. CONTINGENCIES Environmental remediation
The Corporation has contingent environmental liabilities arising out of existing and discontinued
operations in respect of which the Corporation has and continues to estimate the costs likely to be
incurred in connection with such liabilities. Such contingent environmental liabilities differ
from asset retirement obligations and accrued environmental liabilities in that the contingent
environment liabilities are not determinable, the conditions which may give rise to the
expenditures are uncertain, and the future expectations of the applicable regulatory authorities
are not known. The potential costs that may arise in connection with such liabilities are not
included in our provisions until the source and nature of the obligation becomes clear and is
reasonably estimable. Litigation
The Corporation, in the normal course of business, is also subject to other legal proceedings being
brought against it and its subsidiaries. The amounts involved in such legal proceedings are not
reasonably estimable, due to uncertainty as to the final outcome, and management does not believe
these proceedings in aggregate will have a material adverse effect on the Corporations
consolidated financial position or results of operations. The Corporation is investigating a
personal injury claim filed in the fourth quarter of 2003 against subsidiaries of the Corporation.
At this time the potential exposure of this lawsuit is indeterminable. 21. FINANCIAL INSTRUMENTS Balance sheet financial instruments
The Corporations financial instruments recognized in the consolidated balance sheets consist of
cash and cash equivalents, accounts receivable, derivative contracts not accounted for as hedges,
substantially all current liabilities, long-term debt and preferred securities. The estimated fair values of recognized financial instruments have been determined based on the
Corporations assessment of available market information and appropriate valuation methodologies;
however, these estimates may not necessarily be indicative of the amounts that could be realized or
settled in a current market transaction. The fair values of cash and cash equivalents, accounts
receivable and current liabilities approximate their carrying amounts due to the short-term
maturity of these instruments. The fair value of derivative financial instruments on the balance
sheet is nominal. The following table summarizes estimated fair value information about the Corporations unsecured
long-term debt and preferred securities as at December 31 and is based on the quoted market price
of these or similar issues or by discounting cash flows at the rate offered to the corporation for
debt and securities of the same remaining maturities. 2004
    
    
    2003Carrying Amount
    
    
    Fair Value
    
    
    Carrying Amount
    
    
    Fair ValueUnsecured long-term debt
    
    
    481
    
    
    
    602
    
    
    
    585
    
    
    
    697Preferred securities
    
    
    172
    
    
    
    179
    
    
    
    222
    
    
    
    244
 22




---



##### 



Notes to the consolidated financial statements At December 31, 2004 the Corporation had 25 million (2003  seven million) MMBtu notional amount of
natural gas swap contracts maturing in 2005 (2003  expiring in 2004 and 2005) and 10 million (2003
 nil) MMBtu underlying amount of natural gas option contracts maturing in 2005 and 2006 with
exercise prices ranging from $5.95/MMBtu to $8.77/MMBtu that did not qualify for hedge accounting.
Other expense includes net realized and unrealized gains (losses) of $3-million (2003  $(5)
million; 2002  $(5) million) related to the natural gas contracts. Hedges
The Corporation also enters certain derivative financial instruments, which qualify for hedge
accounting and are not recognized in the consolidated balance sheets, as follows: Natural gas supply hedges
The Corporation purchases substantially all of its natural gas requirements through indexed price
contracts with suppliers excluding gas supply agreements for its facilities in Alaska and
Argentina. The Corporation periodically enters into natural gas swap and option contracts to
protect its future earnings and cash flows from the potential adverse impact of rising natural gas
prices. The natural gas swap and option contracts do not require the payment of significant net premiums
prior to settlement. On settlement, these contracts result in cash receipts or payments by the
Corporation for the difference between the contract and market rates for the applicable dollars and
volumes hedged during the contract term. Such cash receipts or payments offset corresponding
increases or decreases in the Corporations natural gas supply costs. Amounts received or paid on
settlement are recognized in inventory in the same period as the hedged transaction, and then
included in the cost of product when the related inventory is sold. At December 31, 2004 the Corporation had six million MMBtu underlying amount of natural gas option
contracts maturing in 2005 and 14
million MMBtu notional amount of natural gas swap contracts maturing in 2005 and 2006 that
qualified for hedge accounting. At December 31, 2003, the Corporation had two million MMBtu
underlying amount of natural gas option contracts maturing 2004 and four million MMBtu notional amount of natural gas swap contracts maturing
in 2004 and 2005 that qualified for hedge accounting. During 2004, $-nil (2003  $12-million) of realized gains was allocated to inventory of which $-nil
(2003  $1-million) remains in inventory at December 31, 2004 and $-nil (2003  $11-million) was
recorded as cost of product. Foreign exchange hedges
The Corporation enters into foreign currency option and forward contracts to fix the exchange rate
or a range of exchange rates used to convert a portion of the Canadian subsidiaries U.S. dollar
denominated revenues into Canadian dollars. These revenues are converted into Canadian dollars for
purposes of paying the Canadian dollar denominated operating costs. The foreign currency option and forward contracts do not require the payment of significant net
premiums prior to settlement. On settlement, these contracts result in cash receipts or payments
by the Corporation for the difference between the contract and market rates for the applicable
dollars hedged during the contract term. Such cash receipts or payments are recognized in the
statement of operations. At December 31, 2004, the Corporation had C$18-million (2003  C$40-million) underlying amount of
foreign currency options with an exercise price of C$1.19 (2003  C$1.3243 to C$1.3292) and
expiring in 2005 (2003  expiring in 2004) and had C$27-million of underlying amount of forward
currency contracts (2003  C$-nil) with forward rates ranging from C$1.3074 to C$1.3979 and
expiring in 2005 that qualified for hedge accounting. During 2004, net realized gains on foreign
currency options and forward contracts of $3-million (2003  $7-million; 2002  less than
$1-million) were recorded in the statement of operations. Fair value of hedges
The fair values of derivative financial instruments that qualify for hedge accounting are the
estimated amount that the Corporation would receive (pay) to terminate the contracts. The fair
value of contracts for each of the years ended 2004, 2003 and 2002 was nominal. 23




---



##### 



Notes to the consolidated financial statements Commodity contracts
The Corporation enters into commodity contracts, including contracts with fixed or adjustable
pricing terms, as a normal course of business. The contracts outstanding at December 31, 2004, are
disclosed in note 19. No amounts are recognized in the financial statements related to these
contracts until such time as the associated volumes are received. Counterparty credit risk
Wholesale in both North America and South America sell mainly to large agribusinesses representing
a small number of customers. Letters of credit and credit insurance are used to mitigate risk
where appropriate. Retail serves large customer bases dispersed over wide geographic areas in both the United States
and Argentina. This geographic diversity, coupled with established credit approval practices,
mitigates counterparty risk. The Corporation may be exposed to certain losses in the event that counterparties to the derivative
financial instruments are unable to meet the terms of the contracts. The Corporations credit
exposure is limited to those counterparties holding derivative contracts with positive fair values
at the reporting date. The Corporation manages this counterparty credit risk by entering into
contracts only with investment grade counterparties in accordance with established counterparty
credit approval practices. 22. SEGMENTATION The Corporations activities are divided geographically and then by functional area into four
reportable segments. The segments include three primary operating segments and a fourth
non-operating segment for corporate and inter-segment eliminations. The three operating segments
are Retail, North America Wholesale and South America Wholesale. Retail comprises the sale of
fertilizers, chemicals, seed, custom application services and agronomic consulting. Wholesale
comprises the production and sales of the three primary nutrients: nitrogen, phosphate and potash.
Net sales between segments and countries are accounted for at prices that approximate fair market
value. In the fourth quarter of 2004 the Corporation integrated its two previously reported Retail
segments (North America Retail and South America Retail) into one reportable Retail segment. Prior
periods have been restated for comparative purposes. Segmented net sales, expenses, net working capital, property, plant and equipment, total assets and
capital expenditures: WholesaleNorth
    
    
    South2004
    
    Retail
    
    
    America
    
    
    America
    
    
    Other
    
    
    TotalNet sales  external
    
    
    1,114
    
    
    
    1,594
    
    
    
    130
    
    
    
    -
    
    
    
    2,838 inter-segment
    
    
    -
    
    
    
    109
    
    
    
    13
    
    
    
    (122
    )
    
    
    -Total net sales
    
    
    1,114
    
    
    
    1,703
    
    
    
    143
    
    
    
    (122
    )
    
    
    2,838Cost of product
    
    
    798
    
    
    
    1,211
    
    
    
    41
    
    
    
    (122
    )
    
    
    1,928Gross profit
    
    
    316
    
    
    
    492
    
    
    
    102
    
    
    
    -
    
    
    
    910ExpensesSelling, general and administrative
    
    
    230
    
    
    
    39
    
    
    
    4
    
    
    
    28
    
    
    
    301Depreciation and amortization
    
    
    18
    
    
    
    116
    
    
    
    15
    
    
    
    7
    
    
    
    156Kenai award and settlement (note 3)
    
    
    -
    
    
    
    (86
    )
    
    
    -
    
    
    
    -
    
    
    
    (86
    )Royalties and other taxes
    
    
    5
    
    
    
    22
    
    
    
    -
    
    
    
    2
    
    
    
    29Other expenses
    
    
    (18
    )
    
    
    52
    
    
    
    -
    
    
    
    9
    
    
    
    43Earnings (loss) before interest expense and income taxes
    
    
    81
    
    
    
    349
    
    
    
    83
    
    
    
    (46
    )
    
    
    467Net working capital
    
    
    359
    
    
    
    (31
    )
    
    
    60
    
    
    
    396
    
    
    
    784Property, plant and equipment
    
    
    91
    
    
    
    918
    
    
    
    231
    
    
    
    (1
    )
    
    
    1,239Total assets
    
    
    729
    
    
    
    2,147
    
    
    
    353
    
    
    
    (573
    )
    
    
    2,656Capital expenditures
    
    
    14
    
    
    
    61
    
    
    
    4
    
    
    
    3
    
    
    
    82
 24




---



##### 



Notes to the consolidated financial statements WholesaleNorth
    
    
    South2003
    
    Retail
    
    
    America
    
    
    America
    
    
    Other
    
    
    TotalNet sales  external
    
    
    1,015
    
    
    
    1,377
    
    
    
    107
    
    
    
    -
    
    
    
    2,499 inter-segment
    
    
    -
    
    
    
    88
    
    
    
    9
    
    
    
    (97
    )
    
    
    -Total net sales
    
    
    1,015
    
    
    
    1,465
    
    
    
    116
    
    
    
    (97
    )
    
    
    2,499Cost of product
    
    
    717
    
    
    
    1,106
    
    
    
    34
    
    
    
    (97
    )
    
    
    1,760Gross profit
    
    
    298
    
    
    
    359
    
    
    
    82
    
    
    
    -
    
    
    
    739ExpensesSelling, general and administrative
    
    
    222
    
    
    
    35
    
    
    
    4
    
    
    
    25
    
    
    
    286Depreciation and amortization
    
    
    19
    
    
    
    99
    
    
    
    15
    
    
    
    7
    
    
    
    140Asset impairment (note 9)
    
    
    -
    
    
    
    235
    
    
    
    -
    
    
    
    -
    
    
    
    235Royalties and other taxes
    
    
    5
    
    
    
    11
    
    
    
    -
    
    
    
    1
    
    
    
    17Other expenses
    
    
    (14
    )
    
    
    28
    
    
    
    -
    
    
    
    26
    
    
    
    40Earnings (loss) before interest expense and income taxes
    
    
    66
    
    
    
    (49
    )
    
    
    63
    
    
    
    (59
    )
    
    
    21Net working capital
    
    
    219
    
    
    
    465
    
    
    
    30
    
    
    
    (297
    )
    
    
    417Property, plant and equipment
    
    
    95
    
    
    
    896
    
    
    
    238
    
    
    
    31
    
    
    
    1,260Total assets
    
    
    471
    
    
    
    1,553
    
    
    
    324
    
    
    
    (75
    )
    
    
    2,273Capital expenditures
    
    
    13
    
    
    
    73
    
    
    
    3
    
    
    
    10
    
    
    
    99
 WholesaleNorth
    
    
    South2002
    
    Retail
    
    
    America
    
    
    America
    
    
    Other
    
    
    TotalNet sales  external
    
    
    929
    
    
    
    1,094
    
    
    
    60
    
    
    
    -
    
    
    
    2,083 inter-segment
    
    
    -
    
    
    
    78
    
    
    
    4
    
    
    
    (82
    )
    
    
    -Total net sales
    
    
    929
    
    
    
    1,172
    
    
    
    64
    
    
    
    (82
    )
    
    
    2,083Cost of product
    
    
    643
    
    
    
    976
    
    
    
    28
    
    
    
    (83
    )
    
    
    1,564Gross profit
    
    
    286
    
    
    
    196
    
    
    
    36
    
    
    
    1
    
    
    
    519ExpensesSelling, general and administrative
    
    
    199
    
    
    
    24
    
    
    
    4
    
    
    
    19
    
    
    
    246Depreciation and amortization
    
    
    21
    
    
    
    102
    
    
    
    18
    
    
    
    7
    
    
    
    148Royalties and other taxes
    
    
    5
    
    
    
    13
    
    
    
    -
    
    
    
    1
    
    
    
    19Other expenses
    
    
    (16
    )
    
    
    17
    
    
    
    16
    
    
    
    25
    
    
    
    42Earnings (loss) before interest expense and income taxes
    
    
    77
    
    
    
    40
    
    
    
    (2
    )
    
    
    (51
    )
    
    
    64Net working capital
    
    
    118
    
    
    
    310
    
    
    
    (23
    )
    
    
    (87
    )
    
    
    318Property, plant and equipment
    
    
    102
    
    
    
    1,054
    
    
    
    248
    
    
    
    18
    
    
    
    1,422Total assets
    
    
    390
    
    
    
    1,537
    
    
    
    314
    
    
    
    (50
    )
    
    
    2,191Capital expenditures
    
    
    10
    
    
    
    41
    
    
    
    -
    
    
    
    1
    
    
    
    52
 25




---



##### 



Notes to the consolidated financial statements Net sales and gross profit by business segment and product line: 2004
    
    
    2003
    
    
    2002Net
    
    
    Cost of
    
    
    Gross
    
    
    Net
    
    
    Cost of
    
    
    Gross
    
    
    Net
    
    
    Cost of
    
    
    GrossSales
    
    
    Product
    
    
    Profit
    
    
    Sales
    
    
    Product
    
    
    Profit
    
    
    Sales
    
    
    Product
    
    
    ProfitNorth America WholesaleNitrogenAmmonia
    
    
    397
    
    
    
    284
    
    
    
    113
    
    
    
    382
    
    
    
    286
    
    
    
    96
    
    
    
    242
    
    
    
    222
    
    
    
    20Urea
    
    
    499
    
    
    
    365
    
    
    
    134
    
    
    
    423
    
    
    
    323
    
    
    
    100
    
    
    
    330
    
    
    
    292
    
    
    
    38Nitrate, Sulphate and other
    
    
    284
    
    
    
    216
    
    
    
    68
    
    
    
    239
    
    
    
    181
    
    
    
    58
    
    
    
    203
    
    
    
    169
    
    
    
    34Total Nitrogen
    
    
    1,180
    
    
    
    865
    
    
    
    315
    
    
    
    1,044
    
    
    
    790
    
    
    
    254
    
    
    
    775
    
    
    
    683
    
    
    
    92Phosphate
    
    
    309
    
    
    
    238
    
    
    
    71
    
    
    
    261
    
    
    
    217
    
    
    
    44
    
    
    
    239
    
    
    
    202
    
    
    
    37Potash
    
    
    214
    
    
    
    108
    
    
    
    106
    
    
    
    160
    
    
    
    99
    
    
    
    61
    
    
    
    158
    
    
    
    91
    
    
    
    671,703
    
    
    
    1,211
    
    
    
    492
    
    
    
    1,465
    
    
    
    1,106
    
    
    
    359
    
    
    
    1,172
    
    
    
    976
    
    
    
    196South America WholesaleNitrogen
    
    
    137
    
    
    
    38
    
    
    
    99
    
    
    
    111
    
    
    
    31
    
    
    
    80
    
    
    
    61
    
    
    
    26
    
    
    
    35Other
    
    
    6
    
    
    
    3
    
    
    
    3
    
    
    
    5
    
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    2
    
    
    
    1143
    
    
    
    41
    
    
    
    102
    
    
    
    116
    
    
    
    34
    
    
    
    82
    
    
    
    64
    
    
    
    28
    
    
    
    36RetailFertilizers
    
    
    556
    
    
    
    425
    
    
    
    131
    
    
    
    468
    
    
    
    351
    
    
    
    117
    
    
    
    419
    
    
    
    296
    
    
    
    123Chemicals
    
    
    416
    
    
    
    298
    
    
    
    118
    
    
    
    399
    
    
    
    288
    
    
    
    111
    
    
    
    361
    
    
    
    266
    
    
    
    95Other
    
    
    142
    
    
    
    75
    
    
    
    67
    
    
    
    148
    
    
    
    78
    
    
    
    70
    
    
    
    149
    
    
    
    81
    
    
    
    681,114
    
    
    
    798
    
    
    
    316
    
    
    
    1,015
    
    
    
    717
    
    
    
    298
    
    
    
    929
    
    
    
    643
    
    
    
    286Other  inter-segment eliminations
    
    
    (122
    )
    
    
    (122
    )
    
    
    -
    
    
    
    (97
    )
    
    
    (97
    )
    
    
    -
    
    
    
    (82
    )
    
    
    (83
    )
    
    
    1Total
    
    
    2,838
    
    
    
    1,928
    
    
    
    910
    
    
    
    2,499
    
    
    
    1,760
    
    
    
    739
    
    
    
    2,083
    
    
    
    1,564
    
    
    
    519
 Net sales by market destination and assets by country: 2004
    
    
    2003
    
    
    2002Net Sales
    
    
    Capital Assets
    
    
    Net Sales
    
    
    Capital Assets
    
    
    Net Sales
    
    
    Capital AssetsCanada
    
    
    576
    
    
    
    669
    
    
    
    580
    
    
    
    641
    
    
    
    403
    
    
    
    537United States
    
    
    1,687
    
    
    
    332
    
    
    
    1,557
    
    
    
    374
    
    
    
    1,425
    
    
    
    630Argentina
    
    
    207
    
    
    
    238
    
    
    
    162
    
    
    
    245
    
    
    
    118
    
    
    
    255Other
    
    
    368
    
    
    
    -
    
    
    
    200
    
    
    
    -
    
    
    
    137
    
    
    
    -2,838
    
    
    
    1,239
    
    
    
    2,499
    
    
    
    1,260
    
    
    
    2,083
    
    
    
    1,422
 26




---



##### 



Notes to the consolidated financial statements 23. PROFERTIL The Corporation has a 50 percent ownership interest in Profertil S.A. (Profertil), a joint venture
with Repsol-YPF S.A. This investment is recorded as South America Wholesale operating segment in
note 22. A contractual agreement exists between the Corporation and the joint venture partner,
which establishes joint control over Profertil, and therefore the Corporations interest is
accounted for using the proportionate consolidation method. A summary of the Corporations 50 percent interest in the joint venture at December 31 is as
follows: Balance Sheets
    
    2004
    
    
    2003AssetsCash and cash equivalents
    
    
    81
    
    
    
    44Accounts receivable
    
    
    18
    
    
    
    18Inventories and prepaid expenses
    
    
    11
    
    
    
    8Property, plant and equipment
    
    
    231
    
    
    
    238Other assets
    
    
    13
    
    
    
    18354
    
    
    
    326LiabilitiesAccounts payable and current portion of long-term debt
    
    
    42
    
    
    
    39Income and other taxes
    
    
    7
    
    
    
    2Long-term debt (note 13)
    
    
    69
    
    
    
    114Future income taxes
    
    
    4
    
    
    
    (2
    )122
    
    
    
    153Proportionate share of net assets of joint venture
    
    
    232
    
    
    
    173
 Statement of Operations
    
    2004
    
    
    2003
    
    
    2002Net sales
    
    
    143
    
    
    
    116
    
    
    
    64Cost of Product
    
    
    41
    
    
    
    34
    
    
    
    28Gross profit
    
    
    102
    
    
    
    82
    
    
    
    36Selling, general and administrative costs
    
    
    4
    
    
    
    4
    
    
    
    4Depreciation
    
    
    15
    
    
    
    15
    
    
    
    18Other expenses and Argentine charges
    
    
    -
    
    
    
    -
    
    
    
    16Earnings (loss) before interest expense and income taxes
    
    
    83
    
    
    
    63
    
    
    
    (2
    )Interest expense
    
    
    12
    
    
    
    16
    
    
    
    15Income taxes
    
    
    12
    
    
    
    4
    
    
    
    -Proportionate share of net earnings (loss) of joint venture
    
    
    59
    
    
    
    43
    
    
    
    (17
    )
 Statement of Cash Flows
    
    2004
    
    
    2003
    
    
    2002Operating activities
    
    
    82
    
    
    
    25
    
    
    
    27Investing activities
    
    
    (2
    )
    
    
    17
    
    
    
    (5
    )Financing activities
    
    
    (43
    )
    
    
    (15
    )
    
    
    (17
    )Proportionate share of increase in cash of joint venture
    
    
    37
    
    
    
    27
    
    
    
    5
 Consolidated retained earnings of the Corporation include cumulative earnings from Profertil in the
amount of $53-million for the year ended December 31, 2004 (2003
 loss of $6-million). Commitments presented in note 19 include the Corporations 50 percent share in the commitments of
Profertil. 27




---



##### 



Notes to the consolidated financial statements 24. RELATED PARTY TRANSACTIONS The Corporation and two other potash producers own equal shares of Canpotex, a marketing agent for
international potash sales. Sales to Canpotex for the year ended December 31, 2004 were
$71-million (2003  $43-million; 2002  $40-million) and are at prevailing market prices. Accounts
receivable due from Canpotex as at December 31, 2004 were
$11-million (2003  $6-million; 2002  $7-million) and are settled on normal trade terms. 25. DIFFERENCES BETWEEN
ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA AND
      THE UNITED STATES The Corporations consolidated financial statements are prepared in accordance with Canadian GAAP.
These principles differ in certain respects from those applicable under U.S. GAAP. If U.S. GAAP
were applied, the net earnings (loss) in each year would be adjusted as follows: Consolidated Statements of Operations
    
    2004
    
    
    2003
    
    
    2002Net earnings (loss) based on Canadian GAAP
    
    
    276
    
    
    
    (21
    )
    
    
    -AdjustmentsPreferred securities charges, net of tax (a)
    
    
    (9
    )
    
    
    (11
    )
    
    
    (11
    )Deferred tax on foreign exchange translation of preferred securities (a)
    
    
    (1
    )
    
    
    (5
    )
    
    
    -Other
    
    
    (3
    )
    
    
    (1
    )
    
    
    1Net earnings (loss) before cumulative effect of change in accounting policy
    
    
    263
    
    
    
    (38
    )
    
    
    (10
    )Cumulative effect of change in accounting policy, net of tax (e)
    
    
    -
    
    
    
    -
    
    
    
    (29
    )Net earnings (loss) based on U.S. GAAP
    
    
    263
    
    
    
    (38
    )
    
    
    (39
    )Earnings (loss) per common share based on U.S. GAAPBasic net earnings (loss) before cumulative effect of change in accounting policy
    
    
    2.01
    
    
    
    (0.30
    )
    
    
    (0.08
    )Basic net earnings (loss) per share
    
    
    2.01
    
    
    
    (0.30
    )
    
    
    (0.31
    )Diluted net earnings (loss) per share
    
    
    1.89
    
    
    
    (0.30
    )
    
    
    (0.31
    )
 U.S. GAAP requires the disclosure of a statement of comprehensive income. Comprehensive income
generally includes net earnings plus the results of certain shareholders equity changes not
reflected in the statement of operations. Consolidated Statements of Comprehensive income
    
    2004
    
    
    2003
    
    
    2002Net earnings (loss) based on U.S. GAAP
    
    
    263
    
    
    
    (38
    )
    
    
    (39
    )Change in foreign currency translation adjustment (d)
    
    
    38
    
    
    
    95
    
    
    
    (32
    )Change in minimum pension liability adjustment, net of tax (c)
    
    
    -
    
    
    
    (4
    )
    
    
    (6
    )Change in unrealized gains (losses) on derivative instruments, net of tax (b)
    
    
    3
    
    
    
    (5
    )
    
    
    35Change in realized gains (losses) on derivative instruments included in
inventory, net of tax (b)
    
    
    (1
    )
    
    
    2
    
    
    
    5Comprehensive income (loss) based on U.S. GAAP
    
    
    303
    
    
    
    50
    
    
    
    (37
    )
 The cumulative effect of these adjustments on shareholders equity of the Corporation is as
follows: 2004
    
    
    2003Shareholders equity based on Canadian GAAP
    
    
    1,126
    
    
    
    821Preferred securities (a)
    
    
    (172
    )
    
    
    (222
    )Deferred tax on foreign exchange translation of preferred securities (a)
    
    
    (6
    )
    
    
    (5
    )Unrealized gains (losses) on derivative instruments, net of tax (b)
    
    
    2
    
    
    
    (1
    )Realized gains on derivative instruments included in inventory, net of tax (b)
    
    
    -
    
    
    
    1Additional minimum pension liability, net of tax (c)
    
    
    (10
    )
    
    
    (10
    )Other
    
    
    (8
    )
    
    
    (3
    )Shareholders equity based on U.S. GAAP
    
    
    932
    
    
    
    581
 28




---



##### 



Notes to the consolidated financial statements Description of significant differences(a)
    
    Preferred securities  Under Canadian GAAP, the preferred securities are classified as
shareholders equity and the related annual carrying charges are recorded as a distribution
from retained earnings. Under U.S. GAAP, the $175-million preferred securities, would be
classified as long-term debt. The $50-million preferred securities, which were converted to
common shares in January of 2004 would be classified as the current portion of long-term debt
as at December 31, 2003. Carrying charges would be recognized as interest expense. Temporary
differences arising as a result of the foreign exchange translation of the long-term debt
would be recognized as deferred income tax expense. Under U.S. GAAP, in the statement of cash
flows, cash flows under the heading financing would have
increased by $14-million (2003 
$17-million; 2002  $17-million) and cash flows under the heading operating would have
decreased by $14-million (2003  $17-million; 2002  $17-million).(b)
    
    Derivative instruments and hedging activities  The Corporation accounts for its derivative
instruments under Canadian GAAP as described in note 1 and 21. Under U.S. GAAP, generally all
derivative instruments must be recognized as assets or liabilities on the balance sheet and
measured at fair value. Any change in fair value of a derivative instrument that qualifies as
a cash flow hedge is initially included in the determination of comprehensive income. The
gain or loss is subsequently included in earnings in the same period as the hedged item. Any
change in fair value of a derivative instrument that does not qualify for hedge accounting is
recognized in earnings immediately.(c)
    
    Unfunded employee benefits  Under U.S. GAAP an additional minimum liability is recognized if
the unfunded employee benefits Accumulated Benefit Obligation exceeds the accrued benefit
obligation that is recorded in the balance sheet. This additional liability is recorded as a
reduction to other comprehensive income.(d)
    
    Foreign currency translation adjustment  Under Canadian GAAP, foreign exchange gains and
losses on translation of self-sustaining foreign operations are included as a separate
component of shareholders equity referred to as cumulative translation adjustment. Under
U.S. GAAP, such foreign currency translation gains and losses are recorded as comprehensive
income.(e)
    
    Change in accounting policies  Effective January 1, 2002, the Corporation adopted a new
standard under each of Canadian GAAP and U.S. GAAP for Goodwill and Other Intangible Assets.
The Canadian standard mirrors the U.S. standard except that, under U.S. GAAP, the goodwill
impairment calculated on initial adoption of the new policy was charged against earnings in
the current period. Under Canadian GAAP, the transitional adoption of the policy was recorded
against opening balance of retained earnings in the period of adoption.(f)
    
    Joint ventures  Under U.S. GAAP, ownership in a joint venture where the venturer does not
own more than 50 percent and have a significant influence over the operating activities of the
joint venture is to be accounted for using the equity method. Under Canadian GAAP, joint
ventures are proportionately consolidated. Net assets and earnings of the Corporation would
be the same under either method. Note 23 provides the details of the joint venture as
included under Canadian GAAP.
 29