While CF Industries Holdings, Inc. suffered no damage to its Donaldsonville, LA nitrogen fertilizer complex during hurricanes Katrina and Rita, its business will be off in the fourth quarter due to the high cost of feedstock natural gas. And its greatest challenge could come in the spring if farmers decide to cut back on planting because of high fertilizer costs.

“Performance in the fourth quarter of 2005 and in 2006 will be determined by the overall demand for the company’s products, the cost of natural gas, and other factors. The effects of sharply higher energy and fertilizer costs on farmers’ plans for next spring cannot be determined at this time,” said Stephen R. Wilson, the company’s chairman and CEO.

The Louisiana plant operated at 72% of capacity during the third quarter, compared to 93% in the third quarter of 2004. Fourth quarter operations are expected to be off even more due to “unprecedented natural gas costs,” operating at 50% of capacity compared to 100% a year ago.

The company’s second nitrogen fertilizer complex, located in Medicine Hat, AB, Canada, has continued to operate at scheduled rates, taking into account scheduled turnarounds. However, given market uncertainties, this complex is also expected to operate at reduced levels in the fourth quarter. CF Industries expects to meet all customer shipments with the reduced operations, supplemented by product purchases.

The fertilizer maker’s Forward Pricing Program (FPP) helped protect its earnings despite the high costs of feedstock through the third quarter, Wilson said. Under the FPP strategy, as customers place forward nitrogen fertilizer orders, the company buys natural gas futures contracts, effectively fixing the cost of the natural gas used to produce those orders and locking in a substantial portion of the margin on the related sales.

But, “the FPP’s buffer of pre-hurricane gas pricing is not expected to benefit our fourth quarter and 2006 business to the same extent as in the third quarter. We are continuing our efforts to cope with this high-cost environment, which will adversely impact the company until natural gas prices return to more reasonable levels,” Wilson said.

Approximately 1 million tons, or 63%, of CF Industries’ fertilizer sales in the third quarter of 2005 were booked under the FPP, versus a comparable total of approximately 700,000 tons, or 40%, of fertilizer sales in the third quarter of 2004.

As of September 30, 2005, FPP bookings for the fourth quarter of 2005 stood at approximately 1.1 million tons for the company’s nitrogen and phosphate fertilizer businesses, compared to slightly more than 1.2 million tons at the same time in 2004.

For 2006, FPP bookings as of the end of September stood at approximately 220,000 tons, compared to nearly 900,000 tons at the comparable point last year.

“Our Forward Pricing Program is obviously only effective in reducing margin risk to the extent that our customers are willing to make commitments to purchase our products at the offered prices. The 2006 FPP booking level reflects the uncertainty that exists in the fertilizer market and the understandable hesitancy of many customers to make commitments in this volatile natural gas pricing environment,” Wilson noted.

Besides its forward pricing strategy CF Industries also purchases finished nitrogen fertilizer products, when advantageous; reducing, its operating rates at the Donaldsonville plant. It also has rescheduled planned turnarounds at its phosphate fertilizer operations in Central Florida to coincide with hurricane-related downtime at Gulf Coast refineries which produce sulfur.

“These initiatives, have permitted CF Industries to mitigate the near-term impact of the recent natural gas price escalation and other storm-related problems,” Wilson explained.

CF Industries’ gross cash and short-term investments were approximately $315 million at September 30, 2005, and its $250 million senior credit facility, which is subject to a borrowing-base formula, remains undrawn. The company’s current liability for customer advances was approximately $185 million, and long-term debt was approximately $4.2 million at the end of the third quarter.

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