Agrium (AGU) 40-F 2005 FY Annual report (Canada)

EXHIBIT 99.3

2005

Audited Annual Financial
Statements and Notes

MANAGEMENT’S & AUDITORS’ REPORTS

Financial Statements & Notes

Management’s Report to the Shareholders

The audited consolidated financial statements and all information contained in this annual report are the responsibility of management and the audited consolidated financial statements are approved by the Board of Directors of the Corporation. The financial statements have been prepared by management and are presented fairly in accordance with accounting principles generally accepted in Canada and, where appropriate, reflect management’s best estimates and judgments based on currently available information. The Corporation has established an internal audit program and accounting and reporting systems supported by internal controls designed to safeguard assets from loss or unauthorized use and ensure the accuracy of the financial records. The financial information presented throughout this annual report is consistent with the financial statements. KPMG LLP, an independent firm of chartered accountants, has been appointed by the shareholders as external auditors of the Corporation. The Auditors’ Report to the Shareholders, which describes the scope of their examination and expresses their opinion, is presented below.

The Audit Committee of the Board of Directors, whose members are independent of management, meets at least five 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.

Michael M. Wilson
President & Chief Executive Officer
Calgary, Canada
February 22, 2006

Bruce G. Waterman
Senior Vice President, Finance
& Chief Financial Officer

Auditors’ Report

We have audited the consolidated balance sheets of Agrium Inc. as at December 31, 2005 and 2004 and the consolidated statements of operations and retained earnings and cash flows for each of the years in the three-year period ended December 31, 2005. These financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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, 2005 and 2004, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2005, in accordance with Canadian generally accepted accounting principles.

Chartered Accountants
Calgary, Canada
February 22, 2006

64 AGRIUM ANNUAL REPORT 2005

FINANCIAL STATEMENTS

Consolidated Statements of Operations
& Retained Earnings

Years ended December 31	2005			2004			2003
(millions of U.S. dollars, except per share amounts)				Restated (note 2)			Restated (note 2)
Sales		3,491			3,001			2,630
Direct freight		197			163			131
Net sales		3,294			2,838			2,499
Cost of product		2,247			1,928			1,760
Gross profit		1,047			910			739
Expenses (income)
Selling		254			237			227
General and administrative		79			63			59
Depreciation and amortization		146			156			140
Kenai award and settlement(note 3)		–			(86	)		–
Asset impairment(note 9)		–			–			235
Royalties and other taxes		45			29			17
Other expenses(note 4)		23			44			40
Earnings before interest expense and income taxes		500			467			21
Interest on long-term debt		47			65			75
Other interest		2			4			5
Earnings (loss) before income taxes		451			398			(59	)
Current income taxes(note 5)		113			99			22
Future income taxes (recovery)(note 5)		55			33			(44	)
Income taxes		168			132			(22	)
Net earnings (loss)		283			266			(37	)
Retained earnings – beginning of year (as reported)		398			145			191
Cumulative change in accounting policy(note 2)		(6	)		(5	)		–
Common share dividends declared		(14	)		(14	)		(14	)
Common share repurchases		(77	)		–			–
Retained earnings – end of year		584			392			140
Earnings (loss) per share(note 6)
Basic		2.14			2.03			(0.29	)
Diluted		2.12			1.91			(0.29	)

See accompanying notes.

AGRIUM ANNUAL REPORT 2005 65

FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows

As at December 31	2005			2004			2003
(millions of U.S. dollars, except per share amounts)				Restated (note 2)			Restated (note 2)
Operating
Net earnings (loss)		283			266			(37	)
Items not affecting cash
Depreciation and amortization		146			156			140
Asset impairment(note 9)		–			–			235
Kenai award and settlement(note 3)		–			(36	)		–
Proceeds on settlement(note 3)		–			25			–
Loss on disposal of assets and investments		(4	)		(6	)		(5	)
Future income taxes (recovery)(note 5)		55			33			(44	)
Foreign exchange		(6	)		(5	)		(8	)
Net changes in non-cash working capital
Accounts receivable		(29	)		(52	)		(98	)
Inventories		(76	)		(83	)		12
Prepaid expenses		(35	)		4			(25	)
Accounts payable and accrued liabilities		107			69			12
Income and other taxes payable		(18	)		54			(15	)
Other operating		27			15			8
Cash provided by operating activities		450			440			175
Investing
Capital expenditures		(175	)		(82	)		(99	)
(Increase) decrease in other assets		(22	)		(14	)		3
Proceeds from disposal of assets and investments		13			10			12
Net change in non-cash working capital		(10	)		–			26
Other		(18	)		7			10
Cash used in investing activities		(212	)		(79	)		(48	)
Financing
Common shares issued		50			12			6
Common share repurchases(note 17)		(98	)		–			–
Bank indebtedness repayment		–			–			(1	)
Long-term debt repayment		(126	)		(134	)		(27	)
Common share dividends paid		(14	)		(14	)		(14	)
Preferred security repayment		(175	)		–			–
Cash used in financing activities		(363	)		(136	)		(36	)
(Decrease) /increase in cash and cash equivalents		(125	)		225			91
Cash and cash equivalents – beginning of year		425			200			109
Cash and cash equivalents – end of year		300			425			200
Dividends per common share for the year		0.11			0.11			0.11
Supplemental cash flow disclosure
Interest paid		49			74			78
Income taxes paid		132			42			30

See accompanying notes

66 AGRIUM ANNUAL REPORT 2005

FINANCIAL STATEMENTS

Consolidated Balance Sheet

As at December 31	2005		2004
(millions of U.S. dollars)			Restated (note 2)
ASSETS
Current assets
Cash and cash equivalents		300		425
Accounts receivable(note 7)		443		388
Inventories (note 8)		533		447
Prepaid expenses		91		56
		1,367		1,316
Property, plant and equipment(note 9)		1,293		1,239
Other assets(note 10)		103		82
Future income tax assets(note 5)		22		24
		2,785		2,661
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Bank indebtedness		5		–
Accounts payable and accrued liabilities(note 12)		576		472
Current portion of long-term debt(note 13)		30		60
		611		532
Long-term debt(note 13)
Recourse debt		442		471
Non-recourse debt		–		69
Preferred securities(note 2)		–		175
		442		715
Other liabilities(note 14)		280		257
Future income tax liabilities(note 5)		272		209
		1,605		1,713
Commitments, guarantees, contingencies and subsequent event(notes 19, 20, 21 and 26 respectively)
Shareholders’ equity
Share capital(note 17)
Authorized: unlimited common shares
Issued and outstanding: 2005 – 131 million (2004 – 132 million)		583		553
Contributed surplus		3		2
Retained earnings		584		392
Cumulative translation adjustment		10		1
		1,180		948
		2,785		2,661

See accompanying notes.

Approved on behalf of the Board:

Michael M. Wilson
Director

Harry G. Schaefer
Director

AGRIUM ANNUAL REPORT 2005 67

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

Notes to the Consolidated Financial Statements

(amounts in millions of U.S. dollars unless otherwise stated)

1. Accounting Policies

Principles of Consolidation & Preparation of Financial Statements

These consolidated financial statements of Agrium Inc. (the Corporation or Agrium) are prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP). These accounting principles are different in some respects from accounting principles generally accepted in the United States (U.S. GAAP) and the significant differences are described in note 27. Amounts are stated in U.S. dollars unless otherwise indicated.

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 & 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, consisting primarily of fertilizer, seed and chemicals, 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 & 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.

Idle Plant 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, non-qualifying derivative contracts and investments in associated companies. Value-added tax assets relate to South America operations and are

68 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

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 voting interest, are accounted for using the equity method. The Corporation’s share of earnings is included in other income (expense). Investments where the Corporation does not exercise significant influence are accounted for using the cost method.

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 using a reasonable estimate of fair value. The liability is measured at discounted fair value and is adjusted to its present value in subsequent periods through other expenses. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset’s estimated useful life.

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.

AGRIUM ANNUAL REPORT 2005 69

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

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 based 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, which is recognized in the period in which the fluctuation occurs.

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 hedging instrument.

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 at least 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 deferred gains and losses on derivative contracts previously qualifying for hedge accounting, are recognized when the related hedged transaction is recognized and in the same financial statement category as the corresponding hedged transaction. If effectiveness ceases or the hedge is de-designated, the Corporation discontinues hedge accounting, recognizes the derivative contract on the consolidated balance sheet at fair value and any subsequent changes in the fair value of the derivative contract are recognized in other expenses when those changes occur. If a hedged anticipated transaction is no longer probable to occur, the fair value of the derivative contract or the deferred gain or loss on a derivative contract that was previously settled, de-designated or ceased to be effective is recognized in other expense in the current period.

Derivative contracts that do not qualify as hedges are recorded at fair value in the consolidated balance sheet. Any changes in the fair 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 consolidated statements of operations and cash flows are translated at the rates in effect at the time of the transaction. The gain or loss on translation is recorded in the cumulative translation adjustment account in shareholders’ equity.

The change in the cumulative translation adjustment of $9-million (2004 – $38-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 are translated into U.S. dollars using the temporal method. Under this method, monetary assets and liabilities are translated at period-end exchange rates and items included on the consolidated 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 recorded in the consolidated statement of operations in other expense.

70 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

Recent Accounting Pronouncements

Financial Instruments, Hedging Relationships & Other Comprehensive Income

Recently issued accounting standards will be in effect for fiscal years beginning on or after October 31, 2006 for hedge accounting, recognition and measurement of financial instruments and disclosure of comprehensive income. The Corporation is currently investigating the impact of these recently issued standards on its consolidated financial statements.

2. Change in Accounting Policies

Classification of Preferred Securities as Liabilities

Effective January 1, 2005, the Corporation adopted the revised Canadian accounting standards for disclosure and presentation of financial instruments. The amendment requires obligations that must or could be settled with a variable number of the Corporation’s own equity instruments to be classified as liabilities. Consequently, the Corporation reclassified from equity to liabilities its eight percent preferred securities, redeemed February 14, 2005 and its six percent preferred securities, converted to common shares in January 2004. This change was applied retroactively with restatement of prior periods. The effect of the adoption on prior periods and the cumulative impact of retroactive restatement as at the date of adoption are presented below as increases (decreases):

	As at
	December 31, 2004
Balance sheet
Other assets		5
Long-term debt		175
Future income tax liabilities		8
Preferred securities		(172	)
Retained earnings		(6	)

	Year ended			Year ended
	December 31, 2004			December 31, 2003
Income statement
Interest on long-term debt		14			17
Future income tax expense		(4	)		(1	)
Earnings per share
Net earnings available for basic earnings per share		(10	)		(16	)
Weighted-averages for diluted earnings per share (millions of shares)		144			126
Basic earnings per share		(0.01	)		(0.04	)
Diluted earnings per share		–			(0.04	)

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.

AGRIUM ANNUAL REPORT 2005 71

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

3. Kenai Award & 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):

	2004
Arbitration award		50
Settlement of legal claims		36
		86

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 in 2004 were $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 established a definitive gas supply obligation from Unocal to the Kenai facility up until October 31, 2005. In July 2005, the Corporation concluded gas supply contract negotiations with producers that will allow the Kenai, Alaska nitrogen facility to continue to operate until October 31, 2006.

The net gain of $36-million recorded in the fourth quarter of 2004 was comprised of the following:

	2004
Net cash received		25
Earn-out adjustment (2001 – 2004)		81
Adjustments related to termination of gas supply		(70	)
Net gain		36

4. Other Expenses

	2005			2004			2003
Interest income		(22	)		(16	)		(5	)
Idle plant costs		9			5			10
Stock-based compensation		13			4			1
Environmental remediation and accretion of asset retirement obligation		9			14			6
Costs on settlement of debt		14			–			–
Realized and unrealized loss (gain) on derivative contracts		21			(3	)		5
Foreign exchange gain		(5	)		(6	)		(8	)
Kenai, Alaska nitrogen facility earn-out		–			28			–
Litigation and contract settlements		(25	)		(7	)		(2	)
Other		9			25			33
		23			44			40

72 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

5. Income Taxes

The major factors that caused variations from the expected combined Canadian federal and provincial statutory income tax rates were the following:

Earnings (loss) before income taxes	2005			2004			2003
				Restated (note 2)			Restated (note 2)
Canadian		140			118			49
Foreign		311			280			(108	)
		451			398			(59	)
Statutory rate (%)		41			41			42
Income taxes at statutory rates		183			165			(25	)
Recognition of previously unrecognized tax assets		(4	)		(20	)		(13	)
Differences in foreign tax rates		(19	)		(20	)		(5	)
Manufacturing and processing allowance		(3	)		(8	)		(5	)
Resource royalties and allowances		1			2			6
Foreign exchange gains relating to Canadian and Argentine operations		2			9			15
Other		8			4			5
Income taxes		168			132			(22	)
Current
Canadian		15			7			(2	)
Foreign		98			92			24
		113			99			22
Future
Canadian		42			47			42
Foreign		13			(14	)		(86	)
		55			33			(44	)
		168			132			(22	)

The significant components of future income tax liabilities and assets at December 31 are as follows:

	2005			2004
Future income tax liabilities				Restated (note 2)
Depreciation and amortization		194			196
Partnership deferral		106			101
Other		65			36
Total future income tax liabilities		365			333
Future income tax assets
Loss carry forwards expiring through 2015		12			63
Asset retirement obligations and environmental liabilities		59			57
Receivables, inventories and accrued liabilities		22			21
Employee future benefits		17			18
Other		13			12
Future income tax assets before valuation allowance		123			171
Valuation allowance		(8	)		(23	)
Total future income tax assets, net of valuation allowance		115			148
Net future income tax liabilities		250			185
Future income tax assets		(22	)		(24	)
Future income tax liabilities		272			209
Net future income tax liabilities		250			185

AGRIUM ANNUAL REPORT 2005 73

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

6. Earnings (Loss) per Share

The following table summarizes the computation of net earnings (loss) per share:

	2005		2004		2003
Numerator
Net earnings (loss)		283		266		(37	)
Numerator for basic earnings (loss) per share		283		266		(37	)
Preferred securities charges(a)		–		10		–
Numerator for diluted earnings (loss) per share		283		276		(37	)
Denominator
Weighted-average number of shares outstanding for basic earnings (loss) per share		132		131		126
Dilutive instruments
Stock options(a) (b)		1		1		–
Preferred securities converted to common shares $175-million, eight percent(a) (c)		–		12		–
Weighted-average number of shares outstanding for diluted earnings (loss) per share		133		144		126
Basic earnings (loss) per share		2.14		2.03		(0.29	)
Diluted earnings (loss) per share		2.12		1.91		(0.29	)

(a)	For diluted earnings (loss) per share, conversion or exercise is assumed only if the effect is dilutive to basic earnings (loss) per share.
(b)	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, 2005, there were five million dilutive stock options. At December 31, 2004, there were eight million dilutive stock options. At December 31, 2003, there were nine million.
(c)	This series of preferred securities was redeemed for cash by the Corporation on February 14, 2005. At December 31, 2004, there were seven million dilutive preferred securities. At December 31, 2003, there were seven million antidilutive preferred securities.

7. Accounts Receivable

	2005			2004
Trade accounts		390			376
Allowance for doubtful accounts		(12	)		(11	)
Rebates and other non-trade accounts		30			16
Derivative contracts		31			4
Other		4			3
		443			388

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 Western Farm Service, Inc., a subsidiary of the Corporation, which charges a fee of two percent of the pool balances. At December 31, 2005 and 2004, the accounts receivable balances sold were nil.

74 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

8. Inventories

	2005		2004
Retail
Fertilizers		103		85
Chemicals		100		88
Other		17		7
		220		180
North America Wholesale
Fertilizers		213		166
Operating supplies		66		63
Raw materials		24		27
		303		256
South America Wholesale		10		11
		533		447

9. Property, Plant & Equipment

			2005						2004
			Accumulated		Net Book				Accumulated		Net Book
	Cost		Depreciation		Value		Cost		Depreciation		Value
Land		29		–		29		29		–		29
Building and improvements		355		196		159		328		191		137
Machinery and equipment		2,230		1,298		932		2,165		1,168		997
Other (a)		213		40		173		121		45		76
		2,827		1,534		1,293		2,643		1,404		1,239

(a) At December 31, 2005, Other included $134-million (2004 – $49-million) of assets under construction that were not being depreciated.

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.

10. Other Assets

	2005		2004
			Restated (note 2)
South America value-added tax and other costs		14		30
Long-term receivables		5		6
Long-term investments		29		23
Long-term derivative contracts		23		1
Turnaround costs		12		6
Pension asset		5		3
Other		15		13
		103		82

AGRIUM ANNUAL REPORT 2005 75

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

11. Bank Indebtedness

In May 2005, we amended our $450-million three-year syndicated revolving unsecured credit facility. 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.

In conjunction with the repayment of Profertil’s long-term debt, Profertil entered into two separate credit facilities that consist of a $15-million three-year, unsecured credit facility and a $25-million five-year, revolving pre-export financing credit facility. Profertil may borrow at the prevailing interest rates, based on LIBOR plus a fixed margin to fund working capital requirements. The credit facilities require that Profertil maintain certain financial ratios and other covenants.

12. Accounts Payable & Accrued Liabilities

	2005		2004
Trade		250		204
Accrued liabilities		246		201
Income and other taxes		36		53
Accrued interest payable		11		12
Derivative contracts		33		2
		576		472

76 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

13. Long-term Debt

	2005		2004
Recourse debt			Restated (note 2)
Unsecured
6.86% senior notes due December 29, 2005 to 2007(a) (c)		30		45
7.06% senior notes due December 29, 2005 to 2010(b) (c)		71		86
7.7% debentures due February 1, 2017(c)		100		100
7.8% debentures due February 1, 2027(c)		125		125
8.25% debentures due February 15, 2011(c)	��	125		125
Secured
Other		21		20
		472		501
Principal repayments due within one year		30		30
		442		471
Non-recourse debt
Secured
Profertil S.A. – Other(d)		–		99
Principal repayments due within one year		–		30
		–		69
Preferred securities
Unsecured 8% redeemable preferred securities(e)		–		175

(a)	The notes have two remaining equal annual principal repayments, with the next repayment due December 29, 2006. 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 five remaining equal annual principal repayments, with the next repayment due December 29, 2006. 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, was $99-million, of which $30-million was repayable within one year. On September 30, 2005, Profertil repaid all amounts outstanding under the credit agreement.
(e)	On February 14, 2005, the Corporation redeemed the $175-million, eight percent redeemable preferred securities for cash. The redemption price equaled the principal amount of the securities plus accrued and unpaid interest to the date of redemption.

14. Other Liabilities

	2005		2004
Asset retirement obligations(note 15)		60		52
Environmental remediation		145		145
Employee future benefits(note 16)
Pensions		10		14
Other post-retirement benefits		38		36
Long-term derivative contracts		16		–
Other		11		10
		280		257

AGRIUM ANNUAL REPORT 2005 77

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

15. Asset Retirement Obligations

The Corporation’s asset retirement obligations relate to 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 obligations balance is provided below:

	2005		2004
Balance, beginning of year		52		43
Foreign exchange translation		1		2
Additions		3		4
Accretion, included in other expenses		4		3
Balance, end of year		60		52

The Corporation estimates that the undiscounted, inflation-adjusted cash flow required to settle asset retirement obligations is approximately $645-million, which will be settled between 2006 and 2136. Discount rates ranging from 7.5 percent to eight percent were used to determine the asset retirement obligations.

16. Employee Future Benefits

The Corporation’s disclosures for employee future benefits for the year ended December 31, 2005, are measured with information from September 30, 2005.

Obligations & 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:

78 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

	Defined Benefit Pension Plans									Post-retirement Benefit Plans
	2005			2004			2003			2005			2004			2003
Change in accrued benefit obligations
Balance, beginning of year		145			127			105			48			40			31
Foreign exchange on Canadian obligations		2			5			10			–			1			2
Interest cost		9			9			7			2			3			2
Service cost		5			6			5			2			3			3
Actuarial loss		23			5			7			6			4			3
Amendments		–			–			–			(12	)		–			–
Curtailment		–			–			(2	)		–			–			–
Medicare		–			–			–			–			(2	)		–
Benefits paid		(7	)		(7	)		(5	)		(2	)		(1	)		(1	)
Balance, end of year		177			145			127			44			48			40
Change in plan assets
Fair value, beginning of year		106			88			67			–			–			–
Foreign exchange on Canadian assets		2			4			9			–			–			–
Actual return on plan assets		12			10			8			–			–			–
Employer contributions		13			11			9			–			–			–
Benefits paid		(7	)		(7	)		(5	)		–			–			–
Fair value, end of year		126			106			88			–			–			–
Unfunded status		51			39			39			44			48			40
Unrecognized net loss		(46	)		(28	)		(28	)		(17	)		(11	)		(8	)
Unrecognized prior service cost		–			–			–			11			(1	)		(1	)
Accrued employee future benefit liability		5			11			11			38			36			31
Amounts recognized in the consolidated balance sheets consist of:
Other assets – prepaid employee future benefits(note 10)		(5	)		(3	)		(2	)		–			–			–
Other liabilities – pensions(note 14)		10			14			13			38			36			31
		5			11			11			38			36			31

The accumulated benefit obligation at September 30, 2005, is $150-million ($124-million and $111-million for 2004 and 2003 respectively). The estimated aggregate expected contribution to fund the Corporation’s defined benefit plans for the next fiscal year is $5-million to $11-million.

Estimated future benefit payments are as follows:

	Defined Benefit		Post-retirement
	Pension Plans		Benefit Plans		Total
Expected benefit payments
2006		7		1		8
2007		8		1		9
2008		8		1		9
2009		8		1		9
2010		8		2		10
2011 through 2015		49		11		60

AGRIUM ANNUAL REPORT 2005 79

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

Expense

The components of net employee future benefits expense for the Corporation’s pension and post-retirement benefit plans are computed actuarially as follows:

	2005			2004			2003
Defined benefit pension plans
Service cost for benefits earned during the year		5			6			5
Interest cost on projected benefit obligations		9			9			7
Expected return on plan assets		(8	)		(7	)		(6	)
Net amortization and deferral		1			2			1
Net expense		7			10			7
Post-retirement benefit plans
Service cost for benefits earned during the year		3			4			3
Interest cost on projected benefit obligations		2			3			2
Net expense		5			7			5
Defined contribution pension plans		11			11			10
Total expense		23			28			22

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)	2005		2004		2003		2005		2004		2003
Defined benefit pension plans
Discount rate		5		6		6		6		6		7
Long-term rate of return on assets								8		8		8
Rate of increase in compensation levels		4		4		3		4		4		3
Post-retirement benefit plans
Discount rate		5		6		6		6		6		6
Health care cost trend rate		11		12		12		12		12		12

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.

A one-percentage point change in the assumed health care cost trend rate would have the following effects:

	One Percentage		One Percentage
	Point Increase		Point Decrease
Effect on post retirement benefit obligation as of September 30, 2005		5		(4	)
Effect on total of service and interest cost		1		(1	)

80 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

Asset Allocation & Investment Strategy

Defined benefit pension plan asset allocation at September 30, 2005 and 2004, and target allocation for 2006 are as follows:

	Target Allocation	Plan assets		Plan assets
(percent)	2006	2005		2004
Asset categories
Equity securities(a)	53-71		65		65
Debt securities	28-47		28		33
Cash and other	0-7		7		2

(a) Equity securities held by the plans do not include any of the Corporation’s common shares.

The effective date of the most recent actuarial valuations for funding purposes for the Canadian registered plans was December 31, 2004. The next required valuation date for funding purposes is December 31, 2007.

For U.S. registered plans, the effective date of the most recent actuarial valuation for funding purposes is January 1, 2005, and the next required valuation is January 1, 2006.

17. Share Capital

	2005						2004				2003
	Number						Number				Number
	of Shares						of Shares				of Shares
	(millions)			Amount			(millions)		Amount		(millions)		Amount
Common shares
Issued and outstanding, beginning of year		132			553			127		490		126		484
Issued on preferred securities redemption(a)		–			–			4		50		–		–
Issued on exercise of stock options		4			50			1		13		1		6
Stock based compensation		–			1			–		–		–		–
Shares repurchased(b)		(5	)		(21	)		–		–		–		–
Issued and outstanding, end of year		131			583			132		553		127		490

(a)	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 four million common shares. The redemption price was 103 percent of the principal amount, plus accrued and unpaid securities charges.
(b)	On April 28, 2005, the Board of Directors of the Corporation authorized a share repurchase program of up to 13-million common shares (approximately 10 percent of the Corporation’s issued and outstanding common shares) through a normal course issuer bid. Shares may be repurchased from time to time on the open market through to May 2, 2006 at prevailing market prices. Effective October 12, 2005 the share repurchase program was suspended pending completion of proposed acquisition activities.
	During the twelve months ended December 31, 2005, the Corporation repurchased for cancellation a total of 4.7 million common shares under the program at a net cost of $98-million and an average price per share of $20.82, resulting in a reduction of share capital of $21-million and a reduction of retained earnings of $77-million.

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, 2005, the Board of Directors was authorized to grant options up to seven million common shares (2004 – nine million) of which six million options (2004 – eight million) had been granted and are outstanding at December 31, 2005. 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.

AGRIUM ANNUAL REPORT 2005 81

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

The Corporation began prospectively expensing the fair value of equity-settled options granted after January 1, 2003 over their vesting period. In 2005, the Corporation recognized a total compensation expense of $2-million (2004 – $1-million) in connection with equity-settled options.

Tandem Stock Appreciation Rights

Effective January 1, 2004, the stock option plan was amended to permit the attachment of Stock Appreciation Rights (SARs) to all future grants of options. Option holders who are granted options with tandem SARs attached have the right to surrender vested options for SARs. The election of a SAR entitles the holder to receive a cash payment equal to the excess of the U.S. dollar equivalent of the highest price of the Corporation’s shares on the Toronto Stock Exchange (TSX) on the date of exercise over the dollar exercise price of the tandem SAR. The Corporation expects the majority of option holders will elect to exercise their tandem SARs as SARs, surrender their options and therefore receive settlement in cash.

In 2005, the Corporation recognized total compensation expense of $3-million (2004 – $1-million) in connection with options that have tandem SARs attached.

Stock option and tandem SARs transactions for the respective years were as follows:

	2005					2004					2003
	Options			Weighted-		Options			Weighted-		Options			Weighted-
	Outstanding			Avg. Exercise		Outstanding			Avg. Exercise		Outstanding			Avg. Exercise
	(millions)			Price(C$)		(millions)			Price(C$)		(millions)			Price(C$)
Outstanding, beginning of year		8			16.62		9			16.31		9			16.21
Granted		2			19.99		–			21.39		1			15.59
Exercised		(4	)		16.79		(1	)		13.96		(1	)		13.19
Cancelled		–			18.32		–			17.77		–			18.25
Outstanding, end of year		6			17.26		8			16.62		9			16.31
Exercisable, end of year		4			16.72		7			16.68		6			16.37

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:

	2005				2004				2003
	As Reported		Pro Forma		As Reported		Pro Forma		As Reported			Pro Forma
Net earnings (loss)		283		281		266		262		(37	)		(42	)
Earnings (loss) per common share
Basic		2.14		2.13		2.03		2.00		(0.29	)		(0.34	)
Diluted		2.12		2.10		1.91		1.89		(0.29	)		(0.34	)

The fair values of all equity settled options have been estimated using a Black Scholes option pricing model and based on the following assumptions:

	2005		2004		2003
Dividend yield(%)		1		1		1
Expected stock price volatility(%)		32		32		32
Risk-free interest rate(%)		4		4		4
Expected life of the options(years)		7		7		7

82 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

The weighted-average fair value price per share of options granted in the years indicated was as follows: 2005 – C$7.23; 2004 – C$7.49; and, 2003 – C$6.34.

The following table summarizes stock options outstanding and exercisable under the plan at December 31, 2005:

	Options Outstanding				Options Exercisable
	Numbers		Weighted-		Weighted-		Number		Weighted-
	Outstanding		Avg. Remaining		Avg. Exercise		Exercisable		Avg. Exercise
	at Year End		Contractual Life		Price		at Year End		Price
Range of Exercise Prices(C$)	(millions)		(years)		(C$)		(millions)		(C$)
Less than 11.86		–		4		11.71		–		11.71
11.86 to 15.85		2		6		14.56		1		14.12
15.86 to 20.15		2		6		17.87		2		17.37
20.16 to 22.15		2		6		20.69		1		20.55
11.86 to 22.15		6		6		17.26		4		16.72

Stock Appreciation Rights

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 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.

In 2005, the Corporation recognized total compensation expense of $1-million (2004 – $1-million; 2003 – $3-million) in connection with SARs.

Performance Share Unit Plan

Effective October 2003, a Performance Share Unit (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 New York Stock Exchange (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 2005, the Corporation recognized compensation expense of $7-million (2004 – $2-million; 2003 – less than $1-million) in connection with PSUs.

Director’s Deferred Share Unit Plans

The Corporation has two Director’s Deferred Share Unit (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.

The Corporation has 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 general and administrative expenses in the period the change takes place.

AGRIUM ANNUAL REPORT 2005 83

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

In 2005, the Corporation recognized compensation expense of $2-million (2004 and 2003 – less than $1-million) in connection with DSUs.

19. Commitments

	2006		2007		2008		2009		2010
Cost of product
Operating lease commitments		41		26		21		15		12
Natural gas commitments – North America		986		–		–		–		–
Power, suphuric acid and other payments		62		37		27		26		26
Profertil natural gas and other		32		30		31		33		34
		1,121		93		79		74		72
Other
Long-term debt and capital lease repayments(a)		66		64		47		46		45
Total		1,187		157		126		120		117

(a) Includes interest payments.

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 2005 were $41-million (2004 – $42-million; 2003 –
$39-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 fixed base-price contracts are calculated using the prevailing New York Mercantile Exchange (NYMEX) forward prices at December 30, 2005, adjusted for transportation differentials to each production facility.

The Corporation has a 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 three firm supply U.S. dollar denominated natural gas purchase contracts that expire in 2012, 2013 and 2017 respectively, and three firm supply U.S. dollar denominated contracts representing approximately 17 percent of Profertil’s gas supply expiring in the fourth quarter of 2006.

20. Guarantees

In the normal course of business, the Corporation enters into agreements that provide indemnifications and guarantees to counterparties in transactions such as rail car leases and reseller arrangements. The maximum potential future payments for significant guarantees issued by the Corporation was approximately $83-million as at December 31, 2005. Should the Corporation be required to act under such agreements, it is expected that no material loss would result after consideration of possible recoveries under recourse provisions.

84 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

21. Contingencies

Environmental Remediation

The Corporation expects contingent environmental liabilities to arise out of existing and discontinued operations. Such contingent environmental liabilities differ from asset retirement obligations and accrued environmental remediation liabilities in that the amount of 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.

A personal injury claim was filed against a subsidiary of the Corporation in the fourth quarter of 2003. Management believes that insurance coverage is sufficient to cover any award or settlement that may result. A second action, arising from the same matter was filed against another subsidiary of the Corporation in the second quarter of 2004. Unspecified compensatory and punitive damages are claimed. Management believes that an award for punitive damages is unlikely. Both actions are being vigorously defended and the Corporation disputes all liability and damages.

The Corporation is investigating an environmental claim filed in the second quarter of 2005 against a subsidiary of the Corporation. At February 22, 2006, the potential exposure of this lawsuit is indeterminable.

Other

The Corporation’s export sales of potash are marketed through Canpotex. The Corporation is contractually obligated to reimburse the export association for its pro-rata share of any operating expenses or other liabilities incurred by Canpotex. There were no such operating losses or other liabilities in 2005, 2004 or 2003.

22. Financial Instruments

The Corporation’s financial instruments consist of derivative contracts and other financial instruments including cash and cash equivalents, accounts receivable, substantially all current liabilities, long-term debt and preferred securities.

Derivative Contracts

Derivative contracts that qualify for hedge accounting are not recognized on the consolidated balance sheets. Derivative contracts that do not qualify for hedge accounting are recognized on the consolidated balance sheets. The fair values of the derivatives are the estimated amount that the Corporation would receive (pay) to terminate the contracts and have been calculated using estimated forward prices for the relevant period.

Natural Gas Derivative Contracts

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.

AGRIUM ANNUAL REPORT 2005 85

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

Foreign Exchange Derivative Contracts

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 its Canadian dollar equivalent. These revenues are converted into Canadian dollars for purposes of paying Canadian dollar denominated operating costs.

Fair value of derivative contracts:

	2005					2004
				Notional Amount				Notional Amount
	Fair Value			or Quantity		Fair Value		or Quantity
Gas – de-designated swaps and options(a)		48		27 MMBtu			–		–
Gas – non-qualifying swaps and options(b)		(14	)	39 MMBtu			2	35 MMBtu
Gas – qualifying swaps and options(c)		–			–		–	20 MMBtu
Foreign exchange – qualifying forward contracts and options(d)		1			C$105		3		C$45
		35					5

(a)	De-designated natural gas derivative contracts
	Effective July 1, 2005, the Corporation’s previously qualifying natural gas derivative contracts were determined to no longer qualify for hedge accounting due to reduced correlation between AECO based natural gas purchase contracts and NYMEX-based derivative contracts. Accordingly, the fair value of these derivative contracts at July 1, 2005, an unrealized gain of $40-million was deferred and recorded on the consolidated balance sheet and will be recognized as cost of product manufactured in the same periods during which the originally hedged gas purchases occur between 2005 and 2009. Subsequent changes in fair value of these derivatives will be recognized through other expenses.
	During the period from July 1, 2005 to December 31, 2005, $10-million and $1-million of the deferred gain were recognized as cost of product sold and inventory, respectively. At December 31, 2005, the current and long-term portions of the remaining deferred gain in the amount of $15-million and $14-million were included in accounts payable and accrued liabilities and other liabilities. The change in fair value of these de-designated derivative contracts subsequent to the date of de-designation, a gain of $19-million, was recognized as a reduction to other expense. The remaining fair value balance of $19-million was recorded in accounts receivable in the amount of $10-million and other assets in the amount of $9-million.
(b)	Non-qualifying natural gas derivative contracts
	Non-qualifying natural gas derivative contracts are those contracts that do not qualify for hedge accounting, but provide an economic hedge of the Corporation’s exposure to natural gas costs. During 2005, other expenses included net realized and unrealized gains (losses) in the amount of $(40)-million (2004 – $3-million; 2003 – $(5)-million) related to non-qualifying natural gas derivative contracts, representing primarily AECO basis swaps. The fair value of the non-qualifying natural gas derivative contracts was recorded in the consolidated balance sheets.
(c)	Qualifying natural gas derivative contracts
	The Corporation had no natural gas derivative contracts outstanding at December 31, 2005 that qualified for hedge accounting. The fair value of qualifying natural gas derivative contracts as at December 31, 2004 was nominal. During 2005, $15-million (2004 – nil; 2003 – $11-million) of realized gains on qualifying natural gas derivative contracts were recorded as cost of goods sold.
(d)	Qualifying foreign exchange derivative contracts
	During 2005, net realized gains on foreign currency options and forward contracts of $4-million (2004 – $3-million; 2003 – $7-million) were recorded in the statement of operations. The fair value of the qualifying foreign exchange derivative contracts was not recorded in the consolidated balance sheets.

Other Financial Instruments

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 following table summarizes the 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.

Commodity Contracts

	2005				2004
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Unsecured long-term debt		451		507		481		602
Preferred securities		–		–		172		179

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, 2005, 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.

86 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

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.

23. 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 are as follows:

				Wholesale
				North			South
2005	Retail			America			America		Other			Total
Net sales – external		1,242			1,899			153		–			3,294
– inter-segment		–			132			16		(148	)		–
Total net sales		1,242			2,031			169		(148	)		3,294
Cost of product		895			1,443			54		(145	)		2,247
Gross profit		347			588			115		(3	)		1,047
Expenses
Selling		239			19			1		(5	)		254
General and administrative		10			21			4		44			79
Depreciation and amortization		17			107			15		7			146
Royalties and other taxes		7			35			–		3			45
Other expenses		(22	)		(2	)		11		36			23
Earnings (loss) before interest expense and income taxes		96			408			84		(88	)		500
Net working capital		418			644			16		(322	)		756
Property, plant and equipment		93			952			223		25			1,293
Total assets		753			2,468			271		(707	)		2,785
Capital expenditures		18			147			4		6			175

AGRIUM ANNUAL REPORT 2005 87

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

				Wholesale
				North			South
2004	Retail			America			America		Other			Total
Net sales – external		1,114			1,594			130		–			2,838
– inter-segment		–			109			13		(122	)		–
Total net sales		1,114			1,703			143		(122	)		2,838
Cost of product		798			1,211			41		(122	)		1,928
Gross profit		316			492			102		–			910
Expenses
Selling		222			17			1		(3	)		237
General and administrative		8			22			3		30			63
Depreciation and amortization		18			116			15		7			156
Kenai award and settlement(note 3)		–			(86	)		–		–			(86	)
Royalties and other taxes		5			22			–		2			29
Other expenses		(18	)		52			–		10			44
Earnings (loss) before interest expense and income taxes		81			349			83		(46	)		467
Networking capital		359			(31	)		60		396			784
Property, plant and equipment		91			918			231		(1	)		1,239
Total assets		729			2,147			353		(568	)		2,661
Capital expenditures		14			61			4		3			82

				Wholesale
				North			South
2003	Retail			America			America		Other			Total
Net sales – external		1,015			1,377			107		–			2,499
– inter-segment		–			88			9		(97	)		–
Total net sales		1,015			1,465			116		(97	)		2,499
Cost of product		717			1,106			34		(97	)		1,760
Gross profit		298			359			82		–			739
Expenses
Selling		214			15			1		(3	)		227
General and administrative		8			20			3		28			59
Depreciation and amortization		19			99			15		7			140
Asset impairment(note 9)		–			235			–		–			235
Royalties and other taxes		5			11			–		1			17
Other expenses		(14	)		28			–		26			40
Earnings (loss) before interest expense and income taxes		66			(49	)		63		(59	)		21
Net working capital		219			465			30		(297	)		417
Property, plant and equipment		95			896			238		31			1,260
Total assets		471			1,553			324		(70	)		2,278
Capital expenditures		13			73			3		10			99

88 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

Net sales and gross profit by business segment and product line:

	2005									2004								2003
	Net			Cost of			Gross			Net			Cost of			Gross		Net			Cost of			Gross
	Sales			Product			Profit			Sales			Product			Profit		Sales			Product			Profit
North America Wholesale
Nitrogen
Ammonia		606			464			142			397			284			113		382			286			96
Urea		584			419			165			499			365			134		423			323			100
Nitrate, sulphate and other		273			206			67			284			216			68		239			181			58
Total nitrogen		1,463			1,089			374			1,180			865			315		1,044			790			254
Phosphate		313			256			57			309			238			71		261			217			44
Potash		255			98			157			214			108			106		160			99			61
		2,031			1,443			588			1,703			1,211			492		1,465			1,106			359
South America Wholesale
Nitrogen		159			47			112			137			38			99		111			31			80
Other		10			7			3			6			3			3		5			3			2
		169			54			115			143			41			102		116			34			82
Retail
Fertilizers		626			485			141			556			425			131		468			351			117
Chemicals		458			328			130			416			298			118		399			288			111
Other		158			82			76			142			75			67		148			78			70
		1,242			895			347			1,114			798			316		1,015			717			298
Other inter-segment eliminations		(148	)		(145	)		(3	)		(122	)		(122	)		–		(97	)		(97	)		–
Total		3,294			2,247			1,047			2,838			1,928			910		2,499			1,760			739

Net sales by market destination and assets by country:

	2005				2004				2003
	Net		Capital		Net		Capital		Net		Capital
	Sales		Assets		Sales		Assets		Sales		Assets
Canada		745		760		576		669		580		641
United States		1,846		301		1,687		332		1,557		374
Argentina		222		232		207		238		162		245
Other		481		–		368		–		200		–
		3,294		1,293		2,838		1,239		2,499		1,260

AGRIUM ANNUAL REPORT 2005 89

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

24. 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 23. 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	2005		2004
Assets
Cash and cash equivalents		23		81
Accounts receivable		13		18
Inventories and prepaid expenses		11		11
Property, plant and equipment		223		231
Other assets		1		13
		271		354
Liabilities
Accounts payable and current portion of long-term debt		12		42
Income and other taxes		19		7
Long-term debt(note 13)		–		69
Other		3		–
Future income taxes		3		4
		37		122
Proportionate share of net assets of joint venture		234		232

STATEMENTS OF OPERATIONS	2005		2004		2003
Net sales		169		143		116
Cost of product		54		41		34
Gross profit		115		102		82
Selling		1		1		1
General and administrative costs		4		3		3
Depreciation		15		15		15
Other expenses and Argentine charges		11		–		–
Earnings before interest expense and income taxes		84		83		63
Interest expense		8		12		16
Income taxes		31		12		4
Proportionate share of net earnings of joint venture		45		59		43

STATEMENTS OF CASH FLOWS	2005			2004			2003
Operating activities		85			82			25
Investing activities		(4	)		(2	)		17
Financing activities		(139	)		(43	)		(15	)
Proportionate share of (decrease) increase in cash and cash equivalents of joint venture		(58	)		37			27

90 AGRIUM ANNUAL REPORT 2005

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

Consolidated retained earnings of the Corporation include cumulative earnings from Profertil in the amount of $56-million for the year ended December 31, 2005 (2004 – $53-million).

Commitments presented in note 19 include the Corporation’s 50 percent share in the commitments of Profertil.

25. Related Party Transactions

The Corporation has an investment in Canpotex, a marketing agent for international potash sales. Sales to Canpotex for the year ended December 31, 2005 were $97-million (2004 – $71-million; 2003 – $43-million) and are at prevailing market prices. Accounts receivable due from Canpotex as at December 31, 2005 were $17-million (2004 – $11-million; 2003 – $6-million) and are settled on normal trade terms.

26. Subsequent Event

Acquisition of Royster-Clark Ltd.

On February 9, 2006, the Corporation acquired 98.6 percent of the outstanding Income Deposit Securities (IDSs) of Royster-Clark Ltd. and Royster-Clark ULC (collectively “Royster-Clark”) at C$11.90 cash per IDS. The Corporation intends to acquire the remaining 1.4 percent of Royster-Clark pursuant to compulsory acquisition procedures of the Business Corporations Act (Ontario). Estimated total purchase consideration is U.S.$502-million (C$577-million), including assumed liabilities and excluding transaction costs.

Royster-Clark is a retail company in the United States with over 250 retail centers located primarily in the Midwestern and Southeastern United States.

27. 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

	2005			2004			2003
Net earnings (loss) based on Canadian GAAP		283			266			(37	)
Adjustments
Derivative instruments and hedging activities, net of tax(a)		(9	)		–			–
Other, net of tax		(4	)		(3	)		(1	)
Net earnings (loss) based on U.S. GAAP		270			263			(38	)
Earnings (loss) per common share based on U.S. GAAP
Basic net earnings (loss) per share		2.04			2.01			(0.30	)
Diluted net earnings (loss) per share		2.03			1.89			(0.30	)

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

	2005			2004			2003
Net earnings (loss) based on U.S. GAAP		270			263			(38	)
Change in foreign currency translation adjustment(c)		9			38			95
Change in minimum pension liability adjustment, net of tax(b)		(3	)		–			(4	)
Change in unrealized gains (losses) on derivative instruments, net of tax(a)		27			3			(5	)
Change in realized gains (losses) on derivative instruments included in inventory, net of tax(a)		1			(1	)		2
Comprehensive income based on U.S. GAAP		304			303			50

AGRIUM ANNUAL REPORT 2005 91

NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS

(amounts in millions of U.S. dollars unless otherwise stated)

The cumulative effect of these adjustments on shareholders’ equity of the Corporation is as follows:

	2005			2004
Shareholders’ equity based on Canadian GAAP		1,180			948
Unrealized gains (losses) on derivative instruments, net of tax(a)		29			2
Realized gains on derivative instruments included in inventory, net of tax(a)		1			–
Additional minimum pension liability, net of tax(b)		(13	)		(10	)
Other, net of tax		(12	)		(8	)
Shareholders’ equity based on U.S. GAAP		1,185			932

Description of significant differences

(a)	Derivative instruments and hedging activities – The Corporation accounts for its derivative instruments under Canadian GAAP as described in note 1 and 22. 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 and classified in shareholders’ equity. 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.
(b)	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 consolidated balance sheets. This additional liability is recorded as a reduction to other comprehensive income.
(c)	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.
(d)	Joint ventures – Under U.S. GAAP, ownership in a joint venture where the venturer does not own more than 50 percent and has 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 24 provides the details of the joint venture as included under Canadian GAAP.

92 AGRIUM ANNUAL REPORT 2005