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Gas shortage could close plant

Posted: Thursday, December 04, 2003

Unless a sufficient supply of natural gas can be secured, Agrium's Nikiski fertilizer manufacturing complex could cease operations at the end of 2005, corporate officials said Wednesday in a press release.

Currently, the facility is operating well below capacity, at less than 50 percent.

In announcing a possible shutdown two years from now, Agrium officials said the corporation was adjusting its Kenai facility's "carrying cost," or asset value, downward by $140 million in corporate fourth-quarter financial statements.

Agrium President and CEO Mike Wilson put the blame squarely on Unocal, with which Agrium has an ongoing, unsettled dispute over gas supply.

"We have been unsuccessful in reaching a commercial settlement with Unocal on reasonable terms," Wilson said in the press release. "Under the circumstances, we feel it is prudent to adjust the carrying cost of our Kenai facility to reflect the negative effect of Unocal's failure to deliver sufficient gas to meet plant requirements, which we believe is a breach of their contract. We are aggressively pursuing our claims against Unocal through the arbitration and litigation process, with an arbitration hearing scheduled to commence in May of 2004."

Agrium said the carrying-cost adjustment was calculated using gas supply indications from Unocal and did not assume significant alternative gas supplies because no long-term gas contracts had been arranged.

However, recent local gas discoveries, some of them by Unocal, show significant gas resources exist in the Cook Inlet region. Agrium said it was continuing "to work with the state of Alaska and gas producers to maintain plant operations and our employee base in the region."

The Nikiski complex includes two urea- and two ammonia-manufacturing units. Agrium said it expects to operate one of the plants (comprised of one urea and one ammonia unit) through the winter, which represents about 50 percent capacity, and increase production during the summer as additional gas becomes available.

Looking ahead, the company said it is assuming operation of one plant through 2005. Beyond that, things are uncertain.

The indicated gas supply from Unocal to the Kenai facility will be insufficient to operate the facility past the end of 2005, the company's release said.

Agrium continues to allege that Unocal has additional gas that is contractually committed to the Kenai facility.

"The dispute with Unocal has created a great deal of uncertainty," Wilson said.

Unocal has declined to discuss the issues in the case in the press.

"Unocal is meeting all of its contractual obligations to Agrium and will continue to do so," Unocal spokesperson Roxanne Sinz said Wednesday.

The disputed supply from Unocal is not the only factor lowering production at the Agrium complex. According to Lisa Parker, spokesperson for Agrium's Alaska operations, the Nikiski complex had been operating at around 66 percent at the end of the third quarter, largely due to the lack of gas needed to produce three groups of fertilizers nitrogen, phosphate and potash. The drop to around 50 percent that has happened since is due primarily to the onset of winter when much of the existing gas supply is dedicated to utilities, she said.

Agrium's Alaska operation (Agrium USA Inc.) has been undergoing a major restructuring since spring. Between April and June, the firm laid off 65 workers in an effort "to improve the facility's efficiency and operating costs for global and export competitiveness and in light of the current gas supply issues with Unocal," the company said.

The complex currently employs about 230 workers. Worldwide, Agrium employs around 4,800.

The company's third-quarter earnings were reported at $25 million worldwide, the highest third-quarter earnings in more than five years. In announcing those earnings results earlier this month, company officials predicted positive earnings to come in the fourth quarter, due to generally favorable market conditions, such as high grain prices and lower world grain stocks that might lead to greater grain production, and therefore an increased demand for fertilizer products.

Media Relations spokesperson Richard Downey, at Agrium's Canada headquarters, said end-of-third-quarter projections predicted fourth-quarter earnings of about 19 cents a share, excluding the carrying cost adjustment.

He said the $140 million hit caused by the carrying-cost adjustment would affect the per-share earnings, but that hit was an anomaly. Absent that event, Agrium's ability to earn is about what was predicted for the fourth quarter, he said.

Correction:

A story in Thursdays Peninsula Clarion reporting the possible shutdown of the Agrium plant by the end of 2005 contained an error. The Nikiski plant only makes nitrogen-based products, not phosphate and potash.

The Clarion regrets the error.



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